Trusts & Federal Estate Tax: Federal Estate & Gift Tax

Front 1

Federal Estate Tax grants $3.5 'exemption' for estates of decedents dying in 2009

Exemption under Gift Tax is $1m

Back 1

For estate < $3.5m, no estate tax return has to be filed. "Credit shelter"

Hint 1

No gift tax has to be paid unless and until cumulative lifetime taxable gifts exceed $1 million; and no estate tax has to be paid unless and until:

1) cum. lifetime taxable gifts plu
(2) taxable estate exceeds $3.5m

Front 2

Unlimited marital deduction given under both gift/estate tax for qualifying gifts to spouse

Back 2

To qualify for marital deduction, property must be left in form that will cause it to be taxed in surviving spouse's estate at his or her death (to extent it's not given away, consumed or disposed of during survivors lifetime)

Hint 2

Thus, doesn't necessarily save taxes--> defers estate tax until spouse's death

Outright dispositions to spouse (will, intestacy, life insurance in lump sum, etc.) qualify for deduction, as do certain trusts

Front 3

"Pay no tax" Marital deduction formula clause: that outright "smallest amount tha twill produce the largest taxable estate that will result in no estate taxes being payable by my estate, taking into account the value of other gifts to my wife that qualify for the marital deduction."

Back 3

Bypass trust: gives income for life and limited invasion powers; result that get economic benefits but trust not taxed in estate. Also called a credit shelter trust, as it utilizes the unified credit to shelter assets from tax

Front 4

Bypass trust: beneficiary can be given life income interest and limited powers over trust principal, all w/o causing property to be taxed in beneficiary's estate on her death.

Back 4

Trust will not be taxed in beneficiary's estate as long as she is not given a general power of appointment.

Hint 4

Estate tax reaches value of a decedent's interest in property as of the date of the decedent's death. If the value of the decedent's interest in a trust is zero, the moment he dies there is nothing to tax (tho he had economic beneefits during life.

Front 5

Beneficiary can invade trust and appoint principal to self as needed for "health, education, maintenance or support" (HEMS)--> that's okay

Back 5

NOT okay; exposes all assets to taxation on death:

- benefit, welfare, well-being, comfort

Hint 5

"comfortable health, support and maintenance" is okay bc 'comfortable' is adjective modifying permissible standard

Front 6

Testamentary power of beneficiary to appoint among descendants is a special testamentary power of appointment, because she is limited in the class of beneficiaries to whom sh can appoint

Back 6

Can't appoint to herself, or her estate, or her creditors

Front 7

If trustee's power to distribute principal to herself is not limited by an ascertainable standard, trustee can't exercise the power.

Back 7

If there's more than 1 trustee, other trustee(s) can exercise power in the beneficiary's favor. If the beneficiary is the sole trustee, the court may appoint a special fiduciary w/authority to exercise the power.

Front 8

Marital Deduction QTIP Trusts

Client may prefer to have property left in trust rather than leaving it outright to souse (ex: spouse elderly/poor health--> avoid guardianship if incapacitated)

Back 8

QTIP Trusts and QTIP election

Congress has permitted the use of certain trusts to qualify for the marital deduction, the most important being QTIP Trust.

Front 9

To be eligible for QTIP election as a qualified terminable interest trust,

1) Income must be payable to spouse annually for life. If income interest terminates on spouse's remarriage, the trust is not QTIPable (not eligible for QTIP treatment)

Back 9

2) During spouse's lifetime, no other person can be a permissible beneficiary of the trust (Neither spouse nor trustee can have power to distribute trust property to anyone other than spouse. If trustee's given power to distribute principal to the testator's children "in case of an emergency," the trust is not QTIPable)

Hint 9

3) Executor must make a QTIP election on estate tax return.

Front 10

QTIP election can be made for a legal life estate (not in trust)

Back 10

e.g., "I devise Blackacre to my wife W for life, and on her death to my daughter D"

Front 11

"New basis at death" rule

Unrealized value wiped out by new basis (if, for example, stock bequeathed via will)

Back 11

Interests owned by a decedent receive a new basis (for federal income tax capital gains purposes) equal to the asset's date-of-death value

Hint 11

If give appreciated stock as gift, basis is original value (carryover basis rule for lifetime gifts)

Front 12

Under "new basis at death" rule, the entire community property receives a new basis equal to its date-of-death value, even though only 1/2 includable in gross estate (of deceased spouse)

Back 12

-- has the right to name, and change, the beneficiary (of term life insurance policy--- pure term policy has no investment feature or cash surrender value)

- includable in gross estate for estate tax purposes

Hint 12

INCIDENTS OF OWNERSHIP

- insurance $ excluded from gross income; life insurance paid by death of decedent

Front 13

Estate Tax Charitable Deduction

For a remainder interest passing to charity, there is no charitable deduction under the income tax, gift tax, or estate tax, unless gift takes form of:

Back 13

Charitable Remainder Annuity Trust (CRAT): Under a stated dollar amount, which can be no less than 5% of the initial trust corpus, is payable to the individual beneficiary for life

Charitable Remainder Unitrust (CRUT): A stated % (no less than 5%) of the trust corpus, valued annually, payable to individual beneficiary for life

Hint 13

There is $13k-per-donee annual exclusion under the gift tax. Exclusion is available for gifts of present interests, but not for gifts of future interests.

Front 14

There is unlimited exclusion for tuition and medical payments if (but only if) the payment is made directly to the service-provider.

Back 14

A gift is incomplete for gift tax purposes if the transferor retains either the power to revoke the transfer or the power to change the beneficiaries.

So, would be includible in gross estate for estate tax purposes.