Chapter 5: Trusts, Gift Tax, Tax-Exempt Orgs Flashcards
What is generation skipping transfer tax (GST)?
Tax imposed when donor transfers substantial property to beneficiaries at least two generations below the donor.
Gift is taxed as if it went to the direct child, NOT the grandchild
What are NOT considered gifts for tax purposes?
- Transfers to spouses (gifts in contemplation of marriage are NOT exempt)
- Support for minor children
- Transfers to qualified charitable organizations
- Political contributions
- Payment of medical expenses or tuition of another person (must be made directly to provider)
What are the three types of gift transfers?
- Gift of a present interest: Immediate transfer of wealth over the yearly gift exclusion
- Gift of a future interest: Irrevocable transfer of the right to access wealth at a future time. Must be reported regardless of amount at the present balue
- Does not qualify for the exclusion
- Uncompleted gift: Revocable transfer of the right to access future wealth. NOT considered a gift.
What are the five conditions that must be satisfied for a trust to be a valid express trust?
BRATS
Beneficiary: Someone must receive benefits from the trust
Reasonable intent: There must be a valid reason
Assets: The trust must contain some corpus or property
Trustee: A trustee must be in place to exercise control over the assets
Specified life: The trust must have an identifiable termination point.
- Private trusts cannot live forever. Live until purpose is satisfied.
- Charitable trusts can live forever.
What does it mean when a trust is irrevocable? Revocable?
Irrevocable means you can’t pull the assets back.
Revocable means you can pull the assets back, but it turns into a grantor trust and is taxed on the individual’s 1040.
What is excluded as unrelated business income for a tax-exempt organization?
- Legal games of chance (bingo)
- Activities carried out intermittently (annual charity auctions)
- Business activities related to the organization’s purpose (sale of educational materials)
- Most investment income
- Activities that are staffed by volunteers working without pay
- sale of merch that was received as a gift or contribution
- Income from the convenience of members, employees, or students (cafeteria or bookstore)
What does a trustor do and what does a trustee do?
A trustor puts the assets into the trust.
A trustee has control of the assets and a fiduciary responsibility over them.
When is a tax-exempt organization required to file a business return (Form 990-T?
If it has more than $1,000 of unrelated business income (UBI)
When is a charity classified as a private foundation? When is it considered a feeder organization?
A charity is a private foundation when it receives less than 1/3 of its support from the public
It is considered a feeder organization if it operates as a business but transfers all its net earnings to a charity
What is the difference between an income beneficiary and a remainderman (principal) beneficiary?
An income beneficiary receives the earnings a trust makes
A remainderman beneficiary receives the trust’s principal
What are the two ways a trust can be created?
- Assets can be transferred into a trust by a living person (inter vivos trust)
- Created through the execution of a will (testamentary trust)
What are considered gifts for tax purposes?
- Transfers of cash or property
- Sales of property at a bargain price to another family member
- Loans to family members where a fair interest rate is not charged
- Trusts established for others in which income and/or corpus will go to someone else
