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Flashcards in Ch 10 - Tax Planning With Trusts Deck (26):

Revocable and


What are the Two Basic Trust Types


•Power to revoke creates grantor trust taxation

•Incomplete for gift tax purposes

•Value included in grantor’s gross estate

What is a Revocable Trusts


  • •Probate and ancillary probate avoidance
  • •Immediate distribution of income or principal to heirs at grantor’s death
  • •Pour-over device for consolidation of assets
  • •Safeguard against spouse’s right of election
  • •Avoidance of creditor claims (some states)
  • •Opportunity to observe trust in operation
  • •Selection of trust situs
  • •Can contain A-B formula at death
  • •Uninterrupted business continuation potential

What are the Advantages of Revocable Trust


•Grantor retains certain control that causes grantor to be taxed on trust income

•Beneficiary is given certain control that causes beneficiary to be taxed on trust income

What are Irrevocable Grantor Trusts


•Income taxation flows to grantor if certain powers retained

•Consent of adverse party eliminates grantor trust rules for income tax purposes

Note: independent trustee is nonadverse

What are the Grantor Trust Income Tax Consequences


  • •Power to substitute trust property for other property of equivalent value • (most common power used)
  • •Power to borrow without adequate interest or security
  • •Reversionary interest valued at greater than 5%
  • •Power to control beneficial enjoyment of income or principal (power okay for independent trustee)
  • •Power to have income or principal distributions to grantor or spouse •Income actually used to satisfy grantor’s legal support obligation
  • •Power for trustee to use funds to purchase life insurance on life of grantor or grantor’s spouse
  • •General administrative powers exercisable by nonfiduciary or without fiduciary consent

What Powers are Created with Grantor Trust Tax Treatment


•Power for independent trustee to sprinkle income or corpus (for other than legal support)

•Power to allocate among charitable beneficiaries

•Ascertainable power to invade for beneficiaries

•Power to postpone income during minority or legal disability

What Administrative Powers Avoid Grantor Trust Tax Treatment


•Retained income interest

•Reversionary interest above 5%

•Retained right to revoke, amend, or terminate

•Incidents of ownership in life insurance policies

•General power of appointment

•Transfers of life insurance within 3 years of death

What are the Estate Tax Consequences of Transfers to Trusts with Retained Powers


Income Tax:

  • Consent of adverse party avoids income taxation to grantor

Estate Tax:

  • Consent of adverse or nonadverse party irrelevant for estate inclusion

What are the Income and Estate Tax implications With respect to transfers to trusts with retained powers or controls?


•Income not taxed to grantor, but is taxed to trust, its beneficiaries or some combination

•Will be completed gifts for gift tax purposes

What is a Irrevocable (Non-Grantor) Living Trusts


  • –Separate tax-paying entity
  • Allocation of income to lower bracket beneficiary
  • Potential income tax savings
  • –Accumulation and investment of appreciation
  • –Safety of principal and minimization of risk
  • –Security and protection for beneficiaries
  • –Completed gifts
  • –Estate tax savings on appreciation
  • –Outside gross estate (is adjusted taxable gift)
  • –Present interest gift allows annual exclusion
  • –Privacy
  • –Probate avoidance Reduces administrative costs;
  • Avoids delay
  • –Shelter from spousal right of election
  • Protection for children from prior marriage

What are the Advantages of an Irrevocable Living Trusts with No Retained Powers or Controls


–Irrevocability Grantor loses control over assets

–Legal fees Drafting and execution

–Trustee fees Continuing basis

What are the DisAdvantages of an Irrevocable Living Trusts with No Retained Powers or Controls


•Income tax potential

•Estate inclusion potential if beneficiaries hold general power of appointment

How are Trust Beneficiaries taxed?


•Life income interest

•5 and 5 power (noncumulative withdrawal power)

•Ascertainable standard withdrawal powers

•Independent trustee powers to invade corpus for benefit of income beneficiary

•Limited/special power of appointment over remainder

What are the Irrevocable Trust Benefits for Income Beneficiaries without Estate Inclusion


•Power to distribute income or principal to satisfy support obligation creates inclusion in estate

•Income taxed to grantor if power actually used

•Independent trustee/custodian should be used

•Kiddie tax rules potential

What are Minors Trusts or Custodial Accounts


• Cross-trusts ignored for tax purposes when:

  • –Terms are essentially identical
  • –Identical economic circumstances and benefits for grantors [Treated as powers retained by grantors]

What is a Reciprocal Trust Doctrine


•Taxable events

  • –direct skip
  • –taxable distribution
  • –taxable termination

•Flat 40% tax rate (2013)

What is a Generation-Skipping Transfer Tax


•Grandpa writes a check to grandchild

•Grandpa’s will leaves bequest to grandchild

•Grandpa funds a minor’s trust for one beneficiary

What causes GST Taxable Events—Direct Skip


Grandma funds a trust for multiple beneficiaries and gives discretionary distribution powers to trustee. Trustee distributes income or principal to a skip person.

What causes GST Taxable Events—Taxable Distribution


Grandma’s provides a trust. Her son is given a life income interest without a general power of appointment. At son’s death, the trust is distributed to son’s children (Grandma’s grandchildren). There is a taxable termination when son dies.

What causes GST Taxable Events—Taxable Termination


• Annual exclusion (only for direct skips)

• Tuition or medical expense

• $5.25 million (2013) GST exemption

• Predeceased parent exception

  • Parent of transferor’s grandchild must be dead prior to creation of trust

What are the Generation-Skipping Transfer Tax Exemptions and Exclusions


•Applied first against direct skips (above available annual exclusions)

•Applied against contributions to fund a trust that will benefit grandchildren

•Trust will be fully exempt if GST exemption is applied dollar-for-dollar against all contributions

•GST exemption should be allocated most efficiently on gift or estate tax returns against contributions to trusts most likely to benefit skip persons

How is the GST Exemption used?


•General power: creates inclusion in estate of powerholder

•Limited /special power: avoids estate inclusion

What are Powers of Appointment


•Appointment of property could be for:

  • –self
  • –creditors
  • –estate
  • –creditors of estate

Who are General Power Appointees


•Taxable at –lapse –exercise

•Unless exercisable only with consent of:

  • –donor of power
  • –party with substantial adverse interest

How is a General Power of Appointment taxed?


•Reservation of powers by grantor/donor invites estate taxation

•Release of general power by powerholder subject to gift taxation

•Exception to tax ownership treatment for general power of appointment:

  • –When exercise of power by powerholder/donee requires consent of donor or adverse party

How are General Powers taxed?