Module 3 - 4325
Linda Plantier wants to establish a trust for her three grandchildren that will accomplish all of the following objectives: *Exclude all assets transferred to the trust from her gross estate *Protect the trust assets before distribution from the creditors of any beneficiary *Keep the trust assets from disqualifying a beneficiary for public assistance benefits such as Medicaid Which of the following trust provisions would NOT help to achieve one or more of these objectives? A) A provision granting each beneficiary a Crummey power B) A provision making the trust irrevocable C) A provision that once the trust is established, Linda cannot change any of the provisions D) A provision making all distributions from the trust—of both principal and income—subject to the absolute discretion of a corporate trustee
A A Crummey power, which makes any gift to the trust a gift of a present interest and thus eligible for the annual gift tax exclusion, would not accomplish any of the stated objectives. A creditor would be able to exercise the Crummey power to take possession of the property affected by the Crummey power. The remaining options would help at least Linda achieve at least one of her objectives.
Which one of the following is NOT a correct pairing of a trust provision with its characteristics? A) Spendthrift provision: a clause in a trust that prevents a beneficiary from withdrawing more than the greater of $5,000 or 5% of the corpus. B) Crummey provision: a trust clause that provides the beneficiary with a limited duration right to demand payment of contributions to a trust each year up to the annual gift tax exclusion from the trustee. C) Discretionary provision: a trust clause that allows the trustee to use his or her sole judgment in determining how much of the trust income and principal will be paid to or on behalf of a beneficiary. D) Sprinkle (spray) provision: a trust clause that allows the trustee to distribute unequal amounts to the beneficiaries or to make no distribution at all.
A A spendthrift provision is a trust clause limiting both a beneficiary's right to dispose of, and a creditor's right to have legal access to, the beneficiary's interest in the trust before actual distribution. The remaining options are correct.
Mario has accumulated significant wealth over his lifetime, and he is currently implementing gifting techniques. He would like to take advantage of the annual exclusion. Transfers to which of the following trusts/accounts permit Mario to utilize the gift tax annual exclusion? I. Uniform Gift to Minors Account (UGMA) II. Grantor retained annuity trust (GRAT) III. Qualified tuition plan IV. Section 2503(c) trust A) I, III, and IV B) I and IV C) II and III D) I, II, and IV
A A transfer to a GRAT is a gift of a future interest that is not eligible for the annual exclusion. Transfers to an UGMA, a qualified tuition plan, a Section 529 plan, and a Section 2503(c) trust are all eligible for the gift tax annual exclusion.
Which one of the following statements about the use of a split-dollar life insurance plan in a business setting is false? A) The entire value of the policy and its benefits are subject to claims of the employer's general creditors. B) The insurance premiums are typically split between the employer and the employee/insured. C) The insurance can act as a fringe benefit to a valued employee. D) The benefits from the policy are split between the employer and the employee/insured or the employee's beneficiary.
A Only the benefits payable to the employer under the split-dollar agreement are subject to claims by the employer's creditors. All other statements are true.
Which of the following statements is CORRECT about the income, gift, or estate tax implications of making a gift to a charity of a remainder interest in a farm or personal residence? I. A charitable gift tax deduction is not available because it is a gift of a partial interest. II. The farm or residence is included in the grantor's gross estate only if the grantor dies before his actuarially determined life expectancy as of the date of gift. III. The grantor gets a current income tax deduction for the present value of the remainder interest. IV. The grantor's estate will have to pay an estate tax on the value of the farm or personal residence according to the value used for estate tax purposes. A) III only B) I, II, and IV C) II, III, and IV D) I only
A Option I is incorrect because a remainder interest in a farm or residence is an exception to the partial interest rule. Option II is incorrect because the asset is included in the grantor's gross estate under all circumstances because of the reserved right of use and enjoyment. The property will be deducted as a charitable deduction, but it starts out in the gross estate. Option IV is incorrect because of the unlimited charitable estate tax deduction.
Which one of the following objectives cannot be achieved with an unfunded irrevocable life insurance trust that does not have a Crummey power? A) Sheltering premium payments gifted to the trust from gift tax with the annual exclusion B) Avoiding transfer tax on the death benefit, as long as the grantor is not the trustee C) Naming the trust as beneficiary of the policy with annual income payments to the grantor's spouse and children D) Avoiding probate of death benefits
A Sheltering of premium payments gifted to the trust from gift tax by using the annual exclusion cannot be accomplished unless the beneficiaries of the unfunded irrevocable life insurance trust (ILIT) have Crummey powers, which gives them a present interest in the premium payments.
Derik Levine recently established a revocable living trust and funded it with several parcels of income-producing real estate. The trust provides that the trustee has discretion to distribute all trust income at least annually in equal shares to Derik's three adult children, who are also to receive the remainder of the trust at Derik's death. Derik named his brother as trustee. Which of the following statements about the tax implications of this trust are CORRECT? I. Derik will not owe a gift tax on the value of the assets placed in the trust. II. Derik will be able to take three annual exclusions in computing the gift tax due from funding the trust. III. Derik will have to report all trust income on his personal income tax return. IV. The taxable value of the assets placed in trust will be included in Derik's estate tax calculation as an adjusted taxable gift. A) I and III B) I, III, and IV C) II and III D) I and II
A The answer is I and III only. Establishment and funding of a revocable trust are not deemed to constitute a completed gift, as the donor does not give up dominion and control over the assets. Because no gift is made, no gift tax calculation is necessary, and no gift tax is due. Therefore, the trust assets remain part of the grantor's gross estate. A right to revoke a trust triggers one of the grantor trust rules and thus makes all trust income taxable to the grantor whether or not he ever receives any of the income.
Which one of the following statements regarding a charitable remainder trust (CRT) is CORRECT? A) A grantor who establishes a charitable remainder unitrust (CRUT) is eligible for an income tax deduction in the year the trust is established. B) A grantor who establishes a CRT is free to revoke the trust at any time. C) The annuity payment received from a charitable remainder annuity trust (CRAT) fluctuates each year with the value of the trust assets, providing a potential hedge against inflation. D) The remainder interest in a CRT passes to a noncharitable beneficiary.
A The grantor of a CRUT is eligible for an immediate income tax deduction based on the present value of the remainder interest that will pass to charity. A CRT must be irrevocable. The annuity payment from a CRAT is fixed.
Gary and Georgeann Sutter have the following objectives: *For Gary to provide Georgeann exclusively with a mandatory stream of income from the assets included in his gross estate if he predeceases her *To ensure that Gary's children from his prior marriage will ultimately receive the income-producing assets upon Georgeann's death *To prevent assets used to provide income to Georgeann from being included in her gross estate Which of the following estate planning techniques would accomplish the Sutters' first objective of providing a mandatory stream of income? I. a power of appointment trust II. a QTIP trust, with an election III. a QTIP trust, without an election A) I, II, and III B) I only C) II only D) II and III
A The key portion of the Sutters' first objective is that Gary wants Georgeann to have a mandatory income stream. All of these trusts must grant the surviving spouse a mandatory income stream to qualify for the marital deduction. In a QTIP trust, there is a mandatory income stream to the surviving spouse whether or not the election is made. The election affects only tax goals, not distribution goals.
Holly Miller is in poor health and would like to make a gift to her nephew, Todd. Holly's main goal is to reduce administrative expenses and taxes on her estate. She also would like to keep both her and Todd's income tax liability as low as possible. Her will leaves everything to Todd when she dies. Todd does quite well financially, but Holly would like to give him something while she is alive. Based on her objectives, which one of the following transfers to Todd would be the most appropriate? A) Assigning to Todd all incidents of ownership in a life insurance policy that Holly currently owns on a friend's life; the policy names Todd as the primary beneficiary of a $100,000 death benefit; replacement cost of the policy is $44,000 B) Giving up her retained income interest in an irrevocable trust and accelerating Todd's remainder interest; the trust corpus is valued at $39,000 C) Transferring a stock portfolio worth $45,000 to Todd; her basis in the portfolio is $5,000 D) Making Todd a joint tenant with right of survivorship in a one-acre tract of land she owns in a neighboring state; the land is valued at $35,000
A While making Todd a joint tenant with right of survivorship in a one-acre tract of land she owns in a neighboring state will reduce Holly's transfer and administrative costs by eliminating the need for ancillary probate, her gross estate will not be reduced because of the contribution rule for property owned in joint tenancy by nonspouses. Contrast this with the life insurance policy which if gifted will result in a minimum $44,000 reduction in her gross estate. The three-year rule would not apply to the transfer of this policy because it is not on Holly's life. The stock portfolio is a highly appreciated asset, which usually should be transferred at death to take advantage of the step-up in income tax basis. If she gifted the portfolio to Todd and he sold it, he would have to pay income tax on a $40,000 gain. However, if it was transferred to Todd at her death and he sold it, because of a step-up in basis there would be no gain, and therefore, Todd would not owe income tax on the sale. Finally, Holly's release of her retained income interest would be subject to the three-year inclusionary rule. Holly has been in poor health. If she dies within three years of the transfer, the full date-of-death fair market value will come back into her estate. Therefore, such a transfer would not likely reduce the size of her gross estate.
Which of the following statements regarding qualified personal residence trusts (QPRTs) is CORRECT? I. A QPRT may have an interest in only one residence. II. The residence in a QPRT may not be occupied by anyone other than the grantor and members of the grantor's family. A) Neither I nor II B) Both I and II C) II only D) I only
B
Which of the following statements regarding a family limited partnership (FLP) is CORRECT? I. The general partnership interests are transferred to the junior family members and will qualify for minority interest discounts. II. The transfer of the limited partnership interests to the junior family members is considered a future interest gift and is therefore not eligible for the gift tax annual exclusion. III. The transfer of the limited partnership interests to the junior family members may qualify for both a minority interest discount and a lack of marketability discount for federal gift tax purposes. A) II and III B) III only C) II only D) I and III
B Limited partnership interests (not general partnership interests) are transferred to the junior family members and may qualify for valuation discounts. The transfer of such interests is a present interest and is eligible for the gift tax annual exclusion. Another advantage of the FLP technique is that the senior family member retains the ability to control the business and receive income via retention of the general partnership interest.
Last year, Julie Poppins sold to her daughter, Mary, a daycare business for $180,000, which was its fair market value. Julie's basis in the business was $90,000. Mary gave Julie an unsecured promissory note in which she promised to pay the purchase price in 15 annual installments composed of only interest at the prevailing rate for the first five years, with each of the remaining 10 annual payments to be composed of $18,000 principal, plus interest at the same rate. At Mary's request, the note also contained a provision that if Julie died while any part of the note was not yet due, the payments not yet due would be canceled. Which of the following statements correctly describe the tax implications of the intrafamily sale that Julie has made to Mary? I. If Julie dies while any part of the note remains outstanding, her gross estate must include the fair market value of the daycare business. II. If any annual installments under the terms of the note are canceled, the present value of the canceled installments will be included in Julie's gross estate. III. Cancelation of any annual installments by Julie's estate under the terms of the note will cause her estate to realize a taxable gain on the forgiven installments. IV. If Mary closes the daycare business before Julie dies, and Julie cancels the entire note, Julie will be subject to both income taxes and gift taxes. A) I and IV B) II, III, and IV C) II and III D) I, II, III, and IV
B The answer is II, III, and IV only. One key to this question is that this is only an installment sale and not a self-canceling installment sale (SCIN). We know this because a SCIN must pay a premium over the normal installment sale. The premium, which would be calculated by a CPA is either a higher interest rate or a larger initial principal amount (the fair market value (FMV) + the SCIN premium amount). In this case, the principal was the FMV and the interest rate is the prevailing interest rate, not a higher than prevailing interest rate as the premium for a SCIN. Only option I is an incorrect statement because Julie's estate would include the present value of the forgiven payments, but would not include the value of the daycare business as of the date of her death. Option II is correct because in such circumstances, Mary did not pay the required premium for the cancelation provision. If this premium is not paid, the transaction is an installment sale rather than a valid SCIN. When payments pursuant to an installment sale are canceled or forgiven, the seller must recognize any gain in the forgiven payments, and pay transfer tax on them. Option III is correct because in such circumstances, Julie will have to recognize for income tax purposes the proportionate gain (FMV less basis) that she would have otherwise recognized had the payment not been canceled. Option IV is correct for the same reasons as stated for options II and III.
All of the following are correct pairings of an intrafamily planning technique with one of its characteristics except A) installment sale: reporting gain on an installment basis is automatic if a payment is made in any year other than the year of the sale, unless the seller elects not to have it apply. B) private annuity: payments from the transferee to the annuitants are paid for a stated term certain. C) sale-leaseback: the transferor continues to have the right to use business-related property that she previously owned. D) gift-leaseback: the donor leases the property back from the donee at a reasonable rental value.
B The answer is private annuity: payments from the transferee to the annuitants are paid for a stated term certain. It is the only wrong pairing of an intrafamily planning technique to a characteristic. Annuity payments from a private annuity are made for the lifetime of the annuitant regardless of the number of years involved. The transferor is immediately taxed on the difference between the present value of the promised payments and her basis in the transferred property.
Which one of the following statements is CORRECT about the nontax characteristics of a reverse gift? A) Property with an income tax basis close to its fair market value is often the subject of the gift. B) The purpose of the gift is that the donor will get the gift back with a stepped-up basis. C) A gift given anytime within three years of the donee's death will achieve the objective of the donor. D) The donee does not have the right to sell the gifted property.
B The gift is given to a donee who will most likely predecease the donor, with the expectation that the donee will bequeath it to the donor and that the property will have received a stepped-up basis at the donee's death, thereby wiping out any gain. Property with an income tax basis close to its fair market value is incorrect because property that has a large amount of gain is selected for this technique. More than one year must pass between the time of the gift and the death of the donee to achieve a step-up in basis. To get the desired step-up in basis, the donee must have sufficient dominion and control so that the donee could sell the property if she chose, rather than bequeath it back to the donor.
Which one of the following statements correctly describes the characteristics of an entity purchase buy-sell agreement? A) The replacement cost of life insurance on the lives of the other owners used to fund the agreement will be included in the gross estate of the first owner to die. B) The purchase price established for an owner's interest in the agreement will be accepted for transfer tax purposes by the IRS if more than 50% of the value of the property subject to the agreement is owned directly or indirectly by individuals who are not members of the transferor's family. C) Each business interest owner (and/or her estate) has an obligation to sell or offer to sell her interest to the other business interest owners when specified events occur. D) Each business interest owner purchases a life insurance policy on the life of every other business interest owner to be able to meet her obligation to purchase her share of the interest of the other owner or owners.
B The purchase price established for an owner's interest in the agreement will be accepted for transfer tax purposes by the IRS if more than 50% of the value of the property subject to the agreement is owned directly or indirectly by individuals who are not members of the transferor's family. The Chapter 14 rules will not apply as the statutory exception to this section will be met. In an entity redemption agreement, the business entity contracts with each business owner to buy or redeem each owner's interest when specified events occur. The remaining answer choices would be true statements for a cross-purchase buy-sell agreement.
Grace Grubbs, your 76-year-old client, has the following objectives: *Shifting some of the future appreciation in her portfolio of marketable securities to other members of her family *Spreading income from the portfolio among her family without any preferential rights to income *Maintaining control over the entire portfolio for her lifetime *Reducing the size of her gross estate Grace is considering several techniques. Which one of the following would be most appropriate for accomplishing Grace's objectives? A) An installment sale B) A subchapter S corporation in which she retains most of the shares and distributes the remaining shares to family members C) A regular (C) corporation in which she retains all of the voting shares, and distributes nonvoting shares to family members D) A 20-year GRUT (grantor retained unitrust)
B This is the correct answer because it is the technique that will accomplish all of Grace's goals at the least tax cost. By retaining most of the shares, she would retain control of the corporation and thus control of the securities. She can reduce her gross estate by gifting the remaining shares to her family. These shares will be entitled to income on the same basis as Grace's shares, and she can spread the income among the family members who are now owners of the corporation. A gift of these shares will not be subject to the Chapter 14 rules because they are of the same type as those retained by Grace. Some of the future appreciation of the subchapter S corporation will accrue to the holders of these shares.
Which of the following is a characteristic of an installment sale? I. It requires the receipt of at least one payment in a taxable year following the year of sale. II. Reporting gain on an installment basis is automatic for qualifying sales unless the taxpayer elects not to have it apply. A) II only B) Neither I nor II C) Both I and II D) I only
C
Max McFly owns one-third of the shares of Future Past, Inc., a closely held corporation. Max, together with all remaining shareholders of the corporation, has executed a stock redemption agreement obligating the corporation to purchase all the shares of a deceased shareholder, or of a shareholder who withdraws—voluntarily or involuntarily—from the corporation for any reason. The agreement is funded by a cash value life insurance policy on each shareholder with all premiums paid by the corporation, which is the named beneficiary of each policy. The agreement states that the purchase price—under all circumstances—is to be the fair market value of the shares as established by competent appraisal. Which of the following statements is CORRECT concerning the tax implications of this business transfer technique? I. A deceased shareholder's estate would not receive a stepped-up basis on the decedent's shares because a value has already been agreed upon in the redemption agreement. II. The life insurance proceeds would be included in a deceased shareholder's gross estate. III. Premium payments made by the corporation are not taxable income to any shareholder. IV. Policy proceeds would be received income tax free by the corporation. A) I and IV B) II only C) III and IV D) I, II, and III
C Option I is incorrect because a step-up in basis to the value used for estate tax purposes is available for every asset in a decedent's gross estate (that is not IRD) and is not affected by any outside agreement. Option II is incorrect because the assets includible in a decedent's gross estate are fixed as of the date of death, and the insurance proceeds are received after the date of death as the result of a transaction between the deceased shareholder's estate and the corporation. Also, the deceased shareholder has no incidents of ownership in the policy.
Hilger Jantzen established and funded a charitable lead trust with a 10-year term; he designated his children as the remainder beneficiaries. What are the tax implications of this inter vivos intrafamily planning technique? I. Hilger's charitable gift tax deduction is determined by the present value of the charity's right to receive trust assets at the end of the 10-year term. II. Hilger is liable for gift tax based on the value of the gift to the children as discounted to the date of the gift. III. The entire value of the assets gifted to the trust will be removed from Hilger's gross estate only if he outlives the 10-year term. IV. Each year, as the trust pays income to the charity, Hilger receives a charitable income tax deduction for that amount. A) I and III B) I, II, and III C) II only D) I and IV
C The answer is II only as it is the only correct statement. Option I describes how to value the charitable gift tax deduction for a remainder interest—in a charitable lead trust, the charity receives the income with the remainder to a noncharitable beneficiary. Therefore, the charitable gift tax deduction is the present value of the income interest. Option III is wrong because Hilger has not retained any interest in or control over the trust that would cause the transfer sections of the code to apply. Finally, option IV is incorrect because it indicates successive annual income tax deductions. The amount of the charitable income tax deduction is based on the present value of the income interest given to the charity in the year the gift is made. However, if all of the deduction cannot be taken in the year of the gift because of Hilger's AGI limitation, the deduction can be carried forward for five more years.
Which one of the following statements is CORRECT concerning income earned by spouses in a community property state? A) Income earned by each spouse before and after marriage is considered community property. B) Income earned by each spouse is considered separate property. C) Income earned by each spouse after marriage is considered community property. D) Income earned by each spouse after marriage is considered community property only if it is commingled.
C The answer is income earned by each spouse after marriage is considered community property. Even though earned by only one spouse, such earnings are considered community property.
Your client, Cora Kortz, a 77-year-old widow, has heard about living revocable trusts. She has asked you to summarize some of their advantages and disadvantages. You would tell her all of the following except: A) the trust will provide management of her property during periods of incompetency. B) the entire value of assets in the trust at her death will be includible in her gross estate for federal estate tax purposes. C) the trust is cumbersome and expensive because each year she will have to file two separate income tax returns—her personal return and a return for the trust. D) a trust provides greater confidentiality than a will regarding what assets she owns and who will receive them when she dies.
C The answer is the trust is cumbersome and expensive because each year she will have to file two separate income tax returns—her personal return and a return for the trust because it is the only false statement. Income earned by assets in a living revocable trust is passed through and reported on the grantor's own personal return because of the grantor trust rules.
Which one of the following is a CORRECT statement regarding the characteristics of a salary increase or selective pension plan using life insurance under IRC Section 162? A) The insured employee has no incidents of ownership in the policy. B) Part of the death benefit will be paid to the employer. C) The premium payments are taxable income to the employee. D) The employee pays part of the policy premium.
C The premium payments are taxable because this insurance is considered to be additional compensation. The employee holds all incidents of ownership in the policy, but the employer pays the entire premium. All of the death benefit will go to the policy beneficiary designated by the employee.
All of the following statements regarding self-canceling installment notes (SCINs) are correct except A) the purchaser's basis in the asset purchased is equal to the purchase price if a SCIN premium has been paid. B) if the self-canceling provisions of a SCIN never become operative, the tax consequences of a SCIN are identical to those of a regular installment sale. C) the purchaser's basis in the asset purchased is limited to the payments that are actually made to the seller before death. D) if the purchaser has paid a premium to obtain the cancelation provision in the SCIN, the seller may not have to include any payments canceled at death in his gross estate.
C The purchaser's basis in the asset purchased is limited to the payments that are actually made to the seller before death. The purchaser's basis is the agreed upon purchase price even if some of the anticipated payments are never made because of the cancelation provision.
All of the following intrafamily transfers involve the use of a trust except A) GRUTs. B) GRATs. C) FLPs. D) QPRTs.
C Transfers using FLPs (family limited partnerships) involve the use of gifts, not trusts.
Which of the following are CORRECT statements about the nontax characteristics of a gift to a custodial account under the Uniform Transfers to Minors Act (UTMA)? I. UTMA places no restrictions on the type of property that may be gifted. II. UTMA allows both lifetime and testamentary gifts. III. Both income and principal in an UTMA account may be used for the benefit of the minor during his period of minority. IV. A UTMA account is established by irrevocably registering the gifted property in the custodian's name for the benefit of the named minor. A) I, III, and IV B) I, II, and III C) I and III D) I, II, III, and IV
D All statements are true. An important restriction for Uniform Gift to Minors Account (UGMA) accounts, on the other hand, is that they are not allowed to invest in real estate.
Regina establishes a funded irrevocable life insurance trust (ILIT) as part of her estate plan. Which of the following statements regarding this trust is CORRECT? I. The trust holds title to a life insurance policy on Regina's life and also income-producing assets that may be used to pay the policy premiums. II. Income from the ILIT assets is taxed to Regina as grantor of the trust. A) I only B) II only C) Neither I nor II D) Both I and II
D Both statements are correct. A funded ILIT is a grantor trust because it uses trust income to pay the premiums on life insurance covering the grantor's life. Because the trust is a grantor trust, trust income is taxed to Regina.
Which of the following statements regarding qualified personal residence trusts (QPRTs) is CORRECT? I. A QPRT may have an interest in more than one residence. II. There are no restrictions on who may occupy a residence that is owned by a QPRT. A) Both I and II B) II only C) I only D) Neither I nor II
D Neither statement is correct. Statement I is incorrect because a QPRT may have an interest in only one residence. Statement II is incorrect because a residence owned by a QPRT cannot be occupied by anyone other than the grantor and members of the grantor's family.
Which one of the following is an incorrect statement concerning tax implications of lifetime gifts? A) The basis for income tax purposes is not stepped up on assets received as gifts. B) In an outright gift, gifting assets reduces estate tax liability by eliminating all tax on future appreciation that otherwise would be part of the donor's gross estate at death. C) Gifting loss property eliminates the possibility of using capital losses to offset capital gains. D) If a gift is gift taxable, it is ignored in calculating the donor's estate tax liability.
D The answer is if a gift is gift taxable, it is ignored in calculating the donor's estate tax liability. This is because the question asks for the identification of the incorrect statement about the tax implications of lifetime gifts. It erroneously states that taxable gifts are ignored in calculating the donor's estate tax liability. Remember, the transfer tax system is cumulative. Therefore, the taxable portions of gifts are added to the taxable estate to establish the estate's tax base against which the tax rate is applied, unless the gift is included in the gross estate.
Which one of the following statements is CORRECT about the characteristics of a standby (contingent) trust? A) It is often used to manage the grantor's financial affairs when the grantor becomes incompetent. B) The grantor acts as trustee once the trust is funded. C) It is fully funded at the time it is created. D) It is a type of testamentary trust.
A The answer is it is often used to manage the grantor's financial affairs when the grantor becomes incompetent. The trust must be established inter vivos to handle the grantor's financial affairs when he becomes incompetent. The trust is only minimally funded upon creation. Full funding will occur only when the grantor becomes incompetent. If the grantor is incompetent, he cannot act as trustee.
