Estate Planning

Question 1

Describe Ownership, Transferability, Automatic Survivorship, Probate Estate Inclusion and Gross Estate Inclusion features of Separate Ownership

Answer 1

Ownership - One, individual
Transferable - Yes, owner has full control
Automatic Survivorship - No, transfers by will or probate laws of intestancy
Probate Estate Inclusion - Yes, 100%
Gross Estate Inclusion - Yes, 100%

Question 2

Describe Ownership, Transferability, Automatic Survivorship, Probate Estate Inclusion and Gross Estate Inclusion features of Joint Tenant with Rights of Survivorship (JTWROS) Ownership

Answer 2

Ownership - 2 or more owners
Transferable - Yes, without approval of joint tenants
Automatic Survivorship - Yes, at death of a joint tenant
Probate Estate Inclusion - No
Gross Estate Inclusion - 50% FMV if spouse, % Contribution x FMV if non spouse

Question 3

Describe Ownership, Transferability, Automatic Survivorship, Probate Estate Inclusion and Gross Estate Inclusion features of Tenancy by Entirety Ownership

Answer 3

Ownership - 2 spouses only
Transferable - Yes, approval of joint tenant required
Automatic Survivorship - Yes, at death of a joint tenant
Probate Estate Inclusion - No
Gross Estate Inclusion - 50% FMV

Question 4

Describe Ownership, Transferability, Automatic Survivorship, Probate Estate Inclusion and Gross Estate Inclusion features of Tenancy in Common Ownership

Answer 4

Ownership - Several
Transferable - Yes, each owner separately based on individual interest
Automatic Survivorship - No, transfers by will or laws of intestancy
Probate Estate Inclusion - Yes, FMV of individual interest
Gross Estate Inclusion - Yes, FMV of ownership %

Question 5

Describe Ownership, Transferability, Automatic Survivorship, Probate Estate Inclusion and Gross Estate Inclusion features of Community Property Ownership

Answer 5

Ownership - Two, spouses
Transferable - Yes, with both spouses approval
Automatic Survivorship - Yes, if property is titled S1&S2 community property with
right of survivorship or in a joint trust, otherwise no
Probate Estate Inclusion - Yes, Only assets that do not transfer to someone else
Gross Estate Inclusion - Yes, 50% of value of decedents interest is includable (and
added to spouse step up basis to 100% FMV

Question 6

What is a Charitable Lead Trust

Answer 6

Grantor receives a charitable income tax deduction for the PV of the charity’s income interest.

Question 7

What is a Charitable Remainder Trusts:

Answer 7

The grantor receives a charitable income tax deduction for the PV of the charity’s remainder interest.

Question 8

What is a Charitable Gift Annuities:

Answer 8

A donor transfers cash or property to a charity and the charity pays the donor or other donees an annuity payment each year for life.
- Gift tax charitable deduction is the PV of the charity’s remainder interest.
- Gift annuity payments to a spouse: a marital deduction is available if the spouse
receives all annuity payments and has general POA over payments after the
donor’s death.
- Gift annuity payments to others: gift tax is the PV of the annuity payments

Question 9

What is a Pooled Income Fund:

Answer 9

A donor gifts property to a charity and receives an annual pro-rata share of income from the charity’s commingled funds, for life.
- Additional gifts can be made to the fund to increase the donor’s income stream.
- The charity manages the fund which cannot invest in tax-exempt securities and
receives the remainder when the donor’s income interest ends.
- Donor takes an income tax deduction for the PV of the charity’s remainder interest.
- The donor pays income taxes on the income received from the fund.

Question 10

What is a Private Foundation:

Answer 10

A separate legal entity, either a not-for-profit corporation or a tax-exempt trust.
- Most are funded and controlled by family members. High set-up and maintenance
fees.
- Family members who make gifts to the foundation may take an income tax deduction limited to 30% for cash and to 20% for LTCG property.
- The foundation must distribute a minimum of 5% of the assets to public charities every year.

Question 11

What is a Donor-Advised Fund:

Answer 11

Maintained by charities, community foundations, or mutual fund companies.
- Donors may contribute cash, stock, or other property to their individual fund
accounts and select the charities they want to receive their grants.
- Donors are entitled to a charitable income tax deduction based on the type of
property contributed, subject to AGI limitations.

Question 12

Name the 5 elements to a trust

Answer 12

(1) Grantor: A person who transfers property to and dictates the terms of a trust. AKA Settlor, Trustmaker, Trustor

(2) Trustee: A party to whom property is transferred by the grantor and receives legal title to the property placed in the trust. Manages, distributes, and accumulates income + principal. AKA fiduciary.

  - 65-Day Rule allows fiduciaries to make distributions within 65 days of the new 
  - Section 645 election: Allows the executor of an estate and the trustee of a 
    revocable trust to elect to treat the estate and the trust as one for tax purposes. 

(3) Corpus (or res): The amount of principal in a trust.

(4) Terms of the trust: The document outlining a trust’s provisions.

(5) Beneficiaries: A party that will receive the benefit of the use of the trust property and/or income. AKA Remainderman

Question 13

“What is the maximum amount and thresholds by filing status of one’s Social Security benefits that may be subject to taxation?”

Answer 13

A person who files taxes as an individual may have to pay income tax on up to 50% of their Social Security benefits if their total income is between $25,000 and $34,000. They may have to pay income tax on up to 85% of their benefits if their total income is higher than $34,000.

Individuals who file a joint return with their spouse may have to pay income tax on up to 50% of their benefits if they have a combined income of $32,000 to $44,000.
If income is higher than $44,000, individuals completing a joint tax return may have to pay income tax on up to 85% of their benefits.

Question 14

According to Nic’s trust document, the annual distributable net income to beneficiaries is $17,000. In the current year, the trust generated $9,000 of income but $17,000 was distributed to the trust beneficiaries. Identify the amount on which the beneficiaries will be taxed.

Answer 14

With distributable net income (DNI), the beneficiary will be responsible for taxes on the lesser of the DNI allocation, or the amount required to be distributed according to the trust document. The DNI allocation = $9,000 and the amount required by the trust document = $17,000. The beneficiary is responsible for paying taxes on the lesser of these figures, or $9,000.

Question 15

What are key elements of 2503(b) trust relative to
- Purpose of trust
- Income distributions
- Principal
- Amounts eligible for annual exclusion
- EFC impact: Student or Parent asset

Answer 15

2503(b) - Bring Beneficiary Bucks

Purpose: Qualifying Minors Trust; Irrevocable gifts of present interest made to trust, lasting for as long as lifetime of beneficiary

Income Distributions: Must be distributed at least annually

Principle: Does not need to be distributed at beneficiary age of maturity; Is excluded from gross estate of donor (if not trustee) and of beneficiary if the income interest terminates at death

Annual exclusion: Based on actuarial value of present interest gift; Annual exclusion cant be used to offset donors gift tax for the remainder interest passing to remainder beneficiaries

Education funding: Considered asset of student like UTMA/UGMA

Question 16

What are key elements of 2503(c) trust relative to
- Purpose of trust
- Income distributions
- Principal
- Amounts eligible for annual exclusion
- EFC impact: Student or Parent asset

Answer 16

2503(c) - Cease Current Cash

Purpose: Minors Trust based on Irrevocable gifts of present interest made to trust, lasting until minor reaches age 21

Income Distributions: Does not need to be distributed; Accumulates interest that is taxed to the trust (not beneficiary)

Principle: Must be distributed in full (including any un distgributed income) to beneficiary at/before age 21; If beneficiary dies before 21, distributed to minors estate or general power of appointment appointee

Annual exclusion: Entire gift to the state qualifies for annual exclusion as a gift of present interest as long as income and principle available for distribution before age 21

Education funding: Considered asset of student like UTMA/UGMA

Question 17

Compare Simple vs Complex Trust
- Distribution of Principle
- Distribution of Income
- Income exemption
- Charitable Deduction

Answer 17

Distribution of Principle
- Simple - No
- Complex - Yes
Distribution of Income Required
- Simple - Yes
- Complex - No
Income exemption
- Simple - $300
- Complex - $100
Charitable Deduction
- Simple - No
- Complex - Yes

Question 18

What is ILIT and whats are benefits / restrictions

Answer 18

Irrevocable Life Insurance Trust

When a new life insurance policy is purchased by/within ILIT , face value transfers from owners estate

When life insurance policy is transferred:
- Owner must survive transfer by 3 yrs in order for value to transfer from owner estate
- Owner who is not insured will also not have face value included
-

Question 19

What is standard deduction for minor - child under 18

Answer 19

The child’s taxable income = [Gross income – standard deduction (greater of $1,150 or amount of earned income + $350)]

Question 20

How is IRD treated in estate tax calculation for purposes of Gross and Probate estate

Answer 20

IRD is applied as income to estate tax calculation (form 1041) but does not impact gross or probate estate

Question 21

What valuation method (FMV, Adjusted Basis, Sales Price, Other) for the following transactions:
- Gifts
- Gifts to relatives
- Gifts at loss (to relatives)
- Transfers
- SCIN
- Private Annuity
- Transfers
- Gross Estate
- Probate Estate
- Gifts to Charity:
- Ordinary Income/Short Term/At Loss
- Long Term Cap Gain (Intangible/Real/Tangible - related use)
- Long Term Tangible Personalty - unrelated use

Answer 21

• Gifts: Fair Market Value or Present Value of use of the gift or Alternate Valuation
• Gifts to relatives: Fair Market Value, with carryover basis, unless bargain sale
• Gifts at loss (to relatives) - Adjusted Basis for gain/FMV for loss
• Transfers of life insurance: FMV of policy including cash value
• SCIN: Full FMV (purchase price) transferred over a term
• Private Annuity: Present Value of Annuity Payments or extent FMV exceeds PV of retRemainder Interest (if GRAT/CRAT/CRUT)
• Transfers: If qualified, not valued as excluded from any tax
• Gifts to Charity:
  
  • Tangible Property not related use - Adjusted Basis
  • Ordinary Income/Short Term/At Loss - Adjusted Basis
  • Long Term Cap Gain (Intangible/Real/Tangible - related use) - FMV
  • Long Term Tangible Personalty : unrelated use - Adjusted Basis

Question 22

What is gift and estate tax lifetime exclusion amount and how calculated?

Answer 22

Based on credit equivalency of $12.92M which equals credit of $5,113,800 based on formula of

$345,800+40% ( x amount over $1M)

Question 23

What is special use valuation and requirements to use it

Answer 23

For property being used for purposes not related to highest and best use, the value included in decedents gross estate will be the current use value of the property under following conditions
- value of property from highest/best use can not be more than $1.310M
- decedent was citizen or resident of US at time of death
- property first used in farming or trade actively managed by decedent in 5 of 8 years before death
- value of real and personal property must equal or exceed 50% of gross estate/ the value of just real property must exceed 25% of gross estate
- property must be located in the US and pass to heirs to actively manage for 10 years following death
- executor must file the election with estate tax return and recapture agreement

Question 24

What is the gross up rule

Answer 24

Only gift taxes paid on gifts made within three years are included under the gross up rule.

Question 25

Under what circumstances are life insurance proceeds taxable

Answer 25

The proceeds are subject to estate taxes in the estate of the insured if the insured is the owner.

The proceeds may be subject to income taxes if the policy was sold to a third party and was transferred to a transferee who took under a transfer for value rule.

Death benefits from a modified endowment contract (MEC) are still income tax free unless sold.

Question 26

Define key person, minority, blockage and lack of marketability discounts

Answer 26

see pg 63 of Estate Planning

Question 27

Jack is a dentist who never married. Three years before his death, he made the following gift: A $300,000 (death benefit) life insurance policy on his life to Molly. (The policy was worth $5,000 at the time of transfer). - The only gifts he made this year was: Stock worth $40,000 was given to Mickey. At Jack’s death, the stock had increased in value to $70,000 and the life insurance company paid $300,000 to Molly. What amount will be added back to determine the estate tax base?

Answer 27

$23,000

The question is asking about what is added back to get to the ESTATE TAX BASE, not what is included in the gross estate. A very important factor in correctly answering this question. Adjusted taxable gifts are added back to the taxable estate in determining the estate tax base at the date-of-gift value ($40,000) minus the annual gift tax exclusion ($17,000) to arrive at $23,000. The gift to Molly is included as a gift of the $5,000 transfer value, but application of the annual gift exclusion fully offsets the gift.

Question 28

An individual can use the unlimited marital deduction during life to fund the surviving spouse’s applicable estate tax credit. The best property to transfer is the property that is expected to appreciate in value. EXPLAIN

Question 29

What is the Unholy Trinity or Goodman Triangle

Answer 29

The unholy trinity or Goodman Triangle is when the owner, insured and beneficiary are three different people/entities.

If there are three different people at the three points (referencing the triangle), then the death benefit could count as a taxable gift to the beneficiary.

In the case where the beneficiary is a grantor trust which the insured (or in this case his estate) would be responsible for the taxes.

Question 30

What are requirements for interest income from a CRAT or CRUT

Answer 30

The income interest in a CRUT must be between 5% and 50% of the value of the trust as revalued annually, and the income interest of the CRAT must be between 5% and 50% of the original value of the trust.

Question 31

What types of entities can not be a grantor for Charitable Trusts; What is required of grantor to get a charitable income tax deduction

Answer 31

A corporation cannot be the grantor. The charity has the lead interest, not a remainder interest and the grantor will only get a charitable income tax deduction if the grantor elects trust status.

Question 32

What is charitable stock bailout and benefits

Answer 32

Individual gifts closely held stock to charity who in turn will provide corporation first right to redeem/buy stock from them, thus avoiding individual paying taxes on stock purchase as qualified dividends

Question 33

What are 4 characteristics of a qualified disclaimer?

Answer 33

(1) It may not redirect the bequest to another person selected by the disclaimant.

(2) It must be received by the executor of the estate within 9 months of the death of the decedent.

(3) It must be written and irrevocable.

(4) The disclaimant may disclaim a part of an asset.

Question 34

What are differences between special/limited POA and general POA

Answer 34

The surviving spouse can be given the power to invade the entire corpus of a marital trust for an ascertainable standard under special power of appointment.

Exercise, lapse or release of a general power of appointment are considered a transfer of the property by the power holder for gift, estate, and generation skipping tax purposes, versus the existence, lapse, exercise, or release of a special power will not cause inclusion in the power holder’s gross estate.

The existence of a general power of appointment will cause the power holder to be considered the owner of all or part of the trust for federal estate tax purposes in the event the power holder dies whereas special or limited power will not

Question 35

What is a sprinkling provision

Answer 35

Sprinkling provision is a provision within a life insurance agreement that allows the policy’s trustee to spread the death benefit around to beneficiaries at his or her discretion. A sprinkling trust (or spray trust) gives a trustee power to decide how trust funds will be distributed to beneficiaries.

Sprinkling trusts are most useful when:

the grantor trusts the trustee’s discretion to make distributions, and
the grantor wants trust payments to be made based on the needs of the beneficiaries, rather than as a set amount.
Sprinkling trusts may be especially useful when beneficiaries have changing or varied needs because the trustee can adjust payments based on the beneficiaries’ ages, health, education, and financial needs.

Question 36

Which trusts are irrevocable relative to taxable gifts

Answer 36

GRAT, QPRT and the GRUT are irrevocable trusts and would result in a current taxable gift. Also, CRAT,CRUT,CLAT,CLUT

Question 37

What are key elements of Estate Trust

Answer 37

A special type of power of appointment trust, called an estate trust, grants the surviving spouse a testamentary general power of appointment over the trust assets. Only the Estate Trust permits income accumulation.

Question 38

True/False - the following trusts do not allow for accumulation of income (require annual distribution): Q-Tip, Bypass, GPOA

Answer 38

True

Question 39

Upon the transfer of rental property to a Grantor trust, all the excess prior year’s depreciation will be recaptured as ordinary income.

Answer 39

In a grantor trust with control remaining with the grantor, all rental income is taxable to the grantor, thus no true transfer which would cause depreciation recapture.

Question 40

True/False: In a QTIP, the surviving spouse may demand that the trustee only have income producing property in the trust.

Answer 40

True

Question 41

Dr. Ben Allen has two primary assets in addition to his home and personal property. He is an osteopathic physician. He owns an S corporation that is producing substantial income. He has an X-ray machine and support equipment which is fully depreciated. His son, 18, has decided to go to chiropractic school after graduating from college. He would like to pay for the college and chiropractic school with pre-tax dollars. Based on this information, which of the following intra-family planning techniques would be appropriate?

A. Gift stock in the S corporation to his son and use the education deduction.
B. Sell X-ray equipment on an installment sale basis.
C. Gift and leaseback the equipment and X-ray machine.
D. Transfer the S corporation into a Family Limited Partnership.

Answer 41

Solution: The correct answer is C.

Gift and leaseback addresses the means to accomplish the desired objective of using pre-tax dollars to pay his son’s tuition because the lease payments are a deductible business expense to the physician.

Question 42

True / False: A fully depreciated property that is transferred by sale-leaseback to a family member can nonetheless be depreciated by the new owner.

Answer 42

True

Question 43

How are asset treated on death of first spouse under a charitable remainder unitrust (CRUT) with husband and wife as joint and survivor annuitants?

Answer 43

If the CRUT is for the life of the grantor and spouse, the assets are included in the first to die’s gross estate at the value of the assets and then the remainder interest is netted out as the unlimited charitable deduction reducing the AGE to the taxable estate.

Question 44

What is a partnership freeze and tax implications

Answer 44

From an estate planning perspective, these partner-ships are sometimes referred to as “freeze partner-ships,” because they provide a structure that enables one class of partnership interests, typically held by a senior generation family member, to be “frozen” or limited to a fixed rate of return, thereby enabling the future appreciation in excess of that fixed rate to inure to the benefit of the other class of partnership interests, typically held by younger generations or trusts. A partnership freeze would have preferential income rights

Question 45

What is a spendthrift clause

Answer 45

A spendthrift clause is a provision in a trust – most trusts contain one – that prevents a trust beneficiary from using a future distribution to secure credit. The clause also prohibits payment to a creditor if it extends credit to a beneficiary based on future distributions.

Question 46

Under what conditions might a sale and leaseback arrangement be advantageous?

Answer 46

The use of sale and leaseback is indicated where a person wants to retain the use of the asset, has cash flow problems, is in a high income tax bracket and is seeking to divert income. A rental expense will provide a full deduction where a loan payment is part principal; this can be especially useful if the asset has a long depreciable life when compared to the debt obligation’s life. Highly and rapidly appreciating assets are commonly used in this type of arrangement. A sale/leaseback will not reduce the debt because the obligation must still be listed on the balance sheet, however the lease payment may be an expense and provided a greater deduction than depreciation expense.

Question 47

What is probability test for a CRAT

Question 48

What is purpose of Crummey 5/5 rule

Answer 48

To treat gifts into a trust as present interest for purposes of annual exclusion, that would otherwise be classified as future interest and not qualify

The 5/5 rule serves a very specific purpose, it serves as a “limit”, either on unintended gifts inside a trust for multi-beneficiaries or to limit how much is included in a gross estate where a beneficiary has somewhat unrestricted use of funds. The CFP® exam does not generally get into the details of the 5/5 except where it is included as a power for a Crummey Trust with multiple beneficiaries. (If there is only one beneficiary to the trust, no risk of unintended gifts, so all is fine.)

With a split gift, each beneficiary is getting an amount and then gifting it back to the trust in excess of the 5x5 amount thereby creating a future interest gift for themselves to the other beneficiaries.

Question 49

Are UGMA, UTMA, 529 gifts subject to gift tax due to future interest?

Answer 49

Annual contributions for UGMA, UTMA and 529 accounts qualify for the federal gift tax exclusion. This means you can contribute up to $17,000 per year (or $34,000 for married couples) without incurring the gift tax. Any amount above these contribution limits shall be subject to the federal gift tax.

Question 50

Mike funded his granddaughter’s education with a 529 plan. He made himself the owner of the plan so that he could personally use the funds for his own needs if the situation arose. Is this considered a gift and what is unique?

Answer 50

The 529 ownership is deemed a completed gift once made but can be undone by withdrawing. The right to withdraw does not prevent the gift from being complete. The 529 is the only deemed gift which has this kind of capability.

Question 51

What are terms taxable gift, exclusion, exemption and deductions for purposes of Gift and Estate taxes

Answer 51

Taxable gifts is a term meaning net of any annual exclusion.

Exclusion refers to items excluded from calculation of tax, such as direct transfers for gifts and intrafamily transfers for gross estate

Exemption is the amount that generates tax liability which is exactly offset by credit

Deductions refer to amounts that can be deducted from Gross to arrive at net estate (such as funeral costs and debt) or net gift (such as gift taxes)

Question 52

What are key components of Section 303 stock redemption/how used

Answer 52

Stock redemptions are used by owners of closely held corporations to cover estate liquidity needs

The closely-held stock must make up 35% of the decedent’s adjusted gross estate value and must be the stock of a closely-held firm.

The 303 redemption can only be used if the corporation has the cash to redeem the shares.

The 303 redemption can be made even without a positive earnings and profits account. The E and P account must be positive or there is no need for a 303 redemption.

The Section 303 redemption is limited to an amount that cannot exceed the death taxes of the estate, plus funeral and administrative expenses for which the decedent is liable.

Question 53

Which are marital vs non marital trusts and what is relevance to allowing the trustee to invade the principal for health, education, maintenance, and support (HEMS) for all beneficiaries

Answer 53

ILIT and Bypass trusts are non-nmarital trusts and therefore the trustee can have the power to invade for all beneficiaries. The GPOA, QTIP and QDRO trust are marital trusts and the trustee would be redirected to invade for the spouse only or the trust would not qualify for the marital deduction.

Question 54

What is a reverse QTIP

Answer 54

A QTIP election made for estate tax purposes but not for GSTT purposes, qualifying for unlimited marital deduction and utilize GST exemption for GSTT purposes at death of first spouse

Question 55

What types of assets funding trusts avoid probate

Answer 55

Any inter-vivous trust which is established prior to death and assets held in the trust avoid probate.;

All testamentary trusts such as QTIP, GPOA and Testimentary trusts (Totten, POD, credit shelter created at death), are created by the Will, so have to go through probate. An intervivos trust is created during life, avoiding probate

Question 56

What are the different ways property can transfer at death

Answer 56

1) By will ( written, universal residual, per stirpes/capita, disinheritance
2) By contract where named beneficiary is the contracted beneficiary (life insurance, IRA/Roth, qualified plans, annuities, TODs/PODs
3) By Operation of Law via titling (JTWROS, Tenancy by Entirety)
4) Irrevocable testamentary or standby trust
5) Inter-vivous trusts

Question 57

Define following:

Surety Bond.
Letters of Administration.
Letters Testamentary.
Intestacy Laws.

Answer 57

Surety Bond is the bond that an administrator must generally post.

Letters of Admin is what empowers an administrator to act as the agent of a probate court.

Letters of Testamentary is what allows an independent Executor to act as agent without probate court approval (in some states)

Intestacy Laws describes the state laws that govern the disposition of a decedent’s estate if he has failed to prepare a valid will.

Question 58

Which type of property ownership can be changed without consent of other owners

Answer 58

JTWROS and Tenants in Common; After changed then property becomes fee simple

Tenancy in Entirety and Community Property can not as both assume undivided equal interest among spouses

Question 59

What are key elements of IDT (Intentionally Defective Trust )

Answer 59

An Intentionally Defective Trust is an estate planning tool used to freeze certain assets of an individual for estate tax purposes but not for income tax purposes. The intentionally defective trust is created as a grantor trust with a purposeful flaw that ensures that the grantor (Johnny) continues to pay income taxes, as income tax laws will not recognize that assets have been transferred away from the individual.

For estate tax purposes, however, the value of the grantor’s estate is reduced by the amount of the asset transfer.

Question 60

What are requirements of Section 303 Redemption?

Answer 60

All of the following apply to Section 303 redemptions except:

• The value of the stock must be equal to or greater than 35% of the decedent’s adjusted gross estate
• The entity must be a C corporation only.
• The stock redeemed may be common or preferred.
• The redemption may be for less than 100% of the decedent’s interest in the stock.
• A 303 redemption can only be used if the corporation has the cash to redeem the shares.
• A 303 redemption can be made only with a positive E and P account
• A Section 303 redemption is limited to a dollar amount that cannot exceed the summation of death taxes of the estate, plus funeral and administrative expenses for which the decedent is liable.

Question 61

What are exceptions to terminable interest rules that will dis-allow for unlimited marital exclusion

Answer 61

Irrevocable trusts where spouse is only beneficiary and has restricted access (, or an interest in a charitable remainder annuity trust where the spouse is the only non-charitable beneficiary.)

Income interest by spouse who has general Power of Appointment rights to change structure of life interest (ie..A life estate in a home where the spouse has a testamentary general power of appointment.)

Assets whose nature is to terminate in the future ( annuities, bonds, ,An inherited interest in a patent by a spouse).

Executor must make determination of QTIP to qualify for marital deduction. Life or terminable interest to qualify for marital deduction

Question 62

What are key elements of a bypass trust?

Answer 62

A bypass trust is always a non-marital trust.
The income beneficiary will not have inclusion and the trustee does not need to seek permission.
Allows for decedent to use unused exemptions and bypass inclusion in surviving spouses estate
May have power to invade corpus for surviving spouse to pay income to surviving spouse
If created inter vivos all future growth and appreciation in property transferred are exempt from federal estate tax at decedents death

Question 63

Kenny Zee (age 65) died after creating a testamentary bypass trust with his wife, Liz (age 65), as the income beneficiary and his two children, Will (age 37), and Doug (age 35) as remainder beneficiaries. His executor funds the bypass trust with the full life time exemption for estates in 2023. The remainder of his estate he leaves as follows:

• $1,000,000 outright to his wife, Liz.
• $2,000,000 to his girlfriend, Dolly Wink (age 27) in a GPOA trust.

The other $4,000,000 in a QTIP with Liz as the income beneficiary and his two children, Walter (age 5) and Devin (age 3) from his girlfriend, Dolly Wink, as the remainder beneficiaries.

Question
What is the taxable amounts due and why?

Answer 63

Presuming no previous taxable gifts, Kenny’s executor will have an estate tax liability of $800,000.

AND
The GPOA trust is subject to GST tax.

The bypass trust was established with the full lifetime exclusion. Any bequests in addition to the bypass trust will be a the full 40% gift and estate rate.

Dolly Wink is more than 37 1/2 years younger than Kenny and therefore the trust is subject to GST and the $2,000,000 is subject to estate tax at a 40% rate or $800,000. The only other taxable transfer is to the bypass trust, which is sheltered by the lifetime exemption credit equivalency.

The outright transfer and the QTIP qualify for unlimited marital exclusion, so no tax due

Question 64

Foster Damon is 70 years of age and has assets of approximately $15 million. He has decided to embark on a program of gifts for his three children and seven grandchildren. He wants to give each of them the annual exclusion amount so he can reduce his estate, without incurring significant transfer costs. Since Damon is in the top marginal income tax bracket, he would also like to reduce his income taxes, but without causing substantial increases in income tax for his children and grandchildren. Which of the following property interests owned by Foster would be preferred for gifts? And Why?

1. Corporate bonds with a basis of $700,000 and fair market value of $1 million
2. Common stock with a basis of $400,000 and fair market value of $1 million
   3.Municipal bonds with a basis of $800,000 and fair market value of $1 million
3. Residential real estate with a basis of $600,000 and fair market value of $1 million

Answer 64

For Foster, the preferred property interest to use for gifts is the 1. corporate bonds. The municipal bonds provide income that is free of federal income tax, so Foster should retain these bonds to provide himself with tax-free income. The corporate bonds yield taxable income, so giving these bonds to the children and grandchildren will reduce Foster’s income taxes. The children and grandchildren will receive taxable interest income from the bonds, but they will pay income tax at a lower rate than Foster. The common stock and real estate are not preferred for gifts because these interests have a lower cost basis, and the low cost basis will be carried over to the donees. When the donees sell the stock or real estate, they will have substantial capital gains tax. If Foster retains these interests, they will receive a step-up in basis at his death. In addition, Foster can continue to depreciate the real estate and thus reduce his income taxes.

Question 65

What is definition of following trust powers and impact on gift taxes:

Crummey Provisions

Sprinkle Provisions

Ascertainable Standard

5 and 5 power

Answer 65

Crummey provisions in a trust change a future interest gift into a present interest gift that will be eligible for the gift tax annual exclusion. The Crummey provisions give the beneficiaries of the trust the right for a limited time to withdraw the contributions from the trust, so the child is given a present right to enjoy the trust assets. This present interest meets the requirements for the gift tax annual exclusion so gifts up to the annual exclusion amount ($17,000 in 2023) are not taxable.

Sprinkle provisions allow the trustee to exercise discretion in making allotments of income or principal to the beneficiaries. These provisions do not affect the gift tax consequences of the gifts to the trust.

Ascertainable standards will determine whether a power under the trust is a general or special power. If a power is subject to an ascertainable power, it will not be included in the gross estate of the person holding the power. Thus, an ascertainable power affects the estate tax consequences in the future and not the current gift tax consequences.

The 5 and 5 powers allow the holder of the power to exercise a general power over the greater of 5% or $5,000 of the trust assets. The aim of this technique is to give the holder some power to invade the trust for the holder’s benefit while still avoiding the gift and estate tax consequences of a lapse of a general power. The 5 and 5 power can be combined with a Crummey power, but it is the Crummey power that makes a contribution to a trust a present interest gift and eligible for the annual exclusion.

Question 66

Ben Hoffman is 60 years of age and has not worked for the past 7 years while taking care of his father. Ben’s father had Alzheimers disease and died a few months ago. Ben is divorced but has two children who are grown and living on their own. Ben has inherited some money from his father and has a net worth of approximately $550,000. He would like to protect his assets for his children. Ben is a conservative investor with a low risk tolerance. He would like to invest primarily for income. Ben has asked a CFP® professional for help with his financial planning including retirement, investments, insurance, and estate planning. The CFP® professional has gathered information and evaluated Ben’s situation. Which of the following recommendations would be most appropriate for the CFP® professional to make for Ben?

Purchase long term care insurance
Purchase life insurance
Purchase disability income insurance
Purchase municipal bonds

Answer 66

In order to protect assets for his children, Ben should obtain long-term care insurance that will pay for the expenses of custodial care in the event that Ben is diagnosed with Alzheimers or similar condition. The cost of long-term care can be in the range of $6,000 to $7,000 per month, so Ben’s assets would likely be depleted by prolonged nursing home or other custodial care. Long-term care insurance is recommended generally for persons with assets of less than $1 million and over $250,000 because outside that range self-insuring the long-term care risk makes more sense. Medicaid is available for those with few assets, and those who have large estates can pay the expenses of long -term care if it is needed. The purchase of life insurance will not help to deal with the long-term care exposure unless it has a long-term care rider. Life insurance is an asset that may be required to be applied to long-term care expenses so it does not protect Ben’s assets. Disability income insurance is to protect income and will similarly not protect Ben’s assets. Since Ben is not presently employed, disability insurance may also be difficult to obtain. The purchase of municipal bonds is probably not a good plan for Ben because Ben is not working and his income is likely to place him in low tax brackets. He will probably be better advised to invest in investment grade corporate bonds that will have a higher yield.

Question 67

Edgar Moreau is 58 years of age and an owner of a company that does marketing for the entertainment industry. Edgar and his wife engaged a CFP® professional for financial planning including estate planning. After Edgar and his wife had listened to the recommendations from the financial planner, Edgar asked whether the insurance policy that he bought for the business would make any difference to the plan. Under questioning by the CFP® professional, Edgar then described how he had bought a $2 million life insurance policy with the C-corporation as the owner of the policy to provide it with protection. He named his wife Lisa as the beneficiary. His wife is a majority shareholder and treasurer for the company. After Edgar finished explaining the arrangement, he asked whether the policy would affect his estate planning. Which of the following statements would be appropriate for the CFP® professional to make to Edgar and his wife?

The death benefit will not be included in Edgar’s gross estate.
If Edgar purchases the life insurance policy from the corporation and names his wife as the beneficiary, the purchase will not cause the death benefit to be taxable for income tax purposes under the transfer-for-value rules.
The premium payments will not be income to Edgar or his wife.
There may be a gift of the death benefit.

Answer 67

The purchase of a policy by the insured is an exception to the transfer-for-value rules. The death benefit may be included in Edgar’s gross estate since he is an owner of the corporation and with his wife he has a controlling interest. At least, the death benefit will increase the value of the stock included in his estate. The premiums paid by the company on life insurance insuring Edgar’s life and payable to Edgar’s wife may be taxable income to Edgar. The life insurance policy has been purchased by the corporation, and Lisa Moreau is named as the beneficiary so the death benefit is likely to be treated as a dividend paid to her as a stockholder. If Edgar had bought the policy for his personal protection and paid the premiums himself, the death benefit would have been a gift to his wife.