Estate Planning

Question 1

Grantor Trust Basic Rules

Answer 1

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

Question 2

Grantor Trust rights and taxation

Answer 2

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

Question 3

GRAT

Answer 3

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

Question 4

GRUT

Answer 4

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

Question 5

CLT

Answer 5

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.

Question 6

CLT - Taxation

Answer 6

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.

Question 7

CLAT

Answer 7

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.

Question 8

CLUT

Answer 8

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.

Question 9

CRT

Answer 9

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.

Question 10

CRT - Taxation

Answer 10

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.

Question 11

CRAT

Answer 11

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.

Question 12

CRUT

Answer 12

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.

Question 13

Grantor Trust - What happens if grantor dies before the trust TERM ENDS

Answer 13

FMV on DOD or FMV on ADV is included in the gross estate of the grantor

Question 14

Grantor Trust - What happens to corpus/principle at the end of the trust term?

Answer 14

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

Question 15

GRAT and Client Suitability

Answer 15

Clients who have conservative tolerance and desire fixed income for a trust term

Question 16

GRUT and Client Suitability

Answer 16

Clients who have moderate to aggressive tolerance and desire for income to out pace inflation

Question 17

QPRT

Answer 17

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.

Question 18

QPRT - Basis and Taxation

Answer 18

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

Question 19

Taxation of Non-grantor trust

Answer 19

Any retained earnings/income in non-grantor trust is taxed at the trust level , using CFP Provided tax tables (page 3)

Question 20

What happens when non-grantor trust distributes income to beneficiaries

Answer 20

Non-grantor trust gets to take deduction for the amount it distributed to beneficiary.

Beneficiary has to pay the tax

Question 21

DNI - Distributable Net Income

Answer 21

Maximum amount that can be taxed to the beneficiaries

Question 22

What happens when non-grantor trust distributes more to the beneficiary than earned income?

Answer 22

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

Question 23

What happens when beneficiary receives more distribution than DNI?

Answer 23

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.

Question 24

Estate Tax Formula

Answer 24

Gross Estate
Minus: Expenses, debts, taxes, losses
Adjusted Gross Estate
Minus: Marital deduction
Minus: Charitable deduction
Taxable Estate

Question 25

Donor Deductions for a gift to a spouse

Answer 25

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

Question 26

Donor Deductions for a gift to charity

Answer 26

A decedent may receive a charitable estate tax deduction for property passing to a qualified charity. Calculated on Form 706: Estate Tax Return.

Question 27

Charitable Gift Annuities

Answer 27

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 28

Pooled Income Funds

Answer 28

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 29

Private Foundation

Answer 29

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.

The foundation must distribute a minimum of 5% of the assets to public charities every year.

Question 30

Donor-Advised Funds

Answer 30

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 31

When is CLAT a best choice?

Answer 31

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.

Question 32

CLAT Advantages

Answer 32

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.

Question 33

CLAT Disadvantages

Answer 33

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.

Question 34

CLUT Advantages

Answer 34

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.’

Question 35

CLUT Disadvantages

Answer 35

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.

Question 36

CRAT - Income Payments, Term & Taxation

Answer 36

Income payments: Between 5% - 50% of trust value.
I
f 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.

Question 37

CRAT Advantages

Answer 37

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.

Question 38

CRAT Disadvantages

Answer 38

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.

Question 39

CRUT - Income, term and taxation

Answer 39

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.

Question 40

CRUT Advantages

Answer 40

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.

Question 41

CRUT Disadvantages

Answer 41

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.

Question 42

TAX deduction from a CRUT

Answer 42

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)