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Patrick CFP > Trusts > Flashcards

Trusts Flashcards

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CFP® flashcards
1
Q

Which type of trust is required to distribute all accounting income to beneficiaries in the year they are earned?

A

simple

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2
Q

Which type of trust can accumulate income?

A

complex

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3
Q

Which type of trust may have a charitable beneficiary?

A

complex

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4
Q

Which type of trust can distribute principal?

A

complex

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5
Q

Which type of trust cannot distribute principal?

A

simple

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6
Q

Personal exemption for simple vs complex trusts

A

$300 simple vs $100 complex

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7
Q

Identify the category of trusts that allows the grantor the right to terminate the trust

A

revocable

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8
Q

Identify the category of trusts that does not allow the grantor the right to terminate the trust

A

irrevocable

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9
Q

Gift and tax treatment of gift transfer into trusts

A

Revocable: not a completed gift
Irrevocable: completed gift subject to gift taxes

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10
Q

Estate tax on assets in trusts

A

Revocable: subject to estate tax at the time of the grantor’s death
Irrevocable: generally not subject to estate tax when the grantor dies

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11
Q

Identify the characteristics of an Irrevocable Trust

A
  1. Asset Protection
  2. Must be funded to legally exist
  3. Asset transfer is complete to the owner, the trust
  4. Grantor gives up control
  5. Medical Planning
  6. Tax Deductions
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12
Q

Identify the characteristics of a Grantor Trust

A
  1. Revocable (amendable)
  2. Income is taxed to the grantor
  3. Allows rights or powers as specified in the trust rules
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13
Q

Identify the characteristics of a living trust

A

AKA Inter-Vivos
1. Established and funded during the grantor’s lifetime and takes effect immediately.
2. Funds pass outside the will and the probate process, saving costs & time.
3. Title to property inside is held in the name of the trust.

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14
Q

Identify the characteristics of a testamentary trust

A

Created through a will, funded with assets after death.

Possible reasons:
-reduce taxes
-providing professional investment management
-ensuring estate ends up in the right hands

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15
Q

Identify the characteristics of a Revocable Trust.

A
  1. Flexibility
  2. Grantor retains the right to amend trust /property
  3. May be funded or unfunded
  4. Becomes irrevocable when grantor chooses or dies
  5. Incomplete gifts and therefore tax owed in the future
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16
Q

Grantor

A

AKA Settlor, Trustmaker, or Trustor

A person who transfers property to and dictates the terms of a trust

17
Q

Trustee

A

A party to whom property is transferred by the grantor and receives legal title to the property placed in the trust.
-Manages, distributes, and accumulates income + principal.
-Must follow a formal written agreement (i.e., terms of the trust) for the benefit of the beneficiaries.
-Serves as a fiduciary.

18
Q

65-Day Rule

A

allows fiduciaries to make distributions within 65 days of the new tax year

19
Q

Section 645 Election

A

Allows the executor of an estate and the trustee of a revocable trust to elect to treat the estate and the trust as one for tax purposes

20
Q

Corpus

A

AKA res

the amount of principal in a trust

21
Q

Terms

A

Document outlining a trust’s provisions

22
Q

Beneficiary

A

AKA Remainderman

A party that will receive the benefit of the use of the trust property and/or income

23
Q

When Form 1041 filing is required:

A
  1. Any taxable income
  2. Gross income of $600+
  3. Any beneficiary is a non-resident alien
24
Q

Trust Accounting Income

A

-Items of income and expense that are used to determine the amount the income beneficiaries are entitled to receive from the trust each year.
-Does not determine the trust’s taxable income or who will pay the tax (beneficiary or trust).
-Trust document will usually specify what accounting income is (i.e., how capital gains and expenses are allocated to income and principal).
-In cases where accounting income is not specified, the allocation is made according to state law.

25
Q

Trust Taxable Income

A

-Income minus deductions (distributions, charitable contributions, investment interest, investment advisor’s fees, etc.)
- In addition, the trust is entitled to the appropriate personal exemption.

26
Q

Distributable Net Income (DNI)

A

-Allocates taxable income between beneficiaries and the trust.
-DNI represents the maximum that can be taxed to the beneficiaries.
-The beneficiary will be responsible for taxes on the lesser of the DNI allocation, or the amount required to be distributed according to the trust document.

27
Q

An inter-vivos trust is characterized by

A
  1. Established and funded during the grantor’s lifetime and takes effect immediately.
  2. Funds pass outside the will and the probate process, saving costs & time.
  3. Title to property inside is held in the name of the trust.
28
Q

Revocable Trust Characteristics

A

-Flexible
-Grantor retains the right to amend, revoke, or take back property
-Funded or unfunded
-Becomes irrevocable at death

28
Q

Testamentary Trusts

A

Created thru a will, funded with assets after death.

Purposes could include:
-reducing estate taxes
-IM
-Ensuring estate ends up in the right hands

29
Q

Irrevocable Trust Characteristics

A

-Asset protection
-Funding required
-Property transferred completely to the trust
-Grantor gives up control of property

30
Q

Standby Trust

A

Used to manage a person’s assets in the event of incapacitation

Grantor: creates a trust by transferring the legal title of the property to the Trustee
Trustee: manages the trust property for the beneficiary
Beneficiary: has equitable title to trust property

Grantor is all 3 until incapacitation, when a Successor becomes the Trustee.

31
Q

QPRT

A

Qualified Personal Residence Trust. A grantor trust for houses

32
Q

Advantages of a QPRT

A

-Tax reduction (removes a highly valued asset out of the estate)
-Property use (grantor uses it during the term)
-Support for beneficiaries

33
Q

Disadvantages of a QPRT

A

-Possible estate inclusion (if grantor does not outlive the trust term)
-Taxes
-No step up in basis
-Maintenance expenses
-When the grantor survives the term they need to move or rent

34
Q
A

Patrick CFP (15 decks)

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