Transcript Chartered Retirement Planning CounselorSM Professional

CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Estate Planning
Module 6
Methods of Estate
Transfer During Life
©2013, College for Financial Planning, all rights reserved.
Learning Objectives
6–1
Identify the purpose (uses), characteristics, and factors to be considered in using a
given inter vivos intrafamily planning technique.
6–2
Analyze a situation to determine the tax implications and/or the advantages and
disadvantages of a given inter vivos intrafamily planning technique.
6–3
Evaluate a situation to select the most appropriate property and/or technique to
accomplish a client’s inter vivos intrafamily planning objectives.
6–4 Identify the purpose (uses), characteristics, and factors to be considered in using a
given inter vivos closely held business transfer technique.
6–5
Analyze a situation to determine the tax implications and/or the
advantages/disadvantages of a given inter vivos closely held business transfer
technique.
6–6 Evaluate a situation to select the most appropriate transfer technique to accomplish
a client’s inter vivos closely held business planning objectives.
6–7 Identify the purpose (uses), characteristics, objectives, and factors to be
considered in using a given inter vivos life insurance planning technique.
6–8
Analyze a situation to identify the tax implications and/or the advantages and
disadvantages of a given inter vivos insurance planning technique.
6–9
Evaluate a situation to select the most appropriate technique to accomplish a
client’s inter vivos insurance planning objectives.
6-2
Questions to Get Us Warmed Up
6-3
Learning Objectives
6–1
Identify the purpose (uses), characteristics, and factors to be considered in using a
given inter vivos intrafamily planning technique.
6–2
Analyze a situation to determine the tax implications and/or the advantages and
disadvantages of a given inter vivos intrafamily planning technique.
6–3
Evaluate a situation to select the most appropriate property and/or technique to
accomplish a client’s inter vivos intrafamily planning objectives.
6–4 Identify the purpose (uses), characteristics, and factors to be considered in using a
given inter vivos closely held business transfer technique.
6–5
Analyze a situation to determine the tax implications and/or the
advantages/disadvantages of a given inter vivos closely held business transfer
technique.
6–6 Evaluate a situation to select the most appropriate transfer technique to accomplish
a client’s inter vivos closely held business planning objectives.
6–7 Identify the purpose (uses), characteristics, objectives, and factors to be
considered in using a given inter vivos life insurance planning technique.
6–8
Analyze a situation to identify the tax implications and/or the advantages and
disadvantages of a given inter vivos insurance planning technique.
6–9
Evaluate a situation to select the most appropriate technique to accomplish a
client’s inter vivos insurance planning objectives.
6-4
Inter Vivos Gifts: Questions
What is the purpose
or goal of the gift?
Who will be
the donee?
Should the donor retain
an interest in or control
over the gifted assets?
What assets
will be transferred?
What form will the transfer
take? Outright gift …
custodial account …trust?
6-5
Inter Vivos Gifts: Identity of Donee
Factors if identity of donee is not dictated
by desire to help a specific individual or
charity:
• the competency of the potential donee
• the estate tax status of the potential donee
• the potential donee’s marginal income tax
bracket
• the potential donee’s relationship to the donor
Don’t forget that direct and exclusive payment of
medical and tuition expenses is free of both gift
tax and GSTT.
6-6
Inter Vivos Gifts: Retained Interest or Control
Possible Consequences:
• Income tax — may not shift taxation
(e.g., because of grantor trust rules)
• Gift tax—may cause Chapter 14 rules to apply
• Estate tax:
o may cause transfer sections
(Code sections 2036–2038)
to apply
o may cause three-year rule to
apply if retained interest is
released within three years
of death
o may jeopardize marital or
charitable deduction
6-7
Inter Vivos Gifts: Gift Leaseback
• fee simple gift of business property
• business owned or controlled by donor leases property
•
•
•
•
from donee
business gets income tax deduction for lease payments
(if reasonable and necessary)
donor owes gift tax (and possibly GSTT) on FMV of
gifted property
gifted property is removed from donor’s gross estate
donee assumes donor’s basis in
gifted property, must report lease
payments as ordinary income,
and must include property in
gross estate if owned at death
6-8
Inter Vivos Gifts: Reverse Gift
• appreciated property is given to a donee expected to
•
•
•
•
predecease the donor, and is given with expectation
that donee will give property back to donor by will
purpose: donor wants a stepped-up income tax basis
gift is subject to gift tax and possibly GSTT
donee must have no legal obligation to bequeath
property to donor and must include property in gross
estate if owned at death
donor achieves step-up in basis
only if more than one year
elapses between completion
of the gift and donee’s date
of death
6-9
Inter Vivos Gifts: Net Gift
• gift is conditioned on donee assuming a legal obligation
•
•
•
•
of the donor—e.g., a mortgage on gifted property or
obligation to pay gift tax on the transfer
gift tax is paid only on net amount of the gift and
donor’s credit status is used
donor is liable for GSTT if donee is skip party in relation
to donor
if obligation assumed by donee exceeds donor’s
adjusted basis in the property, donor realizes gain to
extent of excess
donor’s estate includes taxable gift and resulting credit
(if gift tax is actually paid) in estate tax calculation,
regardless of tax being paid by donee
6-10
Inter Vivos Gifts: Custodial Accounts
Characteristics
• Property is titled in the name of some
competent adult as the custodian for a
minor pursuant to state’s adoption of
either UGMA or UTMA.
• Separate account must be established
for each minor.
• Age of majority (when minor must be
given control of property) is set by state
law.
• Not a true trust, since minor has both
legal and equitable title to assets;
however, use of assets for benefit of
minor prior to majority is at custodian’s
discretion.
6-11
Inter Vivos Gifts: Custodial Accounts
Taxation
• Income from custodial assets is taxed to
minor except for income used to
discharge a legal obligation of support
of the minor’s parent that is taxed to
the parent; kiddie tax rules apply;
grantor trust rules do not apply.
• Custodial account is a completed gift
and is eligible for annual exclusion even
though no present interest.
• Donor is subject to GSTT if minor is a
skip party in relation to the donor.
• If donor dies while custodian, property
contributed by donor is included in
donor’s gross estate.
6-12
Inter Vivos Gifts: Section 2503(c) Minor’s Trust
Characteristics
• Property is given to an irrevocable trust in which a
minor under the age of 21 years is both the sole income
and remainder beneficiary.
• Trust property may be used for the exclusive
benefit of the minor beneficiary at the
trustee’s discretion.
• Upon reaching age 21, minor beneficiary
must be allowed to remove the property
from the trust.
• If minor dies prior to age 21, trust
property must be paid to minor’s
estate or to appointee of the minor.
6-13
Inter Vivos Gifts: Section 2503(c) Minor’s Trust
Taxation
• Income is taxed to the minor except income used to
discharge a parental obligation of support that is taxed to the
parent.
o kiddie tax rules apply
• Donor must pay gift tax on FMV of assets
given less one annual exclusion.
• Donor must pay GSTT if minor is skip party
in relation to donor.
• If donor dies while trustee or successor
trustee, property given by donor will be
included in donor’s gross estate.
6-14
Inter Vivos Gifts: Qualified Tuition Plan Accounts
Characteristics
• account is established (IRC 529) with an approved sponsor
for the benefit of any person, adult or minor
o cash contributions only
• account not required to be dispersed at any specified age,
and remains under control of contributor
• account beneficiary can be changed, but
may be tax consequences
• sponsor may have maximum contribution limit
o no income limits on contributors
• account balance is usually intended
to cover qualified higher educational
expenses, but no federal requirement
that balance be used for this purpose
6-15
Inter Vivos Gifts: Qualified Tuition Plan Accounts
Taxation
•
Contributions are eligible for the gift tax annual exclusion; can
contribute up to five times the maximum annual exclusion in one year
(”five year averaging”) gift tax free.
•
Contributions are not deductible from federal income, but may be
deductible from state income if made to a state sponsored plan.
•
•
Account earnings accumulate income tax deferred.
•
Account balance is included in beneficiary’s
gross estate; account balance included in
account owner’s gross estate if no designated
beneficiary, or if “five year averaging” is used
and contributor dies during five-year term.
Distributions of earnings for qualified higher educational expenses are
excluded from gross income; distributions for nonqualified expenses
are included in gross income of the recipient and subject to 10%
penalty.
6-16
Inter Vivos Gifts: Coverdell Education Savings Accounts
Characteristics
• Account established (IRC 530) for a minor (under age
18 unless special needs) with institution qualified for
IRAs; contribution is not deductible.
• Is a maximum income limit for individual contributors.
• $2000 maximum contribution per year; can be made for
current year until following April 15.
• Account can be established for
beneficiary of IRC 529 plan account.
• Account must be fully distributed
when beneficiary turns 30 unless
special needs.
6-17
Inter Vivos Gifts: Coverdell Education Savings Accounts
Taxation
•
Contributions are eligible for annual exclusion; thus, no gift tax, and no
GSTT if beneficiary is a skip party.
•
•
Account earnings accumulate income tax free.
•
Only distributions from account because of
beneficiary’s death are included in beneficiary’s
gross estate.
•
Account rollovers are subject to gift tax and
GSTT unless new beneficiary is a member
of the family of the old beneficiary. Rollover
is subject to income tax if account has been
rolled over in last twelve months or if rollover
is not to a member of the same family.
Distributions of earnings for qualified education expenses (K–12 and
postsecondary) are not included in gross income; distributions of earnings
in excess of these expenses or for other purposes are included in gross
income, and are subject to 10% penalty.
6-18
Inter Vivos Gifts: Revocable Living Trusts
Characteristics
•
property is titled in the name of a revocable
inter vivos trust to avoid probate and plan for
incapacity
•
can be used as a pourover trust for assets after
death
Taxation
•
income taxed to grantor under grantor trust
rules
•
no gift tax upon creation because no completed
gift; completed gift upon distribution to other
than grantor; if recipient is skip party to grantor,
GSTT will apply to distribution in excess of
maximum annual exclusion; distributions are
not subject to three-year rule
•
assets are included in grantor’s
gross estate under Code Section
2038 (transfer section)
6-19
Inter Vivos Gifts: Section 2503(b) Mandatory Income Trust
Characteristics
• title to property is placed in
the name of an irrevocable
trust that is required to pay
out all income at least
annually
• trust may have any number
of income and remainder
beneficiaries who can be
minors or adults
• trust term may be for any
length of time, subject only
to any applicable rule
against perpetuities
6-20
Inter Vivos Gifts: Section 2503(b) Mandatory Income Trust
Taxation
•
Income is taxed to income beneficiaries
whether distributed or not.
•
FMV of property given to trust is
subject to gift tax (and GSTT if
beneficiaries are skip parties).
But grantor is entitled to annual
exclusion in an amount not to
exceed the lesser of the number of
income beneficiaries times the
maximum annual exclusion, or the
present value of the income
interest.
Trust assets are removed from
grantor’s gross estate unless grantor
has retained a right of reversion in the
remainder that is subject to Code
Section 2037.
o
•
6-21
Question 1
All of the following are correct statements
regarding a gift leaseback transaction except:
a. The donor will be subject to gift tax on the fair
market value of the gifted property (less
applicable annual exclusions).
b. The donor is subject to capital gains tax on the
difference between the fair market value of the
gifted property and his basis in the property.
c. The business can take an income tax deduction
for the necessary and reasonable expense of
renting the gifted property.
d. The donee must report the lease payments as
ordinary income.
6-22
Question 2
All of the following are differences between the
Uniform Gifts to Minors Act (UGMA) and the
Uniform Transfers to Minors Act (UTMA) except
a. restrictions on the type of property that can
be gifted.
b. restrictions on whether transfers can
be made during life and/or at death.
c. restrictions on how many minors can
be the beneficiaries of an account.
6-23
Question 3
All of the following are consequences of a donor
retaining an interest in or control over gifted property
except
a. if the gifted property is placed in trust, the grantor
may still be taxed on the income even if the trust is
irrevocable.
b. if the gifted property is an interest in a closely held
business, the Chapter 14 rules may apply in
computing the value of the gift.
c. the donor may be subject to income tax on any
capital gain.
d. the gifted property may still be included in the
donor’s gross estate.
6-24
Question 4
All of the following are correct statements regarding a
reverse gift transaction except
a. the property involved has a high basis in relation to
its fair market value.
b. the primary purpose of this transaction is for the
donor to get a stepped-up basis in the asset that is
gifted.
c. the donee cannot have a legal obligation to leave
the property to the original donor at the donee’s
death.
d. the property will receive a step-up in basis only if
more than one year elapses between completion of
the gift and the date of death.
6-25
Question 5
All of the following are correct statements
regarding a net gift transaction except
a. the donee may be asked to pay the gift tax
due on the gift.
b. the taxable gift is included in the donee’s
estate tax calculation as an adjusted taxable
gift.
c. if the obligation assumed by the donee
exceeds the donor’s adjusted basis in the
property, the donor will realize gain to the
extent of the excess.
6-26
Question 6
All of the following are correct statements
regarding a Section 2503(b) mandatory income
trust except
a. this trust can have beneficiaries who are
adults.
b. this trust must disperse its assets when the
income beneficiary reaches age 21.
c. this trust is irrevocable.
d. this trust can have multiple
beneficiaries.
6-27
Question 7
All of the following are correct statements
regarding a Section 2503(c) minor’s trust
except
a. this trust must disperse its assets when the
minor beneficiary turns age 30.
b. this trust can have only one beneficiary.
c. a donor to this trust is entitled to an annual
exclusion.
d. a grantor to this trust may have to include
trust assets in his gross estate.
6-28
Question 8
Which of the following statements regarding qualified
tuition plans (§529) are correct?
I. Contributions are completed transfers.
II. Contributions are entitled to the annual exclusion.
III. An account can have more than one named
beneficiary.
IV. Contributions can be made in cash or property.
a. I and II only
b. II and III only
c. III and IV only
d. I, II, and IV only
6-29
Question 9
Which of the following statements regarding Coverdell
education savings accounts (§530) are correct?
I. Contributions can be made in cash only.
II. Account assets can be used only for qualified higher
education expenses.
III. Distributions are at the discretion of the
trustee/custodian.
IV. Contributions for a prior year may be made until
April 15 of the subsequent year.
a. I and II only
b. III and IV only
c. I, III, and IV only
d. I, II, III, and IV
6-30
Question 10
All of the following statements are true of both
revocable and contingent trusts except
a. both trusts are revocable.
b. trust assets remaining at the grantor’s death
will be included in the grantor’s gross estate.
c. trust assets remaining at the grantor’s death
will avoid probate.
d. both trusts are funded immediately after
they
are established.
6-31
Learning Objectives
6–1
Identify the purpose (uses), characteristics, and factors to be considered in using a
given inter vivos intrafamily planning technique.
6–2
Analyze a situation to determine the tax implications and/or the advantages and
disadvantages of a given inter vivos intrafamily planning technique.
6–3
Evaluate a situation to select the most appropriate property and/or technique to
accomplish a client’s inter vivos intrafamily planning objectives.
6–4 Identify the purpose (uses), characteristics, and factors to be considered in using a
given inter vivos closely held business transfer technique.
6–5
Analyze a situation to determine the tax implications and/or the
advantages/disadvantages of a given inter vivos closely held business transfer
technique.
6–6 Evaluate a situation to select the most appropriate transfer technique to accomplish
a client’s inter vivos closely held business planning objectives.
6–7 Identify the purpose (uses), characteristics, objectives, and factors to be
considered in using a given inter vivos life insurance planning technique.
6–8
Analyze a situation to identify the tax implications and/or the advantages and
disadvantages of a given inter vivos insurance planning technique.
6–9
Evaluate a situation to select the most appropriate technique to accomplish a
client’s inter vivos insurance planning objectives.
6-32
Inter Vivos Gifts: Crummey Trusts
Characteristics
• Property is titled in the name of an irrevocable inter
vivos trust in which some or all of the beneficiaries have
been given a Crummey power.
• Trust can have any number of beneficiaries who can be
minors or adults.
• Distribution of income is discretionary.
• Trust term may be for any length of time, subject only
to any applicable rule against perpetuities.
6-33
Inter Vivos Gifts: Crummey Trusts
Taxation
•
Income may be taxed to:
grantor under grantor trust rules
to holders of a Crummey power under Section 678;
to income beneficiaries if distribution is made; or
to the trust if the foregoing does not account for all income, and
remaining income is accumulated, depending on terms of the trust.
FMV of property given to trust is subject to gift tax (and possibly GSTT)
but grantor is entitled to annual exclusion in an amount equal to the lesser
of the present interests created by the Crummey powers granted, or the
number of powers granted times the maximum annual exclusion.
o
o
o
o
•
•
Trust assets are removed from the grantor’s gross estate unless three-year
rule or transfer sections apply.
6-34
Inter Vivos Gifts: Crummey Trusts
Tax implications to holder of Crummey power:
• Code Section 678 makes holder liable for trust
income to the extent of the power, whether
exercised or not.
• Lapse of Crummey power will subject holder to gift
tax on the lapsed amount that exceeds greater of 5
and 5.
• Any amounts subject to exercise of the power at
death must be included in holder’s gross estate.
6-35
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6-36
Inter Vivos Gifts: Grantor-Retained Trusts
Characteristics
• Property is given to an irrevocable inter vivos trust to last for a
term certain; grantor must also retain a beneficial interest in the
trust.
• Interests commonly retained by the grantor are
o all income from trust assets (GRIT).
o an annuity interest (GRAT).
o a unitrust interest (GRUT).
o the right to use a personal residence (QPRT).
• Remainder interest is given to beneficiaries specified by the
grantor.
• Purpose is to remove asset from grantor’s gross
estate while allowing grantor to retain benefit of
the asset during trust term and/or transfer
remainder interest gift tax free if GRAT is
“zeroed out.”
6-37
Inter Vivos Gifts: Grantor-Retained Trusts
Taxation
• Grantor is taxed on income to extent of interest retained.
o Excess income, if any, is accumulated and taxed to the
trust.
• FMV of property given to trust less present value of the
retained interest is subject to gift tax (and possibly GSTT) for
all but a GRIT.
o FMV of all property given to a GRIT is
subject to gift tax because of Section
2702 (Chapter 14 rules).
• Asset is removed from grantor’s gross
estate unless grantor dies during trust term,
in which event Section 2036 (transfer
section) requires inclusion.
6-38
Inter Vivos Sales: Bargain Sale
Characteristics
• An asset is sold for less than FMV.
o Difference will be held to be a gift.
Taxation
• If sales price exceeds seller’s adjusted basis, seller will have capital
gain to extent of excess.
• If buyer also assumes an existing indebtedness, seller can also
have capital gain if indebtedness exceeds basis.
• Gift tax and possibly GSTT on gift portion,
but donor is entitled to annual exclusion.
• Asset is removed from seller/donor’s
gross estate, but sale proceeds, if not
consumed at death, are included.
6-39
Inter Vivos Sales: Installment Sale
Characteristics
• Purchase price not paid at time of sale is paid in a
fixed number of future installments, at least one of
which must be in a tax year other than the year of
sale.
• Reporting of gain on an installment basis is allowed
automatically unless seller elects otherwise.
• Sale of marketable securities and depreciable
property to a controlled entity is not eligible for
installment reporting of gain.
• Payments may be secured
or unsecured.
6-40
Inter Vivos Sales: Installment Sale
Taxation
• Buyer’s basis is purchase price actually paid.
• Cost recovery recapture, if any, is due in full in the year
of sale (increases seller’s basis).
• Payments are composed of three elements:
1. return of basis (tax free);
2. gain (taxed as capital gain); and
3. interest (ordinary income).
• Reporting of gain may be accelerated
under second disposition rule.
• Present value of remaining payments
is included in seller’s gross estate.
6-41
Inter Vivos Sales: SCINs
Characteristics
• Normal installment sale except all unmatured
payments will be canceled at seller’s death.
• The possibility that the seller may die prior to
due date of all installments must be taken into
consideration to avoid gift tax. This result is
avoided by increasing the purchase price and/or
interest rate—known as a SCIN premium.
6-42
Inter Vivos Sales: SCINs
Taxation
• Seller’s estate must recognize gain in payments
canceled at death if between related parties
and FMV of asset on date of cancellation (or
face amount of note, if less) exceeds the seller’s
basis in the obligation.
• If SCIN premium was not paid, seller is subject
to gift tax.
• There are no estate tax
consequences to the seller.
6-43
Inter Vivos Sales: Private Annuities
Characteristics
• A type of installment sale in which payments are determined
by using the actuarial lifetime of the seller and the applicable
federal discount rate for the month of sale.
• Payments continue for actual lifetime of seller, whether that
is more or less than his or her actuarial lifetime.
• If seller is willing to accept smaller payments, survivorship
payments can be made
over two or more lifetimes, such
as a husband and wife.
• Installment reporting of gain is
not available whether payments
are secured or unsecured.
6-44
Inter Vivos Sales: Private Annuities
Taxation
• Payments are reported by seller under annuity rules
(return of basis and ordinary income until basis has
been fully recovered, at which time all additional
payments are ordinary income).
• No gift tax unless asset is sold for less than FMV.
• Asset is excluded from seller’s gross estate even if seller
dies before end of actuarial
lifetime; no amount for future
payments is included in gross
estate of seller absent
survivorship payments.
6-45
Inter Vivos Sales: Sale-Leaseback
Characteristics
• Business-related property is sold, then
seller’s business leases property from buyer.
Taxation
• Seller recognizes gain (reported on
installment basis if sale price exceeds
seller’s basis).
o Business gets income tax deduction for
lease payments if reasonable and
necessary.
o Buyer reports lease payments as
ordinary income.
• No gift tax unless asset is sold for
less than FMV.
• Asset sold is not in seller’s gross estate.
6-46
Question 11
All of the following are correct tax implications of a
Crummey trust except
a. the holder of the Crummey power will likely
have to include some portion of the trust assets
in his gross estate if he dies during the trust
term.
b. if the holder of the Crummey power exercises it
to withdraw trust assets, the grantor of the
trust will not be entitled to an annual exclusion.
c. there are no gift tax consequences if the holder
of the Crummey power exercises it to take trust
assets for himself or herself.
6-47
Question 12
All of the following statements regarding
qualified personal residence trusts (QPRT) are
correct except
a. the grantor retains the right to live in the
residence during the trust term.
b. the Chapter 14 valuation rules require the
grantor to pay gift tax on the entire value of
the residence at the time the trust is funded.
c. the grantor will be subject to gift tax only on
the present value of the remainder interest.
6-48
Question 13
All of the following statements regarding selfcanceling installment notes (SCINs) are correct
except
a. the self-canceling provisions of a SCIN must
be paid for with a SCIN premium to avoid
gift tax.
b. the seller will not have to include any
payments canceled at death in his or her
gross estate.
c. the purchaser’s basis in the asset purchased
is limited to the payments that are actually
made to the seller prior to death.
6-49
Question 14
All of the following statements regarding split
interest transactions (SPLITs) are correct except
a. the two parties buy their interests in the
asset at different times.
b. the life interest holder is entitled to all income
from the asset during her lifetime.
c. although this transaction involves a sale, it is
subject to one of the Chapter 14 rules if the
two parties are related.
d. the life interest holder may have to include
some part of the value of the asset in her
gross estate.
6-50
Question 15
All of the following statements regarding private
annuities are true except
a. a private annuity involves a sale transaction.
b. in most instances, the value of the property involved
in the transaction will be eliminated from the gross
estate of the annuitant.
c. if the annuitant dies before the end of his actuarial
lifetime, the present value of the future payments
he or she would have received is included in his or
her gross estate.
d. if someone other than the original annuitant will
receive payments as a result of the transaction after
the original annuitant’s death, the original
annuitant’s gross estate must include the present
value of such payments.
6-51
Question 16
Which of the following statements regarding remainder
interest transactions (RITs) are correct?
I. The life and remainder interest holders purchase
their interests at the same time.
II. Since this is a sale transaction, it is not subject to
gift tax.
III. The life interest holder is entitled to all income of
the property.
IV. The property will be in the life interest holder’s
gross estate.
a. I and II only
b. III and IV only
c. I, II, and IV only
d. II, III, and IV only
6-52
Learning Objectives
6–1
Identify the purpose (uses), characteristics, and factors to be considered in using a
given inter vivos intrafamily planning technique.
6–2
Analyze a situation to determine the tax implications and/or the advantages and
disadvantages of a given inter vivos intrafamily planning technique.
6–3
Evaluate a situation to select the most appropriate property and/or technique to
accomplish a client’s inter vivos intrafamily planning objectives.
6–4 Identify the purpose (uses), characteristics, and factors to be considered in using a
given inter vivos closely held business transfer technique.
6–5
Analyze a situation to determine the tax implications and/or the
advantages/disadvantages of a given inter vivos closely held business transfer
technique.
6–6 Evaluate a situation to select the most appropriate transfer technique to accomplish
a client’s inter vivos closely held business planning objectives.
6–7 Identify the purpose (uses), characteristics, objectives, and factors to be
considered in using a given inter vivos life insurance planning technique.
6–8
Analyze a situation to identify the tax implications and/or the advantages and
disadvantages of a given inter vivos insurance planning technique.
6–9
Evaluate a situation to select the most appropriate technique to accomplish a
client’s inter vivos insurance planning objectives.
6-53
Business Transfer: Buy-Sell Agreements
Purpose
• to assure a closely held business owner of a
market for his or her interest in the event of:
o total disability
o retirement
o death
• to prevent closely held business interests from
being transferred to third parties
who may be unsatisfactory
6-54
Business Transfer: Buy-Sell Agreements
Procedure
• Each owner obligates himself to sell his interest in certain
circumstances to each of the other owners (cross-purchase) or to
the business entity (entity or stock purchase).
• In a cross-purchase, every owner obligates himself to purchase his
pro rata share of any offered interest.
• In an entity purchase, the entity obligates itself to purchase any
offered interest.
• The agreement establishes a formula for computing the purchase
price; if triggering event is death,
estate tax value is often used.
• Parties are obligated to purchase
insurance in order to meet
agreement obligations.
6-55
Business Transfer: Buy-Sell Agreements
Taxation
• Premiums paid on insurance are not deductible by payor or
income to the insured; in a cross purchase transaction, buyer
will have basis in interest purchased equal to purchase price.
• No gift tax if interest is purchased at FMV.
• If interest is not purchased at FMV, Code Section 2703
(Chapter 14 rules) may require selling party to pay gift or
estate tax on difference if more than 50% of business is
family owned.
• At death of owner, his or her gross estate
will include FMV of business interest
and replacement cost of policies on
other owners, if cross purchase.
6-56
Business Transfer: Recapitalization
Purpose
• to allow additional owners of the
business, and give them financial
incentive to eventually purchase
owner’s remaining interest and run
the business
• to maintain control of business
until retirement
• to maintain preference in payment
of income and liquidation
• to freeze value of business for
estate tax purposes
• if business interests are given
(rather than sold), to take
advantage of valuation discounts
6-57
Business Transfer: Recapitalization
Procedure
• May require change in entity to
accommodate multiple owners.
• Causes creation of multiple classes of
ownership interests:
o voting vs. nonvoting (to maintain
control)
o preferred vs. nonpreferred (to
maintain preference for income)
o fixed value vs. non-fixed value
(to freeze value)
• Nonvoting, nonpreferred interests are
either sold or given to family
members.
• Voting and preferred interests are
retained by original owner.
6-58
Business Transfer: Recapitalization
Taxation
•
Change of entity and recapitalization can
usually be done without causing
realization of gain by owner.
•
Old owner can receive compensation for
services provided to the business that
are a deductible expense.
Both old and new owners will be
entitled to share of income
distributed by business.
Interests that are gifted are subject to
gift tax as modified by Code Section
2701 (Chapter 14 rules); annual
exclusion and valuation discounts
may apply.
o
•
•
Business interest retained by old
owner until death will be included in
gross estate at FMV.
6-59
Question 17
Goals that a business owner can reasonably
expect to achieve in a preferred stock
recapitalization include all of the following
except
a. maintaining control of the business.
b. eliminating the value of the business from
his or her gross estate.
c. maintaining a preference in payment of
income from the business.
d. freezing the value of his retained interest.
6-60
Question 18
A buy-sell agreement can be used to transfer a
closely held business interest in which of the
following circumstances?
a. when one of the owners dies
b. when one of the owners retires
c. when one of the owners is disabled
d. all of the above
6-61
Question 19
In a cross-purchase buy-sell agreement funded
with life insurance involving two business
owners, each business owner is the owner and
beneficiary of a life insurance policy on the life
of the other owner.
True
False
6-62
Question 20
An estate freeze transaction can be achieved
through a preferred stock recapitalization of an
S corporation.
True
False
6-63
Question 21
All of the following statements regarding a
preferred stock recapitalization freeze
transaction are correct except
a. if shares are gifted to other family members,
the donor may be able to claim discounts for
minority interest and lack of marketability.
b. if shares are gifted to other family members,
they are valued as of the date of completion
of the recapitalization.
c. if shares are gifted to other family members,
the Chapter 14 rules may apply.
6-64
Question 22
All of the following statements regarding buy-sell
agreements are correct except
a. in a cross-purchase buy-sell agreement, the actions
of the purchasing owners can be made optional
rather than mandatory.
b. in a cross-purchase buy-sell agreement, each owner
agrees to sell his or her interest in the business to
the other owners under certain stated conditions.
c. in an entity purchase buy-sell agreement, each
owner agrees to purchase his or her proportionate
share of any interest redeemed by the business
entity from any other owner.
6-65
Learning Objectives
6–1
Identify the purpose (uses), characteristics, and factors to be considered in using a
given inter vivos intrafamily planning technique.
6–2
Analyze a situation to determine the tax implications and/or the advantages and
disadvantages of a given inter vivos intrafamily planning technique.
6–3
Evaluate a situation to select the most appropriate property and/or technique to
accomplish a client’s inter vivos intrafamily planning objectives.
6–4 Identify the purpose (uses), characteristics, and factors to be considered in using a
given inter vivos closely held business transfer technique.
6–5
Analyze a situation to determine the tax implications and/or the
advantages/disadvantages of a given inter vivos closely held business transfer
technique.
6–6 Evaluate a situation to select the most appropriate transfer technique to accomplish
a client’s inter vivos closely held business planning objectives.
6–7 Identify the purpose (uses), characteristics, objectives, and factors to be
considered in using a given inter vivos life insurance planning technique.
6–8
Analyze a situation to identify the tax implications and/or the advantages and
disadvantages of a given inter vivos insurance planning technique.
6–9
Evaluate a situation to select the most appropriate technique to accomplish a
client’s inter vivos insurance planning objectives.
6-66
Life Insurance: Incidents of Ownership
The right to
• name and change the policy beneficiary
• cash in, surrender, or cancel a policy
• receive policy dividends
• borrow against policy cash value
• pledge the policy as collateral
for a loan
• assign any of the
foregoing rights or
the policy
• revoke an assignment
6-67
Life Insurance: Transfer for Value Rule
• Makes life insurance death benefits subject to
•
income taxation if ownership of the policy was
transferred for a value, or if value was paid to
the owner of the policy to be irrevocably named
as beneficiary.
If rule applies, beneficiary recovers amount
paid and subsequent premium
payments tax free, but
excess is subject
to income tax.
6-68
Life Insurance: Transfer for Value Rule
Exceptions
Transfers for value that are not subject to the rule:
• to the insured
• to a partner, partnership, or corporation in which
the insured is a shareholder or officer
• to a transferee whose adjusted basis is determined
in whole or in part by reference to
the transferor’s adjusted basis
• transfers between spouses
incident to a divorce
6-69
Inter Vivos Gifts: ILIT
Characteristics
• Ownership of life insurance policy is given to irrevocable inter vivos
trust with term that usually lasts until death of grantor’s spouse;
beneficiary of policy is changed to trustee.
• If other property is also given to the trust (to generate income to
pay premiums), trust is said to be “funded.”
• If trust is not funded, beneficiaries are usually given
Crummey powers.
• Trustee is usually given power to purchase assets
from or to make loans to estates of grantor or
grantor’s spouse.
• Income and remainder beneficiaries of the trust
are named by grantor.
o It is usually a bypass trust so that trust assets are
not included in gross estate of grantor’s spouse.
6-70
Inter Vivos Gifts: ILIT
Income Taxation
• If trust is unfunded, there will usually be no income until
death benefits are paid and invested.
• If trust is funded, income that is, or may be, used to pay
policy premiums on grantor or grantor’s spouse is
taxed to grantor under grantor trust rules.
• After receipt of death proceeds, taxation of
income will depend on trust provisions
o if distribution of income is discretionary
(common), and no beneficiary is given a
general power of appointment, income
will be taxed to beneficiaries only if
distributed, and accumulated income
will be taxed to trust.
6-71
Inter Vivos Gifts: ILIT
Gift Taxation
• Replacement value of policies and FMV of other
property given to trust is subject to gift tax and
possibly GSTT (less applicable annual
exclusions if beneficiaries have
Crummey powers).
• Future contributions of premium
payments are additional gifts,
but are allowed annual exclusions
if beneficiaries are given
sufficient Crummey powers.
6-72
Inter Vivos Gifts: ILIT
Estate Taxation
• Policy death benefits are removed from grantor’s
gross estate unless three-year rule applies; if other
assets are given, these assets are also removed
from grantor’s gross estate.
• If three-year rule requires inclusion of death
proceeds in gross estate, grantor usually
cannot take marital deduction as ILIT is
usually a bypass trust.
• Trusts are usually written as bypass trusts
so that the trust assets will not be included
in gross estate of grantor’s spouse.
6-73
Life Insurance: Group Term
Characteristics
• Insurance is offered as a benefit by an
employer to its employees on a
nondiscriminatory basis, such as two times
annual salary.
• Employer pays premiums;
employee has the right to
designate beneficiary.
6-74
Life Insurance: Group Term
Taxation
• Premium payments are deductible by employer.
• Premiums for first $50,000 of coverage are not
income to the employee; cost of excess coverage is
taxable income to employee based on
IRS Table I rates.
• Death benefits are included in
employee’s gross estate unless
all incidents of ownership are
assigned more than three
years prior to death.
6-75
Life Insurance: Split Dollar
Characteristics
• Split dollar insurance involves a written agreement between
employer and employee that specifies coverage to be
provided, responsibility of each party for payment of
premiums, and rights of each party to policy benefits upon
surrender of the policy (termination of employment) or death
of the employee who is the insured.
• If employer owns the policy, it is endorsed to allow the
employee to designate a beneficiary of benefits allocated to
him; if employee owns
the policy, he or she makes a
collateral assignment to the
employer to secure employer’s
interest in policy benefits.
6-76
Life Insurance: Split Dollar
Taxation
• Premium payments made by employer are not
deductible.
• Employee likely to have taxable income.
• Death benefits are income tax free to beneficiary unless
transfer for value rule applies.
• Since employee has right to name beneficiary, death
benefits controlled by the employee are included in his
or her gross estate, unless
placed in ILIT more than
three years prior to death.
6-77
Life Insurance: Key Person
Characteristics
• Purchased by a business on life of a key
employee to compensate for anticipated loss of
business income when employee dies.
• Employer is owner and beneficiary and pays all
premiums.
• Insured employee is often an equity
owner, and is therefore
indirectly benefited by
death proceeds.
6-78
Life Insurance: Key Person
Taxation
• Premium payments are not deductible by employer.
• Premium payments are not income to employee.
• Death proceeds are income tax free to employer
unless corporate alternative minimum tax applies.
• Death proceeds are not included in employee’s
gross estate (unless payable to a
beneficiary designated by the
employee and the employee
is also a controlling
owner).
6-79
Life Insurance: Salary Increase or Selective Pension Plan
Characteristics
• Employer purchases and pays all premiums on
life insurance on valued employee as incentive
for employee to remain with employer.
• Employee is the owner of the policy and
designates the policy beneficiary.
6-80
Life Insurance: Salary Increase or Selective Pension Plan
Taxation
• Premium payments are deductible by employer if total
compensation to the employee is reasonable.
• Premium payments are taxable income to the employee.
• Death benefits are included in employee’s gross estate
unless irrevocably assigned more
than three years prior to death.
• If policy is assigned,
employee is subject
to gift tax on
replacement cost and
any subsequent
premium payments.
6-81
Question 23
All of the following are correct statements
regarding a second-to-die (or “survivorship”)
life insurance policy except
a. this policy cannot be placed in an
irrevocable life insurance trust (ILIT).
b. premiums are generally lower than
the cost of two separate policies.
c. it may be possible to secure such a
policy even if one of the proposed
insureds is not otherwise insurable.
6-82
Question 24
Which of the following will cause the life insurance
policy (owned by the insured) death benefit to be
included in the gross estate of the insured?
I. having an incident of ownership in the policy at
death
II. having the estate of the insured as the named
beneficiary
III. the insured gave up an incident of ownership in
the policy within three years of death
a. I and II only
b. I and III only
c. II and III only
d. I, II, and III
6-83
Question 25
All of the following are correct statements
regarding a first-to-die life insurance policy
except
a. it can be used to fund a buy-sell agreement.
b. it can be used for debt reduction.
c. premiums are generally more than the
combined premiums on separate policies.
d. the death benefit will be paid at the death of
the first insured to die
6-84
Question 26
The cost of coverage for the first $50,000 in
death benefit from a group term life insurance
policy is not considered taxable income to the
employee.
True
False
6-85
Question 27
All of the following statements regarding group
term life insurance are correct except
a. this benefit is usually offered only to certain
employees who are highly valued by the
company.
b. the death benefit from this type of policy will be
included in the employee’s gross estate unless it
is placed in an irrevocable life insurance
trust (ILIT), and the three-year inclusionary rule
does not apply.
c. the insured gets to designate a beneficiary for
all death benefits.
6-86
Question 28
All of the following statements regarding split
dollar life insurance offered to an employee as a
benefit are correct except
a. this benefit is usually offered only to certain
employees of the company.
b. an actual written agreement is entered into
between the company and the employee.
c. the death benefit received by the employer
is subject to income tax.
6-87
Question 29
Which of the following statements regarding
ILITs are correct?
I. ILITs can either be funded or unfunded.
II. Funding with an existing policy may cause
the three-year rule to apply.
III. The main purpose of an ILIT is to remove
policy death benefits from the grantor’s
gross estate
IV. Most ILITs are also bypass trusts.
a.
b.
c.
d.
I and II only
III and IV only
II, III, and IV only
I, II, III, and IV
6-88
CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Estate Planning
Module 6
End of Slides
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