Trusts - Review Questions Flashcards
When one is looking to set up a trust, what are the types one is most likely to encounter?
Revocable
Irrevocable
Family member as a beneficiary/Exclusion of a family member
Charitable
Testamentary (after death)
Living (or inter vivos)
What are three common estate-planning tools that can be used to avoid probate in the distribution of testator’s property at death?
joint tenancy with rights of survivorship
beneficiary designations
revocable trusts
What are the tax implications of Revocable Trusts?
For federal income tax purposes, all income is taxed to the grantor at the grantor’s tax rate, since he is considered the owner of the trust corpus.
No gift tax is generated by establishing or funding a revocable trust since the gift is not completed until the trust becomes irrevocable.
Since the grantor has not irrevocably disposed of any assets, the entire trust corpus will be included in the grantor’s estate for federal estate tax purposes.
What is the primary advantage of a sprinkling trust?
The primary advantage of a sprinkling trust is the flexibility it provides to the trustee in making income distributions to beneficiaries who may not have a need for income in one year but could have such a need in a subsequent year.
Which power is a general power of appointment?
Choose the best answer.
1) You create a trust for your husband and sister and retain the power to invade the corpus for your husband’s
health care expenses.
2) You have the power to direct in your will who will receive assets from your mother’s trust.
3) You have the right to exercise a power only with the beneficiary’s consent.
4) You have a power to make distributions to your children from a trust created by your father.
2) You have the power to direct in your will who will receive assets from your mother’s trust.
You have the power to direct in your will who will receive assets from your mother’s trust.
You have been given a general power of appointment to appoint the trust property to anyone you choose at your death- including your estate.
You create a trust for your husband and sister and retain the power to invade the corpus for your husband’s health care expenses.
This statement is incorrect because you have a limited power of appointment according to an ascertainable standard, which can only be exercised for health care.
You have the right to exercise a power only with the beneficiary’s consent.
This statement is incorrect because you have the right to exercise a power only with the beneficiary’s consent. The remainder beneficiary has an adverse interest in the trust, and since you need the beneficiary’s permission to exercise the power, you have a limited power of appointment.
You have a power to make distributions to your children from a trust created by your father.
This statement is incorrect because you have a power to make distributions to your children from a trust created by your father. This power is limited because you cannot appoint property to yourself; only to your children as your father directed in the trust document.
What is a Crummey withdrawal power?
With a Crummey withdrawal power, each time a contribution is made to the trust, the beneficiary has a temporary right to demand withdrawal from the trust. If the demand right is not exercised, the annual transfer remains in the trust. If the demand is made, the trustee must deliver the funds to the beneficiary.
The name “Crummey trust” comes from the name of a party to a lawsuit, Crummey v. Comm. (9th cir. 1968).
What are three requirements for life insurance trust?
The donor(s) must create a trust vehicle to receive the insurance gift (or to receive cash with which to purchase a new policy) with terms that achieve the donor’s goals.
The donor(s) must actually transfer the policy to the trust by signing an irrevocable assignment of the policy.
The insured must be in reasonable health to avoid the policy being valued at a much greater value for gift tax.
Note: the trust itself could purchase the life insurance policy. The only time a life insurance policy is absolutely-assigned or gifted to the trust, is when the grantor already owns life insurance and wants to remove the death benefit proceeds from the gross estate. Also, when an existing policy is gifted into the trust the three year date of death rule will apply.
Which statement is NOT correct?
1) A decedent spouse receives a marital deduction for terminable interest property transferred into a By-Pass
Trust.
2) A marital deduction delays the estate tax until the surviving spouse’s death.
3) A By-Pass trust eliminates the estate tax in both spouses’ estates.
4) Estate equalization combined with By-Pass trusts may reduce the couple’s combined taxable estate since
they may be taxed in a lower tax bracket.
1) A decedent spouse receives a marital deduction for terminable interest property transferred into a By-Pass
Trust.
The first option is not correct: A decedent cannot receive a marital deduction for the terminable interest property passing into the By-Pass trust, nor does the decedent want one. By giving a spouse terminable interest property, the spouse can only take the income as needed and cannot choose the ultimate beneficiaries of this trust. The decedent spouse will use a unified credit against the estate tax.
All other answers are correct:
A marital deduction delays the estate tax until the surviving spouse’s death. But this means the estate tax may be higher because the surviving spouse is taxed on the property inherited from the decedent. This inheritance could result in a higher estate tax bracket at the second spouse’s death, especially if the property appreciates in value over time.
A By-Pass trust eliminates the estate tax in both spouses’ estates. The By-Pass trust is funded with enough money to match the exemption equivalent amount so it’s not taxed in the decedent’s estate, and will by-pass the surviving spouse’s estate.
Estate equalization combined with By-Pass trusts may reduce the couple’s combined taxable estate since they may be taxed in a lower tax bracket. For couples with significant wealth, estates over $27.22 million, this is the best technique to use to minimize their combined estate taxes.
QTIP Trust
Used when the grantor provides income to a spouse for her lifetime, but passes the remainder interest to someone else.
Non-marital or Bypass Trust
Appropriate when the grantor wishes to leave a life income interest to his spouse as well as other family members such as children or grandchildren.
Marital Trust
Provides the decedent’s spouse with control over the decedent’s property. The amount placed avoids estate tax liability of the first decedent spouse.
Disclaimer Trust
Used when the surviving spouse wishes to file a qualified disclaimer over a portion of the property passing to the survivor from the grantor’s estate.
Which of the following is not the purpose of a trust?
1) To distribute income and principal to beneficiaries
2) To avoid paying estate taxes
3) To allow for the professional management of trust property
4) To assist family members with special needs
2) To avoid paying estate taxes
John funds an irrevocable trust with $3,000,000. Which of the following would cause some or all of the trust assets to be includable in John’s estate?
1) John has a limited power of appointment under the trust instrument
2) John can appoint successor institutional trustees
3) John retains a reversionary interest greater than 10%
4) John dies after 5 years of the trust property being added to the trust
3) John retains a reversionary interest greater than 10%
Mary has a Picasso painting. She would like to transfer the property into a trust that will benefit her children eventually but would like to keep the painting during her life. What is the best type of trust for this situation?
1) A QPRT
2) A GRIT
3) A GRUT
4) A GRAT
2) A GRIT
