CFP: Estate Part 2
stranger beneficiaries
If they are the same age or older are not a skip person
Assuming NEITHER person has used any of his/her applicable credit, what is the maximum amount a married couple can give to a single, third-party donee in the current year without paying any federal gift tax?
$23,430,000 A $15,000 gift may be made by each spouse each under the annual gift exclusion amount and a $11.7M gift from each spouse may be made to utilize the applicable lifetime exclusion amount of $11.7M each in 2021. ($11,700,000 × 2) + ($15,000 × 2) = $23,430,000
Advantages of a revocable trust
(1) avoid probate (2) avoid need for guardianship in event of incapacity (3) benefit of privacy (4) can make it last forever (5) ability of grantor to change the trust
General power of attorney trust for the unlimited marital deduction
-No person, other than the surviving spouse, may appoint any part of the trust property to anyone other than the surviving spouse -The general power of appointment granted to the surviving spouse must be exercisable by the surviving spouse alone. -The surviving spouse must be entitled to receive all of the income from the trust, at least annually.
List property arrangements can qualify for the unlimited marital deduction?
1. Tenants by the entirety. 2. A QDOT. 3. A QTIP Trust. 4. A POA trust. 5. Joint tenancy with rights of survivorship.
Federal gift tax return is filed on Form _______
709 Federal Gift Tax return Any lifetime GST is reported on Form 709, the United States Gift and Generation-Skipping Transfer Tax Return
GRAT
A GRAT is an irrevocable trust in which the grantor retains an annuity from the trust. If the grantor outlives the trust, the assets of the irrevocable trust will not be included in his gross estate.
SCIN
A SCIN can give the seller a collateral interest in the property sold. The buyer of a SCIN pays the FMV plus the SCIN premium. Each payments received by the seller consists of (1) interest income, (2) capital gain, and (3) return of adjusted basis. The transferee bought the right to cancel thus no gift.
Jack Hammet and his wife, Janet, were in an auto accident. Janet died three weeks before Jack did. His gross estate was $13.5 million. One of the major assets in his estate was closely held stock in an equipment leasing firm (C corporation) with which rapidly appreciating equipment was purchased. His estate had unsecured debts of $400,000 and administrative expenses of $75,000. His will allocates his estate to his children in equal shares. Which post mortem planning techniques might benefit Jack's estate?
A Section 303 stock redemption. Installment payment of estate taxes.
bypass trust
A bypass trust maximizes the use of the available applicable estate tax credit at the death of the first-to-die spouse. An estate planning device whereby a deceased spouse's estate passes to a trust as a life estate for the surviving spouse rather than entirely to the surviving spouse, thereby reducing the likelihood that the surviving spouse's estate will be subject to federal estate tax. A bypass trust aids in guaranteeing the full use of an individual's applicable estate tax credit. A bypass trust is generally created in a will to receive, at the decedent's date of death, the amount of property necessary to utilize the decedent's available applicable estate tax credit. By creating this trust in his will, the decedent is ensuring that the applicable estate tax credit will be utilized. An estate that does not take advantage of its available applicable estate tax credit is transferring assets at a higher overall estate tax cost than necessary. In other words, the assets that are sheltered under the marital deduction could have transferred estate tax free to other heirs by utilizing the applicable credit. An estate is described as underqualified when, due to a failure to make proper use of the marital deduction, too much of the property is subject to estate tax at the death of the first spouse. An estate is described as overqualified when, due to a failure to make proper use of the marital deduction, not enough property is subject to estate tax at the death of the first spouse.
universal life
A combination of a flexible premium and adjustable life insurance. A universal life insurance policy is similar to a term life insurance policy but with a cash accumulation account attached to it. In the initial years of the policy, the premium paid is in excess of the pure cost of the insurance, and the excess is deposited into the cash accumulation account. In the later years of the life insurance policy, the pure cost of the insurance will increase, but the insured will continue to pay the same premium. Funds within the cash accumulation account will pay any difference between the pure cost of the insurance and the premium paid by the owner. However, if the cash accumulation account does not have the funds to pay the difference, the life insurance contract will lapse. Only a whole life insurance policy will remain in force at all times when the pure cost of the insurance is in excess of the premium paid. Option a is incorrect because the universal life insurance policy will lapse if the policy premium is not paid and the cash accumulation account does not have the funds necessary to pay the policy premium. Even if the policy premium is paid, the universal life insurance policy will also lapse if the cash accumulation account does not have the funds to pay the excess pure insurance cost. Option c is incorrect because the cash accumulation account can be used to pay the policy premium. Option d is incorrect because the insured does not select the investments for the cash accumulation account.
Dynasty trust
A dynasty trust only has income beneficiaries. The trust property will never vest with a remainder beneficiary. A "B" trust where transfers are made to a trust that benefits multiple future generations. A dynasty trust, free of estate, gift, and GST taxes, can last for the lives in being plus 21 years and 9 months (rules against perpetuities) or as long as local law allows. State law dictates whether a trust can use the rule against perpetuities or a number of years (like 100). Beneficiary interests are limited to life estates. A)A dynasty trust will not vest its ownership in each generation of beneficiaries. B)Alaska has laws that favor the creation of dynasty trusts. C)The income of a dynasty trust is taxed at the trust level to the extent the income is not distributed to the beneficiary. The income that is distributed to the beneficiary is taxed to the beneficiary. D)A dynasty trust can give a beneficiary a limited power of appointment without causing inclusion of the trust's assets in the beneficiary's gross estate.
When is Life Insurance included in the insured's probate estate?
A life insurance policy is included in the insured's probate estate only when the death benefit is payable to the insured or no designated beneficiary has been selected.
Special Needs Trust
A special needs trust under 42 U.S.C. Sec. 1396p(d)(4)(A) will permit a family member to contribute to the trust for the benefit of the child with special needs without adversely effecting government benefits if funds are paid back to the State to the extent of the benefit at the death of the child.
term interest
A term interest lasts for a specific period of time, such as three years. A life estate and a usufruct last for the term of a person's life.
QTIP Election
A terminable interest is only deductible for the purposes of the marital deduction when the decedent's executor files a QTIP election, that the property will be subject to tax in the surviving spouses estate. The terminable interest rule can also be avoided by giving the life tenant a general power of appointment over an estate trust.
2503(b) Trust
A trust for the benefit of a minor designed to qualify the contribution to the trust for the annual exclusion. A 2503(c) trust must give the minor the right to receive the trust assets when he reaches age 21, but is not required to pay the income to the minor at any earlier time. the trust document directs the trustee to make distributions. The trust does not have to distribute the principal of the trust to the beneficiary when he reaches the age of majority. The trust is only required to pay the income annually. The present value of the income interest that the child will receive over the term of the trust is eligible for the annual exclusion.
Revocable living trust
A trust in which the grantor reserves the right to revoke the trust and regain trust property. The grantor can serve as the initial trustee. A revocable living trust is primarily established so that the trust assets avoid the probate process and provides for management of assets and grantor trust income tax status. The trust assets will transfer per the trust document and will not need to pass through probate. A revocable living trust does not reduce a grantor's gross estate. The assets of a revocable living trust are included in a grantor's gross estate at the fair market value at the grantor's date of death.
QTIP trust
A trust that grants the surviving spouse a lifetime right to the income of the trust while transferring the remainder interest to individual(s) of the grantor's choosing, typically created at the death of the first spouse to die. Use marital deduction for first spouse
See through trust
A trust that is the beneficiary of a custodial IRA. It provides for more control over distribution of IRA assets after the owner's death, as well as providing increased creditor protection for the beneficiaries of the trust. A)See-Through trusts provides creditor protection. B)See-Through trusts require RMDs to be paid. C)See-Through trusts may be accumulation trusts. D)See-Through trusts are required to provide the custodian of the IRA the trust document by October 31 in the year following the death of the IRA owner.
Trust income
A trust will be subject to income tax on any income that is not distributed during the year. The income that is distributed is taxed to the beneficiary.
Before his death in 2020, Melvin, age 66, incurred $65,000 in medical bills. Melvin's taxable estate at his death was $675,000 and his adjusted gross income for 2020 was $100,000. How much of Melvin's medical expenses will be deducted on his estate tax return?
A)$0.Rationale In this situation, Melvin's executor would not elect to deduct any of the final expenses on Melvin's estate tax return because the medical expenses will not change the estate tax due on Melvin's estate tax return - Melvin's taxable estate is less than the applicable estate tax credit equivalency. Melvin's executor will deduct the expenses, to the extent they exceed 7.5% of Melvin's AGI, on Melvin's final income tax return.
To what transfers does GSTT apply?
A)A taxable termination. B)A taxable distribution. C)A direct skip. NOTE: A skip-over does not exist.
Trusts generally
A)A trust can provide asset protection for a beneficiary. B)A trust can provide the grantor with a yearly payment. C)Property held within a trust will avoid probate. D)A trust will be subject to income tax on any income that is not distributed during the year. The income that is distributed is taxed to the beneficiary.
List trusts generally associated with planning for a special needs situation.
A)Family trust or third party trust. B)A trust under 42 U.S.C. Sec. 1396p(d)(4)(A). C)A pooled trust.
A trustee is subject to
A)Prudent Man Rule. Rationale A trust fiduciary must follow the Prudent Man Rule demonstrating a duty of loyalty and duty of care on behalf of the trust's beneficiaries. The Prudent Man Rule specifically states that the trustee, as fiduciary, must act in the same manner that a prudent person would act if the prudent person was acting for his own benefit after considering all of the facts and circumstances surrounding the decision.
The executor of an estate liquidated assets to generate the cash necessary to pay the estate taxes. Of the following assets, which is the least likely to generate income tax consequences upon its sale?
A)Real estate sold within three months of the decedent's date of death.Rationale The real estate sold within three months of the decedent's date of death would not generally create any income tax consequences because the fair market value on the estate tax return of that piece of real estate would be that sales price. So, when the estate sold the real estate it would not have any gain or loss on the transaction because its adjusted basis (the fair market value on the estate tax return) would be equal to the proceeds of the sale. Options b and d would create income tax consequences as the adjusted basis of the securities to the estate would be the fair market value of the securities at the decedent's date of death. Since these are publicly traded securities, their value changes daily, and the estate would most likely have some gain or loss on the sales. The stock redemption in option c would create favorable tax consequences. Section 303 redemption takes an otherwise dividend distribution subject to ordinary income tax and subjects any gain to capital gains tax.
Available elections for the executor
A)Selection of the tax year-end. B)Electing QTIP on certain property passing to the surviving spouse. C)Deducting the expenses of administering the decedent's estate on the estate's income tax return.
GST Tax
A)The GST tax is flat at 40%. B)Unlike gift tax, the lifetime exemption can be allocated to any gift or several gifts. The automatic allocation provisions for the GST exemption would result in an allocation of GST exemption to any generation skipping transfer unless the donor affirmatively elects not to allocate the exemption on a gift tax return. Without the affirmative election, the GST lifetime exemption will be used first when determining GST tax liability. C)Any GST tax is treated as a gift for gift tax purposes. D)Like gift tax, the lifetime exemption for GST tax is $11,580,000.
Benefits of unlimited marital deduction
A)The estate tax on property can be deferred until the death of the second-to-die spouse. B)The unlimited marital deduction can fund the applicable estate tax credit of the surviving spouse. Property that transfers to the second-to-die spouse is eligible for the marital deduction and, to the extent it is not consumed, will be included in the second-to-die spouse's gross estate at the fair market value at his or her date of death, including any appreciation that may have occurred since the first-to-die spouse's estate. If the first-to-die spouse had transferred the property to other beneficiaries, such as children, at the death of the second-to-die spouse, the assets would have only been subjected to estate tax in the first-to-die spouse's estate. All of the other statements are benefits of the unlimited marital deduction. D)The unlimited marital deduction can ensure the surviving spouse has sufficient assets to support her lifestyle.
characteristics of revocable trust
A)The grantor can take the property back from the trust. B)The income of the trust is always payable to the grantor. C)At the grantor's date of death, the fair market value of the trust's assets are included in his federal gross estate.
List reasons that an irrevocable trust would be included in the grantor's gross estate.
A)The grantor has retained the right to receive the income from the irrevocable trust. B)The grantor has retained the right to use the assets contributed to the irrevocable trust for the remainder of his life. C)The grantor retains the right to revoke the trust.
Benefits of taking a loan to pay estate taxes and administrative fees
A)The interest on the loan is deductible for income tax purposes. B)The executor of the estate will have more time to sell the estate's assets. C)The estate's assets will not be sold in a fire-sale fashion.
special use valuation of property?
A)The property must be used in a farming operation or a trade or business that was actively managed by the decedent or the decedent's family for 5 out of the 8 years immediately preceding the decedent's death. B)The value of the real and personal property used in a qualifying manner must equal or exceed 50 percent of the decedent's gross estate as adjusted. C)The value of the real property used in a qualifying manner must equal or exceed 25 percent of the value of the decedent's gross estate as adjusted. D)The qualifying property must pass to qualifying heirs who must actively participate in the farming activity or trade or business.
Life insurance incedent of ownership
A)The right to change the beneficiary of a life insurance policy. C)The right to take loans against the cash value of the life insurance policy. D)A provision in an ILIT that directs the trust to pay the federal estate taxes of the insured.
Trusteed IRA or a "see-through" trust
A)They can both ensure the owner's wishes with regard to maximum distributions. B)NEITHER can be used to avoid RMDs. C)They can both offer creditor protection. D)They can both offer invasion of principal for an ascertainable standard (HEMS).
Trusteed IRA
A)Trusteed IRAs can provide creditor protection. B)The original owner can name the successor beneficiaries. C)Trusteed IRAs can invade for HEMS. D)Trusteed IRAs can limit distributions to the RMD.
Community property
All property acquired by the efforts of either spouse during the marriage is owned equally by both spouses at the time of acquisition
Family Limited Partnership
Allows owners of farm property and/or agribusiness assets to transfer some of those assets to family members as a gift Transfers of the limited partnership interests in the FLP are usually eligible for minority and lack of marketability valuation discounts. The primary purpose of the FLP is to transfer interests in property utilizing various valuation discounts and for the general partner to retain complete control. The transfer of property to a partnership is generally a tax-free exchange. Limited partners are barred from participating in the day-to-day operations of the FLP.
Reverse QTIP Election
Allows that the original decedent be treated as the transferor for GST purposes so that his or her GSTT exemption can be preserved for the trust.
Special Use Valuation (Section 2032A)
An executor may elect to value real estate used in a closely held business or for farming for its actual use rather than its highest and best use -Max reduction in value is $1,110,000 in 2016 -Real estate must be at least 25% of the gross estate -Farm or closely held business must be at least 50% of the gross estate -The property must pass to qualifying heirs (immediate family members) -Qualified use of the property required for 5 out of 8 years before death and continued use during a 10 year period after death
Income beneficiary of trust
An income interest in a trust can be given to the beneficiary, while also naming the same individual as the remainder beneficiary of the trust. B)A decedent will commonly create a testamentary trust that names his spouse as the income beneficiary of the property for the rest of the spouse's life and the decedent's children as the remainder beneficiaries. C)A dynasty trust only has income beneficiaries. The trust property will never vest with a remainder beneficiary. The income beneficiary is not viewed as making a gift to the remainder beneficiary at the termination of a trust. At the formation of the trust, the grantor of the trust made a taxable gift to the remainder beneficiary equal to the value of the property contributed less the value of the income interest payable to the income beneficiary.
How should grandparents hold life insurance for grandkids?
An irrevocable life insurance trust should be created for the benefit of the grandchild. Rationale The policy should be transferred to an ILIT with the grandchild listed as the beneficiary. Ideally, the ILIT would be funded with cash contributions less than the annual exclusion and would pay the premiums of the life insurance policy on the grandparent's life.
nuncupative will
An oral will (often called a deathbed will) made before witnesses; An oral will with two witnesses which is valid in some states, and not in others. Usually only includes personalty assets, not realty.
Private nonoperating foundation
An organization that is not a public charity and spends 90% of its adjusted net income on activities engaged in for the active conduct of its exempt purpose is a private operating foundation.
QDOT
An outright specific bequest of property from a U.S. citizen to his or her resident alien spouse does not qualify for the marital deduction. As such, the unlimited marital deduction is not available. In order to use the unlimited marital deduction for any transfers would have to create a Qualified Domestic Trust (QDOT). A QDOT will allow the U.S. government to subject any assets remaining at Rosa's death to estate taxation. In order to qualify the QDOT for the unlimited marital deduction, the following requirements must be met:1. At least one of the QDOT trustees must be a U.S. citizen or U.S. domestic corporation.2. The QDOT must prohibit a distribution of principal unless the U.S. citizen trustee has the right to withhold estate tax on the distribution.3. The trustee must keep a sufficient amount of the trust assets in the U.S. to ensure the payment of federal estate taxes, or the trustee must have a minimum net worth sufficient to assure the payment of estate taxes upon Rosa's death.4. Jeremy's executor must elect to have the marital deduction apply to the trust.
CRAT
At the creation of a CRAT, the donor receives an income tax charitable deduction on his income tax return for the year in which the trust is formed. ACRAT does not allow subsequent contributions after creation. Remainder Beneficiary does not have to be informed of their right to receive the remainder interest and they have do not have a right to force the payment of their interest.
MEC
Because Warren's life insurance policy was funded with a single premium payment, the policy is considered a modified endowment contract (MEC). Any loan from a MEC is considered taxable gain, taxed as ordinary income, to the extent there is any gain in the contract.
Bypass Trust // "B trust"
Bypass, nonmarital, B, family, applicable credit amount. Consists of property transferred to the trust at the time of the decedent's death. Gives the decedent postmortem control over the property. The amount of property transferred to the trust is usually an amount equal to the exemption. Can be structured to provide income stream to surviving spouse. Income can be split among the spouse and other individuals Surviving spouse may be given limited withdrawal rights (5 and 5 or HEMS) if this is the case it will not be included in the surviving spouse's estate At the surviving spouse's death the assets pass to the beneficiary, estate tax free. Always fully fund the bypass trust using the available exemption. The Bypass trust does not use the marital deduction. It normally uses the applicable exemption amount ($5,490,000).
the unlimited maritial deduction can / cannot have a terminable interest
Cannot For a transfer to qualify for the estate tax unlimited marital deduction, the property interest must meet three requirements. First, the property must be included in the decedent's gross estate. Second, the property must be transferred to the surviving spouse who is a U.S. citizen. Third, the interest must not be a terminable interest.
lineal descendants
Children, grandchildren, great-grandchildren, and so on of a testator Biological children of lineal descendents Spouses of biological descendents Age does not come into play for skip person determination. If parent dies, child moves up to avoid GST
During the year, Johnson created a trust for the benefit of his five children. The terms of the trust declare that his children can only access the trust's assets after the trust has been in existence for 15 years and the trust does not include a Crummey provision. If Johnson transfers $85,000 to the trust during the year, what is his total taxable gifts for the year?
D)$85,000.Rationale Because the trust does not include a Crummey provision, the transfer to the trust is a gift of a future interest not available to be offset by the annual exclusion. As such, the entire transfer to the trust for the year is subject to gift tax
How can Tenancy by the Entirety be terminated?
Death of either spouse - survivor now owns the property Divorce - parties become tenants in common Mutual agreement to sell the property Foreclosure No Right of Partition Tenancy by entirety cannot be terminated without the consent of the other spouse, death, or court intervention (divorce).
Types of taxable transfers
Direct Skip - TransferOR pay GSTT Taxable termination Taxable Distribution - transferEE pays GSTT
For a transfer to qualify for the estate tax unlimited marital deduction,
For a transfer to qualify for the estate tax unlimited marital deduction, the property interest must meet three requirements. First, the property must be included in the decedent's gross estate. Second, the property must be transferred to the surviving spouse who is a U.S. citizen. Third, the interest must not be a terminable interest.
Upon what form is a lifetime GST reported?
Form 709.Rationale Any lifetime GST is reported on Form 709, the United States Gift and Generation-Skipping Transfer Tax Return.
Characteristics of Generation Skipping Transfer Tax
GST outright gifts qualifying for the annual exclusion are not subject to the tax. Assets transferred to a trust that has a grandchild as the sole beneficiary may be subject to both gift and generation skipping transfer tax. If all the children of a trust are grandchildren (whose parents are living) of the grantor then the trust is subject to GSTT.
In the current year (2021), George made taxable gifts to his two sons. One was for $500,000 to his son Chris and another was to his son Alex for $500,000. George's wife, Lois died several years ago. George used his applicable credit amount to offset any gift tax liability, and would like to know how much applicable gift tax credit does he have left at this time?
George gave $1,000,000 in the current year in taxable gifts so he has $10.7M of remaining exemption left which translates to a $4,280,000 credit ($4,625,800 - $345,800). There is no indication from the stem that he has any portability from his deceased wife. Choice "A" is the credit equivalency, not the credit. Taxable gifts is a term of art meaning net of any annual exclusion. Note: the $345,800 is from the estate tax table. It is the calculated tax due on 1 million dollars of gift or estate amounts.
706
Go on estate tax return GSTs at death
709
Go on gift tax return GST during life
Ascertainable Standard
H Health E Education M Maintenance S Support
Mary Jane's husband died in October of 2020. Mary Jane has a one-year-old dependent child and has not remarried. Which filing status will Mary Jane use on her 2023 income tax return?
Head of household. Rationale: Mary Jane will file as head of household in 2023. Since Mary Jane's husband died in 2020, she will file married filing jointly for the year of her husband's death. In the two years after her husband's death (2021 and 2022), Mary Jane will file as qualifying widow. For the 2023 tax year, Mary Jane will file head of household, and this will continue until she remarries or no longer provides a home for her child. Must have a qualifying dependent to file as head of household or qualifying widow. If not, they file as single
Post 1976 Taxable Gifts
History of taxable gifts that is included in the estate
If it qualifies for the unlimited marital deduction then it IS / IS NOT a taxable gift.
IS NOT
When is life insurance taxable?
If a life insurance policy is transferred for valuable consideration, the death benefit in excess of the transferee's adjusted basis will be subject to income tax. An exception exists for any transfer of the life insurance policy for valuable consideration to the insured, a partner of the insured, a partnership in which the insured is a partner, a corporation in which the insured is a shareholder or officer, or a transferee who takes the transferor's basis in the contract.
ILIT
If only making cash contributions to the trust, the value of the ILIT will not be included in gross estate. If any gift tax are paid on the contributions to the ILIT, the gift tax paid on the contributions would be included in her gross estate. To the extent the grantor of an ILIT releases a right to revoke the trust within three years of death, the value of the ILIT is included in their gross estate. If the executor can demand a distribution from the ILIT to pay Penelope's estate taxes, the value of the ILIT will be included in the gross estate. The executor can sell the assets from Penelope's estate to the ILIT without causing the value of the ILIT to be included in Penelope's gross estate. If creator had released any rights she had to revoke the ILIT in 2019, the value of the ILIT would be included in Penelope's gross estate.
Generational Skipping transfer tax
If the transferee is a non-lineal descendant <AND> who is more than 37.5 years younger than the transferor, the transfer is subject to GSTT. Transfers to relatives within one generation are not subject to GSTT A grandniece is a lineal descendant and a skip person. Each individual can exclude up to $11,580,000 of transfers from GSTT. The GSTT is applied to a gift after the application of the annual exclusion. Gifts that are subject to GSTT can be split. The GSTT applies to the transfer of any property to a skip person or an interest in trust for the benefit of a skip person.
What is GSTT
In addition to the estate and gift tax systems, a third, seperate transfer tax system exists know as the generation skipping transfer tax system (GSTT) The GSTT is an excise tax imposed IN ADDITION TO any gift or estate tax on the transfer of property to a donee OTHER THAN THE SPOUSE who is two or more generations younger than the donor The GSTT rate is a flate tax rate equal to the maximum estate tax rate (40% in 2020) in effect at the time of the Generation skipping transfer. Like the estate and gift tax systems, the GSTT system has an annual exclusion ($15,000 in 2020); a lifetime exemption $11,580,000 (which is indexed for inflation); and an exemption for qualified transfers
Gross estate includes
Incidence of ownership of life insurance policies assigned within three years of death are includible in the decedent's estate, as are CRATs and CRUTs. Any amount subject to the gross up rule is includible in the taxable estate but must be for gifts made within three years of death. Gift taxes paid on gifts made within 3 years of death must be added back to the gross estate but if the gift tax paid is on an older gift, it does not get added to the gross estate
Treatment of inherited IRAs in Federal Bankruptcy
Inherited IRAs are not retirement accounts (according to the Supreme Court) and, therefore, are included in the bankruptcy estate.
GRAT
Interest and dividends earned by assets in a GRAT are taxed to the grantor.
Primary representative
Inventory the estate. Probate the will.
responsibilities of the personal representative
Inventory the estate. Probate the will.
Testamentary trust
Is created under a last will and testament. The assets are included in the gross estate. It is included in probate.
Qualified Disclaimer
It may not redirect the bequest to another person selected by the disclaimant. It must be received by the executor of the estate within 9 months of the death of the decedent. It must be written and irrevocable. The disclaimant may disclaim a part of an asset.
Life insurance dividends
Life insurance policy dividends are a return of the policy owner's adjusted basis. Any policy dividends received would decrease, not increase, the owner's adjusted basis.
LI Proceeds on gratuitously transferred policies
Life insurance proceeds on policies gratuitously transferred within three years of death are included in the gross estate of the donor. gross-up rule - Gift tax paid within three years of death is included in the federal gross estate as well under the gross-up rule.
Skip person
Lineal descendents two or more generations (grandchild) Unrelated and non-lineal if the they are more than 37.5 years younger than than the transferor. Trust if: all interests in the trusts are held by skip person OR if only skip person benefits Predeceased ancestor rule these people trigger the GST
Can the annual exclusion be used against testamentary transfers?
NO
Do the assets in a revocable trust that requires the trustee to create a QTIP trust for the benefit of the spouse at the death of the grantor automatically qualify for QTIP treatment?
No, the executor must elect QTIP assets on the 706.
Does an outright specific bequest of property from a U.S. citizen to his or her resident alien spouse qualify for the marital deduction?
No. The unlimited marital deduction is not available.
When is a written donation statement required?
Only when a contribution totals more than $250 is the organization required to provide the donor with a written statement of acknowledgement. Form 8283 is only filed when the total of non-cash contributions exceeds $500.
Noncupative Will
Oral will, will by made only by a person in imminent peril of death. an oral will with two witnesses which is valid in some states, and not in others. Usually only includes personalty assets, not realty.
GSTT exclusions (not subject to GSTT)
Payment of tuition to a qualified ed org on behalf of skip person Payment of medical exp on behalf of skip person Annual exclusion -Crummy provision for trust contributions - Trust assests can only be distributed for the benefit of the beneficiary during the beneficiary's lifetime - the trust does not terminate before the beneficiary's death and the assets must be includable in the beneficiary's gross estate. Split gifts - Enables a spouse to treat gifts of seperate property as being made 1/2 from each spouse. Applies to all transfers for the year
Revocable living trust
Primary Advantages Grantor trust income tax treatment. Probate Avoidance. Management of assets. A revocable living trust is primarily established so that the trust assets avoid the probate process and provides for management of assets and grantor trust income tax status. The trust assets will transfer per the trust document and will not need to pass through probate. A revocable living trust does not reduce a grantor's gross estate. The assets of a revocable living trust are included in a grantor's gross estate at the fair market value at the grantor's date of death.
Spendthrift clause
Protects the trust assets from the claims of the beneficiary's creditors
Public Charities
Public charities receive broad support from the general public. A public charity can receive up to 33% of its support from its gross investment income and its unrelated business taxable income.
Qtip Trust
Qualified Terminable Interest Property A QTIP trust qualifies for the unlimited marital deduction. It does not give the spouse an unlimited general power. A QTIP trust must distribute income annually only to the surviving spouse. Only one beneficiary is permitted in a QTIP trust in order to qualify for the marital deduction. The trustee may have the power to invade for the HEMS of the spouse only.
2503C contributions
Qualify for the annual gift tax exclusion rules because any gift to such trust is deemed to be a gift of present interest
Skip person
Related= > 2 generations Unrelated = > 37.5 yrs
Charitable remainder trust
Residuary clause in trust or will places all assets in residue of estate in charitable trust Only a CRUT allows additional contributions. A CRAT does not allow additional contributions. A CRET and CRIT do not exist.
Section 303 Redemption
The Section 303 Redemption is used primarily in cases where the decedent is a major stock holder in one or more corporations and the heirs wish to maintain control of the decedent's stock. Under the provisions of Section 303, the surviving family can sell a portion of the decedent's stock to the corporation. This transaction provides cash to pay the decedent's final expenses. The amount necessary to pay the decedent's estate taxes, funeral expenses, and administration fees limits the amount the family can redeem.
Sarah, age 90, would like to spend the few years she has left enjoying her life. She is currently unable to eat and bathe without assistance. She would like to use her life insurance policy to fund the remainder of her life. What are some of her options?
Sarah can exchange the policy for an annuity income tax free. While Sarah is not terminally ill, she is chronically ill because she is unable to perform 2 of the 6 activities of daily living (eating and bathing). Thus, surrendering her policy for accelerated benefits will not cause her to be subject to income tax as long as the proceeds are used to pay medical cost and not general living expenses. The loan is not considered a taxable distribution because the policy is not a MEC. If her son purchases the policy then Sarah has transferred the policy for value. This will cause the policy to be taxed in the son's income when Sarah dies.
Some estate planning can occur after death (post mortem). Some post mortem techniques or tools require an executed document prior to death. Which of the following is effective without a previously executed document that is enforceable after death?
Section 303 stock redemption election. Election to waive the personal representative fees.
Making arrangements to deal with the possibility of physical or mental incapacity is an important area of estate planning. Which of the following arrangements may be used to deal with unexpected incapacity?
Springing durable power of attorney Revocable living trust Living will
TPPT
Tangible Personal property trust Like a GRAT or QPRT, a TPPT uses temporal discounts to transfer property, in this case tangible personal property, at a reduced gift tax cost. Any tangible personal property can be contributed to a TPPT. Property which is expected to appreciate should be contributed to the TPPT so that the appreciation occurs in the hands of the beneficiary and not the grantor.
Tenants in common
Tenancy in common allows for different percentages of ownership for different co-tenants. A decedent's share of the tenants in common property will be probated. Tenants in common titling does not provide for automatic retitling (e.g. it is included in probate estate and goes through probate).
The main difference between a 2503(b) and a 2503(c) trust is:
The 2503(c) trust must terminate, or the beneficiary must have the right to receive the trust's assets, when the beneficiary reaches age 21. A 2503(b) trust may hold property for the lifetime of the beneficiary. Rationale The main difference between a 2503(b) and 2503(c) trust is that the 2503(b) trust may hold property for the life of the beneficiary, whereas the 2503(c) trust must distribute the property to the beneficiary when he reaches the age of 21.
The GSTT applies to transfers when
The GSTT applies to the transfer of any property to a skip person or an interest in trust for the benefit of a skip person.
ILIT (irrevocable life insurance trust)
The IRC (Section 2042) states that if a decedent owns a life insurance policy on her own life or possesses any incidents of ownership in the policy on the date of her death, the policy death benefit will be included in her gross estate. The right to borrow against the life insurance policy is considered an incident of ownership which would cause inclusion in Colleen's federal gross estate. Because Colleen retained this right, her federal gross estate would include the death benefit of the whole life insurance policy owned by the ILIT. As long as the decedent has the right to take a loan against the policy, it is considered an incident of ownership. There is no requirement that a loan be outstanding. Paying the premium on a policy transferred to an ILIT does not create the incidents of ownership that would cause inclusion in Colleen's federal gross estate.
Parties to a trust
The parties to a trust are the grantor, who creates the trust and contributes the property; the trustee, who manages the trust and holds the legal title to the trust assets; and the beneficiary, who holds the beneficial title to the property. The principal of the trust is the property contributed to the trust; it is not a party to the trust.
Alternate Valuation Date
The date 6 months after the decedent's death that may be used for estate tax valuation purposes. The general rule is the election covers all assets included in the gross estate and cannot be applied to only a portion of the property. Assets disposed of within six months of decedent's death must be valued on the date of disposition. The election must decrease the value of the gross estate and decrease the estate tax liability. The election must be made on Form 706 to be valid.
Group term insurance
The death benefit of the life insurance policy will be included in federal gross estate if the owner of the life insurance policy has the right to change the designated beneficiary of the policy. the death benefit payable from a policy issued under a group term life insurance policy is treated just like the death benefit payable from any other life insurance policy. As long as the policy has not been transferred for valuable consideration, the beneficiary will receive the death benefit without any income tax ramifications. The beneficiary of a life insurance policy does not have any right to the death benefit until the insured has died.
Of the following, which is false regarding selling an estate's assets to quickly generate cash?
The estate may have income tax consequences. The assets may not be sold at full, realizable fair market value because of the forced sale. Any selling expenses are deductible on the estate tax return (706). Any losses on the sale of the assets are income tax losses and are deductible on the estate's income tax return, not on the estate tax return. All of the other answers are true statements.
form 706- estate tax return
The executor of a decedent's estate uses Form 706 to figure the estate tax imposed by Chapter 11 of the Internal Revenue Code. Form 706 is also used to compute the generation-skipping transfer (GST) tax imposed by Chapter 13 on direct skips.
What is the value for gift tax purposes of a paid up whole life insurance policy?
The replacement cost
what is the value of a paid up whole life insurance policy for gift tax purposes
The replacement cost of the policy
general power of appointment over the trust's assets
The right to appoint the assets of the trust to herself, her creditors, or anyone she desires will not create an interest which will cause inclusion of the trust's assets in the surviving spouse's gross estate. Anyone dying with a general power of appointment over the assets of a trust will include the fair market value of the trust's assets in his gross estate.
Three year rule
The three-year rule (IRC Section 2035) states that if an individual gratuitously transfers ownership of a life insurance policy on his life, or any incident of ownership in a policy on his life within three years of death, the death benefit of the policy is included in his federal gross estate. In this case, only answer c provides the correct solution. If Louie dies two years after the gift, the gratuitous transfer of the policy falls within the three-year rule and the death benefit is included in Louie's federal gross estate. All of the other options are incorrect.
If life insurance is _____ the death benefit in excess of the transferee's adjusted basis will be subject to income tax.
Transferred for valuable consideration
irrevocable trust
Trust that cannot be amended or revoked once made except on conditions that may be set forth in trust The full fair market value of the trust is excluded from grantors gross estate because the transfer of the trust was irrevocable and grantor does not retain any right to the trust's assets. However, gift tax paid on gifts made within three years of grantor's death is included in his gross estate.
Will Substitutes
Various instruments, such as living trusts or life insurance plans, that may be used to avoid the formal probate process. Property passes outside of probate. A Will substitute avoids public scrutiny, testamentary control, and cannot be overridden by bequests. An example might be a contractual agreement as a life insurance beneficiary. Examples: JTWROS Titling; TOD Designation; Insurance Policy with named beneficiary Community property is NOT a will substitute. It goes through probate
Charitable annuity
When an individual transfers property in exchange for a charitable annuity, the value of the property less the value of the retained annuity interest is the value of the charitable deduction. In this case, $100,000 - $43,000 = $57,000.
Are contractually transfer items included in an individual's gross estate?
Yes
Unrelated person
You are a skip person if you are more than 37.5 years younger than the donor
GST Exemption
allocable to interviso transfers and testamentary transfers On the GSTT you can elect when you want the exemption to occur. first allocated to direct skips
Trusts are subject to GSTT when
beneficiaries are a skip person
Intervivos Trust
created while settlor still alive - self declaration (settlor and trustee are the same person) or transfer in trust (settlor conveys legal title)
6166
extend time for payment of the tax return attributable to something like farmland for a 15yr period. (closely held business also) ex: 15M estate, 5M of that is a farm. 3.9 Estate tax. dont extend 3.9, it extends time for 1.3M (5M=1/3 of 15M) (1.3=1/3 of 3.9). only pay interest on 1.3M on fist 5 years plus interest on unpaid balance. years 6-15 make 10 equal payments. (1/10 of 3M=130K) 130K+interest on what owed. tax attributable to first M dollars of the value of the farm only pay interest of 2%. (1/5 of 1.3)
Anyone dying with a _____ over the assets of a trust will include the fair market value of the trust's assets in his gross estate
general power of appointment
Power of appointment trust
is a marital trust because the surviving spouse has a general power over those assets and must therefore include any remaining assets in his/her gross estate. Gives the general POA to a spouse to dispose of trust assets in favor of the other spouse, or the other spouse's estate. Also referred to as a marital trust, or "A" trust, and will qualify for the estate tax marital deduction if it meets the following requirements: --surviving spouse is entitled to all income, distributed annually, no accumulation is permitted. --surviving spouse must be granted general POA over trust assets, but the trust may specify whether the POA takes effect during the grantor's lifetime or at his or her death. --surviving spouse must be given a general POA that can be exercised in favor of the other spouse or the other spouse's estate. --surviving spouse must be able to exercise the power under all circumstances (including remarriage). Avoids probate, protects trust assets from creditors, and can provide secure income for the surviving spouse. The trust will qualify for the unlimited marital deduction if the surviving spouse is given a general power of appointment over the trust's assets. Powers of appointment trusts are irrevocable trusts that can be created either during lifetime or at death. A general power of appointment trust qualifies the grantor's contributions for the gift tax annual exclusion if the beneficiary is allowed to take withdrawals at his or her discretion. A special power of appointment trust that limits the surviving spouse's right to an ascertainable standard (health, education, maintenance and support) does not qualify the trust for the unlimited marital deduction.
testamentary trust
is a trust created by a will. It only comes into use when the person making the will dies.
GPOA
ohn has a general power of appointment over his father's assets. Which of the following is not true regarding the power? John can appoint his father's money to pay for the needs of his father. John can appoint money to John's creditors. John must only appoint money using an ascertainable standard. If John predeceases his father, John's gross estate would include his father's assets even though they had not been previously appointed to John.
Direct Skip
outright gift to a skip person GST is imposed only on the amount received by the transferee Any GSTT paid by the transferor is treated as a taxable gift by the transferor
Qualified Disclaimer
property being disclaimed must satisfy the conditions of Internal Revenue Code §2518. A qualified disclaimer allows an individual to refuse property from the estate of a decedent. A qualified disclaimer is a disclaimer that is made in writing, filed within nine months of the decedent's date of death, does not allow the disclaiming party to specify to whom the property will pass, and does not allow the disclaiming party to benefit from the property before disclaiming his interest. If a disclaimer is qualified the property will pass to the residual heirs of the estate, or as directed by a disclaimer clause, with no effect to the disclaiming party. In this case, Barney has no taxable gift related to this disclaimer.
special use valuation pertains to real property used in a trade or business.
special use valuation pertains to real property used in a trade or business.
Private annuity
the annuitant sells an asset to a buyer in exchange for an unsecured promise from the buyer to make fixed annual payments to the annuitant for the remainder of the annuitant's life A private annuity cannot give the seller a security interest in the Rationale A private annuity cannot give the seller a security interest in the property or the private annuity treatment is disallowed. a private annuity requires the buyer to pay the annuity payment for the remaining life of the seller. A The risk for the buyer in the private annuity is that the seller lives longer than his life expectancy and the buyer overpays. To compensate for this risk, the buyer does not have to make the payments if the seller dies before his life expectancy.
If a physician has determined that the insured has a physical condition that is terminal, the value of a life insurance policy for gift tax purposes will be
the death benefit, discounted for the predicted life expectancy of the insured
Life Insurance Surrender
the insurer will pay the surrender value, the contract will be canceled, and correspondingly there will not be a death benefit payment at death. The surrender value is equal to the cash accumulation account less a surrender charge from the insurer. Once the policy is surrendered the contract is canceled and no death benefit would be paid to the beneficiary. The approval of the listed beneficiary is not required unless it was stated that he had made an irrevocable beneficiary designation.
What happens to completed gifts for which gift tax was not paid on the transfer.
to the extent it was a taxable gift it would be included in the adjusted taxable estate.
