Trust Drafting - chapters 3 and 4

Today we're dealing with transfer tax. Transfer tax refers to which type of taxes (choose one that applies)? [[estate tax]] [[income tax]] [[sales tax]] [[gift tax]]

[[Correct!|Start2]]

Incorrect. Income tax is not generally considered a type of transfer tax. [[continue|Start2]]

Nope. Transfer tax taxes the transfer of assets without consideration. [[continue|Start2]]

[[Very good!|Start2]]

Gift Tax and Estate tax constitute the types of transfer taxes that we're dealing with in chapters 3 and 4. Would you like to start with [[Gift Taxation]] or [[Estate Taxation]]?

Okay, no problem. Our client is worried that every time she buys her grandson a Christmas present for a few hundred dollars, she has to worry about gift tax. [[Yup. The Government is annoying in that way.]] [[Don't worry about it. That's not the case.]]

Estate taxation it is. The amount of estate tax applicable to an estate is based on the amount... [[subject to probate]] [[in the grantor's name alone]] [[in the grantor's gross estate]]

That is [[incorrect|Don't worry about it. That's not the case.]]

Why don't we have to worry about such small gifts? [[They're covered by the annual exclusion]] [[They're covered by the unified credit]] [[Gifts to grandchildren are not taxable]]

Correct! The annual exclusion covers the first $14,000 (as of 2015) of a gift and makes it not subject to gift tax. [[Continue|Gift2]]

The unified credit is associated with the lifetime exclusion amount and doesn't have to be worried about for such small gifts. [[try again|Don't worry about it. That's not the case.]]

Unfortunately, they are. [[try again|Don't worry about it. That's not the case.]]

Okay. The annual exclusion is $14,000. Doug gives his daughter, Sarah, a car worth $20,000. Does that mean it will be subject to gift tax? [[yes]] [[no]] [[probably not]]

There's a better answer. [[try again|Gift2]]

Correct! [[Whether the gift is supported by consideration]] [[The extent to which Doug has already given other taxable gifts]]

Huh?? Gifts are, by definition, not supported by consideration. [[pay attention|probably not]]

Correct. What about does Doug have to have previously gifted for the gift of the car to be taxable? [[$1,000,000 over-all]] [[$1,000,000 in taxable gifts]] [[$5,430,000 (as of 2015) over-all]] [[$5,430,000 (as of 2015) in taxable gifts]]

Incorrect. [[try again|The extent to which Doug has already given other taxable gifts]]

This used to be the rule. But in 2013, the gift and estate tax we brought in sync in terms of their lifetime exclusions. [[try again|The extent to which Doug has already given other taxable gifts]]

Incorrect. [[try again|The extent to which Doug has already given other taxable gifts]]

Correct! Doug must have used up all of his unified credit (lifetime exemption) for the gift to be taxable. [[continue|Gift3]]

Can Doug give a gift to a trust instead of directly to his children? [[yes, but then there's no benefit of the lifetime unified credit]] [[yes, but then there's no benefit of the annual exclusion]] [[yes, and there is a way to maintain the annual exclusion]] [[yes, and it automatically gets the benefit of the annual exclusion]]

Incorrect. A gift to a trust is subject to the lifetime exemption. [[try again|Gift3]]

There can be. [[try again|Gift3]]

Correct! Why wouldn't a gift to a trust normally get the annual exclusion? [[it's not considered a gift without consideration]] [[it's not a gift of a present interest]] [[it's considered an income shifting strategy]]

Nope. [[try again|Gift3]]

Sure it is. The trust is not paying value for the gift. [[try again|yes, and there is a way to maintain the annual exclusion]]

Correct! [[continue|Gift4]]

That doesn't affect the annual exclusion. [[try again|yes, and there is a way to maintain the annual exclusion]]

So, how to we take care of that problem? [[Give the grantor power to revoke]] [[give the trustee power to terminate the trust]] [[give the beneficiary the power to withdraw the contribution]]

That would make it an incomplete gift and would ruin many purposes of a trust. [[try again|Gift4]]

Sorry, that wouldn't make the gift a present interest. [[try again|Gift4]]

Correct. This is a "Crummey" right of withdrawal [[continue|Gift5]]

Excellent job on getting to this point. If you haven't yet done [[Estate Taxation]] please do so now. If you've already done the [[Estate Taxation]] section, [[continue|Combined1]]

Lucy wants to give lots of money to her husband Ricky (say, $20,000,000). Will there be any estate or gift tax issue? [[Of course. Gifts between spouses are not exempt from transfer tax]] [[Don't worry about it. It's exempt.]] [[Tell me, is Ricky a US citizen?]]

Nope. It's broader than that. [[try again|Estate Taxation]]

Correct. The gross estate is what is subject to estate tax. [[continue|Estate1]]

The gross estate includes all of the following EXCEPT... [[money in a payable on death account funded by the deceased]] [[money in the deceased's 401(k) account]] [[life insurance on the deceased's life when the policy is owned by the deceased]] [[life insurance on the deceased's life when the policy is owned by another party]] [[a joint account with another person funded by the deceased]]

Incorrect. That's part of the deceased's gross taxable estate. [[try again|Estate1]]

Correct!! [[continue|Estate2]]

Incorrect. That's part of the deceased's gross taxable estate. [[try again|Estate1]]

We want to make sure that a transfer to a trust is outside of the grantor's taxable estate. However, the grantor wants some control over the assets. Which retained right is most likely to be safe in that the trust assets will probably be outside of the estate when the grantor dies? [[The right to determine who among the grantor's children gets the money]] [[the right to get the trust income for the next 5 years]] [[the right to get part of the trust income for life]] [[the right to revoke the trust if the trustee agrees]]

No. Under 2038, that would bring the trust assets back into the grantor's estate. [[try again|Estate2]]

Correct!! What does the grantor have to do to ensure that the assets are outside of his estate? [[survive the 5 years]] [[renounce the right to the income]]

An interest in the trust for life keeps the whole trust in the grantor's estate under Section 2036. [[try again|Estate2]]

Nope. Even a power to revoke conditional on someone else's approval would probably keep the assets in the grantor's estate under Section 2038. [[try again|Estate2]]

Correct! Once the 5 years are up and the interest expires, the trust assets are no longer in the grantor's estate. [[continue|Estate3]]

This is unnecessary. All the grantor needs to do is [[survive the 5 years]]

Lucy gives money to a trust and relinquishes all power over the assets except that she may determine what happens to the money on her death and she may only then give it to and among her children. [[She has not retained any significant interest in the assets]] [[She has retained a general power of appointment.]] [[She has retained a limited power of appointment.]]

Incorrect. [[try again|Estate3]]

Nope. [[try again|Estate3]]

Yes, this is a limited power of appointment. [[continue|Estate4]]

Is this retention of a limited power of appointment of any significance? [[not really]] [[You bet! It keeps the assets in Lucy's taxable estate!]]

[[You bet! It keeps the assets in Lucy's taxable estate!]]

That is correct. If the grantor retains any power over the distribution of the assets, even by limited testamentary power of appointment, the assets are brought back into her estate under Section 2038. [[continue|Estate5]]

Excellent job on getting to this point. If you haven't yet done [[Gift Taxation]] please do so now. If you've already done the [[Gift Taxation]] section, [[continue|Combined1]]

Ummm. Yes, they are. [[try again|Combined1]]

There's a better answer. Or should I say, question? [[try again|Combined1]]

Good question! [[continue|Combined2]]

Let's say Ricky's not a US citizen, can we still get an unlimited marital deduction? [[Yes, with a marital trust.]] [[Yes, with a Qualified Domestic Trust]] [[Sorry, no can do.]]

A marital trust doesn't take care of the problem of the spouse not being a US citizen. [[try again|Combined2]]

Bingo! A transfer to QDOT qualifies for the marital deduction. [[continue|Combined3]]

Chant it with me... YES WE CAN! [[try again|Combined2]]

Let's assume that Ricky is a US citizen. Lucy doesn't want to give him the money directly. What can she do and still take advantage of the marital deduction? [[give it to another person outright to hold for Ricky]] [[put it in a marital trust for Ricky]]

That certainly won't allow the marital deduction. [[try again|Combined3]]

Yes! [[continue|Combined4]]

What power does Ricky NOT need to have to retain the marital trust's QTIP status? [[the ability to appoint the trust assets upon his death]] [[the power to demand trust income]] [[the power to demand that trust assets be used to produce income]] [[the fact that nobody else can benefit from the trust during Ricky's lifetime]]

Correct! This is not a power necessary to preserve a QTIP. [[continue|Combined6]]

Nope. This is necessary to retain QTIP status. [[try again|Combined4]]

Beautifully done! You've completed this Chapters 3-4 exercise. We'll see you next time for Chapter 5. THE END The interaction credit code for this exercise is: positron