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232 Cards in this Set
- Front
- Back
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PROPERTY OWNERSHIP & ESTATE PROCESS Estate |
- All the rights, titles, and interests that a person (living or deceased) has in any property |
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PROPERTY OWNERSHIP & ESTATE PROCESS Estate Planning |
- The process of planning for the accumulation, conservation, and distribution of an estate to effectively and efficiency accomplish both tax and nontax objectives. |
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PROPERTY OWNERSHIP & ESTATE PROCESS Estate Planning Objectives |
1.) Preserve the wealth that others have helped to create;
2.) Allow the client to use that wealth as desired during his or her lifetime; and
3.) Pass the greatest possible amount of that wealth to designated recipients in the appropriate form at death |
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PROPERTY OWNERSHIP & ESTATE PROCESS Transfers of Property: During Life |
1. By sale 2. By gift - Given by donor - Received by donee |
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PROPERTY OWNERSHIP & ESTATE PROCESS Transfers of Property: At Death |
1. By probate 2. By will substitute |
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PROPERTY OWNERSHIP & ESTATE PROCESS Probate |
- the process of proving who is entitled to receive a decedent's assets if the decedent did not, prior to their death, designate a recipient in an approved will substitue form for every asset |
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PROPERTY OWNERSHIP & ESTATE PROCESS Probate Situations |
1.) the situation in which the decedent left a valid last will and testament; 2.) the situation in which the decedent either did not leave a valid will or left a valid will that does not effectively dispose of all property not disposed of by will substitute |
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PROPERTY OWNERSHIP & ESTATE PROCESS Testate |
A person who leaves a valid will is called a testator if male, or testatrix if female, and is said to die testate. |
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PROPERTY OWNERSHIP & ESTATE PROCESS Laws of Intestate Succession |
Aka "Laws of Descent and Distribution" Total Intestacy Probate - if there is no will Partial Intestacy Probate - if there is a will, but the will does not effectively dispose of all probate assets |
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PROPERTY OWNERSHIP & ESTATE PROCESS Will Substitute |
- form of death-time transfer that is meant to accomplish the same task as a will, but without the stringent execution requirements for a will and without the process of administration that is required to carry out the provisions of a will |
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PROPERTY OWNERSHIP & ESTATE PROCESS Principle of Right of Survivorship |
- Used by both JTWROS and Tenancy by the entirety - At death, the deceased's ownership is transferred to surviving tenant |
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PROPERTY OWNERSHIP & ESTATE PROCESS Beneficiary Designation |
- The owner of the property is performing the same basic task as in a will by stating who is to receive the asset upon death of owner |
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PROPERTY OWNERSHIP & ESTATE PROCESS Types of Property |
1.) Real Property 2.) Tangible Personal Property 3.) Intangible Personal Property |
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PROPERTY OWNERSHIP & ESTATE PROCESS Real Property |
- land and its permanent improvements known as fixutres (such as a residence) |
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PROPERTY OWNERSHIP & ESTATE PROCESS Tangible Personal Property |
- any property other than real property that has value because of its physical existence (such as an automobile or collectibles)
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PROPERTY OWNERSHIP & ESTATE PROCESS Intangible Personal Property |
- any property other than real property that has value because of the legal rights that it confers (such as a stock certificate or an installment note)
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PROPERTY OWNERSHIP & ESTATE PROCESS Property Interests |
- A person's rights in property are dependent primarily upon his or her interest in the property |
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PROPERTY OWNERSHIP & ESTATE PROCESS Legal Interest |
- A person who has the right to manage and transfer property - Fiduciary duty to manage property for the benefit of another person |
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PROPERTY OWNERSHIP & ESTATE PROCESS Beneficial or Equitable Interest |
- A person who has the right to use, consume or enjoy property |
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PROPERTY OWNERSHIP & ESTATE PROCESS Present Interest |
- If the beneficial owner can immediately use, possess, enjoy or consume the property - Someone who owns property in their sole name - The legal right to demand immediate payment |
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PROPERTY OWNERSHIP & ESTATE PROCESS Future Interest |
- If the beneficial owner cannot immediately use the property - Someone who is a beneficiary of a property |
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PROPERTY OWNERSHIP & ESTATE PROCESS Life Estate |
- An interest that will terminated upon someone's death - can be life of the life estate holder or life of another person - Someone who owns property solely |
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PROPERTY OWNERSHIP & ESTATE PROCESS For Years or For a Term Certain |
- Interest that will terminate after a precise period of time |
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PROPERTY OWNERSHIP & ESTATE PROCESS Vested or Non-Contingent Interest |
- Interest that is certain to occur |
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PROPERTY OWNERSHIP & ESTATE PROCESS Contingent Interest |
- Interest that will only occur upon the happening of a contingency (other than time) |
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PROPERTY OWNERSHIP & ESTATE PROCESS Power of Attorney |
- an independent document in which one person (known as the principal) gives authority to another person (known as the agent, or attorney-in-fact) to performed designated acts as the principal directs. |
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PROPERTY OWNERSHIP & ESTATE PROCESS Power of Appointment |
- Almost always contained in a will or trust - a clause wherein the granting party (known as the donor or creator) gives authority to another person (known as the donee or holder) to, at the donee's discretion, transfer title to a specified portion of the dontor's property to a recipient (known as an appointee) |
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PROPERTY OWNERSHIP & ESTATE PROCESS Purpose of Powers of Appointment |
- Adds flexibility to a trust - The power holder can remove property from the trust for purposes not specifically allowed by the trust instrument, and give that trust property to persons who may not even be named trust beneficiaries |
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PROPERTY OWNERSHIP & ESTATE PROCESS General Power of Appointment |
- Presumed if the holder can name as an appointee any of the following four parties: 1. the holder 2. the creditors of the holder 3. the holders estate 4. the credtiros of the holder's estate |
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PROPERTY OWNERSHIP & ESTATE PROCESS Special (or limited) Power of Appointment |
If the holder can only act with the consent of the donor (creator) of the power |
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PROPERTY OWNERSHIP & ESTATE PROCESS Ascertainable Standard |
- Power of appointment will be considered special if the power can be exercised only subject to ascertainable standard - HEMS (health, education maintenance and support) |
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PROPERTY OWNERSHIP & ESTATE PROCESS Ways in which a Power of Appointment can be used |
1. Exercise it 2. Release it 3. Let it lapse |
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PROPERTY OWNERSHIP & ESTATE PROCESS Types of Property Ownership |
- Sole ownership (fee simple or fee simple absolute) - Concurrent ownership |
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PROPERTY OWNERSHIP & ESTATE PROCESS Recoginzed Forms of Concurrent Ownership |
- Tenancy in common - JTWROS - Tenancy by the entirety - Community property |
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PROPERTY OWNERSHIP & ESTATE PROCESS Community Property |
- The efforts of both spouses contribute to the acquisition of property during the marriage, and therefore, title should not be consluse regarding true ownership |
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PROPERTY OWNERSHIP & ESTATE PROCESS Community Property States |
Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin |
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PROPERTY OWNERSHIP & ESTATE PROCESS Marital Parternship Property |
Used by Wisconsin
Similar to that of the historical commmunity property system that devloped in the remaining community poreropoty states |
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PROPERTY OWNERSHIP & ESTATE PROCESS Determination of Seperate or Community Property |
1. All property acquired during marriage will be presumed to be community property. 2. The community property presumption may be overcome by clear and convincing evidence by the party seeking to overcome the presumption 3. If seperate property and community property are commingled so as to make a finding of seperate property impossible, property will be treated as community 4. Property once shown to be seperate will retain this character unless such property is commingled with seperate property of the other spouse, or with the couple's community property, and tracing of the seperate property is impossible. |
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PROPERTY OWNERSHIP & ESTATE PROCESS Gift/Estate - Community Property |
The presumption of community property status for property acquired during the marriage can usually be overcome if the property was acquired solely by one spouse as a gift or through an estate. |
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PROPERTY OWNERSHIP & ESTATE PROCESS Uniform Disposition of Community Property Rights at Death Act |
- Recognizes the rights of each spouse to dispose of one-half of the formerly acquired community property
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PROPERTY OWNERSHIP & ESTATE PROCESS Basic rules of Common-Law property brought into a Community State |
1. The law of common-law state governs the character of assets acquired in that state, does not change when moved into community state. 2. The law of the community state governs the disposition of property at death or in the event of divorce, if lived there at death or divorce. |
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PROPERTY OWNERSHIP & ESTATE PROCESS Doctrine of Quasi-Community Property |
Extends community property rights to protect a nontitled spouse from disposition of property to a third party in death or divorce. |
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PROPERTY OWNERSHIP & ESTATE PROCESS Nonfinancial Goals of Estate Planning |
1. Meeting the needs of dependents 2. Proper distribution of assets 3. Transfer by trusts 4. Efficient transfer of assets at death 5. Asset protection 6. Control of Assets |
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PROPERTY OWNERSHIP & ESTATE PROCESS Nontax Financial Goals of Estate Planning |
1. Preserving business value 2. Maximizing premortem and postmortem flexibility 3. Maximizing benefits for a surviving spouse 4. Minimzing nontax transfer costs 5. Maintaining a satisfactory standard of living 6. Maintaining adequate premoretem and postmortem liquidity |
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PROPERTY OWNERSHIP & ESTATE PROCESS Tax-Related Financial Goals of Estate Planning |
Tax goals related to income tax 1. Shifting the receipt of income 2. Shifting the taxation of income 3. Obtaining a stepped-up basis 4. Deferring the recognition of income and gain Tax goals related to transfer taxes 1. Freezing or reducing the value fo assets subject to tax 2. Leveraging the use of exclusions, exemptsion, reductions and credits 3. Delaying payment of a tax due |
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PROPERTY OWNERSHIP & ESTATE PROCESS Common Estate Planning Mistakes |
1. Failure to recommend necessary changes to a will 2. Improper Disposition of Assets 3. Improper Titling of Assets 4. Improperly Arranged Life Insurance 5. Lack of Estate Liquidity 6. Failure to Avoid Ancillary Probate 7. Failure to Provide Business Planning 8. Failure to Minimize Taxes and Costs 9. Failure to give Proper Advice Regarding Funeral Arrangements |
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PROPERTY OWNERSHIP & ESTATE PROCESS Estate Planning Process |
1. Establishing and Defining Client-Planner Relationship 2. Gathering Client Data Including Goals 3. Analyzing and Evaluating the Client's Financial Status 4. Developing and Presenting Recommendations 5. Implementing the Recommendations 6. Monitoring the Implemented Recommendations |
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PROPERTY OWNERSHIP & ESTATE PROCESS Members of the Estate Planning Team |
- Accountant - Life Insurance Professional - Trust Officer - Attorney - Financial Planner |
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METHODS OF ESTATE TRANSFER Probate Estate |
Property that passes at a person's death by terms of the person's will or by state laws of intestate succession |
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METHODS OF ESTATE TRANSFER Must prove when presenting will |
- the testator intended the document presented to be their will - the testator had testamentary capacity at the time of execution of the will - the testator is deceased - the document presented is the testator's last will and has not been revoked - the will was properly executed and was valid in the state in which it was executed |
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METHODS OF ESTATE TRANSFER The Objectives of Probate |
1. Distributing the decedent's property according to applicable provisions in a will or state laws of intestate succession
2. Paying the legitimate claims of creditors 3. Collecting taxes |
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METHODS OF ESTATE TRANSFER Personal Representative (PR) |
- Person or entity who is responsible to the probate court for keeping the proceeding in motion and ensuring completion of the entire process in a timely manner - Executor/executrix - Administrator/administratrix (intestate) |
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METHODS OF ESTATE TRANSFER Letters of Appointment |
- Document that formalizes the PR's appointment
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METHODS OF ESTATE TRANSFER Duties of the PR |
- Marshaling the decedent's assets - Processing payments to valid creditors of the deceased - Attending to tax obligations - Managing estate assets - Distributing estate assets |
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METHODS OF ESTATE TRANSFER Augmented Estate |
Includes not only the decedent's probate estate at the time of death, but it also includes assets that the decedent transferred for less than full and adequate consideration within a certain time period prior to death
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METHODS OF ESTATE TRANSFER Spousal Elective Share |
The amount which the spouse is entitled in a common law state AKA an election against the will |
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METHODS OF ESTATE TRANSFER Homestead allowance and exemption statutes |
Gives a dependent spouse and/or children either an ownership or an occupancy interest in real property used by such parties as a personal residence Property exempted from creditors |
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METHODS OF ESTATE TRANSFER Exempt Property Award Statutes |
Exempts personal property from being used or sold to satisfy the estate's general creditors Commonly: automobiles, household furnishings, tools used in a trade or business, death benefits from insurance and survivor benefits under a qualified pension plan |
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METHODS OF ESTATE TRANSFER Family Allowance Statutes |
Allows for dependent spouse and dependent children to receive a periodic amount during the estate administration period |
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METHODS OF ESTATE TRANSFER Permitted/Omitted/After Born heir statutes |
If decedent's will does not mention child(ren) simply because the decedent had no children at the time the will was executed
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METHODS OF ESTATE TRANSFER After Born heir exclusions |
- There is evidence that the omission was intentional - The will left an amount to the child's remaining parent that is sufficient to provide for the omitted child - The decedent made other provisions for the omitted child outside of the will |
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METHODS OF ESTATE TRANSFER Adopted and Illegitimate Children |
Adopted and illegitimate children have the same inheritance rights that are given to biological/legitimate children |
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METHODS OF ESTATE TRANSFER Felonious Homicide Statutes |
Prohibits a person from receiving property from a decedent when the person has feloniously caused the decedent's death |
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METHODS OF ESTATE TRANSFER Advancement Statute |
Applied in cases in which the issue is raised as to whether property given to a beneficiary by the decedent during the decedent's lifetime was meant to be an advance upon what the beneficiary was to have received from the decedent's death |
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METHODS OF ESTATE TRANSFER Disclaimer Statute |
Occurs when a beneficiary of a decedent does not want to accept assets given to him or her by the decedent |
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METHODS OF ESTATE TRANSFER Abatement Statutes |
Specifies which shares are to be reduced first, second, third and so on, by what amounts |
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METHODS OF ESTATE TRANSFER Ademption Statutes |
Occurs when a will gives an identifiable asset to a named individual but the asset is no longer available |
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METHODS OF ESTATE TRANSFER Divorce or Annulment Statutes |
Overrides decrees in a will when a divorce has taken place after the writing of a will |
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METHODS OF ESTATE TRANSFER Simultaneous Death Statutes |
When order of death cannot be determined, defines how the beneficiaries will be delegated |
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METHODS OF ESTATE TRANSFER Tax apportionment statutes |
Defines how taxes are to be paid out of assets |
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METHODS OF ESTATE TRANSFER Buy-Sell (or Business Buyout) Agreement |
Made between the decedent and their business partners or business entity to sell a deceased partner's business interest |
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METHODS OF ESTATE TRANSFER Location of Probate |
Personal property is probated in the state of the decedent's domicile
Real property must probated in the state where the real estate is located |
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METHODS OF ESTATE TRANSFER Residence / Domicile |
Residence is where a person is residing or staying at any particular moment Domicile is a permanent residence |
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METHODS OF ESTATE TRANSFER Probate Advantages |
- Probate is an orderly process - Probate gives concerned parties certainty - Probate is a fair process |
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METHODS OF ESTATE TRANSFER Probate Disadvantages |
- Probate is a costly process - Probate is a lengthy process - Probate is a public process |
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METHODS OF ESTATE TRANSFER Requirements of a Valid Will |
- Minimum age - Testamentary Capacity - Valid Form - Execution Requirements |
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METHODS OF ESTATE TRANSFER Testamentary Capacity |
- An understanding of the general nature of the document that the maker is signing or executing - An understanding of the nature and extent of his or her property - An understanding of the persons who are the "natural objects of his or her bounty" (family) |
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METHODS OF ESTATE TRANSFER Valid Form |
A form that is recognized as valid in the state in which it is executed:
1. medium used 2. execution requirements for the testator 3. execution requirements of witness(es) 4. execution requirements regarding notarization |
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METHODS OF ESTATE TRANSFER Types of Mediums in Valid Form |
Typewritten (or witnessed) will - prepared by attorneys and executed in the presence of an attorney and witnesses Holographic will - written entirely in the will maker's handwriting and signed (and dated) by the will maker Requires no witness Nuncupative will - originally made orally by the testator, may be required to be reduced to a written memorandum within a specified time frame |
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METHODS OF ESTATE TRANSFER Nuncupative will restrictions |
- By dollar amount - By type of property - By occupation of the testator - By health of the testator |
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METHODS OF ESTATE TRANSFER Simple (or single) will |
Single document with independent provisions executed by a single maker |
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METHODS OF ESTATE TRANSFER Joint will |
Single document executed by multiple parties |
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METHODS OF ESTATE TRANSFER Mutual Wills |
Single or multiple documents executed by tow or more parties in which the parties contract with each other to leave their property in a specified manner |
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METHODS OF ESTATE TRANSFER Reciprocal Wills |
a type of mutual will in which each maker names the other as the recipient of his or her property if the beneficiary survives |
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METHODS OF ESTATE TRANSFER Introductory or Exordium Clause |
Purpose is to: - identify the maker - establish the maker's domicile - declare that the document is meant to be the maker's will - revoke any previous wills |
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METHODS OF ESTATE TRANSFER Family Statement Clause |
Identify members of a family, such as "spouse" or "children" |
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METHODS OF ESTATE TRANSFER Precatory Language |
Non definitive language that should be avoided, such as "wish, hope , or desire"
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METHODS OF ESTATE TRANSFER Dispositive Clauses |
Disposes of real property by a devise to a recipient known as a devisee Disposes of personal property by a bequest (or legacy) to a recipient known as a legatee Bequest that is payable out of specifically identifiable assets is known as a specific bequest Bequest that is payable out of the general estate is known as a general bequest |
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METHODS OF ESTATE TRANSFER Personal Property |
Tangible Personal Property Clause - defines specific items to specific people Tangible Personal Property Memorandum - personal property under a stated value to be disposed of by a written memorandum Intangible Personal Property Clause - may be directed towards a specific beneficiary |
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METHODS OF ESTATE TRANSFER Residuary Clause |
Defines who is to receive any probate property not disposed of. |
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METHODS OF ESTATE TRANSFER Disclaimed Property |
Disclaimed Property Clause - defines where disclaimed property goes Disclaimer Trust - a trust that will hold disclaimed property |
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METHODS OF ESTATE TRANSFER Testamentary Trust |
A trust used if one or more of the dispositions are not made outright to an individual beneficiary
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METHODS OF ESTATE TRANSFER Pourover clause |
One or more of the dispositive clauses that may direct the personal representative to transfer estate assets to an existing trust established by the will maker prior to death |
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METHODS OF ESTATE TRANSFER Per Capita |
Designates equal shares to all beneficiaries regardless of the degree of their relationship |
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METHODS OF ESTATE TRANSFER Per Stirpes (or By Representation) |
"by the root" Gives blood line dispositions |
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METHODS OF ESTATE TRANSFER Per Capita at Each Generation |
Equally divides assets at a generational level |
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METHODS OF ESTATE TRANSFER Fiduciary Clauses |
Fiduciary Appointment Clause - Defines the PR Fiduciary Powers Clause - Defines the powers of the appointed fiduciary |
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METHODS OF ESTATE TRANSFER Concluding Clauses |
Testator's Signature or Testamonium Clause Attestation, or Statement of Witness Clause |
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METHODS OF ESTATE TRANSFER Testator's Signature or Testamonium Clause |
- reaffirms that the document is the testator's last will - affirm that statutory signature requirements have been met - state the date of signing |
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METHODS OF ESTATE TRANSFER Attestation, or Statement of Witness Clause |
- Allow the witnesses to affirm that they saw the testator sign the will - Allow the witnesses to affirm that the testator had testamentary capacity at the time of the signing - Verify that all statutory requirements relating to witness signatures have been met |
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METHODS OF ESTATE TRANSFER Self-Proving Clause |
- The attestation clause contains all of the essential statements that the witness would have to verify if called to testify personally at the time the will is offered for probate - The will is notarized - The state in which the will is executed has an appropriate statute allowing a will to be admitted to probate without personal testimony of the witnesses if it is in a prescribed form |
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METHODS OF ESTATE TRANSFER No Contest Clause (or In Terrorem Clause) |
States that if a disinherited family member contests the will and succeeds in having the provision that disinherits him or her declared invalid, then he or she is to be given a nominal amount such as one dollar. |
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METHODS OF ESTATE TRANSFER Codicil |
A document that amends a will |
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METHODS OF ESTATE TRANSFER Intestacy Proceeding |
Probate proceeding when someone dies without a will |
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METHODS OF ESTATE TRANSFER Escheat |
Property belonging to the state due to a lack of persons coming forward to present a valid will |
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METHODS OF ESTATE TRANSFER Operation of Law |
When a decedent's interest in a surviving tenant(s) is transferred automatically, without the need for probate |
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FEDERAL ESTATE TAX Estate Tax |
A federal tax imposed on the right of an estate to transfer the decedent's wealth |
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FEDERAL ESTATE TAX Inheritance Tax |
A tax on the right to receive or inherit wealth |
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FEDERAL ESTATE TAX Death Tax |
Estate and Inheritance taxes are both known as death taxes |
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FEDERAL ESTATE TAX Federal Transfer Tax System |
Composed of three taxes that apply when wealth is transferred gratuitously from one person to another: - Gift Tax - Estate Tax - Generation-skipping Tax |
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FEDERAL ESTATE TAX Federal Unified Transfer Tax System |
Refers to federal gift and estate taxes because the same tax fates apply to both - Marital Deduction - Charitable Deduction |
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FEDERAL ESTATE TAX Applicable Tax Credit |
Equal to the sum of the tax on the basic exclusion amount, and in the case of a surviving spouse, the deceased spousal unused exclusion amount |
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FEDERAL ESTATE TAX Applicable Exclusion Amount |
Should not be used in the actual calculation of gift or estate tax liability. Calculate the tax on the entire value, then apply the exclusion amount. |
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FEDERAL ESTATE TAX Tax Exclusive and Inclusive |
Tax Exclusive - when the money used to pay tax is not taxed, i.e. gift tax
Tax Inclusive - when the money used to pay tax is taxed (the money used is part of gross estate), i.e. estate tax |
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FEDERAL ESTATE TAX Fair Market Value |
Treasury Regulation 20.2031-1(b) The price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. |
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FEDERAL ESTATE TAX FMV Special Applications |
- Real Estate
- Closely Held Stock - Valuation of Life Insurance - Corporate Stocks and bonds - Blockage Discount - Annuities - U.S. Government Bonds - Property in co-ownership with others - Tenancy in common - Joint tenancy with rights of survivorship - Tenancy by the entirety and community property |
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FEDERAL ESTATE TAX Special Use Valuation |
- Maximum reduction of $1.1MM in 2015 of the qualifying real estate may be allowed if special requirements are met |
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FEDERAL ESTATE TAX Qualifying for Six-Month Alternative Valuation |
Must decrease both: 1. The value of the decedent's gross estate 2. The decedent's estate tax liability |
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FEDERAL ESTATE TAX Submitting Federal Estate Tax Return |
Form 706 due date is nine months after the decedent's death Six-month extension is granted automatically upon application made on IRS Form 4768 |
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FEDERAL ESTATE TAX Formula for Computing Estate Tax |
Gross Estate - Deductions = Taxable estate plus adjusted taxable lifetime transfers since 1976 = Tax Base x Applicable estate tax rate = Tentative estate tax - Credits = Net estate tax due |
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FEDERAL ESTATE TAX Gross Estate |
Includes all property in which the decedent had an interest at death, no matter what kind of property it is. Includes: home, car, cash, stocks, bonds, bank accounts, partnership interests, antiques, contracts, CDs, life insurance policies, promissory notes, art, royalties, and leases |
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FEDERAL ESTATE TAX Income in Respect of a Decedent |
Income to which a decedent is entitled but which is not properly includible in computing taxable income for tax year in which the decedent died Includes: deferred comp, bonuses, renewal commissions, interest accrued and payable to the decedent, expense reimbursements, proceeds from installment sales, etc. |
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FEDERAL ESTATE TAX Incident of Ownership |
Where the decedent has a partial interest in a life insurance policy, such as a split dollar policy with an employer All incidents of ownership in a policy are often assigned to an irrevocable life insurance trust to prevent inclusion of the policy proceeds in a person's gross estate |
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FEDERAL ESTATE TAX
Code Section 2044 |
Requires that the value of property in which the decedent had a qualifying income interest for life, and which received a martial deduction when the interest was given to the decedent, and which has not been subject to Code Section 2519 (relating to dispositions of certain life estates) be included in the decedent's gross estate
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FEDERAL ESTATE TAX IRC Sections 2036 through 2038 |
"the transfer sections" provide the rules by which a few specific lifetime transfers are included in the gross estate Sec. 2036 - Retaining a Lifetime interest Sec. 2037 - Retaining a Revisionary Interest Sec. 2038 - Retaining Rights to Alter, Terminate, Revoke or Amend |
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FEDERAL ESTATE TAX Three-Year Inclusionary Rule |
Applies with: 1. Transfers of a retained interest within three years of death 2. Transfers of insurance 3. The gross-up rule |
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FEDERAL ESTATE TAX Estate Tax Deductions |
1. Debts, Mortgages and Liens 2. Funeral Expenses 3. Administrative Expenses 4. Foreign Death Taxes Actually Paid to a Foreign Country 5. Theft and Casualty Losses 6. State Death Taxes 7. Martial Deduction |
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FEDERAL ESTATE TAX Property that does not pass to the surviving spouse |
- Property used to pay estate taxes or administrative expenses - Property subject to encumbrance - Property relinquished |
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FEDERAL ESTATE TAX Qualifying Forms Eligible for the Marital Deduction |
- Outright transfers - Terminable interest rule --- 1. a life estate coupled with a general POA --- 2. a QTIP arrangement with an election --- 3. Naming one's spouse as the non-charity beneficiary of a CRAT or CRUT --- 4. Conditioning the transfer upon the spouse's survival for a period not to exceed six months |
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FEDERAL ESTATE TAX Charitable Deduction |
- Unlimited deduction - Depends on whether charity is public or private |
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FEDERAL ESTATE TAX Gift Taxes Payable Credit |
- Not a credit, but acts like one - A "credit" for taxes paid out of pocket by the decedent on post-1976 gifts |
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FEDERAL ESTATE TAX Applicable Credit Amount |
The credit amount is the full amount of the estate tax applicable credit allowed in the year of the decedent's death, even if the decedent used part, or all, of the gift tax applicable credit amount allowable in prior years to cover gift tax liability. Currently, $2,117,800 |
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FEDERAL ESTATE TAX Deceased Spousal Unused Exclusion (DSUE) |
Starting after 2010, any unused portion of the estate tax exclusion amount ($5.43 MM) is portable to a surviving spouse Is the lesser of the deceased's spouse basic exclusion amount ($5.43 million) or the deceased spouse's applicable exclusion amount less the deceased spouse's tax base |
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FEDERAL ESTATE TAX Code Section 2012 Pre-1977 Taxable Gifts |
Credit for gift taxes paid out of packet on pre-1977 taxable gifts Pre-1977 gifts are included in the decedent's gross estate |
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FEDERAL ESTATE TAX Code Section 2014 Credit for Foreign Death Taxes |
Credit allowed if property that is included in the decedent's U.S. gross estate is also subject to death taxes by a foreign jurisdiction Available for resident aliens and citizens |
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FEDERAL ESTATE TAX Code Section 2013 Prior Transfer Credit (PTC) |
Partially or fully eliminates a second federal estate tax in the estate of a decedent who has received property from a transferor who died within 10 years before or two years after the decedent. |
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FEDERAL ESTATE TAX Lowering Estate Tax |
1. Reduce the gross estate 2. Increase deductions to which the estate will be entitled 3. Maintain the estate's eligibility for as many credits as possible |
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FEDERAL ESTATE TAX Marital Deduction Planning |
- If one spouse transfers outright ownership, the recipient spouse will have incidents of ownership; and will be taxed upon the recipient's spouse estate. - If one spouse transfers an asset to a trust in which the other spouse has some type of interest in follows same rules. |
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FEDERAL ESTATE TAX Qualifying Income Interest (QII) |
LAME requirements Lifetime Annual Mandatory Exclusive right to the trust income |
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FEDERAL ESTATE TAX Power of Appointment Trust |
Recipient spouse is given a qualifying income interest for life and a general power of appointment over the corpus exercisable during life or at death. Used when grantor spouse: - wants to leave the property in trust rather than outright - definitely wants to get the marital deduction - wants to give the recipient spouse the maximum possible control over and/or right to use trust assets - does not care if the recipient spouse uses the general POA to give the trust property to someone other than the takers in default named by the grantor spouse |
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FEDERAL ESTATE TAX Takers in Default |
Remainder beneficiaries named to receive any corpus not actually appointed to someone by the recipient spouse |
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FEDERAL ESTATE TAX The Estate Trust |
- Qualifies for a marital deduction because the recipient spouse is the sole bene., and any trust income or corpus not actually distributed to the recipient spouse during his or her lifetime is paid to the recipient's spouse's estate Used when grantor spouse: - wants to live property in trust - definitely wants a marital deduction - wants the recipient spouse to receive income on a discretionary rather than mandatory basis - wants the recipient spouse to control where trust property goes after their death by means of general POA |
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FEDERAL ESTATE TAX Qualified Terminable Interest Property Trust (QTIP) |
Trust income control given to receiving spouse, but has no power of appointment and absolutely no control over the trust corpus. Beneficiaries are named solely by the transferor spouse. Used when the grantor spouse: - wants to leave the property in trust form, - wants their estate to have flexibility regarding use of the marital deduction, - wants the recipient spouse to be entitled to all of the trust income on a mandatory basis for the rest of their life, - wants to ensure that the trust property will go to the remainder beneficiaries named in the trust at the death of the recipient spouse |
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FEDERAL ESTATE TAX Bypass Planning |
Allows grantor's spouse to receive benefit from the trust assets without qualifying for the marital deduction, thus using some or all of the grantor's applicable credit amount Used when the grantor spouse: - wants to leave property in trust - definitely does not want to use the marital deduction - wants to include persons other than spouse as income bene. - wants to ensure property will go to remainder bene. named in trust at death of recipient spouse |
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FEDERAL ESTATE TAX Remainder Interest in a Farm or Personal Residence |
Code Sec. 2055(e)(2) Authorizes a charitable deduction when a decedent leaves a qualified charity a vested remainder interest in the decedent's farm or personal residence |
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FEDERAL ESTATE TAX Qualified Real Property Contributions |
Section 2055(f) A decedent's estate can also receive a charitable estate tax deduction for a qualified conservation contirbution |
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FEDERAL ESTATE TAX Qualified Conservation Contribution |
the contribution of a qualified real property interest of a qualified real property interest to a qualified organization exclusively for conservation purposes |
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FEDERAL ESTATE TAX Charitable Lead Trusts |
Income interest to a charity but have the assets go to a beneficiary after a period of time |
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FEDERAL ESTATE TAX Charitable Remainder Trust |
Income interest to a named beneficiary but assets go to a charity upon death of the beneficiary |
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FEDERAL ESTATE TAX Charitable Remainder Annuity Trust (CRAT) |
CRT where income interest must be payable either as a sum certain that is not less than 5% of the intial FMV |
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FEDERAL ESTATE TAX Charitable Remainder Unitrust (CRUT) |
CRT where income interest must be payed as fixed percentage that is not less than 5% of the net FMV of the trust assets, valued annually |
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FEDERAL ESTATE TAX Pooled Income Funds |
Special type of irrevocable CRT with less restrictions than CRAT or CRUTs. Funds established by public charities only, and used when the contributed amount is not large enough to warrant the costs to create a CRUT or CRAT |
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FEDERAL ESTATE TAX
Generation-Skipping Transfer Tax (GSTT) |
Tax on transfer of assets when given over two generations away Assessed in addition to gift or estate tax Exception of direct payment of medical or education |
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FEDERAL ESTATE TAX Skip Person |
A transferee who is deemed to be two or more generations younger than the transferor (or the transferor's spouse or former spouse if the transferee or transferee's spouse, if any, is related to the transferor's spouse or former spouse) |
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FEDERAL ESTATE TAX Lineal Descendents |
Those persons who can trace their family line directly back to that individual |
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FEDERAL ESTATE TAX Non-lineal descendent |
GSTT can apply to non-lineal same family descendents, and non-family transfers. Non-family transfers are based on their ages rather than relationship; and generations are considered 37.5 years |
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FEDERAL ESTATE TAX Transfers in Trust |
GSTT assessed by trust income and remainder beneficiaries generation from benefactor
A trust is a skip person if all the current beneficial interests are held by skip persons
A trust is a nonskip person if any nonskip person holds an interest in the trust |
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FEDERAL ESTATE TAX Transfer Exceptions |
1. Any spouse or ex-spouse, no matter the age, is always deemed to be same generation 2. Any deceased parent of a beneficiary "moves" the beneficiary up a generation |
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FEDERAL ESTATE TAX Direct Skip |
a transfer to a skip person that is subject to Federal estate or gift tax Transferor is responsible for taxes |
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FEDERAL ESTATE TAX Indirect Skip |
any GST where at least one skip person and one non-skip person has an interest in the transferred property after completion of the transfer Recipient is responsible for taxes |
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FEDERAL ESTATE TAX Taxation of Indirect Skips |
Either in:
- Taxable termination - Taxable distribution |
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FEDERAL ESTATE TAX Taxable Termination |
Occurs whenever an interest in trust property terminates (by death, lapse of time, release of power or otherwise) unless - immediately after such termination, a non-skip person has an interest in such property - at no time after such termination may a distribution be made from such trust to a skip person |
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FEDERAL ESTATE TAX Taxable Distributions |
any distribution from a trust to a skip person If the distribution results in the termination of a trust, the distribution will be considered a taxable termination instead of a taxable distribution |
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FEDERAL ESTATE TAX Valuation of skips |
Direct skip during life valued on completion date of gift Direct skip at death valued at transferor's date of death Indirect skip valued on the date of distribution or termination occurs |
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FEDERAL ESTATE TAX Rates |
Equal to maximum federal estate tax rate In 2015, 40% |
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FEDERAL ESTATE TAX GSTT Exemption |
- Cumulative lifetime exemption - GSTT exemption equals the estate tax applicable exclusion amount for the year in which the transfer is completed - In 2015, $5,430,000 - Use of exemption is not mandatory |
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FEDERAL ESTATE TAX Estate Tax Inclusion Period (ETIP) |
The period during which, should death occur, the value of the transferred property would be includible (other than three-year rule) in the gross estate of the transferor or the spouse of the transferor |
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FEDERAL ESTATE TAX Two Basic Ways to Reduce/Avoid GSTT |
1. Make a timely allocation of the transferor's unused GSTT exemption 2. Make sure the transferor has unused exemption |
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FEDERAL ESTATE TAX GSTT Calculation |
The taxable amount X the applicable rate |
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FEDERAL ESTATE TAX GSTT Taxable Amount |
Value of property received Minus Any expense incurred by transferee |
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FEDERAL ESTATE TAX GSTT Applicable Rate |
Maximum Federal estate tax rate X Inclusion ratio |
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TRANSFER DURING LIFE Inter Vivos Transfer |
Transfer of assets during life - Can be gift or sale |
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TRANSFER DURING LIFE Three Basic Types of Lifetime Gifts |
1. Outright gifts 2. Custodial Gifts 3. Gifts in trust |
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TRANSFER DURING LIFE Outright gifts |
Title of asset transferred directly to donee - Total interest, no retained rights gift to an individual Includes: - Intrafamily loans - Gift leaseback - Reverse gift - Net Gift |
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TRANSFER DURING LIFE Intrafamily Loan |
If a family member loans another family member money and charges no interest or a rate of interest below the applicable federal rate, the lender will be deemed to have made a "gift loan" The lender has to report the forgone interest for each year the loan is outstanding as ordinary income. Imputed Interest requirement does not apply to loans up to $10k if used to purchase non-income-producing property, or to loans of up to $100k if the borrower's net investment income is less than $1,000 |
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TRANSFER DURING LIFE Gift Leaseback |
Donor makes an outright transfer of business property to the donee, but then a closely held business owned or controlled by the donor lease the property back from the donee at a reasonable rental value Business owner obtains an income tax deduction for the lease payments |
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TRANSFER DURING LIFE Reverse gift |
Appreciated property is gifted to a donee, who is likely to predecease the donor with the expectation that the donee will bequeath the property back to the donor or donor's spouse by a provision in the donee's will More than one year must elapse Donee cannot have a legal obligation to bequeath the property back to the donor |
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TRANSFER DURING LIFE Net Gift |
Donor makes a conditional gift in which the donee assumes some obligation of the donor. Most commonly it is paying the gift tax, but may be a mortgage |
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TRANSFER DURING LIFE Outright Charitable Gifts |
When donee is a qualified charity, the donor will be entitled to a charitable gift tax deduction in the amount of the gift tax value of the asset. Four most common types: 1. Outright total interest charitable gift 2. Charitable bargain sale 3. Charitable stock bailout 4. Charitable gift annuity |
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TRANSFER DURING LIFE UGMA vs UTMA |
UGMA allowed gifts of only cash, securities or life insurance; allowed lifetime transfers only UTMA has no restrictions on the type of property; allows both inter vivos and testamentary transfers |
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TRANSFER DURING LIFE Gifts in Trust |
Five elements present in any trust: 1. Legally and mentally competent grantor 2. Legally and mentally competent trustee 3. One or more beneficiaries 4. Property is given to the trust 4. Fiduciary relationship between the trustee and the beneficiary(ies) |
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TRANSFER DURING LIFE Testamentary trust |
All testamentary trusts are irrevocable trusts |
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TRANSFER DURING LIFE Transfer of assets to a revocable trust |
Not considered to be a completed gift, no gift tax is incurred by the grantor upon funding. Income from the trust assets will still be taxed to the grantor by the grantor trust rules Assets will be included the grantor's gross estate |
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TRANSFER DURING LIFE Transfer of assets to an irrevocable trust |
Considered a completed gift Taxation of trust income shifts to trust or beneficiaries Assets excluded from grantor's gross estate |
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TRANSFER DURING LIFE Funded or Unfunded |
Funded trust - substantial assets have been contributed currently and that is operational currently Unfunded trust - only the minimal amount of assets necessary to qualify a trust as a legal entity under state law; not currently operational and is a shell for some future purpose |
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TRANSFER DURING LIFE Section 2503(c) Minor's Trust |
No part of a gift to an individual under the age of 21 years shall be considered future interest, if the gifted property and income thereof: 1. may be expended by, or for the benefit of, the donee before age 21 2. will to the extent not so expended a. pass to the donee at age 21 b. if donee dies before 21, payable to estate of donee |
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TRANSFER DURING LIFE Qualified Tuition Plan |
Prepaid plan Cash contributions for the benefit of any person, including minors, used to purchase tuition credits |
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TRANSFER DURING LIFE Support Trust |
A trust where an obligation is paid through income-producing assets in a trust |
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TRANSFER DURING LIFE Supplemental Needs Trust |
Established and funded by a grantor for the benefit of another individual Absolute discretion of the trustee |
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TRANSFER DURING LIFE Revocable Living Trust |
Established for three reasons: 1.) Avoid probate of assets funded to the trust prior to death 2.) Handles the grantor's financial affairs in the event of the grantor's incapacity or incompetency 3.) Acts as a pourover trust after the grantor's death Income taxed to individual |
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TRANSFER DURING LIFE Contingent (standby) trust |
Revocable living trust that the grantor establishes to handle their financial affairs when and if the grantor becomes incompetent to do so |
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TRANSFER DURING LIFE Trusts for Asset Protection |
Protection from the grantor's creditors depends on four factors: 1. The transfer of assets to the trust by the grantor must not violate the applicable state's statutes regarding defrauding of creditors 2. The trust must be irrevocable 3. Grantor retains no rights in or control over trust assets that would allow the grantor to legally demand any trust assets for their benefit 4. Grantor should not be the trustee if the trustee has discretion over the distribution of income |
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TRANSFER DURING LIFE Spendthrift Provision |
A clause that prohibits a beneficiary from transferring or alienating his or her future interest in the trust |
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TRANSFER DURING LIFE Foreign Situs Trust |
Trusts of foreign jurisdictions which have stronger creditor protection than other nations, such as Cook Islands. Costs can be higher than other trusts |
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TRANSFER DURING LIFE Throwback Rules |
Designed to prevent a trustee form making distributions in years when beneficiaries were in low income tax brackets and accumulating income when they were in higher income tax brackets |
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TRANSFER DURING LIFE Pourover Trust |
An inter vivos trust created to hold and manage numerous assets for the benefit of multiple beneficiaries. Assets can be "poured" into the trust from the grantor's will, life insurance, pension or profit sharing plans, or similar sources |
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TRANSFER DURING LIFE Dynasty (generation-skipping transfer) Trust |
To pass the grantor's property to several generations of the grantor's descendants Designed to take advantage of GSTT exemption May have "sprinkle" or "spray" provision - allowing trustee's discretion in treating beneficiaries in an unequal manner |
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TRANSFER DURING LIFE Section 2503(b) Mandatory Income Trust |
Allows an annual exclusion to each income beneficiary The income beneficiaries have a present interest in the trust assets as income must be paid at least annually. |
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TRANSFER DURING LIFE Crummey Trust |
Inter vivos contributions entitled to annual gift tax exclusion Requires some or all of beneficiaries to have Crummey power - power to demand that the trustee pay to the beneficiary some or all of the contributions to the trust within a certain time period |
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TRANSFER DURING LIFE Grantor Retained Trusts |
Inter vivos irrevocable trust designed to allow a grantor to retain an interest in trust assets for a term certain so that the transfer sections cannot apply if the grantor survives the term. GRAT- Grantor retained annuity trust GRUT - Grantor retained unitrusts GRIT - Grantor retained income trust QPRT - Qualified personal residence trust |
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TRANSFER DURING LIFE Intentionally defective grantor trusts |
Irrevocable trust that removes assets from grantor's gross estate and spouse's, keeps income tax to grantor, can remove assets from grantor's gross estate through installment sale |
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TRANSFER DURING LIFE Irrevocable Life Insurance Trust |
Grantor transfers existing policy on his or her life to the ILIT, the estate tax objective of removing the death benefits from the grantor's gross estate cannot be achieved unless the grantor survives the transfer by at least three years If grantor funds the trust with cash and not an insurance policy, then it will not matter how soon the grantor dies after the transfer |
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ESTATE LIQUIDITY Estate Liquidity |
1. Administrative Expenses 2. Death Taxes 3. Debts and Claims 4. Miscellaneous Cash Needs 5. Cash Bequests |
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ESTATE LIQUIDITY Reducing Administrative Expenses |
- Use will substitutes - Reduce hard to value assets - Reduce hard to manage assets - Reduce potential litigation - Reduce attorney fees |
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ESTATE LIQUIDITY Reducing Taxes Payable by the Estate |
The Gross Estate - Sec. 2035 - Three Year Inclusionary Rule - Sec. 2036 - Right to Use Prop. or Receive Income - Sec. 2037 - Right to Get Back Property (reversion/remainder) - Sec. 2038 - Right to Alter/Amend/Revoke/Term. Gift & Right to determine beneficial enjoyment of prop. |
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ESTATE LIQUIDTY Gross-Up Rule |
If the decedent paid gift taxes out of pocket on gifts made within three years of death, the gross estate must include the gift taxes paid out of pocket |
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ESTATE LIQUIDITY Nonexoneration Clause |
- Requires inherited properties with mortgages to include mortgages in gift/inheritance |
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ESTATE LIQUIDITY Increasing the Cash Available to an Estate |
- Increase cash or cash equivalents - Sell illiquid assets - Life insurance - Retirement benefits - Closely held business interests |
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ESTATE LIQUIDITY |
- Loans to the estate - Sale of estate assets - Disclaimer of liquid assets by estate beneficiaries - Substitution of estate assets |
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ESTATE LIQUIDITY Postmortem Actions That Minimize Cash Needs |
- Federal Estate Tax
- - Valuation of Estate Assets - - Valuation Discounts - - Special Use Valuations - - Estate Tax Deductions - - Administrative expenses and theft and casualty losses - - QTIP Elections - - Qualified Domestic Trust Election |
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ESTATE LIQUIDITY Qualified Domestic Trust Election |
If surviving spouse is not a US citizen, then only assets passing through a Qualified Domestic Trust are entitled to the marital deduction |
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ESTATE LIQUIDITY Filing the Estate Tax Return |
- "Shall be filed within nine months after the date of the decedent's death" - "an extension of only up to six months is permitted" |
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ESTATE LIQUIDITY Section 6166 |
- allows the PR of an estate to make an election to pay estate and GST tax that is attributable to the value of a closely held business interest in up to 10 equal annual installments |
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ESTATE LIQUIDITY Section 303 |
Estate is afforded capital gains treatment if the value of the stock of a closely held stock. Stock must make up 35% of gross estate (minus funeral & admin. expenses, debt and casualty & theft losses) |
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REVIEW Section 6166 |
Installment payment of estate tax (postmortem) Allows for the delay of GSTT and Estate tax due to a position of a closely held business interest Can be up to 10 annual payments CHBI must exceed 35% of AGE |
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REVIEW Tenancy by the Entirety |
Joint ownership by SPOUSES only that creates equal interests with survivorship rights Can only be terminated with consent of both parties Avoids probate |
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REVIEW Tenancy in Common |
Joint ownership by two or more parties, with potentially unequal interests and no survivorship rights Upon death, each interest is passed on by will or by probate of owner |
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REVIEW Nuncupative Will |
Orally made will, may be required to be eventually written |
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REVIEW Community Property |
Property that is acquired by either or both spouses during marriage. In general, each spouse is considered to own half of the property,regardless of who provided the means to purchase or acquire the property, and regardless of how title is held. Maintains community property ownership even if moved to common-law state |
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REVIEW Power Of Appointment Trust (A TRUST) |
- Qualifies for MD - Grantor's spouse REQUIRED to be exclusive or sole income beneficiary of trust - Qualifying income and included in surviving spouse's GI - Surviving spouse has POA - If surviving spouses uses POA to control corpus, that portion of the corpus is included in AGE |
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REVIEW
Bypass Trust (B TRUST) |
- Does NOT Qualify for MD - Fleixible income beneficiaries - Beneficiaries defined by grantor |
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REVIEW QTIP Trust (Q or C TRUST) |
- Requires election of QTIP to qualify for MD - Grantor's spouse REQUIRED to be exclusive or sole income beneficiary of trust - Beneficiaries defined by grantor |
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REVIEW Estate Trust |
- Seldom used - Qualifies for MD - Discretionary income - Surviving spouse controls corpus |
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REVIEW Chapter 14 |
Section 2701 - Transfer of CHBI to family member while owner retains ownership interest Section 2702 - Transfers of CHBI in trust while owner retains ownership interest in trust assets Section 2703 - Ignores right to transfer for less than FMV Section 2704 - Lapse of a voting or liquidation right considered a gift to other owners |
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REVIEW Mandatory Income Trust Section 2503(b) |
IR trust that demands distribution of all income in the year earned Mandatory distribution creates a present interest, allowing grantor to take an annual exclusion |
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REVIEW Minor's Trust Section 2503(c) |
IR trust where all beneficial interests are held by minor Trust assets available before 21 at trustee's discretion, and available to minor upon age 21 Allows for annual exclusion |
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REVIEW Contingent Trust (Standby Trust) |
Unfunded inter vivos trust which starts upon grantor being incompetent Usually funded through springing DPOA |
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REVIEW Durable Power of Attorney |
A principal allows an attorney-in-fact, or agent, to act on their behalf for financial or property matters |
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REVIEW Durable Power of Attorney for Health Care |
A principal allows an attorney-in-fact or agent to act on their behalf to make health related decisions when considered incompetent Can include such things as file lawsuits or interpret the principal's living will No "spring" |
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REVIEW Section 303 Stock Redemption |
Allows a corporation to redeem sufficient stock from a deceased's shareholder's estate The redemption will be taxed as capital gains instead of ordinary income |
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REVIEW Reverse QTIP |
A second election available on a trust which will allow for the decedent's estate or donor to be deemed transferor of a gifted property. This avoids the spouse from having to be deemed transferor for GSTT This can be advantageous set up over a few trusts to "share" GSTT over spouses |
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REVIEW Terminable Interest Rule |
Terminable interests are not entitled to MD Interest in a property that lapses with time (term) |
