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Estate > Types, Features and Taxation of Trusts > Flashcards

Types, Features and Taxation of Trusts Flashcards

1
Q

Elements of a trust

A
  • must be trust property (corpus)
  • must be grantor (transfers property and dictates terms of trust)
  • must be trustee (legal title to property and manages trust)
  • must be at least one beneficiary (benefit of trust, equitable title)
  • grantor must be competent at creation, trustee must be competent always
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2
Q

Per capita distribution

A
  • if one kid dies, grandkids from that parent get equal shares split with everyone else
  • reduces kids share
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3
Q

Per stirpes distribution

A
  • if one kid dies then grandkids from that parent get parents share and have to split it among themselves
  • kids shares dont reduce
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4
Q

Simple trusts

A
  • conduit for forwarding income to beneficiaries
  • passes income through to beneficiaries who report on income (pay own marginal rates)
  • DNI
  • income must be distributed and its taxed to beneficiary
  • no distribution of corpus
  • no charitable gifts
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5
Q

Distributable Net Income (DNI)

A
  • accounting rule that limits amount that beneficiaries must report as gross income
    purposes
  • provide trust with deduction for amount distributed to beneficiaries
  • limit portion of distribution that is taxable to beneficiaries
  • ensure character of distributions remains same between beneficiary and trust
  • trust deduction = lesser amount actually distributed or DNI
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6
Q

Complex trust

A
  • trust taxed as separate entity on income earned
    -requirements
    1. irrevocable and grantor hasnt retained control
    2. income is accumulated
  • income accumulated taxed to trust, income distributed taxed to beneficiary
  • corpus can be distributed
  • may make charitable gifts
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7
Q

Revocable trust

A
  • trust created during life
  • reserves power to alter trust
  • becomes irrevocable at death
  • included in gross estate of grantor
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8
Q

Irrevocable trust

A
  • cannot be altered
  • not included in grantors estate
  • grantor cannot terminate or reclaim assets
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9
Q

Crummey trust

A
  • irrevocable trust with demand rights
  • gift of future interest into present interest
  • can be used for minor beneficiary
  • demand rights can be granted to minor
  • each time contribution is made to trust, beneficiary has temporary right (30days) to demand withdrawal
  • withdrawal right is equal to lesser of annual exclusion or value of current year contribution
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10
Q

Inter-vivos trusts

A
  • revocable living trust becoming irrevocable at death
  • at death can terminate with corpus distributed to remaindermen or continues to later date
  • no income tax during life (not complete gift)
  • taxed to grantor
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11
Q

Advantages of inter-vivos trust

A
  • organization of property during life
  • lower cost than probate
  • alternative to guardianship/conservatorship
  • more privacy than will
  • speedy disposal of property
  • avoidance of probate
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12
Q

Disadvantages of inter-vivos trust

A
  • legal fees
  • funding burden
  • longer creditor period
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13
Q

Testamentary trusts

A
  • created through will
  • can protect property from estate tax levies as it passes money
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14
Q

Spendthrift provisions

A
  • prohibits transfer of beneficiaries interest
  • not subject to claims of beneficiary creditors
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15
Q

Bypass trust

A
  • first spouse to die controls property of trust
  • trust contains property transferred to trust at time of decedents death
  • gives decedent postmortem control over transferred property
  • amount transferred equals estate tax exemption
  • provides income stream to surviving spouse
  • income can be split among spouse and other individuals
  • trust wont be included in spouses estate unless it included 5 or 5 provision or HEMS withdrawal right
  • at second spouse death, remaining assets pass to other beneficiaries tax free
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16
Q

Portability of unused exemption

A
  • executor of deceased spouse estate can transfer cany amount of unused exemption to surviving spouse
17
Q

Marital trust

A
  • second spouse to die controls property of trust, has right to all income
  • funded with property transferred from surviving spouse at decedents death
  • property passes estate tax free under unlimited marital deduction
  • surviving spouse has postmortem control over this trust
  • included in gross estate of surviving spouse
18
Q

Qualified Terminal Interest Property Trust (QTIP)

A
  • first spouse to die controls property of trust
  • when decedent wishes to provide the surviving spouse with income paid only for life and wishes to qualify property for marital deduction
    LAME
  • Lifetime income for spouse
  • Annual payments to spouse
  • Mandatory payments to spouse
  • Exclusively for spouse
  • decedent can decide who remaindermen are not surviving spouse
  • included in estate of second spouse
19
Q

Estate trust

A
  • marital trust that does not provide the surviving spouse an income stream
  • holds non income producing assets
20
Q

Pour-over trust

A
  • to catch any assets the client owns but not yet controlled by revocable trust at death
  • revocable trust set up first and pour over will is executed
21
Q

Gifts to minors - future interest

A

2503b (bad boy) trust
- interest distribution only
- use applicable credit to fund
- income may be subject to kiddie tax

22
Q

Gifts to minors - present interest

A

Subject to kiddie tax
- UGMA: funded with cash type assets, distributed at 18, in custodians estate, cannot be testamentary
- UTMA: funded with any asset (real estate), distributed at 21, in custodians estate, can be testamentary

Trust tax rate (37% > 14k+)
- 2503c trust: funded with any asset, distributed at 21, costs to set up and maintain, in grantors estate

529: specific funds, flexible distributions, lump sum 85k, donor can retain control, k-12 10k/yr, 10k to student loans

23
Q

UGMA

A
  • property transferred in name of adult custodian for minor
  • securities, cash, LI, annuities allowed
  • cannot hold real property (except in 2 states)
24
Q

UTMA

A
  • real estate, partnership interest, patents, royalty interest, intellectual property allowed
  • allows gifts at death by permitting fiduciary to establish custodianship if authorized by trust
25
Q

UGMA and UTMA rules and purposes

A
  • gift created for only one person (minor)
  • not separate legal entity
  • income taxable to minor (kiddie tax)
  • custodian can distribute income and principal at any time
  • if donor is custodian and dies before minor, included in donors estate
  • if minor dies first, goes to executor of their estate
  • minor receives property outright at 18 or 21
  • cannot be used in obligation to support minor
26
Q

2503b (bad boy) trust

A
  • can be used for minor, more often used for adult children
  • stream of income can result in kiddie tax problem before 24 y/o
  • 2 parts to the gift
    1. income interest: present interest (annual exclusion), subject to tax
    2. remainder interest: future interest
  • only income needs to be distributed, not corpus
27
Q

2503c trust

A
  • gift to minor and still receive annual exclusion
    conditions
  • property and income may be used before 21
  • any property not used will pass to donee at 21
  • if donee dies before 21, payable to donee estate
  • gets $100 deduction for kiddie tax calculation
  • first 2,900 taxed at 10%
28
Q

When to establish 2503c trust

A
  • trust doesnt have to die at 21 if adult keeps putting money in, as long as donee can withdrawal at 21
  • grantor can designate initial and successor trustees
  • if donor dies before donee is 21, included in donors estate
29
Q

2503c vs 2503b

A

Investments
- C: any reasonable investment
- B: income producing investment
Transferred
- C: principal at 21 or sooner
- B: mandatory income but not corpus
Gift tax
- C: present interest, exclusion allowed
- B: future interest for corpus, present for income
Taxation
- C: trust tax ruled
- B: maybe kiddie tax

30
Q

Kiddie tax

A
  • unearned income greater than $2,500 with at least one living spouse at year end
  • counts if under 18
  • counts if 18 and receiving less than half of support
  • counts 19-23 if full time student and receiving less than half of support through earned income

Step 1: 1,250 deduction
Step 2: next 1,250 taxed at 10% (125)
Step 3: over 2,500 taxed at parents rate
* if there is earned income, standard deduction is earned income + 400

31
Q

Long term gains

A
  • children over 18 can still take advantage of lower capital gains tax
32
Q

529

A
  • 85k max in one year (170k if married and splitting)
  • if doing lump sum then cannot use gift exclusion for 5 years
  • if donor dies before 5 years, portion of gift allocated for future years in included in estate
  • donor retains control of gift and can take money back
  • completed gift
33
Q

Sprinkling or spray provisions

A
  • power to direct (distribute) income at the discretion of the trustee for the benefit of the beneficiary
  • provision in trust or estate
  • income
34
Q

Discretionary provision

A
  • provides beneficiary with only as must trust income or principal as the trustee alone sees fit to distribute
  • income or principal
35
Q

Support trust

A
  • distributes only the amount of income and principal the trustee deems necessary for the support or education of the beneficiary
36
Q

Income and remainder beneficiaries

A
  • remainder interest is future interest
  • typically trust corpus goes to another beneficiary after termination of the prior interest for the first beneficiary
37
Q

Rule against perpetuities (RAP)

A
  • no interest in property is valid unless the interest must vest no later than 21 years and 9 months after the youngest life when trust was created
  • some states
  • dynasty trust
38
Q

Dynasty trust

A
  • B trust that benefits multiple generations
  • free of estate, gift, GST tax
  • can last for the lives in being plus 21 years and 9 months or as long as law allows
  • distributed at end of period
39
Q

Section 2503c trust - taxation

A
  • income is gift of present interest (qualifies for annual exclusion)
  • remainder interest is future gift
  • donor pays gift tax or future interest and present over exclusion
  • donee pays income tax (possibly at kiddie tax rules)

Estate (10 decks)

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