Tax Planning 3- Tax Implications of Trusts and Estates Flashcards
True or False
Trusts and estates are separate, fiduciary entities for income tax purposes.
True
What is the rule that determines the amount and character of the income a trust or estate retains or distributes
Distributable Net Income (DNI) =
Taxable Income - Capital Gains + Tax Exemption
What are the various disciplines and authorities that impact the operation and taxation of a fiduciary entity?
(1) Contract law
(2) The governing documents;
(3) Federal income tax law;
(4) State income tax law;
(5) Accounting theory; and
(6) Probate law
The terms “irrevocable” or “revocable” refer to…
the grantor’s continued control over the
assets.
The grantor permanently transfers assets to the trust and releases all dominion and control over them- excluded from the gross estate
irrevocable
Allow the grantor continued control over the transferred assets- includible in the gross estate
revocable
Terms that refer to the income tax treatment of the entity and determine who bears the burden of paying the income taxes generated from the taxable income earned on the assets in the trust
grantor trust
and
non-grantor trust
Trust where the grantor is treated as the owner of the assets for income tax purposes and is responsible for the payment of taxes
Grantor trust
Trust where the grantor is treated as a
separate tax-paying entity and the fiduciary is responsible for the payment of taxes.
Nongrantor trust
Are revocable trusts often grantor trusts or non-grantor trusts?
Grantor trusts
Are nonrevocable trusts often grantor trusts or non-grantor trusts?
Non-Grantor trusts
A type of trust allowed in a small number of states where a person that creates the trust is also the beneficiary of the trust
Self-settled trusts
Types of self-settled trust are spendthrift trust and Domestic Asset Protection Trusts
True or False
A Self Settled Trust is a trust created by an individual to shield the individual’s own assets from creditors while allowing the individual to retain some level of interest in, or benefit from, the transferred assets.
True
An irrevocable trust that allows the grantor to also be a beneficiary of the trust.
Self Settled Trust also known as domestic asset protection trusts, self-designated trusts, or spendthrift self-settled trusts, a
Domestic Asset Protection Trusts
A financial instrument used in estate planning to minimize taxes on large financial gifts to family members. Under these plans, an irrevocable trust is created for a certain period of time. Assets are placed under the trust and then an annuity is paid out to the grantor every year. When the trust expires and the last annuity payment is made, the beneficiary receives the assets and pays little or no gift taxes.
Definition of a GRAT
Assets are placed under the trust and then an annuity is paid out to the grantor every year. When creating a GRAT, a grantor contributes assets in trust but retains a right to receive ____________________ the ____________ of the assets contributed to the trust while earning a rate of return specified by the IRS __________________.
When creating a GRAT, a grantor contributes assets in trust but retains a right to receive (over the term of the GRAT) the original value of the assets contributed to the trust while earning a rate of return specified by the IRS (known as the 7520 rate).
A grantor trust is considered a ____________ for income tax purposes. Therefore, any taxable income or deduction earned by the trust will be taxed on the ___________. In most cases, there will not even be a requirement to file a trust income tax return, as the income of the trust assets can be reported with your social security number.
A grantor trust is considered a disregarded entity for income tax purposes. Therefore, any taxable income or deduction earned by the trust will be taxed on the grantor’s tax return. In most cases, there will not even be a requirement to file a trust income tax return, as the income of the trust assets can be reported with your social security number.
Grantor-retained annuity trusts (GRATs) are estate planning instruments in which a grantor ___________ from which they earn ___________.
Grantor-retained annuity trusts (GRATs) are estate planning instruments in which a grantor locks assets in a trust from which they earn annual income.
Upon expiry, ____________ receives the assets with minimal or no ______________.
Upon expiry, the beneficiary receives the assets with minimal or no gift tax liability.
GRATs are used by wealthy individuals to minimize ______________.
GRATs are used by wealthy individuals to minimize estate and gift tax liabilities.
What is the estate tax risk when establishing a GRAT because it is a bet-to-live strategy?
Under a GRAT, the annuity payments come from interest earned on the assets underlying the trust or as a percentage of the total value of the assets. If the individual who establishes the trust dies before the trust expires the assets become part of the taxable estate of the individual, and the beneficiary receives nothing, making the GRAT useless.
fir a GRIT, once the _________ during which the grantor is eligible to receive income from the trust expires, one of two things can happen. First, the _________ in the trust can be distributed to its ______________.
If you don’t want the trust assets to pass on to beneficiaries right away, the other option is to ____________________. Beneficiaries can still receive assets from the trust, though it would happen _______________. The ________could decide when _____________would be eligible to receive assets. For example, they may have to reach a _______________, or the transfer may not happen until the grantor ________________.
Once the initial term during which the grantor is eligible to receive income from the trust expires, one of two things can happen. First, the remaining assets in the trust can be distributed to its beneficiaries.
If you don’t want the trust assets to pass on to beneficiaries right away, the other option is to continue to hold those assets in trust. Beneficiaries can still receive assets from the trust, though it would happen at a later date. The grantor could decide when beneficiaries would be eligible to receive assets. For example, they may have to reach a certain age first, or the transfer may not happen until the grantor passes away.
When assets are transferred to a GRIT, they’re valued at a ____________. This discount depends on _______________ for which you plan to draw income from the trust as the grantor. The ________the specified term is, the greater the retained income interest, which____________ the taxable gift to the beneficiaries at the end.
When assets are transferred to a GRIT, they’re valued at a discount. This discount depends on the number of years for which you plan to draw income from the trust as the grantor. The longer the specified term is, the greater the retained income interest, which lowers the taxable gift to the beneficiaries at the end.
Who cannot be a GRIT Beneficiary?
Spouse
Parents or spouse’s parents
Children or spouse’s children
Siblings or spouse’s siblings (or their spouses) inlaws spouses
Who can be a GRIT Beneficiary?
children of your siblings (nieces and nephews) or other distant relatives as the beneficiary to a GRIT
Who cannot be a GRIT Beneficiary?
Spouse
Parents or spouse’s parents
Children or spouse’s children
Siblings or spouse’s siblings (or their spouses) inlaws pouses
A grantor-retained income trust allows the _______________ to transfer assets to it while still being able to receive _______ from trust assets. The grantor maintains this right for a ________________.
A grantor-retained income trust allows the person who creates the trust to transfer assets to it while still being able to receive net income from trust assets. The grantor maintains this right for a fixed number of years.
When creating a GRUT, a grantor contributes assets in trust but retains a right to receive (over the term of the GRUT) based on the ________________ of the assets.
When creating a GRUT, a grantor contributes assets in trust but retains a right to receive (over the term of the GRUT) the annual valuation of the trust asset.
Similar to GRAT but payment is based on annual trust valuation not an original contribution.
A ____________ is a long-term trust created to pass wealth from generation to generation without incurring transfer taxes, such as estate and gift taxes. They are often used by very wealthy families to take advantage of the generation-skipping tax exemption of $12.92 million (in 2023).
Dynastic Trusts
Assets in a dynasty trust are held under the control of a trustee that the ________designates.
Assets in a dynasty trust are held under the control of a trustee that the grantor designates.
In order to act as a dynasty trust, the trust must ____ _______ ______—meaning _________ that heirs or beneficiaries take cannot be so large as to ___________________.
If the trust is not depleted by the _________, and state law does not otherwise limit the duration of the trust, then, at least theoretically, a dynasty trust could last ________.
They are often used by very wealthy families to take advantage of the generation-skipping tax exemption of _______million (in 2023).
In order to act as a dynasty trust, the trust must be kept “alive”—meaning withdrawals that heirs or beneficiaries take cannot be so large as to deplete the account.
If the trust is not depleted by the beneficiaries, and state law does not otherwise limit the duration of the trust, then, at least theoretically, a dynasty trust could last forever.
They are often used by very wealthy families to take advantage of the generation-skipping tax exemption of $12.92 million (in 2023).
Given the ____________________duration that is characteristic of a dynasty trust, an ___________________trustee (e.g., a financial services company or bank) is generally best suited to perform that role.
Given the multi-generational duration that is characteristic of a dynasty trust, an institutional trustee (e.g., a financial services company or bank) is generally best suited to perform that role.
Given the ____________________duration that is characteristic of a dynasty trust, an ___________________trustee (e.g., a financial services company or bank) is generally best suited to perform that role.
Given the multi-generational duration that is characteristic of a dynasty trust, an institutional trustee (e.g., a financial services company or bank) is generally best suited to perform that role.
