Chapter 12 - Special Elections & Post Mortem Planning

Question 1

Define Alternative Valuation Date

Answer 1

An alternate date, other than the date of death, to value a decedent’s gross estate. The AVD is either 6 months from the date of death, or if the asset is disposed of within 6 months of the date of death, the asset’s disposition date.

Question 2

Define Disclaimer

Answer 2

An heir or legatee’s refusal to accept a gift or bequest. The disclaimer allows assets to pass to other heirs or legatees without additional transfer tax.

Question 3

Define ILIT

Answer 3

An irrevocable trust that owns and holds life insurance on its grantors life.

Question 4

Define Split-Dollar Life Insruance

Answer 4

A single life insurance policy in which two parties have an ownership interest. Usually one party has an interest in the death benefit and the other in the cash value up to the amount of the premiums paid.

Question 5

What are the most common costs that increase the need for liquidity in an estate?5

Answer 5

• Last Medical Costs
• Funeral Costs
• Transition or Adjustment Period Costs
• Administration Costs
• Taxes

Question 6

What are the three most common administration costs?

Answer 6

• Executor’s and Attorney’s Fees
• Preparation for Estate and Inheritance Returns
• Appraisal Fees

Question 7

When is an estate tax return due?

Answer 7

Within 9 months of date of death.

Question 8

When is income tax on any income received during estate administration due?

Answer 8

Annually (April 15th or the 15th day of the 4th month of the end of the fiscal year for the estate).

Question 9

If the decedent generates any gift taxes before death, when are they due?

Answer 9

April 15th

Question 10

What are some sources of liquidity for an estate?

Answer 10

• Life Insurance
• Sale of Assets
• Tax Advantage Accounts
• Corporate Redemption of Closely Held Business
• Loans
• Asset Distribution

Question 11

What are the requirements that state a life insurance policy will be included in a decedent’s gross estate under section 2042? 3

Answer 11

1. The decedent owned the policy at the time of his death;
2. The death benefits are made available to the executor or the estate; or,
3. The decedent had any incident of ownership in the policy at the time of his/her death.

Question 12

What are two ways to address the section 2042 issue?

Answer 12

1. Instead of making the proceeds available to the estate, the ILIT could give the trustee the discretion to make loans to the decedent’s estate.
2. The decedent can have language in his/her will allowing the estate to sell assets to any party, including the ILIT. As long as an arm’s-length transaction is entered into to provide liquidity for the estate, the proceeds of the life insurance policy are not deemed to be made available to the estate, thereby escaping inclusion in the gross estate.

Question 13

What happens with setup basis for IRDs?

Answer 13

If income is deferred during lifetime, the value of the deferral at death will not qualify for a step-up in basis.

Question 14

How is income tax treated with an IRD?

Answer 14

Whoever receives the decedent’s deferred income will have to pay income tax.

Question 15

What happens if an IRD distribution causes an estate to be subject to estate tax?

Answer 15

If the IRD causes the estate to be subject to estate tax, the beneficiary of the tax-advantaged account will be eligible for a deduction in the form of a misc. itemized deduction not subject to the 2% AGI floor.

Question 16

What happens if an executor takes an IRD distribution to pay admin expenses?

Answer 16

The estate must pay income tax on the distribution.

Question 17

How are proceeds taxed in a Corporate Redemption?

Answer 17

Proceeds are considered dividend payments and are taxed at ordinary income tax rates.

Question 18

What is Section 303?

Answer 18

Section 303 states the estate of a deceased shareholder may redeem enough shares to cover the death taxed, funeral expenses, and admin expenses of the decedent, and the shares redeemed will qualify for capital gains tax treatment. More than 35% of the decedent’s adjust gross estate must consist of the closely held business interest.