Advanced Federal Taxation

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Using the article, The 10 most powerful postmortem planning pointers for trusts and estates By Karen S. Cohen, CPA, discuss at least two planning pointers that would be beneficial in preventing improper estate planning.  Provide at least one example.

    http://www.journalofaccountancy.com/Issues/2012/May/Estate-planning-20125011.htm

Dec 2nd, 2015

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Jointly owned property can present many challenges to individuals, especially those couples who are not married and couples where one person is not a U.S. citizen. Without proper consideration, and individual may find himself or herself facing sudden tax-related issues and other concerns that all could have been prevented with proper estate planning.

To start with, joint property opens the door to possible federal and state gift taxes, especially for those non-citizens and non-spouses mentioned above. There’s even the potential for double federal estate taxes if the ownership involves two individuals who are not spouses. In this scenario, the whole property is taxed inside the estate of the first to die, excluding where the survivor is able to show their contribution towards that property. Whatever the survivor gets and doesn’t use or give away will be included in the survivor’s estate, which is also subject to taxation.

Even property that is jointly owned by two spouses has some loopholes: a surviving spouse can leave the property or give away the property to anyone he or she chooses without adhering to the wishes of the deceased spouse. Holding property jointly in this way involves giving up some control at the first death if that individual has specific wishes for the property after he or she passes away. When the jointly held property does pass over to spouse and that spouse immediately spends all assets, the deceased’s executor might have a shortage of case to pay estate taxes or other settlement costs.

All of these challenges can be fixed with a little planning. The establishment of a Credit Equivalent Bypass Trust allows for the sheltering of some funds to prevent the double taxation issue. If you would like to discuss your unique needs, contact an Illinois estate planning attorney today for a consultation.

Aviod Improperly Arranged Life Insurance

A.  The proceeds of life insurance are often payable to a beneficiary at the wrong time (before that person is emotionally, physically, or legally capable of handling it) or in the wrong manner (outright instead of being paid over a period of years or paid into trust).

B.   There is inadequate insurance on the life of the key person in a family (the breadwinner) or the key person in a corporation (the rainmaker).

C.   Often, no contingent (backup) beneficiary has been named. The “Rule of Two” should be applied here. In every dispositive document (any legal instrument that will transfer property at death) there should be – for every name in the document – at least two backups. So, whenever possible, there should be not only back-up beneficiaries but also contingent executors, trustees, guardians, and trust protectors. 

D.  The proceeds of the policy are includable in the gross estate of the insured because the policy was owned by the insured and either never transferred, or was transferred within three years of the insured’s death. The solution is to have a responsible financially competent adult beneficiary (or a trust), acting without specific direction from the insured and using his (or its) own money, purchase and own the insurance from its inception. That party should also be named beneficiary (the insured and the insured’s estate should not be named beneficiary).

E.   When the policy owner of a policy on the life of another names a third party as beneficiary, at the death of the insured, the proceeds are treated as a gift to the beneficiary from the policy owner. For example, if a wife purchases a policy on her husband’s life but names her children as beneficiaries, at the husband’s death she is making a gift in the amount of the proceeds to the children.

F.   If a corporation names someone other than itself (or its creditor) as the beneficiary of insurance on the life of a key employee, when the proceeds are paid, the IRS will argue that the proceeds are not income tax free and should be treated as either dividends, if paid to or on behalf of a shareholder, or compensation, if paid to an employee who is not a shareholder (assuming the premiums were never reported as income or there was no split dollar agreement or no Table 2001 income reported). Worse yet, if the insured owned more than 50 percent of the corporation’s stock, he is deemed to have incidents of ownership (that means federal estate tax inclusion of the proceeds) in the policy on his life. So, for example, the same $1,000,000 proceeds could be taxed as a dividend for income tax purposes (as much as $396,000 of income tax in 2013 for those earning more than $400,000 (single) and $450,000 (married filing jointly) and also be taxed as an asset in the estate for estate tax purposes (as much as $400,000 of estate tax).

Avoid Lack of Liquidity

Most people don’t have the slightest idea of how much it will cost to settle their estates or how quickly the taxes and other expenses must be paid. Worse yet, they don’t realize that a forced (and, possibly, fire) sale of their most precious assets, highest income producing property, or loss of control of their family business will result from an insufficiency of cash. (If you haven’t checked, how do you know your executor will have enough cash to avoid a forced sale?)

Liquidity demands have increased significantly in the last few years and should be revisited by those who have not done a “what if …” hypothetical probate. Among the expenses that demand cash from the estate’s executor are:

Federal estate taxes

State death taxes

Federal income taxes (including taxes on pension distributions)

State income taxes (including taxes on pension distributions)

Probate and administration costs

Payment of maturing debts

Maintenance and welfare of family

Payment of specific cash bequests

Funds to continue operation of family business, meet payroll and inventory costs, recruit replacement personnel, and pay for mistakes while new management is learning the business

Generation-skipping transfer tax (top estate tax rate)

Most larger estates will be subjected to almost all of these taxes and costs.


Please let me know if you need any clarification. I'm always happy to answer your questions.

Please let me know if you need any clarification. I'm always happy to answer your questions.
Dec 2nd, 2015

100 % copied work

Dec 2nd, 2015

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