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CFP - Finley > CFP - 6.2 Estate Planning > Flashcards

CFP - 6.2 Estate Planning Flashcards

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1
Q

What does the grantor retain in a qualified personal residence trust? (QPRT)

A

Right to live in the residence during the trust term

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2
Q

Can a QPRT have an interest in multiple residences?

A

No

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3
Q

What is the value of a residence gift into a QPRT?

A

The FMV of the house discounted for the number of years of the term of its trust at the applicable Section 7520 rate

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4
Q

Are QPRT’s most effective if the property is expected to appreciate rapidly or depreciate rapidly?

A

Appreciate

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5
Q

Who can live in the residence of a QPRT?

A

Only the term holder and family

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6
Q

Can a QPRT be converted to a GRAT?

A

Yes, at discretion of the term holder

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7
Q

Who is the term holder of a QPRT?

A

Grantor

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8
Q

Who can receive income from a QPRT?

A

Only the grantor (term holder)

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9
Q

Can the grantor sell the residence in the QPRT?

A

No, trustee can but has to reinvest proceeds in another residence

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10
Q

What are the two differences between a QPRT and a PRT?

A

A QPRT can include a small amount of cash that may generate income. A PRT cannot.

The trustee of PRT cannot sell the residence and reinvest in another as they can with a QPRT.

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11
Q

What is the purpose of a QPRT?

A

Grantor can gift residence at a discount and still live in it during trust term. At the end of the trust term it is passed to family members. Grantor can repurchase the home or rent it after the trust term.

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12
Q

If the grantor of a QPRT passes before the end of the trust term, what is the estate tax consequence?

A

The FMV of the residence is included in the gross estate

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13
Q

What is a GRAT?

A

Grantor Retained Annuity Trust -

Grantor gifts property but retains the income stream

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14
Q

How is income generated by a GRAT taxed?

A

Taxed to grantor during lifetime as income

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15
Q

What is the value of gift at creation of the trust for a GRAT?

A

FMV minus the value of the grantor’s retained interest

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16
Q

What is the difference between a GRAT and GRUT?

A

GRAT: Income is a set dollar amount and does not fluctuate each year

GRUT: Income is a percentage of the trust assets and fluctuates each year

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17
Q

Is a GRAT or GRUT included in the gross estate?

A

Only if the grantor does not outlive the trust term - included as FMV required to produce the annuity

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18
Q

Are GRAT/GRUT gifts eligible for annual exclusion?

A

NO - future interest!

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19
Q

Are GRATs/GRUTs revocable or irrevocable?

A

Irrevocable

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20
Q

What is the typical trust term for a GRAT/GRUT?

A

2 to 5 years

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21
Q

The amount eligible for the charitable income tax deduction is generally…

A

The FMV of the cash or property donated

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22
Q

Is there a limit to the amount of charitable deduction allowed for transfer tax purposes?

A

No, unlimited

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23
Q

What is a charitable gift annuity?

A

Donor makes an irrevocable transfer of assets to a charity and receives an annuity from the charity in return

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24
Q

What is the deductible amount for a charitable gift annuity?

A

FMV of assets minus the PV of the annuity payments

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25
Q

What is a pooled income fund? (PIF)

A

Irrevocable transfer of assets to a charity for an income stream from the charity’s commingled asset management

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26
Q

Who creates a PIF?

A

The charity

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27
Q

What does the grantor retain in a PIF?

A

Income interest for one or more beneficiaries for life

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28
Q

What investment is not allowed in a PIF?

A

Tax free munis

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29
Q

Is a PIF donation revocable or irrevocable?

A

Irrevocable

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30
Q

What is a CRT?

A

Charitable Remainder Trust

Irrevocable trust in which the remainder beneficiary is a charity

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31
Q

What are the 2 types of CRTs?

A

CRATs and CRUTs

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32
Q

How long can a CRT last?

A

Either for the life of grantor or for a term up to 20 years

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33
Q

What is the value of the charitable gift to a CRT?

A

Total value of property minus the PV of retained interest

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34
Q

What are the annuity/unitrust restrictions for a CRAT?

A

Annual payment must be at least 5% and less than or equal to 50% of the FMV at inception

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35
Q

The PV of the remainder interest at inception of a CRT must be at least ____% of the initial FMV of the property transferred into the trust.

A

10%

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36
Q

What are the annuity/unitrust restrictions for a CRUT?

A

Annual payment must be at least 5% and less than or equal to 50% of the FMV revalued each year

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37
Q

Can CRATs receive additional contributions?

A

No

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38
Q

Can CRUTs receive additional contributions?

A

Yes

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39
Q

Can PIFs receive additional contributions?

A

Yes

40
Q

What happens if a CRAT does not generate enough income to make the annuity payment?

A

Must dip into principal

41
Q

What happens if a CRUT does not generate enough income to make the annuity payment?

A

Annuity payment can be limited to income earned and the trust can make catch-up payments in future years when income does not meet percentage requirement

42
Q

What is a charitable lead trust? (CLT)

A

Reverse CRT. The trust’s income is given to charity and the remainder reverts to a beneficiary (often a family member)

43
Q

What is the charitable deduction for a CLT?

A

The PV of the income interest for a grantor CLT

The income each year for a non-grantor CLT

44
Q

Who pays the tax for trust income generated in a grantor CLT?

A

The grantor

45
Q

What is the difference between an operating and non-operating private foundation?

A

Operating - use funds in own charitable activity

Non-operating - do not engage in charitable activity, disburse funds for charitable purposes

46
Q

What is the income tax deduction limit for cash contributions to non-operating private foundations?

A

30% of AGI

47
Q

What is the income tax deduction limit for long-term capital gain property contributions to non-operating private foundations?

A

20% of AGI

48
Q

A private foundation must distribute at least ____% of its net investment assets each year.

A

5%

49
Q

What is the income tax deduction limit for cash contributions to private foundation donor advised funds?

A

60% of AGI

50
Q

What is the income tax deduction limit for appreciated property contributions to private foundation donor advised funds?

A

30% of AGI

51
Q

How does a Family Limited Partnership work?

A

Senior family member transfers an asset into the partnership for a 1% general partnership interest and a 99% limited partnership interest. He then makes gifts over time of the limited partnership shares to junior family members.

52
Q

How does recapitalization work to transfer a business to family members?

A

Owner exchanges common stock for common non-voting stock and preferred stock. He keeps the preferred stock and gifts the common non-voting stock to the children. Preferred stock is usually valued at zero.

53
Q

Steve owns property with a basis of $50,000 and a FMV of $140,000. He sells (in a bargain sale) it to his son Murray for $90,000.

What are the tax consequences?

A

$40,000 in taxable gain on the sale

$50,000 gift

54
Q

Sale leaseback payments go to…

A

The older family member

55
Q

Gift leaseback payments go to…

A

The younger family member

56
Q

If the seller dies before an installment note is paid off what happens to the unpaid balance?

A

Balance plus any unpaid interest accrued to the seller’s DOD is included in gross estate. The value of the asset sold is not.

57
Q

What is a Self Canceling Installment Note? (SCIN)

A

An installment note that cancels at the seller’s death

58
Q

What is the gift tax consequence of a private annuity sale?

A

None, as long as the present value of the annuity equals the value of the property transferred

59
Q

Are private annuities secured/collateralized?

A

No, not allowed

60
Q

What is a cross-purchase agreement?

A

Each partner purchases a sufficient amount of life insurance on the lives of each other partner to ensure sufficient liquidity to buy out the deceased or disabled partner

61
Q

The number of policies needed in a cross-purchase agreement is what?

A

n x (n - 1)

62
Q

There are 4 partners engaged in a cross-purchase agreement. How many policies do they need?

A

12

4 x (4-1)

63
Q

What is an entity agreement?

A

The business buys the insurance policies on each partner and uses the death proceeds to purchase the deceased partner’s share

64
Q

What is a minority discount?

A

A reduction in value of a transferred asset allowed if the asset represents a minority interest in the business

65
Q

Minority discounts usually range from ____% to ____%

A

15% to 35%

66
Q

Lack of marketability discounts usually range from ____% to ____%

A

15% to 35%

67
Q

Can minority discounts be used in conjunction with lack of marketability discounts?

A

Yes

68
Q

Tom gave 3% of his business, valued at $500,000, to his son. A 40% discount for minority and lack of marketability was applied.

What is the taxable gift amount?

A

$500,000 x 3% x 60% = $9,000 minus annual exclusion equals $0

69
Q

What is the theory behind blockage discount?

A

Discount is attributable to a large block of publicly traded corporate stock. A large block cannot be liquidated at one time without a decrease in the market price.

70
Q

What is a key person discount?

A

Allowed if a key person is deceased or disabled, because now the company is worth less.

71
Q

To meet the special use reduced valuation…

The value of all property (real and personal) used in the farm or closely held business must be at least ___% of the adjusted value of the gross estate.

A

50%

72
Q

To meet the special use reduced valuation…

The value of the real property alone be at least ___% of the adjusted value of the gross estate.

A

25%

73
Q

To meet the special use reduced valuation…

Decedent or family member must have been a material participant in the business for _____ years.

A

8

74
Q

For special use tests, what is the valuation of the property?

A

Its highest and best use value minus any debt

75
Q

If special use property is disposed of to a non-family member, or its use is discontinued within _____ years of death, all or part of the estate tax savings may be recaptured.

A

10

76
Q

Who qualifies for deferred payment of estate tax (section 6166)?

A

Owners of farms or closely held businesses

77
Q

To qualify for deferred payment of estate tax, the value of the farm or business must exceed ____% of the value of the adjusted gross estate.

A

35%

78
Q

How long can qualifying people defer the payment of estate tax?

A

5 years, then pay the tax in 10 annual installments. Interest is paid during the deferral period.

79
Q

What does section 303 stock redemption allow?

A

Allows the estate to redeem the decedent’s shares as a capital gain, using the DOD basis.

80
Q

To qualify for section 303 stock redemption, the value of the stock must be more than _______ and less than _______.

A

More than 35% of AGE

Less than the federal and state death taxes plus deductible funeral and admin expenses

81
Q

What is the GSTT rate?

A

40% for 2018, the highest estate and gift tax rate

82
Q

Is there a penalty for skipping more than one generation?

A

No, GSTT applies only once

83
Q

Who is a related skip person?

A

Related individual, 2 or more generations below the transferor (i.e. grandchild)

84
Q

Who is an unrelated skip person?

A

Unrelated person 37.5 years or more younger than the transferor

85
Q

Can a trust be a skip person?

A

Yes, if all of the beneficiaries are 2 or more generations below the transferor

86
Q

Jeff has one son, Gerald. Gerald passed away and has a son, Clay. If Jeff gifts property to Clay, does the GSTT apply?

A

No, predeceased parent rule

87
Q

If a transferor has no living lineal descendants, can they gift to grandnephews or grandnieces without incurring GSTT?

A

Yes

88
Q

Who pays GSTT of a direct gift or bequest?

A

The transferor or their estate

89
Q

Who pays GSTT on taxable distributions from a trust?

A

The recipient

90
Q

Who pays GSTT on a taxable termination of a trust?

A

The trust

91
Q

What is the unholy trinity?

A

If the owner, insured, and beneficiary on a life insurance policy are 3 different people. The owner will have made a gift to the beneficiary.

92
Q

Can a spouse or ex-spouse be a skip person?

A

No

93
Q

How is the holding period of inherited property determined?

A

Always long term

94
Q

An unrelated person must be _____ years younger than the transferor to be a skip person.

A

37.5

95
Q

If gain property is gifted, a portion of any gift tax paid is allocated to the recipient’s basis. What is the formula?

A

Difference between transferor’s basis and FMV

divided by FMV

Times gift tax paid

Plus basis equals transferee’s new basis

CFP - Finley (11 decks)

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