Estate Planning (10%)

Question 1

4 things that cause an invalid Will? (CUNF)

Answer 1

(CUNF)
Capacity Lacking
Undue Influence
Not Executed Correctly
Fraud

Question 2

4 types of Wills

Answer 2

1. Mutual Will - made in agreement with someone else.
2. Reciprocal Will - each will distributes everything to the other.
3. Holographic Will - handwritten
4. Nuncapative Will - Oral will

Question 3

Per Capita Distribution

Answer 3

Equal amongst all living bene’s.

i.e. 1/4 each grandkids, kids, etc.

Question 4

Per Capita by Generation distribution

Answer 4

All heirs at each successive generation getting equal shares of that generation’s portion.

Question 5

Alternate Valuation Date (AVD) rules

Answer 5

Choose date of death or 6-mo later.
Election is irrevocable - must use it even if values increase.
Cannot use it on depreciating assets:
Cars, patents, life estates, remainder interests.
Must elect by time filing 706 return with extensions.

Question 6

2503(b) trust

Answer 6

also known as a Qualifying Minor’s Trust or Mandatory Income Trust. This is an irrevocable trust which requires distribution of income on an annual basis. Most often, distributed funds are placed into a custodial bank account until the child reaches legal age.

Question 7

2503(c) trust

Answer 7

also known as a minor’s trust, is a trust established to hold gifts for one child until they attain the age of 21. A gift to this type of trust qualifies for the annual federal gift tax exclusion

Question 8

Present Interest Gifts for Minors
4-examples
($18,000 annual exclusion applies)

Answer 8

1. UTMA or UGMA
2. 529 Plans
3. 2503(b) Trusts
4. 2503(c) Trusts

Question 9

Future Interest Gifts to Minors
4-examples
(no annual exclusion applies)

Answer 9

1. Remainder interest in property
2. Trust that accumulates income (2503(c) is an exception.
3. Non-income-producing property in trusts: unless TE can sell the property and buy income-producing property.
4. Trust with sprinkle or spray provision.

Question 10

Unified Credit Amount

Answer 10

$5,389,000 - aka Lifetime applicable credit.

Represents the gift tax that would be payable on $13,610,000. This credit offsets taxes on the exemption amount.

Question 11

DSUE

Answer 11

Deceased Spouse Unused Exclusion.

Transfer of any unused lifetime exclusion amount to the surviving spouse.

Used for portability.

Question 12

Qualified Disclaimer

Answer 12

In Writing
No later than:
i. 9-mo date transfer is created
ii. reaching age 21
Must not have accepted it.
Cannot influence who potential recipient is.
Cannot be undone.

Question 13

Basis of Gifted Property

Answer 13

Donee gets Donor’s basis
Donee gets Donor’s holding period

Portion of gift taxes paid are added to basis

Question 14

Calculation of Gift Tax Adjustment added to donee basis

Answer 14

1. When Donor actually paid gift taxes AND
2. FMV is > donor’s basis.

Appreciation Factor = Appreciation / Taxable amount of gift (subtract $18,000 annual exclusion)

Question 15

Gifted Loss Property - Basis and holding period calculations

Answer 15

Scenario 1 - Final sale above adjusted basis (gains basis)
- Donee uses original basis to calculate gain
- Inherits the donor’s holding period.

Scenario 2 - final sale below FMV (loss basis)
- FMV is basis
- Holding period begins on date of gift

Scenario 3 - final sale between basis and FMV.
- No gain or loss.

Question 16

Basis calculation on Spousal property.
e.g. H paid 80% of house; W paid 20%

Answer 16

50/50 basis for spousal property.

Each has $40k basis. If prop is worth $200k at death, survivor gets $140k basis due to step-up.
Or $200k basis if community property

Question 17

Basis calculation on NON-Spousal property.
e.g. Dad paid 80% of house; Son paid 20%

Answer 17

Retain their contribution basis percentage.

Question 18

Who is a skip person?

Answer 18

Related persons 2 or more generations below.
or
Unrelated and 37.5+ years younger.

The skip person is not the person skipped - it is the person who receives the bequest

Question 19

Simple Trust vs. Complex Trust

Answer 19

how they distribute income and principal, and whether they can make charitable contributions.

Simple - Must distribute all income. No Charity. no principal.
Complex - No required distributions, May have charities.

Question 20

65-day Rule for Trustees

Answer 20

Allows fiduciaries to make distributions until March 6 of following year and count towards prior year

Question 21

Section 645 Election

Answer 21

Allows executor and Trustee to treate estate and trust as one for tax purposes.

Question 22

When is 1041 required to be filed?

Answer 22

1. Any taxable income
2. Gross income of $600+ - even if no taxable income
3. Bene who is non-resident alien

Question 23

Distributable Net Income (DNI)

Answer 23

DNI is max that can be taxed to Bene.

e.g. Trust has $10k income and distributes $12k to bene. Bene is only taxed on the $10k - that is the DNI.

Question 24

Income in Respect of Decedent (IRD)

Answer 24

Untaxed income that a decedent had earned or had a right to receive during their lifetime. Taxes on IRD are owed by the individual beneficiary or entity that inherits this income.
e.g. IRA/401k;

Question 25

GRAT payments to grantor

Answer 25

A - Always the Same; an Annuity for a fixed period of years. Must be paid - even if invade corpus or borrow money.

Question 26

Disadvantages of a GRAT

Answer 26

1. If grantor dies before end of GRAT term it’s back in their estate.
2. Initial gift is taxable - valued at FMV - PV of annuity payments.
3. No additional assets permitted
4. No instance of control for grantor
5. Income is taxable to grantor
6. Fixed annuity must be paid even if it means using corpus or borrowed funds.

Question 27

GRUT payments to Grantor?

Answer 27

Fixed percentage - determined annually for a fixed period of years
Must be paid - even if invade corpus or borrow money.

Question 28

Qualified Personal Residence Trust (QPRT)

Answer 28

Irrev trust that holds a personal residence and allows grantor to live in home for a specified period. At end of term it passes gift-tax free to bene’s.
Back in estate if grantor does not outlive the term.
No step-up in basis for bene.
After QPRT term grantor either needs to move out or pay rent

Question 29

Restriction on Unlimited Marital Deduction

Answer 29

Limit to Non-Citizen spouse is $185,000
Not available for Terminable Interest Property

Question 30

Best time to use a CLAT

Answer 30

Low interest rates. The calculation on paymens to the charity is lower and therefore more remains for family bene remaindermen.

Question 31

Best time to use CLUT?

Answer 31

When GST is a concern. Percentage of trust assets go to annually to a charity and balance to family bene.

Question 32

Best reasons for QTIP trusts?

Answer 32

Grantor in second marriage
Wants to provide support for current spouse and children from prior marriage.
Concerna bout spouse’s ability to manage assets.
Risk of surviving spouse changing bene’s

Question 33

Bypass vs. QTIP

Answer 33

Bypass = Discretionary Income
QTIP = Mandatory all income

Question 34

Who needs QDOT Trust?

Answer 34

Use for non-US citizen surviving spouse.

Answer 35

To qualify as a QDOT, a trust must meet the following requirements:
Trustee: At least one trustee must be a U.S. citizen or domestic corporation
Distributions: No distributions can be made from the trust, except for income, unless the trustee has the right to withhold estate taxes
Withholding: The trust must meet withholding and collection regulation
If the trust assets are over $2 million, one trustee must be a domestic bank. If the trust assets are under $2 million, a bank trustee is not required if no more than 35% of the trust assets are non-domestic real estate.

Question 36

2503(b) Trust vs. 2503(c) Trust

Answer 36

b = Bring Beneficiaries Bucks. Must distribute income annually. Principal can be retained for life.

c = accumulate & can cease current cash. Principal and Income must be distributed at 21.

Question 37

Rules for funding ILIT with existing policy?

Answer 37

3-year rule. Owner who is the insured must survive transfer of the policy by 3-years or it’s back in their estate.

Question 38

Crummy powers

Answer 38

When unfunded ILIT and grantor contributes assets every year to ILIT to pay life insurance premiums.
Turns future interest life insurance benefit to a present interest gift.

Question 39

Liability exposure in FLP?

Answer 39

Older generations retain general partnership interests and have unlimited liability.
Younger generations get limited partnership interests and have liability protection.

Question 40

Private Annuity

Answer 40

Like an installment sale to family.
Receive unsecured annuity payments.
Buyer or their heirs must make payments for life of Seller.
If single life annuity - value is out of seller’s estate.
If joint life annuity - PV of future annuity payments is included in estate.