Estate Planning Final Exam (Chapters 12 + 13)

List the characteristics of a termination of an interest in property held in trust that does not create a taxable termination.

(1) When at the termination, the transfer is subject to federal estate or gift tax. (2) When at the termination, a non-skip person has an interest in the property. (3) When at the termination, it can be determined that no distribution may be made at any time to a skip person.

Define skip person.

A natural person two or more generations younger than the transferor. A trust is a skip person if all interests in the trust are held by skip persons, or no person holds an interest in the trust and at no time after the transfer may a distribution be made to a non-skip person.

What is a qualified transfer and what are its GSTT implications?

A qualified transfer is the payment of tuition to a qualified educational organization or the payment of qualified medical expenses to a medical care provider on behalf of a skip person. Qualified transfers are not subject to the GSTT and do not deplete the annual exclusion or GST exemption.

Define taxable distribution.

A taxable distribution is defined as any distribution from a trust to a skip person other than a taxable termination or a direct skip. Distributions of income or principal from a trust to a skip person that are not taxable terminations or direct skips are taxable distributions

Why is it important for an estate to have cash?

An estate must cover the taxes, administration expenses, last medical costs, and funeral costs. All of these expenses must be paid for with cash, and if the estate does not have the cash necessary to make these payments, assets will have to be liquidated and possibly sold at a price lower than the asset's value to have the cash necessary.

How much can an individual transfer to a skip person during his lifetime, or at his death, without incurring any GSTT?

An individual can transfer $15, 000 for 2018 per year, per transferee without incurring any GSTT. In addition to the annual exclusion, an individual can transfer $11,180,000 for 2018 to a skip person without incurring any GSTT.

To which type of transfers does the GSTT apply?

Applies to direct skips, taxable distributions, and taxable terminations

Justin transfers $2,000,000 in 2014 to an irrevocable trust providing that income is to be accumulated for 22 years. At the end of 22 years, the accumulated income is to be distributed to Justin's child, Chip, and the trust principal is to be paid to Justin's grandchild, Beau. Justin allocates $800,000 of his GST exemption to the trust on a timely filed gift tax return. What is the GSTT rate applicable to the trust? a. 20.00%. b. 24.00%. c. 40.00%. d. 60.00%.

B. 24.00%

What requirements must be met for a surviving spouse to file as a qualifying widow/widower?

Be a qualified widower for 2 years following the decedent's death if the surviving spouse has not remarried and the surviving spouse is maintaining a home for one or more dependent children.

Why is the special use valuation rarely used?

Because of the ongoing requirements that must be in order to benefit from its use

List two reasons why borrowing cash is an attractive option for the executor of an illiquid estate.

Borrowing may prevent the fire-sale of assets. The interest incurred on the note is deductible.

Mel has never made any gifts subject to GSTT. He is single and would like to transfer as much as he possibly can during the year to his grandchild without triggering any GSTT. How much can Mel transfer to his grandchild this year and meet his goal? a. $14,000. b. $2,081,800. c. $5,340,000. d. $5,354,000.

D. $5,354,000

To which of the following transfers does the GSTT not apply? a. A taxable termination. b. A taxable distribution. c. A direct skip. d. A skip-over.

D. A skip-over

List three common administration costs of an estate.

Executor's fees, attorney's fees, fees for appraisals of assets.

(T/F) A disclaimer must be filed within six months of the decedent's date of death.

False. A disclaimer must be filed within nine months of the decedent's death in order to be effective.

(T/F) A pot trust is a pool of many trusts for different individuals.

False. A pot trust is a dynasty trust that keeps all of its assets in one account, which can be contrasted with a separate share trust, which has an account for each beneficiary.

(T/F) Any distribution from a trust to a skip person other than a direct skip is a taxable termination.

False. A taxable termination occurs when the last non-skip beneficiary dies or when the trust actually terminates. Usually, distributions from a trust to a skip person are considered to be taxable distributions.

(T/F) An estate may not take a loan to pay its estate tax.

False. Borrowing money is a common way of generating liquidity for an estate.

(T/F) Dynasty trusts are against the law and subject to penalties.

False. Dynasty trusts are legitimate planning vehicles used to avoid the imposition of future transfer taxes.

(T/F) An executor must file a fiduciary income tax return (1040) for the estate on a calendar year basis.

False. Fiduciary income tax returns may be filed on a fiscal year basis.

(T/F) A surviving spouse must file as a qualifying widower for the tax year of her husband's death.

False. For the year of the husband's death, a surviving spouse may file married filing jointly or married filing separately.

(T/F) When a GSTT is reported on a Form 709, the form is due within three months of the date of transfer.

False. Form 709, the Federal Gift and Generation-Skipping Transfer Tax Return, is due on or before April 15th of the year following the calendar year in which the direct skip occurs.

(T/F) Estate planning should always ensure that the decedent owns his life insurance policy.

False. Generally, a life insurance policy should be held in an ILIT to avoid estate taxation at the decedent's death.

(T/F) Most individuals die with the cash necessary to cover all of the costs and taxes associated with their death.

False. Most individuals do not have sufficient liquidity at death to cover expenses, taxes, and provide for surviving family members.

(T/F) Section 2032A allows the executor to extend the payment of the estate tax over a maximum of 14 years.

False. Section 2032A allows the executor to include the property in the gross estate at its current use value as opposed to its FMV. IRC 6166 allows the executor to extend the payment of estate taxes over a maximum of 14 years.

(T/F) Selling an estate's assets is the best way to generate the cash necessary to cover the administration expenses of the estate.

False. Selling assets often results in realizing less than the FMV of the property. Generally, other ways of generating liquidity should be considered.

(T/F) The GSTT only applies to transfers after October 22, 1986.

False. The GSTT applies to some transfers made before October 22, 1986 if specific requirements imposed by law have not yet been made

(T/F) The 2018 lifetime GST exemption is $4,417,800.

False. The lifetime exemption amount for the GSTT is $11,180,000 for 2018.

(T/F) The administration of an estate is usually quick and easy.

False. Typically administration of an estate takes at least 9 months and can go on for several years for large estates.

(T/F) The beneficiaries of a trust are liable for the GSTT on a taxable termination

False. When a taxable termination occurs, the trustee pays the GSTT due from the trust assets. The beneficiaries of the trust are not directly liable for paying the GSTT.

(T/F) A decedent's last medical expenses cannot be deducted on the estate tax return unless they exceed 7.5 percent of the adjusted gross estate

False. When medical expenses are deducted on the estate tax return, no percentage limitations apply.

(T/F) Anyone who is less than two generations younger than the transferor is a skip person.

False. While a person two or more generations below the transferor is generally considered a skip person, exceptions such as the predeceased ancestor exception may change this result.

(T/F) If a parent disclaims the property bequeathed to them, then the predeceased parent rule will apply if the assets are transferred to the children instead.

False. While the impact of executing a disclaimer is to allow property to pass as it the disclaimant had predeceased the transferor, since the disclaimant has not actually died, the disclaimer is ignored for generation-skipping transfer tax purposes.

When must the allocation of the GST exemption take place?

From the date of the transfer through the date for filing the individual's federal estate tax return. If no estate tax return is required to be filed, the GST exemption may be allocated at any time through the date a federal estate tax return would be due if a return were required to be filed.

Explain the predeceased ancestor exception.

If a child of the transferor is deceased at the time of the transfer, that child's descendents are moved up one generation for purposes of determining whether the transfer constitutes a GST. As a result, a grandchild would be considered a child for GST purposes.

Explain why the government would allow an estate to utilize the special use valuation as a property's fair market value in the gross estate

If an individual is using a piece of real property as a farm or in another trade or business that is not employing the property at its highest and best use, the value of the property may be higher than the value of the property in its current use. This may create an estate tax that could be much larger than an estate tax based on the value of the property utilizing its current value used.

How can an individual potentially reduce the medical expenses to be paid by his estate?

If an individual keeps his medical insurance up to date until his death the amount his estate will have to pay should be less than if he did not have health insurance.

Even if qualified plans are payable to the decedent's estate, why should the executor seek alternative means of meeting the cash requirements of the estate before taking distributions from the qualified plans?

If the estate takes the distribution from the qualified plan to generate the cash necessary to meet the estate's

Why might an executor choose to waive his executor's fee?

If the executor is also a beneficiary of the estate and the estate is in a lower marginal estate tax bracket than the executor's income tax bracket, the executor may choose to waive his fee and receive a distribution from the estate.

How are lifetime direct skips reported to the IRS?

Lifetime direct skips are reported on Form 709, the gift tax return

What requirements must an estate meet to benefit from section 303 stock redemption?

More than 35 percent of the decedent's adjusted gross estate must consist of the closely held business interest. In the event that the decedent owned interests in several closely held businesses, all of the business interests can be aggregated to meet the 35 percent test provided the decedent owned at least 20 percent of each company's outstanding stock.

What is the GSTT rate?

The GSTT is a flat tax equal to the maximum estate tax rate in effect at the time of the GST. For 2018, the rate is 40%.

What is the Uniform Statutory Rule Against Perpetuities?

The USRAP states that an interest in trust will be valid if it will vest or terminate within lives in being plus 21 years, or the interest actually vests within 90 years of the creation of the trust. The USRAP is a uniform set of rules adopted by many states to follow the Rule Against Perpetuities.

What is the estate tax inclusion period?

The estate tax inclusion period is the period during which, should the transferor or the transferor's spouse die, the value of the transferred property would be included in the gross estate of the transferor or the transferor's spouse.

When is the tax year-end of an estate for income tax purposes?

The executor can elect to have the estate's tax year end on the last day of any month during the year.

List three methods that an executor can use to reduce the liquidity requirements of an estate.

The executor can make in-kind distributions to beneficiaries. If planned properly, the executor could sell assets to an ILIT. The executor could use the assets of a qualified plan payable to the decedent's estate.

Why should selling an estate's assets to generate the liquidity necessary for the estate taxes generally be the last option?

The executor usually has to spend a substantial amount of time selling the assets which may increase his executor's fees. Also the estate must pay capital gains tax on the amount for the sales price above the adjusted basis at the decedent's date of death.

In the year of a decedent's death, what are his surviving spouse's filing status options?

The surviving spouse may file married filing jointly or married filing separately.

What are the two requirements for electing the alternate valuation date?

The total value of the assets included in the gross estate six months after the decedent's date of death must be lower than the value of the assets on the decedent's date of death. There must be a reduction in the estate tax due as a result of the election.

Who is liable for the GSTT on a taxable distribution?

The transferee.

Who is liable for the GSTT on a direct skip?

The transferor is liable for the GSTT on a direct skip from an individual. The trustee is liable for the GSTT on a direct skip from a trust.

How can an ILIT be used to generate liquidity for an estate without requiring the value of the ILIT to be included in the decedent's gross estate?

The trust can allow the executor to make a loan from the ILIT or the executor can sell the decedent's assets to the ILIT at the fair market value.

Who is liable for the GSTT on a taxable termination?

The trustee.

List the three requirements necessary for the estate to elect IRC section 6166.

The value of the business interest must be more than 35% of the value of the decedent's adjusted gross estate. The business interest must be a closely held business. The entity must have been actively engaged in the conduct of a trade or a business at the date of the decedent's date of death.

Why do small estates generally overvalue the fair market value of assets in the gross estate?

These estates will try to include all of the assets of their estate at the highest fair market value possible without creating an estate tax due. Heirs will receive the property with the highest adjusted basis possible and will pay lowest capital gain on a subsequent sale.

Why should a dynasty trust give some beneficiaries a limited power of appointment?

To change some of the trust provisions because laws may change or the need for the trust may be completely eliminated.

Who pays the income tax on the income generated within a dynasty trust?

To the extent the income of a dynasty trust is not distributed, the trust pays the income tax. On the income distributed, the beneficiary pays the income tax on the income

(T/F) A casualty loss, if permitted, may be deducted on the fiduciary income tax return (1041) or on the estate tax return (706).

True.

(T/F) A couple who elects to split gifts must agree to split all gifts made during the year.

True.

(T/F) A decedent's assets are included in his gross estate at the FMV at his date of death or the alternate valuation date.

True.

(T/F) A direct skip is a nontaxable gift for GSTT purposes to the extent the transfer is excluded from taxable gifts under the annual exclusion.

True.

(T/F) Administrative expenses of an estate include the expense of the preparation of the estate tax return.

True.

(T/F) An executor may choose to waive his/her executor's fee.

True.

(T/F) Any passive loss carryforwards are deductible on the decedent's final income tax return.

True.

(T/F) Distributions from qualified plans are subject to ordinary income tax.

True.

(T/F) Dynasty trusts should always include spendthrift clauses.

True.

(T/F) Funerals are expensive and can be pre-funded to reduce the expense burden for the family and the estate.

True.

(T/F) Qualified transfers are not subject to GSTT.

True.

(T/F) The grantor of a dynasty trust often gives the trustee the authority to terminate the trust.

True.

(T/F) The inclusion ratio is determined by subtracting the applicable fraction from one.

True.

(T/F) To reap the full benefits of special use valuation, the heirs of the property must use the property in the same use as the decedent for at least ten years after the decedent's date of death.

True.

(T/F) US savings bond do not receive a step-to FMV at the decedent's date of death. When redeemed, all interest is subject to ordinary income tax.

True.

When would an executor choose to deduct an estate's administrative fees on the fiduciary income tax return?

When the decedent did not have a taxable estate and the estate received income during the year.

Explain the tax benefit allowed by a section 303 stock redemption

With a stock redemption to a closely held corporation, the redemption is considered a dividend if it is not for a complete redemption of the stock. Section 303 allows the estate to redeem enough shares to pay its estate taxes and receive capital gain treatment on the sale, even if it is only a partial redemption.

What are the benefits of using a generation-skipping trust?

allows the planner to split the legal ownership of assets from the use of assets. If the beneficiaries do not have legal title to the trust assets when they die, the beneficiary cannot transfer anything in the trust at his death, and therefore no part of the trust may be included in the beneficiary's gross estate.

How can an individual reduce the funeral expenses that his estate will have to pay?

an individual pre-arranges and pre-funds his funeral before his death

Upon what form is a lifetime GST reported? a. Form 1040. b. Form 709. c. Form 706. d. Form 1041.

b. Form 709

Many grandparents name their grandchildren as the beneficiaries of their life insurance policies. How should the life insurance policies for the benefit of grandchildren be held? a. A revocable life insurance trust should be established and funded with a transfer of the life insurance policy. b. The grandparent should be the owner with the grandchild as the listed beneficiary. c. An irrevocable life insurance trust should be created for the benefit of the grandchild. d. The ownership of the policy should be transferred to the grandchild.

c. An irrevocable life insurance trust should be created for the benefit of the grandchild.

Unpaid medical expenses of a decedent are deducted on which form, the estate tax return or the final income tax return?

either on the estate tax return or on the decedent's final income tax return, but the same expenses may not be deducted in both places.