Lesson 3 of Estate Planning: Transfers Outright & In Trust Flashcards

Question 1

Q

Lifetime Transfers

Answer

A

When property is gifted, the FMV of the property is removed from an individual’s gross estate.

The value of the property is also removed from the individual’s gross estate when it is sold,

but the sale does not directly reduce an individual’s overall gross estate
since the FMV of the consideration received replaces the FMV of the property transferred.

While there is no immediate impact on the transferor’s taxable estate when property is sold for full and adequate consideration,

a significant estate planning benefit can be realized over time if the asset sold had a significant potential for appreciation and was replaced with an asset with a lower growth potential.

Question 2

Q

Arms’s Length Transactions

Answer

A

An arm’s-length transaction is a transfer between:

unrelated parties in the form of a sale,
an installment sale, or
an exchange.

Each transaction involves a transfer of property between individuals for valuable consideration based on the FMV of the transferred property.

Arm’s-length transactions do not attempt to reduce the transferor’s gross estate or to economically benefit the transferee.

The buyer and the seller enter the transaction without passing property to the buyer at a reduced cost.

Question 3

Q

Arms’s Length Transactions

Sale

Answer

A

A sale:

is the direct transfer of property to another for money or property of equal FMV.

A sale does not directly affect the gross estate of the seller or the buyer, as each party to the sale has transferred one asset for another asset of equal value.

Question 4

Q

Arms’s Length Transactions

Installment Sale

Answer

A

An installment sale is a sale of property in which the buyer makes a series of installment payments to the seller.

The effect of this transaction is that the buyer pays the seller the purchase price of the property over a specified term plus interest at the current market rate.

The installment payments are paid in cash over the term of the note,:

and at the seller’s death any outstanding principal of the installment note, including any accrued interest, is included in the seller’s gross estate.

An installment sale may be entered into by a related buyer and seller with the intention of accomplishing a planning objective. The agreed-upon sales price of the property in the installment sale may be the property’s FMV, but the interest rate charged on the note may be lower than the current market rate of interest or may even be equal to zero.

In either case, the buyer benefits:

because of the lower interest payment required

the seller benefits:

because he will receive less interest income and will, therefore, reduce his gross estate.

There is a practical limitation on this planning technique, however. While the interest rate charged on the note may be below the prevailing market rate given the risk characteristics involved,

the interest rate must be at least equal to the applicable federal rate in order to avoid gift loan treatment and adverse income tax consequences.

Question 5

Q

Arms’s Length Transactions

Exchange

Answer

A

An exchange is a mutual transfer of assets with equal FMV between individuals.

Like the installment sale and the outright sale:

an exchange will not directly impact a transferor’s gross estate.

Question 6

Q

Transfers to Loved Ones

Transfers Not Subject to Gift Tax

Answer

A

These techniques include transfers to satisfy:

legal support obligations,
qualified transfers, and
below-market rate loans.

Transfers not subject to gift tax reduce an individual’s gross estate

without using the annual exclusion or the individual’s applicable estate tax credit amount.

Example 1:

A grandparent pays medical or law school tuition for a grandchild. The payments are made directly to the institutions and are treated as qualified transfers not subject to gift tax. These tuition payments immediately reduce the grandparent’s gross estate without using any of the grandparent’s annual exclusion or applicable estate tax credit.

There are two example.

Question 7

Q

Transfers to Loved Ones

Gifts Outright and in Trust

Answer

A

When an individual makes a gift, either outright or in trust, the gifted property is transferred to the donee or to the trustee of the trust.

Usually, outright gifts and gifts in trust are reserved for transfers to loved ones.

Ideally these gifts are:

gifts of a present interest
and qualify for the annual exclusion,
reduce the transferor’s gross estate (since the donor relinquishes all control),
remove future appreciation of the gifted property from the transferor’s gross estate, and,
if gift tax is paid after full utilization of the applicable gift tax credit, removes the gift tax paid from the transferor’s gross estate if the transferor lives at least three years following the date of the gift.

When direct outright gifts are made,:

the valuation of the gifted property for gift tax purposes should be documented with a proper valuation
- if the gifted property is not cash,
- marketable securities, or
- if a valuation discount is used when valuing the property.

Question 8

Q

Transfers to Loved Ones

Partial Sale-Gift Transactions

Answer

A

When an individual sells an asset for an amount less than the asset’s FMV, the seller is deemed to have made a gift to the buyer:

equal to the difference between the FMV of the property and the actual sales price.

These combination partial sale-gift transactions, also known as bargain sales, generally occur between family members:

since the seller will only realize a discounted price from the sale in an effort to transfer the property to a family member at a reduced cost.

With a bargain sale, the property is removed from the transferor’s gross estate and is replaced by a reduced amount equal to the consideration paid by the buyer. Any appreciation or income on the property after the transaction is completed is attributable to the buyer/donee.

Question 9

Q

Exam Question - Partial Sale Gift Transaction

Bobby owned a building with a fair market value of $2,000,000. Bobby’s adjusted basis in the building was $1,000,000. Bobby agreed to sell the building to his son, Robby for $1,300,000. What is the amount of Bobby’s taxable gift?

a) Bobby has made a taxable gift of $700,000.
b) Bobby has made a taxable gift of $683,000.
c) Bobby has made a taxable gift of $2,000,000.
d) Bobby has not made a taxable gift.

Answer

A

Answer: B

The discount of $700,000 ($2,000,000 - $1,300,000) is treated as a gift eligible for the annual exclusion, thus creating a taxable gift of $683,000 ($700,000 - $17,000).

Question 10

Q

Transfers to Loved Ones

Sales (Gift) and Leaseback

Answer

A

Sales and leaseback is an arrangement whereby a company owning fully depreciated property sells the property to a buyer (usually a family member in a low income bracket). The new owner becomes the lessor and leases the asset back to the former owner, who becomes the lessee. As a result of this transaction, the lessee receives cash from the sale of the asset and the lessee makes periodic deductible lease payments and retains the use of the asset.

This strategy may be useful to a business that has assets but is in need of investment or operating
capital. This technique works well with clients who are in high income tax brackets and are seeking to divert highly taxed income to members of the family who are in a lower tax bracket.

In the case of a gift and leaseback, the process involves giving the assets or property used in the family business to another family member. The donor may put the property into a trust and lease from the trust. This is similar to a sale and leaseback except that** no cash is exchanged.** Depending on the property value, there may or may not be gift tax considerations.

Question 11

Q

Transfers to Loved Ones

Full Consideration Transfer/Sales
- Private Annuity

Answer

A

There are some transfers for full and adequate consideration (typically structured as a sale of property) intended to benefit transferee loved ones that a transferor would not typically consider with an arm’s-length transferee.

Private Annuities:

A private annuity is a transaction between two (usually related) private parties.
The seller/annuitant sells an asset to a buyer in exchange for an unsecured promise from the buyer to make fixed payments to the annuitant for the remainder of the annuitant’s life.
The promise must be unsecured (under the Treasury regulations).
The annuity term is equal to the life expectancy of the seller/annuitant based on the annuitant’s age at the date of sale. The Section 7520 rate is used to determine the interest portion of each payment and the present value of the private annuity.
While the life expectancy of the annuitant (as determined by the IRS mortality tables) is used for income tax and financial calculations, a private annuity requires payments to be made over the lifetime of the seller/annuitant, which may fall short of or exceed the life expectancy found in the IRS mortality tables.
By selling the asset as a private annuity, the annuitant defers the recognition of any capital gain over his remaining life expectancy, receives a constant stream of income for the remainder of his life, and removes the asset transferred and any of its subsequent appreciation from his gross estate.

Question 12

Q

Exam Question - Private Annuity

Maxine agrees to purchase Jacob’s property utilizing a private annuity. Jacob’s table life expectancy is ten years at the date of the agreement, and the property has a fair market value of $400,000. The private annuity payment is $45,000 per year, and Maxine dies after making two payments. At Maxine’s death, what amount is included in her gross estate with regards to the private annuity and the transferred property?

a) $0
b) $90,000
C) $310,000
d) $400,000.

Answer

A

Answer: D

Maxine bought the property utilizing the private annuity. Maxine’s gross estate will include the fair market value of the property purchased.

The expected present value of the remaining private annuity payments will be a debt of the estate.

Question 13

Q

Transfers to Loved Ones

Private Annuity
- Exhibit Illustrating Application of Private Annuity

Answer

A

The following exhibit illustrates the application of a private annuity with an individual whose life expectancy is 16 years as of the date of the sale. The annuity payment is calculated utilizing a term of 16 years, but if the seller outlives his life expectancy, the annuity payments continue until the seller’s death (21 years after the sale is assumed in the exhibit). On the other hand, if the seller dies prior to the term of 16 years, the annuity payments teminate ar the seller’s death (seven years after the sale is assumed in the exhibit).

Question 14

Q

Transfers to Loved Ones

Full Consideration Transfer/Sales
- Private Annuity
  - Gift and Estate tax Consequences of Private Annuities

Answer

A

Provided the FMV of the property transferred is equal to the present value of the life annuity, there is no taxable gift upon the sale of the property in exchange for the private annuity.

Since the annuitant does not have any right to annuity payments after his death, the value of the private annuity is zero at the death of the annuitant and is not included in the seller/annuitant’s gross estate.

Any annuity payments received before the seller’s death with be included in the seller’s gross estate to the extent the funds were not consumed.

This technique of transferring assets without triggering transfer tax is particularly effective when the actual life expectancy of the annuitant is substantially less than the table life expectancy.

The buyer makes the serial payment consisting of the interest and principal. The buyer’s interest payments are nondeductible for income tax purposes. The buyer’s adjusted basis in the property exchanged for the private annuity is equal to the total of all annuity payments actually paid. If the seller/annuitant dies shortly after the transfer, the buyer will have a low basis in the asset, which will require payment of capital gains tax if the asset is sold.

Question 15

Q

Transfers to Loved Ones

Full Consideration Transfer/Sales
- Private Annuity
  - Risks

Answer

A

A private annuity involves investment risks for both the seller/annuitant and the buyer.

The annuitant is selling an asset in return for an unsecured promise to pay from the buyer.
The seller bears the risk that the buyer will not make payments (default risk).

Question 16

Q

Transfers to Loved Ones

Full Consideration Transfer/Sales
- Private Annuity
  - Income Tax Issues

Answer

A

From the annuitant’s perspective, each private annuity payment is split into three components:

(1) interest (at the Section 7520 interest rate in effect at the date of the sale),
(2) capital gain, and
(3) income-tax-free return of capital (adjusted basis).

Question 17

Q

Transfers to Loved Ones

Full Consideration Transfer/Sales
- Private Annuity
  - Income Tax Issues
    - Examples

Answer

A

The buyer makes the serial payment consisting of the interest and principal. The buyer’s interest payments are nondeductible for income tax purposes. The buyer’s adjusted basis in the property exchanged for the private annuity is equal to the total of all annuity payments actually paid. If the seller/annuitant dies shortly after the transfer, the buyer will have a low basis in the asset, which will require payment of capital gains tax if the asset is sold.

Question 18

Q

Transfers to Loved Ones

Full Consideration Transfer/Sales
- Self-Canceling Installment Notes (SCIN)

Answer

A

The SCIN transaction involves a sale for the full fair market value of the property transferred over a term defined by the seller.

The unique feature of a SCIN is that if the seller dies before all of the installment payments have been made, the note is canceled and the buyer has no further obligation to pay.

In this instance, the seller is taking the risk that he will die before receiving all payments under the SCIN and must be compensated for this risk. The buyer will pay a premium, called a SCIN premium, to compensate the seller for this risk.

The following exhibit illustrates the application of a SCIN with an individual whose life expectancy is 16 years from the date of the sale. The SCIN payment is determined using the IRC life expectancy factor, which is the maximum term of the SCIN.

If the seller dies prior to his life expectancy (seven years as illustrated in the exhibit), however, the SCIN payments terminate at that point.

Question 19

Q

Transfers to Loved Ones

Full Consideration Transfer/Sales
- Self-Canceling Installment Notes (SCIN)
  - Gift and Estate Tax Consequences

Answer

A

The property transferred by a SCIN is removed from the seller’s gross estate, but the payments received will, if retained, be included in the seller’s gross estate.

There is no gift involved in a SCIN provided the:

present value of the note less the SCIN premium is equal to the FMV of the asset transferred,
and the SCIN premium is appropriate for the mortality risk of the transferor and the value transferred.

Like the private annuity, the SCIN is generally used when:

the transferor is in poor health and expected to die before the end of the defined SCIN term.

Question 20

Q

Transfers to Loved Ones

Full Consideration Transfer/Sales
- Self-Canceling Installment Notes (SCIN)
  - Income Tax Consequences - Buyer/Seller

Answer

A

A SCIN is classified for tax purposes as an installment sale.

The buyer will make serial payments of interest and principal.

Unlike the tax treatment that applies to private annuities, the interest (i.e., business interest, qualified residence interest, or investment interest) paid by the buyer
for a SCIN is deductible if permitted by the IRC. In addition, the buyer’s adjusted basis in the property, regardless of the number of installment payments made, is the agreed-upon purchase price of the property, which includes the full face value of the remaining note payment.

The seller receives the installment payments in three components:

(1) interest income,
(2) capital gain,
(3) return of adjusted basis, and also receives
(4) the SCIN premium as either additional
interest income or capital gain depending upon how the SCIN premium was calculated

Question 21

Q

Transfers to Loved Ones

Full Consideration Transfer/Sales
- Self-Canceling Installment Notes (SCIN)
  - Risks

Answer

A

The seller of property under a SCIN undertakes:

default risk,
interest rate risk,
purchasing power risk, and
reinvestment risk.

The buyer’s risk:

is that the transferor outlives the SCIN term, and thus the buyer pays more for the property, by an amount equal to the SCIN premium, than he would have paid under a normal installment sale.
The buyer also has business risk (the risk the asset is not worth the value of the note).

Question 22

Q

Transfers to Loved Ones

Full Consideration Transfer/Sales
- Chart Comparing SCINs and Private Annuities

Question 23

Q

Transfers to Loved Ones

Full Consideration Transfer/Sales
- Grantor Retained Annuity Trust (GRAT)

Answer

A

A Grantor Retained Annuity Trust (GRAT) is an:

irrevocable trust that pays a fixed annuity (income
interest) to the grantor for a defined term and
pays the remainder interest of the trust to a noncharitable beneficiary at the end of the GRAT term.

The GRAT is funded:

by the grantor with a transfer of property,
and the annuity can be a:
- stated dollar amount,
- fixed fraction, or
- a percent of the initial fair market value of the property transferred to the GRAT.

The following exhibit illustrates the formation and application of GRAT:

Question 24

Q

Transfers to Loved Ones

Full Consideration Transfer/Sales
- Grantor Retained Annuity Trust (GRAT)
  - Gift and Estate Tax Consequences

Answer

A

At the creation of a GRAT, assuming the retained annuity interest is payable to the grantor,

the annuity portion is not subject to gift tax,
but the present value of the expected future remainder interest, is a gift of a future interest subject to gift tax.

The value of the remainder interest is determined by:

subtracting the present value of the expected future annuity payments from the fair market value of the original transfer to the GRAT.

The term of the annuity is defined by the grantor.

The longer the term, the higher the present
value of the annuity payments and, thus,
the lower the value of the remainder interest for gift tax purposes.
If the grantor of the GRAT dies during the annuity term, however,
- the fair market value of the property within the GRAT, as of the grantor’s date of death, is included in his gross estate under Section 2036.
- If this occurs, the grantor does not save any transfer tax.

Question 25

Q

Transfers to Loved Ones

Full Consideration Transfer/Sales
- Grantor Retained Annuity Trust (GRAT)
  - Appropriate Time to Consider Using a GRAT

Answer

A

An appropriate time to consider using a GRAT is when:

the transferor holds property that is expected to appreciate at a rate greater than the Section 7520 interest rate applicable to the GRAT.

At the end of the GRAT term, (provided the grantor survives the annuity term) the property will transter to the remaindermen.

In this situation, the grantor will have transferred the appreciated remainder interest in the property at a gift tax cost
calculated using the present value of the
remainder interest at the date of transter.

Question 26

Q

Transfers to Loved Ones

Full Consideration Transfer/Sales
- Grantor Retained Annuity Trust (GRAT)
  - Risk

Answer

A

Upon creation of the GRAT, the greatest risk:

is the grantor’s failure to survive the GRAT term, causing the FMV of the property transferred to the GRAT to be included in the grantor’s gross estate.

Question 27

Q

Transfers to Loved Ones

Full Consideration Transfer/Sales
- Grantor Retained Annuity Trust (GRAT)
  - Income Tax Consequences

Answer

A

A GRAT is subject to the grantor trust rules for income tax purposes.

There are no income tax consequences on the initial transfer to the GRAT because for income tax purposes, the grantor is still deemed to own all of the assets in the GRAT.

All trust income flows through to the grantor annually, however, and is included in the grantor’s income without regard to the amount of the distributions made to the grantor.

Question 28

Q

Transfers to Loved Ones

Full Consideration Transfer/Sales
- Grantor Retained Unitrust (GRUT)

Answer

A

Another device similar to the GRAT is called a GRUT (Grantor Retained Unitrust).

Instead of paying a fixed annuity, a GRUT pays a fixed percentage of the trust’s assets each year as revalued on an annual basis.

The GRUT is less suitable for hard to value assets (e.g. real estate, businesses) because the annual revaluation requirement is cumbersome.

Question 29

Q

Transfers to Loved Ones

Full Consideration Transfer/Sales
- Qualified Personal Residence Trust (QPRT)

Answer

A

A Qualified Personal Residence Trust (QPRT) is a special form of a GRAT.

The grantor contributes a personal residence to a trust and instead of receiving an annuity in dollars, the grantor of the QPRT receives use of the personal residence as the annuity interest component.

At the end of the trust term, the residence passes to the remaindermen,:

and if the grantor is still living, he may then lease, at a fair-market-value rent, the property from the remaindermen and continue to use it as his personal residence.
If the grantor dies before the expiration of the trust term, the fair market value of the residence is included in the grantor’s gross estate.

A QPRT can hold one residence. Individuals can have up to two QPRTs.

Gift and Estate Tax Consequences (QPRTs):

The original transfer of the residence is treated as a gift to the extent that the fair market value of the residence exceeds the present value of the grantor’s retained interest (the use) as determined under Section 7520.

Question 30

Q

Transfers to Loved Ones

Full Consideration Transfer/Sales
- Tangible Personal Property Trust (TPPT)

Answer

A

Tangible Personal Property Trusts (TPPTs) are very similar to QPRTs, with one exception -

a TPPT is funded with personal property, not real property.
TPPTs usually transfer artwork, antiques, and other items of personal property that have the potential to appreciate in value.

Gift and Estate Tax Consequences (TPPTs):

The original transfer of the personal property to the trust is treated as a gift to the extent that the fair market value of the personal property exceeds the present value of the grantor’s retained interest.
As in the case of the QPRT, if the grantor dies during the term of the TPPT, the full fair market value of the trust property will be included in the grantor’s gross estate.

Question 31

Q

Transfers to Loved Ones

Full Consideration Transfer/Sales
- Family Limited Partnerships (FLP)

Answer

A

A family limited partnership (FLP) is a limited partnership created under state law:

with the primary purpose of transferring assets to younger generations using valuation discounts.

Usually, one or more family members transfer highly appreciating property to a limited partnership:

in return for both the 1% general and the 99% limited partnership interests.
In a limited partnership, the general partner has unlimited liability and the sole management rights of
the partnership, while the limited partners are passive investors with limited liability and no management rights.

Gift and Estate Tax Consequences:

Upon creation of the partnership, there are neither income nor gift tax consequences:
because the entity created (the limited partnership and all of its interests, both general and limited) is owned by the same person, or persons, who owned it before the transfer.
Once the FLP is created, the owner of the general and limited partnership interests values the limited partnership interests.
Since there are usually transferability restrictions on the limited partnership interests (marketability), and the fact that the limited partners have little control of the management of the partnership (control), limited partnership interests are usually valued with a substantial discount.

The original transferor (grantor) then begins an annual gifting program:

utilizing the discounts,
the gift tax annual exclusion, and
gift splitting (where applicable) to transfer limited partnership interests to younger generation family members.

Question 32

Q

Transfers to Loved Ones

Full Consideration Transfer/Sales
- Family Limited Partnerships (FLP)
  - Example

Question 33

Q

Transfers to Loved Ones

Full Consideration Transfer/Sales
- Family Limited Partnerships (FLP)
  - Asset Control
  - Asset Protection
  - Design and Implementation

Answer

A

Asset Control:

One of the unique features of the FLP, and perhaps its most important non tax benefit, is that the original owner/transferor can maintain control of the property transferred to the limited partnership by only retaining, a small general partnership interest.

Asset Protection:

The use of the FLP structure can also help protect family assets

Design and Implementation:

The creation of family limited partnerships and the use of discounts to transfer value at a lower gift tax cost has been regularly contested by the IRS. In several cases, however, the courts have ruled in favor of the taxpayer and upheld discounts on the valuation of limited partnership interests in the range of 10 percent to 40 percent, as long as the FLP was operated like a separate business.
The FLP should possess economic substance by having its own checking accounts, tax identification number, payroll (including payment of reasonable compensation to the general partner if he is managing the business), and should not allow family members to withdraw funds at will, nor should the FLP pay for personal expenses of its owners.

Question 34

Q

Exam Question - Intrafamily Transfer to Trusts

Alton would like to transfer the ownership of his Picasso painting to his son Edgar, but Alton would like to continue to have the painting hanging in his house. Which of the following would you recommend to Alton?

a) TPPT.
b) CRAT
C) QPRT.
d) FLP

Answer

A

Answer:

B is incorrect because Alton’s son Edgar is not a charity.

Answer C is incorrect because a QPRT, or Qualified Personal Residence Trust, is a special form of a GRAT to which the grantor contributes his personal residence.

Answer D is incorrect because a FLP would be more appropriate for transferring ownership of a family business than ownership of a painting.

Answer A is correct because TPPTs or Tangible Personal Property Trusts are funded with per-
sonal property and the grantor retains the right to use the property that has been transferred to
the trust.

CRAT is a charitable personal residence trust.

Question 35

Q

Exan Question - Transfers/Sales

Marie is the founder and sole owner of Purple Cakes Bakery. Allen has offered to buy her business for a price Marie considers reasonable, but Allen does not have all of the funds necessary to pay for the business at the current time. Marie is in good health, her true life expectancy is much greater than the IRS life expectancy factor, and she wants to accept Allen’s offer. Allen is not related to Marie and has good credit. Given these facts, which transfer method should be used to transfer the business to Allen?

a) Grantor Retained Annuity Trust.
b) Self-Canceling Installment Note,
c) Private Annuity.
d) Installment Sale.

Answer

A

Answer: D

Marie would sell the business to Allen utilizing a installment sale and would charge a reasonable rate of interest. Because Allen would not have to pay the full sale price at the date of the transfer, he would not need to have all of the funds necessary at that time. Because Allen is not related to Marie, she would not have any reason to enter into a GRAT, SCIN, or Private Annuity, which may inequitably benefit Allen. The best situation would be for Marie to sell the business to Allen in an outright cash sale, but that is not an option in this problem.

Question 36

Q

Medicaid

What Is It?
What Qualifies You For Medicaid?

Answer

A

Like Medicare, Medicaid is a health insurance program sponsored by the federal government but administered by the individual states. Medicaid is primarily intended to benefit certain low-income individuals and families.

Unlike Medicare, the Medicaid program will pay for long-term care in a nursing home for persons who meet the qualifications:

US Citizen or resident alien permanently residing in the US.
Age 65, disabled, or blind.
- ACA authorized expansion of Medicaid to American under age 65 who meet income limits, not all states have adopted this model.
- Children’s Health Insurance Program (CHIP) provides medical insurance for children under age 19 for families that don’t qualify for Medicaid.
Must meet income and asset tests that very by state. Most follow guidelines set by the federal Supplemental Security Income (SSN) program. For SSI, there is a limit of $2,000 on countable assets for in individual and $3,000 for a married couple when both are receiving care. The assets specifically not counted:
- Home (typically $525,000 to $750,000 of equity, some exceptions apply if applicant may return home or if it used by dependents);
- Car and personal property;
- Term life insurance, whole life with little to no cash value, retirement accounts;
- Real or personal property used in business or for the production of income.
To be eligible individuals must not only lack assets, but must also receive a low level of income.
- There are state varying limits, but commonly the income standard is 133% of the federal poverty
  level. In 2023 the federal poverty level for a family of 2 is $19,720 annually.

Question 37

Q

Medicaid

Medicaid Requirements are Strict?
Due to Increasing of People Giving Away Assets In Order to Qualify for Medicaid

Answer

A

Because the Medicaid eligibility requirements are strict, particularly with respect to the applicant’s income and resources, individuals often seek to plan for their Medicaid eligibility long before they need it.

Due to the increasing frequency of people giving away their assets in order to try to qualify for Medicaid, the federal government has adopted a penalty test that imposes a period of ineligibility upon anyone who gives away their assets in order to qualify for the income or resource requirements of Medicaid.

If an individual has transferred assets for less than FMV, the state must withhold payment for nursing facility care (and certain other long-term care services) for a period of time referred to as the penalty period.
States can “look back” to find transfers of assets for 60 months prior to the date that the individual applies for Medicaid.

Question 38

Q

Medicaid

Chart is a Summary of Transfer During Life

Question 39

Q

Medicaid

Medicaid Penalty Period Calculation

Answer

A

Medicaid Penalty Period Calculation for nursing homes is equal to the amount of money gifted or transfered in the 60 months prior to application, divided by the cost of the nursing home.

The time their transfered assets would pay for becomes the penalty period after they spend down their assets to an amount of Medicaid eligibility.

Bernice enters the nursing home with $50,000 in assets and applies for Medicaid. In the prior 60 months, she gifted 70,000 to her 7 grandchildren. The cost of the nursing home is $10,000 a month. Bernice’s assets will pay for the first 5 months of care. She will then face a 7 month penalty period before Medicaid will pay for her care.

Some transfers are permitted and will not cause a period of Medicaid ineligibility. Transfers to a :

spouse,
child who is blind or disabled, trust for the benefit of someone under age 65 and disabled,
transfer of a home to a child under age 21 that has lived in the home at least 2 years prior to the transfer to a nursing home, or
transfer of a home to a sibling who has an equity interest in the home or lived in it for at least a year before the applicant moved to the nursing home.

Federal government requires states to try to recover Medicaid costs. States generally pursue two approaches to cost recovery:

(1) from the deceased individual’s estate, and
(2) from liens on the individual’s property.

Long-term care partnership programs where established between the federal government and a majority of the states. These partnerships were created to encourage more people to purchase private long term care insurance to lessen the burden on Medicaid.

These programs establish special eligibility rules that allow individuals who purchase private long-term care insurance policy to qualify for Medicaid payments for long-term care after the insurance policy pays for the initial period of care.

Question 40

Q

Transfers at Death

Transfers by Will

Answer

A

A will is a legally enforceable document that transfers property to designated beneficiaries at death. To be effective, a will should meet the minimum requirements set forth under state law.

After the debts, expenses, and taxes have been paid, the remaining property is transferred to the beneficiaries, generally in the following order:

Personal property is transferred to legatees.
Real property is transferred to devisees.
Residuary legatees take anything remaining in the estate that has not been specifically disposed of by will.
The residuary estate consists of what is left after all specific bequests have been satisfied. If the estate is not sufficient to discharge all of the decedent’s bequests and the decedent has not expressed a preference, the order of disposition will be determined under decedent’s resident state law.

Universal/Residual Legatees:

A universal legacy is created when the testator gives to one or several persons his entire estate (all of my estate to A). A residual legatee receives the balance of the estate after all specific bequests are satisfied.

Per Stirpes/Per Capita:

In the event a child named as a residual or universal legatee is dead, or disclaims his interest, and such predeceased child has children, those children may take by representation per stirpes or per capita.

Disinheritance:

A testator may attempt to disinherit specific people, or a class of people, by not listing them as legatees in the will. Simply not listing an heir in a will may not be sufficient to disinherit.

Question 41

Q

Transfers at Death

Property Transferred at Death by Contact

Answer

A

There are a number of ways to transfer property at death by contract. These include use of:

life insurance,
annuities,
qualified plans,
individual retirement plans (IRAs),
transfer-on-death accounts (TODs),
Totten Trusts, and
payable-on-death bank accounts (PODs).

The beneficiary named under the contract will be the recipient of the property upon the decedent’s death.

Question 42

Q

Transfers at Death

Transfers at Death by Operation of Law

Answer

A

Titling:

Two forms of titling that have survivorship features are:
- joint tenancy with right of survivorship and
- tenancy by the entirety.

Trusts:

An irrevocable trust will operate in accordance with the terms of its governing instrument and is not subject to the probate process.
Some trusts are created by will (testamentary trusts), or are created (but not funded) prior to the grantor’s death waiting for assets to be transferred to them pursuant to the terms of the grantor’s will (standby trusts).
Care must be taken if assets under the will are to pour over to a preexisting trust or if nonwill assets (e.g., those under contract) are to pour over to a testamentary trust (beneficiary of life insurance is the XYZ trust, a testamentary trust).

Question 43

Q

Transfers at Death

Charitable Transfers at Death

Answer

A

All property of the decedent at death must be included in the gross estate.

There is, however, an unlimited charitable estate tax deduction.
There is no income tax deduction for assets left to a charity at death.

In the event a split interest charitable remainder trust (CRT) is established at death,

the charitable estate tax deduction is equal to the FMV of the property transferred to the CRT less the discounted present value of the retained interest (the annuity or unitrust). The annuitant could be the surviving spouse or some other person.

In order for such property to qualify for the unlimited marital deduction,

the surviving spouse must be the only noncharitable beneficiary.

Question 44

Q

Trusts!

Basic Structure of a Trust is Depicted by the Following Diagram

Question 45

Q

Definitions

Trust

Answer

A

A trust is a structure that vests legal title to assets in one party, the trustee, who manages those assets for the benefit of the beneficiaries of the trust.

The beneficiaries hold the beneficial, or equitable, interest in the trust.
To form a trust, a grantor of a trust transfers money or other property to the trustee.
The money or property transferred is referred to as the trust principal, corpus, res, or fund.
The trust principal will be managed by the trustee to accomplish the grantor’s objectives as expressed in the provisions of the trust document.

Question 46

Q

Parties

Grantor

Answer

A

The grantor (also known as settlor, trustor, or creator) is the person who creates and initially funds the trust.

The grantor establishes the terms and provisions of the trust

and determines the scope and limits of the trustee’s actions and discretion in managing the trust assets.

A trust may have multiple grantors.

Question 47

Q

Parties

Trustee

Answer

A

The trustee is the:

individual or entity responsible for managing the trust assets and
carrying out the directions of the grantor that are formally expressed in the trust instrument.

A trustee is vested with legal title to the trust assets, but must, at all times, act in the best interest of trust beneficiaries. As such, the trustee is considered to be a fiduciary.

The law imposes several duties to ensure that a fiduciary always acts in the best interests of those he is charged to protect. Among these duties are:

(1) the duty of loyalty and
(2) the duty of care.

These duties of loyalty and care can be summarized in a concept referred to as the Prudent Man Rule.

The Prudent Man Rule states that the trustee, as a fiduciary, must act in the same manner that a prudent person would act
if the prudent person was acting for his own benefit after considering all of the facts and circumstances surrounding the decision.

Most states have adopted the Prudent Man Rule as a way of assessing trustee performance, and have codified this standard in the Prudent Investor Act.

Question 48

Q

Parties

Beneficiary

Answer

A

The beneficiary is:

the person (or persons) who holds the beneficial title to the trust assets.
While the beneficiary’s name does not appear on the deed to the trust assets, the trustee must manage the assets in the best interests of the beneficiary.

A trust may have more than one type of beneficiary. Since most trusts are designed to terminate at some point in the future, the two most common types of beneficiaries are:

the income beneficiary and
the remainder beneficiary.

The income beneficiary is:

the person or entity who has the current right to income from the trust or the current right to use the trust assets.

The remainder beneficiary is:

the individual or entity who is entitled to receive the assets that remain in the trust on the date of its termination.

Traditionally,:

income beneficiaries are entitled to receive all of the income from the trust and the
remainder beneficiaries are entitled to receive the principal of the trust.

Question 49

Q

Reasons to Use a Trust

Management

Answer

A

One of the principal reasons for establishing a trust:

is to provide for the management of the trust property.

A trust can be used to provide professional management of assets for individuals who are:

not suited,
by training or experience,
to manage assets for themselves.

Question 50

Q

Reasons to Use a Trust

Creditor Protection

Answer

A

When asked, most individuals would say they would rather receive:

an outright transfer of money than a transfer in trust.

If, however, an outright transfer of assets is made,

the creditors of the recipient (judement creditors or otherwise) will have access to those funds.

If property is placed in a trust with appropriate spendthrift protection instead of being transferred outright,

the creditors of the beneficiary will not be able to access the funds in the trust to satisfy outstanding creditor claims,

A spendthrift clause, coupled with a provision that allows the trustee to make distributions solely on a discretionary basis, is a very strong and effective asset protection tool.

The spendthrift clause simply states
- that the beneficiary may not anticipate distributions from the trust, and may not assign, pledge, hypothecate, or otherwise promise to give distributions from the trust to anyone and, if such a promise is made, it is void and may not be enforced against the trust.

If the beneficiary is also the grantor of the trust,

the trust is referred to as a self-settled trust and,
as a general rule, spendthrift protection will not apply.

Question 51

Q

Reasons to Use a Trust

Split Interests in Property

Answer

A

A trust is often used to take a single asset or property interest and:

divide it into different interests to satisfy a client’s estate planning and wealth transfer objectives.

Question 52

Q

Reasons to Use a Trust

Avoiding Provate (Living Trust)

Answer

A

Perhaps one of the most popular uses of a trust is to avoid probate. In some states, probate is an expensive process, sometimes costing five to six percent of the value of the decedent’s estate.

An alternative to the probate process is the use of a revocable living trust.

All of an individual’s property is transferred to a revocable trust (a trust that the grantor can terminate at anytime) that is managed by the grantor and is for the benefit of the grantor during his lifetime.

Upon the grantor’s death, the trust becomes irrevocable and the property passes to the grantor’s heirs under the terms of the trust.

Since the probate court does not need to intervene and transfer the property (the property will transfer according to the trust document), probate costs and expenses are saved on the trust property.

It is important to note, however, that a revocable trust does not avoid estate taxes:

it only avoids probate fees and expenses.
Because the grantor retained an interest in the trust, the full FMV of the assets are included in his gross estate for estate tax purposes.

Question 53

Q

Reasons to Use a Trust

Minimizing Taxes

Answer

A

Trusts can generate tax savings as a result of:

(1) the transfer of future appreciation to the grantor’s heir
(2) the minimization of transfer taxes on subsequent generations, and
(3) the reduction in the size of the grantor’s gross estate.

When a grantor trust is created,

the grantor is required to pay the income tax liability on the trust income.
By paying the income tax liability, the grantor of the trust reduces his gross estate by the amount of the income taxes paid.

Question 54

Q

Trust Duration - The Rule Against Perpetuities

Answer

A

The rule against perpetuities (RAP) states that all interests in trust must vest, if at all, within lives in being plus 21 years.

From a practical perspective, the effect of the RAP was to place a limit on the amount of time that property could be held in trust.

Due to the uncertainties associated with the length of the perpetuities period under the RAP,

some states have adopted the uniform statutory rule against perpetuities.

Vest: This means that the beneficiary of the right or property interest is certain to receive a specific amount, either now or in the future.

Question 55

Q

Taxation of Trusts

Answer

A

All income a trust receives, whether from foreign or dormestic sources, is taxable:

to the trust
to the beneficiary.
or to the grantor of the trust unless specifically exempted by the IRC

To the extent that the income of the trust is distributed to the beneficiaries,

the beneficiaries who receive the distributions will be subject to income tax on the income.

The trust is allowed to deduct distributions to beneficiaries from its taxable income, with a few modifications.

Therefore, trusts can eliminate income by making distributions to beneficiaries.

Simple trusts are trusts that

mandate the distribution of all income

A complex trust, on the other hand,

is a trust that is permitted to accumulate income, benefit a charity, or distribute principal.
If the trust accumulates income, it will be taxed on that income at the trust income tax rates.

Whether or not a transfer to a trust will be taxable for gift tax purposes depends on the characteristics of the trust:

If the trust is a revocable trust, a transfer to the trust will
- not be considered a completed gift for gift tax purposes, and therefore, will not be subject to gift tax.
If the trust is an irrevocable trust, any transfer to the trust
- will be considered a taxable gift (unless the grantor retains some interest in the trust) subject to gift tax.

For estate tax purposes,

the assets held by an irrevocable trust funded during a grantor’s lifetime are generally:
- excluded from the gross estate of the grantor.
When a grantor funds an irrevocable trust for a noncharitable beneficiary,
- gift tax rules apply becauause the transfer is treated as a completed gift at that time.

The assets of an irrevocable trust are included in the grantor’s gross estate if a grantor makes a transfer to an irrevocable trust, but retains:

(1) the right to receive income from the trust;
(2) the right to use the trust assets;
(3) the ability to exercise voting rights on stock transferred to the trust;
(4) a reversionary interest with a value greater than 5% of the trust;
(5) the right to terminate, alter, amend, or revoke the trust; or
(6) the right to control beneficial enjoyment of the trust. To the extent that the grantor paid gift tax on the transfers made to the trust, and
- the value of the trust assets are included in his gross estate, the grantor’s estate will receive a tax credit for the gift taxes actually paid.

In the event a grantor makes a transfer to an irrevocable trust in which

the grantor retains an interest, and
the grantor releases his interest in the trust within three years of death,
the three-year rule (IRC Section 2035) requires the full FMV of the trust to be included in the grantor’s gross estate.

In addition to income, gift, and estate taxes, a trust may be subject to generation-skipping transfer taxes (GSTT).

Whenever a trust will include a skip person as a beneficiary, it is important to consider the GSTT ramifications,
and, if appropriate, allocate a portion of the GST exemption to the trust to avoid a current or future GSTT.

Question 56

Q

Taxation of Trusts

The Chart is a Summary of the Tax Issues Related to Trusts

Exam Tip: Know The Chart!

Question 57

Q

Exam Question - Trusts in the Gross Estate

Mary’s husband died two years ago. His will included three testamentary trusts: a trust for the benefit of Mary’s children, but giving Mary a general power of appointment over the trust assets (GPOA Trust); a bypass trust for the benefit of Mary’s children, but giving Mary a power to invade the trust for an ascertainable standard for the remainder of her life (Bypass Trust); and a charitable trust for the benefit of Mary’s alma mater (Charitable Trust). At Mary’s death, which of the trusts assets will be included in her gross estate?

GPOA Trust.
Bypass Trust.
Charitable Trust.

a) 1 only.
b) 1 and 2.
c) 2 and 3
d) None.

Answer

A

Answer: A

Only the GPOA Trust would be included in Mary’s gross estate. Because the withdrawal right of the Bypass trust was limited to an ascertainable standard, its assets are not included in Mary’s gross estate.

Question 58

Q

Tax Effect for Trusts

Chart

Know Chart

Question 59

Q

Classification of Trust Arrangements

Revocable Trust

Answer

A

The grantor of a revocable trust:

typically retains the right to revoke the trust at any time
prior to his incapacity or death.

Revocable trusts are commonly used to:

avoid probate and
to provide for management of the grantor’s assets should he become incapacitated.

Question 60

Q

Classification of Trust Arrangements

Irrevocable Trust

Answer

A

The grantor of an irrevocable trust:

cannot take back the property that was transferred to the trust.

To achieve estate tax and gift tax planning objectives, a trust must be irrevocable,

but not all irrevocable trusts are effective for estate tax purposes.
If, for example, the grantor retains some right over the property transferred to the trust,
- the value of the trust assets may be included in his gross estate for estate tax purposes.

Question 61

Q

Classification of Trust Arrangements

Inter Vivos Trust

Answer

A

Any trust that is created

during the lifetime of the grantor is
referred to as an inter vivos trust.

Question 62

Q

Classification of Trust Arrangements

Testamentary Trusts

Answer

A

A trust created after the death of the grantor is referred to as a testamentary trust.

Two of the most common types of testamentary trusts are

credit shelter (or bypass) trusts and
marital deduction trusts (OTIP Trusts, General Power of Appointment Trusts, or Estate Trusts).

Features of a Testamentary Trust:

Creation under a last will and testament
Results in the inclusion of assets in the gross estate.
Does not avoid probate.

Question 63

Q

Exam Question - Testamentary Trusts

Which of the following is not a feature of a testamentary trust?

a) Creation under a last will and testament.
b) Shifts an income tax burden to a lower-bracket taxpayer.
C) Results in the inclusion of assets in the gross estate.
d) Does not avoid probate.

Answer

A

Answer: B

All of the other answers are features of a testamentary trust.

Question 64

Q

Classification of Trust Arrangements

Standby Trusts

Answer

A

A standby trust, also known as a contingent trust,

is a trust created during the grantor’s lifetime that is
either unfunded or minimally funded.
The trust simply “stands by” and waits for a triggering event to activate it.

Answer 59

A

A pourover trust:

is a trust that receives assets from another source, generally the grantor’s estate at the grantor’s death.
The trust is generally unfunded or minimally funded until the assets “pour” into the trust.

Answer 60

A

Grantor trusts

can be revocable or irrevocable trusts,
but must be an inter vivos trust in order to qualify
for grantor trust status.

When a trust is characterized as a grantor trust,

the grantor of the trust, not the trust itself or the trust beneficiaries,
is responsible for paying the income tax attributable to the trust’s income.

Answer 61

A

A trust can be either funded or unfunded.

A funded trust is a trust that has received a transfer of property from the grantor.
An unfunded trust is a trust that has been drafted, but not funded. In some instances, individuals wish to have a trust created so that it is available to receive money or property in the future.

Answer 62

A

For income tax purposes,

a trust can be either a simple trust or a complex trust,

the tax consequences of which are discussed above.

Answer 63

A

Perhaps the most common type of trust created today is the revocable trust.

A revocable trust must be created during the grantor’s lifetime (once the grantor dies, he can no longer take action to revoke a trust), and is, therefore, a form of inter vivos trust.

All revocable trusts are

grantor trusts for federal income tax purposes, requiring the grantor of the trust to pay income tax on all of the trust income.

Answer 64

A

Probate Avoidance

Revocable trusts are effective probate avoidance devices.
When an individual creates a revocable trust and transfers all of his property to the trust, the disposition of the trust property at the death of the grantor will be governed by the terms of the trust and will not become part of the grantor’s probate estate.
A revocable trust becomes irrevocable upon the grantor’s death.
The use of revocable trusts is important in states that have high probate costs.

Privacy

Regardless of the costs associated with probating a decedent’s will, the use of a revocable trust can provide a degree of privacy for the decedent and his family. To probate a will, the will must be submitted to the probate court, and the probate process is generally a matter of public record.

Estate Taxes

Revocable trusts provide significant probate avoidance and privacy benefits, but are not effective for reducing taxes for estate planning purposes.
Because the trust is revocable by the grantor, the grantor
- has not made a completed gift to the revocable trust for gift tax purposes.
- Therefore, no gift tax is due upon creation of the trust,
- but the entire value of the trust is included in the grantor’s gross estate for estate tax purposes.

Answer 65

A

Answer: B

Answer B is an advantage of using a revocable living trust.

Answer A is incorrect because use of a revocable living trust does not reduce the grantor’s federal estate taxes because the full fair market value of the trust assets are included in the grantor’s gross estate.

Answer C is incorrect for the same reason.

Answer D is incorrect because the trust agreement, not the grantor’s will, controls the distribution of the trust assets.

Answer 66

A

Answer: C

The primary purpose of a revocable living trust is to avoid the probate process. The trust assets will transfer per the trust document and will not pass through probate.

A revocable living trust does not reduce a grantor’s gross estate or offer any temporal discounts because a completed gift has not occurred.

The assets of a revocable living trust are included in a grantor’s gross estate at FMV at the grantor’s date of death.

The rule against perpetuities is not an issue with a revocable living trust because the assets will vest at the grantor’s date of death.

Answer 67

A

To achieve estate and gift tax benefits, a trust created during the grantor’s lifetime must be irrevocable.

When an inter vivos irrevocable trust is created,

the grantor cannot take the property back after it has
been transferred to the trustee.
Consequently, a transfer of money or property to the trust is considered a completed gift to the beneficiaries of the trust, and gift tax may be due at that time.

Answer 68

A

Most transfers to trusts are transfers of a future interest and are

therefore not eligible for the annual gift tax exclusion.

A transfer to a trust which requires the income of the trust to be paid to the income beneficiary each year, however,

will qualify as a gift of a present interest eligible for the annual exclusion to the extent of the present value of the income interest.

Also, a transfer to a trust which includes a Crummey power:

will qualify as a present interest and will be eligible for the annual exclusion (discussed in detail below)

Answer 69

A

A Crummey power makes it possible to qualify a transfer to an irrevocable trust for the gift tax annual exclusion.

A Crummey power (named for the taxpayer who first used the technique) allows the beneficiaries of the trust to withdraw any contribution made to the trust within a certain period of time (typically 30 days).

Remember, however, that whenever a trust that gives the beneficiaries the right to demand distribution of the grantor’s contribution to the trust is created, the “5 and-5” power must be considered.

There are 3 primary ways of dealing with the lapsing issue from an estate planning perspective

First, Some grantors will state that the withdrawal right of each of the beneficiaries shall be no more than the lesser of:

(1) the gift tax annual exclusion amount, or
(2) the greater of $5,000 or 5% of the trust corpus.
When this approach is taken, the beneficiary will not be subject to an estate tax consequences, provided that he allows the general power of appointment to lapse.

The second method of dealing with the lapsing issue is to create a hanging power.

A hanging power states that, to the extent that a demand beneficiary has a right to withdraw that does not lapse (the portion over the “5-and-5” amount), the nonlapsing portion will hang over to a subsequent year, when it can lapse under the “5-and-5” standard.

A third way of dealing with the lapsing issue is to:

give the demand beneficiary a continuing right to appoint a portion of the trust equal to the nonlapsing amount.
This is a simpler solution than the hanging power, but will result in a small inclusion in the beneficiary’s gross estate

Answer 70

A

“5-and-5 Power”

allows the beneficiary the right to appoint the greater of $5,000 or 5% of trust assets.

The power is made noncumulative,

so when it is not exercise for a given year, it lapses.
Thus, failure to exercise this power in any will not result in gift tax consequences.

If the power has not been exercised in the year of death,

the beneficiary’s gross estate will only include the greater of $5,000 or 5% of the property
and not all the trust assets.

Answer 71

A

A life insurance trust is an irrevocable inter vivos trust often referred to as:

an irrevocable lite insurance trust (ILIT) or wealth replacement trust (WRT).

The purpose of an ILIT is to:

prevent an insured party from having incidents of ownership in the life insurance policy on his life.
When a person owns a policy on his own life, the death benefit of that policy is included in his gross estate.
Provided that an insured person did not own the policy or any incident of ownership over the policy within three years of his death, the death benefit of the policy is not subject to estate taxation.

When an ILIT is created, the grantor often wants to qualify the gifts to the ILIT

for the gift tax annual exclusion so that his applicable gift tax credit amount will be available for other planning either during lifetime or at death.
Since an ILIT is irrevocable, transfers to the ILIT are usually made subject to a Crummey withdrawal right on behalf of the beneficiaries.

Note: Policies transtered into an ILIT are subject to the estate gross up rules.

New policies bought within the ILIT are immediately removed from the estate and not subject to the gross up rules.

Answer 72

A

A bypass (or credit shelter) trust, also known as a “B Trust,” is commonly used in estate planning.

A bypass trust can be either an inter vivos (during litetime) or a testamentary (at death) trust.

Answer 73

A

The most common approach to using a bypass trust creates the trust at the individual’s death.

Most couples who have over $12,920,000 and less than $25,840,000 in joint assets (in 2023) can completely avoid federal estate taxation by transferring $12,920,000 in property to a bypass trust at the death of the first spouse.
While the $12,920,000 will be subject to estate tax (since it will not qualify for the marital deduction), the decedent’s applicable estate tax credit will be available to completely offset estate tax up to $5,113,800.

The bypass trust can be structured so that all of the income of the trust is payable to the surviving
spouse.

In addition, the trustee can be given the right to make discretionary distributions of principal for the surviving spouse’s health, education, maintenance, and support (an ascertainable standard).
Furthermore, the surviving spouse can be given the right to demand, on an annual basis, the greater of $5,000 or 5% of the trust corpus.

Upon the surviving spouse’s death,

the assets in the bypass trust usually pass to the children (or some other noncharitable beneficiary), and
are not included in the surviving spouse’s gross estate
for federal estate tax purposes.

Answer 74

A

While most individuals create a bypass trust at death, creating an inter vivos bypass trust can yield even bigger benefits.

When all property transfers occur at the death of an individual, everything is potentially included in the gross estate and subject to estate tax.

Instead of waiting until death to create the trust,

an individual can transfer $12,920,000 in assets
(2023) to an inter vivos bypass trust and shield the transfer with the applicable gift tax credit amount of $5,113,800.
Once this is accomplished, all future growth and appreciation in the property that is transferred to the bypass trust escapes federal estate taxation at the decedent’s death.

Answer 75

A

Answer: A

A Bypass, or Credit Shelter, Trust would be the best option to accomplish Sharon’s goals.

Answer 76

A

Power of appointment trusts are inter vivos or testamentary irrevocable trusts.

As the name implies, the trust grants the beneficiary a power of appointment over the trust assets.
The power of appointment can be a general power of appointment or
a limited (special) power of appointment.
The power must be a general power of appointment, however, to qualify for the marital deduction.

Power of appointment trusts

are frequently used in planning to take advantage of the unlimited estate tax marital deduction.

Power of appointment trusts may also be used to avoid the generation-skipping transfer tax.

By granting a nonskip person a general power of appointment over a trust that will distribute assets to a skip person, it is possible to change the identity of the transferor for tax purposes.
Since the nonskip person will be required to include the value of the trust assets in his gross estate
because of the general power of appointment, he will be considered the transferor for generation-skipping transfer tax purposes.

Answer 77

A

A QTIP trust, which is typically created at the death of the first spouse to die,

grants the surviving spouse a lifetime right to the income of the trust while transferring the remainder interest to individual(s) of the grantor’s choosing.
A QTIP trust qualifies for the unlimited marital deduction
- even though the spouse does not receive outright access to the assets.

Answer 78

A

Answer: C

Answer A is incorrect because a QTIP is not the same as a “B” trust.

Answer B is incorrect because the income of the trust must be paid to the spouse, not to any other beneficiary.

Answer D is incorrect because the surviving spouse does not choose the remainder beneficiaries of the QTIP.

Answer 79

A

Grantor Retained Income Trusts (GRITs) are trusts created by a person who keeps an income interest in the trust.

Generally, the grantor will transfer property to the trust,
retain some form of income interest for a period of time, and
upon termination of the trust, transfer the remainder interest to a third party.

Since the third party does not receive the immediate right to possess or enjoy the property,

a discount on the value of the remainder interest is available due to the passage of time (referred to as a temporal discount).

Answer 80

A

Grantor Retained Annuity Trusts (GRATs) are a special type of GRIT

created when the grantor funds a trust and retains a right
- to receive a fixed percentage
- of the initial contribution to the trust
- on an annual basis
- for a specified term of years.

Answer 81

A

Answer: B

The present value of the expected future remainder interest is a gift of a future interest subject to gift tax. The value of the expected future remainder interest is $1,140,000 ($2,000,000 - $860,000). Because this is a gift of a future interest, it does not qualify for the annual exclusion.

Answer 82

A

Answer: D

The transfer of the remainder interest is a gift to his children. Because it is a gift of a future interest, it is not eligible for the annual exclusion. Thus, Kevin’s taxable gifts for the year are $2,500,000 ($4,000 000 - $1,500,000).

Answer 83

A

A Grantor Retained Unitrust (GRUT) is the second form of GRIT which has the same characteristics as a GRAT with one exception:

the income stream received by the grantor is a fixed percentage of the annual value of the trust assets.

Instead of fixing the dollar value of the distribution to the grantor,

a GRUT provides a variable income stream that will
- increase as the value of the assets inside the trust increases,
- or decrease as the value of the assets in the trust decreases.

Answer 84

A

A Qualified Personal Residence Trust (QPRT) is a GRAT

in which the grantor contributes a personal residence to the trust and
the retained income interest is the grantor’s right to “use” the personal residence.

Answer 85

A

Answer: D

The QPRT, Irrevocable Trust, and Revocable Living Trust would ensure that Jim would receive Maxwell’s assets at Maxwell’s death because the assets will transfer per the trust document.

Maxwell’s family will not be able to contest the transfers from the trust.

A testamentary trust will not ensure that Jim will receive Maxwell’s assets because a testamentary trust would be first created in Maxwell’s will.

The family could contest the will and block the transfer to the testamentary trust. In such a case, Jim would not receive the assets.

Answer 86

A

Tangible Personal Property Trusts (TPPTs) are very similar to QPRTs, with one exception

personal property, not real property, is used to fund them.

Answer 87

A

Dynasty trusts are arrangements designed to

last for very long periods of time (preferably forever,
if created in a state that has abolished the rule against perpetuities).

The primary advantage achieved through use of a dynasty trust

is an ability to avoid transfer taxation at the death of each generation of the family,

Answer 88

A

When a grantor trust is created, the grantor,

not the trust or its beneficiaries, will be subject to income tax on the trust income.

Grantor trusts have many names (mostly used for marketing purposes), and include

“Intentionally Defective Grantor Trust (IDGT)”
- (sometimes pronounced “I-dig-it” or “Id-It” depending on your location in the country),
“Defective Trust;” and
“Intentionally Defective for Income Tax Only Trust
(IDIOT),”

The term defective merely means that,

for income tax purposes, there is a defective provision in the trust requiring the grantor to pay tax on the trust income.

“Defective” does not imply

that the trust will not be effective for estate, gift, or generation-skipping transfer tax planning purposes.

Answer 89

A

Strictly speaking (from a legal perspective), minors are not permitted to own property.

If property is transferred to a trust for the benefit of a minor, the minor will not be able to legally access those funds until the later of:

(1) the date the minor reaches the age of majority, or
(2) the date set forth in the trust instrument.

Since the minor cannot receive a present right to enjoy or use the property, any gift to a trust for the
benefit of a minor would be considered a future interest gift.

As previously stated, a future interest gift does not qualify for the gift tax annual exclusion.
Consequently, any transfer to a trust for a minor (even those under $17,000 in value, the 2023 gift tax annual exclusion)
would require the donor to use part of his applicable gift tax credit amount or,
if the applicable gift tax credit has been previously used, pay gift tax.

The IRC does provide two exceptions, thus allowing the transfer to a trust for the benefit of a minor to qualify for the annual exclusion.

Section 2503 of the IRC states that if property is transferred to a trust for the benefit of a minor that meets the requirements of Section 2503(b) or 2503(c), the transfer will be treated as a present interest gift that qualifies for the gift tax annual exclusion
even though, absent these provisions, the gift tax annual exclusion would not apply.

In enacting Section 2503 of the IRC, Congress recognized that individuals may wish to make transfers to minors in a way that would not result in using their applicable gift tax credit amount.

Answer 90

A

A 2503(b) trust may hold property in trust for the lifetime of the beneficiary (or beneficiaries),

but must make income distributions to the beneficiary (or beneficiaries) on an annual basis.

This means, at a minimum, the interest and dividends received by the trust must be distributed.

Once distributed, the income can be placed in a custodial account for the benefit of the child, or may be used for the child’s benefit.

Gifts made to a 2503(b) trust will partially qualify for the gift tax annual exclusion.

The portion qualifying for the gift tax annual exclusion equals the present value of the income interest that the child will receive over the term of the trust.

Answer 91

A

A 2503(c) trust, unlike its counterpart the 2503 (b) trust,

allows income to be accumulated in the trust,
and allows the grantor to qualify the entire gift to the trust up to the annual exclusion amount for the gift tax annual exclusion,
but can only have one beneficiary.

The trustee of the 2503(c) trust may, but is not required to,

make principal and income distributions for the benefit of the child.
In order to achieve these benefits, the trust must terminate when the child reaches age 21,
or, at a minimum, the child must be given the right to receive the trust assets at age 21

Answer 92

A

Crummey trusts, as discussed above, are trust agreements that

allow the beneficiary to withdraw the contribution made by the grantor to the trust.

The withdrawal right is generally limited to the gift tax annual exclusion amount.

In granting the beneficiary a withdrawal right, however,
a general power of appointment is conferred, and it is important to consider the lapsing issues under the “5-and-5” power created by the withdrawal right.

Answer 93

A

Charitably inclined individuals frequently use trusts to accomplish two objectives:

(1) transfer assets to charity in a tax efficient manner; and
(2) assist in estate planning by transferring assets to noncharitable beneficiaries.

Charitable Remainder Trusts (CRTs) are created

when the grantor transfers assets to a trust,
retains an annuity or unitrust interest for a period of time or for his life,
and the remainder value passes to a qualified charity.

Charitable Lead Trusts (CLTs) are created

when the grantor transfers assets to a trust,
gives an income stream (must be an annuity or unitrust interest to qualify for the charitable deduction) to a charity for a fixed period of time followed by a transfer of the remainder interest in the trust to a third party or,
possibly, back to the grantor.
If a third party is named as remainder beneficiary of the trust, use of a CLT can achieve significant wealth transfer goals.

Private Foundations may be structured:

as either corporations or trusts,
but most family foundations use the trust form.

A private foundation manages a family’s social capital, and makes a distribution of at least 5% of its assets each year to charitable organizations or charitable causes.

Private foundations are often coordinated with other charitable techniques,

such as charitable remainder trusts and
charitable lead trusts,
to maximize the tax and charitable benefits available to the grantor.

Answer 94

A

Totten Trusts are not really trusts, but

rather bank accounts that include payable on death beneficiary clauses (PODs).

A bank account with a payable on death clause is transferred to the named beneficiary upon the death of the owner and escapes probate.

Answer 95

A

A blind trust is a revocable trust arrangement

whereby an individual transfers property to the trust for management purposes when self-management of the assets might be deemed to be a conflict of interest.

Blind trusts are commonly used

by high ranking political officials to provide management of their assets during their term in office.

Answer 96

A

Gifts to charity can be made during life (inter vivos) or at death (causa mortis).

General Issues Regarding Charitable Contributions and Taxation:

Gifts to qualified charities during life under the annual exclusion are not taxable gifts,
and gifts in excess of the annual exclusion are eligible for the unlimited charitable gift tax deduction.
In addition, direct gifts to charities made during life usually generate a current income tax deduction for the donor.
All gifts made at death to qualified charities are deducted from the decedent’s adjusted gross estate to arrive at the taxable estate.
A gift tax return will be required for any split interest gift involving a qualifying charity and any other donee or where the donor is required to file a gift tax return as a result of noncharitable gifts made during the year.
Under certain conditions, the value of an otherwise lifetime gift to charity may be included in the decedent’s gross estate. Such an amount, however, will also be deducted from the adjusted gross estate to arrive at the taxable estate.

Answer 97

A

Charitable organizations can be categorized as:

public charities,
private operating foundations, or
private nonoperating foundations

Public charities are those that receive broad support from the general public. Specifically, an organization must meet two tests.

The first test, under Section 509 (a) (2)(A) of the IRC, states:
- that more than one-third of the organization’s support must be from a combination of
- gifts, grants, contributions, membership fees, and gross receipts from sales in an activity
- which is not an unrelated trade or business.
The second test, under Section 509(a)(2) (B), requires that
- not more than one-third of an organization’s support can come from
- the sum of gross investment income
- plus unrelated business taxable income (reduced by related taxes).

If an organization does not meet the two tests described above, it is considered to be a private foundation.

Private foundations:

generally receive their support from a single individual or family and can be classified as either operating or nonoperating.
Private operating foundations are those that spend at least 85 percent of their adjusted net income
(or minimum investment return, if less) on activities engaged in for the active conduct of an exempt
purpose.
- In addition, an assets test, endowment test, or support test must be met.
If a private foundation does not meet the tests to be classified as operating, then it is deemed to be a
private nonoperating foundation.

Answer 98

A

Individuals may deduct cash contributions:

made to qualified charitable organizations subject to some limitations.
The value of the cash contribution is reduced by any tangible benefit received by the donor from the donation.

If a taxpayer receives an item of low value (de minims) that has the organization’s name or logo on it,

then the contribution is deductible in full.

Donations made to college and universities that receive a right to purchase athletic event tickets are:

not a deductible charitable donation (ICJA 2017).

Answer 99

A

When donating services to a charitable organization:

only the unreimbursed out-of-pocket expenses directly connected with the services are deductible.
The value of the service itself is nondeductible.

Examples of deductible out-of-pocket expenses include:

Answer 100

A

Generally, the income tax charitable deduction for donated property is:

the FMV of the property at the date of the contribution, subject to AGI limitations which are dictated by the type of property donated.

Ordinary Income Property

Ordinary income property is property that, if sold, would result in recognition of ordinary income.
- Examples include inventory, capital assets held one year or less, and works of art created by the donor.
The deduction for donated ordinary income property is equal to
- the FMV of the property reduced by any ordinary income that would have resulted from its sale.
- In the event the FMV is less than the adjusted basis (no ordinary income would result from this sale), the deduction is equal to
  - the FMV of the property itself.

Answer 101

A

Property that, if sold,

would result in either capital gain or
Section 1231 gain
is considered to be capital gain property.
This includes intangible property (e.g., stocks and bonds), tangible property (automobile), and real property.
There is a special requirement for tangible property put to an unrelated use that is discussed further below.

Otherwise, subject to the following two exceptions listed below, the charitable deduction for capital gain property:

is the property’s FMV.

Answer 102

A

There are two exceptions to the general rule of a FMV deduction for capital gain property.

The first exception occurs when capital gain property is donated to a private nonoperating foundation.
In that case, the deduction is limited to the adjusted basis of the property.

Answer 103

A

The second exception to the FMV deduction for capital gain property applies to:

donations of tangible property (property that is not realty, is not permanently affixed to the land, and is capital in nature) put to an unrelated use.
This includes art, jewelry, automobiles, books, etc., that are not created by the donor.

When tangible property is donated to a public charity and

is put to a use that is unrelated to the exempt purpose of the charity, then the deduction is limited to the donor’s adjusted basis of the property.

If the donation is made to a governmental entity, the donated property must be used

exclusively for public purposes, or it will be considered “unrelated use” property.

The assumption is that if the donated property is unrelated to the mission of the charity,

the charity will sell the donated property shortly after the date of donation.
Furnishings that are contributed to a charity and are used in the offices that carry out the charitable objective are considered related use property.

The taxpayer must establish at the time of the donation that the property will not be put to an unrelated use, or the taxpayer must be able to reasonably anticipate that it will not be put to an unrelated use

If one of these two requirements is met, the property is considered related use even if the charitable organization later sells or exchanges the property.

Answer 104

A

Depending upon the classification of the charitable organization and the type of donated property, the IRC [Section 170(b)] prescribes an adjusted gross income (AGI) limitation for contributions.

The income deduction limitation for individual contributions is either
- 20 percent,
- 30 percent, or
- 60 percent
- of the donor’s AGI, depending on the classification of the charitable organization and the type of property contributed.
Overall, the total deductible contributions for the tax year cannot exceed 50 percent of the donor’s AGI.

Answer 105

A

Public charities (including churches, schools, hospitals),
Private operating foundations, and
Private nonoperating foundations that distribute their contributions to either public charities or
private operating foundations within two-and-one-half months of their tax year end (referred to as a pass-through private foundation).

Answer 106

A

Contributions to private nonoperating foundations that do not qualify as 50 percent organizations:

(i.e., those private foundations that do not distribute within two-and-one-half months of the organization’s tax year end) are subject to either a
20 percent or
30 percent of AGI limitation,
depending on the type of property contributed.

Contributions of cash and ordinary income property are subject to a:

30 percent of AGI limitation limitation.

whereas contributions of long-term capital gain property:

are subiect to a 20 percent of AGI

Answer 107

A

If a taxpayer makes donations to both 30 percent and 50 percent organizations during a year:

the 50 percent donations are considered first.

Any charitable contribution deductions disallowed because of the AGI limitations may be:

carried over for five years and are used in a first-in first-out order.
The carryover amounts retain their classifications as 20 percent, 30 percent, or 60 percent donations.

Answer 108

A

The factors to Consider are:

The donor’s current AGI and the projected AGI for the next 5 years;
The FMV of the donated property;
The adjusted basis of the donated property;
and
The time value of money,

Answer 109

A

Answer: C

Answer C is correct because, given Donna’s AGI, she will obtain the maximum tax benefit by electing to deduct the adjusted basis of the antique, subject to a ceiling of 50% of her AGI. Electing to deduct the adjusted basis produces a deduction of $50,000 per year for four years, for a total charitable deduction of $200 000.

Answer B is incorrect because if Donna elects to
educt the fair market value of the antique, and is thus limited to 30% of her AGI, her deduction will be $30,000 per year for six years, or a total of $180,000, which is less advantageous than Answer B.

Donna may not take the deductions described in Answers A and Answer D.

Answer 110

A

Determining the FMV of donated property can be difficult. The FMV of any property is the price

at which a fully informed, willing seller and
a fully informed, willing buyer will complete a transaction.

Answer 111

A

Recall that a person may sell property at a price below its FMV to benefit a related party.

Persons may also sell property to a charity at a price below its FMV.

In such a case, the transaction is split into two transactions,

a sale element and
a charitable contribution element.

The adjusted basis of the property is allocated:

pro rata between the sale element and the charitable contribution element.

PRO RATA is proportional.

Answer 112

A

Answer: B

To calculate the capital gain/loss on a bargain sale to a charity, first calculate the ratio of the sales price compared to the fair market value of the property. In this case, the fair market value is $250,000 and the sales price is $75,000, or the sales price is 30% of the FMV.

Accordingly, 30% of the seller’s adjusted basis offsets the sales price received to calculate the capital gain/loss. Mike’s adjusted basis is equal to the FMV at his father’s date of death,

$120,000. 30% of $120,000 is $36,000.

Mike’s gain on the bargain sale is $75,000 -
$36,000 = $39,000.

Answer 113

A

The sale component of the transaction is reduced by the

pro rata allocation of basis.

Answer 114

A

The owner of stock in a closely held corporation makes a gift of the stock to a qualified charity with the understanding:

that if the charity puts the stock up for sale, the first offer to redeem the stock will be made to the corporation itself.

If the corporation had redeemed the stock directly from the stockholder,

this transaction would have been deemed a fully taxable disbursement of dividends by the IRS.

Answer 115

A

With the dramatic increase in individual retirement life expectancy, charities have been promoting charitable gift annuities.

The transaction is usually an inter vivos transfer of property to a charity
in exchange for the charity’s promise to pay an annuity either to the donor, the donor and his spouse, or to another person.

The annuity paid to the donor is dependent upon the age of the donor (annuitant), or donors (annuitants) in the case of a joint life annuity.

An older donor will receive a greater annuity percentage payout due to reduced life expectancy,
but in either case the present value of the annuity will be less than the value of the property contributed to the charity in return for the annuity.

The charitable annuity can be created to provide either an immediate or a deferred benefit annuity.

If the annuity is paid to the donor, the donor receives a charitable income tax deduction in the year of the
transfer and removes the value of the asset from his gross estate.
In the case of an annuity payable to another person, the donor receives a charitable income tax deduction equal to the present value of the remainder interest,
the value of the property may not be included in his gross estate, and the donor has made a potentially taxable gift (equal to the present value of the annuity) to the person who receives the annuity.

Answer 116

A

A donor may transfer encumbered property directly to a charity in exchange for the charity’s payment of an annuity to the donor.

Calculation of the Donation

The donation equals the
- FMV of the property minus the principal of the mortgage and the present value of annuity.
- The annuity is valued using Section 7520 interest rates.

Income Tax Consequences

Each benefit component (the relief of the mortgage and the annuity) receives a proportionate allocation of
- basis,
- potential capital gain, and
- ordinary income.
Any capital gain and the ordinary income related to the mortgage must be recognized in the year of the transfer.
The donor can avoid recognizing the ordinary income and capital gain associated with the annuity in the year of transfer if:
- (1) the annuity is non-assignable to the charity and
- (2) the donor or the donor and his designated survivor’s trust are the only annuitants.
Under these conditions, the annuitant will recognize return of capital, ordinary income, and capital gain ratably over the life of the annuity - the life expectancy of donor.

Encumberence: a claim against an asset by an entity that is not the owner

Answer 117

A

Life insurance may be donated to charities and has certain advantages over other property.

Death proceeds from life insurance:

are received tax free to a charity and
are received without delay of probate or
other administrative processes by simply providing the insurer with a certified death certificate.

A gift of life insurance to a charity is valued according to

general gift tax rules (fair market value at the date of gift).

When life insurance is sold,

any gain is ordinary gain, so a gift of life insurance is a gift of ordinary income property.

Therefore, the charitable deduction is equal

to the lesser of the donor’s adjusted basis or the FMV of the life insurance policy.

Answer 118

A

Life insurance premiums paid by an employer for a group term life insurance policy (up to a face value of $50,000) are

excluded from an employee’s gross income.

Any group term life insurance coverage in excess of $50,000 paid for by an employer will

create taxable income based on the table life insurance rates under Section 72.

An employee can avoid such income inclusion by:

irrevocably naming a charitable beneficiary for any amount of employer-provided life insurance in excess of $50,000.

Answer 119

A

A lifetime charitable gift may:

produce an income tax deduction, but

if a charitable gift is made at an individual’s death,

no income tax deduction is available.

There may, however, be estate tax benefits.

The date of the gift is determined by the date of irrevocability.
If an individual makes a charitable gift at his death, the value of the asset is included in his gross estate,
but the value of the asset is fully deductible from the adjusted gross estate (unlimited charitable deduction) to arrive at the taxable estate.

Answer 120

A

A charitable trust:

can be a useful vehicle for a donor who wants to make a donation to charity,
but does not want to give an undivided interest to the charity.

For example, a donor who owns appreciated stock, real property, or a business,

and needs the income from the property for living or retirement expenses,
but wishes that the ultimate ownership of the property will transfer to charity at a later date.

Conversely, the donor might not currently need the income from the asset,

but would like the stock, or other asset, to pass to a spouse or a child at the donor’s death. A charitable donation of a split interest can provide a solution to these two scenarios and fulfill the donor’s objective.

The advantages of charitable trusts created during life are that the donor:

gets a charitable income tax deduction at the time of the transfer,
retains some right to enjoy the property, and
reduces his gross estate.

To receive the current income tax deduction at the creation of a charitable trust, the trust must be in the precise form of one of the following:

Pooled Income Fund
Charitable Remainder Trust (Annuity or Unitrust)
Charitable Lead Trust (Annuity or Unitrust)

Answer 121

A

Pooled income funds are analogous to a mutual fund provided by a charity.

All donor contributions are pooled into a trust
created and maintained by a single charity, and
each donor receives an allocable share of the trust’s income for life.

Answer 122

A

A Charitable Remainder Annuity Trust (CRAT):

is less flexible than a CRUT.

CRATs provide a fixed annuity to the donor for an amount that is

at least 5% (but not more than 50% for transfers after June 18, 1997) of the
initial net FMV of the property contributed to the trust.

Even if the principal must be invaded,

the annuity must be paid at least annually to the donor.

The term of the annuity

may be for life, or
if for a certain number of years, must be no more than twenty years.

The remainder interest is paid to a named charity,

and once a CRAT is established, additional principal contributions are not allowed.

The trustee of a CRAT can be given the right,

known as a sprinkling provision,
to make distributions to the income beneficiaries as he desires.

Even though the trust is irrevocable,

the donor does not have to notify the charity of its beneficial status,
and the donor may reserve the right to change the designated remainder charitable beneficiary to another qualifying charitable organization without affecting the trust or its charitable status.

Answer 123

A

A charitable remainder unitrust (CRUT) provides more flexibility than a

CRAT

The yearly pay out is a

fixed percentage, or
fraction, that is
at least 5% (but not more than 50% for transfers after June 18, 1997) of the annual net FMV of the assets.

To determine the yearly cash payment, the assets are revalued annually.

Unlike the CRAT, the CRUT annuity payments may be limited to the income earned by the trust,
with a catch up provision if the income later exceeds the current percentage payout.

A CRUT which includes such language is often referred to as a

NIMCRUT, a Net Income With Make-Up Trust.

Contrary to a CRAT, the settlor of a CRUT may make

additional principal contributions after the trust is established.

The trustee of a CRUT can also be given a:

sprinkling provision to make distributions to the income beneficiaries as he desires.

Answer 124

A

Charitable Remainder Annuity Trust (CRAT)

The calculation of the income (the annuity payment) and remainder interest of a charitable remainder annuity trust is fairly straightforward.

Charitable Remainder Unitrust (CRUT)

IRS Publication 1458 provides the factors for valuing remainder interests in CRUTs, and further guidance is given in the regulations to the IRC.

Answer 125

A

For an inter vivos CRAT or CRUT, the disenfranchised parties, if any, would be the normal heirs of the donor (usually the donor’s children).

In such cases, the income tax savings created by the charitable deduction, in real dollar terms,

can be used to purchase life insurance
which will serve as a wealth replacement asset for the asset
which was transferred to the charity.

Answer 126

A

The most common split interest charitable gifts are

CRATs and CRUTs

Answer 127

A

With a charitable lead trust,

the charitable organization receives the income interest during the term of the trust and a
noncharitable beneficiary (usually a family member) receives the remainder interest.

This vehicle is often used by high net worth individuals:

who do not need the current income from a particular asset or set of assets.

It is most advantageous to fund a charitable lead trust with

highly appreciating assets since future appreciation is effectively removed from the estate.

The trust is often structured to obtain an income tax deduction

equal to the full FMV of the property transferred
while the remainder interest is valued at zero to eliminate any taxable gift.

The charitable lead trust, which may take the form of annuity or unitrust (CLAT or CLUT),

is an irrevocable trust, and if the grantor (donor) drafts the trust document to treat the trust as a grantor trust then
the grantor will receive an income tax deduction at the inception of the trust.
The grantor, however, must subsequently recognize all income of the CLAT or CLUT.

The remainderman (noncharitable beneficiary) may either be the donor,

in which case the grantor trust status is certain, or
another family member (non-spouse) in which case
- there is a taxable gift equal to the FMV of the remainder interest. If an income tax deduction is desired, the trust must be designed as a grantor trust.

Answer 128

A

Answer: B

Answer A is incorrect because additional contributions may not be made to a CRAT.

Answers C and D are incorrect because a CLT would not provide a remainder interest to the charity.

Answer 129

A

The Charitable Remainder Annuity Trust would be the best option because the charity is the remainder beneficiary, and David would be theincome beneficiary.

The CRAT is a better option than the CRUT because the payout from the CRAT would be a fixed dollar amount, rather than a fixed percentage. David wants a stable payout each year which would lead us to a fixed-dollar
amount, and thus the CRAT.

Answer 130

A

The methods of charitable transfers at death (testamentary) include the following:

Specific bequest or device.
General legacy of a particular percentage or dollar amount of a decedent’s gross estate.
A residuary bequest.
A remainder interest in property-personal residence or farm.
A split interest in a charitable trust, income, or remainder interest.

Answer 131

A

Several requirements must be met for the estate tax charitable deduction to be permitted.

First, the bequest must be mandatory.
Second, the amount of the bequest must be ascertainable at the date of the decedent’s death, and the asset must be included in the decedent’s gross estate.

Answer 132

A

As detailed above, when tangible property is donated to a charity,

and the charity does not use the property for a related use,
the charitable deduction is generally equal to the donor’s adjusted basis.

Answer 133

A

If community property is donated to a charity and the donor, or donors, retain an interest in the property,

care must be exercised to avoid unwanted taxable results.

If separate property is used to fund a trust that benefits both spouses,

then a gift has occurred from the donee spouse to the other spouse.
While there is no federal gift tax due because of the unlimited marital deduction,
there may be a gift tax imposed by certain states
that do not have an unlimited marital deduction for state estate tax and/or state inheritance tax.

Answer 134

A

If the client’s primary objective is to maximize the income payments to the noncharitable beneficiaries, a CRUT is the better choice,

particularly if the trust assets are expected to appreciate.
Due to the guaranteed income payment from the CRAT, however, the noncharitable beneficiary would receive more from a CRAT than a CRUT if the value of the trust assets decline.

The CRAT has a significant cost advantage over a CRUT

holding the same property if the underlying
trust assets are not readily marketable and require a qualified annual appraisal.
This is because the CRAT only requires one valuation at the funding of the trust and a CRUT requires yearly valuations.
- Yearly appraisals for property that is not readily marketable can be very expensive.

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Lesson 3 of Estate Planning: Transfers Outright & In Trust Flashcards

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