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FIN-3270 Exam 2 Short Answer / Essay
Terms in this set (26)
(ch.6)(SA) What is meant by "incidence of ownership" in a life insurance policy (include examples) and what is meant by an "insurable interest" ?
- When life insurance policy owner reserves the right to enjoy economic benefit or make changes to policy, has incident of ownership and all death proceeds will be included in gross estate
- 6 years before death, X transfers policy on life to son, but retained the right to change beneficiary - has incident of ownership at death and all proceeds included in gross estate
- Insurable interest: Type of investment that protects anything subject to a financial loss. A person or entity has an insurable interest in an item, event or action when the damage or loss of the object would cause a financial loss or other hardships
(ch.6)(E) What is a General Power of Appointment and what is a Limited Power of Appointment, and what is their impact on the gross estate?
General: power which holder can appoint the property to any (i)The holder, (ii)Holder's estate, (iii)Holders creditors, (iv)Creditors of holders estate (has right to enjoy for personal gain) (included in holders gross estate if dies during power term)
Qualifies for the marital deduction if:o The spouse has the right to appoint the trust property to himself, his estate, his creditors, or his estates creditors any time either during his life or at death. A GPOA causes inclusion in the holder's taxable estate. As a result, the assets subject to the power get a step-up (or -down) in basis at the death of the holder. -Limited power of appointment: allows a person to the limited ability to decide who will receive property. The holder of the limited power of appointment can transfer property to anyone other than himself/ herself.
(ch.6)(SA) How is real property valued for purposes of the gross estate?
- Fair market value at date of death or alternate valuation date
- Real estate: appraisals
- Closely held business: valuation discounts (key person, minority, lack of marketability). -Publicly traded securities: average high/low on date of death or alternate valuation date
(ch.6)(SA) How are publicly traded common stocks valued in a decedent's gross estate, and how are they valued if the decedent dies over the weekend?
- Average high/low trading price day of death or using the alternate valuation date
- Weekend: average of the applicable values for the trading day before and after
(ch.6)(E) Describe the alternate valuation dates and how they are used
- Instead of valuation occurring at date of death, can do so Six months after date of death
- PR must make election by filing date of estate tax return (must be lower than gross estate and estate tax due)
- Applies to all assets in gross estate
(ch.6)(SA) List and explain 3 available deductions from a decedent's gross estate
- Funeral costs (burial, grave, transport)
- Last medical costs (cannot have been deducted from final income tax return)
- Administrative expenses (appraisals, payment of debts)
- Losses during administration
(ch.6)(SA) List and explain 3 valuation discounts
- Key Person: (reduction in FMV of transferred stock due to economic reality that value will decline if a key person, such as founder, dies)
- Minority: (reduction in FMV of transferred interest in property because the interest is not a controlling interest)
- Lack of Marketability: (reduction in FMV of transferred asset because the interest is more difficult to sell to the public)
(ch.8) (E) What is a trust, including the parties? Why are trusts used in estate planning? Who is the fiduciary and what are their legal duties/responsibilities?
- Structure that vests legal title to assets to trustee who manages those assets for the benefit of other beneficiaries of the trust
- Used for management of assets, flexibility in the operation of the estate plan
-trustee owns title to trust and is responsible for distribution
- Income beneficiary has right to current income or distributions, current right
- remainder beneficiary entitled to receive remaining assets on date of trust termination - A fiduciary, in estate planning terms, is a person who has a legal or ethical relationship with another person.
(ch,8)(SA) What is a spendthrift clause and why is it included in a trust?
- Clause in trust that voids beneficiary effort in anticipating distributions, assigning, pledging, or promising distributions from trust to anyone
- if made, void and not enforced - a provision in a trust that prevents creditors of any beneficiary from touching the assets as long as they remain in the trust. It basically disenfranchises creditors completely even in bankruptcy.
(ch.8)(SA) Describe the rule against perpetuities and its effect
- All interest in a trust must vest within the lives of beings + 21 years, some states 90
- used so grantor cannot make requirements that would remove the property from commerce, such as denying beneficiary right to sell property
(ch.8)(E) Describe a Crummy power and provision and its strategic importance
- Qualifies transfer to irrevocable trust as a present interest gift, qualifying for annual exclusion for gift tax purposes
- Gives beneficiary general power of appointment over transfers - allows withdraw right for certain period of time (30 days_
- Five-by-Five rule applied if beneficiary allows transfer right claims to lapse, taxes grantor for lapse amount unless between limits - Greater of (i)$5k, or (i)5% of transfer
(ch.8)(SA) What is a GRAT and the primary reason a GRAT would be used in estate planning?
- Grantor Retained Annuity Trust
- grantor funds trust and retains right to receive fixed percentage of initial contribution on annual basis for specific term of years
- when terms of trust terminate, remainder assets transferred to beneficiaries
- Useful for highly appreciating assets by removing them from the estate as long as grantor lives beyond its terms
(ch.8) (SA) Explain, in general, trust taxation (who pays) for a revocable trust and for an irrevocable trust
- Revocable: income taxed to grantor, full FMV included in gross estate
- Irrevocable: income taxed to beneficiaries if distributed, or taxed to trust if retained (not included in gross estate if title transfers more that 3 years before, no interest retained for 3 or more years) (gift taxed only in amounts that exceed annual exclusion)
(ch.8)(E) What is a special needs trust (SNT) and why might a SNT or special needs provisions in a trust be used?
- Benefits beneficiary with special needs - retains their right to federal/state support
- property never titled to them so not included as their asset, trustee distributes accordingly - to remainder beneficiaries after beneficiary death
(ch.8)(SA) What is the prudent investor rule?
- Trustee as fiduciary to act in the same manner as prudent person would act if benefiting self
- diversification of a portfolio and return on investment (make best efforts)
(ch.9)(SA) If ordinary property is contributed to a charitable organization, what is the maximum deductible amount?
(ch.9)(SA) List the factors a donee must consider when electing to decedent the adjusted basis of donated property as opposed to electing to deduct the FMV
(i)The donors current AGI and the projected AGI over the next 5 years - (ii)The FMV of the donated property - (iii)The adjusted basis of the donated property - (iv)The time value of money - (comparison on page 342)
(ch.9)(SA) If individual donates property with FMV of $750, what information must the donor provide the IRS
- Any donation made over $250 requires supporting documentation acknologing (i)Amount or description of property, (ii)Whether any goods/services were given in consideration, (iii)A good faith estimate of the value provided in consideration of the donation
(ch.9)(SA) If a charitable annuity pays the annuity to the donor, how is the value of the donor's charitable income tax deduction calculated (CRAT)
- Value of the property contributed less the present value of the annuity = charitable income tax deduction in the year of the transfer
(ch.9)(E) If an individual donates the underlying ownership interest of their personal residence to a charity, but retains the right to live in the residence for the remainder of their life, how is the donor's charitable deduction calculated?
(ch.10)(SA) What are the 3 requirements for a transfer of property to qualify for the unlimited marital deduction
-(i)Asset must be included in decedent's gross estate
-(ii)Property has to be transferred to surviving spouse
-(iii)Terminal interest rule applies. OR THIS, NOT SURE - Requirements for the unlimited martial deduction - Spouses must be married at date of death or gift - Citizen requirement
(ch.10)(E) Explain/define terminable interest rule and what are the exceptions to the terminable interest rule
- Marital deduction permitted only when dead spouse transfer to surviving is included in surviving gross estate
- Terminable interest only when property rights will terminate at some point (life estates, annuities, patents)
- Exceptions that will not qualify as a terminable interest: (i)Survival contingency of longer than 6 months, (ii)Spouse has general power of appointment, (iii)QTIP trust
(ch.10)(E) Identify the requirements necessary for a QTIP trust to qualify for the unlimited marital deduction
- (i)Property transferred must qualify for the unlimited marital deduction
-(ii)Spouse must be entitled to income for life on at least an annual basis
-(iii)Spouse must be able to compel trustee to sell/replace any non-income producing assets (because it's their gross estate)
- (iv) During spouses lifetime, no one can appoint property to anyone other than spouse
- (v)Executor must file an election on Form 706 return form
(ch.10)(SA) Describe how the portability of exemption works and its election
- Transfer unused dead spouse gift tax exemption amount to living spouse
- Must elect Deceased Spouse Unused Exemption Amount (DSUEA) timely according to Form 706
- remarried surviving spouse not entitled to accumulate DSUEA, limited to new spouse
(ch.10)(E) Explain how/when a family trust and a marital trust come into existence and why this strategy might be used
- Family (credit shelter/bypass) Trust: A bypass trust is created, either at death or during the grantor's life, to receive property with a fair market value equal to the decedent's remaining applicable estate tax credit equivalency. The bypass trust is created to ensure that an individual utilizes his full applicable estate tax credit at his death.
-Marital trust: everything remaining, applied to spouses dual annual exclusion
(ch.10)(SA) What is HEMS and how is it used?
- HEMS clause allows trustee to invade principal to distribute to spouse for health, education, maintenance, and support
- Remainder beneficiaries have to be given notice
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