Question 1

What does the transfer of property to an irrevocable trust usually results in?

Accepted Answer

The transfer of property to an irrevocable trust usually results in a taxable gift. The grantor is subject to gift tax liability on the actuarial value of both the income stream and the remainder interest transferred to the trust beneficiaries. The actuarial value of the gift may be reduced by the fit tax annual exclusion if a beneficiary has a "present interest," which can be created by giving a trust beneficiary an unrestricted right to the immediate use, possession, or enjoyment of property or income.

Question 2

What is the purpose of grantor retained income trusts (GRIT)?

Accepted Answer

The purpose of grantor retained income trusts (GRIT) is to avoid paying estate tax, but not gift tax. This is done by leveraging the applicable exclusion amount. The value of the gift made is calculated by taking the FMV of the property and reducing it by the retained interest. This equals the remainder interest that is considered a gift. This remainder interest is a future interest and is discounted. Therefore, the longer the term of the trust and the higher the Section 7520 rate, the smaller the gift value The result is to freeze the value in the grantor's interest sand transfer growth in value to the children escaping larger gift and estate tax.

Question 3

What is true of charitable remainder unitrusts?

Accepted Answer

No statement is true of charitable remainder unitrusts. Charitable remainder unitrust have income tax deductions equal to the total value of property minus present value of retained interest income. These trusts can hold tax-exempt securities and may hold sprinkling provisions. The remainderman is the charity and additional contributions are permitted. When income is insufficient for payout, the trustee can pay up to income and make up the deficiency in subsequent years.

Question 4

Samantha wants to have great flexibility of a trust she is considering creating and wants to determine the standard for incompetency. What would her best option to meet her needs?

Accepted Answer

A client that wants to have great flexibility of a trust and wants to determine the standard for incompetency should use a living trust. Living trust has great flexibility and the grantor determines what provision will be included in the trust document, such as what the standard for incompetency will be. Additionally, living trust has smaller administration costs and a wider a management authority allowing the trustee to conduct more kinds of transactions with the grantor's property than would be possible under a guardianship or conservatorships.

Question 5

Marsha wants to a trust in which the management and distributions of terms are very detailed and would override any authority over trust property. What would be her best option?

Accepted Answer

An individual that wants a trust in which the management and distributions of terms are very detailed and would override any authority over trust property would be better off with a living trust. Living trusts assure that the transactions will be accomplished: although some third parties may not recognize the authority of an agent under a durable power of attorney, the trustee's power to act according to the trust agreement must be honored (although most states will not compel a third party to follow the directions of an attorney, in fact, states generally will compel others to recognize a trustee's authority over trusts property. Additionally, the management and distribution of terms are usually more detained in a trust. However, a trust is more costly to create and maintain.

Question 6

What is the distinguishing feature of charitable lead trusts?

Accepted Answer

The distinguishing feature of charitable leads trusts is that the donor in the charitable lead trust gives away an income stream and receives a remainder interest. The donor places income-producing property in a reversionary trust and directs that the trust income be transferred to a designated charity for a period of time not to exceed 20 years. At the end of this "lead" time, the property reverts to the donor or to some other non-charitable beneficiary.

Question 7

There are no amounts of property that may qualify for the marital deduction; however at the death of the husband the wife was given other property. The interest of the property transferred to another. What is governs this situation?

Accepted Answer

Terminal interest is defined as an interest that ends upon an event or contingency and the interest then passes to someone else; for example, a spouse initially gets an interest in property, but this interest terminates upon her death or event. Terminal interest has three characteristics: 1) it is subject to some future absolute or contingent termination of the surviving spouse's interest 2) the possibility of termination is created by the decedent, and there will be a shift in the inters 3) some other person or entity will possess or own the property.

Question 8

What is true of IRC Section 2056 (d)?

Accepted Answer

IRC Section 2056 (d) deals with noncitizen spouses and disallows the marital deduction if the surviving spouse is not a U.S. citizen. If the spouse becomes a citizen before the federal estate tax return is filed (within nine months), IRC Section 2056 (d) does not apply. However, the spouse must have been a U.S. resident at the time of the decedent's death. Noncitizen spouses are allowed to receive a special $100,000 annual exclusion indexed for inflation.

Question 9

What type of agreement is a contract binding the owner of a business interest to sell the business interest for a specified or determined price at his or her death or disability?

Accepted Answer

Buy-sell agreements are contracts binding the owner of a business interest to sell the business interest for a specified or determined price at his or her death or disability. If a fixed price is used in the buy-sell agreement, the IRS will take a long look at it. Planners should suggest the client use a formula that allows for the business value to increase or decrease as time passes. If a formula is not appealing, then an appraisal for the business at the time of the decedent's death will help avoid the IRS's scrutinizing the value of the agreement.

Question 10

What transfer technique provides for payment of the purchase price over a period of years?

Accepted Answer

Installment notes are transfer techniques that provide for payment of the purchase price over a period of years. Such sales allow the estate to recognize the capital gains as payments are received rather than all at once. This technique can also be beneficial to the buyer, inasmuch as the buyer is not required to complete the buy-sell agreement with only lump sum. Sometimes an installment sale is part of a family transaction. If the sell dies before the installment term is completed, the remaining payments are included in the gross estate of the sell after the seller's death.

Question 11

Installment notes are transfer techniques that provide for payment of the purchase price over a period of years. What triggers a self-canceling installment note?

Accepted Answer

Self-canceling installment notes are triggered by the death of the person holding the note. A premium is charged for this right to cancel the note by any other means than death. The seller does not include the unpaid amount in the estate. The seller does include the present value of the unpaid amounts as part of income with respect of a decedent. The initial value of an SCIN is less than an installment not, so the buyer has to give additional consideration in the form of a higher principal amount or higher interest rate. Planners may recommend a SCIN when estate tax rates exceed marginal income tax rates.

Question 12

Janis is exchanging an asset to Becky as an unsecured promise to pay an annuity of the life of the transfer. What is this transfer called?

Accepted Answer

A private annuity is an exchange of an asset for an unsecured promise by the buyer to pay an annuity for the life of the transferor. Private annuities commonly provide life payments to the annuitant. Taking the payments in this way allows the annuitant to spread the capital gains from the sale, rather than accepting them in one lump sum. The contract must be unsecured, so the annuitant-to-be should make sure the entity making the annuity payments is sound financially. The annuity allows a person with a large estate to remove possible future appreciation from the estate and spread out capital gains, both actions reducing current income tax.

Question 13

William and Bill jointly own a business. William hates Bill and had decided to sell his share of the business to Bill to avoid seeing him daily. However, he is concerned about gift taxation and their buy-sell agreement. Under what condition would there be owed taxes?

Accepted Answer

Generally, there is no gift taxation unless the buyout agreement gives the purchaser an unqualified present purchase right at a contract price below fair market value. The selling owner sells a capital asset subject to capital gain treatment. However, there is usually no capital gain treatment because the buyer receives a stepped-up basis at fair market value. The selling party is taxed on the proceeds of the business as dividends, to the extent of the corporation's earning, unless the corporation qualifies for IRC Sections 302 and 303.

Question 14

Atticus just refused a broken down mansion due to the amount of work it needs. Now the original estate plan needs changing. What is the best option for post-mortem estate planning in this situation?

Accepted Answer

A qualified disclaimer is used for post-mortem estate planning when property is refused. A disclaimer is simply a formal refusal of an inheritance of property from a decedent. Such a refusal is stall a taxable gift unless one satisfies the IRC requirements for a "qualified disclaimer." Under the qualified disclaimer rules, an estate beneficiary may avoid receipt of the property bequeathed by the deceased, thereby avoiding any gift tax. The disclaimer must be irrevocable and unqualified and must be in writing.

Question 15

Carolina has died and has opted to leave her closely held stock to a charity. The corporation wishes to buy the stock to gain increase power in decisions. The charity has agreed to take the cash. How will the proceeds be treated on the side of the corporation?

Accepted Answer

In general, when a closely held corporations buy back stock form its shareholder, the proceeds must be treated as dividends income unless it falls under Section 303. If an estate qualifies for Section 303, the proceeds received from the redemption are classified as capital gain, usually long-term; if an estate does not qualify for Section 303, the proceeds are treated as ordinary income. Under this rule, stock may be redeemed from an estate equal to the total amount of all estate taxes, inheritances taxes, estate administration costs, and funeral expenses. The owner's death steps up the adjusted basis in the stock, so there is little to no gain reported.

Question 16

There are many ways to obtain deductions from and credits for estate taxes. What is/are a method (s)?

Accepted Answer

Inter-spousal gifting, foreign death taxes, and funeral, debts and losses are all ways to obtain deductions from and credits for estate taxes. Inter-spousal gifting can create significant estate tax savings by making fits from a wealthier spouse to a poorer spouse. Foreign death taxes is a credit allowed for most, but not all, foreign death taxes paid on property that in is included in the U.S. gross estate and situated in a foreign country. Funeral, debt and losses included during estate administration and debts of the estate are all deductible from estate taxes.

Question 17

Often there are situations that do not fit traditional situations or secession of inheritance and estate planning for these non-traditional relationships must supplied. There are four major non-traditional situations. Jason and Mike have been living together for thirty years. They know death will come sooner than later. What would be true of estate planning for this couple?

Accepted Answer

Because Jason and Mike are considered a non-traditional relationship they are subject to consideration under cohabitation and same-sex relationships; therefore, they are not eligible to take advantage of the marital deductions and the estate taxes cannot be deferred, liquidity is a primary consideration, and wills containing specific bequests are very important.

Question 18

Which of the following might you work with to analyze estate liquidity?

Accepted Answer

Analyzing estate liquidity is not complex, but it does require number crunching and dealing with fiduciaries and beneficiaries. You will generally coordinate with other financial professionals, such as estate planning attorneys, tax preparers, and insurance agents.

Question 19

Which of the following is NOT a source of estate liquidity?

Accepted Answer

The decedent's accounts receivable, not payable, may be a source of estate liquidity, along with liquid assets, marketable securities, life insurance proceeds, and trusts outside of the estate that could potentially purchase assets from the estate.

Question 20

Which of the following is true regarding planning for estate liquidity?

Accepted Answer

Along with various methods of estate liquidity, you can also improve liquidity using the IRS estate tax deferral elections that are available to some estates.

Quiz 2: Estate Planning