Estate Planning | Lesson 3: Transfers Outright & In Trust Flashcards
Revocable vs. Irrevocable Trusts
• Income Tax:
• Gift Tax:
• Estate Tax – Gross Estate:
• Estate Tax – Adjusted Taxable Gift:
• Generation-Skipping Transfer Tax:
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During the year, Johnson created a trust for the benefit of his six children. The terms of the trust declare that his children can only access the trust’s assets after the trust has been in existence for 15 years, and the trust does not include a Crummy provision. If Johnson transfers $72,000 to the trust during the year, what are his total taxable gifts for the year?
a) $0.
b) $12,000.
c) $60,000.
d) $72,000.
Answer: D
Because the trust does not include a Crummey provision, the transfer to the trust is a gift of a future interest not available to be offset by the annual exclusion. The entire transfer to the trust for the year is subject to the gift tax.
Todd purchased his mother’s home through the use of a SCIN. Under the terms of the SCIN, Todd was to pay his mother $20,000, plus interest, and a SCIN premium, per year for ten years. If Todd’s mother died after he made four payments, what would be Todd’s adjusted basis in the home?
a) $0
b) $80,000.
c) $160,000.
d) $200,000.
Answer: D
The buyer’s adjusted basis in the property transferred in exchange for a SCIN is the fair market value of the property at the date of the sale regardless of the number of payments made by the seller. In this case, the fair market value of the property must have been the annual principal payment times the expected term of the SCIN. or $200,000 ($20,000 x 10).
Harry, age 60, owns 400 shares of ABC Corporation, which he expects to increase 300% over the next four years. Harry eventually wants to transfer the stock in ABC Corporation to his son, Billy, but Billy is currently incapable of managing the stock or the income from the stock. Harry expects Billy to be responsible in five years. Of the following, which transfer method would work best to remove the expected appreciation of the stock from Harry’s gross estate and protect the property for Billy?
a) Private annuity.
b) SCIN.
c) GRAT.
d) QPRT.
Answer: C
The GRAT with a term of five or more years will allow Harry to transfer the stock to Billy at a gift tax cost equal to the current fair market value of the stock (before the 300% appreciation) less the sum of the annuity payments that will be paid back to Harry. This transfer method is not as ideal as a direct gift of the property because the annuity payments will return to Harry and be included in his gross estate. Also, if Harry dies during the term of the GRAT, the total fair market value of the stock at Harry’s date of death will be included in Harry’s gross estate. Neither a private annuity nor a sale will meet Harry’s goals because both give Billy access to the stock immediately. A QPRT is also not an option because a QPRT is a special GRAT that transfers a personal residence.
Dave transferred $1,500,000 to a GRAT, naming his two children as the remainder beneficiaries while retaining an annuity valued at $500,000. If this is the only transfer Dave made during the year, what is Dave’s total taxable gift for the year?
a) $0.
b) $974,000.
c)$1,000,000.
d) $1,474,000.
Answer: C
The remainder interest is a taxable gift from Dave to his children equal to the value of the property contributed to the GRAT less the value of the annuity retained, $1,500,000-$500,000 = $1,000,000. Because the remainder interest is a gift of a future interest, it is not eligible for the annual exclusion.
Which of the following is not a correct statement regarding a power of appointment trust?
a) The trust will qualify for the unlimited marital deduction if the surviving spouse is given a general power of appointment over the trust’s assets.
b) Powers of appointment trusts are irrevocable trusts that can be created during a lifetime or at death.
c) A general power of appointment trust qualifies the grantor’s contributions for the gift tax annual exclusion if the beneficiary is allowed to take withdrawals at his discretion.
d) A special power of appointment trust that limits the surviving spouse’s right to an ascertainable standard qualifies the trust for the unlimited marital deduction.
Answer: D
A special power of appointment trust that limits the surviving spouse’s right to an ascertainable standard (health, education, maintenance, and support) does not qualify the trust for the unlimited marital deduction. All of the other statements are factual statements regarding the power of appointment trusts.
This year, Roxanne paid Badlaw University $12,000 for her nephew’s tuition and gave her nephew $24,000 in cash. Roxanne is single and did not make any other gifts during the year. What is the amount of Roxanne’s taxable gifts for the year?
a) $0. b) $8,000. c) $24,000. d) $36,000.
Answer: B
The transfer to Badlaw University would be a qualified transfer not subject to gift tax, and the $24,000 cash transfer would be eligible for the annual exclusion of $16,000 ($24,000-$16,000 = $8,000).
Perry’s father sold the family business to him using a private annuity. The private annuity was structured such that Perry would pay his father $40,000 per year, plus interest, for the remainder of his father’s life. At the date of the sale, Perry’s father’s life expectancy was 20 years, and Perry’s father was in excellent health. After six years, Perry’s father died of a heart attack, and Perry sold the business for $2,000,000 six months after his father’s death. What is Perry’s capital gain/loss on the transaction?
a) $240,000. b) $1,760,000. c) $1,960,000. d) $2,000,000.
Answer: B
A buyer’s adjusted basis of property purchased with a private annuity equals the sum of all annuity payments paid. In this scenario, Perry made six annuity payments of $40,000, for a total of $240,000. Since he sold the property for $2,000,000, his gain is calculated by subtracting his basis from the sales price to arrive at $1,760,000 ($2,000,000-$240,000).
Of the following statements regarding Family Limited Partnerships (FLPs), which is true?
a) The primary purpose of creating an FLP is to provide joint management of the property contributed to the
FLP.
b) At the creation of the FLP, the transferring individual will have a capital gain equal to the difference between the fair market value of the property transferred and his adjusted basis in the property.
c) The limited partners in the FLP control all of the day-to-day functions of the FLP.
d) Transfers of the limited partnership interests in the FLP are usually eligible for minority and lack of marketability valuation discounts.
Answer: D
Answer D is a correct statement. Answer A is incorrect because the primary purpose of the FLP is to transfer interests in property utilizing various valuation discounts and for the general partner to retain complete control. Answer B is incorrect because property transfer to a partnership is generally a tax-free exchange. Answer C is incorrect because limited partners are barred from participating in the day-to-day operations of the FLP.
Which of the following statements concerning trust formation is correct?
a) The trustee of the trust will receive the trust corpus after paying the income to the income beneficiary.
b) The remainder beneficiary of a trust receives an annuity payment each year.
c) The grantor of a trust contributes property to a trust that the trustee will manage.
d) The income beneficiary of a trust always receives the trust property at the termination of the trust.
Answer: C
Answer C is a correct statement. Answers a, B, and D are incorrect as the remainder beneficiary of a trust receives the trust corpus, and the income interest is paid to the income beneficiary each year.
A trustee is subject to which of the following?
a) Prudent Man Rule.
b) Trustee’s Ethical Code.
c) Uniform Trustee Provisions.
d) Fiduciary Responsibilities Doctrine.
Answer: A
A trust fiduciary must follow the Prudent Man Rule demonstrating a duty of loyalty and duty of care on behalf of the trust’s beneficiaries. The Prudent Man Rule specifically states that the trustee, as fiduciary, must act in the same manner that a prudent person would act if the prudent person were acting for his own benefit after considering all of the facts and circumstances surrounding the decision. None of the other options are existing codes, provisions, or doctrines.
Your son has been studying trusts in his financial planning class. He has come to you for more information.
Of the following statements listed below, which do you tell him?
a) Of the many reasons people create trusts, one reason is to provide for asset management.
b) Testamentary trusts are created during the grantor’s life.
c) The property within a revocable living trust is not included in decedent’s probate or gross estate.
d) The grantor of a trust must include the full fair market value of any property transferred to a trust within three years of his death in his gross estate.
Answer: A
Answer A is a true statement. Answer B is incorrect because testamentary trusts are created in a grantor’s will. Intervivos trusts are made during the grantor’s life. Answer C is wrong, as property within a revocable living trust is not included in a decedent’s probate estate but in a decedent’s gross estate.
Answer D is an incorrect statement. Only gift tax paid on transfers within three years of a decedent’s death and or the death benefit of a life insurance policy transferred within three years of an individual’s date of death is included in the decedent’s gross estate.
Which of the following situations would not cause the inclusion of an irrevocable trust in a grantor’s gross estate?
a) The grantor has retained the right to receive the income from the irrevocable trust.
b) The grantor has retained the right to use the assets contributed to the irrevocable trust for the remainder of his life.
c) The grantor retains an annuity from the irrevocable trust for years less than his life expectancy.
d) The grantor retains the right to revoke the trust.
Answer: C
If the grantor retains an annuity from an irrevocable trust, this right alone will not cause the inclusion of the irrevocable trust in his gross estate. A GRAT is an irrevocable trust in which the grantor retains an annuity from the trust. If the grantor outlives the trust, the assets of the irrevocable trust will not be included in his gross estate. All of the other situations would cause the inclusion of an irrevocable transfer in a grantor’s gross estate.
Marcia created an irrevocable trust with no retained powers 8 years ago with a contribution of $600,000. She named her only daughter as the sole income and remainder beneficiary and paid gift tax on the date of the transfer of $25,000. Marcia died of lung cancer this year. The property’s fair market value in the irrevocable trust was $3,000,000 at her death. What amount related to the trust is included in Marcia’s gross estate?
a) $0. b) $600,000. c) $625,000. d) $3,000,000.
Answer: A
Because the trust was an irrevocable trust and Marcia did not retain any rights to the trust, the value of the trust is not included in Marcia’s gross estate.
Stephanie contributed $450,000 to a revocable living trust 8 years ago. She named herself as the income beneficiary and her only son as the remainder beneficiary. The term of the trust was equal to Stephanie’s life expectancy. Stephanie died this year when the fair market value of the trust’s assets was $2,000,000. How much is included in Stephanie’s probate estate related to the revocable living trust?
a) $0. b) $345,800. c) $450,000. d) $2,000,000.
Answer: A
The question asks for the amount included in Stephanie’s probate estate. Because a revocable living trust transfers assets per the trust document, $0 of the value of the trust is included in Stephanie’s probate estate. Remember, however, that the total value of a revocable living trust is included in a decedent’s gross estate.
