Estate Planning and Beyond Flashcards
(105 cards)
1
Q
How are Estates and Trusts Taxed Annually?
What are the minimum triggers that require them to file?
A
Both file form 1041
Both must file if income > $600, or if they have a non-resident beneficiary.
Estate or trust income must be reported even if you haven’t received it yet.
2
Q
What are Grantor, Tainted, or Defective Trusts? Who is taxed on trust income with these trusts?
A
Trusts wherein the grantor retains an interest. In these cases, the grantor is taxed on income produced by the trust.
3
Q
To whom is money used to pay premiums for LI in an ILIT taxed?
A
It is taxed to the grantor
4
Q
What is a reversionary interest in a trust?
A
When the trust corpus goes back to the grantor after the trust term.
5
Q
4 Characteristics of a Simple Trust:
- Can it accumulate its own income?
- Does it file a tax return? Why?
- Can it make charitable gifts?
- Can it distribute its corpus?
A
- Pays out all income
- Beneficiaries are taxed on income.
- Files a tax return to show where income went.
- Cannot make charitable gifts
- Cannot distribute its corpus
6
Q
4 Characteristics of a Complex Trust
- What are their options for their income?
- Can they distribute to charities?
- Can they distribute corpus?
- Who pays taxes on their income?
A
- Can distribute or accumulate income.
- Can distribute to charities
- Can distribute corpus
- Pays its own taxes.
7
Q
Revocable or Living Trusts:
- Who pays taxes on their income?
- Are transfers into them taxable?
- When do they become irrevocable?
A
- All income earned by a revocable trust is taxed to the grantor.
- Transfers into them are not taxed b/c they’re not completed gifts
- Become irrevocable at death
8
Q
Three Irrevocable Trust Characteristics
- Can the grantor change them?
- Can they be a grantor trust?
- Can they be either simple or complex?
A
- Grantor cannot change them in any way.
- Can be a grantor trust or not.
- Can be a simple or complex trust
9
Q
What’s the difference (usually) between cost basis and adjusted cost basis?
A
Cost basis = all purchase expenses.
Adj. cost basis = Cost basis - depreciation claimed.
10
Q
What step up to FMV do STD spouses get in community property states?
A
100%
11
Q
When did the US begin using MACRS?
What is required to make SL recovery an option?
What convention is used in the year of acquisition?
What convention is used if > 40% of property is put into service during the 4th quarter of the year?
A
- Used to recover costs in all business property put into use after 1986.
- SL recovery is an option within MACRS, but 1/2 year convention must be used.
- 1/2 year convention is used in the year of acquisition.
- Mid 1/4 convention is used if > 40% of property is put into service during the 4th quarter of the year.
12
Q
What is 5 year property?
A
Cars, trucks and computers.
13
Q
What is 7-year property?
A
Office furniture and fixtures
14
Q
What are the depreciation terms for residential and commercial real estate?
A
27.5 years for residential.
39 years for commercial.
15
Q
What is depreciation recapture? At what rate is it taxed?
A
Depreciation claimed is subtracted from basis to determine adjusted basis. When a property is sold for more than its adjusted basis, depreciation is recaptured up to the amount of the original basis.
For machines it’s recaptured as OI
For property it’s recaptured as OI for accelerated depreciation, 25% for SL depreciation?
16
Q
What is Section 179 expensing? What are it’s limits? Can it be used to create a loss? How long can unused 179 expense be carried forward?
A
It’s essentially 100% depreciation in the first year.
Can’t be used to create a loss, but can be carried forward indefinitely.
If business income > 2.62M you get a dollar for dollar reduction in the 179 cap.
All earned income, even from other sources, can be weighted against 179 to maximize how much you can take.
17
Q
What is the holding period on inherited property?
A
Always long-term. Like Laila’s new house.
18
Q
How is rental real estate taxed at sale?
A
Original cost - adj. basis is taxed at 25%
FMV - original cost = LTCG.
If Accelerated depreciation taken, it’s taxed as OI.
19
Q
How do you calculate personal casualty loss in a federally declared disaster ?
Hint: 4 steps
A
- Lesser of basis or FMV.
- Less insurance coverage.
- Less $100 floor.
- Less 10% of AGI.
20
Q
What business entity do you want if you want liability protection and losses to deduct from your personal income tax liability?
A
S-corp.
21
Q
How do you calculate how much an annuity will pay in total in a case?
A
Find the life expectancy of the person (usually in the profile in the first part of the case) and multiply by the payment amount.
22
Q
Is worker’s comp included in income?
A
No.
23
Q
Is depreciated business equipment a judicious gift from a financial standpoint?
A
Yes. There’s no more losses for you to take.
24
Q
Are entertainment expenses deductible?
Is there such a thing as corporate AMT?
A
No and no.
25
What is the maximum charitable deduction you can claim in 1 year?
60% of AGI
26
What is the maximum charitable deduction you can claim in one year to public charities?
Private charities?
50% of AGI for public charities
| 30% of AGI for private charities
27
For donations of LTCG property how do you compute what donation you can claim? How do you remember this? What happens with any unused deduction?
You can claim either 30% of FMV, or 50% of basis.
You can remember this because FMV is 3 letters and basis is 5
Unused deduction can be carried forward for 5 years (so you get 6 total).
28
What happens if you die with unused charitable deduction?
Your estate can claim 1 year worth of deduction, but the rest is lost.
29
What are the 4 steps for solving charitable deduction problems?
1. Compute 60% of AGI. This is the maximum deduction you can take.
2. Calculate donations of LTCG assets to public charities. For these you can deduct basis up to 50% of AGI, or FMV up to 30% of AGI.
3. Add STCG assets, inventory donations, works of art for unrelated use. Deduct basis, up to 50% of AGI.
4 Add donations to private charities up to 30% of AGI.
30
Why is selling a work of art and giving the $ to charity usually not a good idea?
Selling involves a commission and other costs.
31
If a question doesn't say "in today's dollars" should you adjust it for inflation?
Probably not.
32
Is there estate tax on a charitable gift of the remainder of an estate?
No.
33
How might you maximize a pension benefit if you have a younger spouse?
Take pure life instead of joint-and-survivor and use some of the excess to buy an LI policy with your spouse as beneficiary.
34
For SS, what is a fully insured worker? When are they entitled to retirement benefits? When are they entitled to disability benefits?
A fully insured worker has worked 40 quarters.
They are eligible for retirement benefits at 62.
They are eligible for disability if either
- They've been disabled for 12 months and they expect to be disabled for another 12 months.
- They have a disability expected to end in death, and have completed a 5-month waiting period.
35
When does the spouse of a retired or disabled worker get benefits?
Hint: 3 possible ways
If they are at least 62.
If they're caring for a child under 16.
If they're caring for a child 16 or over who was disabled before 22.
36
When does the surviving child of a deceased, disabled, or retired worker get benefits?
If they're under 19 and in HS.
| If they were disabled before 22.
37
What is the lump sum benefit of $255 and who gets it?
The spouse or dependent child who was living with a deceased worker. It was meant to pay funeral costs.
38
When does a divorced spouse get retirement benefits? What conditions must they meet?
At 62 if they were married for 10 years and has been divorced for 2 (and hasn't remarried)
39
How do you calculate someone's SS retirement benefit if their benefits are reduced because they started them before reaching FRA?
Start with their full retirement age (67)
Their benefit is reduced for each month they retire early.
The calculation is # of months early ÷ 180 = % of benefits reduced.
40
What happens to workers receiving SS who keep working?
1. If they've reached FRA they get their full benefit.
2. If they start benefits before FRA and keep working there are 2 calculations:
- If younger than FRA for all of 2021, benefits reduce $1 for every $2 earned above $18,960.
- If they reach FRA in 2021, benefits reduce $1 for every $3 above $50,520.
Deductions continue until FRA is reached.
41
What 3 things use BEGIN mode? Do mortgage payments?
College tuition payments, retirement benefits, family needs.
| Mortgage payments are due at the end of the month; they use END mode.
42
What does a pour-over will do?
Moves all unaccounted for things into a testamentary trust.
43
Is there any US state in which you can disinherit your spouse completely and they cannot elect against the will?
Can you disinherit them in a post-nup?
No, not in any state. Every state allows a dis-inherited spouse to elect against the will.
You can disinherit them in a post-nup because they have to sign it for it to be valid.
44
Is a GRIT contribution a completed gift?
No. The kids haven't received it yet.
45
What is required for a marital deduction or a QTIP for that matter?
The surviving spouse must get all the property with no strings attached.
In the case of a QTIP, they must get all the income to themselves with no strings attached.
46
What is provisional income?
| What is it used for?
Provisional income is MAGI + 1/2 of SS (MAGI = AGI + Muni income).
It's used to calculate what % of your SS benefits are taxable.
47
At what provisional income thresholds are your SS benefits taxable?
50% of your benefits are taxable if your income is over 25k single, or 32k MFJ.
85% of your benefits are taxable if your provisional income is over 34k single, and over 44k MFJ
48
What is the waiting period for SS disability?
5 months. Payments start on the first day of the 6th month.
49
How much SS retirement benefit can a spouse claim if still married?
Theirs or 50% of their husbands.
| If you made 40 qtrs and more than the SS wage base then your benefits are probably more.
50
Are QP's the only ones that comply with ERISA?
| What is required of them, and what do they get?
They cannot discriminate toward HC's
ER's get a tax deduction when money is deposited into the plan.
Earnings accrue tax free until distribution.
51
When are retirement earnings NOT taxed at distribution?
NUA under stock bonus plans.
ESOPs
10-year averaging
52
What are the 2 types of DB plans?
What are the 2 big downsides of DB plans?
Whom do they favor? Do they integrate with SS? Allow past service credits?
Defined Benefit and Cash Balance are the 2 types of DB plans
(Cash balance are the fake account plans)
DB's are expensive to administer, they require stable $ flow
They favor older workers, integrate with SS, allow past service credits
53
Truths about Money Purchase and Target Benefit plans
- Do they qualify for ERISA?
- Do they integrate with SS?
- What is their max tax deduction?
- Do they involve fixed contributions and stable cash flow?
They both qualify with ERISA, integrate with SS, allow up to 25% covered comp tax deduction, involve fixed contributions and stable cash flow.
54
What's the diff between Money Purchase and Target Benefit plans?
Whom they favor. Target Benefit favors older workers, Money purchase favors younger ones, relatively.
55
5 characteristics of Profit Sharing Plans
- What is the ERISA requirement regarding contributions?
- Are they DC or DB plans?
- What is the maximum ER deduction?
- What kind of business are they most attractive to?
- Can they have CODA features?
1. Contributions are flexible, but they must be recurring and substantial.
2. A type of DC plan.
3. 25% covered comp up to 290k deduction available for ER.
4. Great for uneven $ flow business.
5. Can have CODA 401k feature.
56
4 characteristics of a Stock Bonus Plan
- What’s the ER’s max deduction?
- Are the contributions flexible?
- How much company stock can it own?
- Can they integrate with SS? Can ESOPs integrate with SS?
1. ER can deduct 25% of covered comp.
2. Flexible contribution, works with uneven $flow business.
3. Can be 100% invested in company stock.
4. ESOPs cannot integrate with SS.
57
What is the max # of EE's a company can have and still do a SIMPLE?
What match is required by the ER?
What is the max deferral?
SIMPLEs are for companies with 100 employees or fewer.
The company must match deferrals up to 3%, or make an overall contribution of 2%
The max EE deferral is $13,500.
58
What is the (draconian, not-so-simple) SIMPLE penalty?
| What is the last day a company can open a SIMPLE?
Employees must wait 2 years from the time they open a SIMPLE to make a withdrawal. If they don't the penalty is 25% of earnings withdrawn.
The last day a SIMPLE can be opened is 10/1 of the tax year in question.
59
Are 457 plans ERISA qualified? Are public ones subject to creditors?
No and yes.
60
Are Thrift Plans, 403b's, SEP's and SIMPLEs ERISA qualified?
No. None of them.
61
How is funding determined in a Money Purchase DC plan?
| How much is deductible to the ER?
The EE gets a flat % of their salary contributed to the plan, up to $290,000.
The ER can deduct up to 25% of covered comp.
62
What type of company would want to use a Money Purchase DC plan?
What type of cash flow is required? How are MPDC plans to administer and explain?
A company that wants to retain key employees, or who has young, well-paid EE's.
A company that wants a plan that is simple to administer and explain.
MPDC plans require stable cash flow b-c contributions are mandatory.
63
How do Target Benefit DC Plans work? What is the max contribution? What does the EE ultimately receive? Whom do they benefit?
TBDC plans use an actuary at the start to determine contribution amounts and assume a certain rate of return to target a benefit for the EE.
The max contribution is $58k/yr or 100% of salary, even if the actuary calls for more.
The EE ultimately receives whatever amount is in their account since they bear the investment risk.
TBDC plans benefit older employees.
64
What contributions are required of a profit sharing plan? Why do they appeal to companies? Whom do they benefit, and what usually happens to forfeitures?
Profit sharing plans must make "substantial and recurring contributions". They can skip 2 out of 5 years.
They appeal to companies because their funding is so flexible, and they incentivize EEs to make the company profitable.
They benefit younger EEs.
65
When would an employer select a 401k-only plan?
Must the EEs contribute?
What do they get if they don't?
What is the max contribution?
Are contributions subject to FICA and FUTA?
401k-only plans are good for the ER who has very little $ on hand.
401k's are a cash deferral arrangement added to a profit sharing plan.
EE's are not required to contribute; they can just take $ instead. The max contribution is $19,500 + $6,500 if over 50. Contributions are subject to FICA and FUTA, but not federal withholding.
66
Inhale.
Exhale
67
What is the difference between Strict Liability and Absolute Liability?
Strict Liability is product liability.
| Absolute liability is for your alligator.
68
If you have a loan on an LI policy and you don't want your death benefit reduced, what dividend option do you choose?
The 5th dividend, or 1-year term
69
What is section 162? What is salary continuation? Why is it a counter-intuitive term?
LI as a bonus. It goes on your W-2 and the bonus is your death benefit is tax free.
Salary continuation, oddly, is LI premiums paid as salary but not on W-2, death benefit in that case is taxable.
70
How is growth of an annuity contract held by a corporation taxed?
Non-humans cannot hold annuity contracts tax free; it's OI that year.
71
How do pre-1988 MEC's lose their grandfather status?
Pre 1988 MEC's were not taxed LIFO for withdrawals. If you increase the benefit amount by > $150k in one year without showing proof of insurability, you've just made a new MEC out of your old MEC, and it loses it's grandfather status.
72
How do you calculate geometric mean using TVM?
1. Add 1 to every number as per the formula.
2. Multiply all the results together.
3. Enter this as FV. Enter -1 as PV, enter N for the number of returns.
4. Solve for i.
73
What's the difference between liquidity and marketability?
Liquidity -- Sell fast without a change in price.
| Marketability -- Sell fast with risk of change in price. Like stocks.
74
How is money made selling calls and puts taxed?
For a hedge position, it's LTCG if the holding period is long enough.
For a speculative position it's OI.
75
What key on the 10b computes St. D.?
OS 8.
76
What's the difference between volatility and variability?
Volatility is measured by Β
| Variability is measured by St. D.
77
How do you tell which of 2 stocks gets better return per unit of risk?
Divide mean return by β.
78
What is time-weighted return? What is it useful for?
TW return is the same as geometric return. It computes investment return without mind to dividends or new money added.
It's useful for comparing the performance of 2 investors.
79
How do you compute risk adjusted return?
Annual return ÷ by B
80
What's the key to TVM problems with zero or OID bonds?
2 payments per year!
81
What's the key to YTM problems with the 10b set on 2 pay per year?
Divide the payment in half!
82
What is a bond buyer's most important consideration?
YTM.
83
What's the shortcut to calculating duration?
If the bond pays a dividend, duration is always < maturity. Choose an answer that's less than maturity, BUT beware of answers that are too close to maturity.
84
What do increasing interest rates do to bond duration?
Shorten it!
85
How do you calculate ROE and what is it?
Return on Equity.
| EPS ÷ book value PER SHARE.
86
How do you calculate dividend payout ratio?
Div per share ÷ earnings per share
87
What risk measure did Markowitz use?
Standard Deviation!
88
3 CML Questions:
- What is the intersection of the CML?
- What is the tangent w/ the Efficient Frontier?
- What does it mean if you move L or R from then tangent?
1. The risk free rate.
2. Optimal portfolio for that investor.
3. To move L, you've sold some risky assets and bought some risk free ones. R = the reverse.
89
What is the market risk premium?
| What is the stock risk premium?
```
Market = rm - rf
Stock = (rm - rf)Β
```
90
Can Fundamental Analysis beat the weak form of the EMH? Can Technical Analysis?
FA, maybe. TA, no.
91
What are EMH anomalies?
Things like the January effect that don't support or beat any level of the EMH.
92
What are the 2 types of Fundamental Analysis? Are they active strategies?
Top Down: Start with broad economic indicators, move to company specifics.
Bottom up: Start with company specifics.
Both are active.
93
What does Technical Analysis look at? Is it an active strategy?
Technical Analysis looks at price trends of a particular stock and tries to time the market. Active strategy.
94
What is the Charting investment strategy?
It assumes stock prices have support levels (floors) and resistance levels (ceilings) and buys and sells when stocks are close to those.
95
What is the minimum r-squared that makes Β viable?
.6! .6 sticks!
96
When is the ex-dividend date? When do you have to buy a stock to get the dividend?
The ex-div date is 1 day b4 the date of record. You must buy a stock on the business day before the ex-div date to get the dividend.
97
Are options and mutual funds marginable?
No.
98
Who regulates initial margins?
| Who regulates maintenance margins?
1. The fed under regulation T.
| 2. The exchanges and FINRA.
99
How do you calculate the maintenance price, or the price below which you get a margin call?
What's the short cut for a 30% mm or a 25% mm?
(1 - im ÷ 1 - mm) x initial price.
The shortcut is multiply initial price by 2/3 and pick the next highest answer. If the mm is 25% just pick the 2/3 number.
100
How do you calculate the amt of a margin call?
Investor must have (mm x current stock price) x # of shares
| Investor actually has current stock price x number of shares - loan
101
Which is true:
- Closed end funds can trade at a premium or discount to their NAVs
- UITs can be purchased on one of the national exchanges
- Open-end funds are negotiable securities
- UITs offer a limited # of shares when issued
Only the first is true. Remember UITs issue units, not shares.
102
Do REITS issue redeemable shares?
| Are they negotiable and traded on exchanges?
No. And Yes
103
Among bonds of = maturity, which type likely has the greatest interest rate risk?
Zeroes.
104
When a bond duration question gives you "comparable bonds are paying 6%" can you use that as y (current yield) in the duration calculation?
Yes
105
Does JTWROS property make both of a married couple your client?
What do you do if one wants to cheat the other in a separation?
Yes and tell them you need to meet with both of them together.
