CFP - 6.2 Estate Planning

Question 1

What does the grantor retain in a qualified personal residence trust? (QPRT)

Answer 1

Right to live in the residence during the trust term

Question 2

Can a QPRT have an interest in multiple residences?

Answer 2

No

Question 3

What is the value of a residence gift into a QPRT?

Answer 3

The FMV of the house discounted for the number of years of the term of its trust at the applicable Section 7520 rate

Question 4

Are QPRT’s most effective if the property is expected to appreciate rapidly or depreciate rapidly?

Answer 4

Appreciate

Question 5

Who can live in the residence of a QPRT?

Answer 5

Only the term holder and family

Question 6

Can a QPRT be converted to a GRAT?

Answer 6

Yes, at discretion of the term holder

Question 7

Who is the term holder of a QPRT?

Answer 7

Grantor

Question 8

Who can receive income from a QPRT?

Answer 8

Only the grantor (term holder)

Question 9

Can the grantor sell the residence in the QPRT?

Answer 9

No, trustee can but has to reinvest proceeds in another residence

Question 10

What are the two differences between a QPRT and a PRT?

Answer 10

A QPRT can include a small amount of cash that may generate income. A PRT cannot.

The trustee of PRT cannot sell the residence and reinvest in another as they can with a QPRT.

Question 11

What is the purpose of a QPRT?

Answer 11

Grantor can gift residence at a discount and still live in it during trust term. At the end of the trust term it is passed to family members. Grantor can repurchase the home or rent it after the trust term.

Question 12

If the grantor of a QPRT passes before the end of the trust term, what is the estate tax consequence?

Answer 12

The FMV of the residence is included in the gross estate

Question 13

What is a GRAT?

Answer 13

Grantor Retained Annuity Trust -

Grantor gifts property but retains the income stream

Question 14

How is income generated by a GRAT taxed?

Answer 14

Taxed to grantor during lifetime as income

Question 15

What is the value of gift at creation of the trust for a GRAT?

Answer 15

FMV minus the value of the grantor’s retained interest

Question 16

What is the difference between a GRAT and GRUT?

Answer 16

GRAT: Income is a set dollar amount and does not fluctuate each year

GRUT: Income is a percentage of the trust assets and fluctuates each year

Question 17

Is a GRAT or GRUT included in the gross estate?

Answer 17

Only if the grantor does not outlive the trust term - included as FMV required to produce the annuity

Question 18

Are GRAT/GRUT gifts eligible for annual exclusion?

Answer 18

NO - future interest!

Question 19

Are GRATs/GRUTs revocable or irrevocable?

Answer 19

Irrevocable

Question 20

What is the typical trust term for a GRAT/GRUT?

Answer 20

2 to 5 years

Question 21

The amount eligible for the charitable income tax deduction is generally…

Answer 21

The FMV of the cash or property donated

Question 22

Is there a limit to the amount of charitable deduction allowed for transfer tax purposes?

Answer 22

No, unlimited

Question 23

What is a charitable gift annuity?

Answer 23

Donor makes an irrevocable transfer of assets to a charity and receives an annuity from the charity in return

Question 24

What is the deductible amount for a charitable gift annuity?

Answer 24

FMV of assets minus the PV of the annuity payments

Question 25

What is a pooled income fund? (PIF)

Answer 25

Irrevocable transfer of assets to a charity for an income stream from the charity's commingled asset management

Question 26

Who creates a PIF?

Answer 26

The charity

Question 27

What does the grantor retain in a PIF?

Answer 27

Income interest for one or more beneficiaries for life

Question 28

What investment is not allowed in a PIF?

Answer 28

Tax free munis

Question 29

Is a PIF donation revocable or irrevocable?

Answer 29

Irrevocable

Question 30

What is a CRT?

Answer 30

Charitable Remainder Trust Irrevocable trust in which the remainder beneficiary is a charity

Question 31

What are the 2 types of CRTs?

Answer 31

CRATs and CRUTs

Question 32

How long can a CRT last?

Answer 32

Either for the life of grantor or for a term up to 20 years

Question 33

What is the value of the charitable gift to a CRT?

Answer 33

Total value of property minus the PV of retained interest

Question 34

What are the annuity/unitrust restrictions for a CRAT?

Answer 34

Annual payment must be at least 5% and less than or equal to 50% of the FMV at inception

Question 35

The PV of the remainder interest at inception of a CRT must be at least ____% of the initial FMV of the property transferred into the trust.

Answer 35

10%

Question 36

What are the annuity/unitrust restrictions for a CRUT?

Answer 36

Annual payment must be at least 5% and less than or equal to 50% of the FMV revalued each year

Question 37

Can CRATs receive additional contributions?

Answer 37

No

Question 38

Can CRUTs receive additional contributions?

Answer 38

Yes

Question 39

Can PIFs receive additional contributions?

Answer 39

Yes

Question 40

What happens if a CRAT does not generate enough income to make the annuity payment?

Answer 40

Must dip into principal

Question 41

What happens if a CRUT does not generate enough income to make the annuity payment?

Answer 41

Annuity payment can be limited to income earned and the trust can make catch-up payments in future years when income does not meet percentage requirement

Question 42

What is a charitable lead trust? (CLT)

Answer 42

Reverse CRT. The trust's income is given to charity and the remainder reverts to a beneficiary (often a family member)

Question 43

What is the charitable deduction for a CLT?

Answer 43

The PV of the income interest for a grantor CLT The income each year for a non-grantor CLT

Question 44

Who pays the tax for trust income generated in a grantor CLT?

Answer 44

The grantor

Question 45

What is the difference between an operating and non-operating private foundation?

Answer 45

Operating - use funds in own charitable activity Non-operating - do not engage in charitable activity, disburse funds for charitable purposes

Question 46

What is the income tax deduction limit for cash contributions to non-operating private foundations?

Answer 46

30% of AGI

Question 47

What is the income tax deduction limit for long-term capital gain property contributions to non-operating private foundations?

Answer 47

20% of AGI

Question 48

A private foundation must distribute at least ____% of its net investment assets each year.

Answer 48

5%

Question 49

What is the income tax deduction limit for cash contributions to private foundation donor advised funds?

Answer 49

60% of AGI

Question 50

What is the income tax deduction limit for appreciated property contributions to private foundation donor advised funds?

Answer 50

30% of AGI

Question 51

How does a Family Limited Partnership work?

Answer 51

Senior family member transfers an asset into the partnership for a 1% general partnership interest and a 99% limited partnership interest. He then makes gifts over time of the limited partnership shares to junior family members.

Question 52

How does recapitalization work to transfer a business to family members?

Answer 52

Owner exchanges common stock for common non-voting stock and preferred stock. He keeps the preferred stock and gifts the common non-voting stock to the children. Preferred stock is usually valued at zero.

Question 53

Steve owns property with a basis of $50,000 and a FMV of $140,000. He sells (in a bargain sale) it to his son Murray for $90,000. What are the tax consequences?

Answer 53

$40,000 in taxable gain on the sale $50,000 gift

Question 54

Sale leaseback payments go to...

Answer 54

The older family member

Question 55

Gift leaseback payments go to...

Answer 55

The younger family member

Question 56

If the seller dies before an installment note is paid off what happens to the unpaid balance?

Answer 56

Balance plus any unpaid interest accrued to the seller's DOD is included in gross estate. The value of the asset sold is not.

Question 57

What is a Self Canceling Installment Note? (SCIN)

Answer 57

An installment note that cancels at the seller's death

Question 58

What is the gift tax consequence of a private annuity sale?

Answer 58

None, as long as the present value of the annuity equals the value of the property transferred

Question 59

Are private annuities secured/collateralized?

Answer 59

No, not allowed

Question 60

What is a cross-purchase agreement?

Answer 60

Each partner purchases a sufficient amount of life insurance on the lives of each other partner to ensure sufficient liquidity to buy out the deceased or disabled partner

Question 61

The number of policies needed in a cross-purchase agreement is what?

Answer 61

n x (n - 1)

Question 62

There are 4 partners engaged in a cross-purchase agreement. How many policies do they need?

Answer 62

12 4 x (4-1)

Question 63

What is an entity agreement?

Answer 63

The business buys the insurance policies on each partner and uses the death proceeds to purchase the deceased partner's share

Question 64

What is a minority discount?

Answer 64

A reduction in value of a transferred asset allowed if the asset represents a minority interest in the business

Question 65

Minority discounts usually range from ____% to ____%

Answer 65

15% to 35%

Question 66

Lack of marketability discounts usually range from ____% to ____%

Answer 66

15% to 35%

Question 67

Can minority discounts be used in conjunction with lack of marketability discounts?

Answer 67

Yes

Question 68

Tom gave 3% of his business, valued at $500,000, to his son. A 40% discount for minority and lack of marketability was applied. What is the taxable gift amount?

Answer 68

$500,000 x 3% x 60% = $9,000 minus annual exclusion equals $0

Question 69

What is the theory behind blockage discount?

Answer 69

Discount is attributable to a large block of publicly traded corporate stock. A large block cannot be liquidated at one time without a decrease in the market price.

Question 70

What is a key person discount?

Answer 70

Allowed if a key person is deceased or disabled, because now the company is worth less.

Question 71

To meet the special use reduced valuation... The value of all property (real and personal) used in the farm or closely held business must be at least ___% of the adjusted value of the gross estate.

Answer 71

50%

Question 72

To meet the special use reduced valuation... The value of the real property alone be at least ___% of the adjusted value of the gross estate.

Answer 72

25%

Question 73

To meet the special use reduced valuation... Decedent or family member must have been a material participant in the business for _____ years.

Answer 73

8

Question 74

For special use tests, what is the valuation of the property?

Answer 74

Its highest and best use value minus any debt

Question 75

If special use property is disposed of to a non-family member, or its use is discontinued within _____ years of death, all or part of the estate tax savings may be recaptured.

Answer 75

10

Question 76

Who qualifies for deferred payment of estate tax (section 6166)?

Answer 76

Owners of farms or closely held businesses

Question 77

To qualify for deferred payment of estate tax, the value of the farm or business must exceed ____% of the value of the adjusted gross estate.

Answer 77

35%

Question 78

How long can qualifying people defer the payment of estate tax?

Answer 78

5 years, then pay the tax in 10 annual installments. Interest is paid during the deferral period.

Question 79

What does section 303 stock redemption allow?

Answer 79

Allows the estate to redeem the decedent's shares as a capital gain, using the DOD basis.

Question 80

To qualify for section 303 stock redemption, the value of the stock must be more than _______ and less than _______.

Answer 80

More than 35% of AGE Less than the federal and state death taxes plus deductible funeral and admin expenses

Question 81

What is the GSTT rate?

Answer 81

40% for 2018, the highest estate and gift tax rate

Question 82

Is there a penalty for skipping more than one generation?

Answer 82

No, GSTT applies only once

Question 83

Who is a related skip person?

Answer 83

Related individual, 2 or more generations below the transferor (i.e. grandchild)

Question 84

Who is an unrelated skip person?

Answer 84

Unrelated person 37.5 years or more younger than the transferor

Question 85

Can a trust be a skip person?

Answer 85

Yes, if all of the beneficiaries are 2 or more generations below the transferor

Question 86

Jeff has one son, Gerald. Gerald passed away and has a son, Clay. If Jeff gifts property to Clay, does the GSTT apply?

Answer 86

No, predeceased parent rule

Question 87

If a transferor has no living lineal descendants, can they gift to grandnephews or grandnieces without incurring GSTT?

Answer 87

Yes

Question 88

Who pays GSTT of a direct gift or bequest?

Answer 88

The transferor or their estate

Question 89

Who pays GSTT on taxable distributions from a trust?

Answer 89

The recipient

Question 90

Who pays GSTT on a taxable termination of a trust?

Answer 90

The trust

Question 91

What is the unholy trinity?

Answer 91

If the owner, insured, and beneficiary on a life insurance policy are 3 different people. The owner will have made a gift to the beneficiary.

Question 92

Can a spouse or ex-spouse be a skip person?

Answer 92

No

Question 93

How is the holding period of inherited property determined?

Answer 93

Always long term

Question 94

An unrelated person must be _____ years younger than the transferor to be a skip person.

Answer 94

37.5

Question 95

If gain property is gifted, a portion of any gift tax paid is allocated to the recipient's basis. What is the formula?

Answer 95

Difference between transferor's basis and FMV divided by FMV Times gift tax paid Plus basis equals transferee's new basis