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Estate Planning > Transfer Outright & In Trust > Flashcards

Transfer Outright & In Trust Flashcards

1
Q

If you die with payments from an installment note due, is it included in your gross estate?

Is the accompanying interest?

A

Yes, and yes.

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2
Q

When calculating the taxable gift amount, do you subtract the annual exclusion?

A

Yes.

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3
Q

What is a private annuity (Section 7250)?

A

Buyer agrees to make payments adding to FMV of asset + interest for the life expectancy of seller. Payments end, however, when seller dies.

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4
Q

Are interest payments deductible in a private annuity?

What is the buyer’s basis?

A

No.

Total amount of payments made.

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5
Q

How do you calculate the exclusion ratio of a private annuity?

Hint: 2 steps.

A
  1. Solve for total amount to be paid as a TVM problem.

2. Divide seller’s basis by total amount to be paid. This is exclusion ratio.

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6
Q

What is a SCIN?

A

A type of private annuity that ends at the early death of the seller, or self-cancels at the end of the pre-determined life expectancy of the seller (an ordinary private annuity continues paying).

The seller receives a “SCIN premium” for giving up the chance of extra payments.

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7
Q

What are the differences between a SCIN and an ordinary private annuity?

Hint: 4

A

Term of payment: Private annuity - life of annuitant; SCIN - life expectancy of annuitant or sooner.

Deductibility of interest: PA - No; SCIN - Yes

Buyer’s basis: PA - sum of payments made; SCIN - purchase price.

Can seller retain an interest? PA - no; SCIN - yes

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8
Q

What is a GRAT?

A

Grantor Retained Annuity Trust.
Person moves a property into an IRREVOCABLE trust. Trust pays him a regular annuity in some form. At the end of the trust term, his heir receives the property.

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9
Q

How do you calculate the taxable gift of a GRAT?

A

The remainder interest is a future gift; the annuity is not a gift.

  • Subtract the present value of future annuity payments from FMV.
  • The remainder is a taxable gift.
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10
Q

What is the GRAT gamble?

A

The longer the term of the GRAT, the higher the value of the annuity, and the lower the value of the taxable gift. However, if the donee dies during the term of the GRAT, the property goes back into his gross estate, and no tax is saved.

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11
Q

When is the best time to use a GRAT?

A

When you expect the GRAT item to appreciate faster than the mandatory 7520 interest rate required by the GRAT. If this happens, and the transferor outlives the term of the GRAT, then the appreciation is passed without estate expense.

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12
Q

What is a GRUT?

A

Grantor Retained Unit Trust—Like a GRAT, but pays a % of trust assets each year, instead of an annuity. Must be evaluated annually to determine payment amt., thus less suitable for hard to value assets such as real estate or businesses.

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13
Q

What is a QPRT?

How do they work?

What is the max 1 person can have?

A

Essentially a GRAT for a personal residence. Instead of an annuity, the donor gets to live in the house for the trust’s term.

Gift is FVM of house less value of living their during trust term, determined by section 7520.

Like other trusts, if Grantor dies during term, house goes back into his gross estate.

One person cannot have more than 2 QPRT’s.

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14
Q

What is a TPPT?

A

A QPRT, but for tangible personal property. Works the same way.

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15
Q

What is an FLP?

How does it reduce gift taxes?

A

A family limited partnership. One family member transfers a business into a partnership in exchange for a 1% general interest, and a 99% limited partner interest. No taxable gift at time of set-up.

The general partner, who retains all liability and decision making, begins transferring limited interest to other family members. He uses multiple discounts: annual exclusion, gift splitting, + marketability,
Minimal control to minimize the taxable gifts.

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16
Q

When should one use FLP’s, GRAT’s, QPRT’s, and TPPT’s?

Hint: potential trap question.

A

When transferring to loved ones! If the question is about a sale to an un-related party don’t use these.

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17
Q

Who funds and administers Medicare and Medicaid?

Hint: trick question.

A

The federal government funds it, states administer it.

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18
Q

What is the recommended state limit on countable assets before Medicaid will pay for long-term care?

What is not counted?

A

$2,000 single, or $3,000 married.

Not counted:

  • Home, usually up to 750k
  • Car and personal property
  • Term life, or other life with little cash value
  • Retirement accounts.
  • Property used in production of income.
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19
Q

What is the typical income limit for qualifying for Medicaid to pay for long-term care?

A

133% of federal poverty.

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20
Q

How does Medicaid know if you’ve given away assets to qualify for Medicaid?

What is the penalty?

A

They have a 5-year look back.

They will not begin paying until after the term that the money you’ve given away could’ve bought.

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21
Q

What is the Medicaid benefit of LT care ins.?

A

It allows you to qualify for Medicaid when your LTC ins. Runs out with forfeiting your assets.

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22
Q

What is the charitable deduction at death?

What is the income tax deduction for items left to charity at death?

A

A - Unlimited

B - Zero.

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23
Q

Is a trustee a fiduciary? What are their legal standards?

What is the prudent man rule?

A

Yes.

Duty of loyalty, duty of care,

The common state standard for actions of trustees: how would a prudent person acting in their own self-interest behave?

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24
Q

What are reasons to use a trust (5)?

A
  1. Management of assets for someone who isn’t ready to.
  2. Protection from creditors.
  3. Splitting property among different interests.
  4. Saving on taxes.
  5. Avoiding probate.
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25
Q

What is a spendthrift clause? Can you use one on yourself?

A

A spendthrift clause (usually combined with a clause that says the trustee can distribute assets at his discretion) says: the beneficiary may not anticipate, assign, pledge, or promise to give distributions to anyone.

If you are the donor, or grantor to your own trust that is called a self-settled trust, and spendthrift clauses don’t apply.

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26
Q

What is the rule against perpetuities? What purpose does it serve?

A

It states that trust terms are limited to “lives in being + 21 years.”

It intends to limit how long items can be held in a trust.

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27
Q

What is a simple trust? Why is it simple?

A

A simple trust mandates distribution of all income.

This is simple because it therefore needn’t pay income tax.

28
Q

When is money put into a trust NOT taxable?

A

When the trust is revocable, or the grantor retains an interest

29
Q

When is a trust included in a gross estate?

A

Generally trust assets are NOT included in gross estate, unless the grantor retained an interest.

Or, if the grantor released an interest within 3 years of death.

Or, if funding the trust created a gift tax within 3 years of death.

30
Q

What is an inter vivos trust?

A

Any trust that is created during the life of the grantor.

31
Q

What do revocable trusts accomplish?

A

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

32
Q

What is a testamentary trust?

How are they used?

A

A trust created after the life of the grantor, such as a QTIP, or general power of appointment trust.

These are usually to provide for the estate goals of the grantor.

33
Q

What is a “standby” or “contingent” trust?

A

A trust that is mostly unfunded, that is there in case of a triggering event.

34
Q

What is a “pour over” trust?

A

It’s essentially a stand by trust. It generally receives assets from the grantor’s estate at the grantor’s death.

35
Q

What is a grantor trust?

A

A trust where the grantor is responsible for paying the income tax of the trust?

36
Q

What is the most common type of trust?

What is its purpose?

Who pays its income taxes?

A

A revocable living trust.

It avoids probate; items in the estate are disbursed according to the terms of the trust.

The grantor pays the income taxes on a revocable trust.

37
Q

Does a revocable trust save on estate taxes, or reduce gross estate?

A

No! It’s primary purposes are to save on probate costs and privacy.

38
Q

What is an ILIT? Why would one use one?

Can a contribution to an ILIT qualify for the annual exclusion?

A

Irrevocable life insurance trust. If you die owning an LI policy on yourself, the death benefit becomes part of your estate and is potentially taxable. Putting your LI in an ILIT allows it to pay its benefit w/o any estate tax.

Yes on the annual exclusion if there’s a Crummey provision.

39
Q

What is a testamentary bypass trust?

A

It’s a tool for couples to maximize the first-to-die lifetime exclusion, and the unlimited marital estate tax deduction. When the first dies, the lifetime exclusion amount goes into the bypass trust—no estate tax. The rest goes to the 2nd spouse—no estate tax. The trust can be used for ascertainable support to the second spouse, and go to a remainder beneficiary at her death.

At her death the second spouse’s assets also get her lifetime exclusion.

40
Q

Why is an intervivos bypass trust better than a testamentary one?

A

Because the assets in the trust can grow during the lifetime of both spouses without being subject to the estate tax.

41
Q

What is a power of appointment trust?

When does it qualify for the unlimited marital deduction?

A

Established inter vivos, it gives one person power of appointment over assets, and another the remainder.

To qualify for the UMD, the surviving spouse must be given general power of appointment.

42
Q

What is a QTIP?

Does it qualify for the UMD?

In whose gross estate do the trust assets wind up?

A

Qualified Terminal Interest Property Trust

It grants a lifetime income interest to surviving spouse and leaves other assets to another person.

It does qualify for the UMD, and assets wind up in the gross estate of the surviving spouse.

43
Q

What is a GRIT?

How is the gift to the remainder person discounted?

A

Grantor Retained Income Trust—Grantor receives only income from the trust assets, so the assets aren’t discounted as in a GRAT, but there’s a temporal discount due to the years the remainder person must wait to receive the trust assets.

44
Q

What is the purpose of a dynasty trust?

What states allow them?

A

To avoid generations of transfer tax by existing for decades.

Only states that don’t have perpetuity laws allow them.

45
Q

Are minors allowed to own property?

A

No

46
Q

What is a 2503b trust?

A

2503b and c are 2 portions of the IRC that allow money to be put in trust for minors while using at least some of the annual exclusion.

2503b pays income to the minor from the trust annually. The present value of this income stream is eligible for the annual exclusion.

47
Q

What is a 2503c trust?

How many beneficiaries can a 2503c have?

A

2503 is the part of the IRC that allows people to make trust gifts to minors while using the annual exclusion.

A 2503c trust pays or gives access to all trust assets when the minor turns 21. It qualifies for the full annual exclusion.

A 2503c can only have one beneficiary.

48
Q

What are CLT’s?

A

Charitable Lead Trusts—Charities receive income from trust assets for a period of time, then the assets return to the grantor or pass to a remainder person.

49
Q

What are “Totten Trusts”?

A

Bank accounts with POD benefits that allow them to avoid probate.

50
Q

What are the two tests to be a qualified charitable organization?

A
  1. More than 1/3 of support must be from: gifts, grants, contributions, membership fees, and sales of normal business.
  2. Not more than 1/3 of support can come from gross investment income + unrelated business taxable income.
51
Q

If a charity fails the above tests, what is it called?

How do we know if it’s operating or non-operating?

A

A private foundation.

A private operating foundation spends 85% of its adjusted net income for an exempt purpose.

52
Q

What is deductible when donating services to a charitable organization?

A
  • Driving expenses (not insurance or depreciation)
  • Travel expenses to a convention where you represent the organization.
  • Expenses for uniforms.

The value of services provided is not deductible.

53
Q

What are the AGI deduction caps for donation of cash, OI property, and LTCG property to a charity, or private operating foundation?

A

Cash - 60% (100%) for 2020 and 2021.

OI property, STCG property, loss property - 50% (lesser of adjusted basis or FMV).

LTG property, real property, related use - 30% FMV or 50% adjusted basis.

54
Q

What are the % of AGI deduction ceilings for donations to PNOF’s

A

Cash - 30%

OI, STCG, loss property - 30% (lesser of FMV or adjusted basis)

LTCG, real property, related use - 30% (must use basis)

55
Q

How long can excess loss deductions be carried forward?

A

5 years after the year of the gift (you get six deductions total)

56
Q

What is the max # of years you can claim a charitable deductiont from a single gift?

A

Six - the year of deduction + 5 carry overs.

57
Q

What are the 3 types of charitable trusts?

A
  1. Pooled income fund
  2. Charitable lead trust.
  3. Charitable remainder trust.
58
Q

What is a pooled income fund?

A

Essentially a mutual fund provided by a charity. Many donors’ donations are pooled, the money is invested, and the proceeds are shared between the donors and the charity.

59
Q

What are some unusual rules around a CRAT?

A
  • Owner doesn’t need to let the charity know.
  • Owner can change beneficiary, even after the CRAT is irrevocable.
  • Can’t be longer than 20 years.
  • Trust can “sprinkle” annuity payments to grantor if written into rules.
60
Q

What is the charitable deduction for giving an LI policy to a charity?

A

Lesser of adjusted basis or FMV.

Deduction cap is 50% of AGI. (LI is treated as OI property).

61
Q

Why is a CRUT more flexible than a CRAT?

2

A
  • Payments to grantor can be limited to income of trust and caught up later.
  • Donor can continue making contributions over time.
62
Q

What is the income tax deduction for any type of charitable trust?

A

Value of gift less present value of income stream (or payout) in the year of the gift.

63
Q

Can additional contributions be made to a PIF?

A

Yes.

64
Q

Can PIF’s have sprinkling provisions?

A

No.

65
Q

How do you create wealth replacement for the heirs of a donor to a CRAT or CRUT?

A

Use the income tax savings to buy life insurance policies on the donor with them as the beneficiaries.

66
Q

What is the best charitable trust for wealthy individuals who don’t need income?

A

Charitable lead, funded with appreciating assets. By making it a grantor trust, paying the income tax can be a charitable deduction every year.

Estate Planning (4 decks)

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