HS 330 - Fundamentals of Estate Planning T/F 19, 20 & 21

Trusts and estates file income tax returns for informational purposes only, as do partnerships.

False - Trusts and estates are separate taxpaying entities and are not taxed under a conduit theory of taxation. To the extent income earned by the trust or estate is retained, it is taxed to the trust or estate. Any income distributed is deductible by the trust or estate and taxable to the recipient of the income.

All trusts come into existence and are funded when a person dies.

False - While testamentary trusts are trusts created under a will and do not become funded until the creator dies, there are other kinds of trusts that are created during lifetime. (Also see chapter 6.)

The GSTT is imposed on lifetime or testamentary transfers that are direct skips, taxable distributions, or taxable terminations.

True

If a grantor establishes a trust to provide support for his minor children, the income will be taxed to either the trust or the minor beneficiary.

False

Revocable trusts provide opportunities for income tax savings by creating a separate taxpayer so income can be taxed in a potentially lower bracket.

False - A revocable trust is treated as a grantor trust for tax purposes, and the trust's income continues to be taxed to the grantor.

When there is more than one beneficiary of a single trust, a separate trust should be established for each beneficiary or the beneficiary will be taxed on more income than received.

False - Although a trust has multiple beneficiaries, each beneficiary is taxed only on the amount of income received under the sharing concept.

Once a sale of property qualifies for installment reporting for tax purposes, this installment reporting of the gain by the seller is mandatory.

False - Although the installment-reporting rules are the general rules for sales qualifying for such treatment, a taxpayer can affirmatively elect out of the installment accounting and treat all gain as recognized in the year of sale.

A grantor's transfer of property to a qualified personal residence trust (QPRT) qualifies for the gift tax annual exclusion because the transfer constitutes a completed gift.

False - Although the transfer of property to a QPRT is a completed gift for gift tax purposes, it is a future-interest gift that does not qualify for the annual exclusion.

All living trusts are separate taxpaying entities whether they are revocable or irrevocable.

False - By definition, income from revocable trusts is taxable to the grantor since the grantor has the power to alter, amend, revoke, or terminate the trust. Irrevocable trusts may be separate taxpaying entities if trust income may be and is accumulated rather than distributed.

A concept known as distributable net income (DNI) has been developed for the purpose of advising beneficiaries of the amount of income the trust has earned.

False - Distributable net income (DNI) is a concept that has been developed for the following purposes: (1) It limits the deduction a trust may receive for amounts distributed to beneficiaries, (2) It limits the amount of distribution that may be taxable to the beneficiaries, (3) It establishes the character of the amounts taxable to the beneficiaries.

Trusts and estates each get a $600 income tax exemption.

False - Estates get an income tax exemption of $600, but trusts receive an exemption of $100 if they are classified as complex trusts or $300 if they are classified as simple trusts.

Grantor-retained annuity trusts (GRATs) or grantor-retained unitrusts (GRUTs) are expressly revocable trusts to avoid current gift taxes.

False - GRATs or GRUTs are irrevocable trusts since a completed transfer is necessary if the transaction is to provide the grantor with any potential estate tax savings.

A qualified personal residence trust (QPRT) generally should include all household furnishings if the trust is to provide favorable gift tax consequences.

False - IRS regulations limit the personal residence trust to a personal residence, necessary land, and de minimis cash.

Income in respect of a decedent (IRD) is includible in the gross estate of the decedent and, therefore, is not taxable to the estate or beneficiary when received for income tax purposes.

False - Income in respect of a decedent (IRD) is an asset of the estate because the decedent was entitled to receive it had he or she lived. However, when the income is finally received, it is taxable for income tax purposes to the recipient of the income. There is, however, an income tax deduction allowed for any estate tax payable because the IRD was included in the gross estate.

A qualified personal residence trust (QPRT) provides the grantor with substantial estate tax savings if the grantor fails to survive the retained-interest term.

False - Substantial estate tax savings are available to the grantor of a personal residence trust only if he or she survives the retained interest term.

Any remaining GSTT exemption upon the donor's death can be left to the surviving spouse if property identified on the final estate tax return.

False - The GSTT exemption cannot be left to the surviving spouse like the traditional lifetime exemption can be.

Either the GSTT or the regular estate or gift tax, but not both, will apply to a transfer to a grandchild.

False - The GSTT is applicable to transfers that are also subject to estate or gift taxes. Thus, a gift to a grandchild could be subject to both GSTT and gift tax.

The GSTT is calculated in the same way as the gift and estate tax except for the GSTT $5.45 million lifetime and at-death exemption amount.

False - The GSTT is calculated by an unusual process that is very different from the gift and estate tax calculation. The GSTT rate of 40 percent (in 2016) is multiplied by an inclusion ratio that is determined by a formula.

The generation-skipping transfer tax (GSTT) is imposed on a progressive rate schedule similar to the estate or gift tax.

False - The GSTT is imposed at a flat rate equal to the highest marginal estate or gift tax rate rather than a progressive set of rates.

If the GSTT exemption is not allocated by a decedent's executor, the IRS must allocate it in a manner that results in the lowest GSTT liability.

False - The IRS allocates the exemption by mechanical default rules, and the actual tax results may be less than optimal.

The annual per-donee gift tax exclusion is available for transfers to a generation-skipping trust if Crummey withdrawal powers are given to the beneficiaries in the same manner as for annual gift tax exclusion transfers.

False - The annual exclusion for GSTT is more restrictive than the gift tax annual exclusion for generation-skipping gifts in trust. Such gifts will be permitted an annual exclusion for GSTT purposes only if the trust limits distribution of income and corpus to a single beneficiary and provides that the corpus will be included in the estate of the beneficiary if he or she dies prior to the termination of the trust.

Substantial transfers are exempt from the GSTT since a basic credit amount is available to shelter generation-skipping transfers from tax.

False - The basic credit amount provided for estate or gift tax is not available for generation skipping transfers. However, there is a lifetime and testamentary cumulative GSTT exemption amount for such transfers.

The annual gift tax exclusion will be useful in sheltering a portion of the transfers to a grantor-retained annuity trust (GRAT) from gift taxes.

False - The gift portion of the GRAT transfer is a future-interest gift to the remainderperson, and the annual exclusion is unavailable.

For the purposes of the grantor-trust rules, the grantor can escape income taxation on the trust income by providing a reversionary interest, valued at 25 percent of the trust's total value, to the grantor's spouse.

False - The grantor is deemed to hold any interest held by a spouse living with the grantor when the interest is created. Thus, the reversionary interest causes the grantor-trust rules to apply, and the grantor is taxed on the trust's income.

A sale of property will not qualify for installment-sale reporting unless the installments are paid over more than one taxable year and at least 30 percent of the purchase price is paid at the time of settlement.

False - The only requirement for installment-sale reporting is that the entire purchase price not be paid in the year of the sale.

The buyer and seller in an installment sale are generally free to negotiate the amount of interest payable for tax purposes on the amount of unpaid balance of sale proceeds.

False - The tax rules provide for required target rates of interest on installment obligations under either the imputed interest rules or original-issue-discount rules of the Code.

A direct skip is a taxable transfer to a skip person or to a trust with only one skip beneficiary.

True

A distinguishing feature of a simple trust is that it can never make distributions of principal or have a charitable beneficiary.

True

A family limited partnerships can be used as an effective estate "freezing" technique to transfer ownership of a FLP over to younger generations while avoiding some taxes on appreciation by transferring a portion of the ownership interests over time.

True

A grantor-retained annuity trust (GRAT) will result in a successful estate freeze if the grantor survives the retained interest term.

True

A private annuity is a buyer's unsecured promise to pay a life annuity to a seller in exchange for property.

True

A self-canceling installment note (SCIN) will be useful for estate planning purposes because the value of the note is not included in the seller's estate.

True

A sprinkle provision may be used in a trust to provide flexibility to distribute income among beneficiaries as their needs arise and in proportion to those needs.

True

A trust that is only partially exempt from the GSTT due to the incomplete allocation of the GSTT exemption will face increased administrative fees because of the added complexity of having an inclusion ratio other than zero or one.

True

A trustee under a testamentary trust may be authorized to use trust income both to purchase life insurance on the lives of the beneficiaries and to pay the premiums.

True

All benefits paid from an irrevocable life insurance trust will be exempt from GSTT if all annual premiums made to the trust were sheltered by the GSTT exemption or exclusion.

True

An estate is entitled to take as a deduction any ordinary and necessary business expenses incurred in managing a decedent's business during the period of estate administration.

True

An estate remains in existence until all the testator's assets have been transferred, debts and taxes have been paid, and distribution is made to beneficiaries.

True

An irrevocable life insurance trust can be an effective device for transferring substantial wealth to a skip beneficiary and avoid the GSTT by using the lifetime exemption and annual exclusions.

True

For GSTT distributions, the liability falls on the transferee.

True

For most purposes, transferring unearned income to a child under age 19 (or 24, if a full-time student) will provide little income tax savings to the parents.

True

Generally speaking, the amount received by the seller annually in an installment sale will be treated as containing three separate components: return of basis, taxable gain, and taxable interest.

True

If installment-sale payments end before the seller's death, no value of the note is included in the seller's estate.

True

In general, the GSTT applies when a taxable transfer is made to a transferee more than one generation level below the transferor.

True

In general, trusts and estates are taxed on distributable net income (DNI) that is retained.

True

The general theory of trust income taxation is that trust income is taxed only once, either to the beneficiary or to the trust.

True

The payments made by a grantor-retained annuity trust (GRAT) or a grantor-retained unitrust (GRUT) to a grantor during the grantor's retained-interest term are subject to income taxation to the grantor.

True

Trustees and executors have similar fiduciary responsibilities.

True

Trusts and estates are separate taxpaying entities and are not taxed under a conduit theory of taxation. To the extent income earned by the trust or estate is retained, it is taxed to the trust or estate. Any income distributed is deductible by the trust or estate and taxable to the recipient of the income.

True

With the exception of tax-exempt income, trusts and estates must pay income tax on income received but not distributed.

True

An executor has the legal responsibility to file the decedent's final income tax returns, the estate tax returns, and the estate income tax return.

True - If trust income is used to satisfy a grantor's legal support obligation, the trust income will be taxed to the grantor to the extent it is so used.