Flashcards in Chapter 6 Deck (65)
What are the special rules that govern the imposition of the estate tax on foreigners?
1. estate tax exclusion for non-residents is 60K. Estate tax is due when a non-resident aliant;s estate is transfers US situs assets above 60K
2. charitable deduction applies ONLY to US citizens
3. no marital deduction if the spouse is not a US citizen, if they become one before the estate tax return is filed then it can be applied.
4. foreign death fax credits can be applied agaisnt the US estate tax.
why do estate treaties exist between coutries?
to help insure agaisnt the risk of "double taxation: on the same estate assets. They enable the use of foreign death tax credits agaisnt the US estate tax.
What is income with respect of a decedent? (IRD)
the income the decedent earned but did not receive before his or her death.
What are some examples of IRDs?
1. uncollected salaries, wages, bonuses, commissions, vacation pay and sick pay,
2. interest and dividends accrued but unpaid at time of death
3. uncollected lottery winnings.
4. assets held in deferred compensation benefits.
5. outstanding stock dividends still owed to th decedent
6. accounts receivable of a cash basis sole proprietor
7. rents and royalties accrued but not paid before death
8. unreceivd gain from the sales of property.
IRD is taxexd twice. How?
1. subject to income tax on either the deceased term income tax or if the income has been passed by arrangement to an income beneficiary. then it will be taxed on thiers.
2. s/t estate tax pas part of the decedent estate
What are other benefits to usuing life insurance as a funding vehicle for estate planning?
1. protecting agaisnt estate tax and income replacement sales.
2. source of funds tgo replace financial losses created at death ,
3. tax benefits
4. sujpport retiremen t planning
5. welth shifting oppertunities.
What is a Trust in terms of estate planning?
a legal arrangement whereby property is held and managed for the welfare of a beneficiary. T
- provides an oppertunity for competent asset management.
- acts as independent taxpayer,
- reduce estate tax liabilty and
The internal Revenue code in the US requires that the gross estate include an interest in any property that was what?
1. transfered by the decedent within 3 years of death and 2) would have been included in the estate had such interrest been retained by the decedent.
Name some types of trusts
1. revocable trust
2. irrevocable trust
3. charitable trusts
4. generation-skipping trusts
5. dynasty trusts.
What is a revocable trust?
type of living trust that is set up before death of the grantor.
- no estate tax savings,
- liable for income tax due to income generate within the trust and trust assests
- used to avoid income tax libability
- grantor can select professional asset managers or can personally manage trust assets.
What is an irrevocable trusts
living trust and provides sig opportunity for tax savings as well as wealth and income shifting
- grantor cannot control
What are the grantors benefits to an Irrevocable trust
1. assets removed from the estate and put into the trust reduce the size of the estate and thus the estate tax.
2. appreciation in the trust asset happens outside the estate. This also helps reduce the ultimate size of the estate at death
3. income generated by the trust assets is tacxed to the tust, often at lower rate thant received by the grantor.
4. the trust assets are not vulnerable to the grantors creditors.
What are Irrevocable life insurance trusts (ILITs) are often used in family estate planning. why
the life policy is effectively removed from the estates of both the grantor and the beneficiary who is often the spouse.
- can also loan the estate money to pay estate taxes or arrange to purchase liquid assets from the estate.
What are charitable Trusts and Charitable life Insurance Sales
they can exist forever.
- subject to state laws regardings the rule against perpetuities, which stipulate that private trusts can exist for a period of time not to exceed 21 years after the creation of the trust.
- public trust and can hypothetikcally exist for an ulimited period because they serve the betterment of sociatey, and not a specific individual or a small group.
Are charitable trust are irrevocable?
Yes and they must not name a specific individual or individuals.
- they must name a class of beneficiaries
How do Charitable trusts create tax benefits?
shifting assets out of the estates, reducing the estate tax. The CRT (charitable remainder trsut) allows for a percentage of the trust assets to be paid out annually to a non-charitable beneficiary over time.
What criteria should be reviewed when a Life insurance sales for charitable purpose supports the wishes to an individual to make a bequest and continue contribitions to a charity for a short period of time beyong their demise
1. what is the past hx of giving
2. what has been the amount of the annual contribution
3. is the amount of the annual premium an unresonable percentage of the individuals income?
What is a Generation skipping trust?
GST- avoid of cost of repeated estate tax payments when assets are transfered and address any concerns the grantor can have about the efffect that unearned wealth may have on the charater of their descendants.
- acts by maintaing assets in the trust to an amount equal to certain exemptions to the generation tax.
- can use trust contribution to purchase an insurance plan.
- subject to the rule agaisnt perpetuities.
What is the purpose of multi-generation planning?
allows for the use of estate assets by grand-children, and beyong.
- used where wealthy adult children of wealthy elders would not substantially benhefit by an act of inharitance.
What are dynasty trusts?
- flout the rule agaisnt perpetuities by creating a private trust that can last indefinitely.
- can be funded tax free wit the geneeration-skipping exemption or the annual gift exclusion amount,
- life insurance can be purchase to complete or augment the trust funding when the grantor dies.
What are the two types of personal trusts in Canada?
1. Living (Inter Vivos) trusts
2. Testamentary trusts (est at death.)
What is an intervivos trust?
- set up during the lifetime of the trust created and are treated as a separate taxpayer.
- life insurance had an acception to the rule of trust paying income rates.
- LI avoids Canada's 21 rule
What is Canada's 21 rule
Equivalent to the US rule agaisnt perpetuities and provides that all trusts must normally distribute their assets within 21 years after the trust is created. Trust involving LI are an exception to the 21 year-rule.
What are the common type of Inter Vivos Trusts?
1. Sousal trusts- takes advantage of marital rollover law.
2, Akter EGO and joint partner trusts are intervivos trusts targeted to citizens >64. An alter ego trust has one grantor.
How are testamentary trusts different from inter Vivos trusts
They com into existence as a direct result of the death of the grantor.
- Death benefits paid to a testamentary trust avoid probate fees while also receiving special graduated income tax rates which are more advantageous than the usual rates.
What are the advantages offshore Trusts and private Placement Insurance- US?
1. Many foreign justrisdiction are tax havens. teh trust may not be required to pay an income, capital gains, or estate tax.
2. dosnt recognize foreign judgements. Creditors must file suite in the jurisdiction in which the trust is located, whch can be difficult
3. offshore trusts can avoid or extend the rule agaisnt perpetuities.
4. the trustee of an offshore trust can purchase foreign securities without adhering to the SEC reporting requirements.
5. the trustee can pruchase life insurance from either a domestic or an offshore carrier because life insurance can accumulate cash value tax-free, it is an ideal vehicle to use in conjunction with an offshore trust.
Are offshore carries subject to mainland regulations ?
No, and they have lower internal costs, more flexible investment options for UL plans, and lower ocmmisions rates.
What are private placement variable univeral life contracts? (PPVUL)
they offer investment oppertunities not available to the general piublic.
- involve private offerings and are made available to accredited investors and groups of up too 100 persons. Accredited investors are individuals with invesments of 5M% or more or an institution with investments of >25M$
What is a Family limited partnership (FLP) ?
a modified business partnership comprised solely of family members and has characteristics common to both regular partnerships and corporations.