Estate Planning and Wealth Transfer

Question 1

What are the choices available in planning for incapacity?

Answer 1

• Living will - An advance directive that allows an individual to direct in advance what kind of healthcare they desire or reject in event of incapacity
• DNR - Do not resuscitate declaration that authorizes health care providers to withhold CPR or other measures to restart an individual’s heart
• Healthcare proxy - Designates an individual to make decisions regarding medical treatment in the event the principal is not legally competent
• Also utilize special needs trusts - Type of trust established for beneficiaries who have a disability and are receiving Social Security benefits or other forms of state or federal assistance

Question 2

What are the general powers of appointment?

Answer 2

• General powers of appointment allow the holder of the power to distribute assets in an estate as they see fit, no restrictions on what is given and who they give it to
• Broad powers to a holder to dispose of a donor’s property, or to appoint it to anyone they want
• Holder must exercise powers in the manner the donor has specified
• Holder is subject to gift, estate, or GST tax when they transfer property to others

Question 3

What are the special/limited powers of appointment?

Answer 3

• Special powers of appointment allow the holder of the power to distribute an asset as they see fit, but there are restrictions on what they can give out, and who they can give it to
• Holder typically can’t appoint property to themself

Question 4

What are the limitations of general powers of appointment?

Answer 4

• Can be limited on when the holder can transfer property to beneficiaries (lifetime or testamentary on donor’s life)
• Estate that isn’t transferred is considered in the holder’s gross estate, which could lead to estate taxes on the holder’s estate
• When property is transferred/gifted to a beneficiary, there is a lapse of power for the holder, and it insinuates that a gift is being made to the remainderman. This could result in gift taxes for the holder
• If the holder retains any interest in property at death, the entire value of the property will be included in their gross estate
  (?)

Question 5

What are the limitations of special powers of appointment?

Answer 5

Property cannot be appointed to the holder, only to a specified class of beneficiaries

Question 6

Describe a durable/general power of attorney

Answer 6

• Names an agent or attorney-in-fact to handle a principal’s financial affairs
• Effective upon execution or spring into effect upon the occurrence of a specific event
• Can confer very broad or very limited powers on an agent
• Attorney-in-fact is often a close family member. If that person can make gifts to himself, this power could be deemed a general power of appointment for federal tax purposes, and the failure to exercise the power could constitute a taxable gift
• General power of attorney that can have broad powers for the principal. Remains in effect until death. A power of attorney that is not terminated by subsequent disability or incapacity of the principal. General powers remain in effect after a principal becomes incapacitated

Question 7

Describe a nondurable/limited power of attorney

Answer 7

• Limited power of attorney, may only allow the agent to act on the behalf of a principal in a specified manner
• Allows a named agent to act on the behalf of the principal
• Powers cease when the principal becomes incapacitated

Question 8

Health care proxy

Answer 8

• Name an individual to make health care decisions on the principal’s behalf
• Living wills outline a principal’s wishes for the type of medical care to be used

Question 9

Describe springing powers

Answer 9

• Does not become effective until the occurrence of a specified event such as physical or mental incapacity

Question 10

Special needs trust

Answer 10

• Established for individuals who are receiving some sort of government assistance
• Coordinate with state to make sure it does not interfere with beneficiary’s government benefits
• Distributions are considered taxable income
• Can hold an unlimited amount of assets to cover supplemental expenses not covered by Medicaid

Question 11

ABLE account

Answer 11

• Achieving a Better Life Experience
• Functions like a 529 account, only one can be opened per beneficiary. Contributions capped at the annual gift tax exclusion amount
• Can contribute addition amount after gift exclusion amount is met, which is the lesser of the federal poverty line for a one-person household or the beneficiary’s compensation for the taxable year
• Up to $100,000 is exempt from $2,000 resource cap for Medicaid and Supplemental SSI benefits. When account exceeds $100,000, they will lose their eligibility for the monthly SSI benefits
• Qualified distributions are considered tax-free

Question 12

Describe 5-and-5 powers

Answer 12

• A donor gives a holder a noncumulative right of withdrawal
• Holder can withdraw the greater of $5,000 or 5% of trust corpus each year
• Beneficiaries have a present interest in the trust
• A lapse results in a taxable gift made to other trust beneficiaries
• A lapsed amount equal to or less than $5,000 or 5% of the corpus is not taxed
• A withdrawal right that exceeds the greater of $5,000 or 5% of the trust corpus is taxed when a lapse occurs

Question 13

Describe Crummey powers

Answer 13

• Gives trust beneficiaries present interest
• Beneficiaries can withdraw money transferred to the trust for 30 days
• Grantor can take annual exclusions against taxable gifts made to the trust
• Trustees must notify beneficiaries in writing of their withdrawal rights
• Can withdraw the lesser of annual gift exclusion, the amount the beneficiary can withdraw in proportion to the amount contributed to the trust, or the 5-and-5 power
• Lapse results in a gift to the other trust beneficiaries. It’s a future-interest gift
• Crummey beneficiaries must use unified credits to offset taxable lapses. No gift tax occurs if the amount is less than the 5-and-5 rules

Question 14

What components of an estate plan can be handled after a client’s death?

Answer 14

• Valuation of assets
• It’s important to plan for estate wealth transfer to consider taxes, stepped-up basis, which assets will pay for costs of estate, and beneficiaries. Even when an individual is not planning to have an estate large enough to be taxed, having a plan will allow an individual to pass assets to beneficiaries with a more favorable basis.
  (?)

Question 15

Evaluate the circumstances under which the timing of post mortem decisions can impact the estate tax bill

Answer 15

• Making gifts to individuals and passing away in less than three years will have the assets back in the decedent’s gross estate
• The valuation date of assets will determine step-up basis
  (?)

Question 16

What is a domestic partnership?

Answer 16

Individuals that live together without the legal benefit that is awarded to spouses

Question 17

What is non-citizen estate planning?

Answer 17

• Planning for assets to be transferred to a spouse that is not from the US
• The reason this must be planned is because the US will not let assets transfer to a non-US spouse estate-tax free, for fear that the surviving spouse will return to their home country. This would mean that the US doesn’t receive any tax from the assets
• Assets to be transferred to non-citizens must be placed in trusts where the trustee is in the US

Question 18

Describe complex family arrangements

Answer 18

• Complex family arrangements are those that have non-traditional family structures. This may include having more than two parents for children, children from past relationships, unmarried couples, same-sex couples, families of divorce, single parents, etc.
• These relationships add complexity when it comes to planning because more parties are involved and need to be considered, there are potentially fewer tax benefits to work with, and assets might need protection from one or more people if family members do not get along

Question 19

What are estate planning issues for non-traditional relationships?

Answer 19

• Not awarded the same benefits that spouses receive
• The absence of planning could lead to a partner being excluded from inheriting assets
• These relationships can involve multiple children from previous marriages
• Complexity to estate transfers if there are nontraditional relationships in order to ensure that the proper individuals receive assets

Question 20

Differentiate among types of titling for different assets and the rights granted under each titling type

Answer 20

• Intestate
• Will - sole proprietorship, TIC, Community property
• Contract
• Operation of law - TE, JTWROS, Life estate, TOD, Totten trust

Question 21

Compare and contrast the types of property transfers at death

Answer 21

• Intestate - Dying with out a will. States have law that provide rules for how a decedent’s assets will be dispersed if they do not have a will. Rarely do these laws provide the intended disposition of assets, and the assets are subject to probate and probate court
• Will - Any property transferred by will is subject to probate.
• Contract - Bypass probate. Within the property ownership, the owner will list a beneficiary to ensure that the assets are transferred to the beneficiary appropriately
• Operation of law - Assets bypass probate. These heirs will receive assets as opposed to any heirs listed in the will
• For property transfers at death, it’s important to plan to make sure that assets do not have to unnecessarily go through probate, do not miss the intended beneficiary by being overridden by law or contract, and to ensure that assets are available for estate taxes and administration costs that are needed

Question 22

Describe sole proprietorship titling and the rights granted under it

Answer 22

• Lifetime and testamentary control over assets
• Property will pass by will or through intestacy
• The FMV of the property at death (or AVD) will be included in the gross estate
• Subject to probate

Question 23

Describe tenancy in common titling and the rights granted under it

Answer 23

• Each tenant owns a separate, fractional interest in the same property
• FMV of the tenant’s interest in the property is included in their gross estate
• The fractional interest only will receive a step-up in basis at death
• The property must pass by will or intestacy
• Subject to probate

Question 24

Describe community property titling and the rights granted under it

Answer 24

• Limited number of states that utilize this
• Each spouse has a vested interest in one-half of the property acquired during marriage
• Property held outside a trust must pass by will or through intestacy
• Property goes through probate unless it is placed in a trust
• One-half of the value of all community property assets is included in the decedent spouse’s gross estate
• A marital deduction is available to offset the decedent’s estate tax if the property is bequeathed to the surviving spouse
• The entire value of the property is stepped up to the FMV at the decedent spouse’s death

Question 25

Describe contract titling and the rights granted under it

Answer 25

• Passing property to beneficiaries through a contract
• Beneficiaries are listed on accounts and will go to them
• Avoids probate
• Common examples include retirement accounts, 401(k)s

Question 26

Describe tenancy by the entirety titling and the rights granted under it

Answer 26

• Property is jointly owned by the husband and wife
• Decedent spouse includes 50% of the property’s FMV in their gross estate
• Surviving spouse’s new basis is one-half of acquisition cost plus decedent’s stepped-up basis
• Creditors of one spouse cannot attach the other spouse’s interest in property
• Avoids probate

Question 27

Describe joint tenants with rights of survivorship (nonspouse and spouse) titling and the rights granted under it

Answer 27

• Have equal ownership in property. A tenant can sever joint tenancy without the consent of other owners. The interest in property can be reached by the tenant’s creditors. At death, the property passes to surviving joint tenants and it avoids probate
• Nonspouse - Tenants can contribute unequal amounts to acquire the property, but will receive equal ownership. The FMV of the property is included in the decedent’s estate unless the surviving owner contributed to the purchase price. The amount included in the gross estate is based on the percentage they contributed. The survivor’s new basis is their original basis plus the amount included in the decedent’s gross estate
• Spouse - 50% of the property’s FMV is included in the decedent’s gross estate. A marital deduction is available to offset an estate tax of this property. The surviving spouse’s new basis is one-half of the acquisition cost plus the decedent’s stepped-up basis

Question 28

Describe life estate titling and the rights granted under it

Answer 28

• Ownership in property is split into a life estate and a remainder interest
• The life tenant can enjoy a lifetime interest in real property or can receive all income from a trust for life
• The remainder beneficiary receives ownership of the real property or the trust corpus at the life tenant’s death
• Avoids probate

Question 29

What are the circumstances under which titling rights could be chosen or modified for estate planning purposes?

Answer 29

• To ensure that property passes after death as intended
• To ensure that the individual does not pass away intestate
• For most, avoiding probate will be important
• It’s also important to make sure that beneficiaries listed on property coincide with any wills or other requests. Possible that different beneficiaries are listed for different estate plan documents which can add confusion and issues for beneficiaries

Question 30

What is intestate?

Answer 30

Dying intestate means that the will is not active or working and that the assets in an individuals estate does not have instructions on how they should be distributed. It goes to probate for the courts to determine who receives the assets

Question 31

Why is estate planning preferential to a probate scenario?

Answer 31

It is preferential because it allows the decedent prior to death to determine where their assets can go
Probate is a long and expensive process, it is also public information so there is a lack of privacy

Question 32

Compare the financial outcomes of a probate estate or dying intestate with the outcomes of a planned estate

Answer 32

• The probate estate process can be costly to determine who receives the decedent’s property. Will dip into the actual value of the estate and reduce what there is left to transfer. Executor would need to hire an attorney, an accountant, appraisers, and other professionals to help value the estate and manage the taxes
• With a planned estate, there are costs associated, but it is something the individual will pay to have planned during their lifetime. Can be less costly if assets pass through by contract or operation of law and a name is listed as beneficiary

Question 33

Compare the pros and cons of a probate estate or dying intestate with the outcomes of a planned estate

Answer 33

• The probate process involves the court, which may help determine how property is distributed to heirs. This is important if there are contests to the will or titling of property. It also offers protection to creditors and ensures debts get paid. Protection for heirs by barring future creditor claims against the estate. It also provides notice of a decedent’s death, which provides protection for creditors and heirs as well
• The probate process is a public proceeding, meaning that anyone may see the assets in a decedent’s estate and where the assets go to. It is also expensive and takes a long time to complete.
• A planned estate allows an individual to prepare and decide during life how property will be transferred. Provides a quicker and more private way to transfer assets to heirs. More cost effective when it comes to passing assets to heirs. Ensures the individual that after death, property will be transferred appropriately and can also make sure that there is less burden placed on heirs and beneficiaries after death
• It can take time to plan and determine how property will be transferred after death. Depending on the size of the estate, it make also be complex and expensive to work with CPAs, planners, and attorneys to complete the entire estate plan. If documents are not set up properly, the assets may have to go through probate anyway, or more costs may be incurred because the plans and documents were improperly set up

Question 34

What is the current gift tax rate?

Answer 34

18 - 40%

Question 35

What is the current estate tax rate?

Answer 35

10 - 37%, plus 3.8% NIIT and Medicare surplus tax

Question 36

What is the current generation skipping tax rate?

Answer 36

40%

Question 37

Calculate the tax liability for various gifts scenarios

Answer 37

1. Compute tax on all taxable gifts
   1a. List total gifts for the year
   1b. Subtract one-half of gift if gift splitting
   1c. Subtract annual exclusions to get to gifts after exclusions
   1d. Subtract marital deduction (any gifts to spouse)
   1e. Subtract charitable deduction
2. Compute previous years’ taxable gifts
3. Compute current tentative tax by subtracting step 2 from step 1
4. Gift tax credit remaining
5. Gift tax payable by subtracting step 4 from step 3

Question 38

Calculate the tax liability for various estate scenarios

Answer 38

1. Determine the gross estate by adding up all property in decedent’s name
2. Subtract funeral and admin expenses, debts and taxes, and losses from the gross estate to get to adjusted gross estate
3. Deduct any marital, charitable, or state tax deductions that are available to get to taxable estate
4. Add back any adjusted taxable gifts to taxable estate to get to tentative tax base
5. Compute the tentative tax
6. Subtract any gift taxes payable to get to tax payable before credits
7. Subtract any tax credits remaining such as unified credit, credit for tax on prior transfers, or credit for foreign death taxes to get to net federal estate tax payable
8. Add back total cash bequests
9. Total cash requirements for the estate equals the net federal estate tax payable plus the costs of funeral and admin expenses and debts and taxes.

Question 39

What property is best to gift?

Answer 39

• Property appreciating in value
• Property with a low gift tax value and high estate tax value
• Income producing property when donee is in a lower tax bracket
• Appreciated property that will be sold
• Property located out of state

Question 40

How do you reduce tax liability using inter-vivos gifts?

Answer 40

• Utilize the lifetime gift tax exclusion to reduce taxable gifts
• Utilize the annual exclusion; can gift $18k per person per year without paying tax on it. Marital couples that can gift split can give double to individuals
• Gifting assets that are appreciating to others to remove the asset from your estate
• Any gift taxes more than three years before the donor’s death remove the money from the donor’s gross estate, which reduces the value of it

Question 41

How do you reduce tax liability using gifts of future appreciation?

Answer 41

• Gifting property that is likely to appreciate in value will help remove the asset from your estate and allow the donee to hold onto the asset while it grows
• Donating property that produces income to a donee that is in a lower tax bracket allows you to remove the income and the property from your estate. It also allows the income produced from the property to be taxed at a lower bracket

Question 42

How do you reduce tax liability using gifts made at death?

Answer 42

• CLTs can be established at death to transfer property out of an estate and provide an annual payment to a charity for a certain period of time, and then provide the remainder to beneficiaries
• ILITs transfer the death benefit value out of the individual’s gross estate and provides funds to help pay for the estate taxes
• Waiting until death to transfer assets to a beneficiary allows the beneficiary to receive a step-up in basis for the property. This will help reduce the tax liability of the beneficiary if/when they sell the property

Question 43

Explain the role trusts play in reducing or shifting estate tax liability

Answer 43

• The trust needs to be irrevocable in order for it to be considered a gift/out of the estate. The grantor relinquishes the right to revoke the transfer/relinquishes control of the assets
• Trusts can move assets out of the estate and allow them to grow outside of it for beneficiaries to enjoy
• There can be provisions set up that allow the grantor to receive income or use property within the trust throughout their lifetime or the term of the trust, and then passing onto beneficiaries
• Certain trusts provide gift tax opportunities when funding the trust
• They can reduce the amount of tax the grantor/beneficiaries/trust pay by allowing the assets to grow for a period of time tax free (if there is no distributions being made. Distributions are taxed)

Question 44

What is income in respect of a decedent?

Answer 44

• Assets that would have been subject to ordinary income tax by a decedent if he had received the income prior to his death are subject to tax when received by a trust or beneficiary
• The right to future income earned but not received prior to a decedent’s death

Question 45

What are the tax issues related to IRD?

Answer 45

• The income does not receive a step-up in basis in the decedent’s estate
• The income is taxable when it is distributed to a decedent’s estate to pay taxes and estate administration expenses, or when it is distributed to a beneficiary or trust
• The income may also be subject to estate tax because it’s included in the gross estate
• Any estate tax paid that is attributed to an IRD item is allowable as an income tax deduction to the recipient of the income, considered a miscellaneous itemized deduction

Question 46

Compare the tax consequences of an IRD vs. a living individual

Answer 46

• IRD is subject to estate tax and income tax for the beneficiary, so potential for double taxation but may receive deductions for it on tax form. Capital gains are taxed at preferential rates. There is no step-up in basis for IRD
• A living individual is taxed at the income tax rate for the income received. Certain interest and dividend income is taxed at preferential capital gains rates

Question 47

Describe valuation discounts as a result of lack of control

Answer 47

• Minority discount - Applied to establish the estate and gift tax values of minority limited partner interests. Gift tax can be reduced by this discount and can leverage the general partner’s annual exclusion when FLP interests are gifted to limited partners
• Reflects inability of a limited power to control the operations of the FLP and to invest its assets in a manner that is advantageous to the limited partner
• The owner of less than a majority interest in an enterprise cannot by themself control day-to-day or long-range managerial decisions, impact future earnings, control efforts for growth, establish executive compensation, or access corporate assets through liquidation

Question 48

Describe valuation discounts as a result of lack of marketability

Answer 48

• Marketability discount - Applied to the value of limited partnership interests that do not offer a readily available market for trading. Gift tax can be reduced by this discount and can leverage the general partner’s annual exclusion when FLP interests are gifted to limited partners
• Reflects the fact that a partner who contributes assets to an FLP in return for a limited partnership interest generally has difficulty finding a buyer (if one exists)

Question 49

Apply an appropriate discount based on lack of control or lack of marketability

Answer 49

• Typically a business appraiser will assist with this
• Minority discounts are scrutinized and challenged by the IRS; typical discounts range from 20-30%
• Marketability discounts can be as high as 30% or more

Question 50

Identify fiduciary and trustee issues for estate planning and administration

Answer 50

• Trusts can be complex legal instruments that require attention to detail
• Trustee for irrevocable trusts is responsible for the trust income tax returns
• Trustee is the party responsible for ensuring that the purpose of the trust is met and that the terms are upheld
• Corporate fiduciary is useful when the trust will likely span more than one generation
  *A trustee is considered to have legal ownership of assets in a trust even when they are not the beneficiary, therefore, they have a fiduciary duty

Question 51

Describe the taxation advantages of life insurance in terms of estate taxation and gift taxation

Answer 51

• When a policy owner is the insured, the face value of a policy is included in the owner’s
  gross estate at death
• The death benefit amount avoids probate if the owner has named
  a beneficiary in the contract
• The type of beneficiary named in the policy affects the taxation of benefits in an owner-insured’s estate

Question 52

Describe the tax impacts of life insurance policy ownership on the estate and beneficiary

Answer 52

• If ownership is held by the insured, the death benefit is included in the gross estate. If the insured’s beneficiary is their spouse, they will receive a marital deduction. If the insured’s beneficiary is their estate, the death benefit will be in the decedent’s gross and probate estate.
• If ownership is held by someone that is not the insured, the value of the policy is included in the gross and probate estate. If the spouse is the new owner of the policy after the owner dies, then they can receive a marital deduction

Question 53

Outline the use of the ILIT in the estate plan

Answer 53

• It provides liquidity for the estate for taxes and administration expenses
• It removes the death benefit out of the decedent’s estate
• The insured can transfer a policy to the ILIT or gift cash/assets to fund a new policy
• Future appreciation of the policy is removed from the estate as well

Question 54

Recognize estate planning issues related to large illiquid assets

Answer 54

• There may be a large value associated with the asset, but if is difficult to liquidate, then there will not be a way to generate cash flow
• Typically, family members want to pass the illiquid assets to their family members, but the family members do not have cash to pay for the asset up front
• Utilizing sale strategies and provide the seller a stream of income will be beneficial
• Installment sale, SCIN, private annuities, intra-family loans, bargain sales, sale/lease-giftbacks, or IDGTs provide opportunities for parents to give ownership of illiquid assets (primarily businesses or property) and receive payments over time. They can also partially gift the asset to their family members and utilize some of their gift tax exclusion for it

Question 55

Advantages and disadvantages of revocable trusts for estate planning

Answer 55

• Revocable trusts allow the grantor to retain interest in the property in the trust
• The assets are still part of the grantor’s estate
• The grantor may appoint themself as trustee of revocable trusts. They can also name beneficiaries for the trust to ensure that the assets are transferred properly at death. This will help avoid probate

Question 56

Advantages and disadvantages of irrevocable trusts for estate planning

Answer 56

• Removes the assets from the grantor’s estate
• The grantor no longer has control over the assets and cannot change the terms of it
• The grantor gifts assets in the trusts, may be subject to gift tax
• The assets do not receive a step-up in basis at the death of the grantor

Question 57

Advantages and disadvantages of marital trusts for estate planning

Answer 57

• Surviving spouse receives trust income for life and has the right to name beneficiaries after their death to anyone
• Property qualifies for marital deduction in the decedent spouse’s estate; this property will be included in the surviving spouse’s estate at death unless it’s consumed or given away by that time

Question 58

Advantages and disadvantages of bypass trusts for estate planning

Answer 58

• Fund the trust with the estate tax exclusion amount, or whatever is remaining, and the decedent spouse’s unified credit offsets the tax
• The surviving spouse has a lifetime interest, but they have no control over the assets
• After the surviving spouse dies, the remainder beneficiaries receive the trust assets
• This property isn’t in the surviving spouse’s estate

Question 59

Advantages and disadvantages of QTIP trusts for estate planning

Answer 59

• Allows the decedent spouse’s marital deduction for property passing to a trust for the benefit of the surviving spouse, even thought the decedent controlled the passing of trust property at the surviving spouse’s death
• Ensures that at least some or all of the marital deduction property passes to the decedent’s chosen beneficiaries at the surviving spouse’s death
• Useful for second and late-life marriage situations
• Spouse must receive all income generated from the trust for life
• The remaining assets in this trust are included in the surviving spouse’s estate and they will be distributed to the remaining beneficiaries

Question 60

Advantages and disadvantages of QPRT for estate planning

Answer 60

• Holds a personal residence in the trust
• Grantor and/or spouse lives in the home rent-free for a number of years
• The home passes gift-tax free to the remainder beneficiaries at the term’s end
• The property is removed from the grantor’s estate if they survive the term
• Grantor can continue to live in the home after the term ends by paying rent to the trust
• The remainder beneficiary’s basis in the home is the grantor’s basis
• If unsuccessful, the individual will have incurred attorney fees and transaction costs
• If grantor dies during specified trust term, the executor could be liable for tax on the includible assets
• No step-up in basis allowed
• Tax on gain will eventually be paid by grantor, trust, or beneficiaries

Question 61

Advantages and disadvantages of GRTs for estate planning

Answer 61

• Split-interest trust with family members
• Grantor retains an income interest and gifts a remainder interest to family members
• After the income term ends, the remaining assets pass gift tax-free to beneficiaries
• Trust is removed from grantor’s estate if they survive the income term
• Value of the gift is the PV of the remainder interest
• Need to select assets that will outperform the 7520 rate
• If unsuccessful, the individual will have incurred attorney fees and transaction costs
• If grantor dies during specified trust term, the executor could be liable for tax on the includible assets
• No step-up in basis allowed
• Tax on gain will eventually be paid by grantor, trust, or beneficiaries

Question 62

Advantages and disadvantages of CRTs for estate planning

Answer 62

• Split-interest trust that provides a current income stream to an individual beneficiary with the remainder interest passing to a charity
• Funded with appreciated securities, and when the trust sells the stock, no capital gains tax is due
• Annuity/income stream to the grantor is taxable
• Donor receives an income tax deduction at the time the trust is funded. Equal to the present value of the charity’s remainder interest at the end of the term
• Once it’s funded, no additional assets can be added to a CRAT. Can be added to a CRUT

Question 63

Advantages and disadvantages of CLTs for estate planning

Answer 63

• Split-interest trust that provides an income stream to a charity and the non-charitable beneficiary receives the remainder interest
• Transfer income producing property to a trust
• At the end of a term, the property is returned to the donor or given to a non-charitable beneficiary
• Value of the future gift is equal to the present value of the future gift
• If a grantor CLT, the donor is taxed on the income the trust generates each year

Question 64

Advantages and disadvantages of IDGTs for estate planning

Answer 64

• An irrevocable trust designed to preserve family wealth by transferring appreciating property and income to family members and reduce the value of the grantor’s estate
• Transfers are considered completed gifts for federal gift tax purposes, but are defective for income tax purposes
• Trust income is taxed to the grantor
• Within the IDGT the grantor can sell or transfer assets to an irrevocable trust
• When the assets are passed to the beneficiary, they are passed tax free
• It also requires a higher amount of income before the income from the trust is taxed at 37%, grantor needs to make ~$500k as opposed to the trust being taxed at 37% at $12,500

Question 65

Advantages and disadvantages of ILITs for estate planning

Answer 65

• Policy owner can transfer a life insurance policy to an ILIT
• Grantor can gift cash to an ILIT to buy a new policy
• Proceeds are paid to the trust at the insured’s death
  *Beneficiaries of the ILIT receive distributions
• Removes death benefit from the insured’s estate. Can be structured to bypass a surviving spouse’s estate and offers creditor protection
• The insured has no control of the policy, the insured cannot change the beneficiaries of the policy or the trust, and the transfer of a policy to an ILIT is subject to the three-year rule