Domain III - Legacy Issues

Question 1

2023 Percentage Deduction Limitation Rules

Public Charity

Cash - ?
LTCG property - ?
LTCG property (loss) - ?
Tangible personal property
- same use - ?
- diff. use - ?
STCG/ordinary income property - ?

Answer 1

Cash - FMV @ 60% of AGI
LTCG prop. - FMV @ 30% of AGI / unless you elect to deduct basis @ 50% of AGI
Tangible prop.
- same use - FMV @30% of AGI
- diff. use - Basis @ 50% of AGI
STCG - basis @ 50% of AGI

Question 2

2023 Percentage Deduction Limitation Rules

Private Charity

Cash - ?
LTCG property - ?
Tangible personal property
- same use - ?
- diff. use - ?
STCG/ordinary income property - ?

Answer 2

Cash - FMV @ 30% of AGI
LTCG prop. - Basis @ 20% of AGI, unless qual. apprec. stock then FMV
Tangible prop. - basis @ 20% of AGI
STCG - basis @ 30% of AGI

Question 3

True or False

DAFs are required to distribute at least 5% of their average met assets to acceptabel charitable orgainzations yearly.

Answer 3

False

Question 4

Charitable Lead Trusts

If a grantor CLT, the donor:
- may/may not receive an income tax deduction for gift?
- pays tax on income generated in the trust
- pays _____ tax when charity sells trust assets

Generally, the CLT is non-grantor trust:
- grantor does /does not receive tax deduction for gift?
- _____ is taxed on income?
- typically offers more benefits for gift and estate planning purposes

Answer 4

• may
• capital gain
• does not
• trust

Question 5

From a tax perspective, CLTs (Charitable Lead Trusts) become more effective as interest rates increase/decline?

As the Section 7520 rate rises, the present value of the anuity and the deduction increase/decrease?

Answer 5

• decline
• decrease

Question 6

Charitable Lead Trusts

For a _____ CLT, the donor must pay income tax on any income generated in the trust and applicable capital gains tax when the charity sells trust assets for gain.

For a _____ CLT, the donor does not receive an income tax deduction and the trust is taxed on income.

Answer 6

• Grantor
• Non-grantor

Question 7

CRAT and CRUT: Common elements

The annual payout must be a minimum of _____%.

The annual payout may not exceed a maximum of _____%.

The duration of the non-charitable interest in the trust may not exceed either the life of the non charitable beneficiary or _____ years.

There must be a remainder interest in the trust for the benefit of charity equal to at least _____% of the initial trust value.

Answer 7

• 5%
• 50%
• 20 yrs.
• 10%

Question 8

CRT (Charitable Remainder Trust) Income Tax Advantages

An income tax deduction is available when?
No _____ is realized by the trusts on the sale of the contributed assets.
The CRT is _____ with the possible exception of the UBTI.

Answer 8

• year of the gift
• captial gain
• tax-exempt

Question 9

Four-tier system for deterining the income tax character of the distributions made from a CRT, which is based on what order?

Answer 9

1.) Ordinary income current year (plus any ordinary income which was not distributed in prior years).
2.) Capital gain income (current year, plus any from prior years)
3.) Other income (current or prior year)
4.) Distribution of principal

Question 10

CRAT Requirements

Annual payments to the non-charitable beneficiary mush be at least _____% and not more than _____% of the initial FMV fo the property transferred to the trust.

Payments must stay fixed from year to year and must be made for a term of years, not to exceed _____ yrs.

The annuity must be paid how often?

The value of the remainder at inception must be at least _____% of the initial value.

Answer 10

• 5%
• 50%
• 20 yrs.
• Annually
• 10%

Question 11

CRAT requirements:

What is the 5% Exhaustion Test?

The value of the remainder at inception must be at least _____% of the initial value of the trust property.

Answer 11

• This requires that the annuity payable to the non-charitable beneficiary cannot be so great that there is a more than 5% chance that the corpus will be exhausted before the charity receives its interest.
• 10%

Question 12

CRUT - Charitable Remainder Unitrust Requirements

The annual payments to the non-charitable beneficiary must be at least _____% of fair market value of the assets in the trust which assets are to be valued how often?

The CRUT is intended to provide a hedge against inflation. Payments from a CRUT must be paid how often?

Answer 12

• 5% / annually
• annually

Question 13

In this CRUT variant, the non-charitable beneficiary is paid the lesser of the trust’s net accounting income or a fixed percentage of the value of the trust without a make up provision.

In this variant, it provides the fixed percentage annual payout of the unitrust amount.

In this third variant, it provides that if there is a short-fall of annual income based on the fixed percentage expectation, that is acceptable, and the shortfall is to be made up in the future. This variant also pays the lower of the unitrust amount or the trust accounting income. Used to defer income into future years.

Answer 13

• NICRUT (Net Income CRUT)
• “Standard” CRUT
• Net Income with Make-Up (NIMCRUT)

Question 14

Flip Unitrust:

Begins as a _____ or a _____ but converts to a standard CRUT upon a triggering event. The unitrust percentage is the same before and after the flip. Ex. of triggering events include: marriage, divorce, birth or death, and the sale of “unmarketable assets.” The FLIP unitrust is commonly used when a trust has unmarketable assets that produce little or no income.

Answer 14

• NICRUT / NIMCRUT

Question 15

What is UBTI? What are the tax ramifications of UBTI?

Answer 15

• UBTI occurs when income is generated from an unrelated trade or business activity (e.g., gains from the use of leveraged investments).

*Generally speaking, UBTI may result in double taxation (i.e., UBTI may be taxed to the plan or charitable organization and also to the plan participants or beneficiaries).

Question 16

Powers of Appointment:

Answer 16

The power the donor grants to the donee to designate who will own the property in the future.

*The powerholder may be able to appoint the assets of a trust to a new trust with different administrative provisions. May also be used to move trusts from one taxing jurisdiction to another in order to change the governing law of the trust.

Question 17

Disclaimers: If the intended beneficiary does not accept a post-mortem gift, the gift is considered to be “disclaimed” and is treated as if the intended donee has predeceased the decedent. Refusal of the gift must be in writing and, for federal estate tax purposes, must be made within _____ months of the gifting. Transfers made after this time are considered subsequent transfers of current ownership, which are then subject to federal gift taxation to the intended beneficiary who is disclaiming the gift.

Answer 17

Nine

Question 18

Common estate planning mistakes (10)?

Answer 18

1.) Not having a will or having a homemade will.
2.) Titling too much property in joint tenancy.
3.) Leaving everything to one’s spouse.
4.) Failing to plan for adequate estate liquidity.
5.) Having insufficient life insurance.
6.) Failure to make lifetime gifts.
7.) Failign to take steps to keep life ins. proceeds out of the estate.
8.) Failure to make transfers of assets to trusts.
9.) Failing to make proper beneficiary designations for retirement plan assets.
10.) Failing to consider the effect of a key person’s death on the value of a business.

Question 19

IRS Form 709

Use - ?
Part I - ?
Part II - ?

Answer 19

• Gift tax return
• Gen. information
• Tax Computation

Question 20

IRS Form 709

What is to be reported(6)?

Answer 20

– Future interests of any amount given to a nonspouse
– Present interest gifts in excess of $15,000 (2018, 2019, 2020, 2021), $16,000 (2022), and $17,000 (2023)
– Transfers to a non-U.S. citizen spouse if the gift exceeds $157,000 (2020), $159,000 (2021), $164,000 (2022), and $175,000 (2023)
– Transfers of qualified terminable interest property (QTIP) to a spouse in any amount.
– Split gifts with a spouse (regardless of the amount) made jointly to a third party.
* If spouses in a community property state make a gift of community property to a third person, the gift is considered made one half by each spouse, and each must file a gift tax return,
– Transfers to charity if any part of the transfer was of a future interest.

Question 21

When is Form 709 filed?

Answer 21

Due to be filed not later than April 15 of the year following the calendar year in which the gifts were made.

• If the donor dies during the calendar year in which a gift is made, the gift tax return must be filed no later than the earlier of the due date (inc. extensions) for filing the donor’s estate tax return, or April 15th of the year following the calendar year in which the gifts were made.

Question 22

Code 6166:
* Congress enacted a relief provision to permit the deferral of estate tax payments.

Available if?

• Elect to defer completely for _____ years payment of the portion of the estate taxes attributable to the closely held business interest and thereafter pay the deferred portion of the estate taxes in up to _____ annual installments.

Answer 22

The decedent was a U.S. citizen or resident at the time of death and the value of the decedent’s interest in a closely held business exceeds 35% of the value of the decedent’s adjusted gross estate.

• 5 yrs. / 10 installments

Question 23

IRS Form 706 (Estate Tax)

New Part 6 - ?

• Filing the return is presumed to be a portability election.
• To not elect portability on a filed return, there must be an affirmative opt out.

Answer 23

Portability of Deceased Spousal Unused Exclusion (DSUE)

Question 24

Estate Tax = Tax-inclusive or tax-exclusive?
Gift Tax = Tax-inclusive or tax-exclusive?

Answer 24

Estate = Inclusive
Gift = Exclusive

Question 25

Generation Skipping Transfer Tax

Generation skipping transfer tax is imposed on transfer of property that skips generation. Transfer may be direct skip, taxable termination or taxable distribution. Each person is allowed an amount of lifetime exemption from tax. The amount of the exemption is indexed for inflation.

Every generation skipping transfer is subject to the generation skipping transfer ( GST) tax . A generation skipping transfer takes one of three forms. A direct skip is a transfer to a skip person that is also subject to estate or gift tax. A skip person is _____ generations or more younger than the transferor. The best example of a direct skip is a grandparent making a gift to his grandchild. Deceased parents are ignored for lineal descendants and for other descendants if the transferor has no living lineal descendants at the time of the transfer.

A _____ occurs when an interest in property held in trust terminates and trust property is held for or distributed to a skip person. A taxable distribution is any distribution from a trust, including a distribution of income, that is not a taxable termination or direct skip.

Transfers that are not subject to gift tax because of the annual gift tax exclusion and unlimited exclusion for direct payment of medical and tuition expenses are not subject to GST tax .

Answer 25

Skip - 2 generations

Taxable termination

Question 26

GSTT Transactions

Direct Skip - _____ is responsible for paying GSTT>

Indirect Skip (taxable distribution) - _____ is responsible for paying the GSTT.

Indirect Skip (taxable termination) - _____ is responsible for paying the GSTT.

Answer 26

Transferor

Beneficiary (Transferee)

Trustee

Question 27

GSTT is / is not portable between spouses?

Answer 27

is not

Question 28

The language in a trust, giving the beneficiary (usually a minor) the right to demand a withdrawal of funds from the trust for some
reasonable period of time, which usually is _____ or _____ days. When additions to the trust are made, the trustee informs the beneficiary in writing of this withdrawal right. Then the beneficiary either declines to exercise the right by notifying the trustee in writing or by failing to respond to the trustee’s letter within the prescribed time. This provision permits the grantor’s transfer to the trust to qualify for the annual gift tax exclusion because transfers subject to such demand powers are gifts of present interests.

Answer 28

Crummey Trust Provision

30 / 60

Question 29

The _____ rate is the rate used by the government to discount the value of various gifts including charitable gifts, lifetime and estate gifts, annuities and insurance, business interests, etc. for tax purposes.

Answer 29

IRC Section 7520

Question 30

• payments to surviving spouse under deferred compensation agreement
• compensation for services rendered
• dividends declared but that had not yet been paid
• interest owed
• amounts paid for unrealized receivables or liquidation from a partnership
• distributions from retirement plan or IRA
• proceeds from sales on the installment method

Answer 30

Examples of IRD (Income in Respect of a Decedent)

Question 31

The recipient of IRD does/does not receive a step-up in basis?

Answer 31

does not

Question 32

Examples of Valuation Discounts (3)?

Answer 32

• minority ownership
• illiquid assets
• lack of marketability

Question 33

This trust provides a specific set of rules which, if followed, will allow a transfer in trust for a person under age 21 to be considered a gift of a present interest even if the beneficiary will not receive any of the benefits of the trust, including distributions of income, until attaining age 21.

May be taxed as a grantor trust or complex trust.

Answer 33

Section 2503(c) Trust

Question 34

Where a sufficiently calculated amount of payments are to be
made to the grantor, OR to the grantor’s estate (should the grantor die during the term of a GRAT), the trust can be designed so that there is no taxable gift.

─ This is referred to as a _____?

Answer 34

Zeroed-out GRAT

Question 35

Primary advantages
* Little or no taxable gift
* Low audit risk
* Low interest rate environment
* No additional income tax returns
* No downside if assets depreciate

Primary disadvantages
* Can’t leverage GST exemption (safely)
* Grantor must survive trust term

Answer 35

GRAT

Question 36

A _____ is an irrevocable trust that intentionally violates one of the grantor trust rules so that trust income is taxed to the grantor. It has these characteristics:
1. Transfers of property to the trust are completed gifts for federal gift tax purposes;
2. Trust assets will not be included in the taxable estate of the grantor or grantors;
3. The income of the trust is taxed to the grantor, who is treated as the “owner” of the trust for federal income tax purposes.

Answer 36

defective trust

Question 37

A _____is a trust that generally meets the following conditions:

• The trust instrument must require that at least one of the trustees of the trust be an individual U.S. citizen or a domestic corporation (a U.S. trustee);
• The trust instrument must provide that no distribution, other than a distribution of income, may be made from the trust unless a trustee who is an individual U.S. citizen or a domestic corporation has the right to withhold from the distribution the estate tax on the distribution;
• The trust must meet security requirements to ensure collection of estate tax; and
• The executor must make an election with respect to the trust. This election must be made on the estate tax return and once made, is irrevocable.

Answer 37

qualified domestic trust (QDOT)

Question 38

A _____election avoids wasting the donor spouse’s lifetime exemption to the GST tax. It also leaves the donee spouse free to allocate his or her own lifetime exemption, rather than using any of it for the QTIP trust created by the donor spouse.

Answer 38

reverse QTIP

Question 39

This trust is most effective when the Code Sec. 7520 rates are high.

It’s a statutorily permitted estate planning tool that is commonly used by wealthy taxpayers to transfer personal residence to family members and also enjoy considerable transfer tax savings.

Answer 39

QPRT (Qual. Personal Residence Trust)

Question 40

Advantages of a QPRT(4)?

Answer 40

• Donor retains the right to live in the residence.
• Donor may lease the residence at the end of the trust term.
• Residence (plus appreciation) passes to children at a fraction of its value.
• Residence can be sold during the trust term

Question 41

Special Needs Trusts

Setting up a special needs trust can make it possible for a disabled adult to draw on family funds for supplemental needs while still receiving government assistance. Government programs such as the federal Supplemental Security Income program and Medicaid support only basic needs such as food, clothing, and medical care and generally only accept people with less than $_____ in assets.

Answer 41

$2,000

Question 42

Define “fiduciary.”

Answer 42

A fiduciary is a person who holds or manages property for the express benefit of another. By definition the fiduciary owes the highest duty of good faith to the principal. Common examples of fiduciaries include trustees, guardians, executors, and estate administrators.

Question 43

Since the estate tax marital deduction is unlimited, there is generally no need to pay estate taxes when the first spouse dies. Postponing the estate taxes until the death of the second spouse is generally advantageous; however, this means that the entire estate tax burden falls on the estate of the second spouse to die. _____ insurance is a useful option to provide funds to cover the estate taxes due on the second death.

Answer 43

Second to die

Question 44

Primary Advantages
* Retention of control and power of disposition
* Discounting
* Creditor protection

Primary Disadvantages
* Uncertain estate and gift tax consequences
* Must be administered properly (can be costly)
* Hassle factor to family

Answer 44

Family Limited Partnership

Question 45

Per Stirpes?

Per Capita?

Answer 45

• by branch
• by head