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Topic 53: Property Titling

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

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Topic 53: Property Titling

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  1. 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 $145,000 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 $5,340,000 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 $5,340,000 in 2014 • 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 ($ 5,3400,000 in 2014) • 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 • $1,090,000 reduction in value of farm land in 2014 • 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

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