Week 9 Class Notes - Test 2

Question 1

A testamentary trust is important for (1) and is (2). It may not actually (3). It can be doled out at (4).

Answer 1

1. young children
2. very common
3. come into effect (e.g., if children reach adulthood before the testator’s death)
4. any age (not just majority of the child–can be doled out much older if child is irresponsible)

Question 2

A pourover trust is a (1) in which the testatory gives (2) to a trust that is (3).

Answer 2

1. clause
2. residuary (though, does not have to be residuary–but usually is)
3. already established

Question 3

3 reasons for a trust (makes it worth the higher up-front cost)

Answer 3

1. avoid taxes
2. directs where assets go (how & to whom)
3. avoids probate (lower cost, less time, not public record)

Question 4

4 types of trust that avoid probate

Answer 4

1. revocable trust (intervivos, self as trustee + successor trustee, usually)
2. irrevocable trust
3. testamentary trust
4. irrevocable life insurance (ILIT)

Question 5

The (1) gets property out of the trustor’s name to avoid probate. You cannot be the (2) and (3) or else the title merges.

Answer 5

1. revocable trust
2. sole trustee
3. beneficiary

Question 6

An irrevocable trust helps avoid (1). The trustor cannot also be the (2). This trust requires the trustor to (3), and he cannot (4).

Answer 6

1. federal taxes
2. trustee (otherwise IRS will come after it)
3. lose control over the property
4. control the trustee

Question 7

A spendthrift avoids (1)–in other words, the beneficiary may not ask the trust to (2). The trustor cannot be (3). Interests such as (4), (5) and (6) may dip into trust. Creditors may not (7) to this trust–instead they must (8).

Answer 7

1. voluntary transfer of the beneficiary’s interest
2. pay creditors directly
3. the beneficiary
4. alimony
5. child support
6. necessities
7. attach accounts
8. wait and track the money paid to the beneficiary

Question 8

A sprinkling and spray trust is also called a (1). It gives the trustee (2) discretion on (3) and (4) to distribute the trust income. It is not good because beneficiaries can (5). It allows the trustee to decide what to do about (6) or (7). It also has a built-in (8).

Answer 8

1. discretionary trust
2. absolute
3. when
4. to whom
5. come after the trustee for favortism
6. undeserving beneficiaries
7. unforeseen circumstances
8. spendthrift clause

Question 9

Every individual is allowed an unlimited (1), which only goes to the (2). This deduction avoids (3).

Answer 9

1. marital deduction
2. first to die in a couple
3. estate tax

Question 10

3 rules to marital deduction

Answer 10

1. must be married at the time of death
2. property must be in the decedent’s estate at the time of death (does not include irrevocable trust or power of appt. of decedent - not in estate at death)
3. surviving spouse must be a citizen or become a citizen by the time federal tax estate is filed (3 years after death)

Question 11

If an estate is $6 million, marital deduction (NOT unlimited–for spouse who has already used it) is $5 mil, estate taxes 40%, what is the total taxes that come out of the estate?

Answer 11

$400,000 (6 mil - 5 mil = 1 mil taxed 40%)

Question 12

An AB Trust is also called a (1) or (2) trust, or a (3). It involves one trust up to the (4) for the spouse as (5), and the other is the (6) with the spouse having (7) and when she dies, the corpus goes to the (8).

Answer 12

1. bypass
2. shelter
3. marital deduction trust
4. marital deduction threshold
5. beneficiary (would be taxed without marital deduction, since spouse is trustee and bene)
6. remainder
7. right to use
8. beneficiaries/family

Question 13

A requirement/drawback of an AB trust is (!)

Answer 13

1. there can be nothing left in either’s name (involves 2 TRUSTS)

Question 14

3 “in a nutshell” things about the AB trust

Answer 14

1. Avoids ALL taxes (and that’s the purpose)
2. involves 2 trusts
3. Don’t use numbers! The thresholds may change!

Question 15

Trusts are subject to (1) and (2) tax. There is no (3) until termination of the trust and resulting lump sum paymnt, from which (4) is taken. So it’s good the get the corpus (5)

Answer 15

1. income
2. interest
3. estate tax
4. federal estate tax
5. as low as possible

Question 16

A qualified terminable interest trust (QTIP) allows the decedent to transfer the entire (1) of the trust to somone besides the spouse but gives the spouse all the (2) from the trust for (3)–in other words, the spouse gets the (4). The trust must be (5)

Answer 16

1. principal
2. income
3. life
4. usufruct (right to enjoy)
5. declared as a QTIp

Question 17

An irrevocable life insurance trust (ILIT) avoids (1). One cannot be the (2) of their own ILIT, which transfers (3) and (4) of the life insurance to a trustee. These are often set up to pay the (5) of the (6). There is no corpus until the (7).

Answer 17

1. life insurance tax
2. trustee
3. control
4. ownership
5. expenses
6. beneficiary
7. death/payout of the life insurance

Question 18

A Crummey Trust avoids (1) and is also a meanns of (2). It takes advantage of the (3), which is (4) per beneficiary per year. This exemption can be used in conjuntion with the total $5.4 million exemption–this is called a (5). The recipient must have a (6) in the gift–the child may take (7) from the trust but must do so within (8) or else the chance is forfeited.

Answer 18

1. taxes
2. estate planning
3. yearly gift tax exemption
4. $14,000
5. unified tax exemption
6. present interest
7. immediately
8. 30 days