Book 6 Pages 62 - 106 Flashcards
which of the following are an estate liquidity problem?
- estate may be forced to liquidate assets at a time when they are not fully valued or have not reached their potential value
- assets may have to be sold at less than full value
- closely held businesses may have to be sold to an outsider to generate the cash to pay death taxes
all are estate liquidity problems
true or false?
life insurance death benefits that name the decedent’s estate as the beneficiary are included in the decedent’s gross estate
true
true or false?
if life insurance was originally purchased inside an irrevocable trust, then the decedent will not have to include the death benefits in his/her gross estate
true
QTIP election ___ estate tax by ____ the ____ deduction
lowers ; increasing ; marital
the power to name who will enjoy or own the property
power of appointment
the ___ grants the power of appointment
donor
the ___ receives the power of appointment
holder
the ___ is the person who the holder appoints to enjoy or own the property
appointee
a power in which the holder can appoint the property to him/herself, to his own estate, to his own creditors, or to the creditors of his own estate
general power of appointment
any power that is not a general power
limited power
a limited power is also called a ___ power
special
under a general power of appointment, will any gift tax occur to the holder if the holder exercises the power?
yes
under a general power of appointment, will any gift tax occur to the holder if the holder releases the power?
yes
a lapsing power of appointment that allows a trust beneficiary to withdraw assets from a trust for a limited period of time
Crummey power
Crummey powers are used to take advantage of the ___
gift tax annual exclusion
true or false?
placing a crummey power in an irrevocable trust allows a future interest to be converted to a present interest, which qualifies for the annual exclusion
true
when placing a crummey power in an irrevocable trust, the present interest gift is the right to withdraw the lesser of the ____ or ____
annual exclusion or the amount contributed to the trust
true or false?
when a crummey power exists inside an irrevocable trust, you must withdraw the funds to take advantage of the annual exclsuion
false, just having the right to make the withdrawals is sufficient
to avoid gift tax consequences of a lapsed power under a crummey trust the annual right to withdraw must be limited to the greater of ___% of the value of the property or $____
5% ; $5,000
true or false?
a decedent’s gross estate will include any assets under a general power of appointment held by a decedent at their death whether exercised or not
true
the 5 and 5 power must be ____
noncumulative
true or false?
if the right to exercise general power of appointment is limited to an ascertainable standard such as health, education, or support, then the power is not included in the decedent’s gross estate
true
true or false?
if the right to exercise general power of appointment requires approval of both the holder and an adverse party (someone else) then the power is still included in the decedent’s gross estate
false
true or false?
assets under a limited or special power of appointment are not included in the holder’s gross estate
true
allows the decedent’s estate to deduct an unlimited amount for qualifying bequests or transfers of property to a surviving spouse
marital deduction
to qualify for the marital deduction, the interest in the property must not be a ____ interest
terminable
is a life estate considered a terminable interest?
yes
when a spouse receives a life estate with a ____ the marital deduction is allowed
general power of appointment
straight bequests could be problematic because they could ____ the estate if the first spouse to die does not take advantage of the applicable credit amount
overqualify
a ___ bequest happens when the first spouse to die leaves everything to the surviving spouse
straight
allows a terminable interest to be passed to a surviving spouse and the property to still qualify for the marital deduction
QTIP (qualified terminable interest property)
QTIPs require income from the trust to be payable to surviving spouse at least ____ for life
annually
True or false?
QTIPs require the value of the trust assets to be included in the gross estate of the surviving spouse
true
true or false?
under a QTIP the surviving spouse receives a general power of appointment
false
should a QTIP be used even if the estate is below the estate tax exemption threshold?
no, there would be no need for it
true or false?
to take advantage of QTIP you must elect to do so on the estate tax return
true
allows a terminable interest to be passed to a surviving spouse and the property to still qualify for the marital deduction, without having to elect it on an estate tax return
power of appointment trust
true or false?
under a power of appointment trust, a general power of appointment is given to the surviving spouse
true
under a ____ the first spouse to die has specified the ultimate recipient of the property, but under a ___ the second spouse to die can designate who will receive the remainder interest if he/she were to die
QTIP ; power of appointment trust
a power of appointment trust is sometimes called an ___ trust or a ___ trust
A ; Marital
a QTIP is sometimes called a ___ or ___ trust
C or Q
the purpose of a bypass trust is to take advantage of the ____ when the first spouse dies
applicable credit amount
does property in a bypass trust qualify for the marital deduction?
no
true or false?
when the surviving dies, the bypass trust is not included in his/her gross estate, and the property passes to the remainder beneficiaries
true
a bypass trust can be used instead of an outright bequest to nonspouse heirs who are not ____ or ____ enough to handle the property
sophisticated or mature
a bypass trust is also called a ___ or ___ or ___ or ___
B trust or credit equivalency trust or a credit shelter trust or a family trust
true or false?
both a QTIP trust and power of appointment trust qualify for unlimited marital deduction
true
because a disclaimer has to be made within ___ months of the spouse’s death, the surviving spouse may find it difficult to give up property at a time when the surviving spouse may not be feeling very secure
9 months
true or false?
the unlimited marital deduction is disallowed if the surviving spouse is not a US citizen
true
true or false?
the unlimited marital deduction is disallowed if the decedent is an alien leaving assets to a US citizen
false, the unlimited marital deduction would be allowed in this case
true or false?
the marital deduction is allowed for property placed in a qualified domestic trust that passes on to a non US surviving spouse
true
under a qualified domestic trust (QDOT), the executor must make ___ election
irrevocable
true or false?
an unlimited marital deduction is allowed for testamentary transfers to a surviving spouse
true
at the time of his death, Tom owned a parcel of land valued at $8mil. He also had a checking account of $250k. He bequeathed the land to his spouse and the checking account to his son. What amount if any can be claimed as a marital deduction and what is the value of Tom’s taxable estate?
$8million marital deduction
$250k taxable estate
at the time of his death, Tom owned a parcel of land valued at $8mil. He also had a checking account of $250k. The land had a mortgage of $350k. He bequeathed the land to his spouse and the checking account to his son. What amount if any can be claimed as a marital deduction and what is the value of Tom’s taxable estate?
$7,650,000 marital deduction
$250k taxable estate (the mortgage lowers his gross estate from $8,250,000 to $7,900,000 - known as adjusted gross estate)
true or false?
the marital deduction is reduced by any liabilities, such as mortgages and death taxes, that reduce the amount of property transferred to the surviving spouse
true
as the marital deduction is reduced, the likelihood of paying federal estate taxes ___
increases
occurs when the first decedent spouse in effect uses to much marital deduction at death
overqualification
states that any applicable exclusion amount not used by first spouse to die may be available to the surviving spouse
portability provision
name two ways to avoid over-qualification
- use a bypass trust
2. leave assets in his taxable estate by bequeathing the assets directly to an heir other than the surviving spouse
occurs when the first decedent spouse in effect uses too little marital deduction at death
under-qualification
if too little marital deduction is used, the decedent’s taxable estate will ___ the applicable exclusion amount, resulting in estate tax being due
exceed
name two ways of avoiding under-qualification
- using a marital trust
2. bequeath assets directly to the surviving spouse
a legal arrangement that involves three parties
trust
the person who transfers the property (corpus/principal) into the trust
grantor
the person or entity that holds the legal title to the assets and has a fiduciary responsibility to safeguard the property and distribute corpus and trust income as directed by the trust instrument
trustee
the person or persons that the trust benefits
beneficiary
a ___ trust is when the grantor is both the trustee and beneficiary
grantor
when a beneficiary receives income from a trust they are said to have an ____ interest
income
when a beneficiary receives the trust principal upon termination of the trust they are said to have a ___ interest
remainder
a ___ remainder is one that in nonforfeitable
vested
a ___ remainder is where the interest depends on whether or not a certain future event happens
contingent
a grantor who retains the right to receive the trust principal upon termination of the trust is said to have a ___
reversion
the rule against ___ states that an interest cannot last longer than 21 years after the death of the youngest person who was named in the trust instrument creating the interest and who was alive on the date the interest was created
perpetuities
if the trust is a(n) ____ trust, the interest is created on the date the trust is created
irrevocable
if the trust is a(n) ___ trust, the interest is created on the date in which the trust becomes irrevocable, usually at the death of the settlor)
revocable
true or false?
avoiding probate is a reason to create a trust
true
true or false?
avoiding or reducing transfer and/or income taxes is a reason to create a trust
true
inter vivos means _____
living trust
a type of trust that becomes effective at death
testamentary trust
are transfers to a testamentary trust subject to gift tax?
no
a testamentary trust is created within a ___
will
true or false?
assets that are transferred to a testamentary trust avoid probate
false
a trust that is legally ready to receive property but has not yet done so
unfunded trust
a ___ trust is required to pay out all income to beneficiaries annually
simple
true or false?
under a simple trust payouts to charitable beneficiaries or for a charitable purpose are allowed
false
true or false?
a revocable living trust will be included in a decedent’s gross estate
true
a trust that passes a life insurance policy to grandchildren
dynasty trust
do dynasty trusts avoid generation skipping transfer tax?
yes
a trust created to pay education and medical expenses of grandchildren or other skip beneficiaries free of gift tax and generation skipping transfer tax
health and education exclusion trust (HEET)
the power to direct income at the discretion of the trustee for the benefit of the beneficiary
sprinkling
can a simple trust distribute corpus?
no
what are two differences between a qualified personal residence trust and a personal residence trust (QPRT vs. PRT)?
- a PRT can’t hold any cash, but a QPRT can
2. a PRT does not allow the trustee to sell the residence and reinvest the proceeds in another residence
under a ___ trust all income, deductions, and credits of the trust are attributable to the grantor
grantor
the rule against perpetuities prevents trusts from having an ____ life
infinite
under a ____ income is taxed to the grantor during lifetime or trust term for income tax purposes
grantor retained annuity trust or grantor retained unitrust
true or false?
a grantor retained annuity trust makes fixed payments to grantor at least annually
true
