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Estate Planning > Estate Xfer During Life > Flashcards

Estate Xfer During Life Flashcards

1
Q

What are the three parties to a trust?

A

-Grantor, creator, settler
-Trustee
-Beneficiary

Does not have to be 3 different people

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2
Q

What are the four common elements of a trust?

A

-Legally and mentally competent grantor who intend to establish the trust
-Legally and mentally competent trustee
-One of more beneficiaries who hold interest
-Property owned by the trust (real estate, cash, other tangible property)

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3
Q

What is the rule against perpetuities?

A

Prevents a grantor from establishing a trust for an unreasonably long time (21yrs from the death of the youngest beneficiary)

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4
Q

How are trusts usually categorized?

A

By powers retained by the grantor
The date at which the trust becomes operative
The income taxation (income payout) of the trust

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5
Q

Property transferred to this trust will avoid probate if it is retitled in the name of the trust, but the assets are still included in the gross estate

A

Revocable trust

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6
Q

Property transferred to this trust will avoid probate and will not be included in the gross estate

A

Irrevocable trust

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7
Q

This type of trust is made effective during the grantor’s lifetime. Even with an irrevocable trust, this trust will be subject to gift tax because the transfers constitute a complete gift.

A

Inter vivos trust - during life

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8
Q

This type of trust is made effective by the decedent’s will. The gift tax does not apply, but the estate tax does

A

Testamentary trust

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9
Q

Any trust that isn’t simple
Any irrevocable trust
Any trust that distributes in excess of its income
A trust that can make charitable contributions

A

Complex trust

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10
Q

These two provisions grants the trustee the power to distribute income

A

Sprinkling - income spread over time to one
Spray - income spread over time to many

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11
Q

This provision prevents trust income from being assigned to creditors while also preventing a beneficiary from overspending

A

A spendthrift clause

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12
Q

This provision enables the trustee to distribute only enough income to support or educate the beneficiary

A

Support provision

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13
Q

What are four considerations that may influence a decision to conduct an inter vivid transfer to someone other than a charity?

A

Competency of the individual
Estate tax of the individual
Marginal income tax bracket of the individual
Degree of relationship to the donor

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14
Q

What are the effects of control retention in a trust?

A

Income shifting lost (gift not complete)
Included in estate
Loss of marital deduction
Loss of charitable deduction

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15
Q

What are the types of lifetime gifts?

A

Outright gift
Net gift: give, but DE responsible for gift tax
Reverse gift: give to someone who dies, to get back stepped up
Educational account: 529,
Gift leaseback: gift real estate and then deduct lease payments
Custodial gifts: UGMA, UTMA <- real estate
Gifts in trust: 2503(b) Badboy - distributes annually; 2503(c)=college

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16
Q

In an outright gift, what is sole ownership and what are the consequences?

A

The full transfer of a property.
-DR loses control, but gift is not in estate
-DR may have to pay gift tax
-DE inherits DR basis, not stepped-up

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17
Q

In an outright gift, what are intrafamily loans and what are the consequences?

A

In the case that the loan interest is less than the applicable federal rate (AFR), the lender will have been deemed to have made a gift and will have to pay the difference in interest rates each year the loan is outstanding.
Annual exclusion is available for demand loans, but not for a term loan (gift is only paid once in the first year)

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18
Q

In an outright gift, what is a gift-leaseback and what are the consequences?

A

This is a gift of business property to which the closely held business leases it back from the DE at a reasonable rate.
-Removes the asset from the DR estate
-DR subject to gift tax
-Business may receive a deduction for lease payments
-DE reports lease payments as ordinary income

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19
Q

In an outright gift, what is a reverse gift and what are the consequences?

A

A gift is made to a DE that is expected to predecease the DR in order to get appreciated value through a stepped up basis. Transfer must have been complete for a year before death to work.

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20
Q

In an outright gift, what is a net gift and what are the consequences?

A

The DR makes a conditioned gift to the DE - usually in the form that the DE pays the gift tax. The DE obligation reduces the value of the gift.

Tentative tax / 1 + DR’s tax rate

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21
Q

In an outright gift, what are outright charitable gifts and what are the consequences?

A

A DR can make a deduction of all or partial interest of a qualified charitable donation. If partial, the PV of the remainder interest is what can be deducted

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22
Q

What are custodial gifts?

A

Otherwise known as UTMAs and UGMAs. Diminished by 529s. Titled in the custodians name, but ultimately the property of the minor who also pays taxes. Distributed to the minor at the age of majority. Only difference:
UTMA can be funded with real estate - UGMA cannot

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23
Q

When does a revocable trust become irrevocable?

A

At the grantors death, according to provisions in the trust docs, or when made irrevocable by the grantor.

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24
Q

What is the difference between a funded and unfunded inter vivid trust?

A

Funded - assets have been contributed
Unfunded - only the minimum amount of assets are present to legally establish the trust

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25
Q

T/F. The assets in any funded inter vivid or unfunded life insurance trust will not go through probate

A

False. Funded inter vivid and funded & unfunded life insurance trusts do not go through probate

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26
Q

-Enables the DR gift tax exclusion by providing present interest to the DE
-Primarily used for college
-Taxed to the trust if accumulated
-Taxed to the DE if distributed
-At 21, the DE is given the right to remove all property from the trust. If they chose not to, it becomes a grantor trust to the DE

A

2301(c) trust

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27
Q

-Used in situations when a DR has impoverished or incapacitated parents or when children or fully dependent on parents for financial support
-Must be irrevocable
-Includes spendthrift provision
-Annual exclusion not available unless Crummey powers are included

A

A support trust

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28
Q

-One beneficiary
-Use of trustee to distribute trust assets in a way that does not endanger social security or medicaid.

A

Supplemental needs trust

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29
Q

-Trust established only inter vivid
-Created solely to avoid probate
-Gifts are not complete
-May also contain QTIP

A

Revocable living trust

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30
Q

-This trust is a RLT that the grantor establishes to handle financial affairs when and if the grantor becomes incompetent to do so
-Nominally funded at the time of creation
-Must have an accompanying springing durable POA to transfer assets once incapacitated

A

Contingent (standby) trust

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31
Q

What are 529 plan characteristics?

A

No income phasing to contribute
Balance accumulates tax deferred
10% penalty for distributions not used for education
Up to $10k p/y for K-12 education expenses allowed
Contributions are subject to gift and GSTTs
5-year averaging election allowed (5x gift tax exclusion)
Unlimited transfers between family members

32
Q

What are the Coverdell Education Savings Account (CESA) characteristics?

A

Income phaseout
Limited to $2k p/y contribution
Tax free distributions for K-12 education expenses
Must be completely distributed by age 30
Can be rolled over to another family member

33
Q

How does one setup a trust to protect the beneficiary and grantor from creditors?

A

Must be irrevocable
Must not be for sole purpose to defraud creditors
Grantor should not retain any control that would allow the grantor to demand trust assets for his benefit
Grantor should not be trustee if trustee has discretion over distribution
Trust should not provide for mandatory distribution or have a demand right
Trust should contain spendthrift provision

34
Q

The purpose of this trust is to pass assets to several generations of descendants
Trust would apply GSTT exemption

A

A dynasty trust

35
Q

This trust provide annual distributions to minor beneficiaries
The trust can be exhausted to the beneficiary at any age determined by the grantor
Gift tax exclusion used on present interest

A

2503(b) trust

36
Q

What is a Crummy trust?

A

A trust in which the beneficiaries have Crummey powers
Offers a window in which the beneficiaries have present interest so the DR can use the gift tax exclusion

37
Q

What are gift tax consequences of letting the Crummey power lapse?

A

Gift tax is imposed on the greater of 5% or $5k of assets that could have been taken

38
Q

What are estate tax implications of letting the Crummey power lapse?

A

If lapse by death, the holders estate has to include the maximum amount he could have appointed himself immediately before death

39
Q

Irrevocable, inter vivid only trusts which are designed to allow a grantor to retain an interest for a term certain

A

Grantor retained trusts

40
Q

In this trust, the grantor retains the right to receive an annuity payment from the trust annually
Fixed or percentage amount
Removes from grantor estate if term expires while grantor is alive

A

Grantor Retained Annuity Trust (GRAT)

41
Q

In this trust, the grantor retains the right to receives a entrust amount from the trust at least annually
Expressed as a fixed percentage of FMV
Removes from grantor estate if term expires while grantor is alive

A

Grantor Retained Unitrust (GRUT)

42
Q

In this trust, the grantor retains the right to receive a stated percentage of income at least annually
If no income is earned, no income is distributed

A

Grantor Retained Income Trust (GRIT)

43
Q

In this trust, the grantor retains the right to live in residence for the term of the trust

A

Qualified personal residence trust (QPRT)

44
Q

A trust that is designed to be subject to income taxes on asset growth within the trust, but also designed to be out of the DRs estate for estate tax purposes - this takes advantage of the lesser income tax to the 40% estate tax

A

Intentionally defective grantor trust (IDGT)

45
Q

This trust is used to remove insurance death benefits from a grantors estate while still having access to the policy process to increase the liquidity of the estate.
The grantor must survive the transfer by three years
Unfunded means premium payments still need to be made.

A

Irrevocable life insurance trust (ILIT)

46
Q

These trusts allow a spouse some interest in trust assets, but bypass inclusion in the spouse’s gross estate

A

Bypass trust

47
Q

These trusts with spouses as beneficiaries, are subject to gift or estate tax and therefore the exclusions or credits
Main types of trusts are power of appointment and QTIP

A

Marital trusts

48
Q

This type of charitable trust donates the asset the charity first, with remainder interest going back to the DR or designated beneficiary
Interest income to trust must be annuity or unitrust (percentage)

A

Charitable lead trust
Also CLAT or CLUT

49
Q

This type of trust gives an asset to (a) designated beneficiaries first with remainder interest going to a charity
Can be for term of 20 or lifetime of DR
Paid by annuity not less than 5% of initial FMV or fixed percentage not less than 5% of initial FMV

A

Charitable remainder trust
Also CRAT or CRUT

50
Q

A special type of CRT - established only by public charities (50%)
DRs property commingled with other DRs property

A

Pooled Income Funds

51
Q

What are the various types of inter-family sales?

A

-Ordinary sale: full FMV - no gift
-Bargain sale: less than FMV - difference is gift
-Installment sale: payments over time
-SCIN: installment with death cancellation provision
-Private annuity: sale in exchange for lifetime payments
-Sale-leaseback: sale of depreciated property to be able to deduct lease payments

52
Q

How does one determine the purchaser basis, gift tax, and capital gain in bargain sale if sold below and above basis?

A

Below: FMV - sale price. No loss allowed. New basis is sale price
Above: FMV - sale price = gift. New basis sale price. Capital gain is sale price - seller basis.

53
Q

Generally, how does a self-cancelling installment note (SCIN) work?

A

Basis is the agreed upon price of sale regardless of whether or not all payment were made.
A provision that cancels payments at death. This decreases the PV of current payments.
The buyer has to pay a premium up front to ensure that there is no gift tax paid by the estate at death.
Not includable in seller’s estate

54
Q

How does a private annuity work?

A

Seller sells an asset in exchange for an annuity payment. Buyer pays annuity until death of seller. Payments include basis, capital gain, and interest

55
Q

What is right of first refusal in transferring a closely held business?

A

Allows co-owners first opportunity to buy ownership of company before it is offered to a third party, whom they may not want owning a portion of the company

56
Q

What is a cross-purchase agreement?

A

All owners agree to sell their interests or buy the other interest under certain circumstances such as death, retirement, total disability, etc. n(n-1)

57
Q

What is an entity purchase agreement?

A

Same as cross-purchase, except the option to buy lies with the business entity first, then the co-owners

58
Q

How is insurance handled in a cross-purchase agreement?

A

Every owner will become the owner of and pay the premiums for policies in which all of the other owners are beneficiaries. A policy is required on every other owner. 3 owners, 6 policies.
Premiums are not deductible

59
Q

How is insurance handled in a entity purchase agreement?

A

All insurance policies are purchased, owned and have premiums paid by the business entity. The business entity is the beneficiary. Unlike cross-purchase, one owner, one policy.

60
Q

When “freezing” business valuation appreciation from estate, what type of business entity CANNOT be used?

A

S Corp. Freezing requires more than one class of stock and S corp only allows one class.

61
Q

What are the three rules where chpt 14 rules do not apply to business interest transfers?

A
  1. There is a ready market
  2. The class of interest is the same class as transfer
  3. The retained interest is proportionately the same as the transferred interest
62
Q

Who are chpt 14 applicable family members?

A

Spouse
Any ancestor of the spouse
Any spouse of the ancestor

63
Q

Who are the chpt 14 members of the family?

A

Spouse
Any lineal descendent of the transferor or spouse
The spouse of any such lineal descendent

64
Q

What are the reasons to use life insurance proceeds in estate planning?

A

-Liquidity to pay for estate expenses
-Debt relief (mortgage, car, big expenses)
-Lifetime objectives like buy-sell agreements
-Income replacement
-Wealth accumulation

65
Q

What are the three insurance settlement options?

A

Lump sum (income tax free)
Installments (interest is taxable, remaining payment tax-free)
Pursuant to an interest-only option (all taxable)

66
Q

Transfers to key persons
Transfers between spouse, or incidental to divorce
Transfer to a partnership
Transfer contributed to a business
Are examples of…

A

Exceptions to the transfer for value rule, meaning they retain their tax-free status

67
Q

What is the three year rule for life insurance?

A

A period of 3 years must have passed since transfer of ownership from self to another to prevent insurance benefit from being included in gross estate

68
Q

What is a split dollar life insurance plan?

A

Usually offered to highly valuable EEs as a retention incentive.

69
Q

What is key person life insurance?

A

Insurance which provides a financial help to the business, expecting a dip in income when a key EE dies

70
Q

What techniques can prevent life insurance from being included in an estate?

A

ILIT in which policy wasn’t transferred w/I 3 years
Key person
Someone other than the insured as owner

71
Q

Which is simple and which is complex?

a) Can accumulate wealth & make charitable gifts
b) Pays out income annually & cannot make charitable gifts

A

a) complex
b) simple

72
Q

Creating an assured market for a closely held business in the event of death, disability, or selling of interest, is the purpose of a…

A

Buy-Sell agreement

73
Q

What is a recapitalization?

A

Changes the structure of the company. Different classes of stock, change in business entity (S, C, etc)

74
Q

What is “freezing” a business?

A

Transfer the value of the business to the preferred shares and assigning the business growth to the common shares

75
Q

Which statements are correct?

1) When used by a corporation, these agreements are also known as stock redemption plans.
2) The business entity itself purchases the interest of an owner who dies.
3) The business entity is entitled to an income tax deduction for the premiums it pays on any life insurance policies used to fund the agreement.

A

1) When used by a corporation, these agreements are also known as stock redemption plans.
2) The business entity itself purchases the interest of an owner who dies.

76
Q

in an ILIT, what does it mean to be a grantor trust?

A

In a grantor trust, the ILIT is FUNDED by the assets inside the trust. Conversely, an unfunded ILIT means that the grantor has to pay the premiums each year.

77
Q

In an installment sale, what can a seller choose to do with the payments beyond the first year, regarding reporting gains?

A

Make them optional and report them immediately to offset other losses

Estate Planning (8 decks)

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