Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

1. CFP Exam (updating w/ 2017 numbers from CFFP) > Estate Planning (12%) > Flashcards

Estate Planning (12%) Flashcards

You may prefer our related Brainscape-certified flashcards:
CFP® flashcards
1
Q

What is fee simple ownership?

A

Absolute ownership and control by one individual in life and in death.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is a Totten Trust?

A

It is essentailly the same thing as a Pay on Death POD account at a Bank.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What happends to property acquired when moving from a common law state to a community property state?

A

The character of property acquired while living in common-law state is not changed when they move to community property state.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What happnes to property when moving from a community property state to a common law state?

A
  • The character of property acquired while living in a community property state is not changed when they move to a common law state regardless of title
  • full step-up in basis is lost if property divided
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Non-community Property Interest

A
  1. Income earned by spouses prior to marriage
  2. Property received as a gift by one spouse
  3. Property inherited by one spouse
  4. Interest earned on separate assets held by one spouse as a sole owner
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Community Property

A
  • Ownership can only be held by a husband and wife
  • Each spouse has 1/2 interest in most property acquired during marriage regardless of title.
  • Property controlled by terms of the will.
  • Does not Avoid Probate
  • Full value of qualified spousal property held gets a Full step up in basis, not 1/2 like other JTWROS, TIE, etc.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Joint Tenancy with Rights of Survivorship

(JTWROS)

A
  • Property can be held by husband and wife, parent and child or children, siblings and business partners
  • Control, ownership and enjoyment shared equally by all joint tenants
  • Upon death of each tenant, property immediately passes to surviving joint tenants in equal shares.
  • Property NOT controlled by terms of the will
  • Avoids probate
  • Only one-half the value of qualified spousal property held gets a step up in basis
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Tenancy by the Entirety

A
  • Ownership can only be held by a husband and wife
  • Transfer of property can only occur with the mutual consent of both parties
  • In most states, property is protected from the claims of each spouse’s separate creditors, but NOT protected from the claims of both spouse’s joint creditors
  • Avoids probate
  • Only one-half the value of qualified spousal property held gets a step up in basis
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Tenancy in Common

A
  • Two or more owners each own an undivided interest in the property
  • Any income is distributed according to each owner’s respective share in the property
  • Owners are free to transfer their respective share of the property to other individuals
  • Ownership stake goes through probate upon death
  • TIC property receives a step up in basis depending on the ownership interest percentage of the decedent.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Assets NOT subject to probate

A
  • Property conveyed by deeds of title (IRA)
  • Life Insurance
  • Pension benefits
  • Property held by joint tenancy with rights of survivorship
  • Property held by tenancy by entirety
  • Government savings bond - co-ownership
  • Revocable living trusts
  • Irrevocable living trust (trust must be funded during grantor’s lifetime to avoid probate at death)
  • Payable on death accounts (PODs)
  • Transfer on death accounts (TODs)
  • Totten trust
  • Beneficiary deed designing a bene to take title upon death of grantor
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Assets subject to probate

A
  • “Singly” owned assets
  • Tenancy in Common (TIC)
  • Community Property (CP)
  • Assets where the beneficiary is the “estate of the insured”
  • Assets not in Will Substitute
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Assets Included in the Gross Estate

A

Probate Estate Assets:

  • Individually owned real estate, including fractional interests, such as TIC and CP.
  • Individually owned stocks and bonds, including closely held corporate shares
  • Individually owned cash, bank accounts, certificates of deposit, notes, etc.
  • Individually owned miscellaneous items such as race horses, antiques, autos, household furniture, limited partnership interests, etc.

Non-Probate Estate Assets:

  • Insurance on decedent’s life owned by decedent (“owned” means any incident of ownership) at death
  • Jointly owned property (with survivorship rights like JTWROS, Tenants By Entirety)
  • Property includible in gross estate under IRC Sections 2035-2038 (the transfer sections) 3-year gross-up on gift taxes paid (but NOT GST taxes paid)
  • General powers of appointment held by decedent at death
  • Survivorship benefits of pensions and annuities owned by decedent.
  • Beneficiary is the estate.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Federal Estate Tax Calculation Worksheet

A
  1. (1) Decedent’s Total gross Estate $
  2. (2) Subtract deductions:
    1. (a) Funeral and administrative expenses
    2. (b) Debts of decedent, mortgages, and liens
    3. (c) Theft and casualty losses
      1. Equals adjusted gross estate
    4. (d) Marital deduction
    5. (e) State death taxes actually paid
    6. (f) Charitable deduction
      1. Equals taxable estate
  3. (3) Add adjusted taxable gifts
    1. Equals tax base
  4. (4) Compute tentative tax using the transfer tax table
    1. (a) Lower bracket amount
    2. (b) Tax on lower bracket amount
    3. (c) Excess over bracket amount
    4. (d) Tax rate on excess _______%
    5. (e) Tax on bracket excess amount
      1. Equals total tentative tax (4(e) + 4(b))
  5. (5) Subtract credits:
    1. (a) Gift taxes payable on post 1976 gifts
    2. (b) Applicable credit amount
    3. (c) Credit for tax on prior transfers
      1. Equals net estate tax due

AGE (calculated by F uck D C)

Funeral & Admin

Debts, mortgage and other liens

Casualty and Theft losses

= Adjusted Gross Estate

Taxable Esate (calculated by M ichigan S outh C arolina Gamecocks)

Marital Deduction

State Taxes Paid

Charitable Deduction

= Taxable Estate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Life Insurance Added to the Estate

A
  • Proceeds are paid to the executor of the decedent’s estate
  • Decedent at death possesses an incident of ownership in the policy
  • Decedent transferred a policy with an incident of ownership within 3 year of death
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Valuation of a Gift

A
  • The value of a gift for gift tax purposes is its fair market value (FMV) at the date of gift.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Basis of a Gift

A
  • If FMV on the date of gift is greater than the donor’s adjusted basis, use the donor’s adjusted basis.
  • If FMV of the gift is less than the donor’s basis, use the chart below:

Client’s subtituted basis $2,013,000 Gain

between $2,013,000 and no gain or loss

$1,513,000

_________________

FMV date of gift $1,513,000 Loss

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Deductible Gifts

(not taxable gifts)

also called exempt gifts or

qualified transfer

A
  • Gifts to a spouse, provided they are not a terminal interest
  • Gifts to qualified charities
  • Qualified payment in any amount made directly to an educational institution for tuition
  • Qualified payment in any amount made directly to a medical care provider on behalf of any individual
  • Gifts to American political parties
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Summary of rules regarding

gifts and the donor’s estate

A
  • Generally, gifts given are simply “taxable gifts” to the extent such gifts exceed the annual exclusion.
  • Taxable gifts are added to the taxable estate
  • Gift taxes paid (or payable) are generally allowed as credit against the tentative tax
  • Gift taxes paid on any gifts within three years of death are added to the gross estate
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Powers of Attorney

A

Traditional, non-durable power of attorney - Power ceases when the principal is no longer legally competent

Durable power of attorney - Authority of agent continues when principal become incompetent

Springing durable power of attorney - Main strength is the agent has no authority over the principal’s assets until incompetency.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is a Power of Appointment?

A

A power of appointment is a power to dispose of property.

The power can be as broad or limited as the creator desires depending on whether the creator chooses to give general power of appointment or special powers of appointment.

A power of appointment can also be presently exercised or postponed until a specified event occurs or a condition is met.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Power of Appointment

(Trusts)

A
  • Special Power - Holder of power is exercisable only with the consent of the creator of the power or a person having a substantial adverse interest
  • Ascertainable standard - Holder of power can only exercise the power related to health, education, maintenance or support (HEMS)
  • General Power - Holder of powere may exercise the power in any manner he/she wishes
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Gift and Estate Tax Implications

(General Power)

A

Gift Tax Implications (General Power)

  • Exercised, released or lapsed - taxed
  • Lapsed with a “5 or 5” power - not taxed

Estate Tax Implications (General Power)

  • Exercised, released or lapsed - taxed
  • Exercised, released or lapsed with a “5 or 5” power - greater of the “5 or 5” is taxed
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

“5 or 5” Power

A
  • Property subject to a general power will be included in a donee decedent’s estate (or considered a taxable gift” only to the extent that the property exceeds the greater of:
  1. $5,000 or
  2. 5% of the total value of the fund subject to the power as measured at the time of lapse
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Grantor Trust Rules

(Tainted / Defective Trusts)

Income Tax & Estate

A
  • Trust may be defective / tainted for Income Tax and Estate Tax purposes if the grantor retains:
  1. A right to income or the right to use/enjoy trust property (beneficial enjoyment)
  2. A reversionary interest exceeding 5% (retained interest)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Elements of a Trust

A
  • In order for a trust to exist, there must be property (also known as principal, re, or corpus)
  • There must be a grantor. This is any person who transfers property to and dictates the terms of a trust.
  • There must be a trustee who received legal title to the property placed in the trust, and who generally manages and distributes income according to the terms of a formal written agreement (trust instrument).
  • There must be a beneficiary who has equitable title to the property.
  • The grantor and trustee must be legally competent.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Simple vs. Complex Trusts

A
  • Simple trusts (2503(b), Marital, QTIP) are considered merely a “conduit” for forwarding income to the beneficiaries (pass-through)
  • Complex trusts (2503(c)), are separate tax entities and taxed as such if it meets two requirements:
  1. It is irrevocable, and the grantor has not retained any control
  2. Income is accumulated
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Crummey Trust

A
  • Irrevocable trust with demand rights to make it a present interest gift
  • Demand right given to a minor through his/her guardian
  • Beneficiary has temporary right to demand a withdrawal from the trust that is the lesser of the amount of the annual gift exclusion or the value of the gift transferred

The Crummey power, named after a taxpayer from the landmark tax case in 1968, is an often-used trust provision that allows a gift that would otherwise be a future interest gift to be treated as a present interest gift, and thus be eligible for the annual gift tax exclusion.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Nonmarital “B” Trust

(Decedent, Family, Bypass, Credit Shelter, Unified Credit Shelter)

A
  • Property transferred to the trust at the time of the decedent’s death
  • Can be structured to provide a stream of income to surviving spouse or other individuals
  • Decedent has postmortem control
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

What are the other names of the B Trust?

A
  • Decedents Trust
  • Family Trust
  • Bypass Trust
  • Credit Shelter Trust
  • Unified Credit Shelter Trust
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

QTIP “C” Trust

(Current Income Trust)

A
  • Provides surviving spouse with a stream of income for life, but decedent has postmortem control of trust property
  • Property qualifies for marital deduction
  • Mainly used for second marriages
  • Key word for QTIP - LAME
    • Lifetime income for the spouse
    • Annual payments to spouse
    • Mandatory payments to spouse
    • Exclusively for spouse
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

Qualified Domestic Trust

(QDT / QDOT)

A
  • No unlimited marital deduction
  • However, no estate tax due
  • Jointly held property between spouses is not considered one-half owned
  • Limited gift between spouses of only 100K (indexed) per year
32
Q

Present Interest Gift Vehicles

A
  • UGMA
  • UTMA
  • 2503(c) trust
  • Section 529 college savings plan

Gift to a 2503(b) trust is a gift of a future interest

33
Q

Charitable Contributions/Transfers

A

Income to donor until donor’s death:

  • Charitable Remainder Annuity Trust (CRAT) - 5%
  • Charitable Remainder Unitrust (CRUT) - 5%
  • Pooled Income Fund - no 5% required
  • Charitable Gift Annuity - no 5% required

Income to the charity:

  • Charitable Lead Trust (CLAT/CLUT) - no 5% required
  • Private Foundation - 5% - can give money to individuals
34
Q

Intrafamily Transfers

(Property owner needs income)

A

Remember: PIGS need income

  • Private annuity
  • Installment Sale
  • Grantor Annuity Trusts (GRAT/GRUT)
  • Self canceling installment note (SCIN)
35
Q

Intrafamily Transfers

(Property owner wants to gift assets

and/or income to family members)

A
  • Partnership / S-corp
  • Family Limited Partnership (FLP)
  • Gift Leaseback
  • Qualified Personal Residence Trust (QPRT)
36
Q

Disclaimer

A
  • In order to disclaim property, the following requirements must be met:
  1. Disclaimer must be an irrevocable refusal to accept the interest
  2. Refusal must be in writing
  3. Refusal must be received within 9 months
  4. Intended donee cannot have accepted any interest in the benefits
  5. As a result of refusal, the interest will pass, without the disclaiming person’s direction, to someone else
37
Q

Postmortem Planning Techniques

(Estate Liquidity)

A

Stock Redemption (Section 303):

  1. Business must be incorporated (closely held)
  2. Value of business must exceed 35% of the decedent’s adjusted gross estate
  3. Redemption cannot exceed the sum of the estate taxes plus administrative expenses

Installment payment of estate taxes (Section 6166):

  1. Value of business must exceed 35% of decedent’s adjusted gross estate
  2. During the first 4 years (of 14 years) can pay interest only on taxes due
38
Q

Portmortem Planning Techniques

(Estate Tax Reduction)

A

Special Use Valuation (Section 2032A):

  1. 25% of the gross estate consists of real property
  2. Must be in qualified use: 5-out-of-8 year rule before death and 10 years after death.
39
Q

What are the other names of the A Trust?

A

Survivor’s Trust

Marital Trust

40
Q

What is a life estate?

A

In common law and statutory law, a life estate is the ownership of land for the duration of a person’s life. In legal terms, it is an estate in real property that ends at death when ownership of the property may revert to the original owner, or it may pass to another person.

41
Q

Gross Estate Inclusions?

A

GROSS ESTATE INCLUSIONS

Probate Estate:

  • Schedule A: Individually owned real estate, including fractional
  • interests, such as tenants in common
  • Schedule B: Individually owned stocks and bonds, including closely held corporate shares
  • Schedule C: Individually owned cash, bank accounts, certificates of deposit, notes, etc.
  • Schedule F: Individually owned miscellaneous items such as race horses, antiques, autos, household furniture, limited partnership interests, etc.

Non Probate Assets:

  • Schedule D: insurance on decedent’s life owned by decedent (“owned”means any incident of ownership) at death
  • Schedule E: jointly owned property (with survivorship rights)
  • Schedule G: property includible in gross estate under IRC Sections 2035–2038 (the transfer sections)
  • Schedule H: general powers of appointment held by decedent at death
  • Schedule I: survivorship benefits of pensions and annuities owned by decedent
42
Q

Gross Estate Gift Inclusions of Schedule G: Property includible in gross estate under IRC Sections 2035–2038 (the transfer sections)

A

Transfer sections:

  1. a. Property gifted by decedent is included in the gross estate if the decedent retained rights with respect to the property, including:
    1. (1) the right to use or receive income from the property (§2036)
    2. (2) the right to designate the persons who shall possess or enjoy the property or the income therefrom (§2036)
    3. (3) the right to vote stock in a controlled corporation (§2036)
    4. (4) a right of reversion in the property (§2037)
    5. (5) the right to alter, amend, terminate, or revoke disposition of the property (§2038)
    6. (6) the right to affect the time or manner of enjoyment of the property or its income by others (§2038)
43
Q

Gross Estate Inclusions of Schedule G: Property includible in gross estate under IRC Sections 2035 (Three-year inclusionary rule)

A
  1. 1. Three-year inclusionary rule (§2035)
    1. a. There are only three situations in which property must be included in the gross estate of a decedent because of an action taken within three years of death:
      1. (1) paid gift taxes out of pocket on gifts made within three years of death (the “gross up” rule)
      2. (2) transferred incidents of ownership on a life insurance policy on his or her own life
      3. (3) released a retained right mentioned in the transfer sections of the Code (§§2036–2038)
44
Q

Life Insurance Valuation

A
  • Life insurance owned by decedent on the life of another IS valued at replacement cost
  • Life insurance owned by decedent on his or her own life IS valued at death benefit
  • Replacement cost for term policy IS unused premium
  • Replacement cost for cash value policy IS Interpolated terminal reserve plus unused premium
45
Q

Valuation discount - Blockage Discount

A

Used for large block of publicly traded stock that cannot be marketed without adversely affecting the price

46
Q

Valuation Discount - Minority Interest Discount

A

Inability of closely held business interest to control business decisions

47
Q

Valuation Discount - Co-ownership (fractional interest) discount

A

Real estate that has impaired marketability because estate cannot sell its partial interest or purchase co-owner’s partial interest

48
Q

Valuation Discount - Key Person Discount

A

Loss of person who is vital to business operations

49
Q

Valuation Discount - Lack of Marketability Discount

A

Restrictions on marketability and costs of taking public a closely held business

50
Q

Gross Estate Exclusions?

A
    1. Interests owned prior to death that cannot be transferred, such as
    2. a. life estate
      1. (1) right to annuity or pension payments during life, without survivorship payments
51
Q

Estate Tax Deductions?

A

Deductions: Gross Estate to Adjusted Gross Estate to Taxable Estate

Schedule J: Funeral and administrative expenses

Schedule K: Debts, mortgages, and liens

Schedule L: Casualty and theft losses & nonprobate administrative expenses

= ADJUSTED GROSS ESTATE

Schedule M: Marital deduction

Schedule O: Charitable deduction

No Schedule: State death taxes paid

= TAX BASE

52
Q

What Estate Taxes will we have to calculate?

A

We will have to calculate the:

  • Gross Estate
  • Adjusted Gross Estate
  • Taxable Estate

We will not have to Calculate the Estate Tax Due

53
Q

Differences between UGMA and UTMA?

A

UTMA, UGMA Differences

UGMA UTMA

Only lifetime transfers Lifetime and at Death transfers

Cash Securities, Life insurance No restrictions on securities

Limited Investment Powers Expanded Investment Powers

Custodial Transfers ONLY Custodial & noncustodial xfers

54
Q

Common Provisions of UGMA and UTMA

A
  • Title to the property is transferred to a custodian for the minor’s benefit
  • Individual accounts are required for each minor
  • Gifts are Irrevocable
  • Property is distributed to the minor at age of majority
  • Income is taxed to the minor, Kiddie Tax applies
  • Annual exclusion is available for gifts to the UTMA and UGMA account
  • If the minor dies before the age of majority, the assets are included in the minor’s gross estate.
  • if the donor dies while acting as custodian the assets are included in the donor’s gross estate.
55
Q

What is the difference between the Gift Tax Exclusion and Gift Tax Exemption?

Some of the confusion stems from the fact that there are in fact two “exclusions” or “exemptions” that apply to federal gift taxes.

A

Some of the confusion stems from the fact that there are in fact two “exclusions” or “exemptions” that apply to federal gift taxes:

The Gift Tax Exclusion is known as the “annual gift tax exclusion” and can only be used on an annual basis. With regard to U.S. gift taxes, the annual gift tax exclusion of $14,000 in 2017 is the amount that can be given away by an individual in any given year to an unlimited number of people free from any federal gift tax consequences at all.

The Gift Tax Exemption is know as the “lifetime gift tax exemption” and can be spread out over a person’s entire lifetime. The “lifetime gift tax exemption” is tied directly to the federal estate tax exemption so that if you gift away any amount of your lifetime gift tax exemption, then this amount will be subtracted from your estate tax exemption when you die.

56
Q

Per Stirpes vs. Per Capita

A

Per Stirpes: Per Class or Per stripe. If you have 3 kids - son1, son2, son3. Son1 dies and Son3 dies, then his son 2 gets 1/3 and Son1 kids split his 1/3 share and Son3 kids split his 1/3 share.

Per Capita: By total headcount per generation. If you have 3 kids - son1, son2, son3. Son1 dies and Son3 dies, the son2 get his 1/3 while son1’s 2 kids split the remaining share with son3 kid.

57
Q

Present Value Gift vs. Future Value Gift

A

Present Value Gifts:

A gift has to be a present interest gift in order for an individual to use the $14K gift tax annual exclusion.

Future Value Gifts:

Future value gifts do not benefit from the $14K annual exclusion so the entire gift is subject to gift tax. How do we quantify the gift of future value?

58
Q

Transfers subject to the GSTT?

A
  1. Tax on transfer of wealth (during life or at death) to persons who are deemed to be two or more generations younger than the transferor
  2. GSTT in addition to any gift or estate tax due on the transfer
  3. Taxed at top regular estate tax rate for year of transfer
59
Q

In GSTT Planning who is a Skip Person?

A
  • Lineal Relatives - The Transferee is two or more generations younger than the Transferor. Grandchild or great grandchild.
  • Non Lineal Relatives - Someone who is 37.5 years younger than the Transferor.
60
Q

In GSTT Planning who is a Non-Skip Person?

A
  • Transferee who is deemed to be less than two generations younger than the transferor or the transferor’s spouse. Like a child or nephew of the Transferor.
  • Transferor’s spouse or former spouse is always considered a non-skip person regardess of age difference with the transferor.
61
Q

What is a direct skip?

A
  1. Only skip parties have a current beneficial interest in the transferred property, and in which no nonskip party has any interest.
  2. GSTT in addition to gift or estate tax, reported on same return, and due at the same time

Example: Derrick’s grandfather placed $50,000 in an irrevocable trust of which Derrick was the sole income and remainder beneficiary. Both of Derrick’s parents were alive at the time of the completed transfer.

62
Q

What is an Indirect Skip?

A
  1. At least one non-skip party has a current beneficial interest in the property after the transfer; and at least one skip party must have an interest in the transferred property.
  2. GSTT in addition to gift or estate tax, and will be reported on same return, but tax will not be due at the same time.
  3. GSTT will be due upon taxable termination or distribution.

Example: Derrick’s grandfather placed $500,000 in an irrevocable trust of which Derrick (skip) was the 10 year income beneficiary and Derrick’s parents were the remainder beneficiaries. Both of Derrick’s parents (non-skip) were alive at the time of the completed transfer.

63
Q

Indirect Skips with Taxable Distributions and Taxable Terminations?

A

Taxable Distributions

  • Occurs upon the actual distribution of property to a skip party

Example. Rebecca’s will funded a testamentary irrevocable trust with $1 million and named the First National Bank as trustee. The trust had a term of 20 years, after which time the trust corpus was to be distributed to Rebecca’s descendants by representation. The trustee could distribute income or corpus of the trust in its absolute discretion to any of Rebecca’s escendants during the trust term. At all relevant times, Rebecca had 10 children and nine grandchildren who were potential trust beneficiaries. In the first year of the trust, the trustee distributed $20,000 to each of Rebecca’s nine grandchildren. Each transfer constituted a taxable distribution.

Taxable Terminations

  • Occurs upon the termination of all nonskip parties beneficial interests in property, whether by death, lapse of time, or otherwise

Example. T’s will placed all of his probate estate into a testamentary irrevocable trust which gave income for life to his child, C, with the remainder to C’s descendants by right of representation, with such remainder to be held in trust if any such descendant was under age 40 at the time of distribution. Because this constituted an indirect skip, no GSTT was due at T’s death. However, when C (a non-skip person) dies, a termination of C’s interest occurs, and the GSTT is assessed at that time.

64
Q

GSTT Exemptions or Exclusions?

A
  • Spouses
  • Ex-Spouses
  • Charities
  • Transfers that qualify for the annual exclusion
  • Direct Payments to Medical and Educaitonal providers
65
Q

What is the GSTT Deceased ancestor rule?

A

Let’s say son dies and the grandfather transfers assets to the grandson, then the grandson would move into the son’s slot and there would be no GSTT due to the deceased ancenstor rule.

66
Q

GSTT Bullet Points?

A
  • GSTT is in addition to any estate of gift tax due.
  • Annual exclusion available for present interest gifts.
  • GSTT exemption is $5,490,000 in 2017.
  • Gift Splitting allowed for spouses.
  • Direct payment to educational and medical providers are exempt.
  • Flat tax rate of 40% at Gift and Estate Level and a 40% at the GSTT level.
67
Q

What is a 2503(b) Trust?

A

Known as Mandatory Income Trust

(1) Title is placed in the name of an irrevocable trust that is required to pay out all income at least annually
(2) Trust may have any number of income and remainder beneficiaries, minors or adults
(3) Income is taxed to income beneficiaries whether distributed or not
(4) FMV of property given to trust is subject to gift tax and GSTT
(5) Grantor is entitled to annual exclusion of the lesser of the number of income beneficiaries times the maximum annual exclusion, or the present value of the income interest
(6) Trust assets are removed from grantor’s gross estate unless any of the transfer sections or the three-year rule applies

Example. The grantor of a Section 2503(b) mandatory income trust is not entitled to take an annual exclusion for each dollar contributed, because part of each dollar is deemed to be a gift to the remainder beneficiaries. In a year when the maximum annual exclusion is $14,000, if the present value of the income interest is $30,000, and there are four income beneficiaries, only $30,000 (versus $56,000 in annual exclusions) of the contributed property may be excluded from the taxable amount.

This is a gift of a future interest.

68
Q

What is a 2503(c) Trust?

A
  1. (1) Property is given to an irrevocable trust for the benefit of one minor under the age of 21 years
  2. (2) Trust property may be used for the exclusive benefit of the minor beneficiary at the trustee’s discretion
  3. (3) Upon reaching age 21, minor beneficiary must be allowed to remove the property from the trust
  4. (4) If minor dies prior to age 21, trust property must be paid to minor’s estate or to appointee of the minor
    1. (a) Income is taxed to the minor
    2. (b) Donor subject to gift tax and GSTT
    3. (c) If donor dies while trustee or successor trustee, property will be included in donor’s gross estate
    4. (d) Assets will be included in donee’s gross estate if owned at death

This is a gift of a present interest

69
Q

What are Charitable Remainder Trusts?

A
  1. Decedent gives qualified charity a vested remainder interest
    1. Charitable deduction for present value of remainder interest
  2. Decedent names noncharitable beneficiary to receive income interest
    1. If beneficiary is the spouse => marital deduction for present value of income interest
    2. If beneficiary is nonspouse => tax will be due on present value of income interest
    3. Income interest must be an annuity (CRAT—% of initial FMV of trust assets) or unitrust (CRUT—% of net FMV of trust assets valued annually) amount
    4. Income interest may last for up to 20 years or for a life in being
70
Q

What are Charitable Lead Trusts?

A
  1. Income interest given to qualified charity for period of years or life in being
    1. Income interest must be a unitrust (CLUT) or annuity (CLAT) amount
    2. Charitable deduction for present value of income interest
    3. Grantor is entitled to income tax charitable deduction for inter vivos CLT only if grantor pays income tax on trust income—i.e., trust is a grantor trust
  2. Remainder interest given to noncharitable beneficiary
    1. if beneficiary is the spouse => marital deduction for present value of remainder interest
    2. if beneficiary is nonspouse => tax will be owed for present value of remainder interest
71
Q

What is the beneficial interest classes retained in a Grantor Retained Trust?

A
  1. Property is given to an irrevocable inter vivos trust to last for a term certain
    1. Grantor retain a beneficial interest:
      1. All income from trust assets (GRIT),
      2. An annuity interest (GRAT),
      3. A unitrust interest (GRUT), and
      4. The right to use a personal residence (QPRT). Qualified Personal Residence Trust
72
Q

What is a Grantor Retained Trust?

A
  1. Property is given to an irrevocable inter vivos trust to last for a term certain
    1. Grantor retain a beneficial interest:
      1. All income from trust assets (GRIT),
      2. An annuity interest (GRAT),
      3. A unitrust interest (GRUT), and
      4. The right to use a personal residence (QPRT).
  2. Remainder interest is given to beneficiaries specified by the grantor
  3. Removes assets from grantor’s gross estate while allowing grantor to retain benefit of the asset during trust term
  4. Grantor is taxed on income of interest retained
    1. Excess income, if any, is accumulated and taxed to the trust.
  5. Transfer to a related family member (Section 2702 Chapter 14 Rules)
    1. Gift tax due on FMV of trust property, less the present value of the retained interest
      1. Exception: FMV of all property given to a GRIT (non-qualified interest) is subject to gift tax
      2. QPRTs are expressly exempt from Chapter 14 rules
        1. Asset is removed from grantor’s gross estate unless grantor dies during trust term, in which event Section 2036 requires inclusion.
73
Q

What is the QTIP Election

A

It allows the surviving spouse to get a marital deduction on assets that would be split into a marital A Trust.

The property within the QTIP providing funds to a surviving spouse qualifies for marital deductions, meaning the value of the trust is not taxable after the first spouse’s death. Instead, the property becomes taxable after the second spouse’s death, with liability transferring to the named beneficiaries of the assets within the trust.

74
Q

What is the purpose of a Buy-Sell Agreement?

A
  • To assure closely held business owner of a market for his or her interest in the event of:
    • (1) total disability
    • (2) retirement
    • (3) death
  • To prevent closely held business interests from being transferred to third parties who may be unsatisfactory.
75
Q

What is the procedure of a buy-sell arrangement?

A
  1. Each owner obligates himself to sell his interest in certain circumstances to each of the other owners (cross-purchase) or to the business entity (entity or stock purchase).
    1. In a cross-purchase, every owner obligates himself to purchase his pro rata share of any offered interest. How many polcies is n(n-1)
    2. In an entity purchase, the entity obligates itself to purchase any offered interest.
  2. The agreement establishes a formula for computing the purchase price
  3. Parties are obligated to purchase insurance in order to meet agreement obligations
76
Q

What is the taxation of a buy-sell agreement?

A
  1. Premiums paid on insurance are not deductible by payor or income to the insured
  2. Buyer will have basis in interest purchased equal to purchase price
  3. No gift tax if interest is purchased at FMV
  4. If interest is not purchased at FMV, Code Section 2703 (Chapter 14 rules) may require selling party to pay gift or estate tax on difference
    1. Section 2703 applies to an agreement, option, or other right to acquire property at less than FMV, or any restriction on the right to sell or use property
    2. Such price is ignored for valuation, unless the transaction is:
      1. a bona fide business arrangement,
      2. not an attempt to transfer property to family members for less than full and adequate consideration, and
      3. similar to an arm’s length transaction
  5. These requirements are deemed to be met if more than 50% of the ownership interests of the subject property are owned by non-family members.
  6. At death of owner, his or her gross estate will include FMV of business interest and replacement cost of policies on other owners
77
Q

Gifts made that are included in the Gross Estate? Q12 TEST E

A

Which of the following gifts made two years….

Outright gifts with NO interest or control retained by the owner are NEVER included in the donor’s Gross Estate..

If donor retians a right/interest in property

Property owned in JTWROS with a nonspouse like a child

life insurance DB included due to 3 year look back rule

1. CFP Exam (updating w/ 2017 numbers from CFFP) (17 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions