Estates Ch 7 Transfers during Life & at Death Flashcards
The SCIN level premium is like a term insurance premium over a declining value.
a. True b. False
True
At the date a GRAT is funded, the value of the remainder interest is the excess of the value of the contribution to the trust over the present value of the annuity stream.
a. True b. False
True
The value of a GRIT is calculated by using the FMV less the present value of the retained interest.
a. True b. False
True
A family limited partnership utilizes lack of control and marketability discounts to transfer the partnership interests at a reduced transfer tax cost.
a. True b. False
True
Which of the following statements regarding installment sales is correct?
a. All payments received by the seller in an installment sale are considered interest income.
b. At the death of the seller, the principal balance of the installment sale is included in the seller’s gross estate.
c. The present value of the expected remainder value of the property sold in an installment sale is subject to gift tax at the date of the transfer.
d. An installment sale would never be used with a related party.
The correct answer is b.
At the death of the seller, the fair market value of the remaining payments from the installment sale are included in the seller’s gross estate.
Assuming that interest rates have not changed substantially since the
note was issued, the present value of the installment payments (the fair market value) will equal the remaining principal balance.
Option a is incorrect because the payments received by the seller,
depending upon the seller’s adjusted basis in the property, are allocated as return of capital, capital gain, and interest income.
Option c is incorrect because an installment sale is a sale and does not have an expected remainder value - at the end of the installment payments, $0 principal remains on the note.
Option d is incorrect because an installment sale may be used to transfer potentially appreciating property to a related party. Even though an installment sale would not create a related party advantage, future income and appreciation from the property sold are removed from the seller’s gross estate
In 2022, Laila paid Badlaw University $12,000 for her nephew’s tuition and gave her nephew $26,000 in cash. Laila is single and did not make any other gifts during the year. What is the amount of Laila’s taxable gifts for the year?
a. $0.
b. $2,000.
c. $10,000.
d. $24,000.
The correct answer is c.
The transfer to Badlaw University would be a qualified transfer not subject to gift tax and the $26,000 cash transfer would be eligible for the annual exclusion of $16,000 ($26,000-$16,000 = $10,000).
Todd purchased his mother’s home through use of a SCIN. Under the terms of the SCIN, Todd was to pay his mother $20,000, plus interest, per year for 10 years.
If Todd’s mother died after four payments were made, what would be Todd’s adjusted basis in the home?
a. $0.
b. $80,000.
c. $160,000.
d. $200,000
The correct answer is d.
The buyer’s adjusted basis in property transferred in exchange for a SCIN is the sale price of the property at the date of the sale regardless of the number of payments made by the buyer.
In this case, the sale price
of the property must have been the annual principal payment times the expected term of the SCIN, or $200,000 ($20,000 x 10).
Jocelyn, age 60, owns 400 shares of ABC Corporation, which she expects to increase 300% over the next four years. Jocelyn eventually wants to transfer the stock in ABC Corporation to her son, Stevie, but Stevie is currently incapable of managing the stock or the income from the stock. Jocelyn expects Stevie to be responsible in five years.
Of the following, which transfer method would work best to remove the expected appreciation of the stock from Jocelyn’s gross estate and protect the property for Stevie?
a. Private annuity.
b. SCIN.
c. GRAT.
d. QPRT.
The correct answer is c.
The GRAT with a term of five or more years will allow Jocelyn to transfer the stock to Stevie 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 Jocelyn. This transfer method is not as ideal as a direct gift
of the property because the annuity payments will return to Jocelyn and will be included in her gross
estate. Also, if Jocelyn dies during the term of the GRAT, the amount necessary to replace the annuity
payments specified in the GRAT (up to a maximum of the value of trust assets), at Jocelyn’s date of death,
will be included in her gross estate.
Neither a private annuity nor a sale will meet Jocelyn’s goals because
both give Stevie access to the stock immediately.
A QPRT is also not an option because a QPRT is a special GRIT which transfers a personal residence.
Of the following statements regarding a Qualified Personal Residence Trust (QPRT), which is true?
a. At the end of the QPRT term, the residence reverts to the grantor.
b. At creation of the QPRT, the grantor has a taxable gift to the remainder beneficiary eligible for the annual exclusion.
c. At the end of the QPRT term, the grantor must begin paying rent to the remainder beneficiaries of the QPRT if he continues to live in the residence.
d. A QPRT is ideal for a personal residence that is expected to appreciate at a lower rate than the Section 7520 rate.
The correct answer is c.
Option c is a true statement.
Option a is incorrect because the residence transfers to the remaindermen at the end of the QPRT term.
Option b is incorrect because the remainder interest is not eligible for the
annual exclusion.
Option d is incorrect because the QPRT is ideal for a personal residence which is
expected to appreciate at a higher rate than the Section 7520 rate
Which of the following does not transfer property at death by operation of law?
Property owned JTWROS.
Property owned tenancy in common.
Intestacy.
A revocable living trust.
Property owned tenancy in common.
Rationale
Property owned tenancy in common transfers per the will or the state intestacy laws.
All of the other options transfer property at death by operation of law.
Medicaid is primarily for those people who meet the following eligibility requirements:
Disabled.
Children.
Low Income.
Elderly.
Low Income.
Rationale
Medicaid is primarily for those with low incomes.
In 2024, Laila paid Badlaw University $12,000 for her nephew’s tuition and gave her nephew $26,000 in cash. Laila is single and did not make any other gifts during the year.
What is the amount of Laila’s taxable gifts for the year?
$0.
$8,000.
$20,000.
$26,000.
$8,000.
Rationale
The transfer to Badlaw University would be a qualified transfer not subject to gift tax and the $26,000 cash transfer would be eligible for the annual exclusion of $18,000 ($26,000-$18,000=$8,000) for 2024.
$17,000 ($26,000-$18,000 = $8,000) for 2023.
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 great 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?
$240,000.
$1,760,000.
$1,960,000.
$2,000,000.
$1,760,000.
Rationale
A buyer’s adjusted basis of property purchased with a private annuity is equal to the sum of all annuity payments paid. In this scenario, Perry made six annuity payments of $40,000, or 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)
During the year, Shiloh created a trust for the benefit of her five children. The terms of the trust declare that her 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 Crummey provision.
If Shiloh transfers $85,000 to the trust during the year, what is his total taxable gifts for the year?
$0.
$5,000.
$60,000.
$85,000.
$85,000.
Rationale
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. As such, the entire transfer to the trust for the year is subject to gift tax.
Which of the following statements regarding private annuities is correct?
If a seller dies before the end of the private annuity term, the buyer continues to pay the annuity to the seller’s estate.
A private annuity must include a risk premium to compensate the seller for the possibility of cancellation at the seller’s death.
A private annuity cannot give the seller a security interest in the property.
With a private annuity, the buyer must make the annuity payments for the lesser of the term of the annuity or the life of the seller.
A private annuity cannot give the seller a security interest in the property.
Rationale
A private annuity cannot give the seller a security interest in the property or the private annuity treatment is disallowed.
Options a and d are incorrect because a private annuity requires the buyer to pay the annuity payment for the remaining life of the seller.
Option b is incorrect because the risk for the buyer in the private annuity is that the seller lives longer than his life expectancy and the buyer overpays. To compensate for this risk, the buyer does not have to make the payments if the seller dies before his life expectancy
Which of the following assets are not generally counted for Medicaid planning eligibility purposes?
Certificates of Deposit.
Equity Securities.
Vacation Home.
Primary Residence.
Primary Residence.
Rationale
All are counted, except a primary residence.
Which of the following does not transfer property at death by contract?
Tenancy by the entirety
IRAs.
Life insurance.
POD accounts
Tenancy by the entirety.
Rationale
Tenancy by the entirety transfers property by operation of state titling law. All of the other options transfer property by contrac
which of the following statements regarding installment sales is correct?
All payments received by the seller in an installment sale are considered interest income.
At the death of the seller, the principal balance of the installment sale is included in the seller’s gross estate.
The present value of the expected remainder value of the property sold in an installment sale is subject to gift tax at the date of the transfer.
An installment sale would never be used with a related party.
At the death of the seller, the principal balance of the installment sale is included in the seller’s gross estate.
Rationale
At the death of the seller, the fair market value of the remaining payments from the installment sale is included in the seller’s gross estate. Option a is incorrect because the payments received by the seller, depending upon the seller’s adjusted basis in the property, are allocated as return of capital, capital gain, and interest income. Option c is incorrect because an installment sale is a sale and does not have an expected remainder value - at the end of the installment payments, $0 principal remains on the note. Option d is incorrect because an installment sale may be used to transfer potentially appreciating property to a related party. Even though an installment sale would not create a related party advantage, future income and appreciation from the property sold are removed from the seller’s gross estate.
In an effort to keep any of its future appreciation out of her gross estate, Gretchen, a 73-year-old widow, transferred her home into a Qualified Personal Residence Trust (QPRT) naming her only son as the remainder beneficiary.
Which of the following statements regarding a QPRT is false?
If Gretchen has a taxable gift at the date of formation of the trust, the gift is not eligible for the annual exclusion.
If Gretchen outlives the term of the QPRT and continues to live in the house, she must pay her son rent.
At the termination of the QPRT, the personal residence is distributed to Gretchen’s son.
If Gretchen dies during the term of the QPRT, her gross estate will include the value of her home at the date of the transfer to the QPRT.
If Gretchen dies during the term of the QPRT, her gross estate will include the value of her home at the date of the transfer to the QPRT.
Rationale
All of the options are correct with the exception of option d. If Gretchen dies during the term of the QPRT, her gross estate will include the value of her home at her date of death.
Kane transferred $5,500,000 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 Kane made during the year, what is Kane’s total taxable gift for the year?
$0.
$4,964,000.
$5,000,000.
$5,464,000.
$5,000,000.
Rationale
The remainder interest is a taxable gift from Kane to his children equal to the value of the property contributed to the GRAT less the value of the annuity retained, $5,500,000-$500,000 = $5,000,000. Because the remainder interest is a gift of a future interest it is not eligible for the annual exclusion.
Of the following statements regarding a Qualified Personal Residence Trust (QPRT), which is true?
At the end of the QPRT term, the residence reverts to the grantor.
At creation of the QPRT, the grantor has a taxable gift to the remainder beneficiary eligible for the annual exclusion.
At the end of the QPRT term, the grantor must begin paying rent to the remainder beneficiaries of the QPRT if he continues to live in the residence.
A QPRT is ideal for a personal residence that is expected to appreciate at a lower rate than the Section 7520 rate.
Confidence of your answer
At the end of the QPRT term, the grantor must begin paying rent to the remainder beneficiaries of the QPRT if he continues to live in the
residence.
Rationale
Option c is a true statement. Option a is incorrect because the residence transfers to the remaindermen at the end of the QPRT term. Option b is incorrect because the remainder interest is not eligible for the annual exclusion. Option d is incorrect because the QPRT is ideal for a personal residence which is expected to appreciate at a higher rate than the Section 7520 rate.
Which of the following statements regarding a Grantor Retained Annuity Trust (GRAT) is correct?
The remainder interest of a GRAT is payable to a noncharitable beneficiary.
The term of the trust should be set equal to the life expectancy of the grantor.
The remainder beneficiary is taxed on the income in the GRAT each year.
At the end of the GRAT term, the property reverts to the grantor.
The remainder interest of a GRAT is payable to a noncharitable beneficiary.
Rationale
The remainder interest of a GRAT is payable to a non-charitable beneficiary.
Option b is incorrect because the term of the GRAT should be less than the grantor’s life expectancy because if the grantor dies during the term of the trust the amount necessary to replace the annuity payments specified in the GRAT, as of the grantor’s date of death, is included in their gross estate.
Option c is incorrect because the grantor is taxed on the income in the GRAT each year.
Option d is incorrect because at the end of the GRAT term, the property is payable to the non-charitable beneficiary
Before her death, Meg loaned Ryan $400,000 in return for a note. The terms of the note directed Ryan to make monthly payments including interest at the applicable federal rate. If Meg dies before the note is repaid, which of the following affects the valuation for Meg’s gross estate?
- Ryan’s inability to make payments timely
- The market rate of interest
- The remaining term of the note
- Meg forgives the note as a specific bequest in her will
1 only.
1 and 2.
1, 2, and 3.
2, 3, and 4
1, 2, and 3.
Rationale
If Meg dies before Ryan repays the note, the note is included in Meg’s gross estate at the fair market value of the note plus any accrued interest due at Meg’s date of death.
This fair market value is affected by the interest rate, maturity date, and Ryan’s ability to make the note payments, but not by Meg’s forgiveness of the note in her will.
The forgiveness of the note is deemed a specific bequest and the fair market value of the note is still included in Meg’s gross estate.
Mork and his wife, Mindy, want to establish a family limited partnership (FLP) and transfer their business to the FLP.
The value of the business interest is $4,000,000. They want to make use of the annual exclusion and have been advised that a 25% discount is appropriate for gifting a minority interest of limited partnership shares.
The general partnership interest (1%) is valued at $40,000. They have eight family members (children and grandchildren) to whom to transfer limited partnership interests. Mork and Mindy are unwilling to utilize any of their lifetime exemptions.
Presuming the annual exclusion remains the same and the value of the business interest remains unchanged in the future, how many years does it take them to transfer all of the limited partnership interest?
11 years.
12 years.
14 years.
22 years.
11 years.
Rationale
2024: $18,000 ÷ (1-25%) = $24,000 pre-discount unit value that can be transferred under the annual exclusion
2023: $17,000 ÷ (1-25%) = $22,666.67 pre-discount unit value that can be transferred under the annual exclusion
2024: $3,960,000 ÷ $24,000 = 165 units
2023: $3,960,000 ÷ $22,666.67 = 174.71 units
8 beneficiaries and 2 donors = 16 units per year
2024: 165 ÷ 16 = 10.31 years (rounded up to 11 years
2023: 174.71 ÷ 16 = 10.92 years (rounded up to 11 years)
