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.
Mr. Stallworth, age 70, set up a 6% CRT. He will be the income beneficiary, while living, then his daughter, while living and finally his granddaughter for as long as she was living. Then the corpus remaining would pass to charity. One year after he set up the CRT, his daughter died. Would the charitable deduction change?
The full deduction would stop at his death.
Yes, it would change to partial interest deduction based on a new life expectancy of the trust.
No change
No change
The original charitable deduction was based on the life expectancies of the family members at the time that the trust is set up. Death of a family member does not change the original charitable deduction. The probability of death was factored into the original deduction by use of an IRS table.
Which of the following is not true about charitable remainder trusts?
The trust must irrevocably serve a charitable purpose.
The trust must not provide a discretionary benefit for a definite individual among the class of potential beneficiaries.
The trust can have an indefinite life.
The trust terms can be enforced by someone other than the trustee.
Explanation
The trustee can change the charitable purpose. The trust’s irrevocable remainder interest must be paid to or held for a charity; thus, it can have an indefinite life. The trust terms are enforced by the trustee. The charitable trust must have a definite class of beneficiaries.
The trust terms can be enforced by someone other than the trustee.
The trustee can change the charitable purpose. The trust’s irrevocable remainder interest must be paid to or held for a charity; thus, it can have an indefinite life. The trust terms are enforced by the trustee. The charitable trust must have a definite class of beneficiaries.
Mr. Able gave his grandson $165,000 in 2021. Mr. Able had used all of his gift and GSTT exemption this year. What total amount of transfer tax is due now?
$0
$36,000
$66,000
$96,000
$96,000
Amount of transfer $165,000
less annual exclusion -15,000
Taxable amount $150,000 @ 40% = $60,000 gift tax
Then $165,000 – [$15,000 + $60,000] = $90,000 @ 40% = $36,000 GSTT due
Tiffiny is the beneficiary of a QTIP trust. Her husband died several years ago leaving her certain assets outright and others through a QTIP trust. Her husband had the attorney write in the QTIP trust a provision that the estate tax attributable to the QTIP must be borne by Tiffiny’s estate, not the QTIP assets. If Tiffini dies, what will be the result?
Tiffiny’s estate will bear the burden of the estate tax due.
Tiffiny’s estate will receive reimbursement from the QTIP trust for the estate tax incurred by it (the QTIP property).
Payment of estate taxes by the QTIP trust will cause Tiffiny’s estate to pay more estate taxes.
The remainder beneficiaries of the QTIP trust could sue the trustee for paying taxes attributable to the QTIP.
Tiffiny’s estate will receive reimbursement from the QTIP trust for the estate tax incurred by it (the QTIP property).
The QTIP has to bear the burden for its share of estate taxes. The QTIP will cause more estate taxes to be paid when Tiffiny dies.
Mr. Bailey would like to gift $515,000 (FMV) of appreciated property (basis $200,000) to his son. Mr. Bailey doesn’t want to use his liquid assets to pay the gift tax (40%). He already has gifted $11,700,000 (2021). What would you suggest?
Do not make the gift
Use a net gift technique and have the son pay the gift tax of $142,857
Use a net gift technique and have the son pay the gift tax of $147,143
Have the son pay the gift tax of $200,000 using a reverse gift technique
Use the annual exclusions only to gift the property
Use a net gift technique and have the son pay the gift tax of $142,857
The normal gift tax would be $200,000 ($500,000 x 40%). When the son pays the gift tax, it will be $142,857 ($200,000 / 1.40). The 1.40 is 1 plus the gift tax bracket (40%).
Which of the following will be included in the gross estate of the granter?
Pour-over will assets Joint life and survivor annuity (PV) A gift to a charitable remainder trust (CRT) at death for the benefit of the grantor's spouse A funded revocable trust A funded irrevocable trust All of the above I, II, III, IV I, II I, III, IV II, IV
I, II, III, IV
A pour-over will normally passes separately owned assets into a trust. A gift at death is included in the gross estate even if it is to a charity or to a wife. The CRAT is included because the spouse has an interest. Then it passes tax-free to the spouse by the marital. When she dies it passes to charity. The annuity is included.
Bob sells land with an FMV of $500,000 to a charity for $300,000. His basis in the land is $100,000. What is his taxable gain?
$100,000
$240,000
$300,000
$240,000
$300,000 (sale) / $500,000 (given) x $100,000 (basis) = $60,000
$300,000 (sale) - $60,000 (adjusted basis) = $240,000
The reason for the ratio is that the transaction is part sale ($300,000) and part a deductible charitable gift ($200,000). Without the ratio, the charitable bargain sale would allow the seller an opportunity to double dip on the transaction.
Your client (married) has two main assets besides his home and personal property. He is a physician. He has an corporation, and it is producing a lot of income. In addition, he has purchased a new piece of x-ray equipment. He would like to pay for his daughter’s college education with pretax dollars. Which of the following intra-family planning techniques would be appropriate if she is 13 years old?
Gift stock in his physician’s practice (an S corporation) to his daughter
Gift and lease back the x-ray equipment
Use the x-ray equipment to establish an S corporation and slowly gift the stock to his daughter in about 4 years
Do an installment sale with his daughter
The keys to the solution are conduit income and new equipment. The new equipment could be depreciated, producing minimal income to the client for the next few years. Then when the daughter is at least 17, gift the stock at FMV. $28,000 of stock at 10% return might trigger a kiddie tax in 4 years, but in 4 years the $1,200 could be the standard deduction and $1,200 could be at 10%. Future years could trigger a kiddie tax. Why not take advantage of the standard deduction and the 10% bracket. Meaning, keep the income received under the kiddie tax parents’ rate.
Hal and Beverly Barnes live in a community property state. They want to gift to various family members. Which one of the following statements regarding a community property gift is false?
A gift of $30,000 will not require filing of gift tax returns.
If, after the split, the values of the gift exceeds the annual exclusion, two gift tax returns (one by each spouse) must be filed (including consent by the non-donor spouse).
Only one spouse needs to file a gift tax return if the split brings the gifts down to or below the annual exclusion.
Community property will be treated like joint tenancy with right of survivorship for gift purposes.
Only one spouse needs to file a gift tax return if the split brings the gifts down to or below the annual exclusion.
Community property, like JTWROS, is owned in equal shares. It is automatically split into two $15,000 gifts. Only when the $15,000 annual exclusion is exceeded does a gift tax return have to be filed.
