Estate Planning Study Guide

Contains the notes on the Estate Planning study book material for the CFP Board Exam. Topics cover the many ways to effectively and efficiently transfer wealth regarding probate and around the gift and estate taxes.

The Notes

Starred (*) topics are more likely to be on the exam (2021).
Overview
- Goals/Objectives
  - Effective/efficient asset transfer
    - to the intended person
    - at minimal cost
  - Common Goals
    - Fulfill client’s transfer wishes
    - Minimize taxes
    - Minimize costs
    - Maximize assets
    - Liquidity at death
    - Healthcare decisions
  - Common Risks
    - Assets go to wrong persons
    - Family not provided for financially
    - High taxes
    - High costs
    - Insufficient liquidity
- Estate Planning Process
  - Understand client’s situation
  - Indentify/select goals
  - Analyze current path and alternatives
  - Develop plan of transfer based on goals and info
  - Present recommendations
  - Implement plan
  - Review (and update if needed) plan regularly
  - Note: done via team — CPA, attorney, financial advisor, life insurance agent, trust officer
    - Only the attorney offers legal advice
- Estate Planning Documents
  - Wills
    - Legal document allowing testator to control property distribution at death and avoid state’s intestacy laws.
      - Intestacy = state laws decide how property is distributed!
    - Types
      - Holographic Will
        
        handwritten by testator
        
        must be dated and signed
        
        valid in most states
      - Nuncupative Will
        
        oral, dying declarations in front of witnesses
        
        not valid in most states
      - Statutory Will
        
        Complies with state statutes for wills
        
        Drawn by attorney
        
        signed, dated by testator and witnesses
      - Reciprocal Will
        
        Will for two persons that leaves all assets to surviving person
        
        May be changed at any time
      - Joint Will
        
        Will for two or more people that transfer property to one person
        
        Surviving person is bound to transfer assets based on the will.
    - Is Valid:
      - Testator is age of majority or emancipated minor
      - Testator understand the consequences of the will
        
        recognizes the property being transfers by will
        
        recognizes the persons who have claims to assets
    - Common Clauses*
      - Introductory clause
      - Declaration clause
      - Bequest clause
        
        directs distribution of specific property
      - Residuary clause
        
        directs distribution of remaining assets not specifically distributed through bequest clause
        
        avoids intestate assets
      - Guardianship clause
        
        identifies who raises minors or legal dependents
      - Attestation clause
        
        signed by 2 witnesses authenticating the document as the testator’s will
      - Self-Proving clause
        
        signed by notary after witnessing testator and witnesses sign will
      - Simultaneous Death clause
        
        dictates who died first in the event that both persons die at the same time and no way to know who died first
      - Survivorship clause
        
        requires that an heir/beneficiary survive the decedent or specific time period to receive inheritance
        
        eliminates the need for simultaneous death clause
      - Disclaimer clause
        
        reminds heirs they can refuse a bequest
        
        To be effective:
        
        disclaiming party can not benefit from the property
        
        disclaiming party can not direct future interest in property
        
        disclaiming party must disclaim property within 9 months of decedent’s death
        
        disclaimer must be in writing
      - Contingent Legatee clause
        
        determines how property is divided regarding deceased heirs and their descendants
        
        per stirpes — by the roots
        
        shares to a deceased parent are split amongst children
        
        per capita — by the head
        
        equal share based on number of living beneficiaries
        
        heirs of same generation get equal share IF they are only heirs
        
        per capita at each generation
        
        heirs of same generation ALWAYS get equal share
      - No Contest clause (Terrorem clause)
        
        Eliminates bequests to heirs if they try to contest the will
      - Clause that identifies the executor (and their successors) and their powers
    - Change/Revoke Will
      - Codicil
        
        supplement to will
        
        modifies, explains, amends a will
        
        must be signed, witnessed, notarized
      - Revocation
        
        Create a new will, that revokes previous wills
        
        Destroy will — shred, burn it
    - Statutes that Might Impact Wills
      - Marital Portion
        
        require descendent provide for surviving spouse
      - Felonious Homicide Statutes
        
        Prevent heirs from getting an inheritance if they kill the decedent
      - Divorce Statutes
        
        Invalidates provisions that leave assets to former spouses
      - Anti-Lapse Statute
        
        Assumes that bequest to a deceased close relative go to the relatives heirs
  - Side Instruction Letter
    - Details funeral and burial wishes
    - Separate from will
  - Powers of Attorney/Appointment
    - Legal document authorizing someone (the attorney in fact or agent) to act on your (the principal) behalf
    - Powers of Attorney*
      - standalone document that allows agent to act for principal
      - may include power to appoint assets
      - ends at death of principal
      - may be revoked by principal at any time
      - may be general or limited
    - Powers of Appointment*
      - allows power holder to transfer assets to another
      - often included in trusts or power of attorney
      - may survive death of principal
      - may be revoked by principle during life or death
      - may be general or limited
    - General
      - broadest power — gives agent the power to do anything the principal could do
      - includes assets in agent’s gross estate if agent dies before principal
    - Limited
      - very narrow, detailed power usually on specific matters
      - Example: HEMS (health, education, maintenance, support)
      - does NOT include assets in agent’s gross estate
    - Durable
      - expires only at principal’s death
    - Springing Power
      - agent’s power “springs” into being at some defined event like disability
      - agent can not exercise powers prior to event
    - Disadvantages
      - Agent can abuse their power — chose agent carefully
      - General Powers: if agent dies before principle, value of principal’s assets included in agent’s gross estate
  - Health Care Directives
    - Medical Power of Attorney (durable power of attorney for healthcare)
      - legal document that appoints an agent to make health care decisions
    - Living Will
      - legal document expressing a person’s last wishes for specific medical situations regarding life-sustaining treatment
    - Do-No-Resuscitate (DNR)
      - documents declaring the principals wish to not have CPR performed if the heart stops
- Types of Property Interests
  - Real Property
    - land and anything permanently attached to land
  - Tangible Property
    - property that can be touched, but not realty
  - Intangible Property
    - property that can not be touched — stocks, patents, copyrights
  - Property Ownership*
    - Sole Ownership
      - 1 owner
      - 100% included in probate
      - 100% included in gross estate
      - Qualifies for unlimited marital deduction if transferred to spouse
      - Step-up in basis to FMV at death
    - Tenants in Common
      - 2 or more owners
      - Interest % included in probate
      - Interest % included in gross estate
      - Qualifies for unlimited marital deduction if transferred to spouse
      - Step-up in basis on interest % to FMV at death
      - Owners can partition interest without other owners consent
    - Joint Tenancy with Right of Survivorship
      - 2 or more owners
        
        owns an equal interest
      - At death, interest automatically passes to surviving owner
      - Not included in probate
      - Interest % included in gross estate to extent of original contribution (actual contribution rule)
        
        Exception: spouses as joint tenants deemed to contribute 50% (deemed contribution rule)
      - Qualifies for unlimited marital deduction if transferred to spouse
      - Step-up in basis on interest % to FMV at death
      - Owners can partition interest without other owners consent — owned fee simple after partition
    - Tenancy by the Entirety
      - Only between spouses
      - Can not be partitioned without other spouses consent
      - At death, automatically transfers to other spouse
      - Not included in probate
      - 50% of FMV included gross estate
      - Qualifies for unlimited marital deduction
      - Step-up in basis on interest % to FMV at death
    - Community Property
      - Only between spouses (in community property states)
      - Deemed to contribute 50%
      - Can not be partitioned without other spouses consent
      - 50% included in probate estate
      - 50% included in gross estate
      - Step-up in basis on entire property to FMV at death
      - No automatic right of survivorship — can be transferred to someone other than spouse
      - Qualifies for unlimited marital deduction if transferred to spouse
      - Earnings during marriage are community property
      - Exceptions:
        
        Property acquired before marriage is separate
        
        Property acquired through gift or inheritance during marriage is separate
        
        Move from common law state to community property state:
        
        Property acquired before move retains separate status (unless spouses treat it as community property)
        
        Property acquired after move is community property
    - Life Estate
      - Owner has right to income and/or use of property
      - Interest ends at owners death
      - Transfers to owner of remainder interest
    - Interest for Term
      - Interest in property for a specific number of years
      - Property transfers to remainderman at end of term
    - Legal Ownership
      - Implies legal title to property
    - Equitable Ownership
      - Economic right to property
        
        possess the property
        
        use/enjoy the property
        
        get income from property
- Probate Process*
  - Legal process of retitling assets that do not change title another way.
  - Testate = dying with a will
  - Intestate = dying without a will
  - Legatee = person named in will
  - Heir = gets property through state intestacy laws
  - Purpose — retitle assets from decedent to heirs/legatees
  - Consequence — transfer assets to heirs/legatees
  - Advantages:
    - Testators objectives to disposing assets are followed
    - Provides orderly administration of assets
    - Provides clean title to heirs/legatees
    - Parties in interest have change to be heard
    - Protects creditors — makes sure debts are paid
  - Disadvantages:
    - Delays
    - Costs
    - Open to public
  - Steps
    - Produce a will (if one exists)
    - Open estate administration/succession in probate court
    - Executor appointed to administer estate
      - Produce detailed list of decedents assets
      - Manage/invest assets
      - Give notice to creditors and heirs
      - Pay estate expenses
      - Pay decedent’s debts and taxes (filed timely, w/ correct filing elections)
      - Collect interest, rent, etc. for estate
      - Distribute assets to heirs
      - Close the estate in court
  - Common Problems
    - Abatement = if estate is too small to satisfy all legatees, court will reduce amount to legatees.
    - Ademption = If a bequeathed assets was disposed of prior to decedent’s death, legatee gets nothing.
Gift Tax
- Excise tax on right to freely transfer assets to another person
- Characteristics:
  - Donor must make a voluntary transfer
  - Donor must be competent to make gift
  - Donee must be capable of receiving gift
  - Donee must take delivery
  - Donor must lose control over gifted asset
  - Each party does NOT get full/fair consideration for asset
- Types
  - Direct Gift = direct payment or transfer to donee
  - Indirect Gift = transfer on behalf of doner to benefit donee
    - Ex: below market loan
- Gift Value
  - FMV of asset on date of gift (generally)
- Annual Exclusion
  - Gift, tax free, up to $15,000 per donee per year
    - anyone can be donee
    - gift must be present interest
  - For Spouses:
    - Citizen spouses = unlimited marital deduction for gifts
    - NonCitizen spouses = $159,000 annual exclusion
  - Split Gifts
    - when donor makes a gift and donor’s spouse agrees to use their annual exclusion for donee
    - gift tax return is required
    - both spouses must consent and sign gift tax return
    - gifts of community property don not require gift splitting
- Lifetime Exclusion
  - Applicable exclusion = $11,700,000 (2021)
  - Applicable credit amount = $4,625,800 (2021)
    - covers taxes due on applicable exclusion
- Gift of Present Interest
  - unrestricted right to immediate use of asset
    - title passes immediately
    - Ex: cash, property
- Gift of Future Interest
  - limited by a future date or time
- Crummey Provision
  - allows trust beneficiary to withdraw some/all of a contribution to a trust for limited period of time (usually 30 days) after the contribution
    - the withdrawal converts a gift of future interest to gift of present interest and allows for the annual exclusion
  - 5/5 Lapse Rule
    - applies to trusts with more than 1 beneficiary
    - Taxable gift is made when beneficiary does NOT use the power to withdraw an amount in excess of $5,000 or 5% of trust assets
- Transfers with NO Gift Tax
  - Gifts to political orgs.
  - Qualified Transfers
    - payment made directly to educational institution for another person’s tuition (not room/board, books, supplies)
    - payment made directly to medical care provider for another peron’s medical expenses
  - Payment of legal support obligations
  - Payment from one spouse to another for reasons of divorce
  - Transfers between spouses = unlimited marital deduction
  - Charitable donations = unlimited gift tax charitable deduction
  - Transfers between
- Gift Tax Return
  - No gift tax return filed = gifts are less than annual exclusion or NOT subject to gift tax
  - Gift tax return filed = Split gift election or gift exceeds annual exclusion
  - Statute of limitations = IRS has 3 years to assess additional gift tax
    - Exception: gift is not properly disclosed on gift tax return, then statute of limitations does not expire.
- Gift Strategies*
  - Gift Appreciating Assets
    - Maximum Gross Estate Reduction = gift assets with highest potential to appreciate in value
  - Gifts to Spouse
    - Large gifts to spouses up to maximize the lifetime exclusion
  - Gifts to Minors
    - Via UGMA/UTMA
  - Guidelines:
    - NEVER gift assets if FMV is below adjusted basis. Sell it for a loss (capital loss), then gift the cash.
    - Gift assets with highest potential for appreciation to youngest donees
    - Gift appreciated property to charities to avoid capital gains tax (may be able to deduct FMV as charitable deduction)
    - Gift income-producing assets to donee in lowest margin tax bracket
    - Take advantage of qualified educational transfers (pay tuition for kids, grandkids, etc.)
    - Take advantage of qualified medical transfers (pay medical expenses of heirs)
    - Unlimited lifetime gifts to spouse
    - IF above is exhausted, use transferors lifetime exclusion
  - Advantages of Gifts
    - Gift of appreciating assets excludes future appreciation from gross estate
    - Gift tax paid on taxable gifts excluded from gross estate if made more than 3 years before donor’s death
    - Gifts during life can use annual exclusion (unlike bequests at death)
    - Gift of income-producing assets excludes income from donor and reduces gross estate
Estate Tax
- Imposes on all property owned directly/indirectly by decedent at death
- Gross Estate
  - FMV of all interests owned by decedent at death
  - May also include interest of:
    - property decedent transferred in their lifetime
    - jointly held property
    - life insurance proceeds on decedent’s life
  - Dower/Curtesy Interest
    - Law concept that surviving spouse receives share of deceased spouse’s estate
    - Property subject to dower/curtesy is included in decedent’s gross estate
  - Gifts Made within 3 Years of Death
    - Decedent’s gross estate includes:
      - gift tax paid on gifts made within 3 years
      - value of assets gifted within 3 years if decedent retained interest in property
      - life insurance proceeds on decedent’s life from policies gifted within 3 years
  - Transfers with Retained Life Estate
    - FMV included in gross estate
  - Interest Retained for Life
    - FMV included in gross estate
    - Ex: decedent transfers property but retains use/enjoyment of property
  - Interest Retained for a Period Only Ascertainable by Death
    - FMV included in gross estate
  - Retained Interest Held at Death
    - FMV included in gross estate
  - Transfers Taking Effect at Death
    - FMV included in gross estate
    - Conditional to all the following:
      - possession/enjoyment of property obtained only by surviving decedent
      - decedent retained reversionary interest in property
      - value of reversionary interest exceeds 5% of property value immediately before death
  - Reversionary Interest
    - FMV included in gross estate
    - the possibility that transferred property would return to the decedent
    - alternative valuation date does NOT apply
  - Revocable Transfers
    - FMV included in gross estate
    - Decedent has the power to change, amend, revoke, terminate the transfer
    - Exception:
      - If transfer was for full/fair consideration
      - If decedent’s power can only be exercised with consent of all parties
  - Annuities
    - Single Life Annuity — Not included in gross estate (terminates at death)
    - Survivorship Annuity — value of comparable policy on second annuitant is included in first annuitant’s gross estate
      - If second to die also contributed to policy, the proportion tied to decedent’s contributions is included in gross estate
      - Included in Gross Estate = value of annuity at death x (decedent’s cost basis/total cost basis)
  - Joint Interests
    - FMV of interest (with right of survivorship) included in gross estate
    - Executor must prove decedent did NOT own property entirely
  - Power of Appointment
    - Gross estate includes assets decedent had general power of appointment over at death
    - Exception: Not included in gross estate
      - If right to exercise requires approval of holder or someone else
      - If right to exercise is held to ascertainable standard (HEMS)
      - If right to exercise is limited to greater of $5,000 or 5% of trust assets (5/5 Lapse Rule) and power lapses
  - Life Insurance Proceeds
    - Full death benefit included in gross estate
      - If proceeds were received by estate
      - If decedent held incident of ownership in policy
        
        Incidents of Ownership = right of insured, their estate, to enjoy economic benefits of policy and change beneficiary, surrender, cancel, assign policy, revoke assignment, pledge as loan, etc.
    - If proceeds paid as annuity, then value of lump-sum payment is included in gross estate
    - Community Property — 1/2 the death benefit included in gross estate
- Valuing Assets at Death
  - Either:
    - FMV at date of death
    - Value at alternative valuation date
  - Difficult to Value
    - Require appraisal
    - Ex: real estate, art, jewelry, antiques, collectibles, closely-held businesses
    - Closely-Held Business Valuation Discounts
      - Minority Discount — for minority interest in business — between 15% to 50%
      - Marketability Discount — for lack of marketability — between 15% to 50%
        
        can be used in combo with minority discount
      - Blockage Discount — for difficulty liquidating large blocks of corporate stock
      - Key Person Discount — for when key person dies
  - Financial Securities*
    - FMV = average of high and low trading price on date of death or alternate valuation date
      - If valuation date is on weekend:
        
        FMV = average of the average high and low price on the trading day before and trading day after
    - Bonds (interest-bearing securities)
      - Any accrued interest, but not paid by date of death, is added to value of security (included in gross estate)
    - Accrued Dividends
      - Divided declared date = not adjustment, not included in gross estate
      - Ex-dividend date = add dividend to stock price, include in gross estate
    - Not Traded on Valuation Date
      - FMV = ((Price after date of death x days between death and first preceding trade) + (Price before date of death x days between death and next trade))/ sum of days before and after death*
      - * days do not include weekends, holidays, or other days market is closed
    - Life Insurance
      - FMV = face value aka death benefit
      - Annuity settlement option
        
        FMV = amount payable as lump-sum aka death benefit, generally
  - Alternate Valuation Date
    - 6 months after date of death
    - Requirements:
      - Total value of gross estate must depreciate after date of death
      - Total estate tax must be less than tax calculated using values at date of death
    - Valuation
      - ALL assets valued used alternate valuation date
      - Exception:
        
        Assets distributed/sold before 6 months = valued at date of distribution/sale
        
        Wasting assets = valued at date of death
        
        assets that decline in value for reasons other than market fluctuations
        
        Ex: patents, royalties, lease income, installment notes, annuitized annuities
- Deductions from Gross Estate => Adjusted Gross Estate
  - Funeral expenses
  - Medical expenses
  - Administrative expenses
  - Decedent’s debts
  - Losses during administration
- Deductions from Adjusted Gross Estate => Taxable Estate
  - Charitable deductions — unlimited charitable deduction allowed for assets transferred to charity
  - Unlimited marital deduction — allowed for assets transferred to surviving spouse
  - State death tax deduction — for estate, inheritance, succession taxes paid to state
- Taxable Estate => Tentative Tax
  - Post-1976 taxable gifts — add taxable gifts made after 1976 to taxable estate
  - Tentative Tax Base = taxable estate + post-1976 taxable gifts
    - used to determine tentative tax
  - Tentative Tax = estate/gift tax rate x tentative tax base
    - reduced by credits for gift tax paid and other credits
- Credits from Tentative Tax => Estate Tax Liability
  - Previous gift tax paid
  - Applicable Estate Tax Credit — tax credit equivalency of $4,625,800 (2021)
    - excludes up to $11,700,000 of taxable transfers during a person lifetime
  - Tax on prior transfers
  - Foreign death tax
- Estate Tax Liability
  - What is owed = tentative tax less credits
- Paying Estate Tax
  - Filing
    - Estate tax return — Form 706 — must be filed if gross estate, plus adjusted taxable gifts, is more than tax credit equivalency
    - tax return and payment is due 9 months after decedent’s death
    - Extensions:
      - To File
        
        Additional 6 months
        
        extension must be filed within 9 months after date of death
      - To Pay
        
        Not to exceed 12 months
        
        needs reasonable cause
    - Tax NOT Paid at Original Due Date
      - tax due accrues interest
    - Penalties
      - Failure to File
        
        5% per month, max penalty of 25%
        
        Fraudulent = 15% per month, max of 75%
      - Failure to Pay
        
        0.5% per month, max penalty of 25%
      - If both penalties apply in any month:*
        
        failure to file penalty is reduced by failure to pay penalty but still pay failure to pay penalty
- Adjusted Basis to Heirs
  - Adjusted Basis = FMV reported on estate tax return
    - step-up in basis
  - Holding Period = ALWAYS deemed long term
  - Reverse Gifts
    - Property from decedent, originally gifted to decedent by same heir within 1 year of decedent’s death
    - Basis = decedent’s basis
    - NO step up in basis
  - Surviving Owner
    - Property owned joint tenancy w/ rights of survivorship, FMV of decedent’s interest is added to basis of survivor’s interest
    - Adjusted Basis = FMV included in decedent’s gross estate + survivor’s original adjusted basis
  - Community Property
    - Non-spouse heir = basis is FMV at date of death on half the property
    - Spouse heir = step-up in basis to FMV for entire property (both halves get step-up in basis)
Transfers in Life
- Gifts Outright and In Trust
  - Reduce transferor’s gross estate
  - Removes future appreciation from gross estate
  - Removes gift tax paid, if any, from gross estate (if transferors lives 3 years after date of gift)
  - Document value of the gift if not cash, marketable securities
- Partial Sale-Gift Transactions
  - Bargain sales = asset is sold for less than FMV
  - Gift portion = FMV – sale price
  - Gift portion reduces gross estate
- Sales (Gift) and Leaseback
  - Sell property, usually from a company, to buyer, who leases it back to former owner
  - Gift and Leaseback
    - gift tax may or may not apply depending on value of asset
- Full Consideration Transfers/Sales
  - Private Annuities
    - Between 2 private parties
    - Asset is sold in exchange for unsecured promise of fixed payments over seller’s life
    - Must be unsecured
    - Effective when seller’s life expectancy is less than table life expectancy
    - Seller:
      - Defers capital gains over remain life
      - Receives income stream for life
      - Removes asset from gross estate
    - Estate Tax Consequences
      - Not taxable gift
      - Value of annuity is 0 at death, not included in seller’s gross estate
    - Income Tax Consequences
      - Payments are:
        
        interest
        
        capital gains
        
        return of capital (tax free)
    - Risks
      - Buyer stops paying
    - Buyer’s Basis
      - Adjusted Basis = Total of all annuity payments made
  - Self-Canceling Installment Notes (SCIN)
    - Asset is sold for FMV but paid over a term defined by seller
    - If seller dies before term ends, note is cancelled!
    - Buyer pays premium — SCIN premium — to compensate seller for risk of dying before term ends
    - Effective when seller has short life expectancy
    - Estate Tax Consequences
      - Removed from seller’s gross estate
      - No gift tax
    - Income Tax Consequences
      - Seller
        
        Payments are:
        
        interest
        
        capital gains
        
        return of capital
        
        SCIN premium is either:
        
        additional interest
        
        Additional capital gains
      - Buyer — Interest paid may be deductible
    - Buyer’s Basis
      - Adjusted Basis = agreed upon price
    - Risk
      - Seller
        
        Interest rate risk
        
        Default risk
        
        Purchasing power risk
        
        Reinvestment risk
      - Buyer
        
        Seller outives the SCIN
  - Grantor Retained Annuity Trust (GRAT)
    - Irrevocable trust that pays fixed annuity for defined term, with remainder going noncharitable beneficiary at end of term
    - Effective when transfer property expected to appreciate faster than rate applicable to the GRAT
    - Funded:
      - Grantor transfers property to GRAT
    - Annuity Payment Options
      - Fixed dollar amount
      - Fixed fraction
      - % of initial FMV of property
    - Estate Tax Consequences
      - Annuity portion not subject to gift tax
      - Remainder Interest
        
        Future interest is subject to gift tax
        
        Value of Remainder Interest = FMV of original transfer – PV of expected future annuity payments
        
        Longer the term, lower the remainder interest
      - If grantor dies during term, FMV of property in GRAT at date of death included in gross estate
    - Income Tax Consequences
      - No income tax consequences on initial transfer
      - Trust income included in grantor’s income
    - Risk
      - Grantor fails to survive GRAT term
  - Grantor Retained UniTrust (GRUT)
    - Pays a fixed percent of trust’s assets per year
    - Assets revalued annually
    - Not suitable for hard to value assets (costly annual appraisals)
  - Qualified Personal Residence Trust (QPRT)
    - Transfer a personal residence to a trust in exchange for use of residence over defined term
    - Residence passes to remainderman at end of term — grantor may lease residence after term
    - Only hold 1 residence
    - Individual can have 2 QPRTs
    - Estate Tax Consequences
      - Initial transfer treated as gift, to extent that FMV exceeds PV of grantors retained interest
      - If grantor dies before term, FMV of residence is included in gross estate
  - Tangible Personal Property Trust (TPPT)
    - Transfers real property (not personal property) to a trust like art, antiques, etc. likely to rise in value
    - Estate Tax Consequences
      - Initial transfer treated as gift, to extent that FMV exceeds PV of grantors retained interest
      - If grantor dies before term, FMV of real property is included in gross estate
  - Family Limited Partnerships (FLPs)
    - Partnership created to transfer assets to younger generation through value discounts
    - Estate Tax Consequences
      - No gift or income tax consequence at creation
      - Transfers done via annual gifting at discounted value using annual exclusion and gift splitting
- Medicaid
  - Covers long-term care in nursing home if meet income and asset test
  - Giving away assets to qualify for Medicaid is common
  - Penalty Test
    - If person transfers asset for less than FMV, state witholds payment for nursing care for a penalty period
    - States can look back over 60 months prior to Medicaid application date for transferred assets
    - Penalty Period
      - Calculation = Amount of money gifted or transferred over 60 days/cost of nursing home
    - Permitted Transfers:
      - to spouse
      - to child that is blind or disabled
      - to trust for someone under 65 and disabled
      - of home to child under 21 that lived in home 2 years before transfer to nursing home
      - of home to sibling with equity interest in home or lived in it for 1 year before transfer to nursing home
Transfers in Death
- By Will
  - Transfers property to designated beneficiaries at death
- By Contract
  - Beneficiary named in the contract gets the property at death
  - Ex: life insurance, annuities, qualified plans, IRAs, Totten Trusts, PODs, transfer-on-death accounts
- By Operation of Law
  - Titling
    - Joint tenancy w/ right of survivorship
    - Tenancy by entirety
  - Trusts
- Charitable Transfers
  - Unlimited charitable estate tax deduction
  - No income tax deduction for assets left to charity at death
Trusts
- Basics
  - Structure that holds title to an asset for the benefit of a beneficiary
  - Grantor
    - creates and funds the trust with money/property
    - sets the terms and provisions of trust
  - Trustee
    - Responsible for managing trust assets and following directions of grantor
    - Has legal title to trust assets but MUST act as fiduciary to beneficiaries
    - Prudent Man Rule applies — duty of loyalty and care
  - Beneficiary
    - Holds beneficial title to trust assets
    - Two Types:
      - Income Beneficiary — right to income from trust or current right to use the trust
      - Remainder Beneficiary — right to receive trust assets at trust’s termination
  - Why Use a Trust
    - Management
      - Asset management for those without experience/knowledge to manage the assets
    - Creditor Protection
      - Creditors of beneficiary can NOT access funds in trust
      - Spendthrift Clause — beneficiary can not assign/promise distributions from trust to anyone
    - Split Property Interests
      - Allows single asset interest be divided into multiple interests for estate planning needs
    - Avoid Probate
      - Avoids high probate fees/expenses
      - Via revocable living trust
        
        Property transferred to revocable living trust for benefit of grantor’s life
        
        Becomes an irrevocable trust at grantor’s death, passing to heirs
        
        Property avoids probate
        
        FMV still included in gross estate
    - Minimize Taxes
      - Reduce gross estate
      - Transfer future appreciation out of estate to heirs
      - Lowers transfer taxes
  - Trust Duration
    - Rule Against Perpetuities (RAP)
      - Puts limit on time a property can be held in trust
      - Limit — within lives in being plus 21 years
  - Trust Taxation*
    - Income Tax
      - Income — taxed to trust, beneficiary, or grantor
      - Simple Trusts — mandate distribution of all income
      - Complex Trusts — can accumulate income, taxed on that income
      - Revocable Trust — taxed to grantor
      - Irrevocable Trust — taxed to beneficiaries if distributed, taxed to trust if retained
    - Gift Tax
      - Revocable Trust — transfers to the trust NOT subject to gift tax
      - Irrevocable Trust — transfers to the trust are taxable gift subject to gift tax
    - Estate Tax
      - Gross Estate
        
        Revocable Trust — FMV included in gross estate, subject to estate tax
        
        Irrevocable Trust — excluded from gross estate, NOT subject to estate tax
        
        Exception:
        
        grantor retains interest at date of death
        
        grantor releases interest within 3 years of death
        
        funding trust created generated gift tax within 3 years of death
      - Adjusted Taxable Gift
        
        Revocable Trust — no adjusted taxable gift
        
        Irrevocable Trust — if gift to trust exceeds annual exclusion, adjusted taxable gift is added to tentative tax base to calculate estate taxes
    - Generation-Skipping Transfer Tax (GSTT)
      - Revocable Trust — N/A, assets included in grantor’s estate
      - Irrevocable Trust — Maybe, depends on trust beneficaries
  - Classification
    - Revocable Trust
      - Grantor retains right to revoke trust at any time
      - Used to avoids probate and manage assets
      - All revocable trusts are grantor trusts
    - Irrevocable Trust
      - Grantor can NOT take back property transferred to trust
      - Used to exclude assets from gross estate
    - Inter Vivos Trust — any trust created during grantor’s lifetime
    - Testamentary Trust — any trust created after grantor’s death
    - Standby Trust — created in grantor’s lifetime, unfunded or minimally funded, but waits for a triggering event to activate it
    - Pourover Trust — created to receive assets (assets pour into trust), generally grantor’s estate at grantor’s death.
    - Grantor Trust
      - Created by grantor who retains powers over the trust
      - Grantor pays income tax on trust income
      - Revocable or irrevocable trust
      - Must be inter vivos trust
    - Simple Trust — mandates distribution of all income
    - Complex Trust — can accumulate income
- Trusts in Estate Planning
  - Inter Vivos Revocable Trusts
    - Avoid Probate
      - Avoids high probate costs
      - Becomes irrevocable at grantor’s death
    - Privacy
      - provides some privacy from public probate process
    - Taxes
      - No gift tax at trust creation
      - Grantor pays income tax on trust income
      - Included in gross estate
      - Does NOT avoid estate taxes
  - Inter Vivos Irrevocable Trusts
    - Used for estate and gift tax benefits
    - Gift Tax
      - Transfers to trust are completed gift, may be subject to gift tax
    - Crummey Power
      - Qualifies a transfer for gift tax annual exclusion
      - Allows beneficiaries to withdraw contributions to trust within a period — 30 days
      - 5/5 Rule Lapsing Issues:
        
        Withdraw no more than lessor of: $5,000 or 5% of trust
        
        If lapses (beneficiary does NOT withdraw), no estate tax consequences
        
        Hanging Power
        
        If beneficiary has right to withdraw that does not lapse, the nonlapsing portion hangs over to the next year, when it lapses
  - Irrevocable Life Insurance Trusts (ILITs)
    - Used to replace wealth via life insurance
    - Avoids incident of ownership on life insurance policy as trust owns the policy
      - New policies bought in the ILIT, immediately removed from estate
      - If policy was transferred to trust, included in gross estate if grantor dies within 3 years of transfer
    - NOT included in gross estate, NOT subject to estate tax
  - Bypass Trust
    - Testamentary Bypass Trust
      - Most common use
      - Created at death
      - Avoids estate taxes by using applicable estate tax credit to transfer $11,700,000 in assets to trust at death of first spouse
      - Trust income can be paid to surviving spouse
      - Payments can also be made for ascertainable standard (HEMS)
      - Surviving spouse can be given right to demand $5,000 or 5% of trust
      - At surviving spouse’s death, trust assets pass to beneficiary
      - Not included in surviving spouse’s gross estate
    - Inter Vivos Bypass Trust
      - Created during life
      - Uses applicable gift tax credit to transfer $11,700,000 in assets to trust
      - Removes assets from gross estate, not subject to estate taxes
  - Power of Appointment Trusts
    - Used to take advantage of unlimited estate tax marital deductions or GSTT
    - Grants power of appointment over trust to a beneficiary
    - Can be general or limited power of appoinment
    - Can be inter vivos or testamentary
  - Qualified Terminable Interest Property Trust (QTIP)
    - Created at death of first spouse
    - Grants surviving spouse right to trust income, passes remainder to beneficiary
    - Qualifies for unlimited marital deduction
  - Grantor Retained Interest Trusts (GRITs)
    - Grantor retains income interest in trust for a period of time, remainder passes to beneficiary
  - Grantor Retained Annuity Trusts (GRATs)
    - Granter receives a fixed annuity payment for specific term
    - Fixed income stream
  - Grantor Retained UniTrusts (GRUTs)
    - Grantor receives a fixed percentage of the annual value of the trust for specific term
    - Variable income stream
  - Qualified Personal Residence Trusts (QPRTs)
    - Grantor transfers their residence to the trust but retains right to use residence for specific term
  - Tangible Personal Property Trust (TPPT)
    - Transfers personal property, not real property to the trust — art, antiques, etc.
  - Dynasty Trusts
    - Designed to last a long time — preferably forever
    - Avoids transfer taxes at each generation
  - Grantor Trusts
    - Grantor pays income tax on trust income
  - Trusts for Minors
    - Minors not permitted to own property
    - Minor can access property transferred to trust at later of:
      - day minor hits age of majority
      - date set in trust instrument
    - Transfer to trust for minor, subject to gift tax or use applicable gift tax credit
      - annual exclusion not allowed (considered future interest gift)
      - Exceptions:
        
        2503b Trust
        
        Holds assets for lifetime of beneficiaries
        
        must make annual income distributions to beneficiaries (minor)
        
        interest/dividend income of trust must be distributed (at minimum)
        
        2503c Trust
        
        allows income accumulation
        
        only 1 beneficiary
        
        Trust may (not required) make distributions for minor’s benefit
        
        Trust must terminate when minor hits 21 or minor must get right to receive trust assets at 21
  - Crummey Trusts
    - Allow beneficiary to withdraw grantor contributions to the trust
  - Charitable Trusts
    - Tax efficient transfer of assets to charity
    - Charitable Remainder Trusts (CRTs)
      - Grantor transfer assets to trust, retains annuity interest for period or life, remainder passes to charity
    - Charitable Lead Trusts (CLTs)
      - Grantor transfers assets to trust, annuity pays income to charity for period, remainder passes to noncharitable beneficiary or grantor
    - Private Foundations
      - Distributes at least 5% of asset per year to charities
  - Totten Trusts
    - Bank accounts with payable on death beneficiary clauses (PODs)
    - Avoids probate
  - Blind Trusts
    - Revocable trust
    - Assets transfers to trust for management purposes due to conflict of interests
Charitable Giving
- Gifts to qualified charities receive gift and estate tax benefits
- NOT Qualifying Charities
  - Foreign orgs
  - For-profit groups
  - Homeowner’s associations
  - Political groups
  - Labor unions
  - Chambers of commerce
  - Social clubs
  - Individuals
  - Civic groups
- Types of Charities
  - Public
    - Get broad support from public
    - Meet 2 Tests:
      - Over 1/3 of support from gifts, grants, contributions, membership fees, and sales from unrelated business activity
      - Not more than 1/3 of support from gross investment income plus unrelated business taxable income (less taxes)
  - Private
    - Anything org that does not meet 2 tests above
    - Private Operating Foundation
      - spend at least 85% of adjusted net income on exempt activities
      - An asset test, endowment test, or support test must also be met.
    - Private Nonoperating Foundation
      - Fails the tests of operating foundations
- Charitable Gifts in Life
  - Cash
    - Donations to colleges in exchange for right to buy sports tickets are NOT deductible donations
  - Service
    - Only unreimbursed out-of-pocket expenses tied to service are deductible
    - Value of service is NOT deductible
  - Property
    - FMV of property date of contribution is deductible
    - Ordinary Income Property
      - Results in recognizing ordinary income when sold
      - Ex: inventory, art, capital assets held under 1 year
      - Deduction = FMV of property less any income from the sale
        
        If FMV is less than adjusted basis, deduction = FMV
    - Capital Gain Property
      - Deduction = FMV of property
      - Exceptions:
        
        Donations to private nonoperating foundations
        
        Deduction = adjusted basis of property
        
        Donation of tangible property for unrelated use
        
        Deduction = adjusted basis of property
        
        Ex: art, jewelry, books, etc. not created by donor
- Other Charitable Gifts
  - Bargain Sales to Charities
    - Sell property below FMV to charity.
    - Adjusted basis is split between a sale and charitable portion
  - Charitable Stock Bailout
    - Gift stock of closely held corp. with corp buying the stock from the charity
  - Charitable Annuities
    - Transfer of property to charity in exchange for annuity payments to donor/spouse/other person
    - PV of annuity is less than value of property
    - Annuity Paid to Donor
      - Donor gets charitable income tax deduction in year of transfer
      - Removes asset from gross estate
    - Annuity Paid to Another Person
      - Donor gets charitable income tax deduction = remainder interest
      - Removes asset from gross estate
      - Potential taxable gift to the “another person”
        
        Gift value = PV of annuity
    - Encumbered Properties (Mortgages)
      - Donation = FMV of property less principal of mortgage and PV of annuity
      - Taxes
        
        Any capital gain or income recognized in year of transfer
        
        Exception:
        
        annuity is non-assignable to charity
        
        donor is only annuitant
        
        Capital gain, return of capital, income recognized over life of annuity
  - Life Insurance to Charities
    - Gift of ordinary income
    - Deduction = lessor of adjusted basis or FMV of policy
  - Group Term to Charities
    - Coverage over $50k paid by employer is taxable income to employee
    - Employee can avoid taxable income portion by naming charity as beneficiary for the amount over $50k
- Split Interest Charitable Gifts*
  - Pooled Income Funds (PIF)
    - Mutual fund provided charities — contributions are pooled into a trust, each donor gets a share of the trust income
    - Income Tax Deduction — FMV of property less PV retained income interest
    - Income Recipient — Noncharitable beneficiary (donor)
    - Income — Rate of return of trust
    - Remainder — qualified charity
    - Additional Contributions — allowed
    - Sprinkling Provision — No (trustee can NOT make distributions to beneficiaries as desired)
    - Insufficient Income for Payment — N/A
    - Invest in Tax-Exempt Securities — NO
  - Charitable Remainder Annuity Trust (CRAT)
    - Grantor transfers property to trust, receives fixed annuity payments for a period, remainder goes to charity
    - Income Tax Deduction — FMV of property less PV retained annuity payments
    - Income Recipient — Noncharitable beneficiary (donor)
    - Income — at least 5% and no more than 50% of initial FMV of asset, paid annually for life or term no more than 20 years (like a fixed annuity)
    - Remainder — qualified charity
    - Additional Contributions — NOT allowed
    - Sprinkling Provision — Yes (trustee can make distributions to beneficiaries as desired
    - Insufficient Income for Payment — Pulls money from corpus
    - Invest in Tax-Exempt Securities — Yes
  - Charitable Remainder UniTrust (CRUT)
    - Grantor transfers property to trust, receives a percentage of asset’s value for a period, remainder goes to charity
    - More costly — requires annual valuation of trust assets
    - Income Tax Deduction — FMV of property less PV retained unitrust payments
    - Income Recipient — Noncharitable beneficiary (donor)
    - Income — at least 5% and no more than 50% of current FMV of asset, paid annually for life or term no more than 20 years (like a variable annuity)
    - Remainder — qualified charity
    - Additional Contributions — Allowed
    - Sprinkling Provision — Yes (trustee can make distributions to beneficiaries as desired
    - Insufficient Income for Payment — Pays up to income earned, makes up difference next year
    - Invest in Tax-Exempt Securities — Yes
  - CRT for Wealth Replacement
    - Tax savings from charitable deduction used to buy life insurance to replace wealth donated to charity
  - Charitable Lead Trusts
    - Grantor transfers property to trust, charity gets income from annuity payments, remainder goes to noncharitable beneficiaries
    - Used to remove highly appreciating assets from gross estate
    - Structured to get deduction = FMV of property with a remainder interest of zero (eliminates taxable gift)
    - Irrevocable trust
    - If grantor trust, grantor gets income tax deduction in year of transfer
      - Grantor pays income tax on trust income
- Charitable Gifts at Death
  - Estate Tax Deduction Allowed if:
    - Bequest is mandatory
    - Amount of bequest must be ascertainable at date of death and included in decedent’s gross estate
Unlimited Marital Deduction
- Persons can leave an unlimited amount of assets to spouse at death not subject to estate tax.
- Advantages:
  - Defers estate taxes to death of surviving spouse
  - Ensures surviving spouse has assets to support themselves
  - Maximize the applicable estate tax credit of surviving spouse
- Requirements
  - Must be married at date of death
  - Surviving spouse must receive assets through estate
- Limitations
  - Property must qualify for marital deduction
  - Only net value of qualifying property left to surviving spouse is included in marital deduction
    - Net Value = Gross Value – taxes, debts, expenses
- Qualifications
  - 3 Qualifying Property Requirements
    - Included in decedent’s gross estate
    - Transferred to surviving spouse
    - Not a terminable interest (exceptions exist)
  - Spouse is U.S. citizen (non-US citizen spouses have added requirements)
  - Terminable Interest
    - Interest in property where interest terminates some time in the future
    - Rule: deduction only allowed when property passed from decedent to surviving spouse is included in surviving spouse’s gross estate
      - Caveat: terminable interest property bought at direction of decedent’s will, for the surviving spouse, is NOT allowed marital deduction
    - NO Marital Deduction if all following:
      - Terminable interested transferred to surviving spouse
      - Different interest in same property passes from decedent to third party for less than full/adequate consideration
      - Third party has use of property after surviving spouse’s interest terminates
    - Exceptions:*
      - 6-month survival contigency
      - Terminable interest — outright or in trust — where surviving spouse has general power of appointment
      - Qualified Terminable Interest Property (QTIP)
      - Charitable Remainder Trust (CRT) with surviving spouse as only noncharitable beneficiary
  - Qualifying Transfers
    - Outright Bequests
      - Direct transfer to surviving spouse
      - Simplest way
      - Gives surviving spouse total control over property
    - General Power of Appointment Trusts (GPOA)
      - Trust that creates a terminable interest but includes trust assets in surviving spouse’s gross estate via general power
      - Surviving spouse must have power to appoint assets to themselves, their estate, their creditors, or estate’s creditors.
      - Estate Trust
        
        Type of GPOA trust that does NOT require annual income distributions to surviving spouse
        
        Only surviving spouse can have beneficial interest
        
        Trust assets must pass to surviving spouse’s estate at death
    - Qualifying Terminable Interest Property Trusts (QTIP)
      - Trust holds assets for surviving spouse and makes annual income distributions to spouse
      - Trust assets transfer to remainder beneficiary at surviving spouse’s death
      - Requirements:
        
        Property transferred to trust must be in decedent’s spouse’s gross estate
        
        Surviving spouse entitled to all trust income for life and paid annually
        
        Surviving spouse must have right to sell non-income producing assets to buy income-producing assets
        
        No one can have right to appoint property to anyone other than surviving spouse
  - Over Qualified
    - Too many assets passed to surviving spouse leading to increase in estate taxes
  - Under Qualified
    - Not enough assets passed to surviving spouse leading to higher estate taxes on decedent’s estate
- Non-US Citizen Spouses
  - Outright bequests to non-citizen spouses do NOT qualify for unlimited marital deduction
  - Special Annual Exclusion
    - $159,000 (2021) lifetime transfer for citizen spouse to non-citizen spouse
  - Exceptions
    - Non-citizen spouse becomes a US citizen before estate tax return due date and keeps residence in US
    - Qualified Domestic Trust (QDOT)
      - Subjects remaining assets to estate tax at non-citizen spouse’s death
      - Requirements:
        
        At least 1 QDOT trustee must be US citizen
        
        No distribution of principal (without withholding estate tax on distribution)
        
        Must sufficient assets in US (to ensure estate tax payment)
- Alternatives
  - Estate Tax Credit Portability Feature
    - Lifetime estate tax exclusion amount is portable between spouses
    - Surviving spouse can use any remaining exclusion amount from the last spouse to die (for spouses that die 2011 and beyond)
      - If surviving spouse remarries, and new spouse dies, the remaining exclusion amount from first spouse is lost
  - ByPass Trust
    - Ensures full use of applicable estate tax credit
    - Trust receives assets with FMV equal to estate tax exemption ($11,700,000 (2021)) from decedent gross estate, remaining assets pass to surviving spouse
  - ABC Trust Arrangement
    - 3 Trusts are used:
      - Bypass Trust
      - GPOA Trust
      - QTIP Trust
  - Irrevocable Life Insurance Trust (ILIT)
    - Excludes property from gross estate of both spouses
    - Protects assets from creditors
Life Insurance
- General Rule: Insured should NOT own policy if the policy provides estate liquidity and money to heirs
- Common Objectives*
  - Protect income for beneficiaries
  - Funds for education
  - Liquidity at death
  - Funds for retirement
  - Sustain family wealth
- Gift Taxation
  - Outright Gift
    - Transfer ownership of policy to another via gift = subject to gift tax rules
    - If value is less than annual gift tax exclusion = no gift tax
    - If value is more than annual gift tax exclusion = taxable gift
    - Policy Value
      - Paid-up Policy
        
        FMV = replacement cost of the policy i.e. cost charged by company for a similar policy
      - Premiums Being Paid
        
        FMV = policy’s terminal reserve plus unearned premiums
        
        Insurance company provides this value
        
        Have it calculated based on date of the gift
  - Premiums as Gifts
    - Gift cash to policy owner to pay premiums = no gift tax if qualifies for annual exclusion
    - Gift cash to trust (policy owner) to pay premiums = no gift tax if Crummey Provision and qualifies for annual exclusion
  - Gift Life Insurance to Charity
    - Gift Taxes
      - Follows the rules for outright gifts
    - Income Taxes
      - Charitable deductions limited to:
        
        50% of donor’s AGI for public charities
        
        30% of donor’s AGI for private charities
    - Estate Taxes
      - If transferee dies within 3 years of the policy transfer, death benefit is included in gross estate but death benefit qualifies for estate tax unlimited charitable deduction = no estate tax
- Estate Taxation
  - Die Owning a Policy on Someone Else’s Life
    - value of policy is included in gross estate
  - Die Owning a Policy on Own Life
    - death benefit is included in gross estate
      - Includes Incidence of Ownership
    - beneficiary gets death benefit income tax free
  - 3-Year Lookback Rule
    - Gift transfers of policy on own life within 3 years of death, the death benefit included in gross estate
- Irrevocable Life Insurance Trust (ILIT)
  - Grantor makes annual gifts to the trust to cover premiums on policy
  - Trust must include a Crummey Provision to qualify gifts for annual exclusion
  - Excludes death benefit from insured’s gross estate
  - Trust document dictates management and disposition assets to beneficiaries
  - Provides asset protection from creditors
  - Provides liquidity for estate — be careful to avoid incidents of ownership
    - Trust Provisions
      - Gives trustee power to buy assets from insured’s estate
      - Gives trustee power to loan money to insured’s estate
Postmortem Estate Planning
- Liquidity Needs
  - Last medical costs
    - most of person’s lifetime medical expenses are incurred in last few months of life
  - Funeral costs
  - Transition period costs
    - cash for surviving family to cover normal living expenses
  - Estate administration costs
    - executor and attorney fees, preparing tax returns, appraisal fees
  - Taxes
    - income tax, estate tax, generation-skipping transfer tax
- Liquidity Sources
  - Sale of assets
  - Life insurance
  - Tax-Advantaged Accounts
    - Income in Respect of Decedent Rules (IRD) apply
      - No step in basis on deferred income
    - If executor takes money out of tax-advantaged accounts, its subject to estate income tax
      - executor needs to take out enough to cover liquidity needs and income tax liability
  - Corporate Redemption of Closely Held Business
    - Estate can redeem enough shares to cover death taxes, funeral and admin costs
    - Redeemed shares get capital gains tax treatment
    - Estate gets step-up in basis on shares (tax-free exchange)
    - Requirements:
      - Over 35% of gross estate must be closely held business interest
      - If several closely held business interests:
        
        FMV of all closely held interests must meet 35% test if decedent owned at least 20% of each company’s stock
    - Redemptions in excess of taxes, funeral, admin costs are subject as dividend income tax
  - Loans
    - Estate borrows money to cover taxes and costs
- Deceased’s Final Income Tax Return
  - Final tax return includes all income and deductions up to death
  - Deceased’s Filing Status
    - MFJ or MFS if married and survived by spouse
  - Passive Losses
    - Suspended passive losses (from prior returns) can be claimed on final tax return
  - Expense Elections*
    - Deduct unpaid medical expenses on either final tax return or estate tax return, not both
      - May be split
      - Final Tax Return
        
        Only to extent medical expenses exceed 7.5% of AGI
      - Estate Tax Return (Form 706)
        
        Only if estate is subject to estate tax
      - Estate Income Tax Return (Form 1041)
        
        Not allowed
- Estate Income Tax Return (Form 1041)
  - Select Tax Year
    - Not required to use calendar year
  - Expense Elections*
    - Deduct casualty losses from either estate income tax return or estate tax return (Form 706), not both
      - May be split
  - Waive Executor Fees*
    - Fees are deductible on either estate income tax return or estate tax return (Form 706), not both
    - Fees are taxable income to executor (may be waived)
- Estate Tax Installment Payments*
  - 10 annual installments (if eligible)
    - Up to $1,590,000 (2021)
    - First installment due within 5 years after estate tax return due date
    - 2% interest on first $1,590,000 (2021) of closely held business interest
      - amounts greater subject to interest rate of 45% of usual underpayment rate
  - Eligibility
    - Closely held business interest is over 35% of adjusted gross estate
    - Must be sole proprietorship or partnership, decedent owned 20% interest or voting shares
    - If more than 1 closely held business interests:
      - FMV of all closely held interests must meet 35% adjusted gross estate if decedent owned at least 20% of each company’s stock
        
        if corporation with 45 or fewer shareholders, or
        
        if partnership with 45 or fewer partners
    - Close held business activity engaged in trade/business
- Special Use Valuation*
  - Value of property in gross estate will be current value (not the highest and best use value)
  - Reduce FMV of real property up to $1,190,000 (2021)
  - Eligibility
    - Business real property must used in farm/business activity managed by decedent or family for 5 of 8 years before decedent’s death
    - Value of business real and personal property must be 50% or more of gross estate
    - Value of business real property must be 25% or more of gross estate
    - Real property must pass to qualifying heirs
    - Heirs must use property in business for 10 years to stay eligible
    - Executor must file election with estate tax return
- Disclaimers
  - Disclaimer by Surviving Spouse
    - May disclaim bequest but still receive benefits in disclaimed property
  - Disclaimer in Favor of Surviving Spouse
    - Heirs purposely disclaim bequest knowing disclaimed property passes to surviving spouse and qualifies for marital deduction
  - Disclaimer in Favor of Charities
    - Disclaimed property passes to charity and qualifies for unlimited charitable deduction
Generation-Skipping Transfer Tax (GSTT)*
- Designed to tax large transfers between skipped generations (like grandparent to grandchild)
- Separate and addition to estate and gift taxation
- Transferees
  - Skip Person
    - Any lineal decedent of transferor’s grandparent, 2 or more generations younger than transferor
    - Any non-lineal decedent of transferor and 2 or more generations younger than transferor based on age — 37.5 years
    - Exception:
      - If the child of transferor is deceased, the child’s descendants move up one generation per GSTT
  - NonSkip Person
    - Any person or trust that is not a skip person
    - Trust is nonskip person if any nonskip person has interest in the trust
- Taxable Transfers
  - Direct Skip
    - Outright transfer to skip person subject to estate or gift tax
    - Imposed on value received by transferee
    - Transferor is liable for GSTT, or
      - Trust is liable for GSTT if made from trust
  - Taxable Distribution
    - Any distribution from trust to skip persons, not a taxable termination
    - Taxable Amount = Property value less expense
    - Transferee liable for GSTT
  - Taxable Termination
    - Any termination of a trust unless
      - property transferred is subject to estate/gift tax
      - non-skip person receives property
      - distribution is never received by skip person
    - Taxable Amount = Property value less expenses, debts, taxes
    - Trust is liable GSTT
- GSTT Rate
  - Highest marginal rate for unified gift and estate ta rates (40% — 2021)
  - Any GSTT paid is added to FMV of gift to determine total taxable gift for gift tax purposes
- Exclusions*
  - Qualified Transfer Exclusion
    - Medical and educational payments made directly to institutions
  - Annual Exclusion = $15,000 (2021) per donee per donor
    - Gift splitting applies
- Exemptions*
  - Lifetime Exemption = $11,700,000 (2021)
  - Applies to assets transferred during life or at death

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