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CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Estate Planning. Module 6 Methods of Estate Transfer During Life. Learning Objectives.

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CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Estate Planning


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    1. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMEstate Planning Module 6 Methods of Estate Transfer During Life

    2. Learning Objectives 6–1 Identify the purpose (uses), characteristics, and factors to be considered in using a given inter vivosintrafamily planning technique. 6–2 Analyze a situation to determine the tax implications and/or the advantages and disadvantages of a given inter vivosintrafamily planning technique. 6–3 Evaluate a situation to select the most appropriate property and/or technique to accomplish a client’s inter vivosintrafamily planning objectives.  6–4 Identify the purpose (uses), characteristics, and factors to be considered in using a given inter vivos closely held business transfer technique. 6–5 Analyze a situation to determine the tax implications and/or the advantages/disadvantages of a given inter vivos closely held business transfer technique. 6–6 Evaluate a situation to select the most appropriate transfer technique to accomplish a client’s inter vivos closely held business planning objectives.   6–7 Identify the purpose (uses), characteristics, objectives, and factors to be considered in using a given inter vivos life insurance planning technique. 6–8 Analyze a situation to identify the tax implications and/or the advantages and disadvantages of a given inter vivos insurance planning technique. 6–9 Evaluate a situation to select the most appropriate technique to accomplish a client’s inter vivos insurance planning objectives.

    3. Questions to Get Us Warmed Up

    4. Inter Vivos Gifts: Questions What is the purpose or goal of the gift? Who will be the donee? Should the donor retain an interest in or control over the gifted assets? What assets will be transferred? What form will the transfer take? Outright gift … custodial account …trust?

    5. Inter Vivos Gifts: Identity of Donee Factors if identity of donee is not dictated by desire to help a specific individual or charity: • the competency of the potential donee • the estate tax status of the potential donee • the potential donee’s marginal income tax bracket • the potential donee’s relationship to the donor Don’t forget that direct and exclusive payment of medical and tuition expenses is free of both gift tax and GSTT.

    6. Inter Vivos Gifts: Retained Interest or Control Possible Consequences: • Income tax — may not shift taxation (e.g., because of grantor trust rules) • Gift tax—may cause Chapter 14 rules to apply • Estate tax: • may cause transfer sections (Code sections 2036–2038) to apply • may cause three-year rule to apply if retained interest is released within three years of death • may jeopardize marital or charitable deduction

    7. Inter Vivos Gifts: Gift Leaseback • fee simple gift of business property • business owned or controlled by donor leases property from donee • business gets income tax deduction for lease payments (if reasonable and necessary) • donor owes gift tax (and possibly GSTT) on FMV of gifted property • gifted property is removed from donor’s gross estate • donee assumes donor’s basis in gifted property, must report lease payments as ordinary income, and must include property in gross estate if owned at death

    8. Inter Vivos Gifts: Reverse Gift • appreciated property is given to a donee expected to predecease the donor, and is given with expectation that donee will give property back to donor by will • purpose: donor wants a stepped-up income tax basis • gift is subject to gift tax and possibly GSTT • donee must have no legal obligation to bequeath property to donor and must include property in gross estate if owned at death • donor achieves step-up in basis only if more than one year elapses between completion of the gift and donee’s date of death

    9. Inter Vivos Gifts: Net Gift • gift is conditioned on donee assuming a legal obligation of the donor—e.g., a mortgage on gifted property or obligation to pay gift tax on the transfer • gift tax is paid only on net amount of the gift and donor’s credit status is used • donor is liable for GSTT if donee is skip party in relation to donor • if obligation assumed by donee exceeds donor’s adjusted basis in the property, donor realizes gain to extent of excess • donor’s estate includes taxable gift and resulting credit (if gift tax is actually paid) in estate tax calculation, regardless of tax being paid by donee

    10. Inter Vivos Gifts: Custodial Accounts Characteristics • Property is titled in the name of some competent adult as the custodian for a minor pursuant to state’s adoption of either UGMA or UTMA. • Separate account must be established for each minor. • Age of majority (when minor must be given control of property) is set by state law. • Not a true trust, since minor has both legal and equitable title to assets; however, use of assets for benefit of minor prior to majority is at custodian’s discretion.

    11. Inter Vivos Gifts: Custodial Accounts Taxation • Income from custodial assets is taxed to minor except for income used to discharge a legal obligation of support of the minor’s parent that is taxed to the parent; kiddie tax rules apply; grantor trust rules do not apply. • Custodial account is a completed gift and is eligible for annual exclusion even though no present interest. • Donor is subject to GSTT if minor is a skip party in relation to the donor. • If donor dies while custodian, property contributed by donor is included in donor’s gross estate.

    12. Inter Vivos Gifts: Section 2503(c) Minor’s Trust Characteristics • Property is given to an irrevocable trust in which a minor under the age of 21 years is both the sole income and remainder beneficiary. • Trust property may be used for the exclusive benefit of the minor beneficiary at the trustee’s discretion. • Upon reaching age 21, minor beneficiary must be allowed to remove the property from the trust. • If minor dies prior to age 21, trust property must be paid to minor’s estate or to appointee of the minor.

    13. Inter Vivos Gifts: Section 2503(c) Minor’s Trust Taxation • Income is taxed to the minor except income used to discharge a parental obligation of support that is taxed to the parent. • kiddie tax rules apply • Donor must pay gift tax on FMV of assets given less one annual exclusion. • Donor must pay GSTT if minor is skip party in relation to donor. • If donor dies while trustee or successor trustee, property given by donor will be included in donor’s gross estate. • Assets will be included in donee’s gross estate if owned at death.

    14. Inter Vivos Gifts: Qualified Tuition Plan Accounts Characteristics • account is established (IRC 529) with an approved sponsor for the benefit of any person, adult or minor • cash contributions only • account not required to be dispersed at any specified age, and remains under control of contributor • account beneficiary can be changed, but may be tax consequences • sponsor may have maximum contribution limit • no income limits on contributors • account balance is usually intended to cover qualified higher educational expenses, but no federal requirementthat balance be used for this purpose

    15. Inter Vivos Gifts: Qualified Tuition Plan Accounts Taxation • Contributions are eligible for the gift tax annual exclusion; can contribute up to five times the maximum annual exclusion in one year (”five year averaging”) gift tax free. • Contributions are not deductible from federal income, but may be deductible from state income if made to a state sponsored plan. • Account earnings accumulate income tax free. • Distributions of earnings for qualified higher educational expenses are excluded from gross income; distributions for nonqualified expenses are included in gross income of the recipient and subject to 10% penalty. • Account balance is included in beneficiary’s gross estate; account balance included in account owner’s gross estate if no designated beneficiary, or if “five year averaging” is used and contributor dies during five-year term.

    16. Inter Vivos Gifts: Coverdell Education Savings Accounts Characteristics • Account established (IRC 530) for a minor (under age 18 unless special needs) with institution qualified for IRAs; contribution is not deductible. • Is a maximum income limit for individual contributors. • $2,000 maximum contribution per year; can be made for current year until following April 15. • Account can be established for beneficiary of IRC 529 plan account. • Account must be fully distributed when beneficiary turns 30 unless special needs.

    17. Inter Vivos Gifts: Coverdell Education Savings Accounts Taxation • Contributions are eligible for annual exclusion; thus, no gift tax, and no GSTT if beneficiary is a skip party. • Account earnings accumulate income tax free. • Distributions of earnings for qualified education expenses (K–12 and postsecondary) are not included in gross income; distributions of earnings in excess of these expenses or for other purposes are included in gross income, and are subject to 10% penalty. • Only distributions from account because of beneficiary’s death are included in beneficiary’s gross estate. • Account rollovers are subject to gift tax and GSTT unless new beneficiary is a member of the family of the old beneficiary. Rollover is subject to income tax if account has been rolled over in last twelve months or if rollover is not to a member of the same family.

    18. Inter Vivos Gifts: Revocable Living Trusts Characteristics • property is titled in the name of a revocable inter vivos trust to avoid probate and plan for incapacity • can be used as a pourover trust for assets after death Taxation • income taxed to grantor under grantor trust rules • no gift tax upon creation because no completed gift; completed gift upon distribution to other than grantor; if recipient is skip party to grantor, GSTT will apply to distribution in excess of maximum annual exclusion; distributions are not subject to three-year rule • assets are included in grantor’s gross estate under Code Section 2038 (transfer section)

    19. Inter Vivos Gifts: Section 2503(b) Mandatory Income Trust Characteristics • title to property is placed in the name of an irrevocable trust that is required to pay out all income at least annually • trust may have any number of income and remainder beneficiaries who can be minors or adults • trust term may be for any length of time, subject only to any applicable rule against perpetuities

    20. Inter Vivos Gifts: Section 2503(b) Mandatory Income Trust Taxation • Income is taxed to income beneficiaries whether distributed or not. • FMV of property given to trust is subject to gift tax (and GSTT if beneficiaries are skip parties). • But grantor is entitled to annual exclusion in an amount not to exceed the lesser of the number of income beneficiaries times the maximum annual exclusion, or the present value of the income interest. • Trust assets are removed from grantor’s gross estate unless grantor has retained a right of reversion in the remainder that is subject to Code Section 2037.

    21. Question 1 All of the following are correct statements regarding a gift leaseback transaction except: • The donor will be subject to gift tax on the fair market value of the gifted property (less applicable annual exclusions). • The donor is subject to capital gains tax on the difference between the fair market value of the gifted property and his basis in the property. • The business can take an income tax deduction for the necessary and reasonable expense of renting the gifted property. • The donee must report the lease payments as ordinary income.

    22. Question 2 All of the following are differences between the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) except • restrictions on the type of property that can be gifted. • restrictions on whether transfers canbe made during life and/or at death. • restrictions on how many minors can be the beneficiaries of an account.

    23. Question 3 All of the following are consequences of a donor retaining an interest in or control over gifted property except • if the gifted property is placed in trust, the grantor may still be taxed on the income even if the trust is irrevocable. • if the gifted property is an interest in a closely held business, the Chapter 14 rules may apply in computing the value of the gift. • the donor may be subject to income tax on any capital gain. • the gifted property may still be included in the donor’s gross estate.

    24. Question 4 All of the following are correct statements regarding a reverse gift transaction except • the property involved has a high basis in relation to its fair market value. • the primary purpose of this transaction is for the donor to get a stepped-up basis in the asset that is gifted. • the donee cannot have a legal obligation to leave the property to the original donor at the donee’s death. • the property will receive a step-up in basis only if more than one year elapses between completion of the gift and the date of death.

    25. Question 5 All of the following are correct statements regarding a net gift transaction except • the donee may be asked to pay the gift tax due on the gift. • the taxable gift is included in the donee’s estate tax calculation as an adjusted taxable gift. • if the obligation assumed by the donee exceeds the donor’s adjusted basis in the property, the donor will realize gain to the extent of the excess.

    26. Question 6 All of the following are correct statements regarding a Section 2503(b) mandatory income trust except • this trust can have beneficiaries who are adults. • this trust must disperse its assets when the income beneficiary reaches age 21. • this trust is irrevocable. • this trust can have multiple beneficiaries.

    27. Question 7 All of the following are correct statements regarding a Section 2503(c) minor’s trust except • this trust must disperse its assets when the minor beneficiary turns age 30. • this trust can have only one beneficiary. • a donor to this trust is entitled to an annual exclusion. • a grantor to this trust may have to include trust assets in his gross estate.

    28. Question 8 Which of the following statements regarding qualified tuition plans (§529) are correct? • Contributions are completed transfers. • Contributions are entitled to the annual exclusion. • An account can have more than one named beneficiary. • Contributions can be made in cash or property. • I and II only • II and III only • III and IV only • I, II, and IV only

    29. Question 9 Which of the following statements regarding Coverdell education savings accounts (§530) are correct? • Contributions can be made in cash only. • Account assets can be used only for qualified higher education expenses. • Distributions are at the discretion of the trustee/custodian. • Contributions for a prior year may be made until April 15 of the subsequent year. • I and II only • III and IV only • I, III, and IV only • I, II, III, and IV

    30. Question 10 All of the following statements are true of both revocable and contingent trusts except • both trusts are revocable. • trust assets remaining at the grantor’s death will be included in the grantor’s gross estate. • trust assets remaining at the grantor’s death will avoid probate. • both trusts are funded immediately after they are established.

    31. Inter Vivos Gifts: Crummey Trusts Characteristics • Property is titled in the name of an irrevocable inter vivos trust in which some or all of the beneficiaries have been given a Crummey power. • Trust can have any number of beneficiaries who can be minors or adults. • Distribution of income is discretionary. • Trust term may be for any length of time, subject only to any applicable rule against perpetuities.

    32. Inter Vivos Gifts: Crummey Trusts Taxation • Income may be taxed to: • grantor under grantor trust rules • to holders of a Crummey power under Section 678; • to income beneficiaries if distribution is made; or • to the trust if the foregoing does not account for all income, and remaining income is accumulated, depending on terms of the trust. • FMV of property given to trust is subject to gift tax (and possibly GSTT) but grantor is entitled to annual exclusion in an amount equal to the lesser of the present interests created by the Crummey powers granted, or the number of powers granted times the maximum annual exclusion. • Trust assets are removed from the grantor’s gross estate unless three-year rule or transfer sections apply.

    33. Inter Vivos Gifts: Crummey Trusts Tax implications to holder of Crummey power: • Code Section 678 makes holder liable for trust income to the extent of the power, whether exercised or not. • Lapse of Crummey power will subject holder to gift tax on the lapsed amount that exceeds greater of 5 and 5. • Any amounts subject to exercise of the power at death must be included in holder’s gross estate.

    34. Inter Vivos Gifts: Grantor-Retained Trusts Characteristics • Property is given to an irrevocable inter vivos trust to last for a term certain; grantor must also retain a beneficial interest in the trust. • Interests commonly retained by the grantor are • all income from trust assets (GRIT). • an annuity interest (GRAT). • a unitrust interest (GRUT). • the right to use a personal residence (QPRT). • Remainder interest is given to beneficiaries specified by the grantor. • Purpose is to remove asset from grantor’s gross estate while allowing grantor to retain benefit of the asset during trust term and/or transfer remainder interest gift tax free if GRAT is “zeroed out.”

    35. Inter Vivos Gifts: Grantor-Retained Trusts Taxation • Grantor is taxed on income to extent of interest retained. • Excess income, if any, is accumulated and taxed to the trust. • FMV of property given to trust less present value of the retained interest is subject to gift tax (and possibly GSTT) for all but a GRIT. • FMV of all property given to a GRIT is subject to gift tax because of Section 2702 (Chapter 14 rules). • Asset is removed from grantor’s gross estate unless grantor dies during trust term, • in which event Section 2036 (transfer section) requires inclusion.

    36. Inter Vivos Sales: Bargain Sale Characteristics • An asset is sold for less than FMV. • Difference will be held to be a gift. Taxation • If sales price exceeds seller’s adjusted basis, seller will have capital gain to extent of excess. • If buyer also assumes an existing indebtedness, seller can also have capital gain if indebtedness exceeds basis. • Gift tax and possibly GSTT on gift portion, but donor is entitled to annual exclusion. • Asset is removed from seller/donor’s gross estate, but sale proceeds, if not consumed at death, are included.

    37. Inter Vivos Sales: Installment Sale Characteristics • Purchase price not paid at time of sale is paid in a fixed number of future installments, at least one of which must be in a tax year other than the year of sale. • Reporting of gain on an installment basis is allowed automatically unless seller elects otherwise. • Sale of marketable securities and depreciable property to a controlled entity is not eligible for installment reporting of gain. • Payments may be secured or unsecured.

    38. Inter Vivos Sales: Installment Sale Taxation • Buyer’s basis is purchase price actually paid. • For payments made after seller’s death, buyer gets income tax deduction for estate tax paid on IRD • Cost recovery recapture, if any, is due in full in the year of sale (increases seller’s basis). • Payments are composed of three elements: • return of basis (tax free); • gain (taxed as capital gain); and • interest (ordinary income). • Reporting of gain may be accelerated under second disposition rule. • Present value of remaining payments is included in seller’s gross estate.

    39. Inter Vivos Sales: SCINs Characteristics • Normal installment sale except all unmatured payments will be canceled at seller’s death. • The possibility that the seller may die prior to due date of all installments must be taken into consideration to avoid gift tax. This result is avoided by increasing the purchase price and/or interest rate—known as a SCIN premium. X

    40. Inter Vivos Sales: SCINs Taxation • Seller’s estate must recognize gain in payments canceled at death if between related parties and FMV of asset on date of cancellation (or face amount of note, if less) exceeds the seller’s basis in the obligation. • If SCIN premium was not paid, transaction becomes a bargain sale, subject to gift tax on seller. • There are no estate tax consequences to the seller. X

    41. Inter Vivos Sales: Private Annuities Characteristics • A type of installment sale in which payments are determined by using the actuarial lifetime of the seller and the applicable federal discount rate for the month of sale. • Payments continue for actual lifetime of seller, whether that is more or less than his or her actuarial lifetime. • If seller is willing to accept smaller payments, survivorship payments can be made over two or more lifetimes, such as a husband and wife. • Installment reporting of gain is not available whether payments are secured or unsecured.

    42. Inter Vivos Sales: Private Annuities Taxation • Payments are reported by seller under annuity rules (return of basis and ordinary income until basis has been fully recovered, at which time all additional payments are ordinary income). • No gift tax unless asset is sold for less than FMV. • Asset is excluded from seller’s gross estate even if seller dies before end of actuarial lifetime; no amount for future payments is included in gross estate of seller absent survivorship payments.

    43. Inter Vivos Sales: Sale-Leaseback Characteristics • Business-related property is sold, then seller’s business leases property from buyer. Taxation • Seller recognizes gain (reported on installment basis if sale price exceeds seller’s basis). • Business gets income tax deduction for lease payments if reasonable and necessary. • Buyer reports lease payments as ordinary income. • No gift tax unless asset is sold for less than FMV. • Asset sold is not in seller’s gross estate.

    44. Question 11 All of the following are correct tax implications of a Crummey trust except • the holder of the Crummey power will likely have to include some portion of the trust assets in his gross estate if he dies during the trust term. • if the holder of the Crummey power exercises it to withdraw trust assets, the grantor of the trust will not be entitled to an annual exclusion. • there are no gift tax consequences if the holder of the Crummey power exercises it to take trust assets for himself or herself.

    45. Question 12 All of the following statements regarding qualified personal residence trusts (QPRT) are correct except • the grantor retains the right to live in the residence during the trust term. • the Chapter 14 valuation rules require the grantor to pay gift tax on the entire value of the residence at the time the trust is funded. • the grantor will be subject to gift tax only on the present value of the remainder interest.

    46. Question 13 All of the following statements regarding self-canceling installment notes (SCINs) are correct except • the self-canceling provisions of a SCIN must be paid for with a SCIN premium to avoid gift tax. • the seller will not have to include any payments canceled at death in his or her gross estate. • the purchaser’s basis in the asset purchased is limited to the payments that are actually made to the seller prior to death.

    47. Question 14 All of the following statements regarding split interest transactions (SPLITs) are correct except • the two parties buy their interests in the asset at different times. • the life interest holder is entitled to all income from the asset during her lifetime. • although this transaction involves a sale, it is subject to one of the Chapter 14 rules if the two parties are related. • the life interest holder may have to include some part of the value of the asset in her gross estate.

    48. Question 15 All of the following statements regarding private annuities are true except • a private annuity involves a sale transaction. • in most instances, the value of the property involved in the transaction will be eliminated from the gross estate of the annuitant. • if the annuitant dies before the end of his actuarial lifetime, the present value of the future payments he or she would have received is included in his or her gross estate. • if someone other than the original annuitant will receive payments as a result of the transaction after the original annuitant’s death, the original annuitant’s gross estate must include the present value of such payments.

    49. Question 16 Which of the following statements regarding remainder interest transactions (RITs) are correct? • The life and remainder interest holders purchase their interests at the same time. • Since this is a sale transaction, it is not subject to gift tax. • The life interest holder is entitled to all income of the property. • The property will be in the life interest holder’s gross estate. • I and II only • III and IV only • I, II, and IV only • II, III, and IV only

    50. Business Transfer: Buy-Sell Agreements Purpose • to assure a closely held business owner of a market for his or her interest in the event of: • total disability • retirement • death • to prevent closely held business interests from being transferred to third parties who may be unsatisfactory