Estate Planning

Question 1

Gifting Strategies

Answer 1

Never gift property when the fair market value is less than the adjusted basis. Rather, sell the property and let the donor recognize a capital loss for income tax. The donor can then gift the cash proceeds to the donee who can then purchase the property with the proceeds.

Consider gifting property with the greatest appreciation potential to the youngest donee available who has the most time for the asset to appreciate.

When making gifts to charities, always gift-appreciated property to avoid the capital gain taxes on the difference between the fair market value and the donor’s adjustable taxable basis. For such property, the donor may be able to deduct the fair market value as a charitable deduction, subject to the income tax limitations.

Gift income-producing property to the donee in the lowest marginal income tax bracket so that the income is subject to the lowest possible income tax.

Question 2

Exceptions to the terminable interest rule

Answer 2

A six-month survival contingency.

A terminable interest, either outright or in trust, over which the surviving spouse has a general power of appointment.

A Qualified Terminable Interest Property (QTIP) Trust.

A Charitable Remainder Trust (CRT) where a spouse is the only noncharitable beneficiary.

Question 3

Summary of the Installment Payment of Estate Tax (Section 6166)

Answer 3

10 annual installments (if the estate meets eligibility
requirements):

Up to $1,640,000
First installment must be made within 5 years after the estate tax return is due.
2% interest on first $1,640,000 of a closely held business interest. Amounts greater are subject to an interest rate that is 45% of the usual underpayment rate. If the estate makes use of the lower interest rate, the interest is not deductible.

Eligibility
Value of closely held business interest > 35% of the AGE. Must be a sole proprietorship or partnership in which the decedent owned 20% capital interest or 20% voting share.
If more than one business, they can be aggregated to meet the 35% of AGE if the decedent owns 20% of the capital interest, or voting shares, in the closely held business.
if corporation with ≤ 45 shareholders, or
if partnership with ≤ 45 partners
Closely held business actively engaged in trade or business

Question 4

Summary of Special Use Valuation (Section 2032A)

Answer 4

Reduce the fair market value of real property up to $1,230,000 (2022)
Eligibility
Business real property must be used in farm or business activity managed by the decedent or the decedent’s family for 5 out of the 8 years prior to the decedent’s death.
Value of business real and personal property must be 50% of the GE as adjusted
Values of business real property must be 25% of the GE as adjusted
Real property must pass to qualifying heirs
Executor must file election with the estate tax return
Heirs must use property in business for at least 10 years

Question 5

Exceptions to GSTT

Answer 5

GSTT annual exclusion is $16,000 per donee per donor, gift splitting is available if both spouses elect.
Indexed, but $16,000 for 2022.
The predeceased parent rule applies for direct skips to lineal descendents and collateral heirs if the decedent does not have any direct lineal descendents (children, grandchildren).
Lifetime exemption available during life or at death equal to the applicable estate tax equivalency of $12,060,000 for 2022.
Qualified transfers are excluded.

Question 6

Exclusions to the GSTT

Answer 6

The GSTT system has both an exclusion available for qualified transfers and an annual exclusion of $16,000 (2022).

Medical and Educational Payments - Qualified Transfers

The direct payment of tuition to a qualified educational institution or the direct payment of qualified medical expenses to a medical care provider on behalf of a skip person is not subject to GSTT. The exclusion from GSTT also applies if the payments are made from a trust.

Question 7

Summary of the GSTT
Key Points
Transfers Subject to GSTT
GSTT Rate

Answer 7

Key Points
Designed to tax large transfers between skipped generations (i.e., grandparent to grandchild).
It is separate from and additional to, the gift and estate tax systems.

Transfers Subject to GSTT
Direct skips.
Taxable termination.
Taxable distribution.

GSTT Rate
The GSTT rate is the highest marginal rate for the unified gift and estate tax rates (40% for 2022).
Any GSTT paid will be added to the fair market value of the gift to determine total taxable gifts for the federal gift tax.

Question 8

Charitable Remainder Trusts: (CRAT, CRUT, PIF)

1. Value of a Charitable Gift
2. Recipient of Payment
3. Payment
4. Remainder beneficiary
5. Additional contributions
6. Can hold tax-exempt securities

Answer 8

Question 9

Charitable Trusts (CRAT, CRUT, PIF, CLUT, CLAT):

1. Purpose
2. Characteristics
3. Planning Opportunities
4. Income/gift tax planning

Answer 9

Question 10

Charitable Contribution Deductions

Answer 10

IMPORTANT POINTS:

• Carryover is five years (total of six years)
• Basis=Adjusted basis
• Mileage deductions for auto used in charitable work

Question 11

Relevant tax numbers for estate

Gift/Estate Lifetime exclusion

Gift/Estate Lifetime credit

Annual Gifting exemption

Annual gifting to non-citizen spouse

Max gift and estate rate

Answer 11

Relevent tax numbers for estate for 2022

Gift/Estate Lifetime exclusion $12,060,00

Gift/Estate Lifetime credit $4,796,800

Annual Gifting exemption $16,000

Annual gifting to non-citizen spouse $164,000

Max gift and estate rate 40%

Question 12

Characteristics of a Holographic Will

Characteristics of a Nuncupative Will

Characteristics of a Statutory Will

Answer 12

Characteristics of a Holographic Will

Handwritten (not typed) by the testator and include the material provisions of a will.

Must be dated and signed by the testator, but most states do not require a witness.

Valid in most states.

Characteristics of a Nuncupative Will

Oral, dying declarations made before a sufficient number of witnesses.

In some states, nuncupative wills may only be effective to pass personal property, not real property, and the dollar amount transferred via this method may be limited.

The use of nuncupative wills is fairly restricted and is not valid in most states.

Characteristics of a Statutory Will

Drawn by an attorney, and comply with the statutes for wills of the domiciliary state.

Referred to as witnessed or attested wills.

Must be typed or be in writing, be signed by the testator (generally in front of witnesses), and be signed by the witnesses.

Question 13

What is the difference between per capita and Per stirpes?

Answer 13

The per capita method, sometimes called “by the head”

The per stirpes method, sometimes called “by the roots” directs that the deceased person’s designated share flow to their heirs. Per stirpes is also referred to as taking by representation.

Question 14

Characteristics of a Power of Attorney

Answer 14

A stand alone document that allows an agent to act for the principal and may include the power to appoint assets

Power to act

Ends at the death of the principal

May be general or limited

May be revoked at any time by the principal

Question 15

Characteristics of a Power of Appointment

Answer 15

A power, usually included in a trust or power of attorney, allowing the power holder to direct assets to another

Power to transfer assets

May survive the death of the grantor

May be general or limited

May be revoked by the principal during life or at death (via last will and testament)

1. A general power is a power in which the holder can appoint the property to himself, to his own estate, to his own creditors, or to the creditors of his own estate. These four together are called “restricted parties” or the “prohibited group.
2. Any other power is not a general power of appointment.
3. WHAT IS IMPORTANT TO KNOW: It must be a general power of appointment to be included in your estate and it is also a GENERAL POWER OF APPOINTMENT that allows for the exception to the terminable interest rule.

Question 16

What is a Crummey provision?

Answer 16

A Crummey provision is the explicit right of a trust beneficiary to withdraw some, or all, of any contribution to a trust for a limited period of time, generally 30 days, after the contribution. This power of withdrawal is essentially a general power of appointment, or the ability of the power holder to appoint assets to himself.

A Crummey provision (called a power to lapse) may limit the withdrawal right to an amount equal to the annual exclusion or less, thus, converting what might have been a gift of a future interest in the trust to a gift of a present interest, which will then qualify for the annual exclusion.

Question 17

What is the 5/5 Lapse Rule?

Answer 17

If a trust has more than one beneficiary, the 5/5 Lapse Rule must be applied to determine if the lapse causes a taxable gift from the beneficiary holding the Crummey power to the other beneficiaries of the trust. Such a taxable gift is a gift of a future interest and is not qualified for the annual exclusion.

Under the 5/5 Lapse Rule, a taxable gift is deemed to have been made when the power to withdraw an amount in excess of the greater of $5,000 or 5% of the trust assets has lapsed, or not been used by a beneficiary.

Example:

• What happens here is that if the trust allows them to have a crummey provision, that exceed the 5/5 then a gift has been made between the trust beneficiaries. The gift is to the extent that the rights to withdrawal (Crummey) exceed that of the 5/5 power. Important note, if there are two trust beneficiaries (it can be scaled), there are deemed to have made gift (1/2) to the other one of whatever has lapsed. For example if the amount that exceeds the 5/5 rule is 16K, that is the total from which the trust beneficiaries will split the gift (32K in total since there are two of them), the gift then becomes of 8K since they are giving hald of their ownership to the other. This is gift of the difference between 5K and 8K, so a 3K gift was given

Application:

• If you hold a general POA, no matter if you take it or let it lapse it will be included in your gross estate. The only time that it is not held in your gross estate is if you are limited to a 5/5 power. if you are given a provision that exceeds that regardless if you take the amount or let it lapse it will fall back tot eh original later, and you will include that amount in your gorss estate.

Question 18

Characteristics of transfers resulting in no gift tax

Answer 18

Gifts made to political organizations are exempt from gift tax. The term “political organization” means a party, committee, association, fund, or other organization (whether or not incorporated) organized and operated primarily for the purpose of directly or indirectly accepting contributions or making expenditures, or both, for an exempt function.

A qualified transfer is a payment made directly to a qualified educational institution, or medical provider.

Payments of legal support obligations are exempt from the gift tax rules.

Question 19

Gifts to Minors (UGMA/UTMAs)

Answer 19

Gifts to minors, excepting small amounts, are usually made either in trust or through a custodian type account.

The Uniform Gifts to Minors Act (UGMA) provides that gifted property is transferred to a named custodian under the state UGMA. Permissible gifts include cash, securities, life insurance, and annuities. The custodian is permitted to spend money on behalf of the minor and serves without bond and normally without the need to account.

The Uniform Transfers to Minors Act (UTMA) was designed to replace UGMA. The UTMA expands the kind of property that can be transferred from the limited types under UGMA to any property interests. UGMAs and UTMAs are less expensive than establishing trusts and transfers to either are considered gifts of a present interest. The only caution is that UGMA and UTMA’s cannot be used to provide what would otherwise be legal support.

Question 20

What is included in the gross estate?

Answer 20

Question 21

Examples of Gifts Made within Three Years of Death that are Included in a Decedent’s Gross Estate (IRC Section 2035)

Answer 21

Any gift tax paid on gifts made within three years of the decedent’s date of death,

The value of any property gifted within three years of the decedent’s date of death if the decedent retained an interest, and

The death proceeds of any life insurance policy insuring the decedent’s life that was gifted within three years of the decedent’s date of death.

Question 22

Characteristics of the Alternate Valuation Date

Answer 22

To Qualify

The total value of the gross estate must depreciate after the date of death, and

The total estate tax must be less than the estate tax calculated using the date of death values.

Valuation if properly elected

All assets valued at the alternate valuation date

Except:

Assets distributed or sold before 6 months which are valued at the date of distribution or sale, and

Wasting assets (annuitized annuities, patents, royalties, installment notes, lease income) must be valued at the date of death.

Wasting assets will naturally decline over time and would cause a decrease in the estate not connected to a market value decrease.

Question 23

What is deducted from the gross estate to determine the adjusted gross estate?

Answer 23

Funeral expenses;

Last medical expenses;

Administrative expenses;

Debts of the decedent;

Losses during estate administration;

*Admin Burial Casualty Debts ABCD*

Question 24

Characteristics of the failure-to-file penalty

Answer 24

The failure-to-file penalty is five percent per month up to a maximum penalty of 25 percent, reduced by the failure-to-pay penalty, up to five months.

If the failure-to-file is determined to be fraudulent, the penalty is increased by 15 percent per month up to a maximum of 75 percent.

Question 25

Characteristics of the failure-to-pay penalty

Answer 25

The failure-to-pay penalty is 0.5 percent per month up to a maximum penalty of 25 percent.

Question 26

Characteristics of a Self-Canceling Installment Note (SCIN)

Term of Payment

Deductibility of Interest

Buyer’s Adjusted Basis

Seller May Keep Collateral Interest

Answer 26

Term of Payment - Determined by Seller

Deductibility of Interest - Depends on Property

Buyer’s Adjusted Basis - Purchase Price of Property

Seller May Keep Collateral Interest - Yes

Question 27

Characteristics of a Private Annuity

Term of Payment

Deductibility of Interest

Buyer’s Adjusted Basis

Seller May Keep Collateral Interest

Answer 27

Term of Payment - Life of Annuitant

Deductibility of Interest - None

Buyer’s Adjusted Basis - Sum of Annuity Payments Paid

Seller May Keep Collateral Interest - No

Question 28

GRAT

Answer 28

1. GRAT (grantor retained annuity trust)—appreciating assets are transferred to a trust with the income paid to the grantor during the term.(Freezes value at trust creation if grantor outlives trust term.) Income is taxed to the grantor during lifetime.
2. Not included in grantor’s gross estate unless grantor dies within income period (term of trust)
3. Grantor receives an annual payment from the trust of either a fixed amount or a fixed percentage of the initial FMV
4. Gift to the extent that the value of the property exceeds the present value of the grantor’s retained income interest calculated at time of creation.

**For people that are not going to die sooon**

Question 29

GRUT

Answer 29

1. Grantor receives payments at least annually of a fixed percentage of the net fair market value of the trust assets as determined annually.
2. GRATs for fixed income and GRUTs to combat inflation.
3. Additional assets can be added.
4. Not included in grantor’s gross estate unless grantor dies within income period (term of trust).

Question 30

Characteristics of a Qualified Personal Residence Trust (QPRT)

Answer 30

A Qualified Personal Residence Trust (QPRT) is a special form of a GRAT. The grantor contributes a personal residence to a trust and instead of receiving an annuity in dollars; the grantor of the QPRT receives use of the personal residence as the annuity interest component.

At the end of the trust term, the residence passes to the remaindermen, and if the grantor is still living, he may then lease, at a fair market value rent, the property from the remaindermen and continue to use it as his personal residence. If the grantor dies before the expiration of the trust term, the fair market value of the residence is included in the grantor’s gross estate.

A QPRT can only hold one residence, but an individual can have two QPRTs.

No limit on trust term, and, if transferor lives beyond term of trust, the property is not included in the grantor’s gross estate.

Gift and Estate Tax Consequences (QPRTs)

The original transfer of the residence is treated as a gift to the extent that the fair market value of the residence exceeds the present value of the grantor’s retained interest (the use).

Question 31

Summary of GRATS and QPRTS CHART:

1. Purpose
2. Characteristics
3. Planning Opportunities
4. Income/ Gift tax Consequences

Answer 31

Question 32

Titling Ownershership: (FS, TIC, JTWROS, TE, CP)

Inclusion In gross estate

Inclusion in the Probate estate

Rights of survivorship

UMD

Partition without consent= The Right to Sell Freely

Answer 32

Question 33

Characteristics of a Tangible Personal Property Trust (TPPT) including Gift and Estate Tax Consequences

Answer 33

Tangible Personal Property Trusts (TPPTs) are very similar to QPRTs, with one exception – a TPPT is funded with personal property, not real property. TPPTs usually transfer artwork, antiques, and other items of personal property that have the potential to appreciate in value.

Gift and Estate Tax Consequences (TPPTs)

The original transfer of the personal property to the trust is treated as a gift to the extent that the fair market value of the personal property exceeds the present value of the grantor’s retained interest.

As in the case of the QPRT, if the grantor dies during the term of the TPPT, the full fair market value of the trust property will be included in the grantor’s gross estate.

Question 34

Characteristics of a Family Limited Partnership (FLP)

Answer 34

A family limited partnership (FLP) is a limited partnership created under state law with the primary purpose of transferring assets to younger generations using valuation discounts.

Usually, one or more family members transfer highly appreciating property to a limited partnership in return for both the one percent general and the 99 percent limited partnership interests. In a limited partnership, the general partner has unlimited liability and the sole management rights of the partnership, while the limited partners are passive investors with limited liability and no management rights.

Question 35

Gift and Estate Tax Consequences of a Family Limited Partnership (FLP)

Answer 35

Gift and Estate Tax Consequences

Upon creation of the partnership, there are neither income nor gift tax consequences because the entity created (the limited partnership and all of its interests, both general and limited) is owned by the same person, or persons, who owned it before the transfer.

Once the FLP is created, the owner of the general and limited partnership interests values the limited partnership interests.

The original transferor (grantor) then begins an annual gifting program utilizing the discounts, the gift tax annual exclusion, and gift-splitting (where applicable) to transfer limited partnership interests to younger generation family members.

Question 36

Characteristics of Irrevocable Life Insurance Trusts (ILITs)

Answer 36

The purpose of an ILIT is to prevent an insured party from having incidents of ownership in the life insurance policy on his life.

When an ILIT is created, the grantor often wants to qualify the gifts to the ILIT for the gift tax annual exclusion so that his applicable gift tax credit amount will be available for other planning either during lifetime or at death. Since an ILIT is irrevocable, transfers to the ILIT are usually made subject to a Crummey withdrawal right on behalf of the beneficiaries.

Question 37

Characteristics of a Testamentary Bypass (Credit Shelter) Trust

Answer 37

The bypass trust can be structured so that all of the income of the trust is payable to the surviving spouse. In addition, the trustee can be given the right to make discretionary distributions of principal for the surviving spouse’s health, education, maintenance, and support (an ascertainable standard). Furthermore, the surviving spouse can be given the right to demand, on an annual basis, the greater of $5,000 or five percent of the trust corpus.

Upon the surviving spouse’s death, the assets in the bypass trust usually pass to the children (or some other noncharitable beneficiary), and are not included in the surviving spouse’s gross estate for federal estate tax purposes.

Question 38

Characteristics of an Inter Vivos Bypass (Credit Shelter) Trust

Answer 38

hile most individuals create a bypass trust at death, creating an inter vivos bypass trust can yield even bigger benefits. When all property transfers occur at the death of an individual, everything is potentially included in the gross estate and subject to estate tax.

Instead of waiting until death to create the trust, an individual can transfer $12,060,000 (2022) in assets to an inter vivos bypass trust and shield the transfer with the applicable gift tax credit amount. Once this is accomplished, all future growth and appreciation in the property that is transferred to the bypass trust escapes federal estate taxation at the decedent’s death.

Question 39

Characteristics of Power of Appointment Trusts (A-Trusts)

Answer 39

Allows a terminable interest to be passed to the surviving spouse and still qualify for the marital deduction.

No election required as with QTIP. An A trust automatically gets the marital deduction.

Income from the trust must be payable to the surviving spouse at least annually for life.

Any assets remaining in the trust when the surviving spouse dies must be included in the surviving spouse’s gross estate.

Surviving spouse is given a general power of appointment over the trust property during life or at death.The first spouse to die does not control the ultimate disposition of the property.

Question 40

Qualified Terminable Interest Property (QTIP) Trust (also C or Q Trust).

Reverse QTIP election

Answer 40

The value of any assets remaining in the trust when the surviving spouse dies must be included in the surviving spouse’s gross estate.

Surviving spouse is not usually given a general power of appointment.

Allows a terminable interest to be passed to a surviving spouse and still qualify for the marital deduction.

Election regarding the use of the marital deduction is made on Form 706.

Income from the trust must be payable to the surviving spouse at least annually for life.

Reverse QTIP election—if the remainder beneficiary for the QTIP trust subjects the remainder interest to GSTT rules, the executor may make a reverse QTIP election. This allows the trust to be treated as part of the gross estate and take advantage of the GSTT exemption amount without losing the marital deduction.

Question 41

Benefits of a Power of Appointment Trust for avoiding the Generation Skipping Tax

Answer 41

Power of appointment trusts may also be used to avoid the generation-skipping transfer tax. By granting a non-skip person a general power of appointment over a trust that will distribute assets to a skip person, it is possible to change the identity of the transferor for tax purposes. Since the non-skip person will be required to include the value of the trust assets in his gross estate because of the general power of appointment, he will be considered the transferor for generation-skipping transfer tax purposes.

Question 42

What are the different types of trusts:(PIF, CLT, 2503(b), 2503(c), Crummey trust, Irrevocable life insurance trust)

1. Purpose
2. Characteristics
3. Planning opportunities
4. Income/estate/gift tax consequences

Answer 42

Question 43

Qualifications for the Marital Deduction

Answer 43

First, the property must be included in the decedent’s gross estate.

Second, the property must be transferred to the surviving spouse.

Third, the interest must not be a terminable interest unless it meets one of the exceptions.

If the surviving spouse is not a U.S. citizen, additional requirements must be met in order to qualify for the unlimited marital deduction.

Note: If property is not included in the gross estate of the decedent, the decedent will not be permitted to deduct the value of that property from the gross estate as a marital deduction.

Question 44

What is terminable interest?

Answer 44

A terminable interest is any interest in property passing from a decedent to his surviving spouse where the surviving spouse’s interest in that property will terminate at some point in the future.

Question 45

Under what conditions will the marital deduction not be available?

Answer 45

A terminable interest is transferred to a surviving spouse, and

another interest in the same property passes from the decedent to someone other than the surviving spouse (a third party) for less than full and adequate consideration in money or money’s worth, and

the third party may possess or use any part of the property after the interest of the surviving spouse terminates

Question 46

What requirements must be met in order to qualify the Qualified Domestic Trust (QDOT) for the unlimited marital deduction?

Answer 46

At least one of the QDOT trustees must be a U.S. citizen or a U.S. domestic corporation;

The trust must prohibit a distribution of principal unless the U.S. citizen trustee has the right to withhold estate tax on the distribution;

The trustee must keep a sufficient amount of the trust assets in the United States to ensure the payment of federal estate taxes, or the trustee must have a minimum net worth sufficient to assure the payment of estate taxes upon the death of the noncitizen surviving spouse; and

The executor of the citizen-spouse’s estate must elect to have the marital deduction apply to the trust.

Question 47

Characteristics of the Stock Redemption Buy-Sell Agreement

Answer 47

The stock redemption buy-sell agreement is structured between the owners of a firm and the company or business entity itself.

Under such an agreement, the business entity purchases both life insurance and disability insurance policies on the owners of the business.

The business is named as the beneficiary of the policy and receives any insurance proceeds upon the death or disability of one of the business owners.

The business then uses the policy proceeds to purchase the stock or partnership interest owned by the deceased or disabled owner.

If the owner in question retires rather than dying or becoming disabled, the business can use the accumulated cash value of the policy to redeem his interest or shares.

Question 48

What is a Cross-Purchase Buy-Sell Agreement?

Answer 48

This is a buy-sell strategy used for firms with few owners.

Each co-owner (shareholder or partner) holds a life insurance policy and/or a disability policy on his or her fellow co-owners.

As the number of co-owners increases arithmetically, the number of insurance policies required to cover all possible combinations of individuals increases geometrically.

Question 49

IRC Chapter 14

Answer 49

Under Chapter 14 of the IRC, the strength of using the buy-sell agreement to establish the purchase price of the business entity has been stripped away.

However, IRC Section 2703 provides a safe harbor if certain provisions and guidelines are met, including:

The agreement must be part of a bona fide business arrangement.

It cannot be a device designed to transfer the property to members of the decedent’s family for less than adequate consideration.

Terms of the agreement must be comparable to one that would be entered into by parties who would be involved in an arm’s-length transaction.

Question 50

IRC Section 303

Answer 50

IRC Section 303 states that the estate of a deceased shareholder may redeem enough shares to cover the death taxes (federal and state estate, inheritance, and generation-skipping transfer taxes), funeral expenses, and administrative expenses of the decedent, and the shares redeemed for this purpose will qualify for capital gains tax treatment.

Question 51

List some IRD assets

Answer 51

Qualified Plans

IRAs

U.S. Savings Bonds

Installment Notes

Annuitized Annuities

Accrued Dividends

Accrued Wages

Net Unrealized Appreciation (NUA)

Patents/Copyrights

Question 52

Definition and Requirements of Disclaimers

Answer 52

the disclaimer must be in writing,

the disclaimer must be made within nine months of the date on which the transfer creating the interest was made or the day on which the disclaiming party reaches the age of 21,

the disclaimant cannot specify the party to whom the property will be transferred as a result of the disclaimer, and

the disclaimant cannot accept any interest or benefit in the property prior to disclaiming.

Question 53

What is a “Skip Person?”

Answer 53

A skip person, or the person to whom a transfer may result in a generation-skipping transfer tax, is broadly defined as any lineal descendent of the transferor’s grandparent (or the transferor’s spouse’s grandparent) who is two or more generations younger than the transferor and any person who is not a lineal descendent, is not the spouse of the transferor, and is two or more generations younger than the transferor based on age (37½ years).

Question 54

Definition of a GSTT taxable termination

Answer 54

A GSTT taxable termination is any termination of a trust interest unless at the termination of the trust, the trust property transferred is subject to (1) federal estate or gift tax, (2) a non-skip person receives an interest in the property transferred out of the trust, or (3) the distribution from the trust will never be made to a skip person.

The taxable amount of a taxable termination equals the value of the trust property transferred less any expenses, indebtedness, and taxes attributable to the taxable termination. The trustee is liable for the GSTT on a taxable termination.

Question 55

Definition of a GSTT taxable distribution

Answer 55

A GSTT taxable distribution is any distribution from a trust to a skip person that is not a taxable termination or a direct skip.

The amount received by the transferee in a taxable distribution, reduced by any expenses incurred by the transferee in connection with the GSTT is the taxable amount of the distribution.

Unlike direct skips and taxable terminations, the transferee is liable for the GSTT on a taxable distribution.

Question 56

Ascertainable Standard

Answer 56

Distributions made subject to an ascertainable standard include distributions for:

• Health
• Education
• Maintenance
• Support

Distributions made not subject to an ascertainable standard include:

• Comfort
• Welfare
• Happiness

Question 57

SCIN (self-canceling installment note).

Answer 57

A SCIN is an installment note that cancels at the seller’s death. The unpaid principal balance that is canceled at the death of the seller is not included in the seller’s gross estate. Any unrecognized gain inherent in these notes must be reported on the estate’s income tax return (Form 1041).

SCINs are usually made to family members. A premium over FMV (or a higher interest rate) is necessary for gift tax avoidance. SCINs can be secured by collateral.

Question 58

Private Annuity

Answer 58

Private annuity—the sale of an asset (usually to a related party) in exchange for an unsecured promise to pay a lifetime annuity to the seller. It is used when the seller is not expected to live the full table life expectancy.

There is no gift and, therefore, no gift tax as long as the present value of the annuity to be received is at least equal to the value of property transferred.

Ceases at the seller’s death and is not included in the seller’s gross estate.

May not have security (collateral). This is a critical point. If the transferor needs the transaction to be secured, a private annuity will not work.

If the seller outlives life expectancy, the buyer has made a bad bargain. However, the seller could use the gift tax annual exclusion and forgive up to $16,000

If the income from the asset is used to pay the annuity payment to the seller, the IRS may deem that the seller retained an income interest in the asset and include the asset in the seller’s gross estate.

Question 59

Installment Sale

Answer 59

the installment-sale method allows the taxpayer to spread out the gain as the payments are received (subject to depreciation recapture rules).

If the seller dies before all payments have been received and the seller’s will provides for forgiveness of the debt, the estate must recognize all remaining gain on the debt as income in respect of a decedent (IRD) and report on Form 1041.

if you do not forgive it; the Remaining unpaid balance and any unpaid interest accrued to date of death are included in seller’s gross estate.

Question 60

Gift/leaseback

Answer 60

fully depreciated business property (vehicles, equipment) is gifted to a family member in a lower tax bracket by the donor/business owner. It is then leased back to the donor, providing income to the donee while the donor still has the use of the asset in the business, gaining a lease expense deduction in the process. Notice that the original owner (the donor of the gift) does not receive any income from a gift/leaseback. If the original owner needs income from the property in question, a sale/leaseback would be preferred over a gift/leaseback.

Question 61

Sale/leaseback

Answer 61

an installment sale combined with leasing the property back to the family business. Business property is sold to a younger family member. The property is then leased back to the family business in exchange for commercially reasonable lease payments. The lease payments help fund the installment payments used by the younger family member to buy the business from the older family member. The family business is basically helping fund the purchase by the younger family member with deductible lease payments. The younger family member starts depreciating assets at the purchase price. This helps lower the after-tax cost of the payments.

Question 62

Intentionally Defective Grantor Trust (IDGT)

Answer 62

The trust is intentionally defective so that the grantor is the owner for income tax purposes but not estate tax purposes.

The IDGT structure allows clients to sell their business to the IDGT.

Question 63

Estate and Gift Treatment of Trusts

Answer 63

Trust property is not includible in the grantor’s gross estate if:

The trust is irrevocable.

The grantor does not have substantial rights and powers over the trust.

Question 64

Revocable living trusts.

Answer 64

Avoids probate, publicity, expenses, and delays.

Included in the grantor’s gross estate.

A revocable trust becomes a completed gift when the grantor releases the power to revoke and the trust becomes irrevocable.

Income from trust taxable to grantor because there has been no completed gift.

Question 65

Irrevocable living trusts

Answer 65

Avoids probate, publicity, expenses, and delays.

Excluded from grantor’s gross estate unless the grantor has retained power over the trust.

Gift tax will apply at the time of creation. Completed gifts to beneficiaries/ remaindermen.

Beneficiaries/trust responsible for taxes on income derived from trust.

Question 66

Testamentary trusts

Answer 66

Created by will.

Included in gross estate.

Gift tax does not apply because transfer occurs at death.

Question 67

OWNERSHIP OF LIFE INSURANCE POLICIES ON THE INSURED AND INCLUSION IN GROSS ESTATE OF DECEASED

Answer 67

1. Ownership by the insured—result is the inclusion of the death benefit in the gross estate of the insured
2. Joint ownership by insureds—inclusion to the extent of the contribution rule (spouse deemed 50%) to the estate of the insured 3. Ownership by someone other than the insured
   a. If the policy was acquired outright by someone other than the insured and with an insurable interest, there is no inclusion in the gross estate of the decedent insured.
   b. If a policy is acquired by transfer or by assignment from the insured, the throwback rule will cause inclusion in the insured’s gross estate if the transfer was made within three years of the insured’s death. If the transfer occurred more than three years before death, the death benefit will not be included in the gross estate.
   c. If a second-to-die policy is transferred, the death benefit will be included in the gross estate of the second person to die, if the second person to die is deceased within three years of the transfer. If joint life (first-to-die) was transferred, there is no inclusion (depends on ownership of policy).

NOTE: If the decedent made a completed transfer of ownership of a life insurance policy more than three years before death, the value of the policy, as of the date of the gift, will be included in the decedent’s adjusted taxable gifts (if greater than the annual exclusion).

Question 68

Owning or gifting on the life of an other person (Life Insurance)

Answer 68

The inclusion of the lifetime value of a policy owned on the life of another person (see IRC Section 2033) will generally be the replacement cost if the policy is paid up; if additional premiums are due, the value is the interpolated terminal reserve plus any unearned premium

Question 69

Taxation of Trusts

Answer 69

Trusts are generally treated as separate taxable entities. Grantor trusts are not recognized for tax purposes.

2. A simple trust a. Required to distribute all of its income currently (each year) b. No charitable beneficiaries c. Does not distribute any corpus
3. A complex trust is any trust that cannot be classified as a simple trust. 4. An estate is created when a decedent dies. a. The estate consists of the probate assets. b. The estate holds and protects the assets, collects income from those assets, and satisfies obligations of the estate until all the assets are distributed.
4. Estates and trusts are subject to the same rate schedule, a very highly progressive structure.
5. Fiduciaries file Form 1041 on or before the 15th day of the fourth month after the close of the tax year. Grantor trusts may also file a Form 104

Question 70

Grantor Trusts

Answer 70

a. IRC Sections 671–677 state that if a trust is a grantor trust, the grantor is treated as the owner of the assets. Consequently, all the income, deductions, and credits of the trust are attributable to the grantor.
b. A trust is a grantor trust if the grantor retains the following: 1.) A reversionary interest in the corpus or income of the trust 2.) The power to control the beneficial enjoyment of the property or income (withdraw funds or change beneficiaries)
3. ) Certain administrative powers, such as borrowing 4.) The power to revoke a portion of the trust 5.) Income for the benefit of the grantor, such as purchasing life insurance on the grantor or paying for support obligations of the grantor

Question 71

Probating assets: Real property and Intangible Property

Answer 71

• Real property must be probated in the state for which they are.
• Intangible assets can be probated in any state.