Tax Considerations and Estate Planning

The whole unit on one sheet: how returns are taxed, how wealth transfers during life and at death, and the basis rules the exam loves.

Core Concepts by Theme

• Ordinary income (up to 37% marginal): taxable bond interest, non-qualified dividends, short-term gains (held 1 year or less), real estate investment trust (REIT) dividends.
• Preferential rates: long-term capital gains (held more than 1 year) and qualified dividends at 0%, 15%, or 20%.
• Return of capital is not taxable when received; it reduces cost basis dollar for dollar, then is taxed as a capital gain once basis hits zero.
• Unified transfer tax: gift tax and estate tax share ONE graduated schedule (top 40%) and ONE unified credit; lifetime taxable gifts reduce the exclusion left at death.
• Gifted securities = carryover basis (donor's basis and holding period tack on).
• Inherited securities = stepped-up basis to fair market value (FMV) at death; always long-term.

The One-Liners That Win Points

• Treasuries = federally taxable, state and local exempt. Agencies (Ginnie Mae, Fannie Mae, Freddie Mac) = fully taxable at all levels.
• Municipal bond interest = federally exempt (triple tax-free if in-state); still reportable.
• Short-term gains (held one year or less) are taxed at ordinary income rates, not capital gains rates.
• Gift tax and estate tax share ONE exclusion. Use it on gifts, less is left for the estate.
• Unlimited marital deduction: any amount passes between spouses tax-free, but only if the receiving spouse is a U.S. citizen.
• Portability (deceased spousal unused exclusion) requires filing Form 706, even when no tax is owed; it applies to the estate/gift exclusion but NOT the generation-skipping transfer tax (GST) exemption.
• Transfer on Death (TOD) avoids probate but stays in the gross estate.
• Joint Tenants with Right of Survivorship (JTWROS) passes automatically to the survivor; Tenants in Common (TIC) passes the decedent's share through the estate.

Numbers to Lock In

Memory Aid: JTWROS vs. TIC

• JTWROS = "Right Of Survivorship" (survivor gets all, avoids probate)
• TIC = "In Common" (your share goes to your estate, requires probate)

Top Gotchas

• The "no man's land" for depreciated gifts (sale price between the donor's basis and the FMV at gift) means no gain or loss recognized. The answer is NOT "use the lower basis."
• Inherited securities are ALWAYS long-term, even if sold the day after inheriting.
• Stepped-up basis resets to FMV at death, not the decedent's purchase price; decades of unrealized gains vanish.
• Alternate valuation date (6 months after death) is allowed only if it reduces BOTH the estate value AND the estate tax.
• Direct tuition and medical payments bypass both the annual and lifetime exclusions, but only if paid directly to the institution or provider.
• The GST tax is IN ADDITION to estate or gift tax and is a flat 40%; its exemption is not portable between spouses.
• The financial-exploitation hold covers BOTH disbursements and securities transactions; "disbursements only" is a distractor, and the maximum is up to 55 business days, not 25.
• Specified adults = age 65 or older, or age 18 or older with an impairment; the trusted contact person has NO trading authority.

One-Breath Recap

Ordinary income is taxed up to 37% while long-term gains and qualified dividends get 0/15/20%. Gift and estate tax share one 40% system with a single $15 million lifetime exclusion and a $19,000 annual per-donee gift exclusion, gifts carry over the donor's basis while inheritances step up to fair market value at death and are always long-term, and firms can hold suspicious disbursements or trades for specified adults for up to 55 business days.

Need more than the recap? This is a condensed summary. If it is not enough, read the full Tax Considerations and Estate Planning unit for the complete lesson.