CFP - Estate

Question 1

Roadmap - Post mortem planning

Answer 1

A family run farm/business could possibly use all three

Question 2

Roadmap - Intrafamily transfers

Answer 2

Question 3

Roadmap - Charitable transfers

Answer 3

Question 4

Roadmap - 2503(b)/(c)

Taxation of income distributed from 2503(b)/(c)

Answer 4

Since if the grantor passes before the dollars are distributed, the assets interest will be included in the grantor’s estate = grandparents should not be the grantor of 2503C trust

1. Income distributions from 2503c trust taxed under Kiddie Tax rules
2. Income distributions from 2503b trust taxed at benes rates.

Question 5

Roadmap - Gift to minors

Answer 5

Question 6

Roadmap - A/B/C Trust

Answer 6

B/Non-marital/Bypass = First to die controls
-Income can be to spouse or anyone
-Generally fund up to estate exemption $13,610,000, no marital deduction
-SUPER powerful; growth excluded from estate tax again

A/Martial = Second spouse to die controls

QTIP = First to die controls
-Income has to go to spouse
-Trust included in the second to die’s estate

Question 7

Roadmap - Irrevocable grantor trusts (incl. ILIT + defective trust)

Answer 7

REMEMBER - Tainting can be desirable for income tax purposes, but client doesn’t want irrevocable trust to be tainted for estate tax purposes

Double tax (grantor pays) = Income tax + Estate tax
-this is case for 1. (revisionary interest) & 2. (Beneficial enjoyment)

Question 8

Roadmap - 706

Answer 8

Question 9

Roadmap - Life issuance inclusion on decedent’s estate

Answer 9

Question 10

Gifting appreciated property + affecting basis

Ex. Client buy stock for $1,018,00. The client gifted the stock when the fair market value was $1,118,000. The client paid gift tax of $400,000. What is the recipient basis?

Answer 10

When gifting assets/appreciated property, the tax gift paid attributable to the appreciation is added to the basis.

Ex. $1,118,000 - $18,000 (annual exclusion) = $1,100,000 X 40% (tax rate) = $440,000 tax paid. The $40,000 attributed to growth is added to the basis. The recipient’s basis is $1,058,000.

Question 11

Mini roadmap -
Completed and not completed gifts

Answer 11

REMEMBER - Gifts of future interest, no $18,000 annual exclusion

Question 12

Distributable net income (DNI)

Answer 12

Income available for distribution from a decedent’s estate or trust. Goal = Income taxed at bene rates, not higher trust rates

Question 13

Crummy trust provision (timeline and features)

Answer 13

If bene doesn’t take the lesser of annual exclusion or the value of the gift transferred in 30 days, the annual right to withdrawal expires and dollars stay in the trust.

Crummy (irrevocable) trust doesn’t have to determine money at age 21unlike the 2503c trust

Question 14

5 or 5 concepts

Ex. If client had a five for five right and didn’t exercise it and dies how does this affect what’s included in her estate?

Answer 14

Ex. If she didn’t exercise the five for five before dying, the greater of $5,000 or 5% will be included in her estate

5 or 5 gives general power of appointment

Question 15

Trust provisions (question would have to tell you it’s a part of the trust - don’t assume!)

Answer 15

Income, ascertainable standards (HEMS), 5 or 5, crummy

Question 16

Who is QTIP v reverse QTIP beneficiaries?

Answer 16

QTIP = Kids
Reverse QTIP = grandkids (skip people)

Question 17

Dynasty Trust

Answer 17

Generational bypass trust – B trust that benefits multiple future generations and can last for the beneficiaries lives plus 21 years, and nine months

Question 18

Wealth replacement trust

Answer 18

Alleviates concerns for charitable donors that are worried their remaining assets may be insufficient to satisfy financial needs of their heirs or provide estate liquidity
-In practice this looks like forming a CRUT with a wealth replacement trust (ILIT)

Question 19

Generation skipping tax

1. Who’s a skip person?
2. What are the kinds of skips?
3. Summary of liability for payment of GST

Answer 19

1. Grandkids for related people, someone 37.5 yrs younger that’s not related BUT remember if child dies, their children move up and aren’t skip person’s anymore
2. Three kinds
   
   1. Direct skip - Grandparent gifts to grandkid
   2. Taxable termination - Gift into a trust to benefit the child, but remainder interest goes to grandkids once the kid dies (no annual exclusion - not a direct lifetime gift) - REMEMBER - Taxable termination = Someone terminates for the skip to happen
   3. Taxable distribution - Goes to a child and grandchild (non-skip and skip person)
3. Who pays the GST?
   -if the transfer is a direct, skip, the transferor pays the GST
   -if the transfer is taxable termination, the GST is paid by the trustee
   -if the transfer is a taxable distribution, the GST is paid by the transferee

Question 20

Alternative valuation date (when can you use it + what are exceptions?)

Answer 20

Only if estate tax is due! The AVD is elected to pay less estate taxes so no estate tax = can’t use AVD

When can’t you use it? Wasting assets (assets that reduce based on time passing like annuity)

Question 21

Disclaiming assets - Which to choose?

Answer 21

If the goal is to use up exemption and the will has a disclaimer trust/provision, choose property that, if disclaimed, goes back into the trust

Question 22

Interpolated terminal reserve

Answer 22

When gifting life insurance, the replacement value/interpolated terminal reserve + unearned premium = the gifted amount

Gifting life insurance w/ premiums payable – Value of gift determined by adding the interpolated terminal reserve (reserve adjusted to the date of gift) + value of unearned portion of last premium

In practice, add the unused premium, and the prorated increase policy reserve to the policy reserve = the value of the policy that’s included in gross estate

See question 43 in estate live review book

Question 23

Clients are considering a FLP. The gifts can qualify for various valuation discounts a gift of $18,000 can be discounted by 50%. How long will it take to split gift $4,320,000 to 10 family members?

Answer 23

Six years – discounted by 50% means they can gift $72,000 per year per family member instead of the $36,000 split gift

Question 24

Income in respect to the decedent provisions

Ex. Which of the following is not an example of IRD?
-insurance renewal commissions, taxable distributions from a qualified plan, partnership income of deceased partner, depletion

Answer 24

IRD - Income a decendent was entited to recieve but was not property includable in the decendent’s final tax return.

Income and respect of a decedent (IRD) - If the income is included in the gross estate, the estate tax attributed to that income item is generally deductible by the recipient of the income

IRD includes amounts that the decedent was entitled to but were not included in their final income tax return because the payment had not yet been made.

Ex. Depletion – depletion is an expense, not income and respect of a decedent (IRD)
-Common IRD items: annuities, IRAs, salaries, bonus, lottery winnings

Question 25

Mac Blair decided to make a gift of Blair, Inc. common stock to his son Blake. Mac seeks that any future appreciation of the stock not be included in his estate for federal estate tax purposes. He is going to retire soon and will need income during his post-retirement years. Mac has converted the majority of his common stock to preferred stock and gifted the remaining common stock to his son. What is the result?

Answer 25

The preferred share value will be determined based on the stated dividends. The common stock value would then be the difference between the FMV of the corporation and the aggregate value of the preferred shares.

Question 26

Both of Rusty Whitman's parents recently died in an auto accident. Rusty is 12 years old. Before their death, the Whitmans had established various trusts including revocable living trusts (each parent), an irrevocable life insurance trust, and a 2503(c) minor's trust. While Rusty is younger than age 21, the trust earnings will support his normal living needs. Into which of the following trusts will Rusty's parents' assets ultimately pass? A. A revocable living trust B. A 2503(c) trust C. A Crummey trust D. A standby trust E. A family trust

Answer 26

E. A family trust The revocable trust will become irrevocable and will turn operate as a family trust for Rusty's benefit thereafter. It is rare that a revocable trust would name its beneficary as a 2503(c) children's trust. 2503(c) trusts generally terminate when the minor beneficiary turns age 21.

Question 27

Mrs. Lucy, age 80, is in reasonable health. Five years ago, her husband died leaving her $3 million and placing $3.5 million in a bypass trust for her benefit. In addition, their home was in JTWROS. The home, FMV value $500,000 and the $4 million of investments has a high basis of $3.5 million. Mrs. Lucy has two married children and 5 grandchildren to keep her estate under $5 million. What type of asset do you recommend she give and to whom? A. Low basis, high dividend paying investments to both children and grandchildren. B. High basis, high dividend paying investments to both children and grandchildren. C. Low basis, growth investments to children and high basis, growth investments to grandchildren. D. High basis, growth investments to children and low basis, growth investments to grandchildren.

Answer 27

Think ages. The grandchildren have to be age 30 maybe age 40. With high basis, they can sell the investment with little or no tax or keep it and get big dividends. They could be taxed a 0% or at most 15%. Low basis investments would be subject to capital gains. If she keeps the low basis stocks until death, her estate will get a full step-up in basis. She does not have an estate tax situation.

Question 28

Suzanna York, age 5, was injured on a playground. The playground equipment was found to be defective, and her parents sued the manufacturer on Suzanna’s behalf. Suzanna was awarded a $1,000,000 compensatory structured settlement to be paid out over 40 years. Unfortunately, Suzanna died during the early stages of the settlement process. What would generally happen in regard to the structured settlement?

Answer 28

The present value of the remaining periodic payments would be included in Suzanna’s gross estate for federal estate tax purposes. Although Suzanna’s applicable credit would probably exceed any tentative tax, the present value of the yet unsatisfied payments would be included in her gross estate for federal estate tax purposes. Nothing indicates the settlement ceases at death