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Topic 53: Property Titling
   Community property: states
     Equal ownership property acquired during marriage
        Step up in basis for entire property
           Even though only half included in gross estate
           Property also included in probate estate: not JWROS
               Decedent controls disposition
        No need to split gifts
     Quasi-community property
        Property acquired in a separate property state prior to
          moving to a community property state treated as
          community property
   Separate property
     Acquired before marriage
     Gift/inheritance
     Personal injury payment
2


Topic 53: Property Titling
 JWROS
   Avoids probate
   First to die has no control over disposition
   Can sever interest to create tenant in
    common
   Income divided equally on 1040
   Step up in basis for one-half
   If not with spouse, include entire amount in
    taxable estate unless show survivor’s
    contribution
3


Topic 53: Property Titling
 Tenancy by Entirety
     Both spouse must consent to property transfer
     Not subject to claims against one spouse
 Tenants in Common
     Control disposition
     Subject to probate
 Trusts
     Not subject to probate
     Must actually transfer asset to trust
 4
Topic 54: Methods Transfer at
Death
 By law: JWROS
 By contract: life insurance and retirement beneficiaries
        Primary/Contingent/None
 By trust: under terms of trust
 POD/TOD
 Deed delivered to escrow agent
   Completed gift for estate tax purposes although
     income still taxed to grantor until death since deed
     not recorded
5
Topic 54: Methods Transfer at
Death
 Intestate: die without valid will
     Distribution based on state law
     Generally closest to furthest relatives
 Probate
     Public info
     Can be costly
     Reduces chances of creditor’s future claims
6
Topic 54: Methods Transfer at
Death
 Probate Estate
     All assets passing under will and assets
      with estate as beneficiary
 Avoiding probate
     JWROS
     Living trust
     Payable on death/Transfer on death
 Ancillary probate
     Real estate located in another state
7
Topic 55: Estate Planning
Documents
 Wills
     Codicils: revisions
     Holographic: handwritten. Valid in some states
     Nuncupative: oral. Need disinterested
      witnesses.
 Will contest: challenge validity of will
     Not sound mind
     Undue influence
     Fraud
8
Topic 55: Estate Planning
Documents
 Power of attorney: allow someone else to act
  on your behalf
   Health care, property
 Trusts: provide
   Management, reduce estate taxes, avoid
     creditors, prevent waste, divide
     income/asset
 Prenuptial agreements
   Both parties
      Must disclose all assets
      Should be represented by own attorney
9


Topic 56: Gifting
   Lifetime gifts
     To minors
          UTMA: child receives asset at majority/can hold any type of
            asset such as real estate
          UGMA: can only hold cash, securities
     Section 2503(b) trust
          Income must be distributed to child each year
             Income interest is a present interest qualifying for annual
                 gift exclusion
          Remainder can go to a different beneficiary
     Section 2503(c) trust
          All trust assets distributed to beneficiary at age 21
          Considered present interest/can use annual exclusion
          Income accumulated until age 21
             Trust tax rates:
10


Topic 56: Gifting
 Lifetime gifts
      Crummey trusts
        Beneficiary has noncumulative right to
         withdraw annual contribution to trust
          Qualifies for annual gift exclusion
          May be restricted to > $5,000 or 5% of trust
      Can only gift unlimited amount to spouse
        Can only gift $139,000 to non-U.S.
         citizen spouse
11


Topic 56: Gifting
 Lifetime gifts
      Basis in property received as gift
        Appreciated property: Donor’s cost + gift tax
         paid on appreciation
        Loss property: < of FMV date of gift or donor’s
         basis
12


Topic 57: Gift Tax
 Gift tax return – Form 709 required if:
      Gifts more than annual exclusion
      Gifts of future interest
      Split gifts with spouse
         Must split all gifts for the year
 Donor pays gift tax unless net gift which requires
  recipient to pay gift tax
 Annual exclusion: $14,000
 Unified credit: credit permits gifts above annual
  exclusion of $5,250,000 without gift tax
13


Topic 57: Gift Tax
 Prior taxable gifts: added back in
  calculating tax on current taxable gifts
      Stacking taxable gifts
 Qualified transfers
      Medical: paid directly
      Tuition: paid directly
 Charitable gifts
      Not limited
14


Topic 58: Incapacity Planning
 Powers of Attorney
   General: act in all matters
   Limited
   Durable: act even if grantor incapacitated
   Springing: activated when incompetent
 Living wills: medical treatments desired if incompetent
 Guardianship: typically for children
 Revocable Living Trust:
   Trustee can manage assets if become incompetent
15


Topic 58: Incapacity Planning
 Special Needs Trust
      Irrevocable
      Established for benefit of disabled
       child/parent
        Trustee can make discretionary distributions
        Doesn’t reduce public assistance
16


Topic 59: Estate Tax
 Unified credit: offsets estate tax on $5,250,000
  in 2013
 Was scheduled to revert to $1 million in 2013
 Form 706: filed nine months after death
   Executor liable for tax
 Gross Estate:
   Life insurance with incidents of ownership
   Life insurance transferred within three years
     of death
   Joint and survivor annuity: present value of
     survivor benefits
17


Topic 59: Estate Tax
 Gross Estate:
      Gifts if retained life interest
      Revocable gifts
      Reversionary interest if five percent
       probability would revert
      Life insurance transferred within three
       years of death
      Gift tax paid in last three years
18


Topic 59: Estate Tax
 Adjusted Gross Estate:
      Gross Estate –
          Funeral expenses
          Administration expenses
          Debts, taxes, medical expenses
          State death taxes
      = Adjusted Gross Estate –
        Marital deduction
        Charitable deduction
      = Taxable Estate
19


Topic 59: Estate Tax
 Taxable Estate+:
    Taxable Gifts
    =Tax Base
    x Tax Rate
    = Estate Tax
    -Unified Credit
    -Credit for Prior Transfers
    -Gift Tax Credit
    =Estate Tax Due
20


Topic 60: Sources of Liquidity
 ILIT
 Generally trustee purchases new life insurance
  policy
   If grantor transfers existing policy, must live
     three years to keep proceeds out of estate
   Grantor makes annual gifts to trust to pay
     premiums
        Beneficiaries have Crummey rights
      Grantor has no incidents of ownership
      After death, trust can lend money to estate
       or buy estate assets
21


Topic 60: Sources of Liquidity
    Buy-sell agreements
      To be valid for estate tax purposes
         Must be arm’s length – who is buyer/seller???
         A formula or annual appraisal to set price
         First offer to other owners/then corp/then outside
      Cross-purchase
         Buy policies on all owners
             No transfer for value issue if company buys policies
                from owners
      Entity purchase
         Company buys policies on each owner
         Older owner subsidizing purchase of his policy by
            company
22


Topic 60: Sources of Liquidity
 Section 6166
      Business is > 35% of adjusted gross estate
        Gift other assets to qualify
        Pay taxes in 10 payments starting five years
         after death
           Low interest rates on deferred tax payments
 Section 303
      Corporation is > 35% of adjusted gross estate
      Stock can be redeemed to pay estate taxes and
       final expenses, not to give cash to niece
        Redemption treated as a sale with generally no
          capital gain due to step up in basis
23


Topic 61: Powers of Appointment
 Provide flexibility in estate plan
   Final decision as to asset disposition left to others
      Needs better known at that time
 General power of appointment
   Can transfer assets to anyone including holder
      If holder predeceases grantor, assets included in
        holder’s estate
 Limited power of appointment
   Can only transfer assets to certain individuals (not
     holder)
24


Topic 61: Powers of Appointment
 5 and 5 power: lapse of general power >
  $5,000 or 5% of trusts assets
   Taxable gift
      To other trust beneficiaries
   If holder of power dies, assets which could
     have been appointed to himself but weren’t
     during year included in estate
 Crummey power
   General power to appoint must last at least
     30 days
25


Topic 61: Powers of Appointment
 Ascertainable Standard
        Health
        Education
        Maintenance
        Support
 Limits power of appointment so not
  included in beneficiary’s estate
26


Topic 62: Types of Trusts
 Simple:
   Must distribute all income
      Capital gains generally not income
   Taxed to beneficiaries
   $300 exemption
 Complex:
   Can accumulate income
      If does so, taxable to trust
   Can make distributions to charities
   $100 exemption
27


Topic 62: Types of Trusts
 Revocable:
      Can be changed by grantor at any time
      At death, becomes irrevocable
        Not in probate estate
        In taxable estate
 Irrevocable:
      Grantor gives up control over trust assets
        Not in probate estate
        Not in taxable estate
28


Topic 62: Types of Trusts
 Inter vivos: created while alive
 Testamentary: created at death
 Totten: bank account
      Beneficiary receives account at death
      No gift as depositor could withdraw
       funds
 Spendthrift: limits access to trust
  assets by beneficiaries to keep them
  from creditors, charming ex-spouses
29


Topic 62: Types of Trusts
 Bypass: receives assets equal to unified
  credit ($ 5,2500,000 in 2013)
 Marital: qualifies for marital deduction as
  surviving spouse has general power of
  appointment over assets
 QTIP: decedent determines who will receive
  assets
      Qualifies for marital deduction as surviving
       spouse has right to income from property
      Include in surviving spouse’s estate
30


Topic 62: Types of Trusts
 Pourover: often receives assets from
  probate estate. “ Left over” assets
 Sprinkling: allows trustee to allocate
  income among trust beneficiaries
  based on needs, abilities
 Income beneficiary
 Remainder beneficiary: receives trust
  assets after income interest
  terminates
31


Topic 62: Types of Trusts
    Rule Against Perpetuities
      Trust must end 21 years after death of last beneficiary
         alive when trust was created
          Keeps assets from being removed from economy
              States such as Illinois allow dynasty trusts
    Discretionary: trustee decides how much to distribute or
     accumulate from trust
32


Topic 63: Qualified Interest Trusts
 GRAT (grantor retained annuity)
   Fixed payment to grantor for term of years
   Remainder to beneficiary
     Removes appreciation from estate
     Gift = Assets transferred – retained annuity
        Works very well now with low Sec 7520 rates
           Low rates = higher value of retained annuity
           Goal is for asset to outperform Sec 7520
             rate
     Can’t make additional contributions to trust
33


Topic 63: Qualified Interest Trusts
 GRUT (grantor retained unitrust)
   Fixed percent of assets to grantor for term of years
     Amount of payment would change each year
       based on value of assets
        Assets should be easily valued
   Remainder to beneficiary
     Doesn’t remove all appreciation from estate since
       grantor shares
   Gift = Assets transferred – retained annuity
   Can make additional contributions to trust
34


Topic 63: QPRTs
 Transfer personal residence to trust
   Gift to beneficiaries = home value –retained interest
 Retain right to live in for term of years
 At end of term, residence is transferred to trust
  beneficiaries
   Grantor survives term
       Residence removed from estate
       Must pay rent
   Fail to survive, value of home in estate
35


Topic 64: Charitable Transfers
 CRUT (charitable remainder unitrust)
      Fixed percent of assets to grantor for
       term of years (20 or less) or life
      5 -50% of assets transferred to CRUT
      Remainder to charity
        Must be at least 5% of initial value
      Gift = Assets transferred – retained
       annuity
      Can make additional contributions to
       trust
36


Topic 64: Charitable Transfers
 CRAT (charitable remainder annuity
  trust)
      Fixed payment to grantor for term of
       years (20 or less)
        5 -50% of assets transferred to CRAT
      Remainder to charity
        Must be at least 10% of initial value
      Gift = Assets transferred – retained
       annuity
      No additional contributions to trust
37


Topic 64: Charitable Transfers
 CLUT (charitable lead unitrust)
      Fixed percent of assets to charity for
       term of years (20 or less)
      5% minimum
      Remainder to beneficiary
        Must be at least 5% of initial value
      Gift = Assets transferred – remainder
       interest
      Can make additional contributions to
       trust
38


Topic 64: Charitable Transfers
 CLAT (charitable lead annuity trust)
      Fixed payment to charity for term of
       years (20 or less)
      5% minimum
      Remainder to beneficiary
        Must be at least 5% of initial value
      Gift = Assets transferred – remainder
       interest
      No additional contributions to trust
39


Topic 64: Charitable Transfers
 Pooled income fund
      Transfer property, typically appreciated
       stock, to charitable trust
      Contains property from other donors
      Annual payment to beneficiary based on
       trust income for life
        Can name more than one income
         beneficiary
      At death of last income beneficiary,
       property transferred to charity
40


Topic 64: Charitable Transfers
 Private Foundations
        Donor retains control over organization
        Major philanthropy
        Must distribute 5% of assets
        Can’t own more than 20% of corporation
 Donor Advised Funds
      Contribute to fund, take deduction
      Later fund manager make grants to
       charities as requested by donor
41


Topic 65: Life Insurance
 Incident of ownership
        Name beneficiary
        Surrender and get cash value
        Receive dividends
        Borrow against policy
        Pledge as collateral
42


Topic 65: Life Insurance
 Ownership
      Have insurable interest can buy policy
      Policies can be sold or transferred
      Beneficiary designation can be changed
       unless irrevocable
 Life insurance transferred within three
  years of death included in estate
43


Topic 67: Valuation Issues
 Estate freeze – transfer future appreciation
   Exchange common stock for common and preferred
     stock
      Then gift common stock which should have most
        future appreciation
      Chapter 14 rules now require value to generally all
        be assigned to retained interest unless:
         Keep some common and preferred and give
            some of both
         Retain preferred stock with a fixed dividend
            payment
         Gift preferred and retain common
44


Topic 67: Valuation Issues
 Minority interest discount
      No control = 10 –35% discount
 Control premium
      Higher value for shares
 Marketability discount
      Hard to sell = 15 – 50% discount
 Blockage discount
      Large block publicly traded stock
      1 – 5% discount
45


Topic 67: Valuation Issues
 Key person discount
   Impact of death of key person on business
   Percent discount varies
 Generally property valued at date of death
 Alternate valuation date: six months after death
   Must lower estate taxes
   Doesn’t apply to assets such as IRA, 401(k)
 Special Use Valuation
   $1,040,000 reduction in value of farm land in 2013
   Heirs must continue to farm
   Farm must be at least 50% of estate
46


Topic 66: Marital Deduction
 Requirements
      Surviving spouse U.S. citizen
        If not, must use QDOT
      Not a terminable interest:
        Unless transferred to a QTIP
        Can require spouse to survive up to 180 days
        Terminable interest: trust income stops if
         remarry
 Qualifying property
      Outright bequests to spouse
      Transfers to marital trusts
47


Topic 66: Marital Deduction
 QTIP
      Executor elects QTIP
      Must include QTIP property in surviving
       spouse’s estate
      Income must be paid to spouse annually
      First to die spouse names remainder
       beneficiaries of trust
48


Topic 66: Marital Deduction
 QDOT
      Similar to QTIP
      For non U.S. citizen spouse
      When distribute trust principal must
       withhold estate tax
      Estate taxes payable at death of second
       spouse
49
Topic 67: Defer and Minimize
Estate Tax
 Minimize estate tax
        Lifetime gifts
        Valuation discounts
        Transfer of future appreciation
        Charitable gifts
50
Topic 68: Intra-Family and
Business Transfers
 Buy-sell agreements
      Cross-purchase
        Each owner agrees to sell business interest
         to other owners
        Each owner buys life insurance on other
         owners’ lives
          Lots of policies; unfair if big age difference
      Entity
        Business buy owner’s interest with life
         insurance proceeds
        Fewer policies needed
51
Topic 66: Intra-Family and
Business Transfers
 Installment notes
   Creates income tax deferral
   Depreciation recapture in year of sale
   If seller dies before all payments received, PV of
     remaining payments asset included in estate
   SCIN: installment note cancelled on death
      Used in sale of family business
      Must have higher sales price due to SCIN
         provision
      No value from notes included in estate
52
Topic 67: Intra-Family and
Business Transfers
 Private annuities
   Property transferred in exchange for unsecured
      annuity
       Payments are part interest, return of basis, capital
         gain
   Used when seller in poor health
 Intrafamily loans
   Use proceeds to buy family business
   Must have market interest rate
53
Topic 67: Intra-Family and
Business Transfers
 Gift/sale leaseback
      Gift/sell property to younger generation
       then lease back
 IDGT: defective grantor trust
      Trust assets removed from estate
        Irrevocable
      Trust income taxable to grantor
54
Topic 67: Intra-Family and
Business Transfers
 FLP
        Best for active business; not just investments
        Make gifts of limited partnership interests
        Retain general partner ownership
        Control business while
          Removing most of business value from estate
          Restrict transfer of partnership interests
             Qualify for minority and marketability discounts
55


Topic 69: GST
 Imposed on transfers two or more
  generations younger than donor
      Grandchildren
        Unless parent deceased
      Unrelated 37 ½ years younger than
       donor
      40% tax rate: in addition to estate/gift
       tax
56


Topic 69: GST
 Direct skip: lifetime or testamentary
  gift to skip person
 Taxable distribution: from trust to
  skip person
57

Topic 69: GST

 GST exemption: $5,250,000 in 2012
      GST annual exclusion: $14,000 each
       year
        Must be present interest
 Calculating GST
      Subtract annual exclusion from taxable
       gifts
      Allocate GST exemption to gift
      Multiply taxable gift after exemption x
       40% (in 2013)
58


Topic 70: Fiduciaries
 Types
      Executor: act in best interest of estate
       beneficiaries
      Trustee: act in best interest of trust
       beneficiaries
      Guardian: act in best interest of
       minor/incompetent person
59


Topic 70: Fiduciaries
 Duties
        Act in best interest of party represented
        Full disclosure
        Prudent investments
        Be impartial with regards to beneficiaries
        No self-dealing
 Breach of duties
      May be personally liable
      Corporate/professional trustee held to higher
       standards
60


Topic71: IRD
 Income earned but not received
  before death
      Retirement accounts
        Except Roth accounts
      Dividends declared/not paid
      Rents receivable
      Installment notes
 Income taxed to recipient
61


Topic 71: IRD
 IRD Deduction
      Estate tax attributable to IRD is
       miscellaneous itemized deduction
        Not subject to 2% of AGI limitation
 IRD assets
      No step up in basis
      Contrast with 10,000 shares Exxon
       owned fee simple
62


Topic 72: Postmortem Planning
 Alternate Valuation Date
 Qualified Disclaimer
      Must be
        Irrevocable
        In writing
        Made within nine months
      Can’t control who receives asset when
       disclaim
63


Topic 72: Postmortem Planning
 Section 6166
      Closely held business > 35% adjusted
       gross estate
      Pay estate taxes over 10 years
        Starts five years after return is due
      Reduced interest rate charged by IRS
64


Topic 72: Postmortem Planning
 Section 303
      Closely held business > 35% adjusted
       gross estate
      Stock redemption treated as sale, not
       dividend
        Capital gains treatment
        Amount of gain
      Must use proceeds to pay estate taxes,
       administration and funeral expenses
65


Topic 72: Postmortem Planning
 Section 2032A
      Real estate > 25% gross estate
      Farm/business > 50% gross estate
      Real estate valued based on current use
       (farm) rather than best use
        Maximum reduction in value $1,040,000 in
         2013
      Property must pass to family members
      Family members must continue business
       for 10 years after death
66
Topic 73: Non-Traditional
Relationships
 Children of prior relationships
      Child support
      Guardians
     Courts prefer surviving parent
 Cohabitation
      No marital deduction
      Use trust, beneficiary designations to avoid will
       contests
      Have medical and general power of attorneys
67
Topic 73: Non-Traditional
Relationships
 Adoption
      Inherit from adopted parents
        Can be disinherited
      In some states, from natural parents

				
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