Marital Deduction

Question 1

Marital Deduction Requirements

Answer 1

• the property must be transferred solely to the donor’s legal spouse
• the spouse must be a US Citizen (or the transfer must be to a QDOT)
• the transfer must vest full title, enjoyment, and control in the spouse - in other words, virtual outright ownership

Question 2

Life Estates

Answer 2

• does not qualify for the marital deduction
• the gift is considered a taxable gift
• since the life estate does not qualify for the estate tax marital deduction, the value of the testamentary bequest will be subject to estate tax in the decedent’s gross estate and will not be taxed again in the surviving spouses estate at the time of this or her later death.

Question 3

Power-of-Appointment Trust (marital or “A” trust)

Answer 3

• grants the surviving spouse to dispose of trust corpus
• allows the surviving spouse to direct disposition of the corpus to any beneficiary, including the surviving spouse, his or her estate, or creditors of his or her estate.
• the surviving spouse must be entitled to all income generated by the trust assets at least annually, no accumulation is allows, thus it is a simple trust
• the surviving spouse must be granted a general power of appointment

Question 4

Estate Trust

Answer 4

• does not require income to be distributed annually
• the surviving spouse has no right to demand distributions, as under a power of appointment or under a “5-and-5 power”
• at the death of the surviving spouse, the principal and accumulated income in the trust must be paid to the surviving spouse’s estate
• can be used to hold non-income producing assets

Question 5

Terminable Interests

Answer 5

• an interest in a property that will end or fail by reason of lapse of time or due to an occurrence of a specified event
• do not qualify for the marital deduction

Question 6

Qualified Income Interest

Answer 6

• the donee spouse must be entitled to receive all the income from the property
• income must be paid at least annually
• no one may be given a power to appoint any portion of the property to any person other than the surviving spouse
• the value of the property is taxable in the surviving spouse’s gross estate for federal estate tax purposes at the death of the surviving spouse.

Question 7

Qualified Domestic Trust (QDOT)

Question 8

Income Tax Deduction and Public Charities

Answer 8

-for gifts to public charities a taxpayers income tax deduction is limited to 50% of the taxpayers AGI

Question 9

Deductions with Private Charities

Answer 9

-for gifts to private foundations or private charities, the taxpayers income tax deduction is limited to the lesser of 30% of AGI or 50% of AGI minus the deduction taken for gifts to public charities.

Question 10

Private Foundation

Answer 10

• tax exempt bu are subject to a 2% excise tax on investment income
• must distribute its investment income by the end of the year following the year in which the income is earned
• amount of distributions must be at least 5% of the assets, failure to do so could result in a 15% tax on the income.
• cannot hold more than 20% of the stock of a private corporation.

Question 11

Charitable Remainder Annuity Trust (CRAT)

Answer 11

• established by transferring money and/or securities to a trust that will provide an annual income stream to a noncharitable beneficiary
• the beneficiary may receive this income for a period not to exceed 20 years
• the annuity payable to the noncharitable beneficiary must provide for an annual payment of at least 5% of the initial value of the property placed in trust, and the trust payment can be made from income or principal.

Question 12

Charitable Remainder Unitrust (CRUT)

Answer 12

• income payments must be at least 5% of the annual value of the trust property
• payments will vary with changes in the value of the trust portfolio
• principal may be invaded, but it is not requirements

Question 13

50% Rule

Answer 13

• for a CRAT, the annuity payment for any year cannot be greater than 50% of the initial market value of the trust assets
• For a CRUT, the percentage of assets required to be distributed annually cannot be greater than 50%

Question 14

10% Rule

Answer 14

-the value of any remainder interest that goes to charity under a CRAT or CRUT must be at least 10% of the net fair market value of the assets on the date they are contributed to the trust.

Question 15

Comparison of CRATs and CRUTs

Answer 15

• the annuity trust is easier to administer since you do not have to revalue the annuity trust each year to determine the annuity payment.
• for both, the donor may take a charitable deduction equal to the present value of the remainder interest passing to the charity in the future.
• a larger current income tax deduction may be provided by the annuity trust
• a potential disadvantage of the annuity trust is that an unfavorable invasion of the trust principal may occur if the fixed annuity payments are greater than the trust income.
• additional assets cannot be added to the annuity trust, whereas assets may be added to the unit trust
• they both can invest in tax exempt securities

Question 16

Pooled Income Fund

Answer 16

• the fund is created by a public charity
• the donor transfers property to the charitable organization, and the property is then commingled in the trust with the property transferred by other donors.
• a lifetime interest must be retained by the noncharitable beneficiary and the payment is a pro rata share of the trust income
• principal may not be invaded to make up any deficiency
• pooled income fund cannot invest in tax exempt securities

Question 17

NOTE

Answer 17

-if the income beneficiary is anyone other than the donor then gift tax may apply

Question 18

Gifting a remainder interest to charity

Answer 18

• the taxpayer gives the property to the charity but retains a lifetime right of occupancy for themselves, their spouse, and/or another third party noncharitable beneficiary
• the value of the allowable income tax deduction at the time of the gift is the FMV of the residence or farm, which is reduced by an actuarial discount since the gift is postponed.
• the gift is not eligible for the gift tax annual exlusion but is eligible for the gift tax unlimited charitable deduction because it is a future interest gift.

Question 19

Charitable Lead Trust (CLATs and CLUTs)

Answer 19

• the donor gives away an income stream and receives a remainder interest
• the donor places income producing assets in the trust and directs that the trust income be transferred to a designated charity for a period of time or for the life or lives of the designated individuals
• it is a grantor trust, and thus the annual income is taxable to the donor
• the benefit is a large income tax deduction in the year that the trust is funded because the value of the deduction is the present value of the total anticipated income during the lead period, when the charity receives the income.
• the same 5% rules apply as for the CRUT and CRAT

Question 20

Charitable Gift Annuity

Answer 20

• charitable organizations offer donors the opportunity to buy annuities from a charity and make a charitable gift at the same time
• it is a fixed annuity
• the donor will often pay more than the value of the annuity, so there is a charitable contribution, as well as the purchase of an annuity

Question 21

Bargain Sale

Answer 21

• long-term capital gain property is sold to a charity at a price that is less than its FMV
• the result is a sale resulting in a recognized capital gain, and a gift to the charity that may be deductible as an itemized deduction on schedule A

Question 22

Wealth Replacement Trust

Answer 22

• a funded or unfunded life insurance trust, usually with crummey powers that provide death benefits to the grantors family or other heirs.
• the death proceeds will, in effect, replace the value of the property given to charity, so the donor’s family will receive an inheritance, free of income, estate and gift taxes.

Question 23

Donor Advised Fund

Answer 23

• provides the taxpayer with the up-front charitable deduction and the ability to spread charitable gifts over many years and over several different charities
• administration is usually less than that of a private foundation