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Estate Planning > Transfers Outright & In Trust (Lesson 3) > Flashcards

Transfers Outright & In Trust (Lesson 3) Flashcards

1
Q

What is a Arm’s Length Transaction

A
  • is a transfer between unrelated parties in the form of a sale, an installment sale, or an exchange
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2
Q

Does a arms length transaction attempt to reduce the transferors gross estate

A
  • no the transaction does not attempt to reduce the transferors gross estate or to economically benefit the transferee
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3
Q

What is an installment sale

A
  • is a sale of property in which the buyer makes a series of installment payments to the seller
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4
Q

What happens if there is still an outstanding installment sale at the decedents death

A
  • at the sellers death any outstanding principal of the installment note including any accrued interest is included in the sellers gross estate
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5
Q

What is a exchange

A
  • is a mutual transfer of assets with equal fair market values between individuals
  • not directly impact a transfers gross estate
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6
Q

What happens when an individual sells an asset for an amount less than the assets FMV

A
  • the seller is deemed to have made a gift to the buyer equal to the difference between the FMV of the property and the actual sales price
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7
Q

What are the characteristics of a bargain sale

A
  • the property is removed from the transferors gross estate and is replaced by a reduced amount
  • any appreciation or income on the property after the transaction is completed is attributable to the buyer/donee
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8
Q

What is a sales (gift) and leaseback gifting strategy

A
  • is an arrangement whereby a company owning fully depreciated property sells the property to a buyer (usually a family member in a low bracket)
  • new owner then leases the asset back to the former owner who becomes the lessee
  • Lessee receives cash from the sale of the asset and the lessee makes deductible lease payments and retains the use of the asset
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9
Q

What is the gifting strategy that uses a private annuity

A
  • Two parties are usually unrelated
  • seller/annuitant sells an asset to a buyer in exchange for an unsecured promise from the buyer to make fixed payments to the annuitant for the remainder of the annuitants life
  • Must be unsecured
  • Defers the recognition of any capital gains over their remining life expectancy
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10
Q

(Private Annuity Gifting Strategy)

What happens if the annuitant dies before receiving all of the payments

A
  • since the annuitant does not have any right to annuity payments after their death the value of the private annuity is zero at death of the annuitant and is not included in the seller/annuitants gross estate
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11
Q

(Private Annuity Gifting Strategy)

What are the risks of using the private annuity strategy

A
  • involves investment risk for both the seller/annuitant and the buyer
  • Promise is unsecured
  • default risk if the buyer does not make the payments
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12
Q

(Private Annuity Gifting Strategy)

What are the income tax issues with using the private annuity gifting strategy

A
  • private annuity is split into three components:
  • interest
  • capital gain
  • income tax free return of capital
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13
Q

What do you calculate the exclusion ratio

A

Adjusted Basis/Total of Expected Payments = Exclusion ratio

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14
Q

(SCIN Gifting Strategy)

What is a self canceling installment note

A
  • involves a sale for the full FMV of the property transferred over a term defined by the seller
  • If the the seller dies before all the installment payments have been made the note is cancelled and the buyer has no further obligation to pay
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15
Q

(SCIN Gifting Strategy)

What risk is the seller taking with a SCIN

A
  • taking the risk that they will die before receiving all payments under the SCIN and must be compensated for the risk
  • Buyer pays a premium called a SCIN premium to compensate for the risk
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16
Q

(SCIN Gifting Strategy)

What are the gift and estate tax consequences of using a SCIN

A
  • Property transferred is removed from the sellers gross estate
  • No gift as long as the PV of the note less the SCIN premium is equal to the FMV of the asset transferred
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17
Q

Is the interest on a SCIN or Private annuity deductible

A
  • only the interest on the SCIN is deductible if permitted by the IRC
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18
Q

What is the buyers adjusted basis in the property if a SCIN is used

A
  • regardless of the number of installment payments made, is the agreed upon purchase price of the property, which includes the full face value of the remaining note payments
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19
Q

What are the four components of an installment payment for a SCIN

A
  • Interest income
  • capital gain
  • return of adjusted basis
  • SCIN premium which is either additional interest or capital gain depending upon how the SCIN premium was calculated
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20
Q

(SCIN Gifting Strategy)

What are the risks of using a SCIN

A
  • the seller of the property undertakes default risk, interest rate risk, purchasing power risk, and reinvestment risk
  • buyers risk is that the transferor outlives the SCIN term and thus the buyer pays more for the property by an amount equal to the SCIN premium
  • Buyer also has business risk
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21
Q

(SCIN vs. Private Annuity)

What is the term of the payments under the below:

SCIN
Private Annuity

A
  • SCIN:
  • Determined by the seller
  • Private Annuity:
  • Life of the Annuitant
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22
Q

(SCIN vs. Private Annuity)

Is the interest paid deductible for the below:

SCIN
Private Annuity

A
  • SCIN:
  • Depends on the Property
  • Private Annuity:
  • Not deductible
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23
Q

(SCIN vs. Private Annuity)

What is the buyers adjusted basis for the below

SCIN
Private Annuity

A
  • SCIN:
  • Purchase price of the Property
  • Private Annuity:
  • Sum of annuity payments paid
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24
Q

(SCIN vs. Private Annuity)

Does the seller keep a collateral interest in the property for the below

SCIN
Private Annuity

A
  • SCIN:
  • Yes
  • Private Annuity:
  • No
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25
Q

What is a Granter Retained Annuity Trust

A
  • is an irrevocable trust that pays a fixed annuity to the grantor for a defined term and pays the remainder interest of the trust to a noncharitable beneficiary at the end of the GRAT term
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26
Q

What are the gift and estate tax consequences of a GRAT

A
  • at the creation of a GRAT, assuming the retained annuity interest is payable to the grantor, the annuity portion is not subject to gift tax
  • The PV of the expected future remainder interest is a gift of a future interest subject to gift tax
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27
Q

When is the appropriate time to use a GRAT

A
  • when the transferor holds property that is expected to appreciate at a rate greater than the Section 7520 interest rate applicable to the GRAT
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28
Q

What happens if the grantor of the GRAT dies during the annuity term

A
  • the FMV of the property within the GRAT as of the grantors death is included in their gross estate
  • Considered a failed GRAT
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29
Q

What are the income tax consequences of a GRAT

A
  • subject to grantor trust rules
  • all of the trust income flows through to the grantor annually without regard to distributions
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30
Q

What is a Grantor retained unitrust

A
  • instead of a fixed annuity a GRUT pays a fixed percentage of the trusts assets each year as revalued on an annual basis
  • Less suitable for hard to value assets
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31
Q

What is Qualified personal Residence Trust (QPRT)

A
  • is a special form of GRAT
  • grantor contributes a personal residence to a trust and instead of receiving an annuity in dollars, the grantor of the QPRT receives use of the personal residence as the annuity interest component
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32
Q

What happens if the grantor is still living at the end of the QPRT

A
  • if grantor is still living he may then lease at a FMV rent the property from the remainderman and continue to use the personal residence
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33
Q

What happens if the grantor dies before the end of the QPRT

A
  • the FMV of the residence is included in the grantors gross estate
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34
Q

How many residences can a QPRT have and how many QPRTs can an individual have

A
  • Can hold one residence
  • Person can have up to two QPRTs
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35
Q

What is a tangible personal property trust

A
  • are very similar to QPRTs except a TPPT is funded with personal property not real property
  • transfers artwork, antiques, and other items of personal property
  • grantor retains the right to use the property that has been transfer to the trust
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36
Q

What happens if a grantor dies before the end of a TPPT

A
  • the full FMV of the trust property will be included in the grantors gross estate
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37
Q

What is a family limited partnership

A
  • FLP is a limited partnership created under state laws with the primary purpose of transferring assets to younger generations using valuation discounts
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38
Q

How is a FLP set up

A
  • one or more family members transfer highly appreciating property to a limited partnership in return for both the 1% general and the 99% limited partnership interests
  • General partners have unlimited liability and the sole management rights of the partnership
  • limited partners are passive investors with limited liability and no management rights
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39
Q

How is a FLP used for gifting strategies

A
  • once the FLP is created the owner of the general and limit partnership interests values the limited partnership interests
  • the limited interests are usually eligible for the marketability and control discounts
  • these limited interests are then gifted to individuals using the annual gift tax annual exclusion
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40
Q

How are assets controlled under a FLP

A
  • Transfer retains control of the property by controlling the 1% GP interest
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41
Q

How does a FLP make sure to possess economic substance so that it is eligible for the discounted value

A
  • by having its own checking accounts, tax ID, payroller (including reasonable compensation to the GP if he is managing the business), and should not allow family members to withdraw funds at will, nor pay for personal expenses of its owners
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42
Q

When will Medicaid pay long term care in a nursing home

A
  • US citizen or resident alien permanently residing in the US
  • Age 65, disabled, or blind
  • Meet the income and asset test ($2,000 on countable assets for in individuals and $3,000 for married couples when both are receiving care)
  • Common income test is 133% of the federal poverty level
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43
Q

What are the assets specifically excluded for the asset count for Medicaid

A
  • Home (typically $525,000 to $750,000 of equity)
  • Car and personal property
  • Term life insurance, whole life with little to no cash value, retirement accounts
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44
Q

What is the Medicaid penalty period calculation

A
  • is equal to the amount of money gifted or transferred in the 60 months prior to application divided by the cost of the nursing home
  • the individual must then spend down their assets to the Medicaid eligibility amount
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45
Q

Which transfers are permitted and will not cause a period of Medicaid ineligibility

A
  • transfers to a spouse
  • child who is blind or disabled
  • trust for the benefit of someone under age 65 and disabled
  • transfer of a home to a child under age 21 that has lived in the home at least 2 years prior to the transfer to a nursing home
  • transfer of a home to a sibling who has an equity interest in the home or lived in it for at least before the applicant moved to the nursing home
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46
Q

What is the residuary estate

A
  • consists of what is left after all specific bequests have been satisfied
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47
Q

What is a universal legatee

A
  • created when the testator gives to one or several persons their entire estate
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48
Q

What is a residual legatee

A
  • receives the balance of the estate after all specific bequests are satisfied
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49
Q

Will simply not listing an heir in a will disinherit an individual

A
  • No
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50
Q

What is considered a transfer at death by contract

A
  • life insurance
  • annuities
  • qualified plans
  • IRAs
  • TODs
  • Totten Trusts
  • PODs
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51
Q

(Transfer at Death by Operation of Law)

What are the two forms of titling (survivorship feature)

A
  • joint tenancy with right of survivorship
  • tenancy by the entirety
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52
Q

What type of trust is treated by will

A

Testamentary trusts

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53
Q

What type of trust are created but not funded prior to the grantors death

A

standby trusts

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54
Q

What is a trust

A
  • is a structure that vests legal title to assets in one party, the trustee, who manages those assets for the benefit of the beneficiaries of the trust
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55
Q

What is a grantor of the trust

A
  • person who creates and initially funds the trust
  • establishes the terms and provisions of the trust
  • can have multiple grantors per trust
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56
Q

What is the trustee of the trust

A
  • is the individual or entity responsible for managing the trust assets and carrying out the direction of the grantor that are formally expressed in the trust instrument
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57
Q

What are the two main duties assigned to a trustee

A
  • duty of loyalty
  • duty of care
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58
Q

What is the prudent man rule that is assigned to a trustee

A
  • states that the trustee must act in the same manner that a prudent person would act if the prudent person was acting for their own benefit after considering all the facts and circumstances
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59
Q

What are the reasons to use a trust

A
  • Management
  • Creditor Protection
  • Split interests in Property
  • Avoiding probate
  • minimizing taxes
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60
Q

What provision can be added to a trust to protect it from creditors

A
  • spendthrift provision coupled with a provision that allows the trustee to make distributions solely on a discretionary basis
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61
Q

What is a self settled trust

A
  • the beneficiary is also the grantor of the trust
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62
Q

How can trusts generate tax savings

A
  • transfer of future appreciation to the grantors heir
  • minimization of transfer taxes on subsequent generations
  • reduction in the size of the grantors gross estate
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63
Q

What is the rule against purpertuities

A
  • states that all interests in trust must vest within lives in being plus 21 years
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64
Q

What are simple trusts

A
  • trusts that must distribute all income
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65
Q

What is a complex trust

A
  • a trust that is permitted to accumulate income, benefit a charity, or distribute principal
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66
Q

When are assets of an irrevocable trust included in the grantors gross estate

A
  • if the grantor retains the right to:
  • receive income
  • use the trust assets
  • ability to exercise voting rights on stock transferred to the trust
  • a revisionary interest with a value greater than 5% of the trust
  • right to terminate, alter, amend, or revoke the trust
  • right to control beneficial enjoyment of the trust
67
Q

What happens if a grantor paid gift tax on assets that are then pulled back into their estate

A
  • the grantor will receive a credit for gift taxes actually paid
68
Q

When will assets be pulled into the grantors estate after they released their retained interest

A
  • if the powers were released within three years of death
69
Q

What is an inter vivos trust

A
  • any trust that is created during the lifetime of the grantor
70
Q

What is a contingent trust

A
  • a trust created during the grantors lifetime that is either unfunded or minimally funded
71
Q

What is a pourover trust

A
  • is a trust that receives assets from another source generally the grantors estate at the grantors death
  • usually unfunded or minimally funded
72
Q

What are inter vivos revocable trusts used for and not used for

A
  • probate avoidance = property must be transferred to the trust before the grantors death
  • privacy = since the assets avoid probate they are not subject to public review
  • Not used to avoid estate taxes
73
Q

What is a Crummey power

A
  • allows the beneficiaries of the trust to withdraw any contribution made to the trust within a certain period of time which allows it to qualify for the annual exclusion
74
Q

What is a hanging power

A
  • states that to the extent that a demand beneficiary has a right to withdraw that does not lapse the nonlapsing portion will hang over to a subsequent year when it can lapse under the 5 and 5 standard
75
Q

What is a 5 and 5 power

A
  • allows the beneficiary the right to appoint the greater of $5,000 or 5% of the trust assets
  • non cumulative so that it lapses
  • will not result in the assets being pulled into the beneficiaries estate unless it remains unexercised in the year of death
76
Q

What is the purpose of a ILIT trust

A
  • is to prevent an insured party from having incidents of ownership in the life insurance policy on their life
  • if the insured does not have any incidents of ownership within 3 years of death the death benefit of the policy is not subject to estate taxation
77
Q

When is a life insurance policy subject to the gross up rule with an ILIT

A
  • if an existing policy is transferred into the ILIT
  • New policies bought within the ILIT are immediately removed from the estate and not subject to the gross up rule
78
Q

What is a B Trust

A

Bypass (credit shelter trust)

79
Q

What is a testamentary bypass trust

A
  • created a death of the grantor
  • Does not qualify for the marital deduction
  • decedents applicable estate tax credit will offset any estate tax owed
80
Q

What is a inter vivos bypass trust

A
  • assets are transferred to the trust during the donors lifetime
  • decedents applicable estate tax credit will offset any estate tax owed
  • any growth from date of transfer to death is shielded because the gift tax is due when property is transferred
81
Q

What is a power of appointment trust

A
  • can be inter vivos or testamentary
  • Power can be general or limited (must be general to qualify for the marital deduction
  • used mostly to take advantage of the unlimited marital deduction
  • used to avoid GSTT tax
82
Q

What is a Qualified Terminable Interest (QTIP) Trust

A
  • created at the death of the first spouse to die
  • grants the surviving spouse a lifetime right to the income of the trust while transferring the remainder interest to the individual of the grantors choosing
  • qualifies for the unlimited marital deduction even though the spouse does not receive the outright assets to the assets
83
Q

Are the assets of a QTIP included in the surviving spouses estate

A

Yes

84
Q

What is a Grantor retained income trust (GRIT)

A
  • are trusts created by a person who keeps an income interest in the trust
  • grantor transfers property to the trust, retain some form of income interest for a period of time, and upon termination of the trust, transfers the remainder interest to a third party
  • since the third party does not receive the immediate right to possess or enjoy the property a discount on the value of the remainder interest is available due to the passage of time
85
Q

What is a Grantor retained unitrust (GRUT)

A
  • the distribution to the grantor is a variable income stream that will increase as the value of the assets inside the trust increases or decreases as the value of the assets in the trust decrease
86
Q

What is a dynasty trust

A
  • are arrangements designed to last for very long periods of time
  • primary advantage is an ability to avoid transfer taxation at the death of each generation of the family
87
Q

What are the to exceptions that will allow a transfer to a trust for the benefit of a minor to qualify for the annual exclusion

A
  • 2503(b) Trust
  • 2503(c) Trust
88
Q

What are the characteristics of a 2503(b) Trust

A
  • may hold property in trust for the lifetime of the beneficiary
  • must make income distributions to the beneficiary on an annual basis
  • The present value interest will qualify for the annual gift tax exclusion
89
Q

What are the characteristics of a 2503(c) Trust

A
  • allows income to be accumulated in the trust
  • allows the entire gift to qualify for the annual exclusion amount but can only have one beneficiary
  • Trust must terminate when the child reaches age 21 or must be given the right to all assets at age 21
90
Q

What two objectives are accomplished by using a charitable trusts

A
  • transfer assets to charity in a tax efficient manner
  • assist in estate planning by transferring assets to noncharitable beneficiaries
91
Q

What are Totten trusts

A
  • are not really trusts but rather bank accounts that include payable on death beneficiary clauses
  • avoids probate
92
Q

What are blind trusts

A
  • is a revocable trust arrangement whereby an individual transfers property to the trust for management purposes when self management of the assets might be deemed to be a conflict of interest
  • used by high ranking political officials
93
Q

What are the different categories of charitable organizations

A
  • Public charities
  • private operating foundations
  • private nonoperating foundations
94
Q

What are the two tests to determine if an organization is a public charity

A
  • more than 1/3 of the organizations support must be form a combination of gifts, grants, contributions, membership fees, and gross receipts from sales in an activity which is not an unrelated trade or business
  • not more than 1/3 of any organizations support can come from the sum of gross investment income plus unrelated business taxable income
95
Q

What happens if the organization does not meet the two tests for a public charity

A
  • it is considered a private charity
96
Q

What is a private operating foundation

A
  • those that spend at least 85% of their Adjusted net income on activities engaged in for the active conduct of an exempt purpose
97
Q

Are donations made to college and universities that receive a right to purchase athletic event tickets deductible contributions

A
  • No they are not deductible contributions
98
Q

What are you able to deduct if services are gifted to a charitable organization

A
  • only the unreimbursed out of pocket expenses such as:
  • car expenses (14 cents per mile)
  • support for foster children in excess of payments received if no profit motive exists
  • travel and transportation expenses incurred in connection with attending a convention on behalf of a qualified organization
  • uniforms required to be worn while performing a charitable service
99
Q

What is the deduction for ordinary income property that is gifted to charity

A
  • equal to the FMV of the property reduced by any ordinary income that would have resulted from its sale
  • if the FMV is less than the adjusted basis the deduction is equal to the FMV of the property itself
100
Q

What is the charitable deduction if the property donated is considered Capital gain property

A
  • the deduction is the properties FMV with two exceptions
101
Q

What are the two exceptions to using the FMV of capital property for a charitable deduction

A
  • Property donated to a private nonoperating foundation = deduction is then limited to the adjusted basis of the property
  • Tangible Property donated for unrelated use = limited to the donors adjusted basis of the property
102
Q

(Charitable Donations)

Type of Property: Cash

Valuation for Charitable Deduction:
AGI limit for Public and private operating foundations:
AGI limit for Private Nonoperating Foundations:

A

Valuation for Charitable Deduction: Cash amount

AGI limit for Public and private operating foundations: 60%

AGI limit for Private Nonoperating Foundations: 30%

103
Q

(Charitable Donations)

Type of Property: Ordinary income Property

Valuation for Charitable Deduction
AGI limit for Public and private operating foundations:
AGI limit for Private Nonoperating Foundations:

A

Valuation for Charitable Deduction: Lesser of the adjusted basis or the FMV

AGI limit for Public and private operating foundations: 50%

AGI limit for Private Nonoperating Foundations: 30%

104
Q

(Charitable Donations)

Type of Property: Short term Capital Gain Property

Valuation for Charitable Deduction
AGI limit for Public and private operating foundations:
AGI limit for Private Nonoperating Foundations:

A

Valuation for Charitable Deduction: Lesser of the adjusted basis or the FMV

AGI limit for Public and private operating foundations: 50%

AGI limit for Private Nonoperating Foundations: 30%

105
Q

(Charitable Donations)

Type of Property: All Loss Property

Valuation for Charitable Deduction
AGI limit for Public and private operating foundations:
AGI limit for Private Nonoperating Foundations:

A

Valuation for Charitable Deduction: Lesser of the adjusted basis or the FMV

AGI limit for Public and private operating foundations: 50%

AGI limit for Private Nonoperating Foundations: 30%

106
Q

(Charitable Donations)

Type of Property: LTG - Intangible (stocks, bonds, etc)

Valuation for Charitable Deduction
AGI limit for Public and private operating foundations:
AGI limit for Private Nonoperating Foundations:

A

Valuation for Charitable Deduction: FMV or basis if election is made

AGI limit for Public and private operating foundations:

  • 30% if FMV is used
  • 50% if Basis is used

AGI limit for Private Nonoperating Foundations:
- 20% must use basis

107
Q

(Charitable Donations)

Type of Property: LTG - Real Property

Valuation for Charitable Deduction
AGI limit for Public and private operating foundations:
AGI limit for Private Nonoperating Foundations:

A

Valuation for Charitable Deduction: FMV or basis if election is made

AGI limit for Public and private operating foundations:

  • 30% if FMV is used
  • 50% if Basis is used

AGI limit for Private Nonoperating Foundations:
- 20% must use basis

108
Q

(Charitable Donations)

Type of Property: LTG - Tangible Personality (Related Use)

Valuation for Charitable Deduction
AGI limit for Public and private operating foundations:
AGI limit for Private Nonoperating Foundations:

A

Valuation for Charitable Deduction: FMV or basis if election is made

AGI limit for Public and private operating foundations:

  • 30% if FMV is used
  • 50% if Basis is used

AGI limit for Private Nonoperating Foundations:
- 20% must use basis

109
Q

(Charitable Donations)

Type of Property: LTG - Tangible Personality (unrelated use)

Valuation for Charitable Deduction
AGI limit for Public and private operating foundations:
AGI limit for Private Nonoperating Foundations:

A

Valuation for Charitable Deduction: Lesser of the adjusted basis or the FMV

AGI limit for Public and private operating foundations: 50%

AGI limit for Private Nonoperating Foundations: 20%

110
Q

What is considered a 50% AGI organization

A
  • public charity
  • private operating organization
  • private nonoperating foundations that distribute their contributions to either public charities or private operating foundations
111
Q

What is a considered a 30% AGI organziation

A
  • private nonoperating foundation that do not qualify for 50% organizations
112
Q

What is the AGI limit for contributions of LTG property to a 30% organization

A

20%

113
Q

What is the AGI limit for contributions of ordinary income property to a 30% organization

A

30%

114
Q

What happens if a taxpayer makes donations to both 30% and 50% organizations during a year

A
  • the 50% donations are considered first
115
Q

How long can excess charitable contributions be carried over to future years

A
  • 5 years and are used in a FIFO order
  • Amounts retain their character
116
Q

(Record Keeping and Reporting)

Amount of Donation: Under $250

Cash :
Property:

A

Cash :
- Cancelled check

Property:
- Receipt with donee name, date, description of property

117
Q

(Record Keeping and Reporting)

Amount of Donation: $250 - $500

Cash :
Property:

A

Cash :
- Contemporaneous acknowledgement from donee organization

Property:
- Contemporaneous acknowledgement from donee organization

118
Q

(Record Keeping and Reporting)

Amount of Donation: Over $500 but no more than $5,000

Cash :
Property:

A

Cash :
- Contemporaneous acknowledgement from donee organization

Property:

  • Contemporaneous acknowledgement from donee organization
  • maintain records of how and when property was acquired
  • its adjusted basis
  • file form 8283
119
Q

(Record Keeping and Reporting)

Amount of Donation: Over $5,000 ($10,000 for non publicly traded stock

Cash :
Property:

A

Cash :
- Contemporaneous acknowledgement from donee organization

Property:

  • Contemporaneous acknowledgement from donee organization
  • maintain records of how and when property was acquired
  • its adjusted basis
  • file form 8283
  • Need qualified appraisal attach appraisal to the return
120
Q

What is a bargain sale of property to charity

A
  • the transaction is split into two transactions a sale element and a charitable contribution element
  • adjusted basis of the property is allocated pro rata between the sale element and the charitable contribution element
121
Q

How do you calculate the amount of capital gain that will be reported on an individuals tax return when a bargain sale is made to charity

A
  • First calculate the ratio of the sales price compared to the FMV of the property
  • Then multiple the ratio by adjusted basis to see how much of the basis is allocated to capital gain portion
  • Subtract the allocated basis from the adjusted basis and that is the amount of gain that is included on the return
122
Q

What is a charitable stock bailout

A
  • the owner of the stock in a closely held corporation makes a gift of the stock to a qualified charity with the understanding that if the charity puts the stock up for sale the first offer to redeem the stock will be made to the corporation itself
123
Q

What is a charitable annuity

A
  • Transaction is usually an inter vivos transfer of property to a charity in exchange for the charity’s promise to pay an annuity either to the donor, donors spouse, or another person
  • Present value of the annuity will be less than the value of the property contributed to the charity
  • donor receives a charitable income tax deduction in the year of the transfer and removes the value of the asset from their gross estate
124
Q

How is the donation calculated for property that has a mortgage that is exchanged for a charitable annuity

A
  • donation equals the FMV of the property minus the principal of the mortgage and the present value of the annuity
125
Q

How can the donor avoid the income tax consequence in the year of donating a property with a mortgage in exchange for a charitable annuity

A
  • if the annuity is non-assignable to the charity and
  • the donor or the donor and their designated survivors trust are the only annuitants
126
Q

What type of gift is a gift of life insurance

A
  • gift of ordinary property
127
Q

What happens when life insurance is donated to a charity

A
  • the death proceeds from the life insurance are received tax free to a charity and are received without delay of probate or other administrative process by simply providing the insurer with a certified death certificate
128
Q

What is the life insurance valued at when it is donated to charity and what is the available deduction

A
  • valued at FMV at the date of the donation
  • Deduction is equal to the lesser of the donors adjusted basis or the FMV of the policy
129
Q

How can an employ avoid the inclusion in gross income any amount that is over $50,000 for employer provided group term life insurance

A
  • employee can avoid the income inclusion by irrevocably naming a charitable beneficiary for any amount of the employer provided life insurance in excess of $50,000
130
Q

When is charitable trust a useful vehicle

A
  • donor wants to make a donation to charity but does not want to give an undivided interest to charity
131
Q

What are the advantages of a charitable trust created during life

A
  • are that the donor gets a charitable income tax deduction at the time of the transfer
  • retains some right to enjoy the property and
  • reduces their gross estate
132
Q

To receive the current income tax deduction at the creation of a charitable trust what from must the gift be in

A
  • Pooled Income Fund
  • Charitable remainder trust (annuity or unitrust)
  • Charitable lead trust (annuity or unitrust)
133
Q

What is a polled income fund (PIF)

A
  • are analogous to a mutual fund provided by a charity
  • all donor contributions are pooled into a trust created and maintained by a single charity and each donor receives an allocable share of the trusts income for life
134
Q

What is a Charitable Remainder Annuity Trust (CRAT)

A
  • less flexible than a CRUT
  • provide fixed annuity to the donor for an amount that is at least 5% (no more than 50%) of the initial FMV of the property contributed to the trust
  • no additional principle contributions
  • Annuity must be paid annually
  • Period is for life or no longer than 20 years
  • remainder interest is paid to charity
135
Q

Can more contributions be made to a CRAT once it is established

A
  • No
136
Q

What is a sprinkling provision for a CRAT and a CRUT

A
  • trustee can make distributions to the income beneficiaries as they desire
137
Q

Does donor have to notify the charity that they are the beneficiary of the CRAT and can the charity be changed

A
  • Does not need to notify the charity
  • Charity can be changed
138
Q

What is a CRUT

A
  • Provides more flexibility than a CRAT
  • yearly payout is a fixed percentage, or fraction that is at least 5% (no more than 50%) of the annual net FMV of the assets
  • Assets are revalued annually
  • annuity payments can be limited to the income earned by the trust with a catchup provision if the income later exceeds the current percentage payout
  • additional principal contributions can be made to the trust
  • Trustee can be given a sprinkling provision
139
Q

Can additional principal contributions be made to a CRUT

A
  • Yes
140
Q

What is the income tax deduction for a CRAT

A
  • Total Value of property less PV of retained annuity payments
141
Q

What is the income tax deduction for a CRUT

A
  • Total Value of property less PV of retained unitrust payments
142
Q

What is the income tax deduction for a PIF

A
  • Total value of property less PV of retained income interest
143
Q

What is the requirement for income to be distributed from a CRAT

A
  • At least 5% and no more than 50% of initial FMV of assets
  • paid at least annually for life or term ≤ 20 Years
144
Q

What is the requirement for income to be distributed from a CRUT

A
  • At least 5% and no more than 50% of current FMV of assets
  • paid at least annually for life or term ≤ 20 Years
145
Q

What is the requirement for income to be distributed from a PIF

A
  • Trust rate of return for year
146
Q

Are annual additions permitted for a CRAT

A
  • No
147
Q

Are annual additions permitted for a CRUT

A
  • Yes
148
Q

Are annual additions permitted for a PIF

A
  • Yes
149
Q

Does a CRAT allow for a Sprinkling provision

A
  • Yes
150
Q

Does a CRUT allow for a Sprinkling provision

A
  • Yes
151
Q

Does a PIF allow for a Sprinkling provision

A
  • No
152
Q

What happens if income is insufficient for payment for a CRAT

A
  • Must invade corpous
153
Q

What happens if income is insufficient for payment for a CRUT

A
  • Can pay up to income earned and make up deficiency in subsequent year
154
Q

Can a CRAT, CRUT, and PIF invest in tax exempt securities

A
  • CRAT: Yes
  • CRUT: Yes
  • PIF: No
155
Q

How can a charitable remainder trust be used for wealth replacement

A
  • the income tax savings created by the charitable deduction, in real dollars, can be used to purchase life insurance which will serve as a wealth replacement asset for the asset which was transferred to the charity
156
Q

What is a charitable lead trust

A
  • the charitable organization receives the income interest during the term of the trust and a noncharitable beneficiary receives the remainder interest
157
Q

What type of asset should a CLT be funded with

A
  • with a highly appreciating asset since future appreciation is effectively removed from the estate
158
Q

What are the methods of charitable transfers at death (testamentary)

A
  • Specific bequest
  • % or dollar amount of decedents gross estate
  • residuary bequest
  • remainder interest in property personal residence or farm
  • split interest in a charitable trust, income, or remainder interest
159
Q

What are the requirements for a bequest to qualify for the estate tax charitable deduction

A
  • bequest must be mandatory
  • amount of the bequest must be ascertainable at the date of the decedents death and the asset must be included in the decedents gross estate
160
Q

If tangible property is donated to a charity and the use is non related what is the deduction limited to

A
  • donors adjusted basis
161
Q

If an asset is expected to increase in value would a CRAT or CRUT maximize the amount that would be received by the non charitable beneficiaries

A
  • CRUT
162
Q

If an asset is expected to decrease in value would a CRAT or CRUT maximize the amount that would be received by the non charitable beneficiaries

A
  • CRAT
163
Q

Would a CRAT or a CRUT require more administration fees

A
  • CRUT because the asset is required to be appraised annually

Estate Planning (4 decks)

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