Estate and Incapacity Planning 2

Question 1

Outright gifts of business interests

Answer 1

1. Gift
2. Private Annuities
3. Grantor Retained Annuity Trusts (Grantor transfers business interests to an irrevocable trust and retains an income stream for a set number of years. At termination, it is passed to beneficiaries. Not exempt from GST

Question 2

Intentionally Defective Grantor Trusts (IDGTS)

Answer 2

A complete transfer for estate tax purposes but an incomplete transfer for income tax purpose. This is a way to remove highly appreciated assets from the estate. An appraisal has to take into account a complete valuation.

Question 3

Installment Sale

Answer 3

Owner acts as bank, selling assets or business to buyer, over time, so as to defer capital gains tax recognition over time.

Question 4

Self-Cancelling Notes

Answer 4

A promissory note is issued which is cancelled at the owner’s death.

Question 5

Buy Sell Agreement - Requirements

Answer 5

1. Valuation Clause - formula for valuing the business
2. Funding Mechanism - a way for the buyer to purchase - do they have money available to do that? Fund with life insurance?
3. Define the triggering event - is it death, divorce, illness?
4. Tax Considerations - estate tax, property taxes, GST, Gift Tax
5. Audited financials for three years

Question 6

Charitable Remainder Trust (CRT)

Answer 6

Donor retains income benefit during life and charity gets the remainder.

Question 7

What are the two types of CRT?

Answer 7

Charitable Annuity Trust (CRAT) - It distributes a fixed annuity amount each year, and additional contributions are not permitted. The annuity amount must be at least 5% and not more than 50% of all trust assets.
Charitable Remainder Uni Trust (CRUT) - This distributes a fixed percentage based on the value of trust assets on an annually determined basis. Additional contributions may be made.

Question 8

Charitable Remainder Trust - Taxes

Answer 8

Are typically tax exempt. Typically, will add a low basis asset to it so when it is sold, you avoid capital gains. Cannot hold S Corporation stock.

Question 9

Charitable Lead Trust

Answer 9

It is irrevocable that operates for a set term.

After the term, the assets are distributed to the beneficiaries.

Question 10

Charitable Remainder Trusts - When to Use

Answer 10

• Donated assets are usually highly appreciated capital assets.
• Client has a charitable intent.
• Client wants to defer tax recognition.
• Client is or at retirement
• Contribution is made in a high interest rate environment
• Client wants to diversify
• Client wants to convert net worth into an income stream

Question 11

Two Types of the Charitable Lead Trust

Answer 11

Grantor and Non-Grantor

Question 12

Retirement Assets

Answer 12

Example - Naming the charity as the beneficiary. While the client is alive, the client can transfer the RMD to the charity.

Question 13

Tax Benefits of a CRT

Answer 13

• Immediate tax deduction for the value of the remainder interest as a charitable contribution in the year of the transfer to the trust.
• Reinvestment is allowed.

Question 14

When not to use a CRT

Answer 14

• An operating business or for debt-financed assets
• In a low interest rate environment, unless the annuity stream is not important to the client.
• When the client’s charitable intent is not genuine.

Question 15

Charitable Lead Trust - When to Use

Answer 15

• The donor has excess income for which he or she has little need.
• The donor wants to give income to a charity over a period of years.
• Wants to give highly appreciated assets to family members.
• Wants to recognition for making substantial gifts.

Question 16

Charitable Lead Trust - When Not to Use

Answer 16

• If the client will need the income.
• Does not have appreciating assets
• When an outright gift to charity will meet the same goals.

Question 17

Private Foundation

Answer 17

Independent legal foundation.
Advantages - Autonomy and control - can choose the board, etc.
Disadvantages - Can be expensive to operate; complicated compliance requirements.

Question 18

Donor Advised Fund

Answer 18

The donor can have a lot of control, but the community foundation can take care of compliance.

Question 19

Tax Apportionment Clause

Answer 19

There should be an equitable apportionment clause is used when charities are part of the remainderman beneficiaries, rather than a “pay out of residue” clause (PC 20100)

Question 20

C Corporations

Answer 20

• The Shareholders are not liable for company debts and obligations.
• Subject to double taxation - once at the corporate level and again when dividends are distributed.
• Losses cannot be deducted by shareholders
• Are not pass-through entities

Question 21

S Corporations

Answer 21

• They do qualify for QBI
• Are a pass through entity - tax benefits and losses pass to individual shareholders
• Not subject to double taxation

Question 22

S Corporations - Limitations

Answer 22

• Cannot have more than 100 shareholders
• No stockholders can be a non-resident alien
• Cannot have more than one class of stock
• Certain types of trust can be shareholders (QSST or ESBT)
• Limitations on liability - same as the C Corporation

Question 23

General Partnership

Answer 23

• Easy to form
• Pass-through nature of partnerships for income tax purposes
• Flexibility for management and control

Question 24

Limited Partnerships

Answer 24

• Limited Liability (for limited partners only, not general partner)
• Common when investors are needed
• Easy to establish
• Flexibility
• Not subject to double taxation

Question 25

Limited Liability Partnerships

Answer 25

• Partners are not personally liable for partnership debts, but are liable for their own liabilities (malpractice) incurred in their profession, but not for their partners’ malpractice.
• only available to attorneys, accountants, architects, engineering, and land surveyors

Question 26

Limited Liability Company (LLC)

Answer 26

• Pass Through company
• No limit on the number of members an LLC can have
• Can be flexible
• Subject to minimize franchise tax and gross receipts fee
• Cannot be used for certain businesses

Question 27

Family Limited Partnerships

Answer 27

• Governed by state law and partnership agreement
• General partner has general liability
• Limited partners have limited liability
• Must have a legitimate business purpose

Question 28

Sole Proprietorship

Answer 28

*Personally liable for all debts

Question 29

Gifts

Answer 29

• Given without consideration and no strings attached.
• Once the donor releases the gift, it passes out of their control to the control of a third party.
• No bargain for exchange.

Question 30

Annual Exclusion Amount

Answer 30

• Does not count toward the donor’s lifetime gift exemption

* Gift tax return does not have to be filed

Question 31

Gift over the Annual Exclusion Amount

Answer 31

• A return must be filed. Form 709. Due by 4/15, the year following the gift
• Subject to gift tax (IRC section 2503(b) - giver not recipient is liable for the gift tax.

Question 32

Is the gift considered an earned income?

Answer 32

The donor must file the gift tax return and is not included as ordinary gift.

Question 33

Lifetime Gifts

Answer 33

Carries the donor’s basis. The donee must pay the capital gains tax based on the donor’s basis. When it is sold will have to pay the capital gains because there is no adjusted basis.

Question 34

Post Mortem Gifts

Answer 34

Carries the donee’s basis. Will receive an adjusted basis and the tax liability will decrease. Basis is adjusted to the date of death of donor. Particularly important for low basis items, and if the person has a terminal illness.

Question 35

Gift Tax - Spouses

Answer 35

Spouses - Unlimited

Non-Citizen Spouse - The amount is limited - 2021 amount?

Question 36

Creditor Protection

Answer 36

*Retirement accounts are exempt from bankruptcy and other retirement accounts