Please see attached files and can you help me cite.
Please see attached files and can you help me cite.
Alicia Burghduff #8147 Tax526 Estate Taxation and Planning Lesson 5 Tax 526 Briefly explain the reason Congress enacted the marital deduction for married residents of common-law estates. In the nine community property states of the US, any property acquired during the marriage (other than property inherited or received as a gift) is considered property of both spouses. Therefore, when one spouse dies, half of the deceased property is excluded from the deceased estate because it belongs to the surviving spouse. In order to make estate taxation equitable to spouses living in common-law states, Congress enacted the marital deduction which operates as an equivalent mechanism to the transfer of property between spouses in community property states. The need for the equivalent mechanism was because in community property states, the automatic split of assets between spouses reduced the size of the deceased estate and therefore the taxation of the estate. What are the requirements to qualify for the marital deduction? In order to be eligible for the marital deduction, property must be a qualifying interest. This means it cannot be a terminable interest. A terminable interest is one that terminates at the death of the surviving spouse1. Since it terminates, it would not be included in the surviving spouse’s estate and since it cannot be included, it would escape taxation. To close this tax evasion loophole, Congress deems terminable interest property to be ineligible for the marital deduction and it is included in the deceased estate. Other requirements to be eligible to use the marital deduction are basic requirements: The decedent and spouse must have been married at the time of the decedent’s death The surviving spouse must be a US citizen The property must actually transfer to the surviving spouse The property would have been included in the decedent’s estate What it the general theory and goal of the terminable-interest rule? The general theory and goal of the terminable-interest rule (as explained in the previous response) is to prevent the decedent from deducting property from his estate that is transferred to a surviving spouse and would also not be included in the surviving spouse’s estate – therefore avoiding taxation2. Terminable-interests provide for a surbiving spouse, while allowing any remaining interest at death to be transferred to the decedent’s other heirs. This is helpful in situations when the decedent has children from a previous marriage, if the surviving spouse remarries, or when the decedent would like to make sure that his goals are carried out according to his own wishes and not the surviving spouse’s wishes.3 What are the advantages and disadvantages of outright marital bequests? An outright bequest directs the executor to transfer certain property directly to the surviving spouse and gives the spouse the right to use and the discretion to manage the asset according to preference. The downside of this occurs when a surviving spouse has poor money management skills or careless spending habits. By giving the spouse a direct bequest, its less likely that the surviving spouse will contest the decedent’s will and no trustee or court accountings are required. If the surviving spouse has a large estate, the transferred property could potentially increase the taxation of his or her own estate at the time of death. If the spouse does gift or consume the transferred assets before his or her own death, it may be to the detriment of waiting beneficiaries, or to the benefit of a second spouse. If the surviving spouse has creditors, they have access to and may attach liens to the transferred property. What is the general rule and limitations for the charitable deduction? The general rule for charitable deductions is that it must be included in the gross estate in order to be deductible. The amount of the deduction is unlimited but only the amount actually transferred qualifies. The charitable organization must be qualified. The deduction is denied if the charitable organization is for the benefit of an individual, a political candidate, contingent on a certain event, or in attempt to influence legislation. In the event of a split-interest arrangement, it may be partially deductible. If a charitable interest is a remainder interest trust and someone other than a charity has an intervening interest, like a life estate, no deduction is allowed, unless the remainder interest is a: Charitable remainder annuity trust (CRAT) Charitable remainder Unitrust (CRUT) Pooled-income fund Nontrust remainder interest in a farm or personal residence4 How may a disclaimer be used to pass property to a charity? If a beneficiary makes a qualified disclaimer and therefore does not accept the property bequested to him or her, so long as that beneficiary does not retain any rights to the bequest including assignment to another individual, a charitable deduction is allowed for amounts that are actually transferred to a qualified charity. Identify the four general types of partial interests passing to charity that can qualify for the charitable deduction. Charitable remainder annuity trust (CRAT) – a trust established with fixed payments to a non-charitable beneficiary in an amount of at least 5% of the initial value and no longer than 20 years, with the remaining amount passing to a qualified charitable organization. No additional funds are allowed to be added to the annuity trust. Charitable remainder Unitrust (CRUT) – similar to a CRAT, annual payments are made to a noncharitable beneficiary (not less than 5% of annually valued trust assets) however instead of only payments from income, if insufficient income is earned, payments cannot be made from principal. Surpluses in future years can make up the differences from prior years. The remaining assets will pass to the charitable organization. Pooled-income fund – a fund maintained by a charitable organization that contains donations from many donors that still allows a deduction for the funds donated from the decedent’s estate Nontrust remainder interest in a farm or personal residence – a farm or a residence is gifted irrevocably to a charitable organization but with retained rights of use by beneficiaries or the donor. These rights are a fixed term or for a life term. What is a charitable gift annuity and what are its advantages? A charitable gift annuity is basically an annuity purchased by a donor from a charitable organization. The donor makes a donation in exchange for annuity payments from the charity to the person the donor chooses. The tax deduction is available because the value of the cash or property transferred is less than the present value of the annual payments from the charity. The property donated is invested and each payment is comprised of return of capital, capital gain, and ordinary income. The capital gains are unrealized gains and are therefore deferred gains. In summary – the donor gets a charitable deduction, fixed annual payments from the charity (though subject to risk the charity will not have funds available), and no trustee fees or trust agreement are required. Briefly describe the two current types of state death taxes. Inheritance tax is tax on the beneficiary’s right to receive property from an estate. It’s based on the value of the property transferred. Many states have designated beneficiary groups that determine the amount of exemption that will be afforded to them based on relationship to the decedent. Taxes are either a flat rate or a graduated rate. State estate tax is similar to federal estate tax and is tax on the right of the decedent to transfer property to beneficiaries. Depending on the state, the exemption amount will differ. In my current residence of NJ, the estate tax exemption increased from $675,000 to $2 million in 2017, and since Jan 1, 2018 NJ estate tax has been completely phased out.5 Describe the general rules used to determine which state has the right to tax the following types of property: real estate – Real estate is only taxed in the state where it is situated. Since it is attached to land or is actual land, this is easy to determine. tangible personal property – Tangible personal property is also taxed in the state where it is located, but more specifically, where it was usually kept during the life of the decedent. intangible personal property – Intangible personal property may be taxed in multiple states if contact with the intangible property can be proven to have nexus by a state. Describe the most common circumstances in which intangible property is subject to double or multiple state death taxation. This happens in cases where intangibles are held in trusts outside of the home state, transferred securities, or when it is unclear which state is the home state of the decedent when the decedent lived in multiple residences. Another scenario would be business related property that was incorporated in a state other than the home state.6 The rule of thumb would be to look at whether or not the property has right to protections offered by the law of that state. If so, then it is likely that the property has sufficient nexus in that state and would be subject to taxation. 1 Treas. Reg. §2525.23(b)-1 2Estate of Clack v. Commissioner, 106 T.C. 131 (1996) 3Sherman, W. R., & Stagliano, A. J. (1992). A half-dozen uses for a QTIP. The CPA Journal, 62(3), 40. Retrieved from https://search.proquest.com/docview/212257868?accountid=158450 4 26 USC §2055 5 NJ Division of Taxation. (2018, June) What’s New 2018. Retrieved from: https://www.state.nj.us/treasury/taxation/whatsnew2018.shtml 6Estate of Tutules, 204 Cal. App. 2d 481 (1962) 5
Please see attached files and can you help me cite.
Alicia Burghduff #8147 Tax526 Estate Taxation and Planning Lesson 6 Tax 526 Given the taxable estate, explain how the tentative tax base is obtained. Adjusted taxable gifts, which are lifetime gifts made after 1976, that are not includable in the decedent’s gross estate are added back to the taxable estate. This is so that the same tax rate schedule is applied to the estate and to lifetime gift transfers to reflect the unified estate and gift tax system. By adding back the previously transferred assets, it treats these gifts the same as transfers that occurred at the time of death. The tentative tax is based on this cumulative total. Once calculated, gift taxes in excess from the basic credit amount are deducted from the tentative tax and subsequently, along with other credits, a credit is given for any tax paid on prior transfers. What amount may be deducted from the tentative tax before credits are determined, what credits may be deducted, and what is the effect of a tax credit? Gift taxes payable on post-1976 gifts in excess from the basic credit amount are deducted from the tentative tax. This results in the estate tax payable before credits are applied. The allowable credits on a 706 estate return are the: Basic credit amount – In 2017 this was $2,141,8001 Credit for foreign death taxes – this is only available to U.S. citizens or to residents of the U.S. and is the lesser of the amount of foreign tax paid or the estate tax attributable to the foreign property Credit for gift taxes paid on pre-1977 gifts Credit for taxes paid on prior transfers – this applies only to gift tax paid attributable to payment by the decedent (not spouse in the case of split gifts) What is the purpose of the applicable credit amount, and how does its use during lifetime affect its availability at death? The purpose of the applicable credit amount is to eliminate taxable transfers allocated to the lower brackets that are below the basic exclusion amount. The credit is equivalent to the exemption amount. As the credit is used first on lifetime transfers, the remaining credit can be used on the estate. If an estate is large enough that it exceeds the exemption amount, estate tax will be due. The credit amount and exemption amount have increased almost annually to reflect inflation. The credit amount for 2017 is $2,141,800 which represents tax on the 2017 exclusion amount of $5,490,000. What is the purpose of the credit for foreign death taxes paid, and to whom does it apply? The purpose of the credit for foreign tax credits paid is relieve double taxation of property owned by U.S. citizens in foreign countries where it was subject to taxation by the foreign entity. Foreign property included in the gross estate is also subject to U.S. tax but the amount attributable to the foreign property can be reduced by the credit. This is only available to U.S. citizens or to residents of the U.S. and is the lesser of the amount of foreign tax paid or the estate tax attributable to the foreign property. 5. For what reasons might an extension of time to pay the federal estate tax usually be allowed? The IRS will allow an extension of time to pay the estate tax due beyond the nine-month due date to an additional twelve months to ten years if reasonable cause exists2. Factors to determine reasonable cause are given through examples given in regulations but are determined on a case by case basis. Some of the factors considered are: The estate’s access to liquid assets sufficient to pay the tax and the ability and efforts of the executor to convert existing assets to cash if insufficient liquidity exists at the tax due date Whether converting assets to cash would cause harm or significant losses upon the estate when available assets are those that provide future benefit such as annuities, royalty payments, receivables, etc. The estate has a major asset that cannot be liquidated quickly due to litigation Whether the estate would be required to borrow funds at a higher than typical interest rate in order to pay the tax Whether the estate’s insufficient access to funds to pay tax timely effect the estate’s ability to provide for the surviving spouse and dependent children while the estate is in administrative process and whether there are sufficient funds available to pay claims currently due against the estate The efforts of the executor to liquidate, obtain, and secure funds in order to pay down taxes payable. 6. Describe the circumstances that must exist before the estate tax may be paid in installments. If certain conditions are met, an executor can elect to defer the payment of estate tax when a farm or closely held business is included in the valuation of the estate. This is only allowable when the farm or business makes up more than 35% of the adjusted gross estate. Tax is then deferred for five years; however, interest accrues and is due annually beginning in year 1. At the fifth year, interest continues to be due along with tax payments included in payment. The tax and interest annual payment installments must be completed at the end of ten years or the entire amount becomes due and payable3. In TAM 9241002, the IRS ruled that an estate that pays its estate taxes in installments under the hardship provisions of IRC § 6161 can take annual deductions for the accrued interest, allowing it to recompute and reduce both the total liability and the annual installments.4 7. Describe what circumstances will trigger an acceleration of the estate tax payable when installment payments are being made. If payments are late or there is a default on installment payments, estate tax becomes due and payable immediately5. Other circumstances that would trigger the immediate balance due are: A withdrawal of more than 50% of assets from the farm or business A sales, distribution, exchange, or disposition of more than 50% or 5% value interest in the business to a third party or anyone other than a beneficiary entitled to receive the interest 8. Explain a Sec. 303 stock redemption and when it can be used. Section 303 stock redemptions are used to reduce the impact of tax on estates where decedents owned closely held incorporated businesses. Section 303 allows redemption of closely held stock owned by the party responsible for paying the debts of the estate including funeral expenses, taxes, and administrative expenses without the stock or business interest being sold to non-partners or those outside the closely-held business group6. The redemption is treated as a sale and the proceeds are capital gains, so long as the decedent’s stock represents more than 35% of the adjusted gross estate. The estate would receive a step up in basis at the redemption so, in reality, there would be no capital gain. If the redemption doesn’t qualify for section 303, any gain is treated as ordinary income. 9. What is the function of basis with respect to an asset? The primary function of basis is to measure the amount of gain or loss when property is ultimately sold. Without knowing the original cost, the true gain or loss can be difficult to determine. For example, in stock sales, it’s possible that only proceeds are reported on a tax form issued by the brokerage house reporting the sale. If no cost basis is reported, the entire proceeds would be taxed at a gain. Additionally, by knowing the date of the acquisition the type of gain can be determined such as long-term or short-term. The basis of property transferred at death follows different rules. The basis is fair market value on the date of the decedent’s death, or the alternative valuation date of 6 months after the date of death (if elected by the executor). The transferee receives this ‘step-up’ in basis and regardless of the actual holding period in the hands of the decedent, the transferee’s holding period is considered long term. When the transferee sells the property, he or she will use this new basis to determine the amount of gain or loss. When property is gifted prior to death, the transferee gets a carryover basis identical to the basis held by the donor, plus any gift tax paid at the time of the transfer that is attributable to the appreciation of value of the gift. If the donor gifted property that has depreciated in value, the donee’s basis is the lessor of the fair market value of the gift or the donee’s basis. 10. Nine months before his death, Mr. Jones purchased gold coins for which he paid $120,000. At the time of his death the price of gold had dropped, and the coins were worth $75,000. His executor sold the coins at auction for $90,000. a. What was the basis to the estate? The basis to the estate is the fair market value of the coins on Mr. Jones’ date of death which is $75,000. b. How much, if any, capital gain was realized? Even though Mr. Jones originally purchased the coins for $120,000, that basis is lost and has been replaced by the estate’s basis in the coins. The $15,000 gain is realized to the estate on the sale made by the executor. 11. Define income in respect of a decedent and explain the tax treatment for a beneficiary in receipt of such income. Income in respect of the decedent is income that was payable or becomes payable to the decedent after the date of death. If the decedent received the income before dying, it would be reported on his or her final income tax return. Income in respect of the decedent is reported on the estate income tax return and may also be included on the estate tax return if applicable. The income is taxed to either the estate or to the beneficiary who received the distribution, but not both. If it is reported on the estate tax return, a deduction is allowed for income that was distributed to a beneficiary. 12. What are the similarities between estates and trusts? Estates and trusts are both managed by someone operating in a fiduciary role that must manage the assets entrusted to him or her. The fiduciary acts in the best interest of the beneficiaries, while the executor must make an effort to manage and dispose of assets in the estate in a manner that reflects the decedent’s last wishes. Although property transferred to an estate can be dictated by function of the law, property is transferred from a grantor to a trust similarly to how property is transferred from a decedent to an estate. Both trusts and estates have beneficiaries that enjoy the income or assets derived from the estate or trust. 13. How are specific bequests distributed by an estate in more than three installments treated for income tax purposes? Specific bequests distributed by an estate taxable to the receiving beneficiary if they are received in three installments or less7. A specific bequest should include an exact dollar amount to be considered specific. If a bequest is distributed in more than three installments, but was a specific bequest, the beneficiary will only be taxed if the distribution was made out of income to the estate. If was required to be paid out of income, the beneficiary would be taxed on the amount received. All other bequests, are considered to be paid out of income first, even if they were paid out of corpus. This happens when the estate receives income and makes a distribution to a beneficiary. It is assumed that the distribution came from the income received. 1 Internal Revenue Service (2018) Form 706 Changes, Retrieved from: https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax 2 26 USC §6161(a) 3 United States v. Askegard, 357 F. Supp. 2d 1152 4 Shapiro, D. A., & Ditman, S. (1994). Interest deductions on IRC sec. 6161. The CPA Journal, 64(12), 72. Retrieved from https://search.proquest.com/docview/212282908?accountid=158450 5 26 USC §6166(10)(g) 6 26 USC §303(a) 7 Treas. Reg. 1.663(a)-1 6
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Alicia Burghduff #8147 Tax526 Estate Taxation and Planning Lesson 7 Tax 526 What types of transfers will result in taxation under the GSTT rules? GSTT is applied to transfers made to donees and beneficiaries who are two or more generations below the transferor. A generation is defined in reference to the transferor. If the transferee is more than 12.5 years younger than the transferor, the transferee is considered to be first generation (such as a parent and a child). If the transferee is more than 37.5 years younger than the transferor, the transferee is considered to second or further removed generation (such as a grandchild or any non-relative). When a transfer is made to a second or further removed generation, if the property value exceeds the GSTT exemption amount, it will be subject to GSTT. This tax was created to capture tax on transfers that would have been subject to taxation if they had been transferred through the direct line of generations. Prior to 1976 law1, a transferor was able to ‘skip’ a generation and keep property within the family line and avoid taxation by transferring property directly to a younger generation. The tax reform Act of 1986 set up the current framework for how GSTT gets imposed. The tax is imposed on direct skips (over first generation), taxable distributions, and taxable terminations. A taxable transfer can also be created when transfers are made indirectly to beneficiaries named in a trust, such as a remainder trust. When a beneficiary has a beneficial interest (such as Crummey withdrawal powers2, or an immediate right to principal and interest). A taxable distribution of principal or interest to a skip person can trigger GSTT. The taxable amount is the net value of the property received by the skip beneficiary, reduced by any amount he or she paid in consideration for the distribution and increased by any amount of GSTT paid by the trustee on the distribution. A taxable termination occurs when there is a termination of property interest held in a trust. For example, when trust income is directed to a non-skip generation beneficiary with the remainder interest directed to a skip generation beneficiary at the non-skip beneficiary’s death, GSTT will be triggered. This is because despite both skip, and non-skip interests in the trust, the GSTT is applicable when there is no longer a non-skip interest and the interest belongs purely to a skip generation beneficiary. These transfers may also be subject to gift tax as well as GSTT. GSTT does not apply if the parent of the skip generation transferee is deceased prior to the transfer. The tax is flat rate of 40%. What is the current $3.5 million exemption against the GSTT, and how should the taxpayer allocate the exemption? The current exemption against GSTT is 11.18 million for 2018. A strategy used to allocate the exemption is to apply the exemption to lifetime transfers of appreciating property because it is assessed at the current fair market value on the date of the transfer and can continue to appreciate without being subject to additional taxation. Another strategy is to use the exemption on life insurance premiums on a policy placed in an irrevocable trust for a skip generation beneficiary. The exemption applied to the premiums will be sheltered from GSTT and the life insurance proceeds would be tax free to the beneficiary. 3. Describe the manner in which the IRS will allocate the GSTT exemption at a transferor’s death if the exemption is not allocated by the decedent. Once a transferor dies, the remaining exemption (if any) is allocated first to remaining direct skip transfers and then to direct skip trust transfers3. If those transfers are partially exempt, the exemption is applied ratably. In the case of testamentary trusts that have potential for a taxable distribution, taxable termination (such as a bypass trust) the exemption is applied ratably to these as well. This creates complexity because the trust partially exempt. Therefore, planning is recommended to make trusts either wholly taxable or wholly exempt to avoid additional cost with calculation of the tax. The other rule to consider is that, if the decedent did not elect the exemption at the tie of the gift transfer, the GSTT consequences are based on the value of the property at the time of the allocation (generally, a significantly higher value) (Eileen, R. S. (1997). What are the advantages of an installment sale from the standpoint of the seller There’s a lot of benefit to an installment plan from the standpoint of the seller. From an income recognition perspective, the income from the sale is recognized over a period of years. The income is characterized as a portion of gain, interest, and return of capital with each payment. By recognizing income over time, the seller is not hit with the full tax ramification if the sale were made in one single transaction. Another benefit is the reduction of estate size by selling the asset. The value of the asset is fully transferred at the initial sale date. This is helpful when the property is expected to increase in value. The value of the property is effectively frozen while any appreciation of the property will be in the hands of the buyer. from the standpoint of the buyer The most obvious benefit to the buyer is that the sale is transacted requiring funds at a reduced amount than would be required at a non-installment purchase. For a buyer with limited income this is useful tool to defer payment over the installments. Another benefit is the possibility to use the interest portion of payments as a deduction on the buyer’s income tax return. How can an installment sale be used as an estate-freezing technique? On the date of the initial sale, the property is valued at the amount that would typically be included in the estate. Assuming the sale follows proper arm’s length rule, none of the value of the transferred property will be subject to gift tax. With the installment method, only the amounts of principal and interest already received (if still in possession of the decedent) plus the present value of remaining installment payments will get included in the estate. This provides a reduction in estate value while freezing the property from any appreciation it may accumulate because the appreciation belongs to the purchaser. What is a private annuity and how is it useful for estate planning purposes A private annuity is in essence a sale of property similar to the installment method in that payments are received over a number of years. The seller transfers a property in exchange for the annuity payments which are based on present value of the fair market value at the date of the annuity. The amount of payments divisible to the present value is calculated over the number of years of the annuity. Since the property is valued at fair market value, there is no gift tax attributable to the annuity because equal consideration will be received through the annuity. The value in estate planning, is that first, because it is a sale, any future appreciation is not includable in the decedent’s estate. The property can now be used as a source of income for the estate owner. Although proposed treasury regulations in 20064, require the seller to recognize all of the gain immediately, a second benefit to estate planning is that any remaining annuity payments at the death of the transferor will not be included in the transferor’s estate. The benefit for a family member making the annuity payments is that payments automatically end when the transferor dies no matter how many payments are remaining. Explain the gift tax consequences when a grantor transfers a personal residence to an irrevocable trust and retains a term interest with the remainder to his or her children. When the property is placed in the irrevocable trust, the value of the transfer subject to gift tax is the value of the property, less the value of the retained interest by the grantor. This reduces the value of the property transferred and effectively reduces the balance subject to gift tax. Sine the transfer is only a future benefit to the beneficiary, the annual gift tax exclusion is not allowed to reduce the value any further. Instead the grantor may use the basic credit amount (if any) to reduce any (if not all) gift tax on the transfer. What are two problems involving spousal cross-ownership of insurance? If cross-ownership is set up at the outset, meaning each spouse has a policy on the other, this avoids any need for transfer of ownership at the risk of violating the 3-year rule under IRC §2035. If only one spouse is insured and is predeceased by the policy-holding spouse, the policy may get transferred back to the insured spouse’s estate causing the strategy to backfire, defeating the purpose of the cross-ownership. Another risk to consider is incident of divorce. The property settlement outlined in the divorce agreement would most likely require a restructure of the life insurance arrangements. How should an irrevocable life insurance trust be drafted to provide solutions to estate liquidity problems without the proceeds being deemed payable to the executor? Two traps to be avoided when drafting an irrevocable life insurance trust are incidents of ownership by the grantor, and proceeds made payable to the estate. If the policy to be placed in the trust is an existing policy, this increases the risk of incident of ownership if the policy owner is the grantor or the policy is transferred within three years prior to death. For this reason, it is recommended that the trust is created prior to application for life insurance. The applicant should be the trustee and the grantor is the insured. The proceeds can be payable to the trust. The trust should not name the estate as the beneficiary of the trust. When the trust is drafted, provisions should be included that the trustee has discretionary powers to use the trust funds to lend funds to the estate or purchase assets from the estate. This is how the trust can be used to provide liquidity to pay estate taxes without including the proceeds in the estate itself. Explain the methods frequently used for postmortem planning. Postmortem planning tools can be used to adjust the estate plan in the most beneficial way for the estate and its beneficiaries: Qualified Disclaimer – there is a time limit of 9 months once the decedent has passed to use this tool and should planning mistakes be discovered, this mechanism can be used to redistribute property and redistribute the tax consequences as necessary Current-Use/Special-Use Valuation of Closely Held Property – under IRC §2032A business property valued at current use can help reduce estate valuation and reduce estate taxes IRC §303 – Stock Redemption – allows a stock redemption to assist with liquidating funds so long as they are used for allowable estate costs Alternative Valuation Date – The estate assets may have a reduced value at either the date of death or the alternate valuation date, 6 months later. Assets sold between the date of death and the alternate date are deemed valued at the sale price. Using an alternate date may assist with reduction of estate value. Marital Deduction Qualification of QTIP Trust Property – this deduction allows a marital deduction for the property transferred to the surviving spouse. This property provides an income interest to surviving spouse and corpus transfers to beneficiaries upon the surviving spouse. This gives a reduction the estate of both spouses with its exclusion. Split Gifting – the Service allows a postmortem election of gift splitting on lifetime transfers. This increases the amount remaining in the estate exemption and reduces tax. Extension on Time to Pay Estate tax on Closely Held Businesses – If 35% or more of an estate is a closely held business, the estate may qualify for an extension of time to pay tax which reduces the immediate burden to pay. Family Allowance – This reduces the estate by providing an allowed sum of money for surviving spouse and children. Election Against the Will by Surviving Spouse – a decedent may not exclude a spouse altogether from a will and must provide a specified minimum percentage of the estate so that the spouse (and children) do not become a burden to the state. Deduction of Administrative Expenses and Medical Expenses – can either be deducted on the Estate Tax Return or the Estate Income Tax Return and therefore the most beneficial choice can be made on where to deduct these expenses Executor’s Fees as a Bequest or Income – a decision can be made on whether or bequest or a payment to the executor results in the best outcome for the reduction in estate taxes Identify the different types of powers of attorney The three basic types of powers of attorney are: Durable Power of Attorney – this is an inexpensive way to ensure the estate-holder’s choice of executor while avoiding delays with a court-appointed executor. It also allows the principal to grant someone power during incapacitation. Special / Limited Power of Attorney – grants authority to perform specific tasks for a specific period of time. Springing Durable Power of Attorney – is operative only in the case of a triggering event which is defined in the document (such as physical or mental incapacity) Explain some of the problems that can arise with bequests to a surviving nonmarital partner under a decedents-partner’s will. When bequests are made to nonmarital partners under a will, challenges to the will by family members may arise. A surviving partner may receive less than the bequest or nothing at all as a result. There are alternative methods to ensure that the surviving partner is provided for without use of the will. A revocable trust with the surviving partner named as the beneficiary would become irrevocable at death with property transferable to the surviving partner. An irrevocable life insurance trust with the surviving partner named as the beneficiary would also ensure the partner is provided for. This is helpful when the surviving nonmarital partner does not have access the decedent’s pension benefits. Should the relationship dissolve prior to death, the irrevocable trust could have provisions that an alternate beneficiary named would receive the assets in certain specific situations. Another method is using a grantor retained interest trust. Assets placed in the trust with a remainder interest would only require gift tax on the non-remainder interest portion and therefore reduce any gift tax liability should a gift be made outright. References Eileen, R. S. (1997). Beware not allocating the GSTT exemption on a gift tax return-a trap for the unwary. The Tax Adviser, 28(8), 514-516. Retrieved from https://search.proquest.com/docview/194945848?accountid=158450 1 The Tax Reform Act of 1976, Pub. L. No. 94-455, § 2006, 90 Stat. 1520, 1879−90. 2Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968) 3 Treas. Reg. 26.2632-1 4 Prop. Treas. Reg. §§ 1.72-6(e) and 1.1001-1(j) 8
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