Back Of Beyond Flashcards
How is NUA taxed?
Basis (or the deduction the ER claimed) is taxed at distribution as OI.
At sale, the NUA (the gain on the stock from basis to distribution is taxed as LTCG)
Any other gain is taxed as holding period.
Must distribute all w/in a year for NUA treatment.
What happens if you roll NUA stock into an IRA?
You lose the NUA.
What type of businesses are Keogh plans for?
Non-incorporated ones! Sole proprietorships and partnerships.
Is the SIMPLE 3% match calculated based on a salary cap of $290k?
No! SIMPLE’s match actual income.
How does a 401k SIMPLE work?
All 401k rules except SIMPLE match (and deferral?) rules
Is the owner of an incorporated business self-employed? Is Keith?
No and no.
Are SEP’s QP’s?
No.
Who are ERISA plan fiduciaries?
All administrators and advisers. Anyone who has anything to do with the plan
Can you have life insurance in your IRA?
Collectibles?
Gold?
No LI or collectibles.
Gold is usually not allowed in your plan, but you can have it in a self-directed IRA.
When are ERISA fiduciaries liable for losses in plan assets?
When they don’t follow the rules of the plan.
What are the coverage tests and to whom do they apply?
They always apply to HC’s
- Safe harbor: plan must cover 70% of NHC.
- Ratio % test: plan must cover NHC’s to at least 70% of the HC’s it covers.
- Average benefit test: NHC’s must get 70% of what HC’s get, on average
- 40/50 test (DB only): Plan must cover at least 40 people or 50% of EE’s.
Top-Heavy tests apply to key employees. What are they and they’re consequences?
No more than 60% of accrued benefit goes to keys.
If top-heavy 3% to non-keys in DC plan, 2% to non-keys in DB plan.
Does ADP/ACP testing use HC or keys?
How does it go again?
It uses HC’s. It applies to CODA plans.
If NHC get (or defer) 0-2%, HC’s can defer 2x as much.
If NHC get (or defer) 2-8%, HC’s can defer +2 more
If NHC get (or defer) > 8%, HC’s can do 125% as much.
What plans cannot integrate with SS?
ESOP, SIMPLE, SIMPLE 401K
When is integrating with SS better than an age-weighted plan or vice versa?
Owner over 50 = 1 point for age weighting.
Owner making over 200k = 1 point for age weighting
Rank and file younger than owner = 1 point for age-weighting
What are new comparability plans? What’s the other name for them? What are they at root?
New comparability plans are also “cross-tested plans”. They are essentially age-based discrimination plans, that pay benefits to people by their job category. You can give 58k to one person and a 5% match to the next.
Do 457 plans count in aggregated deferrals?
No. They’re not ERISA for one thing.
What are parent/subsidirary and brother-sister relationships? What is an affiliated service group?
Parent/Subsidiary = one entity controls 80% of another. B/s = 5 or fewer owners own 80% of 2 or more entities ASG = A service organization and a professional organization.
LI must be incidental to retirement plans. How do DC and DB plans accomplish that?
For DC: Whole (or Ordinary) Life must be ≤ 50% of plan cost for participant, ≤ 25% for Universal or Term.
For DB: Death benefit must be ≤ 100x monthly benefit of pension.
What is UBTI? How do you answer UBTI questions?
Unrelated Business Taxable Income. When plans make income off of leveraged instruments it’s taxable.
Look for something with debt like limited partnership interests or maybe real estate.
What is the only roll-over option for a non-governmental 457 plan?
Another 457 plan.
If you receive a direct check from your retirement plan what does the government do?
Unless what?
It withholds 20%. You get it back if you put 100% of the money into another plan within 60 days. Note: you can only do 2 60-day roll overs in a year.
You can avoid withholding entirely by rolling over directly to custodian.
You can also avoid withholding if you have a qualifying reason for the distribution.
What does the CFP code require practitioners and clients to do regarding basic plan assumptions?
What if you can’t get there?
Client and practitioner must both agree on plan assumptions.
If you can’t get there terminate or limit the agreement.
What are the SIX exceptions to the 10% penalty on qualified plan and TSA distributions for those under 59.5?
If you don’t meet them, how do you best avoid the penalty?
- Death or total disability.
- Substantially equal periodic payments following separation from service.
- Separation from service at 55 or later.
- Distribution under a QDRO (to anyone in the QDRO terms)
- Medical expenses in excess of 7.5% of AGI
- $5,000 for birth or adoption of child.
The best way to avoid the penalty is thru a loan.
What are the conditions for substantially equal periodic payments after separation from service?
The later of:
- -Payments must go for 5-years
- -Attainment of 59.5
What is the penalty for insufficient RMD’s?
50% of the insufficiency.
Does the SEP start date include extensions?
Yes?
If you have a pension plan, and are married, how must you take your benefits?
How do you get out of that?
QJSA.
The only way to not do that is if your spouse opts out of it with signature.
A QP may be attached to a QDRO. If the plan has no cash out feature, what happens? When can the other spouse withdraw?
The plan makes a sub-account for the other spouse. They can withdraw when the worker becomes eligible to withdraw.
Can you have a QDRO for an IRA?
If you have a 457, does that count as being a plan participant for IRA contribution phase outs?
No and no.
What are the 6 conditions for penalty free IRA withdrawal?
- Death and disability.
- Qualified education expense up to 10k
- Medical expense > 7.5% of AGI.
- Health insurance after 12 months of unemployment
- Birth or adoption to 5k
- Substantially equal payments
Is there an age limit for Roth contributions?
No, as long as you have earned income.
How are Roth withdrawals ordered? What’s the significance of this?
Basis, conversions, earnings. It gives you the easiest tax treatment first, followed by the next easiest.
How are conversions taxed?
They are never income taxed, because the tax has already been paid. If they meet the 5-year holding period OR meet any of the penalty exemptions for Roth’s there’s no penalty either. If they don’t have the holding period or meet any of the exemptions there’s no income tax but a 10% penalty.
How are earnings withdrawn from a Roth taxed?
Hint: This is the most complicated.
The first question is, do they meet the 5-year holding period? If yes, do they meet one of the special exemptions (59.5, D+D, first home 10k)? If yes, no tax no penalty. If they meet one of the 2nd tier exemptions (medical, education, health insurance, birth/adoption, = payments), they will be taxed but no penalty. If they meet 5 year, but no exemption, tax and penalty.
If they don’t meet the 5-year holding period, they will be taxed. If they meet any of the exemptions, no penalty. If they meet none, tax and penalty.
What are the 3.5 ways a Roth can be distributed at death?
No named beneficiary - Must distribute in 5 years. Tax free.
Named beneficiary - Must distribute in 10 years, tax free.
Spouse is sole beneificary - Must begin distributions when owner would’ve been 72, OR may roll into their own ROTH IRA
How do Roth 401k plans work?
No income limit to participate
Deferrals are after tax and subject to FICA. ER contributions are pre tax.
Employer matches must go into pre-tax accounts.
How do non-qualified plans work?
- Can they discriminate?
- Does the ER get a tax deduction? When?
- In what cases are the funds earnings taxable to the ER?
- When should an ER use a non-qualified plan?
- They can discriminate
- No ER tax deduction until EE is taxed.
- Funds earnings are taxable to ER if LI or annuity
- Appropriate when ER wants to provide additional deferred compensation to EE beyond ERISA limits.
What are unfunded retirement plans?
What’s another term?
Are 457 plans unfunded?
Unfunded = informally funded. Assets have been set aside but are subject to company’s creditors.
This is true for 457 plans.
Is LI in a deferred compensation a funded or unfunded arrangement?
When are the premiums taxable to the EE?
If ER totally owns the policy, what happens?
- Generally unfunded
- Premiums are taxable to the EE when they have an incidence of ownership, such as naming the beneficiary (162).
If ER totally owns policy: - Premiums not currently deductible to ER
- Death benefit not taxable to ER
- $ value of policy grows tax deferred, basis can be recovered tax free
- Cash value of policy can be paid to employee as long as it’s “reasonable compensation”
- At EE death, if ER pays benefit to EE’s family they are taxable to family, and included in EE’s gross estate.
How do Rabbi Trusts work?
How are they taxed?
Are they subject to FICA?
What are key words indicating that a Rabbi Trust is a good choice?
Rabbi trusts are a form of deferred compensation.
- Money is put into the trust. EE and creditors have = access to it.
- When it is paid to EE it is taxed, deducted and FICA’ed. Not before.
Key words for use of Rabbi Trust: Merger, acquisition, change of ownership
When is unfunded compensation taxable to EE?
When it is easily transferrable to him.
When the last risk that he won’t get it has been removed. Think non-qualified stock grants that are based on performance over the next 5 years. They become taxable in 5 years when the risk of forfeiture expires.
How much in ISO’s can you vest in a year?
$100,000 theoretical value at grant.
What are the two biggest differences between ISO and NQSO?
Tax at exercise: ISO = 0, NQSO = bargain is taxed as OI.
Basis: ISO: basis = grant price. NQSO: basis = Exercise price.
What is the required holding period for an ISO?
Hint: EGG
1 year from exercise, 2 years from grant.
Which part of the ISO Egg rule is most important part for the exam?
The holding period! The 1 year between exercise and sale.
How are ISO’s taxed if not held for 1 year from exercise?
Hint: there are 2 scenarios.
Scenario 1: ISO held less than 1 year from exercise AND sold in the same calendar year. The bargain element is taxable compensation, subject to FICA and FUTA.
Scenario 2: ISO held less than 1 year from exercise, BUT sold in the following calendar year. The bargain element is taxed as OI, but not subject to FICA and FUTA.
Does the employer get a tax deduction for an ISO? For an ISO that becomes an NQSO?
There is no deduction for an ISO. For an NQSO, the bargain element is a tax deduction.
If you gift an ISO, how is it taxed?
If you leave one in your will, how is it taxed?
A gifted ISO becomes an NQSO. The bargain element of a gifted ISO is OI to the giver.
An ISO retains its ISO status if it is inherited.
What is community property?
How is marital income divided?
Does community property have survivorship rights?
Each spouse owns a SEPARATE, UNDIVIDED, EQUAL INTEREST in their property.
Equally, no matter who earned it
No. It goes thru probate.
What is not community property in a community property state marriage?
Income earned prior to marriage
Assets owned prior to marriage
Property received as a gift by one spouse
Property inherited by one spouse
When can a widower claim a 121 exemption (capital gain exclusion on sale of personal residence) for their deceased spouse?
Within 2 years of spouse’s death. Similar to Qualifying Widow filing status.
What kind of property gets 100% step-up in community property states?
Do CD’s?
LTCG property only!
CD’s do not. They’re ordinary income property.
When is JTWROS property held by non-spouses included in the FTD’s gross estate?
What if the STD spouse received their share as a gift?
Always unless the surviving owner can prove they made a contribution to it. A gift is not a contribution.
What is the asset protection feature of TBE property?
Can you have TBE property in a community property state?
TBE property is exempt from creditors of a single spouse.
You cannot have TBE in a community property state.
List the four types of assets subject to probate
- Singly held assets
- TIC assets
- Assets where the beneficiary is the estate of the insured
- Community property (50% for each spouse).
What are the 4 types of property that go into a probate estate?
- singly owned assets
- TIC (50%)
- Any asset with “estate as beneficiary”, but especially LI
- Community property (50%)
How does the Estate Tax flow go?
Gross estate
- minus debts, taxes, funeral expenses, etc
= Adjusted gross estate
- minus maritable and charitable deductions
= Taxable estate
+ Adjusted taxable gifts (gifts for which gift tax was paid)
= Tax base
- lifetime exemption
= Tentative tax
- Gift tax paid
= Tax due
When are gift taxes paid added back into the gross estate?
When the gift was given within 3 years of death.
When is life insurance you no longer own added back to your gross estate?
Does it matter if you’re not the insured?
- the insured is you and you gave it away within 3 years of death.
- the insured is you and you gave it away without changing your estate as the beneficiary
If you’re not the insured there’s no estate inclusion.
What are the 3 sneaky inclusions in gross estate?
- Gift tax paid on gifts within 3 years of death
- LI given within 3 years of death (deceased = the insured)
- Anything with an incident of ownership including power of appointment.
To whom can you give gifts above the exclusion and not pay gift tax?
Gifts to your spouse who is a US citizen
Gifts to charity
Gifts that pay directly to medical or educational institutions for services
Gifts to political parties in the US
How are gifts to US political parties treated for tax purposes?
There is NO gift tax.
There is NO income tax deduction.
It’s like you’re gifting to the party of ‘NO’
Are payments to a college for room and board tax free gifts?
No!
What are the 3 reasons you would need to file form 709 (gift tax return)?
Why is the last one included?
Gift of over 15K
Splitting a gift
A gift of a future interest in any amount
The last one is included (like the first one) to track how much of your lifetime exemption you’re using up.
What are the 4 exceptions to the present interest requirement for the gift tax exclusion?
529
2503c
UTMA/UGMA
Crummey Trust
What are the 3 advantages of naming someone the trustee of your living trust over giving them a durable power of attorney?
Trustee of trust is more easily recognized.
Trustee of trust survives your death.
Trustee of trust can be controlled by directions in trust terms.
What is a “tainted”, “defective”, or “grantor” trust and why would someone make one?
Do they help with estate taxes?
A trust that pays income to the grantor is a grantor or tainted trust. A potential advantage of a defective trust is if the grantor has a lower tax rate than the trust. Tainting is not advisable for estate taxes.
When is a complex trust taxed as its own entity (2 conditions)?
- It is irrevocable, and the grantor hasn’t retained an interest
- It has retained income either because that’s what its document says or because the trustee has the right to do so.
Which are typically simple trusts?
2503b, QTIP, QDOT, Dynasty
A simple trust has dividends of 5,000 and cap gains of 8,000. How much does it need to pay out and why?
5,000. Simple trusts need only pay out income; capital gains are additions to the trust corpus and are taxed to the trust.
How much is the Crummey demand right?
The LESSER of the annual exclusion or the amount gifted to the trust.
If you have HEMS or income or “ascertainable standard” rights to a trust, is it included in your gross estate?
No.
If you have a 5 x 5 power to a trust that you haven’t used, what is included in your gross estate?
Is this before or after Crummy provisions are settled?
The greater of $5,000 or 5% of the trust corpus.
What’s the difference between a Crummey provision and a 5 x 5 power?
Crummey allows for use of the gift tax exclusion. 5 x 5 minimizes estate tax exposure.
What income producing assets are good for a trust?
Trusts pay a high income tax rates. This makes municipal bonds a good idea.
What is a Pooled Income Fund?
What are the +/- for the donor?
Do PIF’s allow municipal bonds?
Is there a 5% rule?
A common trust fund operated by a charity. Donor gets income, but no 5% rule, since the amount of income is specified initially; charity gets remainder at end of term.
Donor cannot change charitable beneficiary, but doesn’t need to set up a trust.
No muni’s in PIFs
What do CRATs and CRUTs have in common?
How are they different?
In common:
- Must pay 5% to income beneficiary each year.
- Must pay 10% to charity at end.
- Payable to any charity
Different:
- No additions to CRATs, Additions to CRUTs
- CRAT payments are fixed, CRUT payments are variable, based on annual evaluation of assets.
- CRAT donor receives deduction of present value of remainder
How does a charitable gift annuity work?
How is it different from a CRAT?
For a charitable gift annuity, the donor transfers property to the charity in exchange for a stream of income.
Differences from CRAT
- No required 5% income stream
- Property is transferred to a charity rather than a trust
- The charity receives the money now.
- Amount contributed to the charity EXCEEDS the present value of the annuity.
- The donor’s deduction is the difference
How do CLAT s and CLUTs work?
When are they most tax effective?
Gives an income stream to charity and remainder to beneficiaries.
Income tax deduction of present value of income stream.
Most tax effective when established at death.
Growth beyond income stream passes to remainders tax free
How does a private foundation work?
What is the tax deduction limitation?
What is the required contribution to charity?
Established by a wealthy donor or family.
Tax deduction limited to 30% of AGI/yr.
Must give 5% of its investment assets to charity or an individual each year.
Exists into perpetuity
Which charitable set-up gives the donor an income stream with an inflation hedge?
A CRUT—They’re re-evaluated every year.
What is a donor advised fund?
A poor man’s private foundation. Donor gives money to charity, then advises charity on whom to grant it to.
How do you save on estate taxes and give your heirs income at your death?
With a CRAT/CRUT and a Wealth Replacement Trust (ILIT).
In an intra-family transfer where the seller needs income, when is an installment sale a bad idea?
Why is an annuity a bad idea?
What’s left? What makes one of those better than the other?
Hint, when are trusts always better—for what kind of property?
An installment sale is a bad idea when depreciation has been claimed against the property.
An annuity now has all gain taxed in first year.
A SCIN and a GRAT/GRIT are all that’s left
- With a SCIN, family member can inherit the SCIN premium.
- GRAT/GRIT are best for appreciating property
In intra-fam transfers where the giver does not need income, when are giving shares (like an S-corp) or gift-leaseback bad ideas? Why? What is the best property for gift-leaseback?
When a child is under 24, gifting shares and gift-leaseback are bad ideas because the heir will be kiddie-taxed on the new income.
The best property for gift/leaseback is fully depreciated property.
When is trust property removed from the grantor’s estate?
At the end of the trust term
In an intra-family sale, how does a SCIN payment make a trade-off between estate tax payments and capital gain tax payments for the estate?
If the seller dies during the SCIN, the value of the business is out of his estate (estate tax savings, 40%). However, the remaining capital gain is taxable to the estate (LTCG rate, 20%).
What discounting advantage do GRAT’s and GRUT’s have over GRIT’s?
GRATS/GRUTS retain an ownership interest, resulting in a discount on the value of the gift. Since no income is guaranteed, there is no discounting the gift of a GRIT.
What’s the tax trap with gifting shares of a service business?
Under assignment of income provisions service business income cannot be transferred, often because the owner is actually doing the work that creates the income (a CPA or a dentist, for example).
If a married couple gets a 50% FLP discount on transferring shares of their business to their heirs, how much can they transfer tax free in a year? Does this work for a service business?
$60k. 30% gift splitting exclusion + 50% share discount.
Not for service business due to assignement of income.
What are two common conditions when the AVD cannot be used because it doesn’t decrease the estate tax due?
- Assets pass by UMD.
- Total estate value is < annual exclusion.
In both cases there’s no estate tax due, so the amount cannot be decreased; thus no estate tax is due.
Who pays the GSTT in the case of a taxable distribution?
What is that?
A taxable distribution is a mix of transferees who are skips and not skips.
In this case the transferee pays the GSTT
If you select the alternative valuation date, what assets are NOT included?
Wasting assets (copyrights, oil and gas rights, anything that gets less valuable with the passage of time).
Can you disclaim an LI benefit? JTWROS property? TBE property? A QJSA annuity? What if you’ve received a benefit from one of the above?
You can’t disclaim TBE property, but you also can’t disclaim any of the above if you’ve received any benefit from them.
What’s the trick about questions that ask you if you can disclaim property, or if you can disclaim property into a disclaimer trust?
You can’t disclaim if you’ve rec’d any income from the property, or if you want to have any influence on who receives it. You can’t disclaim property into a trust if it passes by contract and has a contingent beneficiary.
What is a 303 stock redemption? What is the max that can be redeemed and what are the necessary conditions? What is the tax break?
Hint: This redemption is for liquidity at death, think ‘Colorado river water’
A 303 redemption allows owners of a closely held stock to redeem enough shares at stepped up basis to cover costs associated with death, included estate taxes. 303 redeemed stock will not be taxed as a dividend.
- business must be incorporated (so that it actually has stock to redeem)
- this stock must comprise 35% of ADJUSTED gross estate
- redemption cannot exceed the value of estate tax + admin. Expenses.
How does section 6166 work? What conditions are necessary to use it, and what is the benefit? Can businesses be combined to qualify for this benefit?
Hint: 6166 is for installment payment of estate taxes, and many consider estate taxes to be devilish. 6166 postpones your date with the devil.
For a business owned as sole-proprietorship, partnership, or corporation, 6166 allows estate tax to be paid in installments as long as several conditions are met:
- Value of business must be > 35% of ADJUSTED gross estate
- Business must be ongoing as of date of death
- Aggregation to qualify may be used as long as decedent owned 20% of each
- Installment term is 14 years. During the first 4 interest only on the first 1.59m need be paid.
- The interest rate is 2% and is not deductible
What is section 2032A, reduction of estate tax? What is necessary to qualify for it?
2032A can reduce decedent’s gross estate by up to 1.19m.
It’s primarily used for farms so 25% of the gross estate must be real property, 50% must consist of real and personal property.
- To qualify, property must be in use 5/8 years before death and 10 years after
- Property must pass to qualified heir
What is the definition of a “closely held business”?
Busniness accounts for 35% of adjusted gross estate
What different estate qualification is used by section 303, 6166, and 2032A?
303 and 6166 require the closely held business to be ≥ 35% of adjusted gross estate
2032A requires the farm to be 25% of gross estate to be real property and 50% of gross estate must be real prperty and tangible personalty
Why is 6166 (installment payments) the safe answer out of 303 (liquidity) and 2032A reduction?
6166 doesn’t have the incorporation requirement of 303, nor the 25% real property requirement of 2032A
