Ch 13 Estates Generation-Skipping Transfers Flashcards
Qualified transfers are not subject to GSTT.
a. True b. False
True
The inclusion ratio is determined by subtracting the applicable fraction from one.
a. True b. False
True
The inclusion ratio is determined by subtracting the applicable fraction from one.
a. True b. False
True
The grantor of a dynasty trust often gives the trustee the authority to terminate the trust.
a. True b. False
True
Dynasty trusts should always include spendthrift clauses.
a. True b. False
True
To which of the following transfers does the GSTT not apply?
a. A taxable termination.
b. A taxable distribution.
c. A direct skip.
d. A skip-over.
The correct answer is d.
A skip-over does not exist. GSTT applies to the three other listed options.
for 2022
Melanie has never made any gifts subject to GSTT. She is single and would like to transfer as much as she possibly can during the year to her grandchild without triggering any GSTT. How much can Melanie transfer to her grandchild this year and meet her goal?
a. $16,000.
b. $4,769,800.
c. $12,060,000.
d. $12,076,000.
The correct answer is d.
Melanie can transfer an amount up to the GSTT exemption, $12,060,000 and the annual exclusion for the year, $16,000.
Utilizing both exclusions, Melanie can transfer $12,076,000 for 2022 without being subject to the GSTT
Many wealthy grandparents wish to name their grandchildren as the beneficiaries of their life insurance policies with substantial death benefits. How should the life insurance policies for the benefit of grandchildren be held if the grandparents are likely to be subject to the estate tax?
a. A revocable life insurance trust should be established and funded with a transfer of the life insurance policy.
b. The grandparent should be the owner with the grandchild as the listed beneficiary.
c. An irrevocable life insurance trust should be created for the benefit of the grandchild.
d. The ownership of the policy should be transferred to the grandchild.
The correct answer is c.
The policy should be transferred to an ILIT with the grandchild listed as the beneficiary. Ideally, the ILIT would be funded with cash contributions less than the annual exclusion and would pay the premiums of the life insurance policy on the grandparent’s life.
Option a is incorrect because a revocable trust would
still cause inclusion in the grandparent’s gross estate and possible GSTT consequences.
Option b is incorrect because if the grandparent owns the policy, the death benefit will be included in the grandparent’s gross estate and still subject to GSTT.
Option d is incorrect because the grandchild should not own the life insurance policy outright since it would not place any limitations on the grandchild’s ability to spend the funds
Klein transfers $2,000,000 in 2022 to an irrevocable trust providing that income is to be accumulated for 22 years. At the end of 22 years, the accumulated income is to be distributed to Klein’s child, Calvin, and the trust principal is to be paid to Klein’s grandchild, Harris. Klein allocates $800,000 of his GSTT exemption to the trust on a timely filed gift tax return.
What is the GSTT rate applicable to the trust?
a. 20%.
b. 24%.
c. 40%.
d. 60%.
The correct answer is b.
The applicable fraction of the trust is 0.40 ($800,000 / $2,000,000) and the inclusion ratio is 1 - 40% = 60%.
If the maximum federal transfer tax rate is 40% (in 2022), the GSTT rate applicable to the trust is 24% (0.40 x 0.60).
Upon what form is a lifetime GST reported?
a. Form 1040.
b. Form 709.
c. Form 706.
d. Form 1041.
The correct answer is b.
Any lifetime GST is reported on Form 709, the United States Gift and Generation-Skipping Transfer Tax
Return
In 2024, Patricia, a single wealthy woman, has made previous generation-skipping gifts equal to her current lifetime exemption and now plans to give her granddaughter $1,000,000 this year. Patricia has made no gifts at all to anyone this year.
What will be Patricia’s total cash out flow as a result of this transaction?
$1,000,000.
$1,392,800.
$1,785,600.
$1,942,720
$1,942,720
Rationale
GST Tax
Gift Amount $1,000,000
Annual Exclusion (AE) $18,000
Taxable GST $982,000
GST Tax Rate 40%
GST Tax $392,800
Gift Tax Calculation
Gift (includes GST tax) $1,392,800
Annual Exclusion (AE) $18,000
Taxable Gifts $1,374,800
Gift Tax Rate 40%
Gift Tax $549,920
Summary
Gift $1,000,000
GST Tax $392,800
Gift Tax $549,920
Total Cash Outflow $1,942,720
Byron, age 65, gave $30,000 each to his son, his daughter, his six-year-old grandniece, his 21-year-old female neighbor, and his wife. Which of the transfers would be subject to GSTT?
The transfer to his wife.
The transfer to his neighbor.
The transfer to his grandniece and the neighbor.
The transfer to his grandniece, his neighbor, and his daughter.
The transfer to his grandniece and the neighbor.
Rationale
Only the transfer to his neighbor and his grandniece would be subject to GSTT. If the transferee is a non-lineal descendant who is more than 37.5 years younger than the transferor, the transfer is subject to GSTT.
All of the other transfers are transfers to relatives within one generation. A grandniece is a lineal descendant and a skip person
Upon what form is a testamentary transfer subject to GSTT reported?
Form 1040.
Form 706.
Form 1041.
Form 709.
Form 706.
Rationale
Testamentary transfers subject to GSTT are reported on the Form 706, the United States Estate and Generation-Skipping Transfer Tax Return.
Which of the following statements concerning the GSTT is not correct?
Each individual can exclude up to $13,610,000 of transfers from GSTT.
The GSTT is applied to a gift after the application of the annual exclusion.
Gifts that are subject to GSTT can be split.
The GSTT only applies to transfers in trust.
The GSTT only applies to transfers in trust.
Rationale
The GSTT applies to the transfer of any property to a skip person or an interest in trust for the benefit of a skip person. All of the other statements are true
Grayson, age 78, retired from his 40-year career at BBB Corporation last year. As part of an overall estate plan, Grayson has begun establishing many different trusts.
Of the following list of beneficiaries listed in Grayson’s trusts, who would be a skip person for purposes of the GSTT?
Lucy, age 31, Grayson’s wife.
Tiffany, age 22, Grayson’s girlfriend.
Parker, age 25, Grayson’s grandson, whose mother is living, but whose father, (Grayson’s son) is deceased.
Bill, Grayson’s 81-year-old lifelong neighbor.
Tiffany, age 22, Grayson’s girlfriend.
Rationale
Because Tiffany is unrelated and is more than 37.5 years younger than Grayson, she is a skip person. Lucy is not a skip person because a spouse is always deemed to be in the transferor’s generation. Parker is not a skip person because of the predeceased ancestor rule. Bill is not a skip person because he is older than Grayson.
Klein transfers $2,000,000 in 2024 to an irrevocable trust providing that income is to be accumulated for 22 years. At the end of 22 years, the accumulated income is to be distributed to Klein’s child, Calvin, and the trust principal is to be paid to Klein’s grandchild, Harris.
Klein allocates $600,000 of his GSTT exemption to the trust on a timely filed gift tax return. What is the GSTT rate applicable to the trust?
20%.
28%.
30%.
70%.
28%.
Rationale
The applicable fraction of the trust is 0.30 ($600,000 / $2,000,000) and the inclusion ratio is 1 - 30% = 70%. If the maximum federal transfer tax rate is 40% (in 2024), the GSTT rate applicable to the trust is 28% (0.40 x 0.70).
Billy funds a trust with property valued at $7,000,000. The income beneficiary is Robin who has a general power of appointment over the trust. The remainder beneficiary is Seth, Robin’s son and Billy’s grandson. Billy dies and then Robin dies.
After Robin’s death, the assets are distributed to Seth. Who pays any GST tax?
There is no GST tax.
Seth after the distribution.
The trust before the distribution to Seth.
Robin’s estate.
There is no GST tax.
Rationale
There is no GST tax. Robin’s general power will make the entire trust included in her gross estate and Seth is not a skip person relative to Robin.
Which of the following transfers or bequests will not be subject to generation-skipping transfer tax?
- The grantor placed $16 million in trust for his son’s three children, but his son is no longer living at the time the trust was created and the grandchildren live with their mother.
- The decedent left $16 million in his will to his grandson, and the decedent had two living children, neither of whom was the parent of the grandson.
- The grantor’s only son had already died when he transferred $16 million to two separate trusts for his two grandnieces, whose parents were dead, and another $2 million to a trust for his grandson.
- The decedent had no children and left $16 million to his nephew, even though the decedent’s brother was still alive but had stopped communicating with the decedent.
1 and 4.
2 and 3.
1, 2, and 4.
2, 3, and 4.
1, 2, and 4.
Rationale
The predeceased parent exception applies to transfers to a grandchild where the parent who is a lineal descendant of the transferor has died prior to the transfer.
The transfer in statement 1 is not subject to the GST tax because the grandchildren’s father is the lineal descendant of the grantor and is deceased.
The grandson who received the $16 million in statement 2 also has no living parent descended from the decedent, so the GST tax will not apply.
The transfer to the two grandnieces will be subject to GST tax because the grantor has a lineal descendant who is alive.
Transfers to collateral heirs, such as the grandnieces, qualify for the predeceased parent exception, except when a lineal descendant is alive.
Since the grandson is a lineal descendant, the GST tax will be applied. In statement 4, the bequest to the nephew is not a generation-skipping transfer because the nephew is just one generation below the transferor
Which of the following exemptions or credits is provided in the generation-skipping transfer tax rules for a generation-skipping transfer that occurs during 2024?
A $13.61 million exemption for each transfer from the grantor to their grandchildren in a direct skip.
A $13.61 million exemption per child of the grantor.
A $13.61 million exemption per transferor for all generation-skipping transfers.
A $13.61 million unified credit for lifetime or testamentary generation skipping transfers
A $13.61 million exemption per transferor for all generation-skipping transfers.
Rationale
The current provision for 2024 is a $13.61 million exemption per grantor for all of their generation-skipping transfers.
Ross is age 74 and made transfers to the following people. Which of the following individuals would be considered a skip person?
- Rachel; Ross’s wife who is 23 years old
- Joey; Ross’s grandnephew who is 13 years old
- Matthew; Ross’s youngest son who is 5 years old
- Monica; Ross’s sister’s grandchild
All of the above.
Joey and Monica.
Matthew and Monica.
Monica only.
Joey and Monica.
Rationale
Lineal descendants must be two or more steps down. The 37½ year rule applies to non-lineal persons. A spouse of the transferor is never a skip person. A grandnephew of the transferor is a lineal descendant and a skip person.
Many wealthy grandparents wish to name their grandchildren as the beneficiaries of their life insurance policies with substantial death benefits.
How should the life insurance policies for the benefit of grandchildren be held if the grandparents are likely to be subject to the estate tax?
A revocable life insurance trust should be established and funded with a transfer of the life insurance policy.
The grandparent should be the owner with the grandchild as the listed beneficiary.
An irrevocable life insurance trust should be created for the benefit of the grandchild.
The ownership of the policy should be transferred to the grandchild.
An irrevocable life insurance trust should be created for the benefit of the grandchild.
Rationale
The policy should be transferred to an ILIT with the grandchild listed as the beneficiary.
Ideally, the ILIT would be funded with cash contributions less than the annual exclusion and would pay the premiums of the life insurance policy on the grandparent’s life.
Option a is incorrect because a revocable trust would still cause inclusion in the grandparent’s gross estate and possible GSTT consequences.
Option b is incorrect because if the grandparent owns the policy, the death benefit will be included in the grandparent’s gross estate and still subject to GSTT.
Option d is incorrect because the grandchild should not own the life insurance policy outright since it would not place any limitations on the grandchild’s ability to spend the funds.
Greer, a 46-year-old divorced mother of three, has owned her own automotive repair center for 15 years. She would like to provide income to her assistant, Marilyn, and her other friends. Greer established a trust naming Marilyn, age 67, as the initial income beneficiary for her life. At Marilyn’s death, Doug, a 59-year-old mechanic who has worked for Greer, will receive the income for the remainder of his lifetime.
At Doug’s death, the remainder interest will be divided equally between Greer’s sons, Larry, Curley, and Moe. When will this trust be subjected to GSTT?
At the date of creation of the trust.
At Marilyn’s death.
At Doug’s death.
Never.
Never.
Rationale
The trust will not be subjected to the GSTT because the non-family beneficiaries are older than the trust settlor, and the remainder beneficiaries are the first generation below the settlor.
Thus, no beneficiary is a skip person.
Melanie has never made any gifts subject to GSTT. She is single and would like to transfer as much as she possibly can during the year to her grandchild without triggering any GSTT.
How much can Melanie transfer to her grandchild this year and meet her goal?
$18,000.
$5,389,800.
$13,610,000.
$13,628,000.
$13,628,000.
Rationale
Melanie can transfer an amount up to the GSTT exemption, $13,610,000 and the annual exclusion for the year, $18,000. Utilizing both exclusions, Melanie can transfer $13,628,000 for 2024 without being subject to the GSTT.
All the following statements concerning the generation-skipping transfer tax are correct except:
The tax applies to a lifetime gift or testamentary transfer from a grandparent directly to a grandchild.
A taxpayer avoids the tax by transferring property into a trust for the life of the taxpayer’s child, with the remainder to the grandchildren.
Outright gifts qualifying for the gift tax annual exclusion are not subject to the tax (up to the annual exclusion amount).
Payments of educational or medical expenses for a grandchild are not subject to the tax.
A taxpayer avoids the tax by transferring property into a trust for the life of the taxpayer’s child, with the remainder to the grandchildren.
Rationale
The generation-skipping transfer tax applies to direct skips, which are gifts from grandparents to grandchildren.
The GST tax also applies to trust distributions or remainder interests that pass to skip beneficiaries.
