Estate Planning - Charitable Deduction Planning And Property Transfers

Front 1

What are the requirements for a charitable gift to be deductible for either income, gift or estate tax purposes

Back 1

1) Charitable contribution must be in excess of value received; 2)qualified appraisal must be made for property valued over $5K, transfer must be made by decedent not beneficiaries; 3)a gift of a split interest must be in the form of a specified trust or remainder trust.

Front 2

What is split interest gifting

Back 2

involves the separation of property into an income portion and a corpus portion

Front 3

What are the gift tax adv and disadv of an installment sale?

Back 3

ADV=seller may remove an appreciating asset from his estate--a freezing effect
DIS-If seller dies during the installment period, the remaining unpaid principal plus interest is included in gross estate

Front 4

What are the gift tax adv and disadv of a self-canceling installment note (SCIN)

Back 4

ADV: remaining principal and interest is not included in seller's estate. No estate tax is attributable to IRD also.
Disadv: Buyer must pay a premium so that it cannot be construed that there is an unequal exchange of assets--resulting in a taxable gift. The premium increases as the age of the seller increases. Property sold is collateral for the seller,

Front 5

How can private annuity be used in sale of property for estate purposes?

Back 5

A private annuity is a sale of an asset usually to a family member, in xchange for unsecured promise to pay a lifetime annuity to annuitant seller. Each annuity payment will have three elements; basis, gain and ordinary income.
Annuity terminates at death and nothing is included in estate. NOT collateralized. Buyers tax basis=PV of all annuity payments

Front 6

What are the major differences between SCIN and private annuity?

Back 6

The interest on the SCIN is deductible, but the ordinary income payment on the private annuity is not.
The seller's of an SCIN must report any gain--not a private annuity.
The decedent in a private annuity may take a deduction for any unrecovered basis in the annuity contract.

Front 7

What are the risks in a private annuity/sale?

Back 7

It may not be recognized as arm's length sale. To avoid this consequence, the purchaser should be sure to make payments from income or assets that cannot be traced back to the underlying property

Front 8

What is the sale-leaseback technique?

Back 8

Sells fully depreciated business property to a junior family member and then lease it back. Lease payment is deductiblis there is a valid business purpose.

Front 9

What are the benefits of buy sell agreements?

Back 9

1)can fix the value of the business for estate tax purposes; 2)provides liquidity for the decedent business owner's estate; 3)guarantees there will be a market or buyer for the business at the decedent's death; 4) provides for business continuation and the corresponding goodwill among existing customers of the business.

Front 10

What is a cross purchase agreement

Back 10

owners of the business buy a life insurance policy on the others and use the death proceeds to buy out the other owner's family at death, disability or retirement. Dis: must buy a lot of policies (n x (n-1) Dis adv if owners vary in age. Amount of insurance is amount of ownership of other partners /number of other partners

Front 11

What is an entity purchase agreement?

Back 11

An alternative to the cross purchase agreement(aka stock redemption agreement). Business entiy buys the insurance policies on each owner. Premiums are not deductible. DB is tax free. Creditors have access. AKA stock redemption/entity arrangement. The # of policies=# of owners

Front 12

What are the transfer for value rule and buy sell agreements

Back 12

If life insurance policy is sold to another, the death proceeds may not be fully excludable from income taxation except when: the life insurance policy is sold to the insured, partner, related partnership corporation or its a tax-free exchange

Front 13

What is a family limited partnership (FLP)

Back 13

A partnership that is created to xfer assets to a junior family members at a reduced gift tax valuation and cost. in xchange for a 1% general partnership interest and a 99% limited partnership interest. The senior member then gifts the limited partnership interest over time to the family members..Can take advantage of valuation discounts and annual exclusion.
To avoid problems with IRS, FLP must be established for reasons other than tax avoidance and FLP's income must be distributed to all partners. Also capital must be a material income producting factor (personal services will not work). FLP qualifies for discounts.

Front 14

What is corporate recapitalization and partnership capital freeze?

Back 14

A corporate recapitalization is used by a senior family member who owns a controlling interest in family C corporation and wishes to transfer future ownership rights to one or more of junior family members.Typically the senior family member retains operating control through voting preferred stock w dividends Because the future appreciation in the value of the business is attributed to the CS, the value of preferred stock is frozen

Front 15

What are the similarities between a SCIN, self canceling installment note, SCIN, and a private annuity?

Back 15

They both terminate at death, and nothing is included in the seller's gross estate.

Front 16

What is a CRAT?

Back 16

Charitable remainder annuity. the grantor receives either a fixed percentage of the FMV of gift or fixed dollar amount annually. NO ADDITIONAL contributions can be made after initial funding. The payout rate must be at least 5% annually. The income tax deduction is calculated in the year the CRAT is funded and measured by the PV of the charity's right to receive the trust assets at the end of the annuity period using an IRS rate. Remainder interest must be 10% at trust creation.

Front 17

What is a CRUT?

Back 17

Charitable remaider unitrust--similar to CRAT. However grantor receives a fixed percentage of the trust assets, revalued annually. Additional contributions ARE permitted. Same 5% payout requirement as CRAT and income tax deduction. based on the value of the remainder interest received by charity. There I also a NIMCRUT that provides for a net income with makeup.

Front 18

What is a pooled income fund?

Back 18

It is created and maintained by a public charity. Donor must contribute an irrevocable remainder interest that maintains the fund. The charity must also be a 50% charity. The fund cannot invest in tax exempt securities. The donor retains a life income interest and no term interests are permit (unlike CRAT and CRUT) The payment to the donor is the trust rate of return for the year. The pooled income fund is managed by the remainderman

Front 19

What are the xteristics of a private foundation?

Back 19

It is a tax exempt charitable org created by individual/family. It can be operating (contributed funds are used in the foundations own charitable purpose), or nonoperating (does NOT engage in any charitable activity directly just disburses funds for charitable purposes) Adv: control investment and distribution. However 5% must be distributed to charity annually to avoid an excise tax. Dis: strict reporting requirements.

Front 20

What are the broad exceptions to the transfer for value rule that will not result in the loss of the income tax exclusion on the death proceeds.

Back 20

Sales of the life insurance policy to the insured, partners or partnership or corporation of the insured, transferee whose basis in the policy is determined by reference to the transferor's basis (or a tax-free-xchange)

Front 21

To avoid problems with IRS re FLP what must be done?

Back 21

1. FLP must be established for a reason other than to avoid income tax; 2) FLP must distribute to all partners in accordance with their percentage ownership; and 3) the family limited partnership's capital must be a material income produing factor for the partnership (cannot be a service)

Front 22

What is a partnership freeze?

Back 22

Partnership is reorganized so the sr retains a partnership interest receiving a preferred profit distribution but also specifying a fixed liquidation value. This retained interest resemples preferred stock in the corporate recapitalization strategy. The remaining interests are gifted to the jr family members

Front 23

Do the beneficiaries of an inherited IRA receive a step up in basis?

Back 23

No their basis will be identical to the donor.

Front 24

A married couple owns property as joint tenants. The spouse1 contributed 75% of the cost and spouse2 contributed 25%. What is the percentage of the FMV will be included in the gross estate of spouse 1 when he dies?

Back 24

50%. If they were not related the percentage would be 75%.

Front 25

What is an attestation clause in a will?

Back 25

That clause wherein the witnesses certify that the instrument has been executed before them, and the manner of the execution of the same. The usual attestation clause to a will, is in the following formula, to wit: "Signed, sealed, published and declared by the above named A B, as and for his last will and testament, in the presence of us, who have hereunto subscribed our names as the witnesses thereto, in the presence of the said testator, and of each other." That of deeds is generally in these words "Sealed and delivered in the presence of us."
2. When there is an attestation clause to a will, unsubscribed by witnesses, the presumption, though slight, is that the will is in an unfinished state; and it must be removed by some extrinsic circumstances.

Front 26

What is the basis on inherited property?

Back 26

Generally FMV at date of death or AVD However, for decedents dying in 2010 only, the adjusted carryover basis is used instead because the estate tax was repealed for the year. This adjusted carryover basis applies no matter what year you sell the home. The adjusted carryover basis is equal to the smaller of the fair market value or the decedent's basis for the home, plus any of the adjustment allocated to the home. You can get the adjusted carryover basis from the executor or estate tax return.

Front 27

What is a CRT

Back 27

Charitable remainder trust-irrevocable trust in which the remainder beneficiary is a qualified charity. The PV of the reamainder interest at the inception of the trust must be at least 10% of the initial fair market value of the property xferred. Grantor can be trustee

Front 28

What is a charitable Lead Trust

Back 28

Income from property is transferred to trust is distributed to charity. Reminder reverts to noncharitable beneficiary. If set up as a nongrantor trust, NO charitable income tax deduction is available.. Used by rich who have no need for the current income

Front 29

What are bargain sales

Back 29

sale of an asset for less than full consideration. Diff btwn sp and basis =cG. Difference betwn FMV and consideration =gift

Front 30

How is the amount of insurance for each policy in a cross purchase agreement calculated

Back 30

Amount of partner's share/# of partners less number of partners who died

Front 31

How is a cross purchase sell agreement handled for a corporation

Back 31

Each shareholder agrees to purchase a speciic % of decedent's shares

Front 32

Can a partnership use an existing insurance policy to fund a cross purchase or entity agreement

Back 32

Yes but there would be transfer for value problems

Front 33

What are the major types of valuation discounts

Back 33

Minority (interest); lack of markeability, blockage discount (for publicly traded shares only; key person discount

Front 34

What is the special use valuation (section 2032A)

Back 34

If decedent owned real property used as farm or in connection with a closely held business, than a reduced gross estate valuation may be available, The aggregate reduction cannot exceed $1070.000

Front 35

What are the conditions that must be met to get section 2032A special use valuation

Back 35

Value of real and personal property must be at least 50% of adjusted value of gross estate (valued at HIGHEST AND BEST USE)
Value of REAL property along must be 25% of adjusted value of the gross estate (valued at HIGHEST AND BEST USE)

Decedent or family member must have been a material participant in business for at least 5 of 8 years and hold on o property at least 10 years after DOD

Front 36

What is deferred payment of estate tax (Section 6166)

Back 36

Election to defer for 5 years estate tax payment relating to closely held business. Value of business must exceed 35% of adjusted gross estate.

Front 37

What is stock redemption section 303

Back 37

Permits estate of decedent s/h to redeem decedent's shares at CG rather than OI. The stock must be included in decedent's estate. Value of stock must be more than 35% of adjusted gross estate and included therein. Redemption proceeds cannot exceed deductions for funeral , admin and state tax expense.

Front 38

What is the consequences at death if an installment sale is not self cancelling?

Back 38

IRD. Balance will be in the estate.. Also if buy gets out of business within 2 years, must recognize all gain on 1041.

Front 39

What is a GRAT

Back 39

APPRECIATING assets are xferred to trust with income paid to grantor during term of trust. It freezes value at trust creation if grantor outlives trust term. Income taxed to grantor during lifetime.If grantor dies within trust term, GRAT included in grantor's estate. Gift to extent that balue of property>income interest. Remainder passes to family. Present value of remainder is an immediate gift. Grantor rules apply. CANNOT add additional assets

Front 40

What is a GRUT

Back 40

Similar to GRAT but makes payments at least annually of a fixed percentage of fmv of trust assets as determined annually. also for APPRECIATING ASSETS. Can add additional assets

Front 41

What is a GRIT?

Back 41

AKA QPRT. not commonly used. usually done withvacation. grantor remainder interest trust

Front 42

What xfers are NOT subject to gift tax

Back 42

1. support-aliminoy or child support
2. Spouse - unless alien than $143K/year
3. annual exclusion of $14K
4. Disclaimed property
5. Qualified xfers-direct medical or education
6. QDRO-curt order
7. Imputed interest $10K or less
8. charitable gifts

Front 43

What is Form 706 ft under used for

Back 43

Estate. Due 9 months after death

Front 44

When if the 709 form due

Back 44

Gift tax form 709 due april 15

Front 45

If a married couple elect gift splitting, what does that imply regarding gifts

Back 45

All gifts will be split

Front 46

When gifted property is sold, how is gain determined

Back 46

Double basis rules apply
If loss,=Sales price less FMV at date of gift
If gain=Sales price less crryover basis and carry over hold o@date of gift. Also must proate gift taxes as follows: donors basis + (appreciation/FMV-GIFT EXCLUSION) X gift tax paid
If sold between donor's basis and FMV at date of gift, no gain or loss recognized.

Front 47

What is a net gift and when can it be used

Back 47

Donor and donee agree that Donee pays gift tax. Can only be used when lifetime exemption has been used.

Front 48

What is the peaking order of gift giving

Back 48

1. Retain losers for the tax benefits
2. Give appreciated property to charity
3. Steady parent
4. Grow child
5. Leftovers-anybody

Front 49

What is an ILIT

Back 49

Irrevocable life insurance rust. Removes insurance proceeds from estate. Unfunded is preferred as premiums can be gifted. Trust pays taxes on funded ILIT.

Front 50

How would a buy sell agreement be used for a sole proprietor

Back 50

A trustee can be used to collect and pay premiums on life insurance policy and to transfer business upon death.

Front 51

What are the transfer for value issues for either a entity or x purchase agreement

Back 51

there are none

Front 52

Why are IRAs a good item to donate to a charity if the goal is to give to charity

Back 52

Because IRAs are taxable to the beneficiary

Front 53

Are life insurance proceeds from an entity (stock redemption) buy sell agreement received by a corporation deductible?

Back 53

Premiums are not tax deductible. Life insurance proceeds are received by a corporation in a buy sell agreement are not taxable. HOWEVER,"", the proceeds may be subject to corporate AMT

Front 54

Are life insurance proceeds from an entity (stock redemption) buy sell agreement received by a family owned corporation deductible?

Back 54

Premiums are not tax deductible. Life insurance proceeds received by a corporation in a buy sell agreement are not taxable. HOWEVER,"", the IRSj may treat redemption price as a dividend AND if entity is a C corporation, the proceeds may be subject to corporate AMT

Front 55

What is the gift tax valuation of life insurance (not term)?

Back 55

If the policy has been in force for several years and further premiums are to be paid, the gift tax valuation may be approximated by adding to the interpolated terminal reserve the proportionate part of the gross premium last paid before the gift (unearned premium) which covers the period extending beyond the gift.

Front 56

What is the character of the income received from a CRAT or CRUT

Back 56

The xracter of income is determined based on the income earned in the CRT. The ordinary income rules reuire ordinary income to be used first, followed by CG income, then followed by tax exempt income. If the asset is sold and creates CG income, the all or a portion of the income will be CG.

Front 57

What is a donor advised fund

Back 57

Easy to set up and administrater. Donor gets msximum immediate tax deduction. Administered by public charity. Donor advises, but sponsor can changee donee.

Unlike a private foundation, donor advised funds cannot accept unusual or illiquid assets.

Front 58

What is the charitable deduction allowed on a CRT

Back 58

The charitable deduction= PV of REMAINDER interest

Front 59

What is a unique tax adv xteristic of CRT

Back 59

They are tax exempt. Therefore stock sold within trust are without immediate capital gains.

Front 60

What is the gift tax valuation of TERM life insurance?

Back 60

Unearned premium at date of gift