Estate Planning Flashcards
Susan would like to “income split” potential lease payment cash flow from her clothing store with her son James, age 23 (turning 24 this year). If she operates as an S corporation, which of the following is true?
Only certain types of trusts can be used with S corporations.
The income James receives will be subject to the kiddie tax if paid directly to him.
Susan could issue common and preferred stock and then transfer all the dividend-paying preferred to James.
Only certain types of trusts can be used with S corporations.
James will be 24 this year. The kiddie tax rules will no longer apply. An S corporation cannot issue preferred stock.
Mrs. Delmar, age 78, is in reasonably good health. She has an estate of $7 million. Her major asset is a small strip shopping center worth $2.5 million. It is fully depreciated, producing substantial income. She is concerned about estate taxes but needs the income from the property to maintain her lifestyle. What would you recommend?
Enter into a private annuity with a family member she can trust
Enter into an installment sale with the highest bidder
Arrange a SCIN to get a higher principal amount or interest rate
Arrange a SCIN to get a higher principal amount or interest rate
Although the installment sale and SCIN are subject to income tax recapture, the IRS proposed regulatory changes have halted private annuity usage. Under a SCIN the property will be removed from her estate. A SCIN is often an effective strategy.
Lisa Armstrong bought a life insurance policy on her husband many years ago when universal life insurance first became available. Over the years, she paid the minimum premiums that kept the policy in force. The death benefit is $500,000 but the cash value is only $5,000. Lisa and her husband have an estate of $15,000,000. Her husband just suffered a serious heart attack. He is hospitalized. Her attorney just told her that the $500,000 policy will add to her potential estate taxes at her subsequent death. At age 80, she is concerned. What can she do to get the life insurance out of her estate?
Set up an ILIT and gift it to the trust. She can be the beneficiary. Gift it to her son, age 50 Gift it to a charity of her choice Nothing, if he dies within 3 years I, II, III I II III IV
I, II, III
She is not the insured. She can gift the policy. There is no 3 year rule. There may be a taxable gift based on the interpolated terminal reserve calculation. The policy will not be included in her gross estate.
Peggy and Joseph have been married for 10 years, second marriage for both. They both have children by prior marriages and none together. They each have approximately $15,700,000 in assets. To maximize their estate tax savings and provide the surviving spouse with only a stream of income from their respective assets, how would you allocate their assets should one of them die?
Zero to Trust “A”, $7,700,000 to Trust “B”, and $8,000,000 to Trust “C”
$11,700,000 to Trust “A”, $4,000,000 to Trust “B”, and zero to Trust “C”
$11,700,000 to Trust “B”, and $4,000,000 to Trust “C”
$15,700,000 to Trust “B”, and zero to Trust “C”
Zero to Trust “A”, $4,000,000 to Trust B”, and $11,700,000 to Trust “C”
$11,700,000 to Trust “B”, and $4,000,000 to Trust “C”
Only $11,700,000 is exempted in 2021, the remainder should go into the “C” trust (2nd marriage).
A client purchases property for $13,495,000. Now a few years later the property values have declined. He gifts it this year at an FMV of $12,835,000 to his son. If the client has not used any of his lifetime exemption, how much gift tax did he pay in 2021?
$0
$394,000
$400,000
$448,000
$448,000
Gift $12,835,000
Less annual exclusion $15,000
Less exemption $11,700,000
----------------------
$1,120,000
$1,120,000 @ 40% = $448,000
Your grandfather, in a 40% gift tax bracket, makes a gift in trust for you in 2021. Assume the value of the gift is $5,015,000 and that it is made to a Revocable Living Trust (yours). Assume he has already gifted $11,700,000 to your sister and used all of his available gift and GSTT exemptions. How much will you get, and how much tax will your grandfather have to pay?
You get the $5,015,000 in full. You must pay $1,200,000 in GSTT.
There is GSTT tax due. The gift is to a trust for you. You must pay $2,000,000.
You get the $5,015,000 in trust, and the GSTT is deferred until your grandfather’s death.
You get the $5,015,000 in full, and your grandfather has to pay a tax of $3,200,000.
You get the $5,015,000 in full, and your grandfather has to pay a tax of $3,200,000.
Both GSTT and gift taxes are due now. They are paid by the transferor.
The gift tax ($5,015,000– 15,000) x .40 = $2,000,000
The GST tax ($3,015,000* - 15,000) x .40 = 1,200,000
GSTT Total $3,200,000
The GSTT is imposed in addition to any estate or gift tax that may also be due. It is a flat tax. Remember, $11,700,000 (2021) was already gifted to your sister. He is in a 40% tax bracket.
*The gift tax paid reduces the taxable gift for GSTT purposes by $2,000,000 ($5,015,000 - 2,000,000).
Mr. and Mrs. Able want to establish a dynasty trust that can ultimately benefit their living children, grandchildren, and great-grandchildren. Their state allows the rule against perpetuities. Which of the following are true?
A dynasty trust could violate the rule against perpetuities by stating the number of years (such as 150 years).
The traditional rule against perpetuities provides that no interest in property is valid unless the interest must vest no later than 21 years plus 9 months after some life or lives in being when the interest was created.
Transferors usually can create valid interests for their great- grandchildren only if they outlive their children or specify the measuring lives as persons alive at the transferor’s death.
A dynasty trust violates the rule against perpetuities.
I, II
I, II, III
II, IV
III, IV
I, II, III
Answer I is true because it could violate the rule against perpetuities by stating the number of years. Only if an interest does not, in fact, vest within 90 years does the disposition become invalid (Uniform Statutory Rule). A dynasty trust is a trust that passes a “life interest” in property for as long as the state law allows (not 150 years).
NOTE: A general answer would be “as long as local law allows.” That covers both answers: the rule against perpetuities or a limited number of years.
Which of the following are examples of income in respect of a decedent (IRD)?
Quarterly stock dividends declared but not paid IRA with a CRT as a beneficiary (The spouse is the income beneficiary of the CRT) Royalties receivable Life insurance death benefits All of the above I, II, IV I, III II, III III
I, III
A client purchases a property for $1,500,000. A few years later, when the property values have declined, he gifts it for $1,265,000 to his son, using his annual exclusion. His son sells the property two years later for $1,100,000. What is the amount of the taxable gift?
$420,000 $625,000 $1,250,000 $1,265,000 $1,485,000
$1,250,000
The value of the gift is still the FMV date of gift less the annual exclusion. Taxable gift ($1,265,000 – $15,000 = $1,250,000).
Is a pooled income fund a charitable remainder trust?
Yes
Dr. Zenith and his spouse are German citizens living in the United States. If Dr. Zenith dies, he wants all his assets to pass to his spouse. The U.S. assets are all in his name and total $12,700,000 (resident aliens). What will be the estate tax situation if he does not do a QDT (2021)?
The assets will pass estate tax-free to his wife using the unlimited marital deduction.
If she remains in the U.S. after his death, no estate tax will apply.
There will be an estate tax of $5,080,0000 if she receives the assets at his death in 2021.
There will be an estate tax of $400,000 If she receives the assets at his death.
There will be an estate tax of $400,000 If she receives the assets at his death.
Tax base $12,700,000 less exemption -11,700,000 1,000,000 The estate tax payable on a taxable estate of $1,000,000 after the applicable credit is applied is $400,000 (2021). (40% x $1,000,000)
Your client, age 50, is a CEO of a large corporation that he owns outright (valued at $10 million). His son, age 25, is the VP. He would like to transfer the future appreciation of the business to his son. However, he doesn’t want to lump sum gift the stock away and incur a sizable gift tax. He also wants to maintain control of the business until his son gets more experience. Finally, if possible, he would like to receive income from the business at retirement. Which transfer technique do you suggest he consider?
Gift stock
Recapitalization
Installment sale
Private annuity
Recapitalization
The recapitalization (recap) keys are the following:
– All of the CEO’s stock should be reissued as preferred, paying a cumulative preferred dividend.
– The gift value of all the common stock is based on the value of the business less the value of the retained preferred shares. If the preferred is valued at $9 million, then the gift of the common stock is $1 million ($10 million - $9 million). The client can use some of his $11,400,000 exemption plus the $15,000 annual exclusion. The remainder would be a taxable gift.
– The preferred stock would pay him dividends. This would increase retirement income.
– The preferred stock at his death would be valued at $49 million (estate freeze).
– All the appreciation of the business (common shares) would be in the son’s name.
He will lose control using Answers A, C, and D.
Dr. Baker (37% tax bracket) owns a profitable clinic with various pieces of medical equipment. He would like to gift to his son, age 18, for future educational needs, but he is short of cash. Which of the following would be a workable opportunity for Dr. Baker to fund for his son’s education needs?
Gift the medical equipment and lease it back
Sell the medical equipment to his son using an installment sale technique
Establish a family limited partnership with the medical equipment and slowly gift units to his son over time using his annual exclusion
Establish a family limited partnership with the medical equipment and slowly gift units to his son over time using his annual exclusion
His son is age 18 and probably subject to the kiddie tax. Trust rates could apply. Answer A will produce kiddie tax.
Mr. Little wants to make a gift of $1,015,000 to his son. Which of the following methods should he use?
Use some of his $11,700,000 (2021) exclusion amount and the annual exclusion
Use the net gift technique and the annual exclusion
Use some of his $11,700,000 (2021) exclusion amount and the annual exclusion
Without exhausting the $11,700,000 (2021), the net gift technique cannot be used.
A wealthy widower wants to save estate taxes yet benefit his children. He doesn’t want to gift money outright to charity now. What should he consider?
A donor advised fund
A CLAT
A CRUT with a wealth replacement trust
A CRAT
A CRUT with a wealth replacement trust
With a donor advised fund, the asset is gifted away. With a CLAT, the charity gets income now, and his children are the remainderman. With a CRAT, he would get the income now, and the charity will be the remainderman. Please make sure you understand these concepts.
