Tax Planning 5- Implications of Various Intra- Family Income Shifting Strategies

Question 1

What is the Step Transaction Doctrine?

Answer 1

Rule that the IRS uses to identify so-called sham loans and
transactions (that are often found in family transactions)

Question 2

What are the elements of the Step Transaction Doctrine?

Answer 2

The binding commitment test to determine whether a formal obligation is
required to complete each step of the transaction.
* The mutual independence test to determine if each of the steps in the
transaction were actually necessary or needed.
* The tax avoidance doctrine where the transaction is primarily intended to reduce
taxes rather than achieve some other purpose (also called the “intent test”).
* The substance-over-form doctrine where the transaction has minimal, if any,
nontax consequences.
* The business purpose doctrine where the transaction has no business purpose.

Question 3

What is the Economic Transaction Doctrine?

Answer 3

The economic substance doctrine is a common-law doctrine under which the tax benefits of a transaction are not allowed if the transaction does not have economic substance or lacks a business purpose.

Question 4

What are 4 ways a donor can make gifts to a minor?

Answer 4

1. Give an outright gift to the minor;
2. Use a uniform transfer to minor account;
3. Create a Crummey Trust; or
4. Create a Section 2503(c) (minor’s) Trust

Question 5

What method of giving to a minor qualifies for the annual gift exclusion and gives the minor immediate control of the property?

Answer 5

Outright gift

Question 6

What method of giving to a minor qualifies for the annual gift exclusion and transfers property for the benefit of a minor via a custodial account where the resignation of the custodian or termination of the custodianship does not trigger an estate tax- unless the donor appoints herself as custodian and dies before the minor reaches age of majority.

Answer 6

Uniform Transfers to Minor Act: Custodianship

Question 7

Income earned on assets given under the custodian statutes of Uniform Transfers to Minor Act:

Custodianship is generally taxable to the________; but the income from this property, to the extent it is used for the ______ __
the minor donee, is includible in the gross income of any person who is _____ _______ to support the minor donee.

Answer 7

Income earned on assets given under the custodian statutes of Uniform Transfers to Minor Act:

Custodianship is generally taxable to the minor; but the income from this property, to the extent it is used for the support of
the minor donee, is includible in the gross income of any person who is legally obligated to support the minor donee.

Question 8

What method of giving to a minor qualifies for the annual gift exclusion is a discretionary trust that must meet the below 3 criteria:

1. Principal and income must be available for distribution while the donee is less than 21 years of age (the “minority distribution” requirement);
2. If the donee survives to age 21, all accumulated income and principal must be distributed to him or her on attaining age 21 (the “termination at age 21” requirement); and
3. If the donee dies before reaching age 21, all income and principal must be paid either to the donee’s estate or to the donee’s appointee pursuant to a general power of appointment (the “distribution at death of donee” requirement).

Answer 8

2503(c) Minor’s Trust

Question 9

Under which type of child gifting arrangement is the income taxed to minors even if not distributed?

Answer 9

UTMA

Question 10

Under which type of child gifting arrangement is income taxed to minor even if not distributed

Answer 10

2503C Minor’s trust

Question 11

Under which type of child gifting arrangement is income taxed to minor even if not distributed

Answer 11

2503C Minor’s trust

Question 12

When would an advisor recommend a 2503C Trust over a UTMA?

Answer 12

1. Most frequently used device when a series of annual gifts is contemplated
2. Greater flexibility
3. Better control over the assets

Question 13

When would an advisor recommend a over a UTMA over 2503C Trust?

Answer 13

1. UTMA is more cost-effective and easy to set up.

Question 14

What is a Crummey Trust

Answer 14

A Crummey trust provides that the beneficiary is allowed to withdraw, during each calendar year, the lesser of the amount of the annual gift tax exclusion or the value of assets transferred to the trust during that year. T

Question 15

The beneficiary’s _____ _______ may be extended to the next calendar year without destroying the validity of the
_____power. The exclusion is available even if the beneficiary is a minor.

Answer 15

The beneficiary’s withdrawal right may be extended to the next calendar year without destroying the validity of the Crummey power. The exclusion is available even if the beneficiary is a minor.

Question 16

The ____________ ______, named after the Ninth Circuit case, Crummey v. Commissioner, has evolved into a power of a beneficiary to withdraw from the trust on an annual basis an amount equal to the annual exclusion in any year where transfers are made to the trust. Since the beneficiary has the power to withdraw, even if not exercised, the gift of a future interest problem is obviated, and the gift will qualify for the annual exclusion.

Answer 16

The Crummey Power Trust

Question 17

The ____________ ______, named after the Ninth Circuit case, Crummey v. Commissioner, has evolved into a power of a beneficiary to withdraw from the trust on an annual basis an amount equal to the annual exclusion in any year where transfers are made to the trust. Since the beneficiary has the power to withdraw, even if not exercised, the gift of a future interest problem is obviated, and the gift will qualify for the annual exclusion.

Answer 17

The Crummey Power Trust

Question 18

The beneficiary’s ______ ______may be extended to the next calendar year without destroying the validity of the
Crummey power. The exclusion is available even if the beneficiary is a minor.

Answer 18

The beneficiary’s withdrawal right may be extended to the next calendar year without destroying the validity of the
Crummey power. The exclusion is available even if the beneficiary is a minor.

Question 19

_______beneficiaries must be informed of their right to withdraw assets and must be given a reasonable time in which to make the withdrawal. For a beneficiary who is a minor, notice of the withdrawal right should be given to the beneficiary’s parent or legal
guardian.

Answer 19

Adult beneficiaries must be informed of their right to withdraw assets and must be given a reasonable time in which to make the withdrawal. For a beneficiary who is a minor, notice of the withdrawal right should be given to the beneficiary’s parent or legal
guardian.

Question 20

An UGMA account, the original custodial account, can hold financial assets such as what?

Answer 20

individual stocks, bonds, mutual funds, index funds, cash, and insurance policies

Question 21

UGMA is an expansion of the definition under the GSMA and includes any note, stock, treasury stock, bond,

Answer 21

individual stocks, bonds, mutual funds, index funds, cash, and insurance policies

Question 22

An UTMA account can hold all of the same assets as an UGMA account in addition to what type of assets?

Answer 22

physical assets such as real estate, fine art, and more

Question 23

What were the Kiddie Tax Rules before the Tax Cuts and Jobs Act?

Question 24

What are the Kiddie Tax Rules after the Tax Cuts and Jobs Act?

Answer 24

This law was passed to discourage wealthier individuals from transferring assets to their children to take advantage of their lower tax rates. The kiddie tax has seen many iterations , but current rules tax a minor child’s unearned income—including capital gains distributions, dividends, and interest income—at the parents’ tax rate if it exceeds the annual limit ($2,300 in 2022).

Question 25

What are the Kiddie Tax Rules after the Tax Cuts and Jobs Act?

Answer 25

This law was passed to discourage wealthier individuals from transferring assets to their children to take advantage of their lower tax rates. The kiddie tax has seen many iterations , but current rules tax a minor child’s unearned income—including capital gains distributions, dividends, and interest income—at the parents’ tax rate if it exceeds the annual limit ($2,300 in 2022).

Question 26

What tax applies to dependent children under the age of 18 at the end of the tax year (or full-time students younger than 24) and works like this:

The first $1,150 of unearned income is covered by a standard deduction, so it isn’t taxed.

The next $1,150 is taxed at the child’s marginal tax rate.

Anything above $2,300 is taxed at the parents’ marginal tax rate.

Answer 26

Kiddie Tax

Question 27

What is the 8814 Election?

Question 28

What is the 8814 Election?

Answer 28

Use this form if you elect to report your child’s income on your return. If you do, your child will not have to file a return. You can make this election if your child meets all of the following conditions. The child was under age 19 (or under age 24 if a full-time student) at the end of 2022.

Question 29

What is Tax Bracket Stacking?

Answer 29

This term is used to describe a strategy by which a taxpayer seeks to allocate taxable income in different years or through different taxpayers to “fill up” lower tax rates in order to avoid taxation at higher rates – given a progressive tax system.

Question 30

The beneficiary’s _____ _______ may be extended to the next calendar year without destroying the validity of the
_____power. The exclusion is available even if the beneficiary is a minor.

Answer 30

The beneficiary’s withdrawal right may be extended to the next calendar year without destroying the validity of the Crummey power. The exclusion is available even if the beneficiary is a minor.