Estate Planning Flashcards
Grantor Trust Basic Rules
Follow the grantor ; irrevocable trust into which grantor places assets and RETAINs interest for a fixed number of years.
Grantor may revoke or modify the trust
Retains administrative powers
retains control
income is (can be) used to pay premiums on a life insurance policy for the grantor or grantor’s spouse
Income is distributed to the grantor for the support of the grantor’s childners
Grantor Trust rights and taxation
ALL Income is taxed to the grantor
No trust taxation
No form 1041
Any trust that allows the grantor and grantor’s spouse or 3rd party without a beneficial interest in the trust
Any rights or powers will be taxed as a grantor trust
GRAT
Grantor Retained Annuity Trust
Grantor RETAINS a right to payment of a FIXED $$ amount of initial valuation for a FIXED number of years
Evaluated at the start of the trust and payments stays the same = Annuity
ADDITION ASSETS NOT PERMITTED
GRUT
Grantor Retained Uni Turst
Grantor RETAINS the right to payment for FIXED % of the ivalue of the trust property DETERMINED ANNUALLY for a # of years
Revalued at annually ; served as inflation hedge
payments are go up and down
ADDITION ASSETS ARE PERMITTED
CLT
Charitable Lead Trusts (CLT)
pays an INCOME STREAM to a qualified CHARITY for a TRUST TERM, usually not exceeding 20.
At the expiration of the TRUST TERM (lead period), the remainder interest passes to GRANTOR OR one or more NON-CHARITABLE beneficiaries.
CLT - Taxation
Charitable Lead Trusts (CLT)
Charitable Lead Trusts are considered ‘non-tax-exempt entities.’
Income earned by the trusts is TAXED to the GRANTOR. Interest income would be included in GRNTOR’s gross income for the year.
The grantor CLT typically allows a large up-front income tax deduction in the year it is funded.
With a non-grantor CLT, there is no deduction at the time the CLT is funded.
CLAT
Charitable Lead Annuity Trust (CLAT)
a type of CLT that is designed to provide annual payment of a FIXED amount to a qualified CHARITY for a TRUST TERM (lead period)
At the expiration of the lead period, the REMAINDER (remaining interest) passes to GRANTOR OR one or more NON-CHARITABLE beneficiaries.
CLUT
Charitable Lead Uni Trust (CLUT)
a type of CLT that provides payment of a periodic sum, usually a percentage of the trust assets (revalued annually) to a qualified charity, with the remainder going to a GRANTOR OR NON-CHARITABLE beneficiary.
This creates annual payments that go ‘up and down’ based on the annual valuation.
CRT
Charitable Remainder Trusts
vehicle for gift tax charitable deductions
A trust in which GRANTOR OR NON-CHARITABLE beneficiaries receive annuity or unitrust payments FIRST for the TRUST TERM and then the REMAINING INTEREST is received by a qualified CHARITY.
The grantor receives a charitable income tax deduction for the PV of the charity’s remainder interest.
CRT - Taxation
Charitable Remainder Trusts
vehicle for gift tax charitable deductions
Provide the grantor with a tax deduction during the year in which assets are transferred irrevocably into the trust.
Tax deduction pool can be carry forward for 5 years
The amount of the tax deductions that the grantor receives = FMV – PV of income stream to grantor.
CRAT
Charitable Remainder Annuity Trusts (CRAT)
a trust designed to permit payment of a FIXED amount (based on a % of the trust’s initial valuation) AT LEAST annually to a GRANTOR or NON-CHARITABLE beneficiary FOR A TRUST TERM with the remainder going to CHARITY.
Additional assets CANNOT be added.
Charity receives ALL trust assets UPON the death of the income beneficiary or at the end of the trust term.
CRUT
Charitable Remainder Uni Trust (CRUT)
payment of a periodic sum (A fixed percentage of net FMV of the trust, revalued annually) to a GRANTOR or NON-CHARITABLE beneficiary at least annually FOR TRUST TERM with the remainder going to CHARITY.
Additional assets CAN be added.
Reduces the value of the grantor’s gross estate.
Grantor Trust - What happens if grantor dies before the trust TERM ENDS
FMV on DOD or FMV on ADV is included in the gross estate of the grantor
Grantor Trust - What happens to corpus/principle at the end of the trust term?
Corpus/principle will pass to non-charitable beneficiaries ( and this can be grantor as well)
Benefit of this trust is that it passes on high value property to benes with low valuation method that limits the amount of gift or estate tax payable on these gifts
GRAT and Client Suitability
Clients who have conservative tolerance and desire fixed income for a trust term
GRUT and Client Suitability
Clients who have moderate to aggressive tolerance and desire for income to out pace inflation
QPRT
Qualified Personal Residence Trusts (QPRTs)
Irrevocable GRANTOR trust (for houses) that holds a person’s residence, allowing couples or individual to live in the house rent-free for a specified period.
At the end of the term, home passes gift tax-free to the trust beneficiaries.
QPRT - Basis and Taxation
NO Step-up in basis to the beneficiaries
if grantor paid gift taxes upon transfer to the trust, however, there may be “tacking-on” the basis
If you survive the trust term - REMOVED from gross estate
If you die within trust term - FMV on DOD is INCLUDED in the gross estate
Taxation of Non-grantor trust
Any retained earnings/income in non-grantor trust is taxed at the trust level , using CFP Provided tax tables (page 3)
What happens when non-grantor trust distributes income to beneficiaries
Non-grantor trust gets to take deduction for the amount it distributed to beneficiary.
Beneficiary has to pay the tax
DNI - Distributable Net Income
Maximum amount that can be taxed to the beneficiaries
What happens when non-grantor trust distributes more to the beneficiary than earned income?
Trust only pays taxes on income retained. If more is distributed to beneficiary than earned income, it means that all of the income was distributed (plus some of the corpus) and deducted leavening $0 taxable amount = no taxes due
What happens when beneficiary receives more distribution than DNI?
DNI represents the MAX amount that can be taxed to the bene. If Bene receives more than DNI, he/she is taxed for DNI at the highest marginal tax brackets
Remaining amount is tax free distribution of trust corpus.
Estate Tax Formula
Gross Estate
Minus: Expenses, debts, taxes, losses
Adjusted Gross Estate
Minus: Marital deduction
Minus: Charitable deduction
Taxable Estate
Donor Deductions for a gift to a spouse
Donor can take an unlimited marital deduction for most gifts made to a US Citizen donee spouse.
Annual exclusions for a gift to non-citizen spouse is $185K
Donor Deductions for a gift to charity
A decedent may receive a charitable estate tax deduction for property passing to a qualified charity. Calculated on Form 706: Estate Tax Return.
Charitable Gift Annuities
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.
Pooled Income Funds
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.
Private Foundation
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 20% for LTCG property.
must distribute a minimum of 5% of the assets to public charities every year.
Donor-Advised Funds
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.
When is CLAT a best choice?
A CLAT is the best Charitable Lead Trust (CLT) choice when interest rates are lower, since smaller annuity payments to a charity result in a greater value of the trust corpus for the remaindermen.
CLAT Advantages
Qualify for income tax, gift tax, and estate tax deductions.
If using a ‘grantor-CLT,’ there is a large, front-loaded tax deduction that can offset taxation.
Flexibilty: can be either inter-vivos or testamentary.
Means to support philanthropic goals and support beneficiaries.
CLAT Disadvantages
Trust principal is invaded if income is insufficient to make payments to charity, which ultimately leaves less for the trust beneficiaries.
An income tax deduction is only available for ‘grantor-CLTs.’ Non-grantor CLTs do not qualify.
Lead trusts are ‘non tax-exempt entities.’ Income earned by the trust is taxed to the grantor.
CLUT Advantages
Advantages:
Qualify for income tax, gift tax, and estate tax deductions.
If using a ‘grantor-CLT,’ there is a large, front-loaded tax deduction that can offset taxation.
Flexibility: can be either inter-vivos or testamentary.
Means to support philanthropic goals and support beneficiaries.
Additional assets permitted.
Income stream serves as an ‘inflation hedge.’
CLUT Disadvantages
Trust principal is invaded if income is insufficient to make payments to charity, which ultimately leaves less for the trust beneficiaries.
An income tax deduction is only available for ‘grantor-CLTs.’ Non-grantor CLTs do not qualify.
Lead trusts are ‘non tax-exempt entities.’ Income earned by the trust is taxed to the grantor.
CRAT - Income Payments, Term & Taxation
Income payments: Between 5% - 50% of trust value.
If the income of the trust is insufficient to meet the required annual payment, the difference is paid from capital gains or principal.
If the income is greater than the amount required in any given year, the excess income is reinvested in the trust.
Trust term: Not to exceed 20 years or life.
Tax deduction CANE BE carried forward a maximum of 5 years following the initial contribution.
CRAT Advantages
Current income tax deduction. Amount = PV of the remainder interest.
Income to the grantor or non-charity beneficiaries.
Support for grantor or beneficiaries.
Giving to charity.
Assets within trust accumulate free of taxation.
CRAT Disadvantages
Contributions to the trust are irrevocable. Grantor loses control over the property.
Purchasing power of the income stream may be reduced due to inflationary pressures.
Income received may be subject to ordinary income or capital gains taxes.
CRUT - Income, term and taxation
Income payments: Between 5% - 50% of trust value.
Trust term: Not to exceed 20 years or life.
Charity receives all trust assets upon the death of the income beneficiary or at the end of the trust term.
Tax deduction can be carried forward a maximum of 5 years following the initial contribution.
CRUT Advantages
Current income tax deduction. Amount = PV of the remainder interest.
Income to the grantor or non-charity beneficiaries.
Support for grantor or beneficiaries.
Giving to charity.
Assets within trust accumulate free of taxation.
CRUT Disadvantages
Contributions to the trust are irrevocable. Grantor loses control over the property.
Annual revaluation of trust assets may result in lower payments if investments under perform.
Income received may be subject to ordinary income or capital gains taxes.
TAX deduction from a CRUT
Total available tax deduction = present value (PV) of the remainder interest
CRUT deductions are eligible for a carry forward for 5 years after the initial contribution.
Deduction pool = PV of the remainder interest - current year deduction (available for 5 years to exhaust)
Step-up in Basis
Basis = cost of the asset
= inherited assets receive decedent’s new basis + the owner’s current basis int he property (0 if you inherit the asset fully)
Any gain after the step-up in basis are considered LONG-TERM GAINS (FED taxes only, state taxes may be different)
(Step-up in basis doesn’t apply to assets in qualified accounts)
Q-TIP Trust
QTIP (Qualified Terminable Interest Property) Trusts
AKA - C-Trust
Provides the BENE spouse with INCOME FOR LIFE, qualifies the TRUST PROPERTY for the MARITAL DEDUCTION and gives trust CORPUS TO CHILDREN from a previous marriage.
Q-TIP Trust and Marital Deductions
can be subject to the marital deduction in the decedent’s estate if the executor qualifies the terminable interest property “QTIP” for the marital deduction.
When are QTIP Trust established?
Q-TIP trusts are established when the decedent spouse wants to:
Provide the beneficiary spouse with income for life.
Receive an estate tax marital deduction.
Give trust corpus to children from a previous marriage.
How do QTIPs Work?
The surviving spouse must receive all trust income annually. The spouse may receive distributions of corpus at the trustee’s discretion.
Corpus passes to remainder beneficiaries designated by the decedent, at the beneficiary spouse’s death.
Note: This is a terminable interest trust.
Qualifies the decedent’s estate for the marital deduction.
Executor elects Q-TIP treatment on Form 706.
QTIP - Taxation
Property passes (Gift & Estate) tax-free under marital deductions.
All trust income goes to surviving spouse distributed at annually for life.
Upon Surviving spouses death, the assets pass tax-free to children from previous marriages.
Surviving spouses estate will pay taxes on the corpus passed to the beneficiaries. (Assets are included in the surviving spouses’s estate for tax purposes. )
ILIT
An Irrevocable Life Insurance Trust (ILIT)
Grantor transfers existing LI policy into ILIT or sends cash to buy a new LI (i.e. send premiums).
Owner of LI in ILIT: Turst
Beneficiary in the LI = Trust
Insured = Grantor
Death benefits of IL can go to a non-trust beneficiary
Bypass Trusts - Purpose
B-Trusts For Spousal Transfers
AKA credit shelter trust; family trust
Avoids “over-qualifying” the decedent spouse’s estate for the marital deduction, by utilizing the decedent’s maximum unified credit ($13.61MM in 2024)
Allows the surviving spouse to obtain income as needed.
Trust assets are not included in the surviving spouse’s estate at death.
B-Trust
B-Trusts For Spousal Transfers
AKA
credit shelter trust
OR
family trust
Spousal Income from a B-Trust
The surviving spouse can obtain income “as needed” from the trustee.
The income interest is terminable interest property (TIP).
The decedent spouse cannot receive a marital deduction on their estate tax return.
B-Trust Funding
Established during life: Inter-Vivos revocable trust
Established at death: Testamentary Bypass trust
B-Trust Creation
The decedent spouse determines the trust beneficiaries when the trust is created (e.g., Surviving Spouse; Children).
Trust is funded with property solely owned by the decedent.
First to die spouse:
1. Sets Trust Terms
2. General POA
3. Is taxed upon transfer of $ to trust
4. Uses exemption to offset actual tax
escapes Estate Tax at death on B-Trust assets
What happens to surviving spouses estate in B-Trust?
Property “by-passes” inclusion in the surviving spouse’s estate.
The spouse can be given a limited power of appointment with an ascertainable standard (HEMS) to receive distributions from trust income and corpus.
The spouse can exercise a limited power of appointment to distribute assets to the beneficiaries.
The spouse can be given a 5 x 5 power of appointment over the trust corpus.
