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39 Cards in this Set
- Front
- Back
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"What if You do not Live in a Community Property State?"
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If purchased with community property money, then it is a community property even if not physically in a CP state (like a house!). If acquired something as CP and then you move to a non-CP state, it retains it's CP status (like a car!)
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"Examples of Community Property"
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Salary earned and items purchased with money earned by either spouse. Income generated by community property. Some states, like Texas, the income generated by separate property is also community property
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"Basic Structure of a Will"
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1. Declaration of will 2. Direction to pay all final expenses and taxes 3. Bequest/Devises 4. Creation of Trusts (Optional) 5. Executor's Powers 6. Appointment of the Executor(s)
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"Executor Responsibilities"
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1. Gather assets 2. Value assets 3. Tell creditors about estate 4. Settle all claims filed against estate 5. File final income tax and estate tax 6. Pay administrative expense 7. Distribute assets 8. Provide final accounting to the court
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"The Pitfalls of Intestacy"
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1. Usually cannot give 100% to surviving spouse 2. Court will monitor the guardianship and how they spend money 3. Cannot defer inheritance for child just over 18 4. Cannot setup unequal distribution to kids (like giving more to handicap kid) 5. All go to state if no heir 6. Cannot give to unrelated person. Like a friend or charity
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"Intestacy"
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Means to die intestate (aka, without a will) in a non-community property (shared with spouse) state. The state determines who gets what based on blood relations. Rarely is it the way the deceased wants it though.
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"Naming Someone to Settle Your Estate"
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Must decide if the person has the time, expertise, awareness of the estate, potential conflicts of interest. Usually best to have a corporate executor or co-executor.
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"Other Uses of Wills"
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Other than directing how the estate will split. Naming executor, establishing domicile (where home state is), naming guardian, establishing order of death (if they die together), create a trust
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"Guardianships"
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3 types. 1. Guardian of the person (if minor then until the state's age of majority, if adult, then for period of incompetence 2. Guardian of assets. (duration is same as "Of the person") 3. Guardian ad litum (court appointed to care for minor or unborn child, done when legal issue is resolved)
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"Types of Trusts"
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3 ways to classify. 1. Ability to alter (Revocable or Irrevocable) 2. Independence of trustee (Discretionary or non-discretionary) 3. When created (Living or testamentary) Revocable trusts main benefits are to avoid probate, keep assets info private, to provide management of assets if incapacited, and avoid ancillary administration (assets in multiple states can go through only the trust's domicile state since it technically does not die) Irrecovable trusts main benefits are to lower taxable estate, protect beneficiary from creditor (or prevent them from spending too much money if they are spendthrift), and to maintain control of a gift to one or more persons, which is lost if it is an outright gift
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"Gift and Estate Tax Deductions: Charitable and Unlimited Marital"
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Applicable Credit Amount is applied after a death tax is calculated but two methods can actually reduce the taxable estate before tax is calculated. 1. Charitable Deductions and Unlimited Marital Deduction (there is no limit you can give to your spouse is you are a citizen. This does not apply to residence or nonresident in US, citizen only)
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"The Gift and Estate Unified Rate Schedule"
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Current highest rate is 40% on all amounts over $1 million
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“The Applicable Credit Amount”
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There is a lifetime credit against gift and estate tax that is subtracted after a tax is calculated. This is for both gift and estate tax combined, so if it was all used up by lifetime taxable gift, no more credit is left to credit against estate tax at death
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"What is NOT a Gift?"
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1. Spousal property settlement (like retitling property) 2. child support 3. Joint bank account/US bonds 4. Gratuitous transfer and compensation (selling for below market value is a regular sale not gift) 5. Disclaiming property (if you disclaim property and it goes to another heir. Since you never owned that property, it is not a gift) 6. Uncashed checks (since it can be revoked) 7. Conditional transfer (not actually gifted until condition is lifted) 8. Incomplete gifts in trusts (like giving to your own recovable trust, since it can be taken away)
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"Gift Splitting"
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Each person can gift another person without gift tax up to $14,000/yr. Gift splitting allows a married couple to combine that gift tax exemption limit. If wife gifts $28,000 to her daughter and the husband agrees to split, there is no gift tax. This has to be noted in gift tax return (Form 709)
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"Extensions Associated with a Closely Held Business"
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IRC Section 6166 allows the estate tax related to a closely held business or farm that is more than 35% of estate to be delalyed. Interest only first 4 years and then paid in 10 installments with interest. So it can be stretched for 14 years and 9 months. This is forfeited if late in payment, more than 50% of asset is withdrawn from estate or sold to outsider (not count if qualified heir, like sibling or spouse)
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"Totaling the Gross Estate"
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Life insurance proceeds must be included in gross estate. A way to avoid this is to establish an irrevocable trust to buy a policy, this is called an "Irrevocable Life Insurance Trust" that will be both the owner and beneficiary of the policy. This insurance has to be in the irrevocable trust for 3 years to be effective.
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"Special Circumstances"
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There are techniques to lower estate tax but can be revoked. 1. Special use valuation: if a farm land is valued lower as farm than selling for residential development, it can be valued as such (limit to lower is $1.12 Million) but must keep itsoriginal use for at least 10 years if not the tax savings can be recaptured. 2. partial sale of closely held stock is treated as ordinary dividend, but if you are selling shares to cover death taxes, funeral, and administrative costs (and no more), it can be treated as LTCG with step up basis (so no tax at all)
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"Identifying Triggering Events"
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Direct Skip: if a gift is given directly to the skipping person or in a trust. Taxable Termination: a trust that is for next generation is terminated due to the next generation dying and passing onto the 3rd generation
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"The GST Tax Rate and Exemption"
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GST is a flat tax of 40%. GST exemption is $5.49 Million. Portability is not available for GST exemption. Since the GST tax is on top of gift or estate tax, it is always a good idea to avoid this.
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"Identifying Skip Persons"
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Skip persons are those two or more generations below the transferor. If not related, +- 12 1/2 year is in same generation. The standard deviation is 25 years for each generation. So 12.5 is same gen, 37.5 is next gen, younger than that is skipping generation
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“Valuing Specific Assets”
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1. Tangible Personal Property: by appraisal 2. Series E & EE Bonds: at redemption value 3. Real Property: by comparable sale. Or is there is a specific use, like farm land, that lowers the value, it may be used. 4. Closely-held business: by expert
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“Valuation of Life Insurance”
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1. Term: unused premium 2. Paid-up or single premium: it's replacement cost 3. Whole life (1st year): gross premium paid 4. Whole life (2nd+ year): cash value + unearned premiums
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“Valuation of Investment Securities”
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For liquid securities, it is the average of market high and low of the nearest date before and after the valuation date, usually on date they died. If that day the market is closed, then take the average of high/low the day before and day after and average that again. If it's illiquid, then take the closest day before and after and the average of average high/low but weight it to proximity to date of death
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“Accumulation Distributions and Throwback Rules”
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Accumulation Distributions are if DNI (Distributable Net Income) are not taken out last year, instead this year. To prevent people from only distributing on years with low taxable income, the throwback rule says that accumulation distributions can be taxed the same way as if they were distributed normally in the year the DNI was earned.
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“Taxation of All Other Trusts”
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Tax on trust depends if it is simple or complex. Simple just distributes dividend & interest income to beneficiary (no charitable) and no principle distributions. All other trusts...having charitable beneficiaries, principle distributions...are complex.
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“When NOT to Rely on Portability”
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1. 2nd marriages with kids from 1st marriage. A QTIP should be used to ensure assets passes to blood children and not mixed with 2nd marriage. Portability will just have surviving spouse assets in their own name and unprotected 2. States with their own estate or inheritance tax or no portability. They can have lower limits than federal exemption of that $5.49 Million 3. To fund personal goals. If you desire your money to continue to purpose, like providing for handicapped child or create a trust for grandkids, then don't use portability. A trust can rule from grave, but portability risks your surviving spouse not having the same personal goals 4. Having a nonresident alien spouse: portability is only available for citizen or resident alien spouse that reside in US. So cannot use it even if you wanted to
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“Tax Minimization for Very Large Estates”
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Best to use annual gift tax exclusion or charitable deduction. When gifting, should prioritize high future return potential assets and avoid gifting low basis securities to friends & family and instead give it to charity
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"The General Power of Appointment (POA) Marital Trust"
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Oldest type of Marital Trust. Allows the surviving spouse to appoint a manager, including themselves or someone competent. Surviving spouse pretty much can do as they please with it
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“The General Power of Appointment (POA) Marital Trust"
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Oldest type of Marital Trust. Allows the surviving spouse to appoint a manager, including themselves or someone competent. Surviving spouse pretty much can do as they please with it
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"What if the Surviving Spouse is not a U.S. Citizen?”
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Only citizens are entitled to unlimited maritable deduction. They can transfer to non-citizen spouse up to $149,000/yr in 2017. Work around is to do a Qualified Domestic Trust (QDOT). This accomplishes the following: 1. Defers taxes on assets until non-citizen surviving spouse dies. 2. Pays income to surviving spouse 3. Allows principal distribution (given hardship, if not, must pay estate tax) 4. Prevents spouse from removing funds and leaving country
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“Introducing the QTIP Marital Trust”
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This allows the donor of the marital trust to dictate how the assets benefit the surviving spouse and their children. Normal trusts allow the surviving spouse to dictate what happens to trust assets, but this might be unacceptable if remarried and helping 2nd spouse. To qualify, this QTIP must allow spouse to transfer non-income producing property to income producing and also must provide income to surviving spouse for life, even if remarried. But the decision to distribute estate is up to the donor (who is dead) and not the surviving spouse
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“Qualified Domestic Trust (QDOT) – Summary”
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Use to workaround lack of unlimited spousal transfer for non-citizens. Used to defer estate tax when first spouse dies. Provide income for surviving spouse, allow discretionary distribution of principal, and allows government to protect against non-citizen spouse taking the money out of states
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"Charitable Gifting Techniques"
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Charitable remainder trusts, charitable lead trusts, pooled income funds
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“Two types of Charitable Remainder Trusts”
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CRAT: Charitable Remainder Annuity Trust. Calculation is made one time and used to calculate an annuity. This is different from a Charitable Gift Annuity cause in a CRAT, you retain interest. Once it's setup, you cannot add more. CRUT: Charitable Remainder Unitrust: calculation is made annually. So more like 5% of FMV of each year. Since it's evaluated annually, you can always add more assets
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“Charitable Lead Trust”
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Opposite of a charitable remainder trust. Charity gets income and beneficiary gets the balance (corpus). Can last for life of donor or individual or number of years, there is no 20 year limit. Donor can take the present value of future income stream and make an immediate income tax deduction
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“Charitable Remainder Trusts"
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You gift to a trust, pull income from it during your life or life of another, and the remainder all goes to charity. Low basis or low-income property is ideal. There are no capital gains. Low income assets because you can sell shares as well and have no capital gains to create income. You can name one or more beneficiaries and usually are the grantor and their spouse. It can last as long as income beneficiary lives or a set number of years with a max of 20. Income can start now or be deferred. Income cannot be less than 5% or more than 50% of trust assets. You can change charity without losing trust status.
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“Income Tax Deductibility Limits
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There is a limit to how much you can donate, it depends on type of charity and instrument gifted. What you cannot deduct can be carried forward for 5 years. Max deduction is 50% of adjusted gross income. You can give most property up to 50% of AGI to public charity and 30% to other charity except for property with LTCG, which is limited to 30% to public charity and 20% to other charity
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"Grantor Retained Annuity Trust (GRAT) and Grantor Retained Unitrust (GRUT)"
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Grantor makes a irrevocable gift to a trust and gets an annuity based on value at funding. They get payment for specific terms and corpus goes to remainder beneficiary. If the grantor dies before the trust term is completed, it will be as if the trust never existed. So life expectancy is important. For gift tax purposes, it is an immediate gift. The GRUT is the same but is % of FMV each year instead of funding year.
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