Cfp - Estate Planning - March 2012

Front 1

Community Property Interest vs. Excluded/Individual Property Interests in Community Property States
(1 of 2)

Back 1

CP Incl's: Income earned by either spouse during marriage, appreciation of singly owned property due to contributions of non-owner spouse, separate assets must have been commingled so there's no determining which assets are which

Front 2

Community Property Interest vs. Excluded/Individual Property Interests in Community Property States
(2 of 2)

Back 2

Non-community Property Interests Incl: 1) Income earned by spouses prior to marriage 2) Property received as a gift by one spouse 3) Property inherited by one spouse 4) Interest earned on separate assets held by one spouse as sole owner.

Front 3

Advantage of Community Property Assets at Death

Back 3

Surviving spouse gets a step-up in 100% of (appreciated) property (only - which excl's depreciating use assets,CD's & annuities) if at least half of the property is includible in deceased spouse' gross estate.

Front 4

Definition of Probate Contrasted with Gross Estate

Back 4

Probate is merely the process whereby a court determines the the beneficiary of property at death - doesn't determine what's includable in gross estate. GE incl's all assets decedent has right to whether titled/transferred by JTWROS, contract or probate.

Front 5

Quasi-Community Property

Back 5

Quasi-Community property is property that would've been community prop except it was acquired while in a common law state.

Front 6

Estate Tax Implications of non-spouse JTWROS property

Back 6

IRS will try and include 100% of such property in deceased's estate unless there is strong evidence that each tenant brought their own (and was not gifted etc) money to the deal.

Front 7

Advantages & Disadvantages of Probate

Back 7

Adv: court supervised admin of estate, marshall all assets (inventory & valuation), pay bills & resolve credit issues, oversee distribution of estate.
Disadvantages; loss of privacy, invites will contests, court costs, probate costs & delays, possible multi-state proceedings due to ancillary probate

Front 8

Assets Subject to Probate

Back 8

1) Singly owned assets
2) Property held by TIC
3) Community property
4) Assets where the beneficiary is estate of insured

Front 9

Prior Transfer Credit

Back 9

Tax credit for when assets pass quickly through tax estates. Usable when transferree dies within 10yrs of transferror and assets have already been taxed. Good for credit of 70%

Front 10

Estate Tax considerations of General, Special and 5 or 5 Powers of Appointment

Back 10

5 or 5 powers are the > of $5K or 5%.
Remember that general powers are includable in estate of power-holder and unused distributions for a 5 or 5 power are also included.

Front 11

Gift Tax Consequence of General Powers or 5 or 5 Powers

Back 11

1) Exercised, released or lapsed - taxed
2) Lapsed with a 5 or 5 power - not taxed

Front 12

Estate Tax Consequence of General Powers or 5 or 5 Powers

Back 12

1) Exercised, released or lapsed - taxed
2) Exercised, released or lapsed with a 5 or 5 power - not taxed (> of the 5 or 5 is taxed)

Front 13

Appropriate Beneficiaries for Gift Property

(1 of 2)

Back 13

1) Highly appreciated property - charity or bene in lower tax bracket (or keep until death for step-up)
2) Property likely to appreciate - Good to gift to get future appreciation out of estate.
3) Income producing property - donee in lower tax bracket

Front 14

Appropriate Beneficiaries for Gift Property

(2 of 2)

Back 14

4) Loss property - Sell & take loss (then gift cash from sale)
5) Out-of-State Property - gift to avoid ancillary probate
6) Property subject to depreciation - keep to get full dep'n
7) Life insurance - excellent to gift

Front 15

Gift Tax for Gifts of Future Interest

Back 15

Non eligible for exemption (i.e. gifts to 2503(b) trusts - corpus is future interest, income is not - similarly, gifts to an irrevocable trust with income-only beneficiary.
Gifts to 2503(c) trusts are an exception

Front 16

Annual Allowed Gift to Non-Citizen spouse

Back 16

$100K

Front 17

Value and Basis for Gifted Property

(1 of 2)

Back 17

Value for gift is FMV @ date of gift (whether gain or loss). Basis is dependent on whether it's loss property or not.

Front 18

Value and Basis for Gifts
(2 of 2)

Back 18

If FMV > adj basis, use adj basis. If FMV < adj basis (i.e. loss property), then;
a) If subsequent sale between adj basis and FMV - no gain recog'd
b) If sold for gain over original adj basis, then adj basis used for calc of gain.
c) If sold for less than FMV, FMV used to calc loss.
Present Interest Gifts are always offset by annual exclusion.

Front 19

Gift Tax Filing Requirements

Back 19

Form 709 Req'd to be filed annually if;
1) Gift of >$13K to any non-spouse donee
2) Gift of Future Interest of any amount.
3) A gift for which spouse wants to elect gift-splitting.

Front 20

Filing Reqt's for Gift Splitting

Back 20

If gift > joint annual excl; both spouses need to file 709 (all property types).
If split gift < $26K & Indiv or common property, only donor spouse need to file 709 (but need spouse signature).
If Community or JTWROS property, no 709 req'd at all.

Front 21

Deductible Gifts

Back 21

5 Types of Gifts are Fully Deductible
1) Edu payments made direct to Inst
2) Medical payments
3) Present interest gifts to spouse
4) Gifts to qualified charities
5) Political org

Front 22

Gifting of LIfe Insurance to Charity

Back 22

Life Insurance is an ordinary asset not subject to LTCG treatment. If you gifted a LI to a charity, basis of policy would be gift basis.

Front 23

Calculation of Estate Tax Savings when Sizable gift made (prior to death) and Estate taxes paid

Back 23

Original Estate - $100M
Less Gift - $40M
Less Gift Tax - $14M
Gross Estate - $$46M
+ Taxable Gifts - $45M (incl B-trust $5M gift)
Taxable Estate - $91M
Less Exemption - $5M
= Tax Base - $86M
x 35% Estate Tax = $30.15M Vs. $4M with no gift

Front 24

Defintion of Durable Power of Attorney for Health Care

Back 24

Makes decision relating to health care. Differs from regular DPOA in that DPOAHC; concerns medical decision only, always a springing power, drafted separately from DPOA.

Front 25

Non-tax Related Powers that a Durable Power of Attorney holds for Asset Management

Back 25

1) Buy, sell or lease assets
2) Collect from debtors
3) Operate the principal's biz
4) Sue on principal's behalf
5) Refuse life-prolonging procedures

Front 26

Tax Related Powers that a Durable Power of Attorney holds for Asset Management

Back 26

1) Power to make gifts
2) Disclaimers
3) Living trusts to benefit principal, spouse & heirs
4) Power to complete transfers
5) Can join competent spouse in signing income & gift tax returns
6) Exercise special powers of appt
CANNOT execute or revoke will or execute a living will

Front 27

Advance Medical Directive aka Living Will

Back 27

Legal doct directing physician to discontinue life-sustaining measures if principal is terminally ill. Compared to a DPOAHC, the DPOAHC can name a surrogate to make medical decisions

Front 28

Medicaid Planning

Back 28

- 5yr lookback on gifts (OBRA 'Payback trust' an exception
- Ineligible if > $500K in home equity
- if client has an annuity, must name state as remainder beneficiary
- < $2K in countable assets to qualify

Front 29

OBRA "Payback Trust"

Back 29

Allows an individual with disabilities <65 to qualify for medicaid. If assets remaining in trust at death, state recoups medicaid expenses & remainder goes to estate

Front 30

Differences between Simple and Complex Trusts

Back 30

Simple: Income distributed, taxed to bene, no distribution of corpus & no charitable gifts.
Complex: Income must or may be accumulated, Accumulated income taxed to the trust, income distributed taxed to bene, corpus may be distributed, may make charitable gifts

Front 31

Bypass Trust
AKA - B, non-marital, family, Credit shelter trust

Back 31

Uses exemption credit, bene controlled by decedent, may pay income for life to spouse (& others if desired) but passes tax free to final bene's (provided no more than 5 or 5 or HEMS powers given to spouse). Could be used with alternative lifestyle couples.

Front 32

Marital Trust
AKA - A,Power of Appointment Trust

Back 32

Surviving Spouse (SS) has lifetime or testamentary general powers of appointment. SS controls bene. Qualifies for marital deduction & not included in decedent's estate. Not suitable for alternative couples because uses un-ltd marital deduction. Incl in estate of surviving spouse

Front 33

Qualified Terminal Interest Provision Trust (QTIP)
AKA - 'Current Income Trust' or C Trust

Back 33

Decedent controls bene, Lifetime, Annual, Mandatory, Exclusively for spouse income. Qualifies for marital deduction & must be incl'd in SS's estate. Suitable for > 2nd marriages where decedent doesn't want to gift to other kids. Pays it's own estate taxes from corpus.

Front 34

Estate Tax Treatment of UTMA's, UGMA's and 2503(c) trusts

Back 34

If donor named custodian and predeceases donee, then gift brought back into estate.

Front 35

Sec 2503(b) Trust

Back 35

Corpus funding considered gift of future interest. Provides stream of income but not tax-efficient due to kiddie-tax rules because of this, better suited for adult-child.

Front 36

Sec 2503(c) Trust

Back 36

Exception to gift of Future Interest non-deductibility i.e. gifts can use current gift exemption amounts.
For bene < 21, any property not used passes to bene @ 21. Taxation is subject to Trust tax rules (15% to $2300).

Front 37

Automatic Assets not Subject to Probate

Back 37

1) Property conveyed by deeds of title. 2) JTWROS 3) Govt savings bonds (held in co-ownership) 4) Revocable Living Trusts 5) TOD accounts 6) Totten trust

Front 38

Assets subject to probate
(SCET)

Back 38

SCET 1) Fee-simple or singly owned assets 2) TIC 3) Assets where the beneficiary is the estate of the insured 4) Community property (50% attributable to each spouse)

Front 39

What assets mightn't be included in the gross estate at FMV?

Back 39

1) Life estates 2) Remainder interests 3) Reversionary interests 4) Periodic payments from annuities

Front 40

Which assets might take advantage of discounting methods?

Back 40

Closely Held stock - minority discount, marketability, key person
Publicly Traded Stock - blockage discount (on significant holdings)
Real Estate - co-ownership discount

Front 41

What are three circumstances that cause life insurance to be included in the decedent's estate?

Back 41

1) Proceeds paid to executor of estate
2) Decedent at death possessed an incident of ownership in the policy
3) Insured transferred a policy with an incident of ownership within 3 yrs of death

Front 42

Incidents of Ownership in LIfe Insurance

Back 42

1) Right to assign, terminate or borrow cash reserves 2) Right to name or change beneficiaries. Premium paying is not an incident of ownership

Front 43

Different Trusts and their Provision Types

Back 43

Funding - Crummey
Principal - General power, 5 or 5, special power, HEMS, spray provisions, complex trust
Income - sprinkling provisions, simple or complex
Remainder - CRAT, CRUT, CLUT, QPRT, GRAT, GRUT, GRIT, 2503(b)

Front 44

Suitable Types of Assets to Gift out of Estate (1 of 2)

Back 44

Property likely to appreciate - Gift to remove FV
Income Producing property - Gift to donee in lower tax bracket
Loss Property - Always sell to take loss & then gift the cash from the sale
Out of State Property - Gift to avoid ancillary probate

Front 45

Suitable Types of Assets to Gift out of Estate (2 of 2)

Back 45

Property subject to depreciation - keep to get full dep'n
Fully Depreciated Property - Good for gift-leaseback to donee that can use income
Life Insurance - Always good to gift & get out of estate

Front 46

Deductible Gifts - 4 are fully deductible reducing their gift amount to zero

Back 46

1) Gifts to US citizen spouse - provided they're not a terminable interest
2) Gifts to qualified charities
3) Qualified payments in any amount made directly to provider of health care services or educational institution.
4) Gifts to American political parties (senators is $1K but president is unlimited)

Front 47

Factors that lead to a Defective Trust (1 of 3)

Back 47

1) Administrative power over trust property for < full consideration or right to vote trust property
2) Trust income is or may be distributed or accumulated for benefit of grantor or g's spouse
3) Trust income may be used to discharge any legal obligation of grantor

Front 48

Factors that lead to a Defective Trust (2 of 3)

Back 48

4) Trust income actually is used to discharge a legal obligation of grantor
5) Trust income used to pay LI premiums on grantor or G's spouse
6) A reversionary interest > 5% at the time of creation retained by G or G's spouse

Front 49

Factors that lead to a Defective Trust (3 of 3)

Back 49

7) Power to control beneficial enjoyment of the trust principal or income held by G or G's spouse (e.g. retaining right to decide who will receive &/or when beneficiary will receive income/principal)

Front 50

Bypass Trust (can be simple or complex trust)

AKA "B", family, credit shelter trust

Back 50

Gives decedent post-mortem control over trust property. Amount transferred usually equals exemption amount. Can be structured to provide stream of income to surviving spouse only (or others if decedent chooses). As long as corpus invasion right ltd to '5 or 5' or HEMS, B-trust won't be included in estate @ death. At surviving spouse's death - B trust passes to beneficiary estate tax free.

Front 51

'A' Trust or Marital Trust

AKA - Power of appointment trust

Back 51

The A trust consists of property transferred to the surviving spouse at the decedent's death.
Surviving spouse has either lifetime or testamentary general power of appt over the property & can transfer it to whomever. Key characteristic of this trust is SS has post-mortem control over the property. Property in A trust qualifies for marital deduction in the gross estate of the decedent. Not subject to estate tax - but must be incl in gross estate of SS.

Front 52

Qualified Terminal Interest Provision (QTIP) or C Trust

AKA - Current Income trust

Back 52

Used when the decedent wants to provide the SS with income for life but also wishes to qualify the property for the marital deduction. Allows decedent to have post-mortem control over the property when the SS dies. The property can qualify for the for the marital deduction in the estate of the decedent & must be incl'd as an asset in the gross estate of the SS. Remember LAME applies to QTIP's

Front 53

2503(b) Trusts (Simple trust)

AKA - Badboy trust

Back 53

The gift is considered as 2 parts; income interest & remainder interest. Tax law considers the income interest to be a gift of present interest & the remainder interest to be a gift of future interest (no annual excl). Can be used for minors but subject to kiddie tax. Only income must be distributed

Front 54

Section 2503(C) Trust (Complex trust)

AKA - Children's trust

Back 54

Enables a grantor to fit to a minor in trust & still obtain annual gift tax excl. Gift is not considered a gift of future interest if following provisions are met; trust must provide that the property & income may be expended by or for the benefit of the donee < 21. Any portion not expended will pass to donee at age 21. This type of trust is taxed at trust rates.

Front 55

Dynasty Trust (Simple trust)

Back 55

A Dynasty trust, free of estate, gift, & GST tax can last for the lives in being + 21 yrs & 9 months.

Front 56

Charitable Gift Annuities

Back 56

Donor transfers cash or other property to a qualified charity in exchange for the charity committing to pay a specified amount annually for the remainder of the donor's life. Differences between a CRAT? No specified amount of income (e.g. 5%), property goes to the charity not a trust, charity gets money now,

Front 57

Donor Advised Funds

Back 57

Charitable plan where a donor makes a gift to a public charity or community foundation. Charity sets up a charitable fund in the donor's name which the donor can provide suggestions about where the funds should go. No income stream to donor. Poor man's private foundation. 50% tax deduction but donor loses control of gifting.

Front 58

NIMCRUT

Net Income with Make-up Uni-Trust

Back 58

With a NIMCRUT, the account accrues in those years when the net income is less than the fixed percentage of the trust's value. I.e. if donor donates $1M in 2012 into an 8% NIMCRUT, trust earns 0% income but cap gains of 10%, etc etc, and grows in value to be $1.5M over a few years, than donor can take the accrued ununsed distributions from prior years when no income was taken.

Front 59

Self-Cancelling Installment Note
SCIN

Back 59

SCIN is a variation of the installment sale.The balance of PMTs due at death are automatically cancelled - advantage over traditional installment sale. Buyer must pay premium for SC feature & seller pays more income tax on higher income. Warning - cancellation of PMTs will trigger recognition of entire remaining CG on the decedent's estate tax return.

Front 60

Code Section 303

Estate Liquidity tool

Back 60

Allows a Corp. to make a distribution of stock that won't be taxed as a dividend to cover estate tax & admin expenses.
Requirements - Biz must be a Corp, value of biz must be > 35% of adj gross estate

Front 61

Installment Sale (6166)

Estate Liquidity tool

Back 61

If estate qualifies, estate taxes on the closely held biz may be paid in 10 installments commencing 4 years after decedents death. Low interest rate of 2% chargeable on first $1.36M
Requirements - biz must be >35% of adj gross estate & biz interests can be aggregated but must own min 20% of each.

Front 62

Special Use Valuation (2032A)

Estate reduction tool

Back 62

Method of valuation used in closely held real estate biz or farming operation. If elected, 2032A can result in a max reduction of $1.02M in estate taxes.
Requirements - >50% of the value of the gross estate must consist of real or personal property devoted to qualified use. Real property must be > 25% of gross estate. Property must have been held in qualified use for 5 out of the 8 prior years & must continue in qualified use for another 10 years.

Front 63

Charitable Remainder Annuity Trusts (CRAT)

Back 63

Stream of income for period of years or life (<20).
Income tax deduction on PV of remainder interest (min remainder interest of 10%).
Only one contribution to CRAT.
Pays specified amount of income (no inflation indexing).

Front 64

Charitable Remainder Uni Trust (CRAT)

Back 64

Stream of income for period of years or life (<20).
Income tax deduction on PV of remainder interest (min remainder interest of 10%).
Can have multiple contribution to CRUT.
Pays specified % of income (inflation indexing).

Front 65

Charitable Lead Trusts

Back 65

Take an upfront income tax deduction for PV of PMT stream to be distributed to charity. Future income & growth on CLT is income tax-free but no additional tax deductions on income received. Very handy to have as testamentary as can create huge estate deductions with remainder returning to beneficiaries after a period.

Front 66

Tax treatment of highly appreciated property donated to charity to create a Charitable Gift Annuity

Back 66

IRS has ruled that when highly appreciated property is donated to a charity with the express intention of being sold & proceeds used to generate income, cap gains will be levied on that income.

Front 67

Tax Treatment on Gain Realized on Bargain Sale

Back 67

Bargain sale is a sale of a appreciated property for < FMV. Gift element is the variance between FMV & sale price.
Calculation of taxable gain = Step 1: Sale price /FMV x basis (e.g. sale of property with FMV of $500K, for $300K with basis of $100K = ($300/$500) x $100 = $60K
Step 2: Sale price - Step 1 = taxable gain.

Front 68

What is the income tax treatment for a gift if the giftor is in a 35% tax bracket and the giftee subsequently sells the appreciated gift for a profit? (assuming it's over the annual excl)

Back 68

Basis is increased by the gift tax paid.
[ (FMV of gift) - (Basis of gift) / (FMV of gift - annual excl) ] x (FMV of gift - annual excl) x marginal tax rate = Tax to be added to FMV to determine Taxable basis for subsequent sale.

Front 69

The 3 Circumstances that cause Life Insurance to be included in the Gross Estate at Death

Back 69

1) Proceeds paid to executor of decedent's estate
2) Decedent at death possessed incident of ownership in policy
3) Decedent gifted his/her policy <3yrs before death.
Giftor must be owner & not merely insured to be affected by 3yr rule

Front 70

Interpolated Terminal Reserve Formula

Back 70

1) TR t1
minus 2) TR at end of t2
= Increase x (% of year that's passed) = $Inc
t1 + $Inc + Unused premium (i.e. the amount of unearned premium this year - the inverse of the figure used to calc $Inc) = ITR (value of gift)

Front 71

Corporate and Partnership Recapitalizations s2701

Back 71

Allows owner to retain voting control & receive income while reducing size of biz in taxable estate. 1) Owner's shares reissued as cumulative preferred 2) Gift value of common stock is value of the biz minus the value of CP stock (common shares form a taxable gift) 3) CP stock pay big dividend @ retirement 4) CP stock at death have had value frozen (no growth since recap event) 5) All appreciation of biz in common stock

Front 72

4 Valuation Discounts

Back 72

1) Minority discount
2) Marketability
3) Blockage discount
4) Key person discounts

Front 73

Qualified Domestic Trust (QDOT)

Back 73

Limitations imposed on non-US citizen spouses. 1) No unltd marital deduction 2) $5M exemption is available unless spouse non-resident alien 3) JTWROS not considered half owned. 4) Gifts of $100K only allowed per year. To qualify for marital deduction, property must pass to QDOT

Front 74

Net Gift Compared

Back 74

Net Gift - donee pays gift tax but at a reduced rate (calc normal gift tax due / 1.35 = net gift tax giftee owes). Donee's applicable gift credit must be exhausted first. Called 'Net' gift because only 'net' gift incl in estate (i.e. gift - net gift tax paid = taxable gift). Decendent's gross estate incl gift tax paid on net gifts <3yrs of death.

Front 75

Reverse Gift

Back 75

Reverse gift - gift highly appreciated property to someone near death & receive back with step-up (must live >1yr or pass to children or some other bene)

Front 76

Installment Sale

Sale of property at FMV in exchange for periodic payments

Back 76

1) PV of of remaining PMT's incl in owner's estate if giftor dies during PMT period.
2) Property is secured
3) Gain is cap gain.
Do not use if property subject to recapture. Also, relative can't sell property <2yrs otherwise exposes giftor to LTCG immerdiately

Front 77

Grantor Retained Annuity Trust
GRAT or GRUT trust

Irrevocable trusts that that allow the grantor to make gifts of property while retaining an income interest.

Back 77

1) At end of term, asset to be distributed to remainder
2) Value of the gift is discounted (time, interest rate etc)
3) Owner must outlive term, or asset brought back into estate

Front 78

Gift Leaseback

Gift of fully depreciated property

Back 78

1) Lease pmt's are a biz deduction - provides income to a family member
2) Not suited to those in high income tax brackets (children)

Front 79

Definition of a Skip Person

Back 79

1) At least 2 living generations younger
2) Unrelated persons who are > 37.5yrs younger
3) If parents who are a lineal descendent of the grantor are deceased, then individual & other generations move up level.

Front 80

Exemptions for GSTT

and

Treatment of GST Tax in Estate Calculation

Back 80

$5M GSTT lifetime exemption & $13K annual exemption.

Gift taxes paid within 3 yrs of death are brought back into Estate but not GSTT.

Front 81

Types of GST Transfers

Back 81

1) Direct Skips - transferor is liable for GSTT.
2) Taxable Terminations - is when a non-skip person's interest in trust terminates & only remaining beneficiaries are skip-persons. Tax to be paid by trustee with trust property
3) Taxable distribution - distributions from a trust to a skip-person

Front 82

Disclaimer Trust

Back 82

A testamentary trust that allows for lifetime use of disclaimed property. Disclaimant may invade principale only subject to HEMS or 5 or 5. JTWROS property is suitable to disclaim for this purpose.

Front 83

Estate Planning for Non-traditional Relationships

Back 83

Best planning incl'ds; Revocable trust or TIC.

Bad idea to JTWROS or to rely on will,

Front 84

Life Insurance Inclusion in the Decedent's Estate >> Decedent Insured

Back 84

Scenario 1: You own the policy & die with your estate listed as bene. - Incl in estate
2: Spouse now owns policy on after you gifted it to them & a) die within 3yrs - DB incl in your estate or b) you never changed the bene - DB incl in your estate
4) You sell the policy to someone: Nothing incl in your estate (no 3yr rule)

Front 85

Life Insurance Inclusion in the Decedent's Estate >> Someone other than you Insured

Back 85

1) You own the policy on your spouse (& you die) - replacement cost is incl in your estate (if term, ununsed premium, if WL or UL - Interpolated terminal reserve plus unused premium) - no 3yr rule.
2) You gift the policy on your spouse to your daughter - nothing incl in Estate.

Front 86

Process for calculating Gross Estate in Common or Community Property States

Back 86

1) Start with Total Assets (not net worth as liabilities come out later)
2) Subtract ALL individually held assets until all your left with is joint/community property
3) Divide by 2
4) Add back individually owned assets of decedent
5) Don't forget life insurance (potentially option B) or AD&D policies.
3)