Estate Planning

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Estate Planning
Estate Planning
Chapter 12:
Special Elections and Post Mortem
Planning
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Liquidity Needs
 Last medical costs
 Adequate health insurance
 Funeral costs
 Prepay funeral during life reduces need
 Transition or adjustment period costs
 Assets going through or outside of probate
 Outside reduces transition costs
 Administrative costs
 Attorney, CPAs, appraisers, executor
 Income, estate and generation skipping transfer taxes
 Nine months to pay
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Liquidity Sources and
Implications (1 of 4)
 Sale of assets
 May not find willing buyer for what it is
worth
 Particularly if must be done quickly
 Life insurance
 Don’t forget the ILIT
 Can make loans
 Buy assets
 But not require to pay estate taxes
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Liquidity Sources and
Implications (2 of 4)
 Tax advantaged accounts – qualified plans,
IRAs
 IRD – if you defer income during life then it is
taxable as IRD to the heirs
 If executor takes distributions from the Qualified
Plan or Traditional IRA then the estate has to
pay income tax on the distributions from the
plan
 Leave these to charity
 Large amount of tax to liquidate to pay estate
taxes
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Liquidity Sources and
Implications (3 of 4)
 Corporate redemption from closely held businesses
 Normally dividend ordinary income
 Currently capital gains tax rate
 IRC Sec 303 allows shareholder to redeem enough
shares to cover tax and expenses and qualify for
capital gains
 35% of the AGE must be the closely held business
 Multiple businesses can be combined, but one
needs to be 20% of AGE
 Generally no income tax due on redemption of
stock due to step up in basis
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Liquidity Sources and
Implications (4 of 4)
 Distribution of assets
 Assets in lieu of cash
 Sale of asset by heir
 Government wants CASH!
 Estate recognizes any gain from date valued in
estate
 Loans for payments of taxes and other
costs
 May borrow to cover costs
 Estate can deduct interest if they had to borrow.
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Joint or Separate
Final Return (1 of 2)
 Final income tax return may be filed
as married filing separately or
married filing jointly
 Married filing jointly due to the more
favorable tax
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Joint or Separate
Final Return (1 of 2)
 Surviving spouse may file as
qualified widow(er) for two years
following death, and enjoy the lower
tax rates applicable provided that:
1. Surviving spouse is not remarried
2. Surviving spouse maintaining home for
one or more dependent children
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Passive and Capital Losses
 If the decedent had losses from prior
tax years
 Passive losses carried over can be
claimed on the decedent’s final income
tax return
 Capital losses can’t
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Expense Elections
 If the decedent’s estate is not subject
to estate tax the expenses should be
deducted from the decedent’s final
income tax return
 If the decedent’s estate is subject to
estate tax then it is usually more
advantageous to deduct the medical
expenses from the estate tax return
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Income Tax Issues Regarding
the Estate (1041)





Selection of tax year
Expense elections
Waiver of executor’s fees
US Savings Bonds
Distribution and tax bracket analysis
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Selection of Tax Year
 Executor can elect to have the
estate’s tax year end on the last day
of any month during the year
 January 31 preferred to November 30
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Expense Elections
 If the estate is subject to federal
estate taxes then it is better to
deduct the expenses on the estate
tax return
 If the estate is not subject to federal
estate taxes then an income tax
deduction should be claimed on the
estate income tax return
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Waiver of Executor’s Fees
 Fees can be deducted on either (but not both)
the estate income tax return or on the estate
tax return
 Generally estate tax return more beneficial
 Generally the executor is also beneficiary and if
the beneficiary receives distribution from the
estate, there is no income tax consequence
 An executor who is also a beneficiary of the estate
should consider whether or not he would like to waive
the executor’s commission
 For small estates – a waiver of the executor’s fee will
usually make good financial sense
 Essentially making gift to other heirs
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US Savings Bonds
 US Savings Bonds are IRD assets
 Do not receive a step to FMV in basis at the
owner’s death
 The estate will have to pay tax on the
income
 Distribute the income to the beneficiaries
and allow them to pay the income tax
 Charitable bequests – use Savings Bonds
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Gift Tax Issues
 Election to Split Gifts for Year of
Death
 Code allows a surviving spouse to elect
to split the gifts made by the decedent in
the decedent’s final tax year
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Basic Estate Planning Issues
(Post Mortem)
 Valuation of assets
 Fair market value
 Assets usually require an appraisal
 Unless publicly traded
 Selection of valuation date
 Alternate valuation date
 Can only be used if it reduces estate taxes
 Not to create step up in basis at no cost
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Installment Payments of Estate
Tax (6166, 6161) (1 of 3)
 Closely held business
 Extend the payment of estate taxes over a
14 year period.
 First four years of payments are interestonly, followed by 10 payments that
amortize the estate tax liability over the
payment period
 The value of the business interest must be
at least 35% of the value of decedent’s
Adjusted Gross Estate (AGE)
 Gifting other assets can help
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Installment Payments of Estate
Tax (6166, 6161) (2 of 3)
 The business interest must be:
 a closely held business (a sole proprietorship);
 a partnership if at least 20% of the capital
interest is included in the decedent’s gross
estate or if the partnership has fewer than 15
partners; or
 a corporation if at least 20% of the voting stock
is included in the decedent’s gross estate or if
the corporation has 15 or fewer shareholders)
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Installment Payments of Estate
Tax (6166, 6161) (3 of 3)
 The entity must have been actively
engaged in the conduct of a trade or
a business at the date of the
decedent’s death
 Interest is 2% on estate tax of
$580,000 in 2014
 Remainder is at 45% of the regular
underpayment rate
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Special Use Valuation (2032A)
(1 of 4)
 Fair market value implies the value of
a property is its highest and best use
 The value included in the decedent’s
gross estate will be the current use
value of the property, subject to a
limitation that the highest and best
use value cannot be reduced by more
than $1,090,000 for 2014
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Special Use Valuation (2032A)
(2 of 4)
 Conditions for special use valuation:
1. Property must be used in a farming operation or
trade or business that was actively managed by
decedent or decedent’s family 5 out of the 8
years immediately preceding decedent’s death
2. Value of real and personal property used in
qualifying manner must equal or exceed 50% of
decedent’s adjusted gross estate (not taking
into consideration any reductions for unsecured
indebtedness)
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Special Use Valuation (2032A)
(3 of 4)
3. The qualifying property must pass to
qualifying heirs (a member of the
decedent’s family who acquires the
property from the decedent) who must
actively participate in the farming
activity or trade or business
4. Executor must file the election with the
estate tax return, complete with a
recapture agreement
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Special Use Valuation (2032A)
(4 of 4)
 Qualifying heirs must continue to use
the property in its qualified use, as
stated in the election included with
the estate tax return for a period of
at least 10 years following decedent’s
death
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Disclaimers
(1 of 2)
 Must be in writing
 Must be made within 9 months
 Disclaimant cannot specify the party
to whom the property will be
transferred as a result of the
disclaimer
 The disclaimant cannot accept any
interest or benefit in the property
prior to disclaiming
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Disclaimers
(2 of 2)
 QTIP Election
 Ultimate decision of whether to make the
election, and, if the election is to be made,
how much property should be qualified by
the election, rests with the executor or
administrator of the estate
 Executor has 15 months to determine the
applicability of the QTIP election
 Making QTIP election means assets will be
included in surviving spouse’s estate
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