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An individual makes a taxable gift of $2 million to a trust for the benefit of her child for life, remainder to her grandchildren. She allocates $400,000 of her GST exemption to the trust at the time of the transfer. What is the applicable fraction? What is the inclusion ratio? What is the applicable rate of tax?
The applicable fraction is 1/5 ($400,000 ÷ $2,000,000). The inclusion ratio is 4/5, or 1 - 1/5. The applicable rate of tax is 28 percent (4/5 × 35 percent).
An individual makes a taxable gift of $4 million to trust for the benefit of his children and grandchildren and allocates $2 million of his GST exemption to the trust. In 2011, the trustee exercises its discretion to make a $5,000 income distribution to a grandchild to help her buy a home. What is the trust's applicable fraction? What is the inclusion ratio? How much tax is owed on the distribution? Who is liable for the tax?
The numerator of the applicable fraction is the exemption of $2 million allocated to the trust, and the denominator is the value of the trust, $4 million, so the applicable fraction is ½. The inclusion ratio is one minus the applicable fraction, here also ½. The inclusion ratio is applied against the rate of tax, which is the top marginal estate tax rate, 35 percent, to produce the applicable tax rate. Here, the applicable tax rate is 17.5 percent (½ of 35 percent). The applicable tax rate is applied against the taxable amount of the transfer. Thus, in this trust every taxable distribution and taxable termination will incur a 17.5 percent tax. The trustee's distribution of $5,000 in income to grandchild is taxable, so grandchild will owe a GST tax of $875, but she will also be entitled to an income tax deduction for that amount. A better result could have been achieved if the original transfer had been divided into two trusts of $2 million each. The donor could then have fully exempted one trust, for which the inclusion ratio would be 0, leaving the other trust totally taxable. The trustee could then have made distributions to grandchildren from the exempt trust, which would incur no GST tax.
Grantor creates a trust for the benefit of child and grandchild giving the trustee discretion to sprinkle income and principal to either of them; upon child's death, the remainder passes to grandchild. The trustee exercises discretion to distribute income to both child and grandchild in the current year. What are the GST tax consequences of these distributions? How would those consequences differ if the trustee distributed principal instead?
The distribution to Child is not taxable for GST tax purposes because Child is a nonskip person. Distributions are taxable only if made to a skip person. The distribution to grandchild, however, is taxable because grandchildren are skip persons. In this case, grandchild will pay GST tax on the distribution at the top federal estate tax rate, currently 45 percent; unless the trust had an inclusion ratio of less than one, grandchild also will obtain a deduction against taxable income passed on by the distribution equal to the amount of GST tax paid. If trust principal had been distributed, it would have been a taxable termination of Child's income interest in that corpus. The only difference in result is that the trustee would be obligated to pay the tax out of the distributed property rather than grandchild paying the tax. A basis adjustment under IRC § 2654 also would be permitted for the tax attributable to appreciation in the distributed property.
On February 1, 2007, A transfers $2 million to a trust for the benefit of her child and grandchildren. Under the terms of the trust, the trustee may distribute income and principal to her child, C, and grandchildren, G and H, during the child's life. At C's death, the trust continues for the benefit of G and H. A allocates $1 million of her GST exemption to the trust. On February 1, 2011, the trustee distributes $50,000 to G. On February 1, 2012, when the value of the trust is $2.5 million, C dies. On November 1, 2012, the trustee distributes $100,000 each to G and H. What GST tax is due on each of these transactions? Who is liable for payment of the GST tax?
The applicable fraction is ½. The inclusion ratio is ½. The applicable rate of tax in 2011 and 2012 is 17.5 percent (50 percent x 35 percent). No tax is due on the creation of the trust because C, who is a nonskip person, has a present interest in the trust. The trustee's distribution of $50,000 to G in 2011 is a taxable distribution. GST tax due is $8,750, (17.5 percent of $50,000), and it is payable by G as transferee. If the trustee pays the taxes, that will also be treated as a taxable distribution, triggering additional tax. At C's death, there is a taxable termination because all trust beneficiaries are then skip persons. GST tax due is $437,500 (17.5 percent of $2,500,000), which is payable by the trustee. At C's death, the transferor of the trust is assigned to C's generation, so no GST tax is due on the 2012 distributions to G and H.
What are the GST tax consequences if grandchild dies before child?
Under IRC § 2612(a) grandchild's death would be protected from taxable termination treatment because Child, a nonskip person, continues to have a present interest in the trust. Under the GST tax, it is easiest to think of the trust as not yet "ripe" for the tax to apply; it applies only when all present interests at the nonskip level terminate, and the property "drops down a generation." In this case, that will not occur until Child dies, if at all, so there are no tax consequences to grandchild's death.
What are the GST tax consequences of child's death?
Child's death is a taxable termination, and a GST tax would be paid on the full value of the trust at the top federal estate tax rate, currently 45 percent, unless the trust had an inclusion ratio of less than one. It is not required that the beneficiary who dies be a skip person for a taxable termination. A new basis would be permitted under IRC § 2654, similar to that under IRC §1014 when a decedent dies owning appreciated property.
What are the GST tax consequences of distributions of income or principal to grandchild after child has died?
At Child's death, a taxable termination occurred that causes the "new transferor" rule in IRC § 2652 to apply. Now the transferor is deemed to be at the Child level, and distributions to grandchild are to a nonskip person, so there is no tax consequence. The result is the same as if the trust had distributed to Child before Child's death, followed by Child taking that property and creating a trust for grandchild's benefit. In that trust, grandchild would be a nonskip person and the distributions would not be taxable. In both situations, grandchild is to Child as Child was to the settlor in Question 1.
What would be the GST tax consequences if child died but exercised a nongeneral testamentary power of appointment to create a life estate for child's surviving spouse? Would your answer differ if child's power were a general power of appointment?
If the power is nongeneral, the death of Child is not a taxable event because the deferral rule of IRC § 2612(a) applies here as it did in Question 3. Child's surviving spouse is a nonskip person, and the new present interest arising out of Child's death similarly will prevent imposition of the GST tax. If this power had been general, Child's death would be an estate-taxable event under IRC § 2041, subject to possible qualification for the estate tax marital deduction. If property is subject to estate tax at Child's death, Child becomes the transferor of the trust property under Chapter 13, and no GST tax thereafter will be owed on distributions to grandchild because grandchild becomes a nonskip person.
(a) A declared herself trustee of certain properties that she owned. Under the declaration of trust, the trustee is to distribute the income quarterly between B and C in such proportions as the trustee shall determine at her discretion. Upon the death of the survivor of B and C, the trust corpus is to be distributed to X or his estate. The trust is irrevocable. Does A incur a gift tax liability? Why? Is the remainder interest to X a complete or an incomplete gift? (b) A resigned, and T was appointed as trustee in her place. What is now the status of the gift of the income interest? Is it a taxable gift?
(a) Because A retained the power as trustee to change the proportionate interests of B and C, the gift of the income interests was incomplete, so A incurred no gift tax liability. The gift of the remainder interest to X was complete. (b) If A resigned and T was appointed as successor trustee, A's power over the income interest was terminated by her resignation, and the gift of the income interest became complete at that date. Before A resigned, any current income that the trustee actually distributed to either B or C was placed beyond A's power of control, so there was a completed gift of the income distributed from the trust on the date of distribution.
(a) A transferred property to T in trust for A for life, remainder to B. Has a complete gift been made? Why?
(b) Is the gift completed if A retains the power to revoke the whole trust?
(c) Is the gift completed if A can revoke only with T's consent?
(d) Is the gift completed if A can revoke only with B's consent?
(a) This is a completed gift of the remainder interest because the donor has relinquished all control over that interest.
(b) If A retained the power to revoke the whole trust, there is no gift.
(c) If A can revoke only with the consent of T, who does not have a substantial adverse interest, there is no completed gift.
(d) If A can revoke only with B's consent, the gift is complete.
(a) A transferred property to T in trust for C for life, remainder to D. A reserved the power to alter or amend the trust as he sees fit. Is a taxable gift made?
(b) A later amends the trust so that he can exercise the power of further amendment only with the consent of C. Is C's life interest a taxable gift? Is D's remainder interest taxable? Why?
(a) The transfer is not complete, so there is no taxable gift.
(b) There will be a complete transfer and a taxable gift as to C's life estate, but not as to D's remainder interest. The gift of C's life estate is effected on the date the amendment is made. C does not have an adverse interest as to A's alteration of the remainder interest in the trust; hence, the requirement that C consent to any alteration does not render complete the transfer of the remainder interest in the trust
(a) A trust is created in 2011 in which X has a noncumulative power to withdraw $26,000 in each calendar year, and X has no other interest in the trust. X fails to exercise the power during 2011. If the trust corpus is less than $100,000, what is the value of the gift X made in 2011 to the beneficiaries of the trust? (b) If the trust corpus is $150,000, what is the value of the gift X made to the beneficiaries of the trust? (c) If X also had been designated as the income beneficiary, what would happen to the amount of the taxable gift as shown in the first and second question above?
(a) If the trust corpus is less than $100,000, making five percent of corpus less than $5,000, X made a gift of $21,000 in 2011 ($26,000 - $5,000 maximum allowable lapse) to the beneficiaries of the trust. (b) If the trust corpus is $150,000, so that five percent of corpus, $7,500, is greater than $5,000, X made a gift of $18,500 in 2011 ($26,000 - $7,500). (c) If X also had been designated as the income beneficiary, the amount of the taxable gift as shown in questions a and b above would be discounted to take into account the value of X's life estate in the amount that lapsed.
(a) F transferred $100,000 to his son, S, upon S's promise to pay X, his sister, a comparable annuity. Is the gift to X direct or indirect? Is the gift taxable?
(b) If F made the gift to S with no obligation and if S, on his own initiative, made a comparable gift to X, there are two gifts―F's gift to S and S's gift to X. Which of the gifts is taxable?
(a) F has made an indirect gift of the annuity to X. It is a taxable event.
(b) Both gifts are taxable events.
(a) W owned a life insurance policy on the life of her husband, H, with X as beneficiary. W retained the power to change the beneficiary of the policy. H dies. Are the policy proceeds that are distributed to X as beneficiary subject to gift tax? (b) Would the designation of beneficiary constitute a completed gift of the policy if W had irrevocably designated X as the beneficiary and retained no other beneficial interest in the policy, such as the power to surrender the policy or to borrow against the cash value?
(a) Upon H's death, the policy's owner, W, is deemed to have made a gift to the beneficiary, X, of the policy's proceeds. See Goodman v. Commissioner, 156 F.2d 218 (2d Cir. 1946); Rev. Rul. 77-48, 1977-1 Cum. Bull. 292). In such cases, the commissioner has ruled that because the gift to X is incomplete until after H dies, the split-gift provisions of IRC § 2513 do not apply. See Rev. Rul. 73-207, 1973-1 Cum. Bull. 409. (b) Had W irrevocably designated X as the beneficiary and retained no other beneficial interest in the policy, such as the power to surrender the policy or to borrow against the cash value, the designation of beneficiary would constitute a completed gift of the policy at the time of designation. The insurance policy would be valued at its unmatured value.
(a) X created an equal joint tenancy with rights of survivorship between his son, S, and himself in certain stocks previously owned by X, having a value of $50,000. The stocks were subsequently sold for $60,000, and the proceeds from the sale were divided equally between X and S. What is the extent of X's gift? (b) What would be the taxable gift of S to X if X had retained all $60,000 of the proceeds from the sale?
(a) X made a $25,000 gift, half of the stocks, less a $13,000 annual exclusion, when he created the joint tenancy because either tenant could sever the tenancy. (b) If X had retained all $60,000 of the proceeds from the sale, S would have made a $30,000 taxable gift back to X, less the $13,000 annual exclusion.
A transferred property to T in trust to pay the income annually to B for 20 years, and at the end of that period, to distribute the corpus to B or to B's estate. A retained the power to direct T to accumulate the income in any year and to distribute it together with the corpus after the expiration of the 20-year period. Has A made a completed gift that is subject to the gift tax? Why?
B's interest in the trust is vested and only the timing of enjoyment is subject to change. Therefore, A has made a completed gift that is subject to the gift tax.
A transferred property to T in trust to pay the income to himself for life, remainder to X. Is the remainder interest a completed gift subject to the gift tax? How is the remainder interest determined?
The remainder interest is a completed gift subject to the gift tax. The remainder interest is determined by deducting the value of A's income rights.
D died intestate survived by only two children, A and B. Under local law A and B are entitled to share D's entire estate equally. If A accepts his intestate share and then gratuitously gives it to B, has he completed a gift? Will the gift be considered completed if A makes a qualified disclaimer of his intestate share?
If A accepts his intestate share and then gratuitously transfers it to B, he will be considered to have made a gift to B. On the other hand, if by making a qualified disclaimer of his intestate share pursuant to IRC § 2518, A's interest in D's estate automatically passes to B, because A will be treated as never having received an interest in D's estate, he will be treated for gift tax purposes as not having transferred his interest to B.
F established a revocable trust to pay the income annually to X for life, remainder to Y. At the time the trust was created, was there a completed gift? Would the annual income payments to X be considered completed gifts? Would F be entitled to an exclusion to be applied against the income actually distributed to X each year?
At the time the trust was created, there was not a completed gift of the principal or income interests because F retained the power to revoke. The annual income payments to X are completed gifts when distributed, however, so F is entitled to apply the annual exclusion against the income actually distributed to X each year.
F lent his son, X, $13,000. F later forgave X the debt at a time when X was not financially sound and could have paid F only 50 cents on the dollar. Assuming that the cancellation of the debt was donatively motivated, does F's forgiveness of X's debt constitute a gift?
Assuming that the cancellation of the debt was donatively motivated, F made a gift to X of the fair market value of X's obligation, which might be valued as low as $6,000.
F transferred property to T in an irrevocable trust to pay the income to X, Y, and Z during F's life, and on his death, remainder to X, Y, and Z equally. T was given the power to allocate the income among X, Y, and Z at his sole discretion. It can be shown that distributable income will amount to $39,000 annually. Does the $13,000 gift tax exclusion apply?
Although there is a gift of an income interest to X, Y, and Z and at least one of them will receive $13,000 a year, none of them has the power to demand an income interest each year. Because neither X, Y, nor Z has the right to immediate possession or enjoyment, no present interest can be ascertained for an exclusion. See Prejean v. Commissioner, 354 F.2d 995 (5th Cir. 1966); Rev. Rul. 55-503, 1955-1 Cum. Bull. 471.
G transferred property in trust for the benefit of his 14-year-old son, S. The trustee is authorized to distribute such amounts of income and principal to the beneficiary as the trustee determines at his discretion. Upon the 21st birthday of the beneficiary, or upon his prior death, the trustee is required to distribute all accumulated income to the beneficiary or his estate; and thereafter, all the income of the trust must be distributed to the beneficiary quarterly. The trust terminates on the 25th birthday of the beneficiary, or upon his earlier death, and upon termination, the principal of the trust is to be distributed to the beneficiary or his estate. What does and what does not qualify for the annual exclusion under Sec. 2503(c)?
Because the principal of the trust is not required to be distributed to the beneficiary upon his 21st birthday, his remainder interest in the corpus of the trust does not qualify under IRC § 2503(c). The value of his right to income from the trust until his 21st birthday or earlier death, however, does qualify for the annual exclusion. In Estate of David H. Levine, 63 T.C. 136 (1974), the Tax Court held that the value of the beneficiary's right to income until his 25th birthday, the date on which his income interest terminated, qualified for the annual exclusion—but the Second Circuit reversed the ruling, holding that income after the age of 21 does not qualify. See 526 F.2d 717 (2d Cir. 1976).
G transfers $13,000 in trust for his 10-year-old son, S. The trustee has discretion to distribute any amount of income or corpus to S that the trustee determines. The trust terminates upon the 21st birthday of S or upon the death of S, whichever occurs first. On termination, all of the trust assets, both principal and accumulated income, are to be distributed to S or to the estate of S. Is the annual exclusion under § 2503(c) applicable?
The entire $13,000 transferred by G qualifies for the annual exclusion under IRC § 2503(c).
H makes cash gifts of $26,000 to each of his three children and to each of his four grandchildren in the year 2011 and again in the year 2012, totaling $364,000 for the two years. H and his wife, W, elect to utilize the split-gift provisions for both years. What is the amount of the gift by W to each child and grandchild? Does the $364,000 in gifts result in any taxable gifts?
H is deemed to have made a gift of only $13,000 to each child and grandchild. W is deemed to have made a like gift of $13,000 to each child and grandchild. None of the gifts deemed made by H or W to any single donee in either year exceeded the $13,000 annual exclusion, so there were no taxable gifts.
In 2011, F made gifts of $5,000 to X and $15,000 to Y. What amount would be subject to the gift tax?
The amount subject to gift tax would be $2,000. The fact that F gave less than $13,000 to X has no effect on the gift to Y for purposes of the $13,000 annual exclusion.
In May 2011, W transferred $100,000 in trust to pay all of the income for life to X, age 50, remainder to Y. The transfer to the trust is treated as a gift to the beneficiaries, X and Y, to the extent of their interests. Was the gift to X entitled to the $13,000 exclusion? Why? Was the remainder interest to Y entitled to the $13,000 exclusion? Why?
Because the gift of the income interest to X is a present gift, the $13,000 exclusion applies to X's interest in the trust. The remainder interest given to Y is a future interest so no exclusion is allowed for its value. The values of the income interest and remainder interest would be calculated using the monthly valuation tables promulgated under IRC § 7520.
On January 1, 2010, D's 15th birthday, D's father dies and leaves his estate in trust with income paid to D's mother for life, remainder to D. D's mother dies on January 1, 2020. What is the last day D can make a qualified disclaimer of his interest?
The last day D can make a qualified disclaimer of his interest is October 1, 2016, nine months after D's 21st birthday. The disclaimer must be made within nine months after the date on which the transfer creating the interest is made, or the date the disclaiming person reaches age 21, whichever is later. In this case, the transfer creating the interest occurred at D's father's death, even though D's interest did not take effect until his mother's death.
W transferred $100,000 into an irrevocable trust for the benefit of X, her minor child. The trustee was required to distribute the trust corpus to X on his 25th birthday, and could accumulate income until that date. X was given the right to demand at any time that the trustee make payments to him of unlimited amounts of principal or income. Does a gift tax exclusion apply? Why or why not?
The right to demand immediate payments gives a beneficiary an immediate right to possession and usually will qualify a gift for an annual exclusion. For several years, there was some question about whether a beneficiary's power to withdraw is sufficient when the beneficiary is a minor and under state law minors are incapable of making this demand. (Compare Kieckhefer v. Commissioner, 189 F.2d 118 (7th Cir. 1951); Gilmore v. Commissioner, 213 F.2d 520 (6th Cir. 1954); Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968); and Stifel v. Commissioner, 197 F.2d 107 (2d Cir. 1952).) The commissioner, however, ultimately ruled that a gift of this type will qualify for the annual exclusion so long as the trust deed or local law does not prohibit the appointment of a guardian for the minor. See Rev. Rul. 73-405, 1973-2 Cum. Bull. 321.
X is the donee of a general power of appointment. Will an exercise or release of such power make X liable for gift tax? How is a power of appointment treated under IRC § 2518? What if X makes a qualified disclaimer of the power?
An exercise or release of such a power may result in gift tax liability being imposed on X. See IRC § 2514. A power of appointment, however, is treated as an interest in property under IRC § 2518, and a qualified disclaimer of the power will result in X being treated as though he had never received the power. As a result of the disclaimer, no gift tax will be imposed on X.
X transfers $60,000 to a Qualified State Tuition Program in 2012 for her grandchild. How much of this gift qualifies for the gift tax annual exclusion, assuming X has made no other gifts to the grandchild?
The whole gift qualifies for the gift tax annual exclusion, as long as X has made no other gifts this year. IRC § 529(c)(2) allows an individual to set aside $65,000 for a child or grandchild in one year and treat the gift as the use of five years' worth of annual exclusions.
A credit shelter trust authorizes the trustee, who is the surviving spouse, to distribute income and principal to the decedent's children for their health, support in reasonable comfort, and education. The trust also permits the trustee to satisfy his or her legal obligation to support the beneficiaries. Is it appropriate for the surviving spouse to act as trustee of the credit shelter trust? Why?
The surviving spouse should not act as trustee of the credit shelter trust if any of the children are minors. She may be deemed to possess a general power of appointment over the trust if she can use the trust income and principal to satisfy her legal obligation to support a minor child and the credit shelter trust would be included in her estate. Otherwise, there would be no problem in giving her the power to distribute income and principal for her children's health, support in reasonable comfort, and education, because her discretionary power is subject to an ascertainable standard.
H dies in 2011 with a $8 million estate consisting of $7,500,000 of probate assets in H's name and a $500,000 one-half joint tenancy interest with W in the family residence. H has an A-B estate plan that funds the marital trust pursuant to a pecuniary marital formula, with the family trust receiving the residue. H made no lifetime taxable gifts. On the date the trusts are funded, the probate assets have appreciated in value to $8,500,000. What do the marital trust, the family trust, and W receive, ignoring any debts and administrative expenses?
Using the pecuniary marital formula, the marital trust will receive a fixed amount equal to the value of H's probate assets at the date of death, reduced by the largest amount of property that can be sheltered by the applicable credit amount. The applicable credit amount could shelter up to $5.12 million, so the marital trust will receive $2.5 million ($7,500,000 - $5,120,000). The family trust will receive the probate property remaining on the distribution date, $6.12 million ($8,500,000 - $2,380,000). Thus, the family trust benefits from the post-death appreciation of estate assets. Under operation of law, W receives directly H's half-interest in the family residence by right of survivorship.
H has an estate of $15 million. H and his wife, W, have three minor children. H's current plan leaves his entire estate outright to W if she survives him, otherwise to his children per stirpes. W's estate consists of $200,000. W's will leaves everything outright to H if he survives her, otherwise to the children, per stirpes. What are the tax aspects of this plan if H dies first? If W dies first? What would be the tax consequences if H and W used an A-B estate plan?
(a) Existing plan: If H dies first, his entire estate passes to W and will be sheltered by the marital deduction. When W dies later, assuming there is no change in values, her estate will be worth $15,200,000. She can shelter the applicable exclusion amount. Thus, if H had died in 2011 and W died in 2012, $10.24 million would be sheltered if portability is available, but the remaining $4.96 million would be subject to estate tax. If portability is not available, then $10.08 million is subject to estate tax. If W dies first, her entire estate passes to H and also will be sheltered by the marital deduction. When H dies, he can shelter the applicable exclusion amount. Thus, if H died in 2012, $10.24 million of his $15.2 million estate would be sheltered if portability is available, but the remaining $4.96 million will be subject to estate tax. If portability is not available, then $10.08 million is subject to estate tax. (b) A-B estate plan: If H dies first, the applicable exclusion amount would be sheltered in the B trust, and the remainder would pass to W in a manner qualifying for the marital deduction. No estate tax would be due. Thus, if H died in 2012, $5.12 million would be sheltered by the B trust and $10 million by the marital deduction. At W's death, her estate would be worth $10.2 million, which would be sheltered by her $5.12 million applicable exclusion amount, and $5.08 million will be subject to tax. The advantage to the credit shelter trust is that any appreciation on assets in the credit shelter trust between the death of the first spouse and the death of the second will escape tax.
Husband (H) and wife (W) have interests in several parcels of real estate. H and W own Parcel 1 in joint tenancy with right of survivorship. W was the sole purchaser. For Parcel 2, which is held by H, W, and X, H paid the entire consideration. Parcel 3, which is held by H and W as tenants in the entirety, was a gift from W's father. If H dies first, what will be included in his estate? What should H and W do with their real estate from a tax planning perspective if H's estate, in addition to interest in the three parcels of real estate, is $10 million, and W's estate, in addition to her interests in the real estate, is $50,000?
At H's death, 50 percent of the value of Parcels 1 and 3 and the entire value of Parcel 2 will be included in his estate. Under IRC § 2040, 50 percent of the property owned solely by spouses in joint tenancy with rights of survivorship or owned in tenancy by the entirety is included in the estate of the first spouse to die, regardless of who furnished the consideration. Because an individual other than a spouse has an interest in Parcel 2, the value of that property is included in proportion to the consideration H contributed to purchase the property, which in this case was 100 percent. If W were to die first, her estate would consist of $50,000, plus 50 percent of the value of Parcels 1 and 3. Because the real estate passes to the surviving joint tenants by operation of law, W does not have sufficient assets to fully use her applicable credit amount. H could give his interests in the parcels to W without gift tax consequences, thereby increasing her estate in order to more fully use her applicable credit amount.
J's estate plan creates a family trust for the benefit of her husband and children. Can J's husband be the trustee? What are the disadvantages of the husband acting as trustee?
J's husband may act as trustee of the family trust. To avoid having the trust property included in his estate, his power to distribute trust property to himself must be limited by an ascertainable standard. Also, all or a portion of the family trust could be included in his estate if he can use his power as trustee to distribute property to his children to discharge his legal obligation of support. Using the property in this way also could cause him to be taxed on the distributed trust income. Finally, unless his power to distribute property to his children is also limited by an ascertainable standard, distributions to the children could give rise to gifts. These problems are avoidable if J names a corporate or other independent trustee for the family trust.
Y has an estate in excess of $5 million and is married to X. Each has children from a previous marriage. Y has decided to execute an A-B estate plan and wants to ensure that property qualifying for the marital deduction ultimately passes to Y's children. What estate planning technique can Y take advantage of to control the ultimate distribution of the marital gift? List the requirements of this technique.
The only technique Y can use to take advantage of the marital deduction and still ensure that the children receive the property is a QTIP trust. For the trust to qualify as a QTIP, (i) the surviving spouse must be entitled for life to all the income from the trust, payable at least annually; (ii) no one, including the surviving spouse, may appoint the property to anyone other than the surviving spouse during her lifetime; and (iii) the executor must make an election on the estate tax return to treat the property as QTIP.
Grantor transfers $2 million to a GRAT, reserving a 10-year annuity, remainder to grandchild at the end of the annuity term. Grantor has her entire $5.12 million GST exemption available and wishes to fully exempt the trust. At Grantor's death during the term, the entire trust would be included in her estate under IRC § 2036. What are the GST tax consequences of the transfer? How would the result differ if the trust were a charitable lead annuity trust with the annuity payable to charity for 10 years?
Under IRC § 2642(f), allocation of the GST exemption is ineffective until the estate tax inclusion period (ETIP) has terminated. This will occur at the earlier of the expiration of the 10-year annuity term or Grantor's death. If the trust has grown in value to more than $5 million during the annuity term, the GST exemption will not shelter the entire trust. Because of Grantor's retained interest, the transfer to grandchild at the end of the term will be a taxable termination. If the trust were a charitable lead annuity trust instead, Grantor effectively could allocate her entire GST exemption when the trust is created. In that case, how much of the trust will be exempt is determined at the end of the charitable term, based on the value of the adjusted GST exemption in relation to the value of the trust principal at that time. The adjusted GST exemption is the compounded value of the GST exemption that Grantor allocates to the trust, using the discount rate that applied to value the charitable annuity interest under IRS valuation tables. If it equals or exceeds the trust value when the annuity ends, the trust will be completely exempt.
Husband dies in 2012, survived by Wife, with a gross estate of $7 million. He had previously made taxable gifts totaling $1.12 million. As a result, his will creates an optimum marital deduction trust of $3 million and a credit shelter trust of $4 million. The marital trust gives Wife a testamentary general power of appointment and otherwise qualifies under IRC § 2056(b)(5). How much of Husband's $5.12 million GST exemption may his executor allocate at his death? How would the answer differ if the marital trust qualified instead for QTIP treatment under § 2056(b)(7)?
If an individual creates a general power of appointment marital trust for a surviving spouse, the spouse will be treated as the transferor of that trust for GST tax purposes. This prevents the creator from effectively allocating any GST exemption to the trust. To exempt the trust, the surviving spouse's executor must allocate that spouse's GST exemption at the spouse's death. Here, Husband's executor may only allocate Husband's GST exemption to the $4 million credit shelter trust. In contrast, if the marital trust is QTIP, the executor may make a reverse QTIP election under IRC § 2652 and treat Husband rather than Wife as the transferor of the marital trust. In that case, the executor can allocate Husband's GST exemption to the marital trust as well. As a result, $1 million of Husband's GST exemption cannot be allocated..
May a donor make a $13,000 gift in trust for a grandchild and have it excluded from GST tax without using his GST exemption?
Yes. Subject to certain restrictions, annual exclusion gifts that are direct skips automatically are excluded from GST tax. If the direct skip transfer is in trust, this exclusion applies only if the trust qualifies for the annual exclusion, the grandchild is the sole beneficiary of the trust, and the trust property will be included in the grandchild's gross estate for federal estate tax purposes if the trust is still in existence at the grandchild's death.
Wife died in 1984 and created a general power of appointment marital deduction trust for Husband. At Husband's death, the trust property will be held in further trust for his children and grandchildren. What are the GST tax consequences of Husband's death? Would the result differ if the trust were a QTIP trust?
Because Wife died in 1984, the marital trust will be grandfathered from application of the GST tax under the effective date rules. Upon Husband's death, however, he will be treated as making a constructive addition to the trust of its full value if he does not exercise his power of appointment. As a result, he will be treated as the transferor of that property and the grandfather protection will no longer apply, thus subjecting the trust to the Chapter 13 rules. If he does exercise the power, he will be treated, nevertheless, as the transferor of the property because it is included in his estate, which could subject it to GST tax if exercised in a manner that causes a GST. If the trust were QTIP, the IRS would treat Wife as having made a reverse QTIP election at her death and exempt the entire trust. In that case, the entire trust would remain exempt upon Husband's death, so long as his estate plan does not cause any additional property to be added to the trust.
a. D transfers property in trust with income to A for life, remainder as A appoints by deed or will but in the absence of an appointment by A, remainder to B. A has a general power of appointment. If A wishes to make a qualified disclaimer of such a power, when must he do so? b. If A does not disclaim the power and appoints to X, when must X make a qualified disclaimer? c. If A does not disclaim the power, but fails to exercise it, what happens to the property under the terms of the trust?
(a) A must make a qualified disclaimer of his general power of appointment within nine months of the transfer into trust by D. See Treas. Reg. § 25.2518-2(c)(3). (b) If A does not disclaim the power and appoints to X, X must make a qualified disclaimer within nine months of A's irrevocable exercise of the power. See Treas. Reg. §§ 25.2518-2(c)(3) and (5), Example 2. (c) B would take the property. B must make a qualified disclaimer of her remainder interest within nine months after A's death. See Treas. Reg. §§ 25.2518-2(c)(3) and (5), Example 2.
D bequeathed his residuary estate to T in trust. T was authorized to distribute at his sole discretion as much of the trust income and principal to W, D's surviving wife, for life, as he deemed to be in her best interests. He was directed to pay any balance of the trust funds remaining on the death of W to a specified charitable entity. Would the net value of the residuary estate qualify for the estate tax charitable deduction in D's estate if W died before the due date of the return and before any trust funds were distributed to her? Why?
If W died before the due date of the return and before distribution of any trust funds to her, a qualified disclaimer would be deemed to have occurred and the net value of the residuary estate would qualify for the estate tax charitable deduction in D's estate.
D died on June 1, 2011. On March 1, 2012, her executor pays D's medical bills of $3,000, trustee's fees of $2,000 for expenses incurred in distributing D's assets, and attorney's fees of $6,000 for the probate of D's estate. On which tax returns may these expenses be claimed as deductions?
Medical expenses of D's last illness, trustee's fees incurred for actions by the trustee that would be taken normally by the executor, and attorney's fees incurred for estate administration all may be claimed as deductions on the estate tax return. Alternatively, the trustee's fees may be taken as deductions on the trust's income tax return, and the attorney's fees may be deducted from the estate's income tax return. In that case, they are not deductible on the estate tax return. Because the medical expenses were paid within one year of D's death, they may be taken alternatively as deductions on D's final income tax return instead of on the estate tax return.
D's will creates a testamentary trust. Upon D's death, the trust provides for income to A for life, remainder to B. A and B are both over 21. When can A and B make qualified disclaimers of their interests?
A and B can make qualified disclaimers of their interests only by acting within nine months of D's death because after nine months the trust becomes irrevocable. To make a qualified disclaimer, however, A cannot have accepted any of the benefits of the trust.
G died in November 2011. G's executor chooses for the estate a first tax year ending February 28, 2012. The executor makes an income distribution from the estate to B estate on March 1, 2012. B is a calendar-year taxpayer. When is B deemed to have received the income? What is the earliest date B will be required to pay any tax on this income? The latest date?
B is deemed to have received the income on February 28, 2013, the last day of the estate's tax year in which the distribution was made. At the earliest, B must begin paying tax on it on April 15, 2013, if B is required to make estimated tax payments. At the latest, B may not have to pay any tax until April 15, 2014.
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