Ch 10 - Tax Planning With Trusts

Question 0

• Power to revoke creates grantor trust taxation
• Incomplete for gift tax purposes
• Value included in grantor’s gross estate

Answer 0

What is a Revocable Trusts

Question 1

Revocable and

Irrevocable

Answer 1

What are the Two Basic Trust Types

Question 2

• •Probate and ancillary probate avoidance
• •Immediate distribution of income or principal to heirs at grantor’s death
• •Pour-over device for consolidation of assets
• •Safeguard against spouse’s right of election
• •Avoidance of creditor claims (some states)
• •Opportunity to observe trust in operation
• •Selection of trust situs
• •Can contain A-B formula at death
• •Uninterrupted business continuation potential

Answer 2

What are the Advantages of Revocable Trust

Question 3

• Grantor retains certain control that causes grantor to be taxed on trust income
• Beneficiary is given certain control that causes beneficiary to be taxed on trust income

Answer 3

What are Irrevocable Grantor Trusts

Question 4

• Income taxation flows to grantor if certain powers retained
• Consent of adverse party eliminates grantor trust rules for income tax purposes

Note: independent trustee is nonadverse

Answer 4

What are the Grantor Trust Income Tax Consequences

Question 5

• •Power to substitute trust property for other property of equivalent value • (most common power used)
• •Power to borrow without adequate interest or security
• •Reversionary interest valued at greater than 5%
• •Power to control beneficial enjoyment of income or principal (power okay for independent trustee)
• •Power to have income or principal distributions to grantor or spouse •Income actually used to satisfy grantor’s legal support obligation
• •Power for trustee to use funds to purchase life insurance on life of grantor or grantor’s spouse
• •General administrative powers exercisable by nonfiduciary or without fiduciary consent

Answer 5

What Powers are Created with Grantor Trust Tax Treatment

Question 6

• Power for independent trustee to sprinkle income or corpus (for other than legal support)
• Power to allocate among charitable beneficiaries
• Ascertainable power to invade for beneficiaries
• Power to postpone income during minority or legal disability

Answer 6

What Administrative Powers Avoid Grantor Trust Tax Treatment

Question 7

• Retained income interest
• Reversionary interest above 5%
• Retained right to revoke, amend, or terminate
• Incidents of ownership in life insurance policies
• General power of appointment
• Transfers of life insurance within 3 years of death

Answer 7

What are the Estate Tax Consequences of Transfers to Trusts with Retained Powers

Question 8

Income Tax:

• Consent of adverse party avoids income taxation to grantor

Estate Tax:

• Consent of adverse or nonadverse party irrelevant for estate inclusion

Answer 8

What are the Income and Estate Tax implications With respect to transfers to trusts with retained powers or controls?

Question 9

• Income not taxed to grantor, but is taxed to trust, its beneficiaries or some combination
• Will be completed gifts for gift tax purposes

Answer 9

What is a Irrevocable (Non-Grantor) Living Trusts

Question 10

• –Separate tax-paying entity
• Allocation of income to lower bracket beneficiary
• Potential income tax savings
• –Accumulation and investment of appreciation
• –Safety of principal and minimization of risk
• –Security and protection for beneficiaries
• –Completed gifts
• –Estate tax savings on appreciation
• –Outside gross estate (is adjusted taxable gift)
• –Present interest gift allows annual exclusion
• –Privacy
• –Probate avoidance Reduces administrative costs;
• Avoids delay
• –Shelter from spousal right of election
• Protection for children from prior marriage

Answer 10

What are the Advantages of an Irrevocable Living Trusts with No Retained Powers or Controls

Question 11

–Irrevocability Grantor loses control over assets

–Legal fees Drafting and execution

–Trustee fees Continuing basis

Answer 11

What are the DisAdvantages of an Irrevocable Living Trusts with No Retained Powers or Controls

Question 12

• Income tax potential
• Estate inclusion potential if beneficiaries hold general power of appointment

Answer 12

How are Trust Beneficiaries taxed?

Question 13

• Life income interest
• 5 and 5 power (noncumulative withdrawal power)
• Ascertainable standard withdrawal powers
• Independent trustee powers to invade corpus for benefit of income beneficiary
• Limited/special power of appointment over remainder

Answer 13

What are the Irrevocable Trust Benefits for Income Beneficiaries without Estate Inclusion

Question 14

• Power to distribute income or principal to satisfy support obligation creates inclusion in estate
• Income taxed to grantor if power actually used
• Independent trustee/custodian should be used
• Kiddie tax rules potential

Answer 14

What are Minors Trusts or Custodial Accounts

Question 15

• Cross-trusts ignored for tax purposes when:

• –Terms are essentially identical
• –Identical economic circumstances and benefits for grantors [Treated as powers retained by grantors]

Answer 15

What is a Reciprocal Trust Doctrine

Question 16

•Taxable events

• –direct skip
• –taxable distribution
• –taxable termination

•Flat 40% tax rate (2013)

Answer 16

What is a Generation-Skipping Transfer Tax

Question 17

• Grandpa writes a check to grandchild
• Grandpa’s will leaves bequest to grandchild
• Grandpa funds a minor’s trust for one beneficiary

Answer 17

What causes GST Taxable Events—Direct Skip

Question 18

Grandma funds a trust for multiple beneficiaries and gives discretionary distribution powers to trustee. Trustee distributes income or principal to a skip person.

Answer 18

What causes GST Taxable Events—Taxable Distribution

Question 19

Grandma’s provides a trust. Her son is given a life income interest without a general power of appointment. At son’s death, the trust is distributed to son’s children (Grandma’s grandchildren). There is a taxable termination when son dies.

Answer 19

What causes GST Taxable Events—Taxable Termination

Question 20

• Annual exclusion (only for direct skips)
• Tuition or medical expense
• $5.25 million (2013) GST exemption
• Predeceased parent exception
• Parent of transferor’s grandchild must be dead prior to creation of trust

Answer 20

What are the Generation-Skipping Transfer Tax Exemptions and Exclusions

Question 21

• Applied first against direct skips (above available annual exclusions)
• Applied against contributions to fund a trust that will benefit grandchildren
• Trust will be fully exempt if GST exemption is applied dollar-for-dollar against all contributions
• GST exemption should be allocated most efficiently on gift or estate tax returns against contributions to trusts most likely to benefit skip persons

Answer 21

How is the GST Exemption used?

Question 22

• General power: creates inclusion in estate of powerholder
• Limited /special power: avoids estate inclusion

Answer 22

What are Powers of Appointment

Question 23

•Appointment of property could be for:

• –self
• –creditors
• –estate
• –creditors of estate

Answer 23

Who are General Power Appointees

Question 24

• Taxable at –lapse –exercise
• Unless exercisable only with consent of:
• –donor of power
• –party with substantial adverse interest

Answer 24

How is a General Power of Appointment taxed?

Question 25

• Reservation of powers by grantor/donor invites estate taxation
• Release of general power by powerholder subject to gift taxation
• Exception to tax ownership treatment for general power of appointment:
• –When exercise of power by powerholder/donee requires consent of donor or adverse party

Answer 25

How are General Powers taxed?