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CFP BIF > Estate Planning > Flashcards

Estate Planning Flashcards

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1
Q

Estate Tax Formula

How to calculate taxable estate…?

A

GAT
Gross Estate
(minus) Deductions
Adjusted Gross Estate
(minus) Charitable & marital deductions
= Taxable Estate

On Form 706 (due 9 months after death)
Estate tax is a tax on property transferred @ death. All gifts in lifetime is in the flow.

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2
Q

Form 706

A

Estate & Generation Skip Transfer Tax (GSTT)

Due 9 mo. after death

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3
Q

Three Year Rule

A

Any property gifted within 3 years of the death of the donor is generally not included in the gross estate.

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4
Q

Simple vs Complex Trust

A
  1. Simple Trust cannot Distribute Principal, Complex can.
  2. Simple Trusts are required to distribute all income. Complex Trusts are not.
  3. Simple Trust Income Exemption amount is $300, Complex Trusts are $100.
  4. Simple trusts cannot have a charitable deduction. Complex Trusts can.
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5
Q

Revocable Trust

A
  • Included in Gross Estate
  • Grantor can terminate
  • May be funded or unfunded.
  • transfer of assets into Trust is not considered a completed gift. Not taxed upon transfer because the grantor can take it out.
  • Assets in trust are subject to estate tax at time of grantors death.
  • Becomes an irrevocable trust at death and avoids probate.

IS INCLUDED in Gross Estate

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6
Q

Irrevocable Trust

A
  • may not be revoked once created.
  • Transfer of assets into trust is considered a completed gift. Owned by trust.
  • Must be funded to exist.
  • Not subject to estate tax at grantors death.
  • Goes around probate.
  • Avoids Gross estate.

IS NOT Included in Gross Estate

Good for medical planning, asset protection, tax deductions.

Can be ammended w/ beneficiary okay.

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7
Q

Grantor Trust

A
  • All income taxed to grantor. (basically a revocable trust)
  • Allows grantor, grantor spouse or third party the right to revoke or make changes.
  • Grantor retains beneficial enjoyment.
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8
Q

Living (inter-vivos) Trust

A
  • Established during grantors lifetime. Effective immediately.
  • Funds pass outside the will and probate.
  • Title to property inside is in name of trust.
  • INCLUDED in Gross Estate.
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9
Q

Testamentary Trust

A

Created through a will, funded AFTER death.

Possible purposes:
* Reduce Estate Taxes
* Provide Professional investment manager
* make sure estate ends up in right hands.

INCLUDED in Gross Estate

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10
Q

When is the Grantor Taxed?

A

The Grantor is taxed on income grom the Grantor Trust

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11
Q

When is the trustee (the trust)Taxed?

A

Taxed on retained income

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12
Q

When is the beneficiary taxed?

A

Distributed Income, Non-grantor trusts

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13
Q

Who does what?

A

Grantor - Gives
Trustee - Trust Fiduciary
Beneficiary (remaindermen) - Benefit Receiver

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14
Q

Corpus

A

Amount of principal in trust

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15
Q

65 Day Rule

A

Gives trustees 65 days after end of fiscal year to make beneficiary distributions. Can still report on prior year tax return.

Can distibute 65 days into 2024 and still put it on 2023 tax return.

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16
Q

Section 645 Election

A

Allows trust to have extended payment deadlines

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17
Q

Standby Trust

A

Used to manage assets if they become incapacitated.

Grantor is trustee & beneficiary.

They set up a successor who steps up when Grantor is incapacitated.

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18
Q

Must file form 1041 if…

A
  • Trust has ANY taxable income for the year.
  • Gross income of $600 or more.
  • A benficiary who is a non-resident alien.
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19
Q

Distributable Net Income (DNI)

A

Represents the MAX that can be taxed to beneficiaries.
- When a trust distribution exceeds the DNI Amount, excess is treated as non-taxable transfer of corpus.
- Beneficiary is taxed on the lesser of the DNI allocation or the amount required to be distributed.

Distribution - Income of Trust = Taxed on lesser of income or Distribution.

If 17k of income and 9k Required Distribution from trust… 9k = Taxable amount. 8k = Tax Free Distribution

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20
Q

Grantor Retained Annuity (GRAT)

A
  • Is an irrevocable trust where the grantor places assets and a right to a fixed payment of income (usually annually) for a chosen period.
  • Future appreciation of assets will pass to a family member - free of estate taxes if grantor survives the term.
  • If grantor does NOT survive term, GRAT continues payment to grantors estate and is subject to estate tax

A is for ANNUITY and the income stream is ALWAYS the same.
Gift tax exposure is reduced if Value of the retained annuity is increased and value of the remainder interest is decreased.

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21
Q

Purpose of GRAT

A
  • Transfer property in the trust at a reduced (or zero) gift tax value.
  • Pass appreciation in the GRAT to bene’s with 0 gift tax.
  • Reduce value of grantors estate.
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22
Q

Advantages of GRAT

A
  • Estate tax reduction
  • Provides income to grantor
  • Supports grantor and beneficiariess
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23
Q

Disadvantages of a GRAT

A
  • Initial gift is taxable
  • No additional Assets permited
  • Beneficiary receives carryover basis
  • Loses control of property
  • Fixed annuity must be paid no matter what
  • Income is subject to creditor claims
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24
Q

Grantor Retained Unitrust (GRUT)

A

An irrevocable trust into which the grantor places assets and a right to receive income (annually) for a chosen period.

Receive payment of a fixed percentage which is determined annually. Amount of income each year will change based on the value of the account.

U stands for UP AND DOWN. Assets are valued annually, and income stream will go up and down based on that value.
Is useful as an INFLATION HEDGE

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25
Q

Purpose of a GRUT

A
  • Transfer property at a reduced (or zero) gift tax value
  • Pass appreciation to bene’s without incurring additional gift tax.
  • Reduce the value of the grantors gross estate.
26
Q

Advantages of a GRUT

A
  • Estate tax reduction; if grantor outlives term, property in GRUT has no estate tax.
  • Provides income to grantor
  • Additional assets ARE permitted
  • OFfers support for grantor and bene’s
27
Q

Disadvantages of a GRUT

A
  • Initial gift is taxable (FMV - Annuity payments); income payments are taxable to grantor.
  • Bene’s receive carryover basis
  • Loses control of property
  • Income is subject to creditor claims
28
Q

Qualified Personal Residence Trust (QPRTs)

A
  • An irrevocable trust that holds a persons residence and allows the couple or individual to live in the house rent-free for a specified period.
  • At the end of the term, the house will pass gift-tax free to the trust beneficiaries.
29
Q

Advantages of a QPRT

A
  • Tax Reduction: Potentially removes a high valued asset from ones estate.
  • Property Use: Permits grantors continued use during term.
  • Supports beneficiaries.
  • Step up in basis upon grantors death
30
Q

Disadvantages of a QPRT

A
  • Possible estate inclusion (i.e., FMV on date of death if grantor does NOT outlive the trust term)
  • Taxes (income)
  • If beneficiaries intend to sell the home, the original basis is transferred, increased only by any gift taxes paid.
  • When the grantor survives the trust, they must move or rent.
31
Q

Gift & Estate Tax: Marital & Charitable Deductions

A

Unlimited Marital Deductions are available for most gifts made to a donee spouse.
* Cannot be used for a non-citizen spouse. The annual exclusion for a non-citizen spouse is $175,000.

32
Q

Charitable Deductions…

A

May receive a charitable estate tax deduction for property passing to a qualified charity. (Calculated on Form 706 Estate Tax Return)

33
Q

Common vehicles for gift tax charitable deductions include…

A
  1. Charitable Lead Trusts (High Cost/Complexity, Yes Income)
  2. Charitable Remainder Trusts
  3. Charitable Gift Annuities
  4. Pooled Income Funds (Low Cost/Complexity, Yes Income)
  5. Private Foundation (High Cost/Complexity, No Income)
  6. Donor Advised Funds (Low Cost/Complexity, No Income)
34
Q

Charitable Lead Annuity Trust (CLAT)

A

a type of CLT that is designed to provide a fixed annual payment toa qualified charity with remainder going to a non-charitable beneficiary.

35
Q

Charitable Lead Unitrust (CLUT)

A

A type of CLT that provides payment of a periodic sum, usually a percentage of trust assets (revalued annually) to a qualified charity, with remainder going to a noncharitable beneficiary.

Annual payments go up a down based on valuation.

36
Q

Charitable Remainder Annuity Trust (CRAT)

A

A trust designed to permit payment of a fixed amount annually to a noncharitable beneficiary with the remainder going to a charity.

Payments are 5%-50% of trust value
Not to exceed 20 years or life
Charity receives all assets after death

37
Q

Charitable Remainder Unitrust (CRUT)

A

Provides payment of a periodic sum, usually expressed as a percentage of the assets of the trust, to a noncharitable beneficiary, with the remainder going to charity.

38
Q

Bypass Trust
(B-Trust)

aka: Credit Shelter Trust, Family Trust, B-Trust

A

Avoids “over-qualifying” the decedent spouse’s estate for the marital deduction by utilizing the decedents maximum unified credit.

First to die spouse:
* Sets Trust Terms
* General POA
* Taxed upon transfer of $ to trust
* uses exemption to offset actual tax
* Escapes Estate Tax at death on b-trust assets

39
Q

A-B Trust
Estate Order

A

B - Trust = Funded with amount equal to the lifetime exemption amount. -> At death of surviving spouse, assets pass to beneficiaries tax free.

A-Trust = Funded with amount of assets that EXCEED the lifetime exemption amount. -> At death of surviving spouse, trust assets taxed.

BEFORE then AFTER

39
Q

B-Trust

A

Does not qualify for Marital Deduction
Surviving spouse does not have power of appointment
It is included in Decedent’s Estate
Is NOT included in surviving spouses estate

income can be taken as needed by surviving spouse and IS taxable to surviving spouse.

39
Q

A-Trusts

aka: Power of Appointment Trust

A

Qualifies for the unlimited marital deduction.
- Surviving spouse has access to income and corpus for life.
- Surviving spouse has general power of appointment over trust corpus.
- Must receive income annually, no accumulation of income in trust.
- Surviving spouse determines beneficiaries.
- Trust property is included in surviving spouse’s estate.

39
Q

A-B Trust

A

Gives surviving spouse full use of the family’s economic wealth, while minimizing estate tax payable at the death of both spouses.

Surviving Spouse - has right to all income. Only property from A trust is in surviving spouse’s estate.

Decedent Spouse - Marital Deduction is available for A trust. Lifetime Exemption Amount is used for B Trust. Estate tax liability is zero.

B = Before
then..
A = After

40
Q

Q-TIP Trusts
(Qualified Terminable Interst Property)

A

Purpose - They are established when the decedent spouse wants to…
* provide the bene spouse with income for life
* receive an estate tax marital deduction
* give trust corpus to children from a previous marriage

Provisions -
* Must receive all income annually
* Corpus passes to remainder beneficiaries designated by decedent at bene spouse’s death.
* Qualifies the decedent’s estate for the marital deduction.

41
Q

2503(b) Trust
(Qualifying Minor Trust or Mandatory Income Trust)

A

An Irrevocable Trust which distributes income on an annual basis. Funds in an acct until child reaches legal age.

Enables the grantor to make a gift to a minor in a trust and still obtain the annual gift tax exclusion.

  • Income must be distributed at least annually
  • Principal May be witheld from the beneficiary until his or her death
  • Amount eligible for annual exclusion is the actuarial value of the income interest

2503(b) trusts bring beneficiaries bucks

42
Q

2503(c) Trust

A

Considered a Gift of Present interest. Gift qualifies for annual gift tax exclusion.

No requirement for current income distributions

All Principal must be distributed (along with income) no later than the age of beneficiary attaining age 21.

Amount eligible for annual exclusion is the entire gift to the trust.

2503(c) trusts accumulate & Can Cease Current Cash

43
Q

Special Needs Trusts

A

Preserves eligibility for disabled individuals to receive government benefits to pay for extra services that are not covered by public assistance groups.

Pooled: A pooled SNT is managed by a non-profit

First-Party: is a trust that are designed to help indviduals who are dealing with a disability caused by an injury. Funded by the person with special needs.

Third-Party: Holds assets that never belonged to the trust beneficiary. Offsets part of donors estate plan, to aid the special needs of an indiviaul while they’re alive.

Income needs to be less than $934 ($1,391 for a couple) a month to preserve the ability for someone to qualify for SSI.

44
Q

Special Needs Trust Taxation

A

Most are third party trusts and are taxed as pass-through entity.

Taxed to beneficiary at individual income tax rates

45
Q

Irrevocable Life Insurance Trust (ILITs)

A

Gives the ability of a decedent to move face value of their insurance poilcy outside of the estate.

46
Q

ILIT Three year Rule

A

Certain property interests tha were transferred into the trust within 3 years with the intent to be removed out of their gross estate, WILL BE INCLUDED in the gross estate.

If they survive the three year rule, it will not be included in the gross estate.

47
Q

Unfunded ILIT

A

Grantor must transfer money into the trust each year so the trust can pay for life insurance premiums.

Beneficiaries are given **Crummey Powers. **
* Those powers gives bene’s the right to withdrawal some or all of the grantors contribution to an irrevocable trust each year.
* Turns an interest gift into a present gift
* Qualify’s for the annual gift exclusion amount.
* Lesser of
* Annual Exclusion
* ANnual Contribution to trust
* Greater of 5k or 5% of amount tranferrred to trust.

48
Q

Funded ILIT

A

Transfer a life insurance policy and income producing property into the ILIT.
* Trust income will pay policy premiums
* bene’s are not given crummey powers
* Grantor is taxed on trust income due to grantor trust isues.

49
Q

Family Limited Partnerships (FLPs)

A

A passthrough entity which works as a partnership consisting entirely of family members allowing senior family members to transfer property to junior family members at reduced transfer costs.

Assets exchanged for general and limited partnership shares.

Older family members retain General Partnership shares.

Younger members receive limited partnership shares.

50
Q

Advantages of FLPs

A

Control - General Partners (senior family members) retain control of property through the FLP

income Tax Reduction - Shares are shifted to junior family members at lower tax brackets. Earnings in FLP’s are taxed at recipients tax brackets

Protection from creditors

**Valuation Discounts **- Range from 30% to 70%
* Lack of Marketability Discount
* Minority Interest Discount - Applied when tranferring business interests to minority shareholders because they have no influence

Gifting - Ease of gifting asets that are difficult to distribute. Qualifies for $17,000 exclusion.

51
Q

Disadvantages of FLP’s

A

Income shifting to younger members limited by kiddie tax

Filing fees and informational tax returns are due when filing.

Gifts to NOT receive a step up in basis

Retained partnership interest continues to appreciate in senior family members estate.

52
Q

Intra-Family Transfers:
Sale-Leasebacks & Gift Leasebacks

A

Can structure the sale or gift of a business property to family members to provide them with 1) an income straem from lease payments and 2) removes business property from estate.

53
Q

Sale Leaseback

A
  1. Business Owner sells business to an adult child then leases it back.
  2. Owner receives lump sum payment or installments from child and continues to use the property in the biz.
  3. Owner Deducts monthly lease payments made to the child as a biz expense.
  4. Lease payments are taxed in the childs lower tax bracket.
54
Q

Gift Leaseback

A

A gift of business property to family members (via irrevocable trust) to provide them with an income straem from lease payments and remove biz property from estate.

  1. Owners gifts property into an irrevocable trust then leases property back.
  2. Owner receives business deductions for lease payments made into the trust.
  3. Trustee distributes lease payments to family beneficiaries.
  4. Family Beneficiaries are taxed in lower brackets.
55
Q

Installment Sale

A

Used to sell the business to a family member or 3rd party with secured income.

no downpayment

PV of outstanding payments are included in sellers gross estate

56
Q

Self-Canceling Installment Note (SCIN)

A

Partially or fully cancels installment note before it matures.

Can cancel in a will. Unpaid balalnce is not included in gross estate.

Subject to capital gains and gift taxes.

Can cancel in increments of 17k per buyer and removes biz property from gross estate

57
Q

Private Annuity

A

Seller receives a fixed annuity income stream for life and removes the biz/property from gross estate

Payments from sale are structured as an annuity and are unsecured.

Single Life Annuity - Remaining payments are not included in sellers estate.

Joint & Survivor annuity: Payments continue for two lives.

If buyer dies before seller, buyers estate must make payments to the seller for life.

Payments are unsecured

CFP BIF (6 decks)

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