Trusts
A bypass trust is also known as a:
a. Credit shelter trust.
b. Marital trust.
c. Charitable remainder trust.
d. QTIP trust.
a. Credit shelter trust.
A bypass trust is also known as a credit shelter trust.
Which combinations correctly match the types of property donated to the corresponding percentage deduction limitation rules when high income earners are contributing to charities?
a. FMV and cash contributions - 60% deduction limitation
b. Long-term capital gain property and tangible personal property (if long-term) - 50% deduction limitation
c. Short-term capital gain property or ordinary income property - 30% deduction limitation
d. Basis unless a qualified appreciated stock is donated, then FMV - 20% deduction limitation
b. Long-term capital gain property and tangible personal property (if long-term) - 50% deduction limitation
Contributions of long-term capital gain property and tangible personal property (if long-term) are subject to a 50% deduction limitation. Short-term capital gain property or ordinary income property are subject to a 30% deduction limitation. The combination b correctly matches these rules.
Under what circumstances might an estate be eligible to utilize Section 6166?
a. If the estate has no closely held business assets.
b. If the estate consists solely of liquid assets such as cash and securities.
c. If a significant portion of the estate's value is tied up in closely held businesses.
d. If the estate's total value exceeds a certain threshold set by the IRS.
c. If a significant portion of the estate's value is tied up in closely held businesses.
Section 6166 is a relief prevision.
Upon the death of the grantor of a revocable inter vivos trust, the trust assets receive:
a. A carryover basis.
b. A carryover basis with inclusion in the gross estate.
c. A step-to FMV basis with inclusion in the gross estate.
d. A step-to FMV basis with capital gain or loss income tax consequences.
c. A step-to FMV basis with inclusion in the gross estate.
There is step-to FMV basis but no capital gains tax and there is inclusion in gross estate.
Which of the following is/are correct regarding qualifying disclaimers?
1. Must be in writing.
2. Property must be disclaimed within nine months of the date of death.
3. Disclaiming party could not have previously benefited from the interest being disclaimed.
4. Disclaiming party cannot direct the interest to any other specific person.
a. 1 only.
b. 2 only.
c. 1 and 2.
d. 1, 2, 3, and 4.
d. 1, 2, 3, and 4.
A QTIP trust must:
a. Be in the form of a testamentary trust.
b. Give the surviving spouse the right to require only income producing assets be in the trust.
c. Permit the trustee to use any amount of the trust principal for any purpose for the spouse.
d. Give the surviving spouse a general power of appointment over the assets.
b. Give the surviving spouse the right to require only income producing assets be in the trust.
Which of the following is false regarding an intentionally defective grantor trust (IDGT)?
a. The trust income will be taxed to the grantor.
b. The gift to the trust is typically cash, which is then used as seed money to purchase assets from the grantor at FMV.
c. If the grantor dies during the term of the trust, the full value of the trust is included in their gross estate.
d. The grantor does not recognize income tax on the sale of the asset to the trust.
c. If the grantor dies during the term of the trust, the full value of the trust is included in their gross estate.
However, if the asset was sold under an installment note, the PV of the remaining payments will be included in the gross estate. This effectively freezes the value that is included in the gross estate and ensures that future appreciation after the sale will not be subject to transfer taxes. The other statements regarding an IDGT are true.
Which of the following best describes the purpose of Section 303 in estate planning?
a. To allow shareholders of closely held corporations to transfer their shares to family members without incurring gift taxes.
b. To provide a tax deduction for charitable donations made by shareholders of closely held corporations.
c. To enable the redemption of stock in a closely held corporation to pay federal estate taxes without triggering additional tax consequences.
d. To exempt closely held corporations from federal estate tax obligations entirely.
c. To enable the redemption of stock in a closely held corporation to pay federal estate taxes without triggering additional tax consequences.
Section 303 is a relief prevision.
What is the primary purpose of Section 6166 in estate planning?
a. To provide tax exemptions for closely held businesses.
b. To allow the estate tax attributable to closely held businesses to be paid in installments over time.
c. To enforce strict regulations on the transfer of assets within family-owned businesses.
d. To require lump sum payments for estate taxes owed on closely held businesses.
b. To allow the estate tax attributable to closely held businesses to be paid in installments over time.
Section 6166 is a relief provision.
Which of the following regarding portability of a deceased spouse’s unused exemption is not correct?
a. A surviving spouse of more than one deceased spouse is permitted to stack portability of unused exemptions of up to three deceased spouses.
b. The executor must make the election for portability of the deceased spouse’s unused exemption on a timely-filed estate tax return.
c. An estate that would otherwise not be required to file a Form 706 must do so to elect portability.
d. If the first spouse dies this year without either spouse having used any of their lifetime exemption, portability effectively doubles the exemption for the surviving spouse.
a. A surviving spouse of more than one deceased spouse is permitted to stack portability of unused exemptions of up to three deceased spouses.
A surviving spouse of more than one deceased spouse is limited to portability of the unused exemption of the most recently deceased spouse.
Ninoska contributed $500,000 to an irrevocable trust in which the income is required to be distributed annually to her daughter for life, and upon her daughter’s death the remaining trust assets are to be distributed to Ninoska’s granddaughter. Which of the following correctly describes the type of trust Ninoska has created?
a. A simple trust.
b. A complex trust.
c. A grantor trust.
d. A pourover trust.
a. A simple trust.
A simple trust is one in which the income must be distributed at least annually.
Choice b is incorrect because a complex trust can accumulate income.
Choice c is incorrect because Ninoska did not retain any powers over the trust that cause it to be a grantor trust.
Choice d is incorrect because a pourover trust receives assets that pour into it from other sources such as from the will or from life insurance or retirement plan proceeds.
An intentionally defective grantor trust does all of the following except:
a. Removes assets from the grantor’s estate.
b. Freezes the value of the assets placed in the trust so that any appreciation goes to the beneficiaries tax free.
c. Places the income tax burden on the grantor.
d. Allows the grantor to make changes to the trust.
d. Allows the grantor to make changes to the trust.
The grantor cannot make any changes to the trust. The terms of the grantor trust are irrevocable.
What is the best use for a private annuity?
a. To transfer assets to a trust for charitable purposes.
b. To transfer assets to family members in exchange for a stream of income.
c. To create a tax-free investment vehicle for retirement savings.
d. To liquidate assets quickly to pay off outstanding debts.
b. To transfer assets to family members in exchange for a stream of income.
A private annuity can be used to transfer assets, such as real estate or a business, to family members in exchange for a stream of income (annuity payments). This allows individuals to pass on assets to the next generation while potentially minimizing estate taxes and providing a steady income stream during retirement.
Which of the following gifts made by Tristan, age 49, is subject to the generation-skipping transfer tax?
a. $17,000 to his grandson.
b. $20,000 to his niece, age 6.
c. Payment of medical school tuition of $50,000 for the granddaughter of Joe, Tristan’s best friend.
d. $20,000 to the daughter (age 6) of Tristan’s former college roommate.
d. $20,000 to the daughter (age 6) of Tristan’s former college roommate.
Option a is exempted by the annual exclusion (2023 limit). Option b, a niece, is not a skip person. Option c is a qualified transfer not subject to GST. Option d is to a skip person because a nonlineal descendant is a skip person if more than 37½ years younger than the transferor.
Which combinations accurately represent the percentage deduction limitation rules for contributions to charitable organizations based on the type of property donated?
a. Cash contributions and tangible personal property (if long-term)
b. Long-term capital gain property and short-term capital gain property or ordinary income property
c. FMV if the charity employs in related use and basis unless a qualified appreciated stock is donated, then FMV
d. Public charity and private foundation
c. FMV if the charity employs in related use and basis unless a qualified appreciated stock is donated, then FMV
Contributions of cash and tangible personal property (if long-term) are subject to a 60% deduction limitation. Long-term capital gain property and short-term capital gain property or ordinary income property are subject to a 30% deduction limitation. The combination c correctly matches these rules.
Which type(s) of charitable remainder arrangements permit additional contributions after inception?
1. CRATs.
2. CRUTs.
3. Pooled income funds.
a. 1 only.
b. 3 only.
c. 1 and 2.
d. 2 and 3.
d. 2 and 3.
Only CRUTs and pooled income funds permit additional contributions after inception.
In a typical family limited partnership (FLP):
a. Immediately upon the FLP’s creation, the owners transfer general partnership interests to their children or grandchildren.
b. A discount is allowed on the gifts only if the children’s interest as a group will be less than 50%.
c. The children or grandchildren receive limited partnership interests.
d. The family limited partnership should be funded with assets that are not expected to appreciate faster than the 7520 rate.
c. The children or grandchildren receive limited partnership interests.
The parents/grandparents retain general partnership interests while transferring limited partnership interests to children/grandchildren. A discount for minority interest/marketability can be used in valuation purposes. FLP’s are particularly useful with assets expected to appreciate since the post-gift appreciation will be removed from the estate, and any appreciation on interests not gifted will generally receive valuation discounts.
What is a key factor to consider when determining the funding amount for an Irrevocable Life Insurance Trust (ILIT) in estate planning?
a. The number of beneficiaries named in the trust.
b. The age of the insured individual.
c. The size of the estate and potential estate tax liabilities.
d. The cash value of the life insurance policy.
c. The size of the estate and potential estate tax liabilities.
The primary purpose of an ILIT is often to provide liquidity to pay estate taxes, so the funding amount should be sufficient to cover these taxes based on the size of the estate and applicable estate tax laws.
Which combinations accurately pair the types of charitable organizations with the appropriate valuation method for the donated property?
a. Public charity - FMV if the charity employs in related use
b. Private foundation - Basis unless a qualified appreciated stock is donated, then FMV
c. Public charity - FMV unless election is made to deduct basis up to 50% of AGI
d. Private foundation - Basis
a. Public charity - FMV if the charity employs in related use
Contributions to a public charity are generally valued at Fair Market Value (FMV), unless the charity employs the property in a related use, in which case FMV is used for valuation. Private foundation contributions are generally valued at basis. The combination a correctly matches these rules.
Which of the following statements regarding the estate tax marital deduction is correct?
a. If the decedent received a marital deduction, the property is excluded from the surviving spouse’s gross estate upon the surviving spouse’s death.
b. A QTIP trust will qualify for the marital deduction, if the executor makes the appropriate election.
c. The surviving spouse must be a U.S. citizen for the decedent to qualify for the marital deduction even using a QDOT.
d. The marital deduction only applies in community property states.
b. A QTIP trust will qualify for the marital deduction, if the executor makes the appropriate election.
The marital deduction applies in both community property and separate property states. There is no need for the surviving spouse to be a U.S. citizen if using a QDOT. The marital deduction property must be included in the surviving spouse’s gross estate.
Which of the following statements regarding a grantor retained annuity trust (GRAT) is/are true?
1. When the trust is established, a taxable gift occurs based on the present value of the remainder interest of the trust assets.
2. The gift that occurs when the GRAT is created is eligible for the annual exclusion.
3. For estate planning purposes, a GRUT (grantor retained unitrust) is preferable to a GRAT if the assets in the trust are expected to appreciate in value.
4. The beneficiaries of a GRAT will not receive a step-up in basis of the trust property if the grantor survives the trust term.
a. 1 and 4.
b. 2 and 3.
c. 3 and 4.
d. 1, 2, and 4.
a. 1 and 4.
Statement 1 is correct. A taxable gift will occur when the GRAT is established.
Statement 2 is incorrect. The gift will not be eligible for the annual exclusion, since it is not a present interest gift.
Statement 3 is incorrect. A GRUT will result in a higher annuity payment to the grantor each year (if the assets are appreciating in value). For estate planning purposes, the grantor would want to remove assets from the estate. Therefore, a GRUT would be inappropriate because it would bring a higher amount into the grantor’s estate each year than the GRAT.
Statement 4 is correct. If the grantor survives the trust term, the beneficiaries will not receive a step up in basis of the trust assets. If the grantor died during the trust term, a portion of the trust assets would be included in the grantor’s gross estate; therefore, the heirs would receive a step up in basis on that portion.
Which of the following statements regarding a grantor retained annuity trust (GRAT) is/are true?
1. At the end of the GRAT term, a taxable gift will occur when trust assets are transferred to the beneficiary.
2. If the grantor dies during the trust term, a pro rata share of the trust assets will be included in the grantor’s estate.
3. Interest and dividends earned by assets in a GRAT are taxed to the grantor.
4. If the grantor survives the trust term, none of the trust assets are included in the grantor’s gross estate.
a. 1 and 4.
b. 2 and 3.
c. 3 and 4.
d. 1, 2, and 4.
c. 3 and 4.
Statement 1 is incorrect. A taxable gift will occur when the GRAT is established, not at the end of the GRAT term.
Statement 2 is incorrect. If the grantor dies during the trust term, the amount necessary to replace the annuity payments specified in the GRAT is included in the grantor’s gross estate, not a pro rata portion.
Statement 3 is correct. The trust is a grantor trust; therefore, all income will be taxed to the grantor.
Statement 4 is correct. If the grantor survives the trust term, none of the trust assets will be included in the grantor’s gross estate. However, the taxable gift (that occurs when the trust is established) must be added back to the taxable estate as a prior taxable gift.
Isaac is 67 years old, and would like to transfer some of his assets to his adult son, Murray. Isaac does not want to incur any gift tax liability, and also needs some cash flow, so he is considering selling the assets to his son. A friend recently informed Isaac that a self-canceling installment note (SCIN) is a good planning strategy. Which of the following statements regarding self-canceling installment notes (SCINs) is/are correct?
1. To be effective, a SCIN must reflect a risk premium to compensate the seller for the possibility of cancellation.
2. A seller of a SCIN may accept security without jeopardizing the installment sale treatment.
3. At the seller’s death, the present value of any remaining SCIN balance is excluded from the seller’s gross estate.
4. A SCIN is a debt ordinarily extinguished at the seller’s death.
a. 1 only.
b. 3 only.
c. 1 and 3.
d. 1, 2, 3, and 4.
d. 1, 2, 3, and 4.
All are correct. The present value of a self-canceling installment note balance is not included in the gross estate of the seller (decedent) since the value at death goes to zero as a result of the self-canceling feature.
Prior to his death, Ashton owned a closely held business. The business is valued at $5,000,000, the real estate used in the business is valued at $4,000,000, and Ashton’s total adjusted gross estate was $13,000,000. Which of the following postmortem estate planning techniques can Ashton’s executor elect?
a. IRC Section 6166.
b. IRC Section 2032A.
c. IRC Section 1033.
d. IRC Section 1031.
a. IRC Section 6166.
The closely held business will qualify for IRC Section 6166. The corporation is 38.5% of Ashton’s adjusted gross estate (AGE). Section 2032A requires the value of the closely held corporation to be at least 50% of the AGE. Section 1031 and Section 1033 are tax-free exchange provisions and do not apply
Kyrie dies and leaves his son, LeBron, the family farm. The value of the farm as used is $3,000,000. The fair market value of the farm at its highest and best use (supermarket and shopping mall) is $6,000,000.
Which of the following statement(s) is/are true regarding a proper IRC Section 2032A election?
1. The value of the land in the gross estate will be less than $3,000,000.
2. LeBron will have to use the farm for 10 years to avoid recapture of the IRC Section 2032A benefit.
a. 1 only.
b. 2 only.
c. Both 1 and 2.
d. Neither 1 nor 2.
b. 2 only.
Statement #1 is incorrect because the amount included in the gross estate will be $6,000,000 minus the 2032A election (assuming they meet all of the other requirements of Sec. 2032A).
IRC Section 2032A is a provision of the Internal Revenue Code (IRC) in the United States that allows qualified family-owned farms and closely held businesses to receive favorable estate tax treatment. This provision enables eligible estates to value certain qualifying real property (such as farms or closely held business property) at its current use rather than its highest and best use, which can result in lower estate tax liability.