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CFP 516 > Chapter 3: Methods of Estate Transfer during Life > Flashcards

Chapter 3: Methods of Estate Transfer during Life Flashcards

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1
Q

What are the elements and prties to a trust?

A

Grantor/Settlor/Creator
Beneficiary
Trustee

They can all be the same person

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2
Q

Why do people create a trust?

A 
Ability to benefit beneficiaries 
Trusts are flexible 
Avoid probate at grantors death
Protect grantors/beneficiary assets from creditors
Income, gift, or estate tax savings
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3
Q

What is a grantor trust?

A

Any income tax consequences are reportable as income to the grantor

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4
Q

When is a revocable living trust used?

A

Typically used in planning for grantors legal incapacity

These can be funded or unfunded

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5
Q

What is the rule against perpetuities?

A

Legal limit on how long a trust may last – generally 21 years

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6
Q

How are trusts classified?

A

Categorized based on:

  • Powers (ex: revocable/irrevocable) What is retained vs what is relinquished
  • Operative date
  • Income taxation
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7
Q

What is the permancy of the trust?

A

Revocable trust

Irrevocable trust

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8
Q

What is the operative date of a trust?

A

Intervivos trusts are made effective during the grantor’s lifetime (more common)

Testamentary trusts don’t get funded until death (Assets will have to go through probabte)

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9
Q

What are income payout requirements for a simple trust?

A
  • Must pay out all income at least annually
  • Does not distribute any trust principal or corpus
  • Income taxed at beneficiary’s individual tax rate
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10
Q

What are Complex trusts?

A
  • Any trusts that are not simple trusts
  • Any irrevocable trusts
  • Any trust that distributes in excess of its income
  • Income may be accumulated
  • Discretionary trusts
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11
Q

What is the sprinking (spray) provision?

A

Directs the distributions in how the trustee deems appropriate – whoever and whatever amounts

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12
Q

What is the spendthrift provision?

A

Prevents pledging the assets in the trust as a loan
Can’t use the trust assets for creditors
Also part of a special needs trust

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13
Q

What is a special needs trust?

A

Makes it so the benefiary does not have control over the assets and can continue to collect government support

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14
Q

What are advantages of an intervivos trust over testamentary?

A
  • the annual exclusion
  • Removal of future appreciation
  • Taxable income may be moved from high bracket donor to lower bracket donee
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15
Q

What are advantages of an intervivos trust over testamentary?

A
  • the annual exclusion
  • Removal of future appreciation
  • Taxable income may be moved from high bracket donor to lower bracket donee
  • Creditor protection
  • Enjoy seeing the donees enjoy the gift
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16
Q

What is the 3 year rule

A

if you make a gift, you must live 3 years longer in order for the gift tax exclusion to apply

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17
Q

What are disadvantages of a lifetime gift vs testamentary transfer?

A
  • Gift tax due
  • loss of step-up in income tax basis
  • Does not provide for possible changed circumstances of donor and/. or donee
  • Loss of the use of asset
  • Psychological loss from losing control of the asset
  • Irrevocability
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18
Q

What are types of estate transfer during life?

A
  1. Outright gift
  2. Net Gift: Donee pays the gift tax
  3. Reverse Gift: Transferring wealth to someone who will probably die so you get a step up in basis. (Must outlive the gift by 1 year)
  4. Gift Leaseback
  5. Custodial gifts
  6. Educational accounts
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19
Q

What is the 2503(b)?

A
  • Provide for college funding
  • Irrevocable
  • Can be set up for anyone
  • Can have multiple beneficiaries
  • Not required to distribute
  • Income distribution is mandatory
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20
Q

@503

A
  • Trust ends when the minor reaches 21

- Income distribution is discretionary

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21
Q

How to gift to minors?

A

Custodial accounts

Section 529 plans

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22
Q

What is an UTMA?

A
  • used to save money for college
  • only for minors (18 or 21 depending on state)
  • one beneficiary only
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23
Q

What is a 529 plan?

A 
Irrevocable
No contribution limit
No phaseout limits
One beneficiary per account-but you can change the beneficiary
No age limit
You can front end 5 years of gifting
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24
Q

What is a coverdell?

A

$2000 annual limit total
Irrevocable
Phaseout limits

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25
Q

What is a crummey provision?

A

Makes it so that a trust gift is a present interest gift

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26
Q

What are Grantor Retained Trusts?

A

GRAT: Receive back a fixed payment for a term of years

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27
Q

What are Grantor Retained Annuity Trusts?

A

GRAT: Receive back a fixed payment for a term of years

If you outlive the trust, the remainder goes to children

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28
Q

What is a Intentiaonlly Defective Grantor Trust?

A

You make a gift, it’s a completed gift for transfer tax purposes, but it’s defective for income taxes.

So you continue to pay income taxes on the gift so you can give more to heirs

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29
Q

What is a marital trust?

A

It qualifies for the marital deduction
QTIP Trust
A Trust

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30
Q

What are types of sales transactions?

A 
Installment sale
SCIN
Private annuity
Intra-family loan
Bargain sale
Sale leaseback
Intentional defective grantor trust
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31
Q

What is an installment sale?

A

Allows us to sell an asset and recognize the gain over the installment/payment period

32
Q

What is a SCIN?

A

Self Canceling Installment Note.

If the seller dies, the buyer just gets the asset and doesn’t have to complete payments

Basis is the purchase price

Can be collateralized

If you do this, you need to either charge an above market interest rate OR the sales price needs to be above market price. IRS table

33
Q

What is a private annuity?

A

A sale of asset typically between family.

The buyer promises a payment for the rest of the sellers life

Basis is the sum of payments made

Unsecured

Not deductible

Each annuity payment includes:

  • return of basis
  • Gain on sale
  • Ordinary income (interest)
34
Q

What is an intra family loan?

A

Lower than market rate loan between family members.

35
Q

What is a bargain sale?

A

Sell an asset for less than fair market value.

The difference between sales price and FMV is a gift and subject to gift tax

36
Q

What is a sale leaseback?

A

You sell something than lease it back—thus avoiding gift tax

37
Q

What is the Intenially Defective Grantor Trust

A

Making a transfer of an asset into a trust but it’s defective in the sense that the grantor still has to pay the income tax on the income from the asset.

Note that the payments of the income tax is not considered an additional gift to the grantee

38
Q

What strategies are appropriate for a client who wants to receive entire purchase price at the time of sale?

A
  • Outright sale
  • Bargain sale
  • Sale Leaseback
39
Q

What strategies are appropriate for a client who wants to allow for installment reporting of gain?

A
  • Installment sale
  • SCIN
  • Sale-leaseback if purchased in installments
40
Q

What strategies are appropriate for a client who wants to include the unpaid purchase price in the sellers estate at death

A
  • Installment sale
  • Private annuity IF the payments will continue to a survivor
  • Sale-leaseback if purchased in installments
41
Q

What strategies are appropriate for a client who wants to allow for continued use of the assets?

A

Sale leasback

42
Q

What strategies are appropriate for a client who wants to avoid possible gift tax element?

A

-

43
Q

What are buy-sell agreements?

A

Purpose
-to assure closely held business owner of a market for his or her interest in the event of death or disability

How it works:
- Each owner obligates himself to sell his interest through a cross purchase or entity purchase

44
Q

What are recapitalization transactions?

A

It changes the structure of the company to a C corp so that they can have different classes of stock

Allows additional owners

Gives an incentive

Freezing technique

Discount on the transfer

45
Q

What is an entity purchase arrangement?

A

A company buys a life insurance policy on each of the owners

The premium payment is not deductible

46
Q

Why life insurance?

A
  • provides estate liquidity
  • Pay off debts
  • Lifetime objectives
  • Income replacement
  • Wealth accumulation
  • Death benefit received income tax free but not gift or estate tax free
  • Death benefit included in the gross estate
47
Q

Transfer for value rule

A

Could happen if Greg transfers the policy on him to me when he retires.

48
Q

What is included in the gross estate in regards to life insurance?

A

The death benefit.

UNLESS
An owner who is not the insured dies

49
Q

What is the purpose of an irrevocable life insurance trust?

A

Exclude the death benefit from the gross estate

Creates a liquid pool to pay estate tax due

50
Q

What is a split dollar plan?

A

Allows the company to own a collateral interest in the premiums paid

Provides death benefit to the employee

Employer pays the policy, employee gets the death benefit

Employee only pays the tax cost

51
Q

What is key person life insurance?

A

Purchased by a company

52
Q

What are the advantages when the insured is the owner of a life insurance policy? Disadvantages?

A
  • Total control of the policy including right to name beneficiaries
  • Disadvantages is that the death benefit is included in the gross estate of the insured
  • The insured may be su
53
Q

What are the advantages and disadvantages of an outright gift to a non charitable donee?

A

Advantages

  • Qualifies for annual exclusion
  • Removes asset from the donor’s gross estate
  • Removes future appreciation of asset from gross estate
  • Removes the future income from the donor’s gross estate
  • No recognition of gain
  • Credit protection for the asset

Disadvantages

  • Loss of control of the asset
  • Loss of future income from the asset
  • Included in adjusted taxable gifts
  • Using up the applicable credit amount or payment of gift tax out of pocket
54
Q

What are advantages and disadvantages of an outright gift to a CHARITABLE donee?

A

Advantages

  • If qualified charity, no gift tax due bc of the annual exclusion and/or gift tax charitable deduction
  • If qualified charity, donee will get an income tax deduction if she itemizes deductions
  • If it’s a charitable bargain sale, the donor receives proceeds from the sale
  • If it is a charitable stock bailout, the donor avoids the gain she would realize if the stock were sold or possible ordinary income if the stock were redeemed by the corporation remaining stockholders own a greater interest in the corporation
  • If it is a charitable gift annuity, this allows the designated beneficiary to receive an income without a trust
  • If it is a remainder interest in a farm or personal residence, this allows the donor to get a current income tax deduction while retaining use of the property for themself or someone else

Disadvantages

  • If it is a charitable bargain sale, the donor gets an income tax deduction only for the gift portion
  • If it is a chartiable gift annuity and annuity interest is given to someone other than the donor or the spouse, the annuity interest will incur gift tax
  • If is is a charitable gift annuity, an income tax deduction will e smaller than the gift of total interest in the asset because the charity is obligated to pay annuity interest
  • If it is a remainder interest in a farm or personal residence, an income tax deduction will be smaller than the gift of total interest because only present value of the remainder interest constitutes a charitable gift.
55
Q

What are advantages and disadvantages of a gift-leaseback?

A

Advantages

  • Same as an outright gift to non charitable donee (Exclusion, assets out of gross estate, income and appreciation out of gross estate, no gain recognition, creditor protection)
  • Donor retains use of the property by a lease
  • Business deduction for lease payments
  • If the donor gives the property to his children, the lease payments can be accumulated for education or other expenses

Disadvantages

  • Same as outright gift to a non charitable donee (loss of control & income, included in taxable gift, uses up applicable credit amount)
  • The donor must make lease payments to keep use of the property
56
Q

What are the advantages and disadvantages of a reverse gift?

A

Advantages

  • Same as an outright gift to non charitable donee (Exclusion, assets out of gross estate, income and appreciation out of gross estate, no gain recognition, creditor protection)
  • Step-up in basis if there is more than one year between gift and death – thus less gain recognized

Disadvantages

  • Same as outright gift to a non charitable donee (loss of control & income, included in taxable gift, uses up applicable credit amount)
  • The donee may not give the property to the donor by will
  • There is no step-up in basis if the death occurs before 1 year
57
Q

What are the advantages and disadvantages of a Net gift?

A

Advantages

  • Same as an outright gift to non charitable donee (Exclusion, assets out of gross estate, income and appreciation out of gross estate, no gain recognition, creditor protection)
  • The donor pays no gift tax out of pocket
  • The donor’s estate gets credit of gift tax paid of of pocket by the donee

Disadvantages

  • Loss of control
  • Loss of future income
  • Adjusted taxable gifts may be increased
  • The donor can incur capital gain if the gift tax paid by the donee exceeds the donor’s basis
58
Q

What are the advantages and disadvantages of UGMA?

A

Advantages

  • qualifies for the annual exclusion
  • No trust document is necessary
  • Removes the asset from gross estate if he does not die while he is the custodian
  • Removes future appreciation from the donor’s gross estate
  • No recognition of gain (carryover basis)
  • Removes the asset from he reach of the donor’s creditors
  • Removes the asset from the reach of the minor’s creditors until distribution

Disadvantages

  • Same as outright gift to a non charitable donee (loss of control & income, included in taxable gift, uses up applicable credit amount)
  • The term is limited by state law
  • Trust income is taxed to the parent if used to meet the obligation of support
  • Kiddie tax rules apply
  • The property remains in the donor’s gross estate if she dies as the custodian or successor custodian
  • Restricted on types of property that can be gifted; restricted to intervivos transfers
  • Only one minor per account
59
Q

What are the advantages and disadvantages of UTMA?

A

Advantages:

  • qualifies for the annual exclusion
  • No trust document is necessary
  • Removes the asset from gross estate if he does not die while he is the custodian
  • Removes future appreciation from the donor’s gross estate
  • No recognition of gain (carryover basis)
  • Removes the asset from he reach of the donor’s creditors
  • Removes the asset from the reach of the minor’s creditors until distribution
  • Less restrictions than IGMA on types of property that can be gifted; inter vivos or testamentary transfers are acceptable

Disadvantages

  • Same as outright gift to a non charitable donee (loss of control & income, included in taxable gift, uses up applicable credit amount)
  • The term is limited by state law
  • Trust income is taxed to the donor if used to meet the obligation of support
  • Kiddie tax rules apply
  • Property remains in the donor’s gross estate if he dies as the custodian or successor custodian
  • Only one kid per account
60
Q

What are the advantages and disadvantages of a Section 2503(c) trust?

A

Advantages

  • Present value of income interest is entitled to one annual exclusion
  • There is no recognition of gain (carryover basis)
  • Trust term ends when beneficiary turns 21
  • Removes future income from the grantor’s gross estate
  • There is only one beneficiary for the income and remainder
  • The beneficiary must be under 21 at the start of trust
  • Property and future appreciation are removed from the grantors estate unless he dies while she is the trustee
  • Discretionary distribution of trust assets
  • Removes future income from the grantors estate
  • Removes asset from the reach of the donors creditors
  • Removes the asset from the reach of the minors creditors until actual distribution

Disadvantages

  • The trust document must be drafted
  • Same as outright gift to a non charitable donee (loss of control & income, included in taxable gift, uses up applicable credit amount)
  • Trust income is taxed to the grantor if used to meet the obligation of support
  • Kiddie tax rules apply
  • The property remains in the gross estate if the grantors dies as the trustee or successor tristee
  • Must allow the beneficiary to take assets out of the trust at 21
61
Q

What are the advantages and disadvantages of a Section 2503 (b) trust?

A

Advantages:

  • The PV of income interest is entitled to annual exclusion
  • There is no recognition of gain
  • Removes future income from gross estate
  • Can have multiple beneficiaries
  • Beneficiaries aren’t limited to minors
  • Property and future appreciation are removed from the grantors gross estate
  • Removes the asset from the reach of grantor’s creditors
  • Removes the asset from the reach of beneficiary creditors until distribution

Disadvantages

  • Income distribution is mandatory
  • Part of the contribution will always be gift taxable if there is a different remainder interest holder
  • Same as for an outright gift to a nonchartiable donee
  • Trust income is taxed to the grantor if used to meet the obligation of support
  • Kiddie tax rules apply
  • The property remains in the gross estate if the grantors dies as the trustee or successor tristee
  • Trust document must be drafted
62
Q

What are the advantages and disadvantages of a Section 529 plan account?

A

Advantages:

  • Can receive 5x the max annual exclusion for a gift in one year
  • Property is included in the gross estate only if there is no named beneficiary or more than the max annual exclusion is contributed in one year and remains unamortized at death
  • Income-tax-free growth
  • No income tax on distribution if it is used for edu expenses
  • Donor retains control over distributions which can be made at any age and can change the beneficiary
  • No income phaseout restrictions
  • the beneficiary is not required to be a minor

Disadvantages

  • Loss of total control over assets
  • The donor does not control the investment of assets
  • An excise tax for distbituions is not used for qualified higher education expenses. Only $10k/ year of k-12 education expenses are qualified
63
Q

What are the advantages and disadvantages of a cover dell education savings account?

A

Advantages

  • Income tax free growth
  • No income tax on distribution if it is used for qualified education expenses
  • contributions for prior year may be made until April 15
  • Contributions qualify for the gift tax annual exclusion

Disadvantages:

  • Limited contribution amount
  • income phaseout
  • An excise tax for distributions is not used for qualified education expenses
  • can be established only for a minor
  • must be distributed by age 30
64
Q

What are the advantages and disadvantages of a Crummy trust?

A

Advantages

  • Same as for an irrevocable trust
  • Can hav multiple beneficiaries of any age
  • Qualifies for annual exclusion to the extent of Crummey powers granted
  • Distribution of income is discretionary

Disadvantages

  • The donor may incur a gift tax on funding
  • loss of control over assets
  • A trust document must be drafted
  • Crummey powers may be exercised (unlikely)
65
Q

What are the advantages and disadvantages of a Charitable Lead Trust?

A

Advantages

  • Allows the donor to benefit charity with out incurring a gif tax and retain eventual title or giving title to another beneficiary
  • Can be established for a term certain or one or more lives
  • Can give the chatty an annuity or entrust interest
  • The grantor gets an income tax deduction for the PV of the income interest if grantor trust rules apply
  • The grantor gets a charitable gift tax deduction for present value of income interest
  • If a remainder interest is given to the donor’s spouse, the interest will qualify for the marital deduction
  • May be used to discount a gift to family members holding the remainder interest

Disadvantages:

  • An income tax deduction cannot exceed the present value of income interest
  • If the reminder interest is not retained or given to the spouse, a gift tax will be incurred
  • The grantor will not have use of trust assets during the trust term
  • Assets will be in the grantors gross estate if he retains a reversion that is greater than 5% of the assets value at the time of the grantors death
  • Trust income is taxable to the grantor if the grantor trust rules apply; otherwise income is taxed to the trust.
66
Q

What are advantages and disadvantages of a charitable remainder trust?

A

ADvantages

  • Allows the donor to benefit charity while retaining income or giving income to a designated beneficiary
  • Can be established for a term certain on one or more lives
  • Can give the income beneficiaries an annuity or unitrust interest
  • The grantor gets a gift tax and income tax and income tax deuduction for the present value of the remainder interest
  • If the grantor’s spouse is the sole income beneficiary, the grantor will get a marital deduction

Disadvantages:

  • If the income inteest is not retained or given to the spouse, a gift tax will be incurred when funding the trust
  • Trust assets will be included in the grantors gross esrtate if the grantor retiains the income interest, but the estate will recieve an offsetting charitable deduction
  • Trust amounts distributed to the income beneficiary are taxed to that beneficiary; accumulated income is not taxed because it will go to the charity
  • Title to property passes to the charity at end of the trust term
67
Q

What are the advantages and disadvantages of pooled income funds?

A

Advantages

  • Benefit the charity while still retaining income
  • Can be established for one or more beneficiaries
  • Gift and income tax deduction for PV of remainder interest
  • The income beneficiary gets income produced by a contributed share

Disadvantages

  • Gift tax when income interest is not retained
  • Assets included in the gross estate if income interest retained
  • Trust amounts
  • Can only be establisehd by a public charity
  • Trust amounts distributed to the income beneficiary are taxed to that beneficiary; accumulated income is not taxed because it will go to the charity
  • Title to property passes to the charity at end of the trust term
68
Q

Advantages and disadvantages of a GRIT?

A

Advantages:

  • Grantor retains income for a term certain
  • Grantor subject to income tax on amounts to which he is entitled
  • Assets are removed form the gross estate if the grantor survives the trust term
  • Probate is avoided, unless the grantor dies during the trust term
  • can contribute additional assets after the initial year of funding

Disadvantages

  • Entire amount subject to gift tax if the chapter 14 rules apply
  • Gift tax on funding
  • Remainder interest does not qualify for annual exclusion
  • Income interest is not protected from the grantors creditors
  • Trust document
  • Loss of control of assets
69
Q

Advantages and disadvantages of a GRAT?

A

Advantages:

  • Grantor retains income for a term certain
  • Grantor subject to income tax on amounts to which he is entitled
  • Only the remainder will be subject to a gift tax becuase the grantor retains a qualified interest if chapter 14 rules apply
  • Assets are removed form the gross estate if the grantor survives the trust term
  • Unless the trust assets revert to the grantors estate if she dies during the trust term - Probate is avoided, unless the grantor dies during the trust term

Disadvantages

  • There is a gift tax on funding
  • Remainder interest does not qualify for annual exclusion
  • Assets are not removed from the gross estate if the grantor dies during the term
  • Income interest not protected from creditors
  • Trust document
  • Loss of control
  • Cannot contribute additional assets aftert he initial year of the funding
70
Q

Advantages and disadvantages of a GRAT?

A

Advantages:

  • Allows the grantor to retain a unitrust interest from the assets for a term certain
  • Grantor subject to income tax on amounts to which he is entitled
  • Only the remainder will be subject to a gift tax becuase the grantor retains a qualified interest if chapter 14 rules apply
  • Assets are removed form the gross estate if the grantor survives the trust term
  • Proavbate is avoided unless the grantor dies during the trust term
  • CAN contriubute additional assets after the initial year of funding

Disadvantages

  • There is a gift tax on funding
  • Remainder interest does not qualify for annual exclusion
  • Assets are not removed from the gross estate if the grantor dies during the term
  • Income interest not protected from creditors
  • Trust document
  • Loss of control
71
Q

Advantages and disadvantages of a QPRT?

A

Allows you to pass on your house at a discounted rate and continue to live there for a term of years. If you pass away during the term, the entire value of the house is included in the estate

Advantages:

  • Allows the grantor to retain the use of her persona residence
  • The remainder will be subject to a gift tax because the trust is not subject to chapter 14 rules
  • Assets are removed from the gross estate if the grantor survives the trust term
  • Probate is avoided unless the grantor dies during the trust term

Disadvanateges

  • Disadvantages
  • There is a gift tax on funding
  • Remainder interest does not qualify for annual exclusion
  • Assets are not removed from the gross estate if the grantor dies during the term
  • Trust document
  • Loss of control
  • Grantor will have to move or pay rent if he survives the trust term
72
Q

What are the advantages and disadvantages of a revocable trust?

A

Advantages

  • Funded assets avoid probate
  • No gift tax on funding
  • Retain control over trust assets
  • Retain income from trust assets
  • Can be used for incompetency

Disadvantages:

  • Income is taxed to the grantor and trust assets are still part of the grantors gross estate
  • no protection from creditors
  • Trust doc
73
Q

What are the advantages and disadvantages of a Irrevocable trust?

A

Advantages:

  • Funded assets avoid probate
  • Assets are removed from the gross estate unless IRC sections 2035-2038 apply
  • Can shift taxation of income
  • Protects assets from the grantor’s creditors if the grantor reserves no rights

Disadvantages

  • There is usually a gift tax on funding
  • loss of control
  • Possible loss of income if the grantor trust rules apply
  • trust doc
74
Q

What are advantages and disadvantages of an Intentionally defective Grantor Trust?

A

Advantages:

  • Funded assets removed from gross estate
  • Trust can buy assets from the grantor without incurring capital gain
  • Trust assets pass to remainder beneficiaries at the end of the trust term
  • Income taxed to the grantor removes further assets from gross estate
  • Trust assets are not included in the grantors gross estate

Disadvantages

  • There is usually a gift tax on funding
  • The grantor is still taxed on income
  • Cost of drafting trust
  • Provides little asset protection from the grantors creditors
  • A promissory note received by the grantor on the sale of assets is included in the gross estate if not paid prior to death
75
Q

What are the advantages and disadvantages of an ILIT?

A

Advantages

  • Same as irrevocable trust
  • If the ILIT is drafted as a bypas trust, trust assets will not be included in the gross estate of the survinging spouse
  • Can be funded with a policy only or with other assets as well
  • Can give beneficiaries Crummey powers to make contributions eligible for annual exclusion
  • The trustee can be given voluntary authority to use insurance death benefits to purchase assets from the estate of either spouse or to make loans to either esteate

Disadvantages

  • A trust document must be drafted
  • Taxation of income can be shifted unless income is or may be used to pay premiums on a policy of the grantor or the spouse
  • Loss of control over assets
  • If funded with an existing policy on the grantor, the 3 year policy will apply
  • If crummey powers are given, they may be exercised
  • Crummey powers may ause holders to incur income tax
76
Q

Advantages and disadvnatages of a contingent standby trust

A

Advantages

  • Same as revocable trust
  • Not immediatly funded

Disadvantages

  • Requires execution of a springing durable power of attorney
  • Possible needless expenditure if incompetency does not occur
  • No protection from the grantors cretidors
  • Assets are not removed from the grantors gross estate
  • Income is taxable to the grantor

CFP 516 (8 decks)

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