CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Estate Planning

1. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMEstate Planning Session 5The Federal Estate Tax

2. Session Details

3. Procedure to Determine Assets Included in Gross Estate • Assets owned at death (some part of which can be transferred after death) • JTWROS property • Other ownership types • Assets with a retained interest • Right to use or get income • Right to alter, amend, revoke, or terminate • Right to get ownership back (reversion) • Right to determine beneficial enjoyment

4. Procedure to Determine Assets Included in Gross Estate continued • Assets subject to three-year rule (action occurs within three years of death) • Give up incidents of ownership in LI where transferor is insured • Give up retained right (transfer sections) • Paid gift tax out of pocket on gifts made within 3 years of death (gross up rule) • General Powers of Appointment • QTIP property—property for which a QTIP election has previously been made

5. Question 1 Which one of the following is not an example of a retained interest that will cause the assets in question to be included in the transferor’s gross estate? • The transferor places assets in an irrevocable trust and retains the right to replace the bank that is named as trustee with another bank if he is dissatisfied. • The transferor places assets in an irrevocable trust and retains the right to receive the income from trust assets for the rest of his life. • The transferor places assets in a revocable trust and names himself as trustee and sole income beneficiary. • The transferor gives his child a remainder interest in his house, but retains a life estate for himself.

6. Question 2 Which one of the following statements regarding the three-year inclusionary rule (IRC Section 2035) is not correct? • It requires the decedent to take certain actions within three years of death. • The gross-up rule is part of this rule. • Any insurance policy that a decedent transfers within three years of death is subject to this rule. • A decedent who gives up the right to receive income from a trust he established within three years of his death will be affected by this rule.

7. Determining if Asset is Entitled to Marital Deduction • If by will substitute, DC’s spouse must be: • Named beneficiary (insurance, IRA, etc.) • Named payee at death (P.O.D., T.O.D.) • How is property titled? Will determine if property passes by probate or will substitute • JTWROS, TBE • TIC, CP

8. Determining if Asset is Entitled to Marital Deduction continued If by probate, will pass by will or intestacy • Valid will—given to DC’s spouse in several ways • Specific bequest • Residuary clause • Marital trust—an income interest in • Power of appointment trust • Estate trust • QTIP trust with an election • Intestacy laws • Total intestacy—does not pass by WS; no valid will • Partial intestacy—does not pass by WS; asset passed by defective will because no residuary clause and asset passes to DC’s spouse • Amount given to DC’s spouse depends on: • Does DC have any surviving descendants? • Are DC’s descendants also descendants of spouse? • Does spouse have descendants not descendants of DC?

9. Determining if Asset is Entitled to Marital Deduction continued Is the property a non-terminable interest or a deductible terminable interest? • Definition of terminable interest • Transferor has given someone other than spouse an interest in the same property; and • Spouse cannot control where the property will go after his/her interest ends or fails • Examples of a terminable interest: • Spouse receives an income interest in trust for term certain • Life estate w/o GPOA or QTIP election

10. Determining if Asset is Entitled to Marital Deductioncontinued Is the property a non-terminable interest or a deductible terminable interest? • Exceptions to terminable interest rule (aka deductible terminable interests): • Outright gift contingent on survival for 6 months or less (ET only) • Life estate + GPOA or QTIP election • Spouse is sole income beneficiary in CRAT/CRUT • QTIP with an election • Examples of a non-terminable interest not in trust: • Outright transfer not subject to survival clause • Life estate + GPOA or QTIP election • Examples of non-terminable interests in trust: • Estate trust • General power of appointment trust • QTIP trust with an election

11. Question 3 Which one of the following statements regarding the estate tax marital deduction is not correct? • The property receiving the deduction must be included in the deceased spouse’s gross estate. • If property receives a marital deduction in the estate of the first spouse to die, it will be subject to transfer taxation when the surviving spouse disposes of the property. • The deduction is elective for property placed in a power of appointment trust. • If the spouse is given a terminable interest in property as well as a general power of appointment over the same property, the decedent’s estate will be allowed to take a marital deduction.

12. Determining if Asset is Entitled to Charitable Deduction Prerequisites • Qualified charity • Donation of cash or property • Gratuitous completed transfer • If partial interest, must be in approved form • Asset must be in decedent’s gross estate

13. Adjusted Taxable Gifts • Added to the taxable estate to form the tax base • Only the taxable portion of gifts made by the decedent since 1976 that are not required to be included in the decedent’s gross estate by the Transfer Sections, the Three-Year Rule, or owning property in JTWROS with a non-spouse • Addition of these gifts is where the cumulative feature of the federal estatetax is accomplished

14. Estate Tax Credits Gift Taxes Payable Only gift tax that would have been paid out of pocket by the decedent on taxable gifts made since 1976 using rates in effect in the year of death can be taken as a credit. Applicable Credit Amount Maximum credit allowed in year of death is used with a few exceptions; amount is not reduced by any gift tax credit used by the decedent as those gifts are being taxed again either by including gifted property in the gross estate or by adding adjusted taxable gifts.

15. The Death of Jose O’Shea José O'Shea died January 1, 2014, survived by his wife and children. Make the following assumptions: • date of death value of the residence held in JTWROS with his three children was $1,700,000 • date of death value of José's sole assets (given equally to his children by his will) was $3.5 million • The date of death value of José's share of remaining joint assets (all owned with his wife as JTWROS) was $500,000

16. The Death of Jose O’Sheacontinued • José's valid funeral and administrative expenses, debts and liens, and casualty losses were $25,000 each • José's will made no charitable bequests, and his estate paid $34,916 in state death taxes • All funeral, administrative expenses, debts, and taxes are to be paid from the children's share

17. The Death of Jose O’Sheacontinued Compute José's gross estate:

18. Estate Tax Calculation Worksheet

19. Estate Tax Calculation Worksheet continued The gift taxes payable credit is computed using the amount of taxable gifts (not adjusted taxable gifts, if different) made by the decedent post 1976, which in this case was $1,276,000. The gift tax on this amount using 2014 rates is $456,200. The maximum gift tax exclusion amount for the years in which gifts were given was $1,000,000. The gift tax on this amount using 2014 rates is $345,800. Therefore, $456,200 minus $345,800 = $110,400, which is more than was actually paid out of pocket ($105,960). Therefore, only the amount that that was actually paid out of pocket can be taken by Jose O’Shea’s estate as a gift taxes payable credit.

20. Unified Federal Estate & Gift Tax Rates for 2014

21. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMEstate Planning Session 5End of Slides