Lesson 5: Family Transfers Flashcards
In a FLP, there may be special valuation discounts available to enable wealth to pass to younger generations at a significantly lower tax cost than would otherwise be possible. One of these is the “lack of marketability” discount. What is the other?
A) The “limited partner” discount.
B) The “succession of generations” discount.
C) The “minority interest” discount.
D) The “property right” discount.
The correct answer is (C).
The other discount is called the minority interest discount.
A FLP offers all of the following advantages EXCEPT:
A) Significant discounts in valuing transfers of partnership interests.
B) A convenient way to gift assets that are generally difficult to break into easily giftable pieces.
C) A method of keeping appreciation of the FLP assets taxable to the older generation rather than heirs.
D) A means of giving away property while still maintaining control.
The correct answer is (C).
A FLP provides just the opposite — a method of shifting future appreciation in the value of assets to the next generation, who would likely be in a lower tax bracket.
Which of the following entities does not have the benefit of pass-through taxation?
A) FLP
B) LLC
C) C corporation
D) S corporation
The correct answer is (C).
A C corporation is a separate taxable entity.
Which of the following is not a benefit of an Intentionally Defective Grantor Trust (IDGTs)?
A) IDGTs allow the grantor to transfer property free of estate and income taxation.
B) A grantor can transfer appreciated property into an IDGT without incurring taxable capital gains on the transfer.
C) The grantor is liable for the trust’s income tax.
D) The grantor cannot reclaim the trust assets once they are transferred into an IDGT.
The correct answer is (A).
While IDGT transfers are irrevocable and therefore free of estate tax, the grantor is still liable for income tax on income earned by the trust assets because the trust is a grantor trust. All of the other statements are true.
Hannah, a wealthy business owner, wants to sell her business to her neighbor Dylan. Which of the following statements is not true regarding potential sale strategies?
A) If the sale is structured as a private annuity, Hannah cannot secure the sale with the business collateral and she will owe capital gains on the sale immediately.
B) If the sale is structured as an installment sale, Dylan and Hannah can negotiate the installment term, payment amount, and interest rate.
C) If the sale is structured as a SCIN, Dylan will make payments to Hannah for the rest of her life.
D) If the sale is structured as an installment sale, Hannah will recognize capital gains on each installment payment made.
The correct answer is (C).
The term of a SCIN is the installment term, however, if Hannah dies before the end of the installment term, Dylan is not required to make additional payments. All of the other statements are true.
In a typical family limited partnership:
A) The owners of the closely held business immediately upon its creation transfer general partnership interests to their children or grandchildren.
B) A discount is allowed on the gifts only if the children’s interest as a group will be less than 50%.
C) The children or grandchildren receive limited partnership interests.
D) The family limited partnership should be funded with assets that are not expected to appreciate faster than the 7520 rate.
The correct answer is (C).
The parents/grandparents retain general partnership interests while transferring limited partnership interests to children/grandchildren. A discount for minority interest/marketability can be used in valuation purposes. FLPs are particularly useful with assets expected to appreciate since the post-gift appreciation will be removed from the estate, and any appreciation on the interests that are not gifted will generally receive valuation discounts.
John is 67 years old and would like to transfer some of his assets to his adult son, Murray. John does not want to incur any gift tax liability and also needs some cash flow, so he is considering selling the assets to his son. A friend recently informed John that a self-canceling installment note (SCIN) is a good planning strategy. Which of the following statements regarding self-canceling installment notes (SCINs) is/are correct?
I. To be effective, a SCIN must reflect a risk premium to compensate the seller for the possibility of cancellation.
II. A seller of a SCIN may accept security without jeopardizing the installment sale treatment.
III. At the seller’s death, the present value of any remaining SCIN balance is excluded from the seller’s gross estate.
IV. A SCIN is a debt ordinarily extinguished at the seller’s death.
A) I only
B) III only
C) I and II
D) I, II, III and IV
The correct answer is (D).
All are correct. The present value of a self-canceling installment note balance is not included in the gross estate of the seller (decedent) since the value at death goes to zero.
Which of the following statements regarding a Grantor Retained Annuity Trust (GRAT) is/are true?
I. At the end of the GRAT term, a taxable gift will occur when trust assets are transferred to the beneficiary.
II. If the grantor dies during the trust term, a pro rata share of the trust assets will be included in the grantor’s estate.
III. Interest and dividends earned by assets in a GRAT are taxed to the grantor.
IV. If the grantor survives the trust term, none of the trust assets are included in the grantor’s gross estate.
A) I and IV
B) II and III
C) III and IV
D) I, II, and IV
The correct answer is (C).
Statement I is incorrect. A taxable gift will occur when the GRAT is established, not at the end of the GRAT term. Statement II is incorrect. If the grantor dies during the trust term, the entire value of the trust assets is included in the grantor’s gross estate, not a pro rata portion. Statement III is correct. The trust is a grantor trust; therefore, all income will be taxed to the grantor. Statement IV is correct. If the grantor survives the trust term, none of the trust assets will be included in the grantor’s gross estate. However, the taxable gift (that occurs when the trust is established) must be added back to the taxable estate as a prior taxable gift.
Which of the following statements regarding a Grantor Retained Annuity Trust (GRAT) is/are true?
I. When the trust is established, a taxable gift occurs based on the present value of the remainder interest of the trust assets.
II. The gift that occurs when the GRAT is created is eligible for the annual exclusion.
III. For estate planning purposes, a GRUT (Grantor Retained Unitrust) is preferable to a GRAT if the assets in the trust are expected to appreciate in value.
IV. The beneficiaries of a GRAT will not receive a step-up in basis of the trust property if the grantor survives the trust term.
A) I and IV
B) II and III
C) III and IV
D) I, II, and IV
The correct answer is (A).
Statement I is correct. A taxable gift will occur when the GRAT is established.
Statement II is incorrect. The gift will not be eligible for the annual exclusion, since it is not a present interest gift. Statement III is incorrect. A GRUT will result in a higher annuity payment to the grantor each year (if the assets are appreciating in value). For estate planning purposes, the grantor would want to remove assets from the estate. Therefore, a GRUT would be inappropriate because it would bring a higher amount into the grantor’s estate each year than the GRAT. Statement IV is correct. If the grantor survives the trust term, the beneficiaries will not receive a step-up in basis of the trust assets. If the grantor died during the trust term, the trust assets would be included in the grantor’s gross estate; therefore, the heirs would receive a step-up in basis.
Which of the following statements regarding a Qualified Personal Residence Trust (QPRT) is/are true?
I. The grantor must survive the trust term to realize any estate tax savings.
II. After the trust term, the house will revert back to the grantor.
III. The grantor will have a taxable gift upon the creation of the QPRT.
IV. A QPRT is generally inappropriate for vacation homes.
A) I only
B) I and II
C) I and III
D) II and IV
The correct answer is (C).
Statement I is correct. If the grantor dies during the trust term, the entire value of trust property is included in the grantor’s gross estate. Statement II is incorrect. At the end of the trust term, ownership of the house will be transferred to the beneficiaries. Statement III is correct. The taxable gift will be based on the fair market value of the house (on the date of transfer) less the present value of the right to live in the house. Statement IV is incorrect. Vacation homes are often transferred to QPRTs.
