Estate Planning: Chapter 7

Which of the following statements regarding a Grantor Retained Annuity Trust (GRAT) is/are true? 1. When the trust is established, a taxable gift occurs based on the present value of the remainder interest of the trust assets. 2. The gift that occurs when the GRAT is created is eligible for the annual exclusion 3. For estate planning purposes, a GRUT (Grantor Retained Unitrust) would be preferable to a GRAT if the assets in the trust are expected to appreciate in value. 4. The beneficiaries will not receive a step-up in basis of the trust property if the grantor survives the trust term. A) 1 and 4 only B) 2 and 3 only C) 3 and 4 only D) 1, 2, and 4 only

A) 1 and 4 only

Which of the following statements regarding a Qualified Personal Residence Trust (QPRT) is/are true? 1. With a QPRT, the grantor must survive the trust term to realize any estate tax savings 2. After the trust term, the house will revert back to the grantor 3. The grantor will have a taxable gift upon the creation of the QPRT 4. A QPRT is generally inappropriate for vacation homes A) 2 and 3 only B) 1 and 2 only C) 1 and 3 only D) 2 and 4 only

C) 1 and 3 only

Which of the following statements regarding a Grantor Retained Annuity Trust (GRAT) is/are true? 1. At the end of the GRAT term, a taxable gift will occur when trust assets are transferred to the beneficiary. 2. If the grantor dies during the trust term, a pro rata share of the trust assets will be included in the grantor's estate. 3. Interest and dividends earned by assets in a GRAT will be taxed to the grantor. 4. If the grantor survives the trust term, none of the trust assets are included in the grantor's gross estate. A) 1 and 4 only B) 2 and 3 only C) 3 and 4 only D) 1, 2 and 4 only

C) 3 and 4 only

A Family Limited Partnership (FLP) offers all of the following advantages except: A) Significant discounts in valuing transfers of partnership interests B) A convenient way to gift assets that are generally difficult to break into easily giftable pieces C) A method of keeping appreciation taxable to the older generation D) A means of giving away property while still maintaining control

C) A method of keeping appreciation taxable to the older generation

In a Family Limited Partnership (FLP), there may be special valuation discounts available to enable wealth to pass to younger generations at a significantly lower tax cost than would otherwise be possible. One of these is the "lack of marketability" discount. What is the other? A) The "limited partner" discount B) The "succession of generations" discount C) The "minority interest" discount D) The "property right" discount

C) The "minority interest" discount

In a typical family limited partnership: A) The owners of the closely held business transfer general partnership interests to their children or grandchildren B) No discount is allowed on the gifts since the children's interest as a group will be more than 50% C) The children receive limited partnership interests D) The family limited partnership should be funded with assets that are not expected to appreciate

C) The children receive limited partnership interests

John is 67 years old, and would like to transfer some of his assets to his adult son, Murray. John does not want to incur a gift tax liability, and also needs some cash flow, so he is considering selling the assets to his son. A friend recently informed John that a self-cancelling installment note (SCIN) is a good planning strategy for many reasons. Which of the following statements regarding self-cancelling installment notes (SCINs) is/are correct? 1. To be effective, a SCIN must reflect a risk premium to compensate the seller for the possibility of cancellation. 2. A seller who accepts a SCIN may accept security without jeopardizing the installment sale treatment. 3. At the seller's death, the present value of any remaining SCIN balance is excluded from the seller's gross estate. 4. A SCIN is a debt that is ordinarily extinguished at the seller's death. A) 1 only B) 3 only C) 1 and 3 only D) 1, 2, 3, and 4

D) 1, 2, 3, and 4

Which of the following techniques will not help an individual lower his gross estate? a. Pay-on-Death Arrangement (POD). b. Grantor Retained Annuity Trust (GRAT). c. Sale d. Self-Canceling Installment Note (SCIN).

a. Pay-on-Death Arrangement (POD). The correct answer is a. A POD is a transfer mechanism that transfers a bank account to a beneficiary according to contract law. A POD does not reduce an individual's gross estate as the full value of the POD bank account is included in the individual's gross estate. A GRAT, sale, and SCIN may all reduce an individual's gross estate by removing appreciation and future income from the property transferred.

Which of the following statements regarding a Grantor Retained Annuity Trust (GRAT) is correct? a. The remainder interest of a GRAT is payable to a non-charitable b. The term of the trust should be set equal to the life expectancy of the c. The remainder beneficiary is taxed on the income in the GRAT each d. At the end of the GRAT term, the property reverts to the Grantor.

a. The remainder interest of a GRAT is payable to a non-charitable The correct answer is a. The remainder interest of a GRAT is payable to a non-charitable beneficiary. Answer b is incorrect because the term of the GRAT should be less than the grantor's life expectancy because if the grantor dies during the term of the trust the full fair market value of the trust assets are included in his gross estate. Answer c is incorrect because the grantor is taxed on the income in the GRAT each year. Answer d is incorrect because at the end of the GRAT term, the property is payable to the non-charitable beneficiary.

Perry's father sold the family business to him using a private annuity. The private annuity was structured such that Perry would pay his father $40,000 per year plus interest, for the remainder of his father's At the date of the sale, Perry's father's life expectancy was 20 years and Perry's father was in great health. After six years, Perry's father died of a heart attack and Perry sold the business for $2,000,000 six months after his father's death. What is Perry's capital gain/loss on the transaction? a. $240,000. b. $1,760,000. c. $1,960,000. d. $2,000,000.

b. $1,760,000. The correct answer is b. A buyer's adjusted basis of property purchased with a private annuity is equal to the sum of all annuity payments paid. In this scenario, Perry made six annuity payments of $40,000, or a total of $240,000. Since he sold the property for $2,000,000, his gain is calculated by subtracting his basis from the sales price to arrive at $1,760,000 ($2,000,000-$240,000).

Darrin and his wife, Kathi, want to establish a family limited partnership (FLP) and transfer their business to the FLP. The value of the business interest is $4,000,000. They want to make use of the annual exclusion and have been advised that a 25% discount is appropriate for gifting a minority interest of limited partnership The general partnership interest (1%) is valued at $40,000. They have eight family members (children and grandchildren) to whom to transfer limited partnership interests. Darrin and Kathi are unwilling to utilize any of their lifetime exemptions. Presuming the annual exclusion remains the same and the value of the business interest remains unchanged in the future, how many years does it take them to transfer all of the limited partnership interest? a. 12 b. 13 c. 16 d. 18

b. 13 The correct answer is b. $15,000 ÷ (1-25%) = $20,000 $3,960,000 ÷ 20,000 = 198 units 8 beneficiaries and 2 donors = 16 units per year 198 ÷ 16 = 12.38 years or 13 years (round up when dealing with years like in this example). OR you can solve it this way: $15,000 x 8 (family members) = $120,000 $120,000 x 2 (Darrin and Kathi) = $240,000 $240,000 / (1-.025) (Discount) = $320,000 per year $3,960,000/$320,000 = 12.38 years

Which of the following statements regarding installment sales is correct? a. All payments received by the seller in an installment sale are considered interest income. b. At the death of the seller, the principal balance of the installment sale is included in the seller's gross estate. c. The present value of the expected remainder value of the property sold in an installment sale is subject to gift tax at the date of the transfer. d. An installment sale would never be used with a related party.

b. At the death of the seller, the principal balance of the installment sale is included in the seller's gross estate. The correct answer is b. At the death of the seller, the fair market value of the remaining payments from the installment sale is included in the seller's gross estate. Answer a is incorrect because the payments received by the seller, depending upon the seller's adjusted basis in the property, are allocated as return of capital, capital gain, and interest income. Answer c is incorrect because an installment sale is a sale and does not have an expected remainder value - at the end of the installment payments, $0 principal remains on the note. Answer d is incorrect because an installment sale may be used to transfer potentially appreciating property to a related party. Even though an installment sale would not create a related party advantage, future income and appreciation from the property sold are removed from the seller's gross estate.

Which of the following statements regarding self-cancelling installment notes (SCINs) is correct? a. If a seller outlives the SCIN term, the buyer continues to pay the SCIN payment until the seller's death. b. If the buyer dies before the end of the SCIN term or the death of the seller, his gross estate includes a debt equal to the present value of the remaining payments. c. A SCIN cannot give the seller a collateral interest in the property sold. d. If the seller dies before the end of the note term, the seller is deemed to have made a taxable gift to the buyer equal to the difference between the payments made and total principal payments on the SCIN.

b. If the buyer dies before the end of the SCIN term or the death of the seller, his gross estate includes a debt equal to the present value of the remaining payments. The correct answer is b. If the buyer dies before the end of the SCIN term or the death of the seller, his gross estate includes a debt equal to the present value of the remaining payments. Answer a is incorrect because SCIN payments cease at the earlier of the death of the seller or the end of the SCIN term. Answer c is incorrect because a SCIN can allow the seller to retain a collateral interest in the property sold. Answer d is an incorrect statement.

Which of the following statements is correct concerning Medicaid? a. Medicaid is the government's medical insurance program for those age 65 and older. b. Medicaid is the government's medical and assisted living program for the poor. c. Medicaid only pays for care in approved, skilled nursing homes after a hospital stay. d. Medicaid coverage is limited to 100 days per episode of illness.

b.Medicaid is the government's medical and assisted living program for the poor.

In 2019, Roxanne paid Bad law University $12,000 for her nephew's tuition and gave her nephew $25,000 in cash. Roxanne is single and did not make any other gifts during the year. What is the amount of Roxanne's taxable gifts for the year? a. $0. b. $2,000. c. $10,000. d. $24,000.

c. $10,000. The correct answer is c. The transfer to Bad law University would be a qualified transfer not subject to gift tax and the $25,000 cash transfer would be eligible for the annual exclusion of $15,000 ($25,000-$15,000 = $10,000).

Dave transferred $5,500,000 to a GRAT naming his two children as the remainder beneficiaries while retaining an annuity valued at $500,000. If this is the only transfer Dave made during the year, what is Dave's total taxable gift for the year? a. $0. b. $4,972,000. c. $5,000,000. d. $5,487,000.

c. $5,000,000. The correct answer is c. The remainder interest is a taxable gift from Dave to his children equal to the value of the property contributed to the GRAT less the value of the annuity retained, $5,500,000-$500,000 = $5,000,000. Because the remainder interest is a gift of a future interest it is not eligible for the annual exclusion.

Which of the following statements regarding private annuities is correct? a. If a seller dies before the end of the private annuity term, the buyer continues to pay the annuity to the seller's estate. b. A private annuity must include a risk premium to compensate the seller for the possibility of cancellation at the seller's death. c. A private annuity cannot give the seller a security interest in the property. d. With a private annuity, the buyer must make the annuity payments for the lesser of the term of the annuity or the life of the seller.

c. A private annuity cannot give the seller a security interest in the property. The correct answer is c. A private annuity cannot give the seller a security interest in the property or the private annuity treatment is disallowed. Answers a and d are incorrect because a private annuity requires the buyer to pay the annuity payment for the remaining life of the seller. Answer b is incorrect because the risk for the buyer in the private annuity is that the seller lives longer than his life expectancy and the buyer overpays. To compensate for this risk, the buyer does not have to make the payments if the seller dies before his life expectancy.

Of the following statements regarding a Qualified Personal Residence Trust (QPRT), which is true? a. At the end of the QPRT term, the residence reverts to the b. At creation of the QPRT, the grantor has a taxable gift to the remainder beneficiary eligible for the annual exclusion. c. At the end of the QPRT term, the grantor must begin paying rent to the remainder beneficiaries of the QPRT if he continues to live in the residence. d. A QPRT is ideal for a personal residence that is expected to appreciate at a lower rate than the Section 7520 rate.

c. At the end of the QPRT term, the grantor must begin paying rent to the remainder beneficiaries of the QPRT if he continues to live in the residence. The correct answer is c. Answer c is a true statement. Answer a is incorrect because the residence transfers to the remaindermen at the end of the QPRT term. Answer b is incorrect because the remainder interest is not eligible for the annual exclusion. Answer d is incorrect because the QPRT is ideal for a personal residence which is expected to appreciate at a higher rate than the Section 7520 rate.

Which of the following entities does not have the benefit of pass-through taxation? a. FLP b. LLC c. C Corp d. S. Corp

c. C Corp

Harry, age 60, owns 400 shares of ABC Corporation, which he expects to increase 300% over the next four years. Harry eventually wants to transfer the stock in ABC Corporation to his son, Billy, but Billy is currently incapable of managing the stock or the income from the stock. Harry expects Billy to be responsible in five years. Of the following, which transfer method would work best to remove the expected appreciation of the stock from Harry's gross estate and protect the property for Billy? a. Private annuity. b. SCIN. c. GRAT. d. QPRT.

c. GRAT. The correct answer is c. The GRAT with a term of five or more years will allow Harry to transfer the stock to Billy at a gift tax cost equal to the current fair market value of the stock (before the 300% appreciation) less the sum of the annuity payments that will be paid back to Harry. This transfer method is not as ideal as a direct gift of the property because the annuity payments will return to Harry and will be included in his gross estate. Also, if Harry dies during the term of the GRAT, the full fair market value of the stock, at Harry's date of death, will be included in Harry's gross estate. Neither a private annuity nor a sale will meet Harry's goals because both give Billy access to the stock immediately. A QPRT is also not an option because a QPRT is a special GRIT which transfers a personal residence.

Medicaid is primarily for those people who meet the following eligibility requirements: a. Disabled b. Children c. Low Income d. Elderly

c. Low Income Medicaid is primarily for those with low incomes.

When applying for Medicaid, the look back period for transfers of income and assets to family members is a) 9 b) 12 c) 36 d) 60

d) 60

Todd purchased his mother's home through use of a Under the terms of the SCIN, Todd was to pay his mother $20,000, plus interest, and a SCIN premium, per year for 10 years. If Todd's mother died after 4 payments were made, what would be Todd's adjusted basis in the home? a. $0. b. $80,000. c. $160,000. d. $200,000.

d. $200,000. The correct answer is d. The buyer's adjusted basis in property transferred in exchange for a SCIN is the fair market value of the prop- erty at the date of the sale regardless of the number of payments made by the seller. In this case, the fair market value of the property must have been the annual principal payment times the expected term of the SCIN, or $200,000 ($20,000 x 10).

During the year, Johnson created a trust for the benefit of his five children. The terms of the trust declare that his children can only access the trust's assets after the trust has been in existence for 15 years and the trust does not include a Crummey If Johnson transfers $85,000 to the trust during the year, what is his total taxable gifts for the year? a. $0. b. $10,000. c. $60,000. d. $85,000.

d. $85,000. The correct answer is d. Because the trust does not include a Crummey provision, the transfer to the trust is a gift of a future interest not available to be offset by the annual exclusion. As such, the entire transfer to the trust for the year is subject to gift tax.

Medicare is primarily for those people who meet the following eligibility requirements: a. Disabled b. Children c. Low Income d. Elderly

d. Elderly The correct answer is d. Medicare is primarily for the elderly, age 65 and above, but it can cover the disabled.

In an effort to keep any of its future appreciation out of her gross estate, Mary, a 73-year-old widow, transferred her home into a Qualified Personal Residence Trust (QPRT) naming her only son as the remainder Which of the following statements regarding a QPRT is false? a. If Mary has a taxable gift at the date of formation of the trust, the gift is not eligible for the annual exclusion. b. If Mary outlives the term of the QPRT and continues to live in the house, she must pay her son rent. c. At the termination of the QPRT, the personal residence is distributed to Mary's son. d. If Mary dies during the term of the QPRT, her gross estate will include the value of her home at the date of the transfer to the QPRT.

d. If Mary dies during the term of the QPRT, her gross estate will include the value of her home at the date of the transfer to the QPRT. The correct answer is d. All of the answers are correct with the exception of answer d. If Mary dies during the term of the QPRT, her gross estate will include the value of her home at her date of death.

Which of the following assets are not generally counted for Medicaid planning eligibility purposes? a. Certificates of Deposit. b. Equity Securities. c. Vacation Home. d. Primary Residence.

d. Primary Residence. All are counted, except a personal residence.

Which of the following statements regarding Family Limited Partnerships (FLPs) is correct? a. The primary purpose of creating a FLP is to provide joint management of the property contributed to the FLP. b. At the creation of the FLP, the transferring individual will have a capital gain equal to the difference between the fair market value of the property transferred and his adjusted basis in the property. c. The limited partners in the FLP control all of the day-to-day functions of the FLP. d. Transfers of the limited partnership interests in the FLP are usually eligible for minority and lack of marketability valuation discounts.

d. Transfers of the limited partnership interests in the FLP are usually eligible for minority and lack of marketability valuation discounts. The correct answer is d. Answer d is a correct statement. Answer a is incorrect because the primary purpose of the FLP is to transfer interests in property utilizing various valuation discounts and for the general partner to retain complete control. Answer b is incorrect because the transfer of property to a partnership is generally a tax-free exchange. Answer c is incorrect because limited partners are barred from participating in the day-to-day operations of the FLP.