CFP Exam

Amount of tax on first million of gift tax after exceeding annual exclusion and lifetime exemption

345,800

Crummey trust

Gives beneficiary a temporary withdrawal right

2503(b) trust

Can go past age 21 but qualifies only the income interest

2503c trust

Trust qualifies the full gift but must distribute at 21

B Trust

(Bypass/Credit Shelter Trust): Funded up to decedent’s remaining exemption; spouse gets income + HEMS; No GPOA = excluded from spouse’s estate

A Trust

(Marital/GPOA Trust): Qualifies for marital deduction; spouse gets all income + GPOA; max flexibility

C trust

QTIP Trust: Assets exceeding B trust capacity, all income to spouse, remainder to decedent’s chosen beneficiaries

Ordering of Trusts

B trust first (preserves exemption), then C or A

Which trusts qualify for marital deduction

A & C

Which trusts are included in surviving spouses estate?

A & C

Which trusts can decedent fix remainder persons

B & C

Which trusts require income to surviving spouse?

A & C

Which trusts take advantage of decedent’s exclusion?

B

Section 303 Stock Redemption

Estate sells stock back to C-Corp at cap gains rates

Section 6166 Installment Payments

Estate tax on business interest paid over 14 years

Percentage of AGE that business makes up to qualify for 303 or 6166

More than 35%

What are the 6 incidents of ownership for life insurance

change beneficiary, surrender, assign, pledge, borrow, control payout

Consequence of having an incident ownership

Full death benefit included in gross estate

Gift of an existing policy

Interpolated terminal reserve (CV) + unearned premium

Un-holy trinity result

Owner makes a gift to the beneficiary at the insured’s death

Who owns the insurance policy in an ILIT?

ILIT

Who is beneficiary of insurance policy in an ILIT

ILIT

What happens if insured retains incident of ownership of policy in ILIT

DB is not excluded from GE

Liquidity of ILIT

Trustee MAY purchase estate assets or lend money to estate

What happens if you die within 3 years of transferring insurance policy

Full DB is pulled back into GE

Treatment of Appreciated Property to charity

Deduction at FMV, no capital gains tax and removed from estate

Treatment of Loss Property

FMV, capital loss is lost

Bargain Sale to Charity

Part sale, part gift, donation is FMV minus sell price, basis is basis * sale ratio

Common characterizes between Charitable Remainder Trusts

Irrevocable, income for life or up to 20 years, 10% remainder for charity

CRAT

Fixed payment locked at creation, have to use principal if market decline

CRUT

Fixed % of trust’s assets, revaluated every year, inflation hedge, more flexible

GRAT

Fixed annuity to grantor for a term, remainder to children/trust

GRUT

Fixed % of annually revalued assets to granter, inferior to GRAT because gives back more to grantor

QPRT

Transfers personal residence to irrevocable trust, grantor retains right to live there for a term

GRAT, GRUT, QPRT common characteristic

Grantor must survive trust term or assets are pulled back in GE

What kind of gifts qualify for universal charitable deduction & limit per person

cash gifts, 1k per person

Business Valuation Discounts Calculation

Multiplicative and can be applied to same interest, take inverse of each % 1 at a time

Two ways to transfer business property at discount

DLOM and DLOC

Family Limited Partnership

Consolidates assets, GP retains control and transfers LP interests at discount. Highly challenged by IRS (must have real business purpose)

Installment sale to family

Spread gain recognition over time, AFR required, future appreciation passes to buyer

SCIN

Note cancels at seller’s death, unpaid balance is not included in estate, requires mortality premium

Private annuity

UNsecured lifetime annuity, al lgain recognized upfront

Problem with SCIN and private annuity

Only worth it when expected to not survive long

How to calculate cross purchase agreement policy amount

N*(N-1)

Cross purchase agreement

Each owner owns a policy on everyone else

Factors of cross-purchase agreement (basis, premium, credit exposure)

Basis step-up, premium inequities for age and health, lower credit exposure

Entity redemption

Business buys one policy per person

Entity redemption factors (basis, premium, credit exposure)

No basis step up, no premium inequities because entity pays, higher credit exposure

Special use valuation for liquidity problems

Section 2032A and Section 6166

Section 2032A

Farm or business real estate to be valued at actual use not highest and best

Section 6166

Installment estate tax paymetns over 14 years

Percentage Minimums of 2032A

real + personal = 50% or more of GE, personal = 25% or more of GE

Percentage minimum of 6166

Business greater than 35%

What qualifies as a skip person

Lineal descendant 2+ generations below or unrelated person more than 37.5 years younger

When is a trust subject to GSTT

When all beneficiaries are skipped through the trust

Portability of GSTT exemption

Not portable

How to preserve first spouse’s GST exemption

Reverse QTIP election

How to maximize leverage with GSTT exemption?

Dynasty or long-duration trusts

IRD

Included in gross estate and taxed as income to recipient (Inherited IRA)

Disclaimers

Only work if disclaimer gets no beenfit and provides no direction at all

Key tools for unmarried partners

Wills, JTWROS, beneficiary designations, RLTs

Special Needs Trust

Preserves government benefits, distributions for qualify of life, NOT basic support

First Party Special Needs Trust

Beneficiary’s assets, Medicaid payback required

Third party Special Needs Trust

Funded not by beneficiary, no Medicaid payback

Gross-up Rule for Gifting

Gift taxes paid on gifts made within three years of death are included in gross estate

AVD Election

Value assets of estate at six months after the date of death

AVD Exception

Assets affected by mere lapse of time, like annuities and copyright remain at date of death value

Valuing assets with AVD election (after, during)

Assets not disposed of within 6 months are valued at AVD date, if sold during 6 month period use sale price

Community Property after death

One half of community property owned during marriage goes to probate

Ademption

When bequeathed property no longer exists in estate at time of testator’s death because sold, destroyed, or disposed of

Clauses commonly found in wills

Exordium, attestation, residuary

Amount of tax when past 1st million of gift tax → after exceeding annual exclusion and lifetime exemption

345,800 + 40% of excess

28% rule (front-end ratio)

Monthly housing costs / gross monthly income

36% rule (back-end ratio)

Monthly debt payments / gross monthly income

Holding period return

(Ending Value - Initial Value) + Income all divided by Initial Value

Correlation

Measures how asset prices move in relation to one another

Realized gain

Amount realized (total value received from sale + liabilities assumed - selling expenses) - adjusted cost basis (original purchase price of asset + capitalized improvements - depreciation, cost recoveries, reinvested dividends)

Court where taxpayer does not have to pay tax beforehand

Tax Court (no jury trial and specialized judges)

Vesting Schedules for DC Plans

No later than 3 year cliff or 6 year graded

Vesting Schedule for DB plans

No later than 5 year cliff or 7 year graded

Top heavy vesting schedule

6 year graded or 3 year cliff

Dual basis

Gain: Donor’s adjusted basis, Loss: FMV at time of gift, No gain and No Loss: if between FMV and donor’s basis

Catch up contribution

Age 50 and older of year you turn (extra 8k)

Super catch up

Age 60 through 63 (extra 11,250)

HSA catch up

Age 55 and older (1k more)

High earner catch up

If FICA wages from prior year exceed 150k, have to make Roth catch up

Chapter 7 Bankruptcy

Liquidation that eliminates unsecured debt like credit cards and medical bills

Chapter 13 Bankruptcy

Reorganization where you keep property and pay back debt through repayment plan

Out of pocket maximum

Every dollar you spend out of your own pocket including your annual deductible moves you closer to hitting your OOPM