Estate Planning - Module 3

All of the following intrafamily transfers involve the use of a trust except

FLPs.

Which of the following is a characteristic of an installment sale? It requires the receipt of at least one payment in a taxable year following the year of sale. Reporting gain on an installment basis is automatic for qualifying sales unless the taxpayer elects not to have it apply.

Both I and II

Which one of the following statements regarding a charitable remainder trust (CRT) is CORRECT?

A grantor who establishes a charitable remainder unitrust (CRUT) is eligible for an income tax deduction in the year the trust is established.

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 subchapter S corporation in which she retains most of the shares and distributes the remaining shares to family members

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 provision granting each beneficiary a Crummey power 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.

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?

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

Which of the following statements regarding qualified personal residence trusts (QPRTs) is CORRECT? A QPRT may have an interest in only one residence. The residence in a QPRT may not be occupied by anyone other than the grantor and members of the grantor's family.

Both I and II

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? 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. Income from the ILIT assets is taxed to Regina as grantor of the trust.

Both I and II 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 one of the following statements is CORRECT concerning income earned by spouses in a community property state?

Income earned by each spouse after marriage is considered community property.

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? Derik will not owe a gift tax on the value of the assets placed in the trust. Derik will be able to take three annual exclusions in computing the gift tax due from funding the trust. Derik will have to report all trust income on his personal income tax return. The taxable value of the assets placed in trust will be included in Derik's estate tax calculation as an adjusted taxable gift.

I and III

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)? UTMA places no restrictions on the type of property that may be gifted. UTMA allows both lifetime and testamentary gifts. Both income and principal in an UTMA account may be used for the benefit of the minor during his period of minority. A UTMA account is established by irrevocably registering the gifted property in the custodian's name for the benefit of the named minor.

I, II, III, and IV

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? a power of appointment trust a QTIP trust, with an election a QTIP trust, without an election

I, II, and III 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.

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? Uniform Gift to Minors Account (UGMA) Grantor retained annuity trust (GRAT) Qualified tuition plan Section 2503(c) trust

I, III, and IV 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.

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? 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. Hilger is liable for gift tax based on the value of the gift to the children as discounted to the date of the gift. 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. Each year, as the trust pays income to the charity, Hilger receives a charitable income tax deduction for that amount.

II only 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.

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? If Julie dies while any part of the note remains outstanding, her gross estate must include the fair market value of the daycare business. 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. 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. 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.

II, III, and IV 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.

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? 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. The life insurance proceeds would be included in a deceased shareholder's gross estate. Premium payments made by the corporation are not taxable income to any shareholder. Policy proceeds would be received income tax free by the corporation.

III and IV 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.

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? A charitable gift tax deduction is not available because it is a gift of a partial interest. 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. The grantor gets a current income tax deduction for the present value of the remainder interest. 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.

III only

Which of the following statements regarding a family limited partnership (FLP) is CORRECT? The general partnership interests are transferred to the junior family members and will qualify for minority interest discounts. 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. 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

III only 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.

Which one of the following is an incorrect statement concerning tax implications of lifetime gifts?

If a gift is gift taxable, it is ignored in calculating the donor's estate tax liability. 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?

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.

Which of the following statements regarding qualified personal residence trusts (QPRTs) is CORRECT? A QPRT may have an interest in more than one residence. There are no restrictions on who may occupy a residence that is owned by a QPRT.

Neither I nor II 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 objectives cannot be achieved with an unfunded irrevocable life insurance trust that does not have a Crummey power?

Sheltering premium payments gifted to the trust from gift tax with the annual exclusion 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

Which one of the following is NOT a correct pairing of a trust provision with its characteristics?

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.

Which one of the following statements about the use of a split-dollar life insurance plan in a business setting is false?

The entire value of the policy and its benefits are subject to claims of the employer's general creditors.

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?

The premium payments are taxable income to the employee. 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.

Which one of the following statements correctly describes the characteristics of an entity purchase buy-sell agreement?

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.

Which one of the following statements is CORRECT about the nontax characteristics of a reverse gift?

The purpose of the gift is that the donor will get the gift back with a stepped-up basis.

All of the following are correct pairings of an intrafamily planning technique with one of its characteristics except

private annuity: payments from the transferee to the annuitants are paid for a stated term certain.

All of the following statements regarding self-canceling installment notes (SCINs) are correct except

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 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.

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:

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.