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Questions and Answers
The highest tax bracket for trusts and estates is 37%.
The highest tax bracket for trusts and estates is 37%.
True
What is the minimum waiting period for probate distributions?
What is the minimum waiting period for probate distributions?
6 months
What is the basic amount a taxpayer is to have invested in a particular asset?
What is the basic amount a taxpayer is to have invested in a particular asset?
What is the tax rate for capital gains?
What is the tax rate for capital gains?
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What is the maximum amount that can be gifted before gift taxes are incurred?
What is the maximum amount that can be gifted before gift taxes are incurred?
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Marital property is an important factor in estate planning.
Marital property is an important factor in estate planning.
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What is the basis of gifted property?
What is the basis of gifted property?
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What is the amount of the estate tax?
What is the amount of the estate tax?
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If the decedent received the property that is subject to the stepped up basis within one year of death, and the original donor and the devisee are the same person, the basis will be stepped up.
If the decedent received the property that is subject to the stepped up basis within one year of death, and the original donor and the devisee are the same person, the basis will be stepped up.
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What does the acronym IDGT stand for?
What does the acronym IDGT stand for?
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What is the general rule for determining the value of an asset for estate or gift tax purposes?
What is the general rule for determining the value of an asset for estate or gift tax purposes?
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The IRS can challenge the value of an asset.
The IRS can challenge the value of an asset.
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Which of the following is NOT a factor considered when valuing a closely held business?
Which of the following is NOT a factor considered when valuing a closely held business?
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The IRS has a statutory authority for taking a discount from closely held stocks.
The IRS has a statutory authority for taking a discount from closely held stocks.
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The purpose of a self-canceling installment note (SCIN) is to make the payment of the note cancel at death.
The purpose of a self-canceling installment note (SCIN) is to make the payment of the note cancel at death.
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The IRS recognizes a "discount" for a closely held business.
The IRS recognizes a "discount" for a closely held business.
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What is the highest value that a piece of real property must be worth, to require appraisal?
What is the highest value that a piece of real property must be worth, to require appraisal?
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A disclaimer is a post-mortem device that permits a recipient to say they do not want anything and it transfers without any gift tax consequences.
A disclaimer is a post-mortem device that permits a recipient to say they do not want anything and it transfers without any gift tax consequences.
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A disclaimer cannot be revocable or unqualified.
A disclaimer cannot be revocable or unqualified.
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The gift tax system is united. If you die, the estate tax exemption is lower.
The gift tax system is united. If you die, the estate tax exemption is lower.
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Property transfers made pursuant to a marital settlement agreement or child support are generally exempt from gift tax.
Property transfers made pursuant to a marital settlement agreement or child support are generally exempt from gift tax.
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Payments of educational and medical expenses are exempt from gift tax.
Payments of educational and medical expenses are exempt from gift tax.
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A gift is not taxed until the gift is completed.
A gift is not taxed until the gift is completed.
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Cash that is jointly owned with a 4-year-old child is not considered a gift until the child withdraws the funds from the account.
Cash that is jointly owned with a 4-year-old child is not considered a gift until the child withdraws the funds from the account.
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The IRS does not track gift loans that are less than 10,000.
The IRS does not track gift loans that are less than 10,000.
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A gift is not considered to be completed until the check is deposited.
A gift is not considered to be completed until the check is deposited.
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If a donor places money in a revocable trust, the transfer is complete.
If a donor places money in a revocable trust, the transfer is complete.
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If a grantor of a trust designates a successor trustee and retains the right to appoint the successor, what does the IRS consider this action?
If a grantor of a trust designates a successor trustee and retains the right to appoint the successor, what does the IRS consider this action?
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An ascertainable standard is a limited by health, education, maintenance or support, and is something a beneficiary can enforce.
An ascertainable standard is a limited by health, education, maintenance or support, and is something a beneficiary can enforce.
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An ascertainable standard is extremely broad.
An ascertainable standard is extremely broad.
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The IRS considers a transfer of corporate shares to be a completed transfer for estate tax purposes if the individual retains only voting rights.
The IRS considers a transfer of corporate shares to be a completed transfer for estate tax purposes if the individual retains only voting rights.
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The general rule for transfers of property with life estates is that 100% of the property is included in the decedent's estate at death.
The general rule for transfers of property with life estates is that 100% of the property is included in the decedent's estate at death.
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The general exception to the general rule for estates with a life estate is that a portion of the property is excluded if the decedent receives a full and adequate consideration for the transfer.
The general exception to the general rule for estates with a life estate is that a portion of the property is excluded if the decedent receives a full and adequate consideration for the transfer.
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If the decedent establishes a trust with a life estate, the general rule is that the remainder interest is excluded from the decedent's estate.
If the decedent establishes a trust with a life estate, the general rule is that the remainder interest is excluded from the decedent's estate.
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The exception to the general rule for lifetime transfers to a trust, is that the grantor/decedent must be a beneficiary of the trust for it to be included in the estate.
The exception to the general rule for lifetime transfers to a trust, is that the grantor/decedent must be a beneficiary of the trust for it to be included in the estate.
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If the decedent is a beneficiary, they cannot also be a trustee.
If the decedent is a beneficiary, they cannot also be a trustee.
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If the decedent retains the right to direct distribution of a trust, and does not relinquish all rights, the transfer is complete.
If the decedent retains the right to direct distribution of a trust, and does not relinquish all rights, the transfer is complete.
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If the decedent retains a beneficial interest in the trust, but it is not for a prohibited length of time or the decedent has the right to possession, then 2036 does not apply.
If the decedent retains a beneficial interest in the trust, but it is not for a prohibited length of time or the decedent has the right to possession, then 2036 does not apply.
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If there is a direct transfer, 2036 does not apply.
If there is a direct transfer, 2036 does not apply.
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If the decedent has a power to change the income or manner of enjoyment of a property, it triggers 2038
If the decedent has a power to change the income or manner of enjoyment of a property, it triggers 2038
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The power to revoke or terminate a trust is the most important factor for triggering 2038.
The power to revoke or terminate a trust is the most important factor for triggering 2038.
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An individual that is 50% owner of a business is not a controlling shareholder.
An individual that is 50% owner of a business is not a controlling shareholder.
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In what manner can an individual avoid including life insurance proceeds in their estate?
In what manner can an individual avoid including life insurance proceeds in their estate?
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Life insurance proceeds are included in the decedent's gross estate if they are payable to a trust that has an obligation to make tax, debt, or other expense distributions.
Life insurance proceeds are included in the decedent's gross estate if they are payable to a trust that has an obligation to make tax, debt, or other expense distributions.
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The IRS considers a power of appointment over the business to be an incident of ownership.
The IRS considers a power of appointment over the business to be an incident of ownership.
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The IRS considers a power of appointment to choose a beneficiary as an incident of ownership.
The IRS considers a power of appointment to choose a beneficiary as an incident of ownership.
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If the decedent is a trustee over a trust that includes a life insurance policy, they can always pull the proceeds back into their estate.
If the decedent is a trustee over a trust that includes a life insurance policy, they can always pull the proceeds back into their estate.
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A business may be designated as a beneficiary on a life insurance policy and not trigger 2042, as long as it is a third party beneficiary.
A business may be designated as a beneficiary on a life insurance policy and not trigger 2042, as long as it is a third party beneficiary.
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The IRS considers incidents of ownership held by a corporation to be attributable to the shareholders if the decedent is the sole or controlling shareholder.
The IRS considers incidents of ownership held by a corporation to be attributable to the shareholders if the decedent is the sole or controlling shareholder.
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Life insurance is not considered to be an investment.
Life insurance is not considered to be an investment.
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The owner of the life insurance policy is the same individual as the insured.
The owner of the life insurance policy is the same individual as the insured.
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If you are using a life insurance trust, the trustee should be the insured person on the policy.
If you are using a life insurance trust, the trustee should be the insured person on the policy.
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If a life insurance policy is gifted to a person, the IRS considers them to be the owner of the life insurance policy.
If a life insurance policy is gifted to a person, the IRS considers them to be the owner of the life insurance policy.
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The value of a single-premium life insurance policy that is gifted is determined by the cost which is the premium that's been paid.
The value of a single-premium life insurance policy that is gifted is determined by the cost which is the premium that's been paid.
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The value of the investment element of a cash value life insurance policy is determined by a value that is generally considered to be the same as the cash surrender.
The value of the investment element of a cash value life insurance policy is determined by a value that is generally considered to be the same as the cash surrender.
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The IRS considers a gift of a life insurance policy to be a present interest, and therefore, is eligible for the annual exclusion if gifted to a trust.
The IRS considers a gift of a life insurance policy to be a present interest, and therefore, is eligible for the annual exclusion if gifted to a trust.
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If the insured dies, the value of a term life insurance policy will be the amount of the unexpired premiums left in the policy.
If the insured dies, the value of a term life insurance policy will be the amount of the unexpired premiums left in the policy.
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The IRC allows the deduction of expenses that are incurred as a result of a decedent's death, but they must be legal obligations of the deceased or their estate.
The IRC allows the deduction of expenses that are incurred as a result of a decedent's death, but they must be legal obligations of the deceased or their estate.
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The amount that can be deducted for legal obligations for the deceased and their estate is limited to the value of the property subject to claims plus any amount that has been paid within the statute of limitations.
The amount that can be deducted for legal obligations for the deceased and their estate is limited to the value of the property subject to claims plus any amount that has been paid within the statute of limitations.
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Which of these is NOT an expense that is deductible on a decedent's final income tax return?
Which of these is NOT an expense that is deductible on a decedent's final income tax return?
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Medical expenses paid by the estate after the decedent's death are deductible on the estate tax return.
Medical expenses paid by the estate after the decedent's death are deductible on the estate tax return.
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The final income tax return of the estate is a tax exclusive estate tax.
The final income tax return of the estate is a tax exclusive estate tax.
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The gift tax is inclusive, and the estate tax is exclusive.
The gift tax is inclusive, and the estate tax is exclusive.
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Funeral expense is not deductible on the estate tax return.
Funeral expense is not deductible on the estate tax return.
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If the IRS determines that a settlement with a charity is not a bona-fide contest, the amount deducted will be the total amount that was paid.
If the IRS determines that a settlement with a charity is not a bona-fide contest, the amount deducted will be the total amount that was paid.
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If a beneficiary of a trust disclaims a gift, the IRS treats the beneficiary as predeceasing.
If a beneficiary of a trust disclaims a gift, the IRS treats the beneficiary as predeceasing.
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A bequest to a foreign government is not deductible for estate tax purposes.
A bequest to a foreign government is not deductible for estate tax purposes.
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A qualified conservation contribution is made to a qualifying organization for conservation purposes.
A qualified conservation contribution is made to a qualifying organization for conservation purposes.
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A qualified conservation easement must be made to a government entity, a public charity, or a private foundation that meets the requirements of 509a(2) or 509a(3).
A qualified conservation easement must be made to a government entity, a public charity, or a private foundation that meets the requirements of 509a(2) or 509a(3).
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The amount that can be excluded from the decedent's estate for a qualified conservation easement is the lesser of $500,000 or the applicable percentage of the value of the land.
The amount that can be excluded from the decedent's estate for a qualified conservation easement is the lesser of $500,000 or the applicable percentage of the value of the land.
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There is no option to make a qualified conservation contribution after the decedent's death.
There is no option to make a qualified conservation contribution after the decedent's death.
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The estate is able to receive an income tax deduction for a conservation easement.
The estate is able to receive an income tax deduction for a conservation easement.
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Study Notes
Income Taxation
- Lifetime exemption: Individuals can give up to $13,610,000 without paying gift taxes (lifetime) or estate taxes (upon death).
- Estate Tax: There is a generation-skipping tax (GST) tax exemption amount, and the amount of the estate tax is 40% of the value above the exemption amount.
Different Ways of Making Gifts That Will Be Taxed
- Outright: Directly transferring money, e.g., a check.
- Trust: Money is put into a trust for the recipient.
- Business: Contributing money to a joint business.
- Other: Various other ways of gifting that will be taxed
State Property Law
- State vs. Boch: Even though federal law governs estate and gift taxation, state property law is considered for determining if a gift was made, who owns the property, and what rights are involved.
- Marital property: Marital property is not relevant in estate planning, but only in divorce cases.
Arguments For and Against the Estate Tax
- Arguments for: Contributes $33 billion to the government.
- Arguments for: A deduction is allowed for charitable donations to avoid the 40% tax on the excess over the exemption.
- Arguments against: 40% of revenue, assets have already been taxed.
Forms and Due Dates
- Gift Tax Return (Form 709): Used for reporting gifts within the current year and prior year; due by April 15th, extendable to October 15th.
- Estate Tax Return (Form 706): Includes reports of all assets owned at the time of death; due 9 months after death; possible 6-month extension.
Probate
- Assets in an individual's name at death are distributed through the courts.
- A 6-month waiting period is common.
- Estate taxation is not limited to probate distributions.
Valuation
- General overview: Identifying property interest and determining fair market value (FMV) on the date of death or 6 months after.
- Important considerations for valuation: Finding the most relevant and important factors; excluding any post-death factors; and finding the fair market value at the time of the transfer or date of death
- Determining date of value for the property transfer (decedent death or 6 months after death)
- Using proper valuation methods to determine fair market value and which code sections will determine the value of the property transfer
Tangible Personal Property
- Typical valuation: Yard sale value
- Exception: Highly valuable items (jewelry, art, antiques) worth over 3000orcollectionsworthover3000 or collections worth over 3000orcollectionsworthover10,000 must be professionally appraised.
Securities
- Valuation: Average of the high and low price of the day, taking into account adjustments
Real Property
- Valuation: Based on the highest and best possible use of the property and any related appraisals. This includes minerals, building, etc.
- Partial and temporal interests are included in the value of the estate based on the owner's percentage interest.
Interests in Closely Held Businesses
- Valuation: Based upon valuation of similar businesses
Other (Income Tax Things to Note)
- Highest tax bracket: 37%
- Trust and estate tax: Must use the highest applicable tax rate if the trust/estate's income is greater than $14,451.
- Defective grantor trusts (IDGTs) allow the grantor to avoid income taxes. Income is accounted for by the grantor, even though the grantor is no longer the owner of the asset.
Annual Exclusion
- Statutory amount: $18,000 per donee in a single calendar year
- Gift splitting: Spouses can split gifts between themselves.
Gifts to Minor
- Custodial accounts for minor children
- 529 plans for educational expenses of children
Crummey Trusts
- Allows beneficiaries to withdraw a certain amount of assets from a trust within a certain time period to exclude gifts under the annual exclusion.
Property Owned at Death
- In the estate tax, all assets owned by the decedent (at the time of death) are included in the estate.
- Assets are included in the gross estate - the value of the assets are based on the value at the time of death.
Kinds of Property (Ownership Under §2033)
Included
- Real property
- Tangible personal property
- Bank/savings accounts
- Cash Not Included
- Life estates
Rent and Interest Accrued at the Date of Death
Included
- Rent
- Interest
Dividends
Included
- Dividends
Insurance Proceeds
Included
- Insurance proceeds will be included if the decedent had any ownership/control over it.
- Insurance will be included under § 2033 if the proceeds are part of the estate, and § 2042 if the decedent had incident of ownership.
Social Security Benefits
Not Included
Wrongful Death Recoveries
Not Included
Outstanding Loans and Notes
Included
Business Interests
Included
Joint Ownership
- Tenancy in common
- Joint tenancy
- Tenancy by the entirety
Survivor Property under §2040
- If one spouse or co-tenant dies, the entire property is classified to include the value of the deceased co-tenant's interest
- There are exceptions involving considerations from respective parties.
Retention Interest Retained §2036
- Example: If you create a trust that leaves income to you for life, remainder to your child, the entire value of the trust is included in your estate unless the transfer to the trust meets special guidelines for transfer.
General Considerations
- Gifts made within 3 years of the donor's death are considered for tax purposes as if made by the decedent.
- Valuation of gifts is based on market value
Qualified Conservation Easements
- These are legal agreements where land ownership is transferred but the donor retains some rights or restrictions on how the land can be used.
Transfers to Charity §2055
- Allows a deduction for transferring property to non-profit organizations, only if it meets certain criteria.
Deductions (Expenses, Claims, Debts, and Losses)
- The tax code offers deductions to help cover the cost of administering estates and paying off debts and claims.
- Claims are not deductible unless they are considered bona fide in nature and not for estate tax avoidance
- Taxes are deductible as claims if paid prior.
Marital Deduction §2056
- Allows a deduction for transfers to a surviving spouse, but certain types of interests don't qualify.
- Example: A gift to a surviving spouse of a life estate or a terminable interest will not qualify for the deduction.
Annuities and Employee Death Benefits §2039
- There must be agreement or a contract that is life insurance; beneficiary also has to be a surviving party which means they both survive the person or party from whom the agreement was made.
Powers of Appointment §2041
- Includes the right to designate who will enjoy property or to demand or withdraw property.
- Example: If the decedent has the right to control the beneficial enjoyment of a trust, or appoint other persons to receive the trust property the entire value will be included in the estate under 2041.
Life Insurance §2042
- If the decedent has incidents of ownership in a life insurance policy (i.e., the right to change beneficiaries, borrow against the policy, or receive or assign a part of the proceeds), the value of the life insurance policy is included in the gross estate at death.
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