Chapter 6 Flashcards

Question

What is the **Adjusted Gross Estate**?

Answer 1

The gross estate minus allowable deductions ## Footnote Allowable deductions include debts, funeral expenses, medical expenses, administrative expenses, and losses during estate administration.

Answer 2

* Allowable debts (such as mortgages) * Funeral expenses * Medical expenses * Administrative expenses * Losses during estate administration ## Footnote These deductions help determine the taxable estate.

Answer 3

A deduction that allows property passing to the spouse to be completely deducted from the adjusted gross estate ## Footnote It postpones the imposition of estate tax until the death of the surviving spouse.

Answer 4

FALSE ## Footnote There is no assurance that the surviving spouse will manage the estate assets wisely or leave them to the decedent's heirs.

Answer 5

* Value of property rights (power of appointment) * Partial interests in property * Charitable remainder trusts * Guaranteed annuity interests * Split gifts ## Footnote These factors can affect how the marital deduction is utilized.

Answer 6

A property right reserved by the donor that allows control over who receives the property or benefits from it ## Footnote This concept is important in estate planning.

Answer 7

A trust where a beneficiary receives income from the property, but the charity gets the property upon the beneficiary's death ## Footnote This arrangement benefits both the beneficiary and the charity.

Answer 8

Interests where the charity receives income for a specific term, then the property passes to a beneficiary ## Footnote This structure can provide income to charities while eventually benefiting individuals.

Answer 9

Partial gifts that go to a charity with the remainder going to a beneficiary ## Footnote This can be a strategic way to benefit both charitable organizations and heirs.

Answer 10

donated ## Footnote This raises questions about the creation of the estate.

Answer 11

They argue that individuals are attempting to replace property in which they no longer have an interest ## Footnote They believe the proper amount of insurance should reflect the needs generated by the reduced estate.

Answer 12

The insurance industry ## Footnote They claim it serves to benefit society at large and provides a valuable estate planning tool.

Answer 13

The size of the taxable estate ## Footnote The insurance policy needed to cover this expense is also influenced by the taxable estate size.

Answer 14

To cover the liabilities of a death at an uncertain date ## Footnote Many estate planning sales allow for the expectation of estate growth.

Answer 15

$8,724,400 ## Footnote This illustrates the potential for significant estate growth through high interest rates compounded over time.

Answer 16

Determining the appropriate time frame and interest rate assumptions ## Footnote Accurately predicting a potential estate value too far into the future is difficult.

Answer 17

* A reasonable rate of return commensurate with the average return on assets * Reflect the types of investments in the estate * Adjust to the age of the estate owner * Assume some investment income will be consumed ## Footnote These factors help in making realistic projections for estate growth.

Answer 18

FALSE ## Footnote Instead, the Canadian Income Tax Act treats a deceased taxpayer as having sold all capital property at fair market value immediately before death.

Answer 19

They are subject to tax on the terminal income tax return of the deceased ## Footnote This is due to the treatment of capital property under the Canadian Income Tax Act.

Answer 20

* Depreciable capital property * Non-depreciable capital property ## Footnote Depreciable capital property includes items like buildings, furniture, and machinery, while non-depreciable includes land, stock, and mutual funds.

Answer 21

adjusted cost basis ## Footnote The adjusted cost basis is essentially the original cost of the property.

Answer 22

50% ## Footnote This applies when the fair market value exceeds the adjusted cost basis.

Answer 23

$750,000 ## Footnote This exemption can shelter additional capital gains from tax.

Answer 24

recapture of capital cost allowance ## Footnote The recaptured depreciation is taxable as income on the terminal tax return.

Answer 25

$70,000 ## Footnote The home had a depreciated value of $30,000, leading to a taxable difference of $40,000.

Answer 26

FALSE ## Footnote Jointly held property passes without tax, similar to the spousal rollover option.

Answer 27

15% ## Footnote Donations above $200 qualify for a 29% tax credit.

Answer 28

* Tax benefit * Significant bequest for charitable foundations ## Footnote This strategy has gained attention due to Canadian legislation aimed at supporting charities.

Answer 29

* U.S. citizenship * Residency or domicile * Situs or location of estate assets ## Footnote These premises determine the applicability of the estate tax by the IRS.

Answer 30

Every decedent who is a citizen or resident of the United States ## Footnote Citizens are taxed on the value of their estate assets worldwide.

Answer 31

* Native-born citizens * Naturalized citizens * Citizens living abroad * Individuals with multiple citizenships including U.S. * Former citizens and expatriates ## Footnote Each category has specific implications for estate tax liability.

Answer 32

FALSE ## Footnote A U.S. citizen living abroad is liable for the estate tax regardless of their presence in the U.S.

Answer 33

It generates a decreasing proportional estate tax for ten years ## Footnote The tax owed decreases by 10% each year after renunciation.

Answer 34

death ## Footnote Domicile is acquired by living in the U.S. with no intention of leaving.

Answer 35

Living there for a brief period with no definite intention of leaving ## Footnote Mere residence without the intention to remain indefinitely does not constitute domicile.

Answer 36

* Physical presence * Intention to remain in the country ## Footnote Intention is often subject to subjective interpretation of circumstantial evidence in court.

Answer 37

* Application for a permanent resident visa or green card * Behavior indicating no intention to remain indefinitely ## Footnote Illegal immigrants may be subject to estate tax if they had no intention of leaving the country.

Answer 38

* Not buying a home or assets in the U.S. * Not setting up substantial banking and financial arrangements * Not remaining in the U.S. for regular, extended periods ## Footnote These behaviors indicate that their intention is not to remain in the U.S. indefinitely.

Answer 39

The part situated in the United States ## Footnote This applies even if the decedent has never visited the U.S. and has no residence there.

Answer 40

* Land * Homes * Tangible property * Corporate stock * Bank accounts ## Footnote Life insurance owned directly by a nonresident alien is excluded from the estate tax.

Answer 41

$60,000 ## Footnote Estate tax is due when a non-resident alien's estate transfers U.S. situs assets above this amount.

Answer 42

FALSE ## Footnote The charitable deduction applies only to U.S. charities.

Answer 43

There is no marital deduction ## Footnote If the spouse becomes a U.S. citizen before the estate tax return is filed, the deduction can be applied.

Answer 44

Foreign death tax credits ## Footnote These credits can help reduce the estate tax liability.

Answer 45

To help insure against the risk of double taxation on the same estate assets ## Footnote These treaties enable the use of foreign countries' death tax credits against the U.S. estate tax.

Answer 46

Income the decedent earned but did not receive before death ## Footnote An example is an uncashed commission check earned by the deceased.

Answer 47

* Uncollected salaries, wages, bonuses * Interest and dividends accrued but unpaid * Uncollected lottery winnings * Assets in deferred compensation benefits * Outstanding stock dividends * Accounts receivable of a cash basis sole proprietor * Rents and royalties accrued but not paid * Unreceived gain from the sale of property ## Footnote These items represent income that was earned but not received before death.

Answer 48

FALSE ## Footnote IRD is subject to both income tax and estate tax.

Answer 49

Up to 80-90% ## Footnote This significant depletion can occur for wealthy individuals subject to high levels of income and estate taxation.

Answer 50

IRD deduction ## Footnote This allows the beneficiary to deduct the portion of federal estate tax paid on the IRD.

Answer 51

Purchase life insurance ## Footnote A life insurance policy can provide funds that offset the tax implications of IRD.

Answer 52

70% of its value ## Footnote This loss occurs during the estate transfer process.

Answer 53

Buys life insurance for an irrevocable life insurance trust (ILIT) ## Footnote The ILIT distributes death benefits to heirs free of estate and income tax.

Answer 54

A tax problem ## Footnote IRD can be used to fund a life insurance policy that solves the problem and preserves the value of the inheritance.

Answer 55

TRUE ## Footnote This can create an enormous tax liability for the estate.

Answer 56

Provide a fund that can be loaned to the estate to pay estate taxes ## Footnote This helps manage the tax liability created by lottery payments.

Answer 57

A legal arrangement whereby property is held and managed for the welfare of a beneficiary ## Footnote Trusts provide an opportunity for competent asset management.

Answer 58

Provides an opportunity for competent asset management ## Footnote Trusts can also act as independent taxpayers, often paying taxes at a lower rate than the grantor.

Answer 59

Estate tax liabilities ## Footnote Trusts can reinforce the decedent's wishes regarding the distribution of income and assets.

Answer 60

Life insurance ## Footnote The internal value of a life insurance policy accumulates in a tax-free manner.

Answer 61

Can be made available before the death of the insured ## Footnote This provides liquidity and financial support to beneficiaries.

Answer 62

annual gift tax exclusion ## Footnote The annual gift tax exclusion was $17,000 in 2023, allowing limited cash contributions to the trust without federal gift tax.

Answer 63

The benefits will revert to his estate ## Footnote This is specified under the Internal Revenue Code, Sec. 2035(a)(I) and (2).

Answer 64

* Revocable trusts * Irrevocable trusts * Charitable trusts * Generation-skipping trusts * Dynasty trusts ## Footnote Each type of trust has distinct features and implications for estate planning.

Answer 65

estate tax savings ## Footnote The grantor remains liable for any income tax due on income generated within the trust.

Answer 66

It means the assets remain part of the estate ## Footnote This is because the grantor can undo the trust at any time before death.

Answer 67

* Select professional asset managers * Evaluate manager's performance * Enjoy gratitude of beneficiaries ## Footnote These advantages enhance the grantor's experience and oversight of the trust.

Answer 68

control ## Footnote This loss of control allows for significant tax savings and wealth shifting.

Answer 69

no incidents ## Footnote The grantor cannot change, undo, or manage trust assets once established.

Answer 70

* assets removed from the estate and put into the trust, reduce the size of the estate, and thus the estate tax * any appreciation in the trust asset happens outside the estate. This also helps reduce the ultimate size of the estate at death * income generated by the trust assets is taxed to the trust often at a lower rate than received by the grantor * the trust assets are not vulnerable to the grantors creditors

Answer 71

Family estate planning ## Footnote ILITs effectively remove the life policy from the estates of both the grantor and the beneficiary.

Answer 72

The spouse ## Footnote The spouse can benefit from the proceeds while living.

Answer 73

Loan money to the estate or purchase liquid assets ## Footnote This helps manage estate taxes effectively.

Answer 74

To the children ## Footnote This occurs without estate tax consequences.

Answer 75

They can exist indefinitely ## Footnote Charitable trusts serve the betterment of society and are not limited by the rule against perpetuities.

Answer 76

A class of beneficiaries ## Footnote For example, they can benefit all victims of Alzheimer's disease.

Answer 77

By shifting assets out of the estate ## Footnote This reduces the estate tax burden.

Answer 78

A trust that pays a percentage of assets to a non-charitable beneficiary over time ## Footnote Typical assets include property and stock with potential for large appreciation.

Answer 79

Avoids paying capital gains taxes on increasing asset value ## Footnote Assets are removed from the estate.

Answer 80

Heirs receive proceeds free of income or estate taxation ## Footnote The charity receives what is left in the CRT.

Answer 81

The fair market value of property or assets placed in the CRT ## Footnote This ensures proper valuation and benefit.

Answer 82

- what is the past history of giving? - what has been the amount of the annual contribution? - is the amount of annual premium, an unreasonable percentage of the individuals income?

Answer 83

* Costs of repeated estate tax payments * Generation-skipping transfer tax ## Footnote GSTs help in multi-generational financial planning by allowing assets to be passed to younger generations without incurring multiple estate taxes.

Answer 84

To create a private trust that can last indefinitely ## Footnote Dynasty trusts can bypass the rule against perpetuities, allowing for long-term asset management across generations.

Answer 85

FALSE ## Footnote GSTs are designed to avoid this tax, which discourages the distribution of estate assets beyond the next generation.

Answer 86

Assets are distributed to beneficiaries after 21 years ## Footnote This is in accordance with the rule against perpetuities.

Answer 87

* Purchase an insurance plan upon the life of the grantor * Fund the trust ## Footnote This insurance can act as a primary funding vehicle for the trust.

Answer 88

$17,000 per donee per year ## Footnote This amount can be transferred into the GST without incurring taxes.

Answer 89

They can be oversold and anti-selective ## Footnote This is particularly true for individuals with health impairments.

Answer 90

Use of estate assets by grandchildren and further generations ## Footnote This approach allows wealthy families to bypass middle generations in inheritance.

Answer 91

To restrict access to trust income or principal ## Footnote This helps prevent beneficiaries from becoming overly dependent on the trust.

Answer 92

To improve the quality of life of a person with special needs ## Footnote SNTs allow for additional financial support without risking disqualification from government benefits.

Answer 93

FALSE ## Footnote Benefits from a SNT will supplement but not replace the beneficiary's government benefits.

Answer 94

They are irrevocable ## Footnote Most creditors cannot access funds within irrevocable trusts.

Answer 95

* First-party (self-settled) SNT * Third-party SNT ## Footnote First-party trusts are funded with assets belonging to the beneficiary, while third-party trusts are funded by others.

Answer 96

The beneficiary must be under the age of 65 when the trust is created ## Footnote Other requirements include being irrevocable and providing for Medicaid reimbursement.

Answer 97

A type of ILIT established for the benefit of a grantor's spouse ## Footnote Allows spousal access to the life insurance policy's cash value while keeping the death benefit outside the taxable estate.

Answer 98

A trust contained in a last will and testament ## Footnote It provides for distribution of an individual's estate upon death.

Answer 99

person with special needs ## Footnote These trusts have specific requirements, including Medicaid reimbursement upon termination.

Answer 100

Maintains the policy's death benefit outside the taxable estate ## Footnote This allows for tax advantages while providing access to cash value.

Answer 101

* Inter vivos trusts * Testamentary trusts ## Footnote Inter vivos trusts are established during the lifetime of the trust creator, while testamentary trusts are created at death.

Answer 102

taxpayer ## Footnote These trusts pay income tax at a rate equivalent to the highest marginal rate applicable to individuals.

Answer 103

Trusts must normally distribute their assets within 21 years after creation ## Footnote This rule is similar to the U.S. rule against perpetuities, but trusts involving life insurance are exceptions.

Answer 104

* Spousal trusts * Alter ego and joint partner trusts ## Footnote Spousal trusts benefit a spouse and protect offspring, while alter ego and joint partner trusts are for individuals aged 65 or older.

Answer 105

Death benefits paid to a testamentary trust avoid probate fees ## Footnote This can be substantial in some provinces.

Answer 106

TRUE ## Footnote Testamentary trusts come into existence as a direct result of the death of the grantor.

Answer 107

Allow property to be placed in the trust tax-free for the benefit of a spouse ## Footnote It often protects offspring from a previous marriage and provides professional management of trust assets.

Answer 108

Exists between spouses, including common-law spouses and same-sex partners ## Footnote The grantor(s) receive income and capital disbursements for their lifetime(s).

Answer 109

Provides tax-free inside buildup and offsets capital gains liabilities ## Footnote Life insurance can also help pay tax obligations upon the death of the grantor(s).

Answer 110

To take advantage of favorable legal environments and investment opportunities in foreign countries ## Footnote Offshore trusts are often utilized by wealthy individuals.

Answer 111

* Tax havens * Non-recognition of foreign judgments * Avoidance or extension of the rule against perpetuities * Flexible investment options * Purchase of life insurance ## Footnote These advantages make offshore trusts appealing for asset protection and investment.

Answer 112

FALSE ## Footnote Offshore carriers are not subject to mainland regulations, allowing for lower costs and more flexible investment options.

Answer 113

* Venture capital funds * Hedge funds * Foreign securities * Patents * Real estate ## Footnote Offshore trusts can invest in assets not typically allowed under U.S. regulations.

Answer 114

Accumulation of cash value tax-free ## Footnote Life insurance can be purchased from domestic or offshore carriers.

Answer 115

* Customized investment options * Available only to accredited investors * Involves private offerings ## Footnote Private placement variable universal life (PPVUL) contracts offer investment opportunities not available to the general public.

Answer 116

* Individuals with investments of $5 million or more * Institutions with investments of $25 million or more ## Footnote Accredited investors can access private placement offerings under Sec.2(a)(51) of the 1940 Securities Act.

Answer 117

private placement sales ## Footnote These policies are developed by both domestic and offshore carriers.

Answer 118

Permanent Variable Universal Life ## Footnote PVUL provides attractive investment options for wealthy individuals and institutions.

Answer 119

* Elders * Individuals contributing property ## Footnote General partners are responsible for the daily management of the partnership.

Answer 120

* Liability protection against creditors * Assets shifted out of the estate of the grantor * Tax benefits from wealth and income shifting ## Footnote FLP partners enjoy similar protections as corporate stockholders.

Answer 121

* Funding vehicle for the FLP * Part of the buy-sell arrangement ## Footnote Buy-sell agreements can be used in FLP estate planning.

Answer 122

TRUE ## Footnote The aging baby boomer generation has contributed to this emerging market.

Answer 123

80 million ## Footnote This represents a significant increase from current figures.

Answer 124

1 in 8 in 1994; 1 in 5 by 2030 ## Footnote This indicates a growing elderly population.

Answer 125

12.8 million ## Footnote This group is expected to triple in size.

Answer 126

39 males for every 100 females ## Footnote This indicates a significant gender disparity in the elderly demographic.

Answer 127

Assumptions about motivation for insurance cannot be made ## Footnote Underwriters must consider anti-selection when reasons for purchasing life insurance are unclear.

Answer 128

* Estate transfer * Continuing income * Funds for final expenses * Stock repurchase * Management and protection of accumulated assets * Changing investments from growth to quality * Long term care needs ## Footnote These needs often drive the interest in insurance for elderly individuals.

Answer 129

Determining if the desired objective can be accomplished in the remaining normal life span ## Footnote This is crucial for justifying any insurance sale, especially for older insureds.

Answer 130

TRUE ## Footnote As the probability of death increases, the potential for anti-selection also increases.

Answer 131

It is attractive compared to other investment options ## Footnote However, life insurance should be part of a diversified financial strategy.

Answer 132

It can help plan for the payment of estate tax ## Footnote Anticipated estate growth for younger adults can justify larger insurance sales.

Answer 133

* Insurable interest * Indemnification for loss resulting from premature death ## Footnote These concepts are crucial for elderly parents and their children.

Answer 134

inheritance ## Footnote This applies where no inheritance would otherwise exist.

Answer 135

They may not apply appropriately ## Footnote Typical formulas for younger individuals may not be suitable for older ages.

Answer 136

Obtaining a loan to finance a life insurance policy ## Footnote Useful for individuals with substantial assets but little liquid cash.

Answer 137

* Investor-Owned Life Insurance (IOLI) * Stranger-Owned Life Insurance (STOLI) ## Footnote These plans involve purchasing insurance with the intent to sell it to investors without insurable interest.

Answer 138

Businesses that purchase life insurance policies for profit ## Footnote Often related to IOLI and STOLI plans.

Answer 139

To determine control and ultimate beneficiaries ## Footnote Insurable interest should not be presumed solely based on the existence of a trust.

Answer 140

The details of the planning process and financial plan ## Footnote Especially scrutinize purchases without prior insurance.

Answer 141

* Potential life span * Ability to pay premiums ## Footnote Medical problems can affect both lifespan and financial objectives.

Answer 142

Early lapsation of the policy ## Footnote This can occur if the insured cannot afford premiums due to health-related costs.

Answer 143

Replace assets lost due to estate transfer costs ## Footnote In the U.S., this loss occurs due to the estate tax; in Canada, capital gains and recapture of capital cost allowance reduce estate value.

Answer 144

Through buy-sell agreements or purchasing illiquid assets from an estate by a trust ## Footnote Life insurance proceeds can facilitate these transformations.

Answer 145

Increase assets through private placement insurance ## Footnote This contributes to the overall enhancement of the estate.

Answer 146

TRUE ## Footnote It is critical for addressing estate planning problems.

Answer 147

Proper implementation as a solution to estate planning problems ## Footnote This understanding ensures effective use of life insurance in estate planning.

Answer 148

* Assets managed on behalf of trust beneficiaries * No estate tax savings accrue to grantor * Grantor retains control over trust assets * Non-tax advantages include control and choice of trust manager ## Footnote Enjoyment grantor has in providing benefit while still living.

Answer 149

* Assets managed on behalf of trust beneficiaries * Assets removed from the estate of grantor * Grantor does not retain control over trust assets * Taxable appreciation happens outside estate of grantor * Income generated taxed to trust, not grantor * Trust assets not vulnerable to grantor's creditors ## Footnote This type of trust provides significant tax advantages.

Answer 150

* Type of irrevocable trust * Life insurance policy on grantor comprises trust asset * Policy & death benefit removed from estate of grantor and beneficiary * Beneficiary receives death benefit during lifetime * Can loan money to estate to pay estate taxes * Trust assets can be passed to children without tax consequences ## Footnote This trust helps in estate tax planning.

Answer 151

* Assets managed on behalf of charity * Life insurance policy can be made asset of trust * Not subject to Rule Against Perpetuities ## Footnote This type of trust benefits charitable organizations.

Answer 152

* Type of charitable trust * Percentage of trust assets paid out annually to non-charitable beneficiary * Life insurance can be purchased on life of grantor with trust's annual payments * Charity receives trust assets upon grantor's death ## Footnote Insurance proceeds given to non-charitable policy beneficiaries.

Answer 153

* Trust assets benefit grandchildren & later generations * Trust assets equal GST exemption amount * Can purchase life insurance contract on life of grantor * Insurance policy proceeds fund trust at death of grantor * Subject to Rule Against Perpetuities ## Footnote This trust is designed to skip generations for tax purposes.

Answer 154

Private trust not subject to Rule Against Perpetuities ## Footnote Can be funded like GST with exemption amount and can purchase & benefit from life insurance on trust grantor.

Answer 155

A type of irrevocable trust also referred to as supplemental needs trusts ## Footnote Can be funded by assets or income belonging to the special needs person or someone other than the special needs person.

Answer 156

Benefits received from trust do not replace beneficiary's government benefits ## Footnote Nor disqualify them for qualifying for such benefits.

Answer 157

A type of irrevocable trust that allows grantor control of assets for the heirs/beneficiaries of the trust ## Footnote Provides a way to access policy's cash value for a variety of supplemental needs.

Answer 158

A type of irrevocable trust contained in a last will & testament ## Footnote Comes into effect upon grantor's death, providing details of estate distribution.

Answer 159

TRUE ## Footnote Testamentary trusts do require probate court administration.

Chapter 6 Flashcards

(183 cards)