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
a grantor retained annuity trust is considered a gift to the extent the value of the _______ exceeds the present value of the _____ calculated at time of the creation
transferred property ; retained income interest
true or false?
a qualified retained income interest is not valued at zero for purposes of section 2702
true
a ____ is usually used with a family member and where the transferor has a better than average probability to outlive the term of the trust
grantor retained annuity trust
under a ___ the remainder passes to noncharitable beneficiaries at the end of the income term
grantor retained annuity trust
true or false?
under a grantor retained annuity trust, if the grantor outlives the trust term the trust will be included in the grantor’s gross estate
false
under a grantor retained annuity trust, if the grantor dies before the expiration of the trust term, what happens?
the fair market value of the trust assets required to produce the annuity will be included in the gross estate
true or false?
under a grantor retained annuity trust , the gift is considered a present interest
false
true or false?
a grantor retained annuity trust is an irrevocable trust
true
a trust where the grantor transfers personal residence to the trust and retains the right to live in the residence during the trust term
QPRT (qualified personal residence trust)
a trust where the grantor transfers property to the trust but retains the right to annual income payments
GRAT or GRUT
what’s the difference between a GRAT and a GRUT?
under a GRAT you receive a fixed dollar amount each year but under a GRUT you receive a fixed % of trust assets each year
under a ___ you are transferring appreciating assets to family members while retaining an income interest
GRAT or GRUT
under a ___ you are transferring appreciating residence to family members while retaining the right to live in the residence for a specified period of time
QPRT
true or false?
QPRT qualifies as a gift of present interest
false
true or false?
GRAT and GRUT qualifiy as a gift of present interest
false
if a client outlives the term of the QPRT, he/she will have to ___ or ___ to keep the residence out of his estate
move out or pay fair market rent his children
true or false?
under a QPRT only the client and family members can occupy the residence during the trust term
true
who does the residence past to at the end of the rust term under a QPRT?
family members
who is the income taxed to under a GRAT or GRUT?
grantor during the trust term
true or false?
a GRAT should be used if the grantor does not expect to outlive the trust term
false, should be used if they are expected to outlive the trust term
true or false?
an unlimited charitable deduction is allowed for transfer tax purposes
true
____ occurs when the donor makes an irrevocable transfer of assets to a charity and receives an annuity from the charity in return
charitable gift annuity
what is the amount of charitable deduction allowed under a charitable gift annuity?
an amount equal to the value of the donated property - the present value of the annuity payments that will be received
an irrevocable transfer of assets to a charity for an income stream from the charity’s commingled asset management
pooled income fund
true or false?
a pooled income fund is created and maintained by the charity
true
true or false?
under a pooled income fund the property given to charity can be commingled with property from other donors
true
can a pooled income fund include municipal bond fund as investments?
no
an irrevocable trust in which the remainder beneficiary is a qualified charity
charitable remainder trust
a charitable remainder trust can take the form of a ____ or a ____
charitable remainder annuity trust or charitable remainder unitrust
true or false?
both a charitable remainder annuity trust and charitable remainder unitrust are irrevocable
true
true or false?
under a charitable remainder annuity trust and charitable remainder unitrust the remainder interest is paid to charity
true
under a charitable remainder annuity trust and a charitable remainder unitrust, the trust term can last _____ or for a term up to ___ years
for the life of the grantor ; 20
the present value of the remainder interest at the inception of a CRAT or CRUT must be at least ___% of the initial FMV of the property transferred to the trust
10%
under a CRAT or CRUT the payout rate must be at least ___% and less than or equal to ____%
5% ; 50%
true or false?
a CRAT allow additional contributions after inception
false
true or false?
a CRUT allows for additional contributions after inception
true
true or false?
under a CRAT the grantor can receive a fixed percentage of the initial fair market value annually but under a CRUT the grantor receives a fixed percentage of the trust assets valued annually
true
the value of charitable gift under a CRAT is equal to ____
total value of property minus present value of retained interest
the value of charitable gift under a CRUT is equal to ____
total value of property minus present value of retained interest
the value of charitable gift under a pooled income fund is equal to ___
total value of property minus present value of retained interest
the payment under a CRAT is equal to ____
at least 5% and no greater than 50% of initial FMV of assets and must paid at least annually
the payment under a CRUT is equal to ____
at least 5% and no greater than 50% of current FMV of assets and must be paid at least annually
the payment under a pooled income fund is equal to ___
fund’s rate of return for the year
who is the remainder beneficiary under a CRAT?
charity
who is the remainder beneficiary under a CRUT?
charity
who is the remainder beneficiary under a pooled income fund?
charity
do CRATs allow for additional contributions?
no
do CRUTs allow for additional contributions?
yes
do pooled income funds allow for additional contributions?
yes
can CRATs hold tax exempt securities? (munis)
yes
can CRUTs hold tax exempt securities? (munis)
yes
can pooled income funds hold tax exempt securities? (munis)
no
under a ____ income from property transferred to the trust is distributed to charity and the remainder reverts to a non charitable beneficiary (often a family member)
charitable lead trust
____ are typically used by high wealth individuals who have no need for current income from the asset
charitable lead trust
true or false?
if a charitable lead trust is set up as a grantor trust then a charitable income tax deduction is available at the time of inception
true
true or false?
if a charitable lead trust is set up as a non grantor trust then a charitable income tax deduction is available at the time of inception
false, no charitable income tax deduction is available
true or false?
a grantor retained charitable lead trust qualifies as a gift of present interest
false
true or false?
under a grantor retained charitable lead trust, the trust income is taxable to the grantor each year
true
____ are tax exempt charitable organizations created to effectively direct charitable contributions
private foundations
true or false?
private foundations usually receive contributions from a variety of supporters
false
___ or ____ are usually the creators of a private foundation
families or corporations
____ private foundations use their funds in their own charitable activity, including purchasing assets
operating
___ private foundations do not engage in charitable activity directly but disburse funds for charitable purposes
non operating
income tax deduction for contributions of cash to private nonoperating foundations is limited to ___% of the donor’s contribution base for the year
30%
tax deduction for contributions of long term capital gain property to private nonoperating foundations is limited to ___ and limited to ___% of the taxpayer’s contribution base
basis ; 20%
which of the following are advantages to a private foundation?
- donor is eligible for a charitable deduction in the year the contribution is made
- provides ability to train heirs to manage wealth
- accumulation of assets allows for larger charitable gifts
- can be administratively expensive
- donations are subject to deductibility limits
- allows the donor to address a specific charitable objective that might not be addressed by other organizations
1, 2, 3, 6
a private foundation must generally distribute at least ___% of its net investment assets each year
5%
the income tax deduction allowed for DAF for contributions of cash is limited to ___% of the donor’s contribution base for the tax year
50%
the income tax deduction allowed for DAF for contributions of appreciated securities is limited to ___% of the donor’s contribution base for the tax year
30%
true or false?
costs to establish a DAF are relatively low
true
true or false?
a donor who uses a DAF has the ability to name several charitable recipients
true
true or false?
you don’t get an immediate income tax deduction while using a DAF
false
true or false?
once a donor makes a contribution to a DAF it is revoable
false
under a charitable remainder annuity trust, you must receive annuity income of at least ___% of the ____ FMV of trust assets
5% ; original
true or false?
the donor of a CRAT is eligible for an immediate charitable income tax deduction
true
____ is a split interest gift where part of interest is given to charity then the donor receives a fixed annuity and the remainder goes to charity
CRAT
under a CRUT, the donor must receive an income payment of at least ___% of the ___ FMV of trust assets
5% ; current
which of the following should be used for clients who want to hedge against inflation?
CRUT or CRAT?
CRUT
true or false?
the donor of a CRUT is eligible for an immediate charitable income tax deduction
true
which of the following should be used for clients who want to avoid establishing a trust but still are charitably inclined?
CRAT, CRUT, or Pooled Income Fund
pooled income fund
the process of planning for the eventual sale or transfer of control of an owner’s interest in a business
business succession planning
a ____ is created to transfer business assets to younger generations at a reduced gift tax valuation and cost
family limited partnership
what is the major objective when using a family limited partnership?
to generate valuation discounts for estate and gift tax purposes on the transfer of a limited interest in the partnership
true or false?
under a family limited partnership the senor family member can retain control of the business and is the only one with general partnership interest
true
true or false?
under a family limited partnership there is no protection from creditors
false, there can be some
true or false?
even with proper planning gifts of a family limited partnership interest do not qualify for the annual exclusion
false, they can qualify for the exclusion
are there attorney fees involved when a family limited partnership is created?
yes
are there appraisal fees associated with a family limited partnership?
yes
true or false?
family limited partnerships are appropriate for a personal service entity
false, should be used for businesses that are capital intensive such as family farms
can a family limited partnership include people other than family members?
no
does a family limited partnership make use of the applicable credit amount?
yes
a lifetime transfer technique for corporations
recapitalization
under a recapitalization technique a ____ family member/business owner trades _____ for common nonvoting stock and _____ voting stock
senor ; common stock ; preferred
under a recapitalization technique the senor family member will retain the ____ stock and gives the ____ stock to the children
preferred voting ; common nonvoting
true or false?
under a recapitalization technique, the preferred stock is generally valued at zero under section 2701 of Chapter 14
true
under a recapitalization technique, the common stock becomes the full value of the _____ and the amount of the taxable ____
business ; gift
a sale of an asset for less than full consideration, usually made to related parties
bargain sale
are bargain sales considered a sale or a gift?
both
under a bargain sale, the difference between the ___ of the assets and the _____ in the asset will be treated as taxable gain to the ____ for income tax purposes
sales price ; seller’s basis ; seller
under a bargain sale, what amount is treated as a gift?
the difference between the FMV of the asset and the consideration received
true or false?
the gift portion under a bargain sale is eligible for the annual exclusion
true
true or false?
under a bargain sale, the asset sold will be included in the seller’s gross estate
false
___ and ____ are used as a planning device to minimize estate taxes
installment notes and self cancelling installment notes
____ is a note providing the buyer will pay purchase price in installments over time
installment note
___ is an installment loan that cancels at the seller’s death
self cancelling installment note
what amount is included in the gross estate of the seller if they die before the installment note is paid off?
the remaining unpaid balance plus any interest accrued to the seller’s date of death
true or false?
if a decedent had a self cancelling installment note, it will be included in a decedent’s gross esate
false
true or false?
if a decedent had a self cancelling installment note, any remaining unrecognized gain must be included on the estate income tax return
true
true or false?
self cancelling installment notes are used between family members
true
true or false?
the buyer of a self cancelling installment note will pay a risk premium
true
true or false?
a self cancelling installment note uses minority discounts
false
true or false?
a family limited partnership uses minority discounts
true
does a self cancelling installment note make use of the applicable credit amount?
no
is a self cancelling installment note considered a gift?
no
does a self cancelling installment note make use of the annual gift tax exclusion?
no
true or false?
if you are in ill health relative to actuarial life expectancy it makes sense to use a self cancelling installment note
true
when using a SCIN, the older you are the ____ the premium you will charge to the buyer
greater
when the seller dies under a SCIN, what will the basis of the buyer be in the property?
the sum of the payments paid to the seller
the sale of an asset (usually to a related party) in exchange for an unsecured promise to pay a life time annuity
private annuity
under a private annuity there will be no gift tax as long as _____
the present value of the annuity to be received equals the value of the property transferred
true or false?
interest under a private annuity is deductible for the buyer
false
under a private annuity, what amount must be included in the gross estate of the seller if they outlives life expectancy?
all the payments received during life but not consumed before death
typically a private annuity is only used between _____
loved ones
true or false?
a private annuity is a sale
true
does a private annuity remove assets from the gross estate?
yes
does a private annuity use minority discounts?
no
does a private annuity use control discounts?
no
can a private annuity be secured by collateral?
no
can a SCIN be secured by collateral?
yes
which of the following do not involve any gift consequences?
- SCIN
- recapitalization
- private annuities
- family limited partnerships
1 and 3
true or false?
a buy-sell agreement can provide liquidity to a decedent’s estate
true
true or false?
a buy-sell agreement does not provide for business continuation
false
true or false?
a buy-sell agreement guarantees there will be a buyer for the business at the decedent’s death
true
true or false?
a buy-sell agreement increases a business’s access to credit because of the continuation plan
true
true or false?
one of the problems with a cross purchase agreement is that life insurance costs could be different if partner ages vary
true
are premiums under a cross purchase agreement funded with life insurance deductible?
no
is the death benefit under a cross purchase agreement funded with life insurance tax free?
yes
what is the difference between an entity agreement and a cross purchase agreement?
under an entity agreement the entity (business) buys itself the insurance policies on each partner/shareholder’s life and uses death benefit to purchase the interest of the deceased partner/shareholder
an entity agreement is also referred to as a _____ if the entity is a corporation
stock redemption agreement
is the death benefit under an entity agreement funded with life insurance tax free?
yes
are the premiums under an entity agreement funded with life insurance tax deductible?
no
under a entity agreement, if the entity is a C corp, life insurance proceeds received may be subject to corporate ____
AMT
a hybrid version of a cross purchase plan and entity agreement
wait and see agreement
allows owners to wait until an owner dies or retires before deciding whether the surviving owners or the business entity will purchase a deceased or retired owner’s interest
wait and see agreement
if there are many partners/shareholders the ___ agreement should be used in regards to buy sell agreements
entity
a ____ agreement is more flexible than a ____ agreement in regards to buy sell agreements
cross purchase ; entity
under a cross purchase agreement, ____ owners will pay higher premiums on the lives of ____ owners
younger ; older
