Estate Planning

Question 0

What are the exceptions to the terminable interest rule with respect to property that qualifies for the estate tax marital deduction?

Answer 0

1. The spouse must actually survive the condition for the property to be qualified for the estate tax marital deduction. If the spouse does not survive, the property is not qualified.
2. The present value of the annuity or expected unitrust payment to the spouse will qualify for the marital deduction. The present value of the remainder interest will qualify for the charitable deduction.

Question 1

The _______ is the person appointed by a court to manage the estate of a decedent who died without a valid will.

Answer 1

Answer: An administrator is similar to an executor. They differ in that an administrator administers an intestate succession, while an executor administrates a testate succession.

Question 2

Qualified Disclaimer Time Frame!

Answer 2

A qualified disclaimer must be made within 9 months of the later of the day on which the transfer creating the interest was made on which the person making the disclaimer reaches age 21

Question 3

A section 6166 election requires that the business interest of the decedent must exceed…

Answer 3

Answer: 35% of his/her adjusted gross estate.

In addition, the business interest can be in a partnership, sole proprietorship, or corporation and the decedent must have been actively carrying on the business at the time of the decedent’s death.

Question 4

pay on death/transfer on death

Answer 4

1. Totten trusts - form of trust; back account titled “Depositor” in trust for beneficiary
2. Savings account - bank account has named beneficiary to receive the balance of holder’s account at holder’s death
3. Securities - TOD
4. Do not pass thru probate

Question 5

SCIN

** Usually to family members

Answer 5

1. minimize estate tax
2. self canceling note that cancels at seller’s death
   a. Value of note canceled at death of seller not included in seller’s gross estate
3. Remaining unrecognized gain for sale inherent in SCIN must be reported on estate’s income tax return (NOT included in G.E).

Question 6

SCIN

Answer 6

1. Transaction is a sale - seller will have capital gain, ordinary income if depreciable property) and return of capital
2. Sale is for FMV and buyer pays premium
   3 Removes assets from Gross Estate
3. Used when seller is in ill health
4. For specified term
5. No step up to FMV at death of seller
6. Purchasing power risk to seller
7. Interest rate risk to seller
8. No Minority discounts; No annual exclusion (not a gift); Do not used applicable credit amount

Question 7

Private Annuities

Answer 7

1. Sale of asset (usually related party), in exchange for an unsecured promise to pay a lifetime annuity to the seller.
2. No gift and no gift tax as long as value transferred equals the value of the property received (PV of annuity)
3. No immediate tax but gain reported similar as installment sale. Gain recognzied using exclusion ratio, similar to annuity.
   a. Ordinary income is interest component
   b. Return of basis based on exclusion ratio
4. No security
5. If seller outlines life expectancy, the buyer will have made a bad bargain, and he seller’s gross estate must include all the annuity payments received during life but not consumed before death. The seller could use his annual exclusion and forgive up to 14k or split gift of 28k without any gift tax
6. Used when seller not expected to live full life
7. Interest not deductible to buyer for income tax

Question 8

Cross Purchase Buy Sell Agreement

Answer 8

1. Under cross purchase arrangement a partner/shareholder purchases sufficient life insurance on the lives of all other partners/shareholders to assure sufficient liquidity to buy out deceased or disabled partner/shareholder.

Question 9

Entity Buy Sell Agreement

Answer 9

1. An entity agreement is an alternative to the cross purchase arrangement where the entity itself buys the insurance policies on each partner or shareholer. The advantage is that the number of policies is reduced.
2. Premiums are not tax deductible and proceeds are not includible in taxable income

Question 10

Stock Redemption Buy Sell Agreement

Answer 10

1. In a stock redemption buy sell agreement the corporation purchases separate life insurance policy on life of each shareholder.
2. The Corporation is the purchaser, owner and premium payer. The amount of insurance on each shareholder is equal to the respective shareholder’s interest in the business.

Question 11

Bargain Sale

Answer 11

1. The property sold will not be included in seller’s gross estate upon death, and the portion of the property that is considered a taxable gift will be added back to the seller’s taxable estate (as a prior gift) in arriving at the estate tax base.
2. The gift portion will qualify for the annual exclusion if it is a completed gift.

Question 12

steve owns property with a basis of 50k, and a current value of 140k, which he sells to his son, Murray, for 90k. Steve will have a taxable gain of $40k, (90k sales price less 50k basis). Steve has also made a gift of $50k, (140k - 90k). What is the gift and will it be eligible for the annual exclusion?

Answer 12

The gift is 50k and yes will be eligible for the annual exclusion

Question 13

Gift/leaseback

Answer 13

1. Fully depreciated business property (vehicles, equipment) is gifted to a family member in a lower tax bracket by the donor/business owner. It is then leased back to the donor, providing income to the donee while the donor still has the use of the asset in the business, gaining a lease expense deduction in the process.

Question 14

SCIN

Answer 14

1. The unpaid principal balance of the notes that are canceled at death of the seller are not included in Gross Estate.
2. Any unrecognized gain inherent in these notes must be reported on the estate income tax return 1041.

Question 15

Difference between SCIN and Private Annuity

Answer 15

1. SCIN self canceling installment note secured by an asset that cancel’s at seller’s death.
2. Private annuity sale of asset in exchange for an unsecured promise to pay a lifetime annuity to the transferor.

Question 16

Private Annuity

Answer 16

1. Ceases at seller’s death and not included in transferor’s Gross Estate
2. No security or be collateralized
3. No gift tax.
4. Gain recognized using an exclusion ratio

Question 17

Private Annuity

Answer 17

1. If the income from the asset is used to pay the annuity payment to the seller, the IRS may deem that the seller retrain an income interest in the asset and include the asset in the seller’s gross estate.
2. Buyer must be able to prove that the annuity payments are paid from other assets than the asset purchased with the annuity to avoid inclusion in the seller’s gross estate.
3. If annuitant outlives life expectancy, the payor will have made a bad bargain and the annuitant will include all the annuity payments not consumed in his estate. However, the transferor could use his annual exclusion for 14k with gift splitting of 28k.

Question 18

Family Limited Partnership

Answer 18

1. FLP’s provide creditor protection for limited partners.
2. Reduce impact on transferor’s gift and estate tax
3. Ability of Gen. Partners to make substantial gifts yet maintain control of the partnership assets
4. Continuing control of income from transferred assets because distributions from an FLP must be authorized by general partners.
5. Partnership assets separate assets and not marital assets.
6. Reduce probate cost with respect to real estate in other states. No ancilary adm required.

Question 19

Recapitalization - an estate freezing technique for coporations

Recapitalization is a lifetime transfer technique for coporations

Senior Family Member retains the preferred voting stock and gives the common nonvoting stock to the children

Answer 19

1. Current common stock traded for preferred stock
2. Owner retains preferred stock and gives the common stock to the children.
3. Limits the amount included in the owner’s estate to the value of the preferred stock
4. Any appreciation that occurs after the recapitalization and gifting of common stock is attributed to the common stock, which keeps the appreciation out of the owner’s estate.
5. Section 2701 allows some estate freezing but generally the preferred stock is valued at zero, and so the gift becomes the full value of the business.
6. Under certain conditions, (preferred stock is cumulative), some value may be assigned to the preferred stock

Question 20

GRT’s Grantor Retained Trusts

Answer 20

1. GRAT (Grantor Retained Annuity Trust)
2. GRUT (Grantor Retained Unitrust)
3. Qualified Personal Residence Trust (QPRT)
   a. Also called GRIT “Grantor Retained Interest Trust”
   b. Dynasty Trust - allows donor to pass wealth from generation to generation without payment of transfer taxes, including estate and gift tax and the Generation Skipping Tax

Question 21

GRAT Grantor Retained Annuity Trust

Answer 21

1. Appreciating assets transferred to trust with the income paid to grantor during term. Designed to produce estate tax savings for the grantor. (Freezes value at trust creation is grantor outlives trust term.) Income taxed to Grantor during life.
2. Grantor receives annual payment either fixed amount or fixed %
3. Not included in G.E. unless grantor dies within income period (Term of Trust)
4. Gift to the extent the value of the property exceeds income interest calculated at time of creation. this is the remainder interest.
5. A GRAT is usually used with a family member and where the transferor has a better than average probability to outlive the term of trust.

Question 22

GRUT - Grantor Retained Unitrust

Answer 22

1. makes payments at least annually of a fixed % of net fair market value of trust assets as determined annually

Question 23

Qualified Personal Residence Trust QORT

Also called: GRIT - Grantor Retained Interest Trust

Answer 23

1. Grantor transfers personal residence to a trust and retains right to live in residence during term of trust.
2. Value of future-interest gift to remainder man = FMV discounted for number of trust term years.
3. No Limit on trust term, if transferor lives beyond term of trust, there is no inclusion of the asset in Gross Estate
4. If transferor dies before the expiration of the trust term, the property is included in the gross estate at the FMV at the date of death.

Question 24

Dynasty Trust

Answer 24

1. Technique that allows donor to pass wealth from generation to generation without payment of transfer taxes, including estate and gift tax and the GSTT.
2. Irrevocable
3. Term - may be subject to rule against perpetuities (a term measured by a life or lives at it’s creation plus 21 years)
4. Takes advantage of the lifetime exclusion
5. Usually limits distributions to HEMS

Question 25

Regarding a QPRT…

Answer 25

1. With a QPRT, the grantor must survive the trust term to realize any estate tax savings.
2. The grantor will have a taxable gift upon the creation of the QPRT

Question 26

Transfers not subject to gift tax

Answer 26

1. Legal support - Alimony and Child Support
2. Gift to spouses - gifts to spouses are part of taxable gifts, but the unlimited marital deduction usually eliminates any tax. Present interest gifts to an alien spouse are limited to an annual exclusion of $143,000
3. Annual exclusion 14k of gifts to each donee
   a. Present interest qualify! Future gifts do not!

Question 27

Other transfers not subject to gift tax

Answer 27

1. Disclaimed property - a qualified disclaimer treats the bequest as having never occurred
2. Qualified Transfers - medical expenses and tuition paid directly to the provider are not taxable gifts
3. Property Settlements between divorcing spouses not gifts
4. Interest on below market, interest rate loans
   a. To shareholders
   b. To ER
   c. Imputed interest on gift loans less than $10k
5. Charitable gifts

Question 28

Transfers not subject to gift tax

Answer 28

1. Donations to political organizations
2. Qualified disclaimers
3. Qualified transfers: Medical and Education direct payments to institutions.
4. Property settlements between divorcing spouses

Question 29

Transfers that are deductible for determining taxable gifts

Answer 29

1. Charitable gifts for donors who are US citizens or residents
2. Gifts and transfers between spouses are deductible, provided the transfer is not a terminable interest or meets an exception to terminable interest rules.
3. Noncitizen spouse, only the first $143,000 per year of gifts of a present interest not subject to gift tax (special annual exclusion)
4. For noncitizen spouse, all gifts of a future interest are subject to gift tax

Question 30

Valuation of a Gift

Answer 30

1. FMV on the date of the gift
2. Any consideration received by the donor reduces the value of the gift
3. For securities, the value is the average of the high and low prices on the date of the gift or date of death.
   a. Value of stock the average of the high and low prices on the date of the gift.

Question 31

Life Estate and Remainder Interests

Answer 31

1. A life estate is the right to possession, enjoyment and profit from property during the person’s lifetime.
2. A remainder interest is an interest in property that begins in the future.
   a. Gift tax value of a remainder interest is the present value of the remainder interest on the date of the gift.
   b. US IRS Table S to determine present value factor.

Question 32

Liability for Gift Tax

Answer 32

1. Donor is liable for any gift tax due
2. Donee not subject to gift tax or income tax on the gift. However, if the donor fails topay, the donee will be liable.
3. Net gifts occur when the donor and donee agree, prior to the gift, that the donee will pay any gift tax due.

Question 33

Net gifts and tax

Answer 33

1. Net gifts occur when the donor and donee agree prior to the gift, that the donee will pay any gift tax due.
   a. This is considered part sale and part gift, causing the donee to realize taxable income to the extent that the gift tax paid by the donee exceeds the donor’s adjusted basis.
   b. Net gifts are an appropriate technique when donor does not have sufficient liquid investments (cash) to pay the gift tax due.
   c. This usually occurs when the lifetime credit is not longer available for the gift to the donee; otherwise, by law, the donor would have to utilize the lifetime credit of $2,045,800.
   d. If the annual exclusion is available, it is deducted from the FMV of the gift before calculating the gift tax due.

Question 34

Gift Splitting

Answer 34

1. Annual exclusion can be doubled to 28k per donee
2. Gift tax return Form 709 required
3. Gifts of community property assets are joint gifts, and do not require gift splitting until the gift is greater than 28k (becomes a taxable gift)

Question 35

Crummey Provision (Power to Withdraw)

Answer 35

1. Allows a gift of a future interest to qualify for the annual exclusion by making it a gift of a present interest by giving the name beneficiary the power to withdraw funds.
2. The Crummey power holder then lapses the power.
   a. Withdrawal usually limited no lesser of amount contributed to trust or annual exclusion
   b. If multiple beneficiaries - withdrawal also limited to greater of 5% of contribution or $5,000 to avoid gift taxes due.

Question 36

To be subject to the reporting provisions of the Securities Act of 1934 …

Answer 36

1. Must have shares listed on a national security exchange
2. At least 500 shareholders
3. Total gross assets of at least 5 million

Question 37

when a beneficiary receives the death benefit from a life insurance policy funded with a qualified plan, the taxable portion equals…

Answer 37

Answer; the cash surrender value of the policy minus any costs included in the participant’s income during the participant’s life

Question 38

PAP Auto Policy provides four types of insurance Coverage

Answer 38

Part A: Liability Coverage
Part B: Medical Payments Coverage
Part C: Uninsured Motorists Coverage
Part D: Coverage for Damage to Your Auto
A PAP can be written on eligible vehicles such as private passenger vehicles that weigh less than $10k

Question 39

All the following economic factors that have been used in estimating expected returns using Arbitage Pricing Theory (APT)

Answer 39

1. Unanticipated changes in industrial production
2. Unanticipated changes in the term structure of interest rates
3. Changes in Expected Inflation.

**Changes in tax rates is not used to estimated expected returns under APT

Question 40

Strategic Asset Allocation

Answer 40

Strategic Asset Allocation involves selection of the correct asset allocation based on risk tolerance of the client, economic forecasts, and expectations of selected asset classes and rebalancing once or twice per year to keep the portfolio with the parameters of the desired strategic mix.

Question 41

The top down approach to fundamental analysis

Answer 41

1. The top-down approach to fundamental analysis begins with the economy, the overall market, interest rates, and inflation; continues with likely industry prospectes, and finally analyzes individual companies.
2. When investors use the top-down approach to security analysis, they should contentrate on a company’s expected stream of benefits, earnings and dividends, and the required rate of return.

Question 42

Regarding the exemption amount used to reduce AMT…

Answer 42

1. The applicable exclusion amount is determined by the taxpayer’s filing status and is phased out for upper income taxpayers.
   2 . The phase out of the AMT exemption is determined by calculating the amount of the taxpayer’s AMTI that is in excess of a specified threshold and then multiplying that excess by 25%.

Question 43

Target Benefit Plans

Answer 43

1. Have a fixed contribution formula that is based on an actuarial contribution and the participant’s age at plan inception.
2. The plan allows higher contributions for older EE’s
3. Though the plan is technically a defined contribution plan, it’s intention is to fund for a targeted benefit at retirement, based on EE’s a age and number of years to retirement. The actual contributions may or may not achieve the targeted benefit, therefore, the retirement benefit is not guaranteed.
4. The plan sponsor does not actuarially adjust the participant’s contribution percentage annually.

Question 44

CFP Principle of Fairness

Answer 44

1. Rules 1.2 and 2.2 explicitly require that the certificant disclose material information relevant to the professional relationship, including the certificant’s address, telephone number, credentials, qualifications, licenses and compensation structure.