Trust Taxation - Other Taxes

Question 1

3 Main Federal Transfer Taxes and The Main Exclusions

Answer 1

1. Federal Transfer Taxes
   
   1. Federal Gift Tax
   2. Federal Estate Tax
   3. Federal Generation Skipping Transfer Tax (GST)
      
      1. Can owe GST in addition to Estate or Gift tax
2. Exclusions
   
   1. $15K annual exclusion per donee
   2. 11.7M lifetime exclusion shared between estate/gift/GST

Question 2

Federal Gift Tax

1. Liability of Donor and Donee
2. Current Gift Tax Rate
3. Exemptions from Gift Tax
4. Grantor vs. Nongrantor Trusts
5. Sale vs. Gift

Answer 2

1. Liability of Donor and Donee - Gift tax is imposed on the donor, but the donee may incur liability if the donor does not pay.
2. Current Gift Tax Rate - 40%
3. Exemptions
   
   1. Unlimited exemption for
      
      1. non-terminable gifts to spouse (e.g. can’t be conditional)
      2. direct payments to educational institution
      3. direct payments to medical providor
      4. payments to charity
   2. 15k annual exclusion
   3. 11.7M lifetime exclusion
4. Grantor vs. Nongrantor Trusts
   
   1. Grantor Trusts - gift tax doesn’t apply to grantor trusts
   2. Nongrantor Trusts - single gift to nongrantor trust is individual gift to each B with present interest (e.g. life estate, right to contributions)
      
      1. if total gift divided by B w present interest is < $15k then no gift tax
5. Sale vs. Gift - Transfers for full consideration in $ or $’s worth are not subject to gift tax (this is a sale).

Question 3

Present Interest Rule for Nongrantor Trusts

1. General Rule
2. Exceptions

Answer 3

1. General Rule - A single gift to a non-grantor trust is considered an individual gift to each beneficiary of the trust with a present interest
   
   1. present interest - the donee must have the immediate right to use, possess, or enjoy the property:
2. Exceptions to Present Interest Requirement
   
   1. Crummey Trust - T gives B short term immediate withdrawal right (i.e. present interest) of donated property.
      
      1. Send crummey letter
      2. B has 15 days to withdraw after which funds are in trust gift-tax free up to 15k.
      3. often used to pay ILIT premiums.
3. Trusts for Minors & Young Adults Under 21
   
   1. no crummey letter needed to qualify for 15k annual exclusion
   2. when kid reaches 21, send crummey letter and trust continues as crummey trust.

Question 4

Federal Estate Tax

1. What Does Estate Tax Include?
   
   1. Value?
2. Max Tax Rate
   
   1. Exemptions

Answer 4

1. Estate Tax Includes - everything decedent owned at death.
   
   1. Value based on FMV at death.
2. Max Tax Rate - 40%
   
   1. 11.7M exclusion per person (couples get 23M)

Question 5

Federal Estate Tax -

1. Credit Shelter Trusts and
2. Portability

Answer 5

1. Credit Shelter Trusts - way to get around estate tax for estates over 11.7M
   
   1. give CST any part of your 11.7M lifetime exclusion amount.
   2. give the rest to your spouse (100% marital deduction)
2. Portability - allows a surviving spouse to utilize any unused estate tax exemption left over from deceased spouse plus their own individual exclusion amount.
   
   1. less preferred than CST for several limiting reasons.

Question 6

Estate Tax - Marital Deduction

1. General Rule
2. Requirements
3. Exceptions

Answer 6

1. General Rule - unlimited estate tax marital deduction
2. Requirements -
   
   1. property is included in deceased spouse’s gross estate
   2. property passes to surviving spouse; and
   3. the interest passed is not terminable (ie. conditional)
      
      1. Exceptions
         
         1. LEPA
         2. QTIP
         3. CRT where spouse is sole income B

Question 7

Federal Estate Tax - Marital Deduction Life Estate Trust

1. Purpose
2. Requirements
3. Effect

Answer 7

1. Marital Deduction Life Estate Trust (LEPA Trust) – way to get around the terminable interest rule for marital deduction
2. Requirements -
   
   1. SS entitled to income for life;
   2. income is paid annually; and
   3. SS has sole power to appoint entire estate at death
3. Effect - Assets will be included in surviving spouse’s estate.

Question 8

Federal Estate Taxes - Qualified Terminable Interest Trusts

1. Purpose
2. Requirements
3. Effect
4. Difference from LEPA

Answer 8

1. Qualified Terminable Interest Trusts (Q-TIP Trusts) - Also doesn’t violate the terminable interest rule for the marital deduction.
2. Requirements
   
   1. SS is US citizen
   2. all income payable to SS annually for life
   3. SS has right to make trustee convert non-income proeprty to income property
   4. no other B of income other than SS
3. Effect -
   
   1. included in SS estate for estate tax purposes
   2. qualifies for marital deduction
4. Difference from LEPA -
   
   1. LEPA - ss has general power of appointment (can direct trust funds anywhere at death)
   2. QTIP - Deceased spouse/settlor can dictate where the money goes at SS’s death.

Question 9

Federal Estate Tax - Qualified Domestic Trust

1. Issue for Non-US Spouses
2. QDOT

Answer 9

1. Non U.S. Citizen Spouses dont’ qualify for marital deduction.
2. QDOT Exception - holds $ till SS gets citizenship and qualifies for deferred marital deduction.

Question 10

Federal Estate Tax - Reciprocal Trust Doctrine

Answer 10

If two related parties are setting up trusts for each other, the courts may return the trust property to the estates of the transferor for tax purposes if the trust instruments are the mirror image of each other.

Question 11

Federal Estate Tax - ILIT

1. Advantages
2. Disadvantages
3. Estate Taxation of Life Insurance

Answer 11

1. ILIT Advantages
   
   1. Proceeds can be excluded from estate of both grantor and spouse
   2. Estate liquidity though loans to and or purchases of assets from grantor’s estate
   3. Can leverage GST tax exemption
   4. Protects B’s from potential creditors (spendthrift provision in ILIT)
2. ILIT Disadvantages
   
   1. Loss of access to policy and other assets
   2. Administrative burdens and legal, accounting and trustee costs
   3. Loss of control
3. Estate Tax on Life Insurance - proceeds are included in insured’s estate if:
   
   1. death benefit is payable to the estate (directly or indirectly)
   2. if insured had any control over policy during life

Question 12

Generation Skipping Transfer Tax

1. Skipped Person?
2. Tax Rate
3. Exemption
4. Portability?
5. Grandfathered Exemption
6. Reverse QTIP

Answer 12

1. Skipped Person
   
   1. Related – two or more generations apart
   2. Unrelated – more than 37.5 years younger
2. Tax Rate – 40% in addition to estate/gift (so up to 80%)
3. Exemptions
   
   1. 11.7M shared lifetime exemption
   2. Grandfathered GST exemption for some trusts
      
      1. No portability of GST Exemption
      2. Reverse QTIP – QTIP without GST exemption allocated to it (so that GST exemption can be allocated elsewhere if remainder B of QTIP are not skipped persons