Lesson 6: Trusts Flashcards
A bypass trust is also known as a:
A) Credit shelter trust.
B) Marital trust.
C) Charitable remainder trust.
D) QTIP trust.
A bypass trust is also known as a credit shelter trust.
Notwithstanding any gift tax exclusion, Crummey powers are further limited in the following way to not be considered a taxable gift to the other trust beneficiaries if the holder of the power allows it to lapse:
A) Allowing the beneficiary to withdraw 5% of the trust assets.
B) Allowing the beneficiary to withdraw $5,000.
C) Allowing the beneficiary to withdraw $5,000 PLUS 5% of the principal.
D) Allowing the beneficiary to withdraw $5,000 OR 5% of the principal, whichever is greater.
The correct answer is (D).
The maximum is the greater of $5,000 or 5% of the principal.
An intentionally defective grantor trust does all of the following EXCEPT:
A) Removes assets from the grantor’s estate.
B) Freezes the value of the assets placed in the trust so that any appreciation goes to the beneficiaries tax-free.
C) Places the income tax burden on the grantor.
D) Allows the grantor to make changes to the trust.
The correct answer is (D).
The grantor cannot make any changes to the trust. The terms of the grantor trust are irrevocable.
If a trust receives assets passing under the will from life insurance proceeds, the trust is called a/an:
A) Pour-over trust
B) Bypass trust
C) QPRT
D) GRAT
The correct answer is (A).
A trust receiving assets passing under the will is called a pour-over trust.
What can a grantor use to fund a QPRT?
A) Assets that are expected to increase in value faster than the 7520 rate.
B) An interest in a closely held business.
C) A home or vacation home.
D) A home or vacation home and furnishings.
The correct answer (C).
A qualified personal residence trust must be funded by a personal residence or a vacation home and cannot include its furnishings.
A rolling GRAT is actually a series of:
A) GRATs with short terms.
B) GRATs with long terms.
C) remaindermen who are the same person.
D) codicils attached to a GRAT allowing it to last for the grantor’s lifetime.
The correct answer is (A).
A rolling GRAT is actually a series of GRATs with very short terms (e.g., two-year GRATs) to reduce the likelihood that the grantor will die during the trust term.
A donor who serves as trustee of a Section 2503(c) trust risks having the principal of the trust:
A) included in his or her own gross estate.
B) not considered a gift of a present interest.
C) held in the trust after the minor turns 21 years old
D) be subject to the kiddie tax.
The correct answer is (A).
A donor who serves as trustee of a Section 2503(c) trust risks having the principal of the trust included in his or her gross estate.
A donor with reservations about a child’s financial and emotional sophistication at the time they receive an outright distribution of all property from a 2503(c) trust at age 21 can do which of the following:
A) Delay the distribution by up to 10 years.
B) Dictate that the distribution be split into 5 equal parts spread over 5 years.
C) Make a decision at the time the minor turns 21 on whether to go ahead with the distribution or to allow the trust property to revert back to the donor’s estate.
D) Consider alternatives to the 2503(c) trust because full distribution at age 21 is a required part of the trust.
The correct answer is (D).
There is no way around the mandated full distribution of trust property at age 21, so donors with reservations about the wisdom of such a distribution should look into other options instead of the 2503(c) trust.
Cassie wishes to leave a sum of money to each of her minor grandchildren upon her death. She wants the investment income to be used to support them until they finish their education, and she wants the investment income from the funds to be taxed at as low a rate as possible. She does not want the grandchildren to have access to the capital until the age of 45. Cassie should leave the money to:
A) Each of her children to be invested for the benefit of the grandchildren.
B) Each of her grandchildren directly.
C) Testamentary trusts established for each of her grandchildren as beneficiaries.
D) Inter vivos trusts established for each of her grandchildren as beneficiaries.
The correct answer is (C).
Testamentary is upon death. The testamentary trust permits irrevocable provisions that accomplish Cassie’s objectives (income only to age 45). Statement (A) would not guarantee that her wishes would be fulfilled. Statement (B) would not guarantee the funds would be used for support while the children finish their education. Statement (D) would require her to transfer the assets to her grandchildren before her death. The correct answer is (C).
Testamentary is upon death. The testamentary trust permits irrevocable provisions that accomplish Cassie’s objectives (income only to age 45). Statement (A) would not guarantee that her wishes would be fulfilled. Statement (B) would not guarantee the funds would be used for support while the children finish their education. Statement (D) would require her to transfer the assets to her grandchildren before her death.
Angela and Barry, both in their late sixties, recently got married. Angela is wealthy and has a large portfolio of investments and real estate, with significant accrued gains. On her death, Angela wants to ensure a comfortable lifestyle for Barry, and she also wants to protect the balance of her children’s inheritance in the event that Barry remarries. In order to achieve these objectives and minimize tax on her death, Angela should leave her estate to Barry:
A) and the children in trust, with access to income and capital available to all beneficiaries on her death.
B) in trust, and in the event of his remarriage, trust assets would be distributed to her children.
C) in trusts, with access to only trust income for him, and on his death, trust capital would be distributed to her children.
D) in trust, with access to only trust income for him and, if required, for her children. And then on his death, trust capital would be distributed to her children.
The correct answer is (C).
A bypass trust would fulfill the objectives as it could provide income for life to her husband and the remainder will go to children. The other options would not allow for full utilization of the marital deduction.
