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CFP > Estate > Flashcards

Estate Flashcards

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1
Q

CRUT

A
  • Reduces the value of a grantor gross estate
  • Tax deduction can be carried forward for a maximum of five years following initial contribution
  • Income received may be subject to ordinary income or capital gains taxes
  • Particularly useful for grantor with highly appreciated assets seeking diversification without triggering capital gains taxes.
  • Common objectives include tax deduction, philanthropic support, and income stream.
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2
Q

Tax deduction for CRAT/CRUT

A
  • Fair market value - present value of income stream = deduction
  • The present value of future charitable remainder
  • First claimed in tax year contribution is made
  • Limit on deduction: subject to AGI limitations (public charity: 60% cash, 30% appreciated property)
  • Carry forward available for five years
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3
Q

Features: Donor advised fund

A
  • Maintained by charities, community foundations, or mutual fund companies. - Donors may contribute, cash, stock, or other property to their individual fund accounts and select charities they want to receive their grants
  • Donors entitled to charitable income tax deduction based on the type of property contributed and receive the deduction at the time of their donation to the fund not when the funds are distributed to the chosen charities.
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4
Q

Annual exclusion for gifts to a non-citizen spouse

A

$185,000 in 2024

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5
Q

CRATS

A

A trust designed to permit payment of a fixed amount annually to a non-charitable beneficiary with the remainder going to charity

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6
Q

Income payments for CRATS

A

If the income of the trust is insufficient to meet the required annual payment, the differences paid from capital gains or principal and if the income is greater than the amount required in any given year the excess income is reinvested to the trust

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7
Q

CRATS; current income tax deduction

A

Present value of the remainder interest that will go to the charity

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8
Q

CRUT

A
  • Provides payment of a periodic sum, usually expressed as a percentage of the assets of the trust to a non-charitable beneficiary with the remainder going to charity. The trust value is revalued annually.
  • Particularly useful for a grantor that has highly appreciated assets in a seeking diversification without triggering capital gains tax.
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9
Q

CRAT risk profile

A

Risk averse
- Desires a tax deduction and predictable fixed payments

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10
Q

CRUT risk profile

A
  • Moderate to aggressive risk tolerance
  • Tax deduction and income stream that keeps pace with inflation
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11
Q

Inter vivos trust

A
  • Established and funded during the grantors lifetime and takes affect immediately
  • Funds pass outside the will and probate process, saving cost and time
  • Title to property inside is held in the name of the trust
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12
Q

How must a QDOT be set up?

A

A QTIP trust or an estate trust

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13
Q

When must the income from a 2503B trust be distributed?

A

At least annually

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14
Q

Pooled income fund investment restriction

A

The charity manages the fund which cannot invest in tax exempt securities

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15
Q

2503B trust how much is the annual exclusion limited to?

A

The income interest

The focus here is on the concept that the annual exclusion only applies if the contribution results in a present interest (like income), not a future interest.

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16
Q

Charitable gift annuities

A
  • A donor transfers cash or property to a charity and the charity pays the donor or other donees an annuity payment each year for life
  • Gift tax charitable deduction is the present value of the charities remainder Interest
  • Gift annuity payments to a spouse: marital deduction available if this spouse receives all annuity payments and GPOA over payments after donors death
  • Gift annuity payments to others: gift tax is present value of annuity payments
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17
Q

What property is the marital deduction not available for?

A

TIP

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18
Q

Estate tax formula

A
  • Gross estate, less expenses, debts taxes, and losses = adjusted gross estate
  • adjusted gross estate less marital deduction or a charitable deduction = taxable estate
  • taxable estate plus taxable gifts made after 1976 = total taxable transfers
  • Total taxable transfers times tax rate = tentative Tax estate
  • tentative taxes, state minus taxes paid on post 1976 gifts = gross estate tax
  • Gross estate tax minus applicable, credit amount, and other credits = estate tax liability
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19
Q

Holding period for inherited property

A

All inherited property receives long-term holding period status

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20
Q

What is the spousal versus non-spousal step up in basis for JTWROS?

A

Spousal is automatically 50-50 regardless of the contribution

Non-spousal depends on the contribution, each party’s original basis is calculated based on the percentage of their contribution

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21
Q

When is a CLAT the best option?

A

When interest rates are lower and smaller annuity payments to a charity will result in a greater value of trust corpus for the remaindermen

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22
Q

When are CLUT’s the best option?

A

When GSTT is a concern as CLUT’s are a better alternative due to the unlimited charitable deduction being available for the full value of interest going to the qualified charity

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23
Q

Distributable net income

A
  • Allocates taxable income between beneficiaries and the trust
  • DNI represents the maximum that can be taxed to the beneficiaries
  • The beneficiaries will be responsible for taxes on the lesser of the DNI allocation or the amount required to be distributed, according to the trust document
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24
Q

With a 2503C trust how is accumulated income taxed?

A

To the trust, and not to the beneficiary, you must take the accumulated income to the trust tax tables.

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25
Q

IRD

A

Income earned by the decedent, but not received by the date of death or included in the final tax return
- Tax as income to the recipient of the assets
- Does not include capital assets/no step up in basis
- IRD: annuities, employer sponsored retirement plans (401k/pensions,) IRAs, EE bonds, salary, bonus, commission lottery winnings, rental income

26
Q

What is section 303 redemption?

A

Section 303 redemptions offer estates a valuable tax advantage when large portions of the estate consist of closely held business interests, ensuring liquidity for tax and administration purposes without incurring heavy dividend taxes.

Normally, if a corporation redeems stock from a shareholder, the amount received may be taxed as a dividend to the extent of the corporation’s earnings and profits. However, Section 303 provides an exception to this rule for certain redemptions made to pay funeral costs, estate administration expenses, and other estate settlement costs.

The redemption amount is generally capped by the costs of estate taxes and related expenses, and the stock must meet the 35% estate threshold.

27
Q

IRC section 2032a

A

Allows a personal representative to elect that a farm in certain closely held business property included in a gross estate be valued for a state tax purposes as its current or special valuation limited to 1.39 million as indexed rather than its highest user best value

28
Q

IRC section 2032a

A

Allows a personal representative to elect that a farm in certain closely held business property included in a gross estate be valued for a state tax purposes as its current or special valuation limited to 1.39 million as indexed rather than its highest user best value

29
Q

TIP

A

Interest in property that may terminate on the happening or failure of some event or contingency

Marital deduction not available for tip unless there is an exception: GPOA or Q-tip election

When gifting tip, the donor spouse can take an annual exclusion for the present interest gift

30
Q

Three year rule

A

Applies to and is included in the gross estate:
- Property interest: if the decedent gave up a life estate, reversionary interest, or right to amend or revoke
- Life insurance: if a decedent transferred to life insurance policy within three years of death, the full death benefit will be included in the gross estate
- Gift taxes paid: any gift taxes paid within three years of death will be pulled back into the gross estate

31
Q

Federal estate tax is a tax on:

A

The transfer of property when a person dies, it is measured by the value of the property rights that are shifted from the decedent to others. It is a tax on the right to transfer property or interest in property rather than on the right to receive property.

32
Q

When is the federal estate tax due?

A

Payable by the decedents executor on the date form 706 is due, which is within nine months of the decedents death

33
Q

What is section 645 election?

A

Allows the executor of an estate and the trustee of a revocable trust to elect for the estate and the trust to file a single tax return form 1041 which reduces the administrative burden

34
Q

How are different parties to a trust taxed?

A
  • Grantor: grantor trust, grantor tax - responsible for paying taxes on the income, regardless of whether they receive trust distributions
  • Trust: taxed on retained income at trust tax rates
  • Beneficiaries: taxed on distributed income from a non-grantor trust
35
Q

What is the 65 day rule?

A

Allows fiduciary to make distributions within 65 days of the new tax year as if the distributions had been made in the previous tax year. This rule can help trustees to manage tax liabilities and optimize distributions to beneficiaries.

36
Q

Simple trust

A
  • Required to distribute all the accounting income to the beneficiaries in the year the income is earned
  • May not have a charitable beneficiary
  • Cannot distribute principal during the tax year
  • Have a personal exemption of 300 in 2024
37
Q

Complex trust

A
  • Are not required to make distributions and they can accumulate income
  • May have a charitable beneficiary
  • May distribute principal during the tax year
  • Have a personal exemption of $100 in 2024
38
Q

Irrevocable trust

A
  • May not be revoked once created
  • Transfer of assets is considered a completed gift and is subject to gift taxes
  • Assets are generally not subject to estate tax at time of the grantors death
39
Q

Grantor Trust

A
  • A revocable trust in which all income will be taxed to the grantor
  • Any trust that allows the grantor, the grantors spouse, or even a third-party with a beneficial interest in the trust any rights or powers as specified in the grantor trust rules will be taxed as a grantor trust.
40
Q

Estate tax flow

A

Gross estate
Less deductions (expenses, claims, taxes, casualty/theft losses)
= Adjusted gross estate
Less charitable/marital deduction
= Taxable estate

41
Q

Estate tax flow

A

Gross estate
Less deductions (expenses, claims, taxes, casualty/theft losses)
= Adjusted gross estate
Less charitable/marital deduction
= Taxable estate

42
Q

How does a pooled income fund work?

A

-The donor gifts property to a charity and receives an annual pro rata share of income from the charity’s commingled funds, for life.
- Additional funds can be contributed to the fund to increase the income stream.
- The charity manages the funds and receives the remainder when the donors income interest ends

43
Q

QPRT

A

Qualified personal residence trust

  • Irrev tst holding a personal residence which allows the individual to remain in the home rent free for a specified period of time. At the end of the term the home passes gift tax free to the benes.
  • If grantor doesn’t survive trust term it’s included in the estate
  • Original basis (+ gift taxes paid) transferred NO STEP UP
  • If grantor survived trust term they must either move or rent
44
Q

GRAT: what happens if grantor dies before the end of the trust term?

A

The GRAT continues payments to the grantors estate and the property is subject to estate tax

45
Q

What is the main purpose of a GRAT?

A

Pass appreciation in the GRAT to beneficiaries without incurring additional estate tax

46
Q

Ancillary probate

A

Property owned in a different state that is probated in the other state

47
Q

Avoiding probate

A

T - trust
L - law (JTWROS, POD)
C - contract (bene)

48
Q

Where is personal property probated?

A

In the decedents state of domicile

49
Q

Where is real property probated?

A

In the state where it is located (situs) which may be subject to ancillary probate

50
Q

Per capita

A

By the head

51
Q

Per stirpes

A

By the root

52
Q

Per capita by generation

A

Used when second gen is set to receive a specific % share with all third gen receiving an even split of the remainder

53
Q

Dying without a will

A

Intestate

54
Q

AVD exception

A

Depreciating property whose value declines over time EX: car, patent, life estate, remainder interest

55
Q

AVD assets sold within 6 months

A

Valued on date of sale or distribution

56
Q

Non durable POA

A

Remains active till incapacitation. Also used if principal needs the agent to complete a specific task on their behalf.

57
Q

When is a QTIP Trust most useful?

A

When the decedent wishes to provide the surviving spouse with a stream of income for life, qualify for the marital deduction, yet ultimately control who will receive the trust property upon death of the surviving spouse.

58
Q

Direct transfers to educational institutions are not considered a taxable gift if

A

They are made directly to the educational institution for tuition expenses

59
Q

A qualified disclaimer must be

A

In writing

Received no later than 9 months after the later of the date of the transfer or the date the person disclaiming reaches 21

60
Q

A qualified disclaimer must be

A

In writing

Received no later than 9 months after the later of the date of the transfer or the date the person disclaiming reaches 21

61
Q

Crummey power withdrawal amounts

A

The lesser of:
- the annual exclusion
- the annual contribution made to the trust
- the greater of $5000 or 5% of the amount transferred into the trust

CFP (10 decks)

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