FHCE 4220 Estate Planning Exam 1

Gift Tax Lifetime Exemption Amount

- $11,400,000 lifetime exemption amount (in 2019) - Applicable credit amount of $4,505,800 - Annual exclusion versus lifetime exemption -- Annual exclusion applies before calculating taxable gifts -- Lifetime exemption applies to taxable gifts - Is cumulative lifetime total - Unused amount applies toward estate tax

Net Gifts

- A gift made on the condition that the donee pay any gift tax - The donor will have taxable income to the extent that any gift tax paid by the donee exceeds the donor's adjusted basis in the property - (Normally the donor is responsible for all gift taxes)

Surety Bond

- A promise by a surety or guarantor to pay one party a certain amount if a second party fails to meet some obligation, such as fulfilling the terms of a contract - Court appointed administrators are generally required by state law to post bond

Gift splitting with spouse

- Annual exclusion doubled to $30,000 (in 2019) per donee - If no gifts exceed 30,000 then donor spouse must file a form 709 - If gift does exceed 30,000 then both spouses must file a form 709

Gift Tax filing exclusions

- The gift is under the annual exclusion - The gift is a qualified transfer - The gift is a transfer to a spouse (generally) - The gift is a transfer to a charity

Charitable Gifts

- There is an unlimited gift tax deduction for gifts made to qualified charities

Gifts to Spouses

- There is an unlimited marital deduction allowance for transfers between married people without gift tax - The transferee spouse must be a U.S. citizen - There are different rules for non-U.S. citizens

Qualified transfers not subject to gift tax

- Transfer directly to qualified educational institution - - Transfer directly to medical provider - Property transfers part of divorce agreement or decree

What Property Passes Outside Probate?

- Transfers by contract using beneficiary designations other than decedent's estate - Transfers by operation of law - Transfers by trust

Gift Tax Exemptions

- Transfers to Political Organizations - Qualified Transfers -- qualified transfer is a payment made for someone else paid directly to a: Qualified educational institution for tuition, or Medical care provider for qualifying medical expenses -- A qualified transfer does not count against the annual exclusion or applicable lifetime exclusion amounts - Payments for Support -- Payments for legal support are not gifts -- Legal support does not necessarily stop at age 18 (depends on state law) - Payments to Divorcing Spouses -- Payments pursuant to a divorce decree are nontaxable property settlements and therefore not gifts

Custodial Accounts for Minors

- Two types -- Uniform Gifts to Minors Act (UGMA) -- Uniform Transfers to Minors Act (UTMA) -- (Type that may be established varies by state. Most states now provide for UTMA accounts) - Once funded, account is legally the child's money Child can access account at state set age of majority

Gift

- Voluntary transfer of property - transfer for less than full consideration

Distributing Assets

- What if the asset no longer exists? - Ademption - extinction of right, revoking a gift my selling it off before death or destroying it. - Distribute remaining assets.

Consideration

- something of value exchanged for something else of value - Not counted as a gift anymore

Transfers that are gifts but fully deductible

-- Gift to qualified charity by U.S. citizen or resident - Gift to spouse if gift is not terminable interest

Assets subject to probate

-singly owned assets -TIC property -community property -assets where the beneficiary is designated as the estate of the insured * use a trust to avoid probate

Direct Gifts

A direct payment of cash or transfer of property from one person to another

Heir

A person who inherits another's belongings. Blood relative. Inherits under intestacy laws

Powers of Appointment

A power, usually included in a trust or power of attorney, allowing the power holder to direct assets to another

Ancillary Probate

A probate for real property located in a state other than the domicile of the deceased. - Personal assets Probated under law of decedent's residence (domicile) - Real estate Probated under law of state where located (situs)

Attestation Clause

A provision at end of the document signed by the witnesses as authentication of testator's will

Physician Orders for Life Sustaining Treatment (POLST)

A supplement to a living will and health care power of attorney specifically addressing using or not using various treatment options

Simple Will

A will that leaves everything to the spouse. No estate planning needed.

Holographic Will

A will written entirely by the testator with his own hand. No witnesses required

What if there are not enough assets to satisfy all bequests?

Abatement - reduction

Will

Allows the testator to control the distribution his property at death.

Crummey Provision

Allows the trust beneficiary to withdraw some or all of any contribution to a trust for a limited period to create a gift of a present interest

Side Instruction Letter

Also known as a personal instruction letter, details the testator's wishes regarding the disposition of tangible possessions (household goods), the disposition of the decedent's body, and funeral arrangements. A side instruction letter is not legally binding, but generally followed.

Condicil

An amendment to a will

Nuncupative Wills (oral)

An oral dying declaration made before sufficient witnesses. Not valid in all states. Witnesses must not have any interest in testator's property.

Durable Power of Attorney for Health Care

Appoints agent to make health care decisions in case of principal's incapacity or disability Power of agent does not expire with person's incapacity or disability; only at death

Will

Avoids the state's intestacy law distribution scheme

Per Capita

Based on the number of beneficiaries living at decedent's death

Revoking a Will

By destroying the old will, or create a new will specifically revoking the old one

Appointments and Powers Clause

Clause directing payment of debts and taxes (includes the sources from which to pay them)

Fee Simple

Complete ownership of property by one person. 100% of value included in owner's gross estate 100% of value included in owner's probate estate

Do Not Resuscitate Order (DNR)

Declares the principal's wish to avoid having CPR performed in the event the heart stops beating

Per Stripes

Directs equal shares to each member of a specific tier or class of relatives

The Bequests Clause

Directs specific property to be passed to others

Gift Tax Due Date

Due date: April 15 - Year following year in which taxable gift was made - May be extended to October 15 - Income tax extension also extends gift tax deadline - The donor is primarily liable for gift tax but the donee can become responsible if the donor does not pay

Testate

Having made and left a valid will.

The Declaration Clause

Identifies document as last will and testament of testator Revokes all previous wills and codicils of testator

The Introductory Clause

Identifies testator, testator's residence, state of domicile, and next of kin.

Present Interest

Immediate right to enjoy benefits of property Gifts qualify for annual exclusion ($15,000 in 2019)

Complex Will

Involves estate planning. Leaves property as tax-efficiently as possible.

State Titling Law (survivorship features)

JTWROS Tenants by the Entirety

Living Wills/Advance Medical Directives

Legal document expressing an individual's last wishes regarding sustainment of his life under specific circumstances

Requirements for completed gift under state law

Legally competent donor Donative intent (not required for gift tax purposes) Actual or constructive delivery Valid acceptance by donee

Donor (person who makes a gift)

Must be competent to make the gift Must have intent to make a voluntary transfer

Donee (person who receives a gift)

Must be competent to receive the gift Must take delivery Must accept the property

Guardianship Clause

Names the guardian for minors or other legal dependents

Legatee

One who inherits personal property under a will. May also be a charity or business. Only valid with a will.

Devisee

One who inherits real estate under a will. Only valid with a will.

Joint Will

One will for two persons, usually husband and wife

Advantages of a properly prepared Will

Permits the selection of an executor/executrix as the decedent's personal representative to administer the estate Provides for the orderly transfer of assets that are not automatically transferred at death by some other means Permits the designation of guardian for minors and or dependents Permits the transfer of assets to charity (is not possible in intestacy) A will can provide for the utilization of the unlimited marital deduction A will can provide for disinheritance of unworthy heirs A will can help to minimize the estate tax burden A will can direct the estate's share of any tax burden to be paid as well as sources of funds to be used to pay such taxes

Durability Feature

Power remains in effect even if the principal becomes incapacitated or disabled

Probate Process

Process for transferring ownership at death. Governed by state law.

Reversion

Property reverts back to original owner.

Intangible Property

Property that has no physical form (Stocks, Bonds, Patents, and Copyrights)

Tangible Property

Property that has physical existence and can be distinguished by the senses of touch and sight.

State Trust Law (property already retitled to trust)

Revocable Living Trust - Assets must be transferred to trust before death - Revocable trust becomes irrevocable at death - Irrevocable Trust

Future Interest

Right to enjoy benefits of property only in future (No Gift Exclusion, fully taxable)

The Residuary Clause

The clause in a will that disposes of all of the testator's property not otherwise distributed

Intestacy

The condition resulting from one's dying not having made a valid will.

Privately Drafted Trust Arrangements

Three types - Section 2503(c) trust (or minor's trust) - Section 2503(b) trust (or mandatory income trust) - - - Crummey trust (Most flexible)

Mutual or Reciprocal Wills

Two identical wills leaving all assets to the other (usually spouses) Sometimes referred to as - Sweetheart wills

Gifts of a Present Interest

Unrestricted right to the immediate use of the property

Statutory Will

a formal will on a preprinted form

power of attorney

a legal document authorizing someone to act on your behalf

Realty (Real Property)

land and anything permanently attached to the land

remainder interest

property passes to third party at end of intervening interest

Springing Power

the agent's power "springs" into existence upon some defined event or determination

Executor vs. Administrator

- The executor (testate) or administrator (intestate) is appointed by probate court - Executor named in will - Administrator named by probate court - The court issues letters testamentary (for executors) or letters administration (for administrators)

Tenancy in Common

- Co-ownership of property in which each party owns an undivided interest that passes to his or her heirs at death. - Tenants do not necessarily own equal interests - Each tenant's interest can be severed without the other tenant's consent - Each tenant generally shares in income and expenses - Upon death, tenant's interest transfers via probate either testate or intestate - If the tenants disagree, they each have the right to partition or sever the property. After they sever, each owner then owns his share fee simple - If ownership is not in proportion to contribution percentage, a gift may have occurred - FMV of ownership interest is included in the gross estate of a decedent and in the probate estate

Complete vs. Incomplete Gifts

- Completed gifts are gifts that have come to fruition -- The donor has released all control over the asset and the donee can be identified - Incomplete gifts are gifts that have not yet come to fruition -- They are not taxable gifts for gift tax purposes -- Joint bank accounts?

Disadvantages of Probate

- Complex and takes time Generally takes 6-24 months - Monetary expenses Court costs - 5 to 10% (some up to 20%) - Ancillary probate (probate in a nondomiciliary state for ancillary property owned by decedent) - Loss of privacy, Court proceeding are open to public scrutiny

Value of a gift

- FMV of property on date of gift - Consideration paid by donee reduces value of gift - Donor liable for gift taxes due on gift (If donor fails to pay gift tax, donee may be liable) - Net gift: donee agrees to assume gift tax on gift

Gift Tax Annual Exclusion

- First $15,000 of gifts to each donee (2019) - Applies to as many donees as donor chooses - Non-U.S. citizen spouses -- "Super Annual Exclusion" = $152,000 (2019)

Section 529 Plans

- Funds contributed on behalf of minor - Ownership remains in name of donor - Contribute up to $75,000 (in 2019) without making taxable gift (must file Form 709 documenting the use of annual exclusions for future years) - Earnings grow tax deferred - Owner/parent can take back money at any time. - Distributions for qualified education expenses are tax free

Gift tax return (Form 709) must be filed if any of the following occurs:

- Gifts to any donee exceed $15,000 (for 2019) - Gift of future interest in any amount is made - Not eligible for tax annual exclusion - Gift splitting has occurred between spouses - Not applicable to community property and JTWROS - Gift exceeds $155,000 (for 2019) to noncitizen spouse

Income in Community Property States

- Income generated by community property Remains community property - Income generated by separate property Remains separate property unless commingled - Property purchased Retains character of income used in purchase

Indirect Gifts

- Indirect transfer on behalf of a donor for the benefit of a donee - Donor makes a payment for someone else - Titles property jointly - Below-market loans

Joint Tenancy (JTWROS)

- Interest in property held by two or more related or unrelated parties. - Each tenant owns an equal undivided interest in the whole. - Percentage ownership of each tenant must be equal. - Each tenant generally shares in income and expenses equally Implied right of survivorship. - Each tenant's interest can be severed without the other tenant's consent. - Interest passes outside of probate - If the tenants disagree they each have the right to partition or sever the property (If they sever, each owner then owns his share fee simple) - Tenants may change ownership to tenancy in common if one owner sells to a 3rd party - Possible gift at inception if contribution of each joint tenant is not equal (Exception to the gift rules: Married couples are deemed to have contributed equally) - Bank accounts and Series H Bonds (gift at withdrawal) - Decedent interest included in gross estate according to actual contribution rule. (except for: Spouses - Deemed to have made a 50% contribution)

Future Interest Gift

- Interest that is limited in some way to a future date or time - Donee's right to the property is contingent upon some future date or time

State Contract Law Retitles to Beneficiary Directly

- Life insurance contracts - Annuity contracts - IRAs, SEPs, SIMPLEs, & qualified plans - Pay-on-Death (bank accounts) & Transfer-on-Death accounts (investment accounts)

Gifts to Noncitizen Spouses

- Maximum exclusion = $155,000 (in 2019) - Gifts over $155,000 Reduce donor's lifetime credit, or Result in gift tax if credit has been used

Community Property

- Property acquired during marriage and owned equally by both spouses - Separate Property Includes: Property acquired before the marriage Property acquired by gift or inheritance during marriage

Advantages of Probate

- Protects the decedent. Fulfills wishes. - Protects the legatees and the heirs - Orderly legal administration of decedent's assets to prevent one heir from taking inappropriate priority over another - Clean title to heirs and legatees -Allows creditors to have claims heard Makes sure debts are paid

Valuation of a Gift

- Real estate: may need appraisal - Publicly traded securities are valued at the high and low trading price for the day - Bonds: Present value of the expected future payments - Discounts may be allowed for lack of marketability, lack of liquidity, and lack of control

Gifts to Minors

- Section 2503(c) trusts - Trust property and income may be spent for benefit of minor before age 21. - If trust property not expended, passes to minor at 21. - If minor dies before 21, property passes to: minor's estate or whomever minor appoints under general power of appointment.

Tenancy by the Entirety

- Similar to JTWROS except occurs only between married people - Neither tenant can sever without consent of the other tenant - Right of survivorship implied - Deemed 50% contribution rule (married) - 50% of total value of property included in gross estate of decedent

What Property Passes Through Probate?

- Solely Owned Property - Tenancy in Common Property - Community Property - Invalid Beneficiary Designations to contracts such as insurance, annuities, IRAs etc.

General Process

- Someone locates the decedent's will - Someone (usually executor) takes the will to probate court (usually the domicile of the decedent) - Someone petitions to open the estate