CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Estate Planning

1. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMEstate Planning Session 9Income Tax Issues

2. Session Details

3. Income Tax: Basis Rules Property Received by Gift • Carryover of donor’s basis to donee, except where “loss” property is given and donee subsequently sells property at a loss, in which case the donee’s basis is the fair market value of the property at the time of the gift • If donor (or donee in a net gift situation) pays gift tax out of pocket on the gift, donee may increase the donor’s adjusted basis by such taxes as are attributable to previously unrealized appreciation

4. Donee’s Basis in Loss Property Tony gives Bob an asset with a date-of-gift fair market value of $80,000. Tony has an adjusted basis in this asset before the gift of $100,000. If Bob sells the asset for $70,000, Bob will use the date-of-gift fair market value of $80,000 to compute a $10,000 loss. If Bob sells the property for $90,000, there will be neither gain nor loss. If Bob sells the property for $110,000, Bob will use Tony’s adjusted basis of $100,000 to compute a $10,000 gain. Bob sellsfor $70,000 $80,000 ondate of gift Bob sellsfor $90,000 $100,000 basison date of gift Bob sellsfor $110,000 Bob incurs no gain or loss $10,000 loss Bob incurs$10,000 gain

5. Donee’s Basis When Gift Tax is Paid Out of Pocket In 2014, Ted gave Bert an asset with a date-of-gift fair market value of $114,000 and a taxable gift value of $100,000 (due to the annual exclusion). Ted had an adjusted basis in this asset before the gift of $40,000. Since Ted used his gift tax applicable credit amount on prior gifts, Ted paid a gift tax of $40,000 on this gift. Bert’s basis in the asset will be $69,600: $40,000 (donor’s adjusted basis prior to gift) + $29,600.

6. Income Tax: Basis Rules Property Received from an Estate by a Beneficiary • If property was included in decedent’s gross estate, the estate and beneficiary to whom the property is distributed has a basis in the asset equal to its estate tax value except a reverse gift of one year or less, and except for income in respect of a decedent-IRD— whether measured as of • the date of death, • the alternate valuation date, or • by special use valuation. • With community property, even the half owned by the surviving spouse gets a step up in basis to its estate tax value.

7. Income Tax: Holding & Tacking Rules

8. Question 1 Which one of the following is a true statement about a donee’s basis in property acquired by gift? • If no money changed hands between the donor and donee, the donee’s basis will be zero. • The donee will always receive a “carryover cost basis” from the donor. • For loss property, if the donee sells the property for less than its FMV at the time of gift, then the donee’s basis will be the property’s FMV on the date of the gift. • The donee will receive a step-up in basis to the FMV of the property gifted if, on the date of the gift, the FMV is greater than the cost basis of the donor.

9. Question 2 A mother gave her son some stock that she purchased five years ago for $14,000. The current FMV of the stock is $23,000. What is the son’s basis in the stock? • $0 • $14,000 • $23,000

10. Question 3 If the son in Question 2 immediately sells the stock, what would be his holding period for capital gain purposes? • 0 years • 1 year • 5 years

11. Question 4 If the mother in Question 2 had to pay $4,000 in gift tax out of pocket on that gift, what would the son’s basis be? • $17,600 • $18,000 • $23,000

12. Question 5 If father gives daughter stock that he bought for $50,000 and is now worth $30,000, and daughter later sells the stock for $36,000, what is the daughter’s basis for computing her capital gain or loss? • $30,000 • $36,000 • $50,000

13. Income Tax: Taxation of Trust Income Determination of who is taxable on trust income should be made according to the following hierarchy: • Do any of the grantor trust rules apply? • Does anyone have a general power of appointment (such as a Crummey power, or a demand or invasion right) over trust assets? • Is distribution of trust income mandatory on an annual basis? • Have any discretionary distributions of trust income been made? • Accumulated income is taxed to the trust at trust rates.

14. Income Tax: Grantor Trust Rules Cause trust income to be partially or totally taxed to the grantor of the trust Apply when • grantor or grantor’s spouse has power to amend, alter, or revoke the trust. • trust income is or may be distributed to the grantor or the grantor’s spouse. • trust income is or may be accumulated for future distribution to the grantor or the grantor’s spouse. • trust income is or may be used to pay premiums on insurance on the life of the grantor or the grantor’s spouse. • trust income is used to discharge a legal support obligation of the grantor. • trust income is or may be used to discharge any legal obligation of the grantor. • the grantor retains a reversionary interest that exceeds 5% of the value of the trust at the time of creation. • grantor or grantor’s spouse has the power to control beneficial enjoyment of trust assets, or has certain administrative powers.

15. Trust Income Examples John Howard established an irrevocable trust and funded it with $1 million in cash. The terms of the trust provide that income shall be payable to Edward Howard, John’s son, for 15 years, then to Richard Howard, John’s grandson, for life. At Richard’s death, his living descendants will receive the remainder in equal shares. Who must report the income of this trust during its existence? Explain your answer.

16. Trust Income Examples June Wilson, age 80, established an irrevocable trust and funded it with $500,000 in cash. The terms of the trust provide that income is payable to June for the rest of her life at the institutional trustee’s discretion. After June’s death, one-half of the income of the trust is to be paid to her surviving children in equal shares for 10 years, with the other half of the income being payable to June’s surviving grandchildren at the trustee’s sole discretion. At the end of the 10-year period, the trust will terminate, and its assets are to be distributed to a qualified charity. Who must report the income of this trust during its existence? Explain your answer.

17. Trust Income Examples Red McIntyre, age 65, established and funded a charitable remainder annuity trust (CRAT) with $500,000 cash. He named himself as the sole income beneficiary of a 7% annuity payment for life, and a qualified charity as the remainder beneficiary. Who must report income earned by the assets of this trust if the assets of the trust earn income that is (a) less than the annuity amount, (b) equal to the annuity amount, or (3) more than the annuity amount in a given year? Explain your answer.

18. Charitable Income Tax Deduction

19. Determining Charitable Income Tax Deduction Determine category of gifted property • If other than cash, inventory, or life insurance, did donor hold long or short term • If held long term (more than one year) is property • real estate • intangible personal property, or • tangible personal property • If is tangible personal property, is it • use related, or • use unrelated

20. Determining Charitable Income Tax Deductioncontinued Total Amount Deductible • Only basis is deductible except for • real estate • intangible personal property • use-related tangible personal property if held long term and given to a public charity, and • life insurance • Can elect to deduct FMV for • real estate, intangible personal property, and use-related tangible personal property if held long term and given to a public charity • If life insurance must use lesser of replacement cost or basis • Loss property must be valued at FMV

21. Determining Charitable Income Tax Deduction continued • AGI limitation for yearly deductions • Public charities: • 50% for basis • 30% if not • Private charities: • 30% for cash, inventory, and short-term property • 20% for everything else • Carry forward—5 years

22. Question 6 If a client with a current year AGI of $50,000 wants to make a contribution to a public library and get the largest possible income tax deduction in the current year, which of the following assets should he gift to the charity? • A car he purchased for $20,000 four years ago that is now worth $10,000. • A diamond ring he purchased eleven months ago for $11,000 that is now worth $13,000. • A rare book that he purchased two years ago for $10,000 that is now worth $15,000.

23. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMEstate Planning Session 9End of Slides