The CPA Journal

Common Estate Planning Myths

By Marvin L. Korobow, Esq., CPA

Estate planning is complex, and keeping current with every regulation and planning technique can be difficult. The pervasive incorrect information communicated at some technical seminars compounds the problem, even for professionals. What follows is a deconstruction of some of the common estate planning myths, along with the reality behind each.

Myth: Revocable living trusts can save taxes.

Reality: Revocable living trusts are “grantor trusts” for income tax purposes: the grantor is required to report all the income and take all the deductions and credits on form 1040. Because these trusts are revocable, control remains with the grantor, and the assets in the trust are includible in the gross estate of the grantor for estate tax purposes. The transfer of assets into the trust can be revoked by the grantor at any time and the assets are not completed gifts. Consequently, revocable living trusts do not save taxes.

Myth: Remarriage of the income beneficiary of a qualified terminal interest property trust (QTIP) ends the obligation to such beneficiary.

Reality: To be eligible for the marital deduction, the QTIP must, among other things, provide the income beneficiary (surviving spouse) with all of the income of the trust, at least annually, for life. This obligation is not ended by a later remarriage of the surviving spouse.

Myth: If a married couple elects a split gift of $20,000 or less in a given year, there is no requirement to file any gift tax return.

Reality: While no gift tax is generated due to the split-gift annual exclusion of $20,000, a gift tax return (Form 709 or 709A) must be filed and signed by the consenting spouse and the donor spouse by April 15 of the year following the calendar year in which the gift was made. The 2001 Tax Act modified this requirement slightly, requiring formal notification to the gift recipient of the gift’s basis and market value.

Myth: The basis of property acquired by gift is its fair market value at the date of gift.

Reality: The adjusted basis of the donor at the date of gift carries over to the donee and is known as the substituted or carryover basis. If the donee later sells the gifted property for purposes of calculating a loss, however, the basis would be the lower of the donor’s adjusted basis or the asset’s fair market value on the date of sale.

Myth: The growth (appreciation) of assets originally placed in a properly drafted and properly funded Credit Shelter Trust will be included in the gross estate of the income beneficiary for estate tax purposes.

Reality: The full value of the Credit Shelter Trust assets (including any appreciation) will not be included in the gross taxable estate of the income beneficiary.

Myth: If property is transferred directly from a transferor to the person entitled to receive it as the result of a qualified disclaimer, such person is deemed to have received a gift from the disclaimant.

Reality: Because the disclaimant is deemed to have predeceased the decedent with regard to the property disclaimed, it will not be a gift because the disclaimant never owned the property. On the other hand, property going to another individual as the result of a release of a power of appointment is deemed a gift.

Myth: In New York State, a spouse can be disinherited, and such disinherited spouse will have no recourse.

Reality: In New York State, a surviving spouse is entitled to elect to take a minimum prescribed share of the deceased spouse’s estate. For decedents dying after August 31, 1992, a spouse’s elective share equals the greater of $50,000 or d! of the net estate. (Note that the net estate, for this purpose, is calculated in a special manner too extensive to be covered here.)

Myth: The income beneficiary of a QTIP that holds unproductive property must permit the trustee to continue to hold such property indefinitely.

Reality: If the trust provisions so provide, the income beneficiary may demand that such unproductive property be converted into income-producing property, and the trustee must honor this demand.

Myth: Life insurance proceeds paid upon the death of the insured are never included in the gross estate of the decedent for estate tax purposes.

Reality: The proceeds of a life insurance policy are subject to federal estate tax and will be included in the decedent’s gross estate for estate tax purposes if—

the proceeds are payable to, or for the benefit of, the decedent’s estate.
at time of death the insured possessed any incidents of ownership, such as the right to change the beneficiary, the right to surrender the policy, the right to borrow; or, if the policy is transferred within three years of the insured’s death.
there is not a named beneficiary; or, if a named beneficiary has predeceased the insured and there is not a contingent beneficiary named in the policy.

Myth: QTIPs are not a good estate planning tool for second marriages if there are children from a prior marriage.

Reality: QTIPs are considered ideal for estate planning purposes in second marriages, especially where there are children of a prior marriage. It defeats the second (or later) spouse’s right to asset ownership, providing only income. When the second (or later) spouse dies, the property in the trust can be directed to the children of the prior marriage.

Myth: A surviving non-citizen spouse who is a U.S. resident can obtain the marital deduction through a QTIP.

Reality: One of the basic requirements of a QTIP is that it can only be used when the surviving spouse is a U.S. citizen. Residency alone is not enough.

Myth: Property placed in a QTIP escapes estate taxation in the estates of both spouses.

Reality: When the surviving spouse dies, the value of the QTIP is includible in the estate of the surviving spouse for estate tax purposes, allowing for a deferral of estate taxes until the death of the surviving spouse. Remember, however, that the QTIP is taxed on top of the surviving spouse’s estate, possibly resulting in a higher bracket than if no QTIP election was made.

Myth: The five-and-five power in a credit shelter trust, if not used in a calendar year, can be used cumulatively in addition to any other benefits in the following calendar year.

Reality: Generally, property subject to a general power of appointment will be included in the estate of the donee of the power. The five-and-five power is a de minimus rule that permits the greater of $5,000 or 5% of assets subject to a general power of appointment and distributed in a given calendar year to avoid inclusion in the estate of the donee of the power. The five-and-five power must be used or it is lost; it cannot be used cumulatively in a succeeding year.

Myth: Property that goes to a surviving spouse exercising the right of election is not eligible for the marital deduction for estate tax purposes.

Reality: It does not matter if the property finds its way to the surviving spouse by way of the spouse’s exercise of the right of election, as long as the deduction’s effect is to shift the transferred assets into the taxable estate of the recipient spouse.

Myth: Property passing to a surviving spouse as the result of a disclaimer by the children is not eligible for the marital deduction for estate tax purposes.

Reality: It does not matter if the property finds its way to the surviving spouse by way of a disclaimer, as long as the deduction’s effect is to shift the transferred assets into the taxable estate of the recipient spouse.

Myth: Joint ownership is the best way to transfer property at death.

Reality: If the joint tenants are not husband and wife, the full value of the property for estate tax purposes is presumed to be included in the estate of the first to die. This presumption can be overcome only if, and to the extent that, the decedent’s personal representative can prove that the surviving tenant either contributed to the purchase price or originally owned the asset.

In addition, the surviving tenant will ultimately obtain full control over disposition of the property. If a surviving spouse remarries, the new spouse may get control of the property or, at least, may acquire a right of election to take a prescribed share (as noted above). This may be contrary to the parties’ wishes and objectives before the first spouse’s death (e.g., it may preempt the children of the first marriage). Because only one-half of the property is generally included in the decedent’s gross estate, only one-half will receive a step-up in basis upon death of the first joint tenant.

Editors:
Lawrence M. Lipoff, CPA
Deloitte & Touche LLP

Susan R. Schoenfeld, JD, LLM, CPA
Bessemer Trust Company N.A.

Contributing Editors:
Jerome Landau, CPA

Debra M. Simon, MST, CPA
The Videre Group LLP

Richard H. Sonet, JD, CPA
Marks Paneth & Shron LLP

Peter Brizard, CPA

Ellen G. Gordon, CPA
Margolin Winer & Evens LLP

Jeffrey S. Gold, CPA
Joseph R. Beyda & Company P.C.

Harriet B. Salupsky, CPA
Weinick Sanders Leventhal & Company LLP

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The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

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