Financial planning is the acquisition and employment of assets in order to maximize the return on these assets through (1) establishing financial planning objectives, (2) development of financial plans by which these objectives can be achieved, (3) establishing a budget by which funds can be allocated to the purchase of the financial assets, and (4) review, and if necessary, revise the financial plan to make certain that progress is being made toward the achievement of the planning objectives.
A complete discussion of financial planning is beyond the scope of this text – it is a profession and many texts are available on just financial planning. However, life insurance plays an important role in financial and estate planning and needs to be discussed in this context.
In fact, life insurance plays the most important part of the establishment of financial planning objectives. The goals of the financial plan would include the following:
In the determination of a financial and/or estate plan, the “risks” involved in attempting to achieve the objectives must be carefully considered. In this sense, life insurance becomes a tool for risk management, as does property and casualty insurance for risk management of property because life insurance guarantees that an individual’s family and dependents or business, will not have to suffer the risk of financial loss in case of premature death of the individual.
In accumulating wealth, the savings element of life insurance is an important tool in risk management. The costs of education continues to climb, and a premature death without insurance can cause a dependent child to lose the advantage of a college education, or the privilage of attending the college of their choice.
In order to enjoy retirement, life insurance now offers a wide variety of fixed-value and variable investments which can assist in building up the retirement fund. After retirement, fixed or variable policies can provide tax-deferred investments not available in other investments.
Because of the tax deferral privileges of life insurance, taxes are minimized. More than just being a vehicle that pays a sum in case of premature death, life insurance is purchased usually for one (or more) of the following reasons:
Basically, financial objectives are either cash objectives, or income objectives.
It is relatively easy to determine cash objectives. Basically, they are the need to pay for outstanding obligations, such as mortgage, auto payment, credit card debts, etc., and the information on these amounts are readily available. Educational funds are a little more difficult, but assuming a rate of growth of tuition and other college costs, an approximation can be reached. Final expenses can be more easily estimated.
This can be very technical and difficult, even though the best that can be expected is an approximation. First it must be determined how much money will be needed for the survivors, taking into consideration all sources of income, such as government or employee benefits. The changing of family responsibilities that naturally occur as the family ages, must be considered. Inflation, while quite low at this particular time, can create havoc with a financial plan that does not take it into consideration.
The methodology used for life insurance planning is quite technical, although the purposes are straight-forward. The net income amounts are usually converted to a single-sum present value equivalent, taking into consideration the future interest growth. While the planning process is simple in concept, the assumptions that must be used to calculate future inflation and interest rates make the analysis quite complex and the technique is (way) beyond the scope of this text.
The complexity of these determinations has created a market for computer programs and because there are so many assumptions that must be made, the computer programs help with the “number-crunching”, and also it is a valuable tool for analyzing different scenarios. With the need to revise plans (particularly because of the new tax laws) periodic revisions can be more easily accomplished.
Estate planning is concerned with the distribution of property at death, but it must be considered as an important part of the overall financial planning procedure. Life insurance plays an important part of estate planning as it can provide the necessary cash to pay estate tax and any other liabilities, and also fund the income needs of surviving family members. Life insurance is the primary asset of many estates, and consequently is a major source of family income after an estate owner dies.
Simply put, all property owned by an individual will pass to another at death - the method as to how it will pass is what makes the difference.
Probate is the most important method of passing property for individuals. Probate is the process of a court by which the Will of an individual is presented to the court, who then appoints someone to administer the affairs of the estate in accordance with a Will. If there is no Will, the property will pass to court or state law-stipulated persons.
Property can pass because of the nature of the ownership, such as “joint tenancy with right of survivorship” would dictate that upon the death of one of the owners, the property would transfer to the other owner.
Property can pass by contract, and if contracts are established prior to death that call for payments at or after death, the property will pass outside the probate estate. Certain Trusts and life insurance contracts are the best known of these contracts.
By law, certain property can pass outside of probate, such as Social Security survivor benefits.
Wills are extremely important for estate and financial planning. A Will is a legal declaration of an individual’s desires as to the disposition of their property on their death. Certain salient points should be considered in any discussion of Wills.
A Will should not be confused with “Living Wills” which are legal instruments which state the individual’s desired as to the use of life-sustaining measures in case of terminal illness or serious incapacitation.
A description of all types and applications of trusts is outside the scope of this text, but there are certain trusts that are common in estate planning, and a knowledge of how these trusts apply is important in determining the value of life insurance in these areas.
When a living person creates the trust and transfers property to it, the trust is an inter vivos trust. Conversely, a trust created at death through a Will, is called a testamentary trust.
A living trust (inter vivos) can be either revocable or irrevocable. With a revocable trust, the grantor (the person creating the trust) can change or terminate a trust whenever they wish. This is used, for example, to transfer property directly to beneficiaries outside of the probate estate. There is no income, estate or gift tax savings with a revocable trust.
With an irrevocable trust, the grantor gives up all rights of ownership or control over the trust. While there can be a gift-taxable event using this type of trust, there could be income and estate savings applicable to the property or cash.
The marital deduction of the Internal Revenue Code (IRC) provides for an unlimited deduction for property left to the surviving spouse, therefore everything can be left to the surviving spouse and there would be no estate tax. However, upon the death of the surviving spouse, the estate may be larger and more estate taxes may be due.
The actual creation of a marital trust may be unnecessary, however it can be used for investment management and administration purposes.
Qualified Terminable Interest Property trust (QTIP)
A property interest will usually not qualify for the marital deduction unless it is included in the surviving spouse’s gross estate and certain terminable interest property passing to a surviving spouse does not qualify for the marital deduction. However the QTIP trust can qualify for the marital deduction.
The QTIP trust allows a decedent to provide for the surviving spouse during his/her lifetime, but at the same time, it allows for the decedent to direct the transfer of property to others without loss of the marital deduction. The main purpose of the QTIP trust is usually used to make sure that if, after the death of the first spouse, the surviving spouse’s remarriage will not result in the children of the first marriage receiving nothing from the estate.
A trust that is used for property that is not left to the surviving spouse in a QTIP trust, or not used for other bequests, taxes or expenses, is put into a second trust, a bypass trust) also known as a Credit Shelter trust, Nonmarital trust or Residuary trust). Frequently, the surviving spouse has the right to the income for life from the bypass trust. This allows the surviving spouse to use the decedent’s property during his/her lifetime, without having the residual trust included in that spouse’s estate for federal estate tax purposes.
A trust for periodic payments for the children’s education or other such use when they are old enough to handle the responsibility of the fund, is often used. Previously, the point was made that the annual exclusion is available only for gifts of present interest. Therefore, the annual exclusion would not be available for a gift for a minor in trust if the funds were not available to the minor. This can be overcome using a Section 2503(c) trust which requires that the trustee has the discretion to distribute both principal and income; the beneficiaries are entitled to receive the principal of the trust when they reach age 21; and if any of the beneficiaries die before age 21, the child’s share of the assets would pass through to his/her estate. By using this trust, the $10,000 annual gift exclusion can be used and income can be accumulated until the child reaches age 21.
With this type of a trust, gifts of life insurance policies in trust for minors should qualify as being of present interest if any policy value is used for their benefit. If the ownership of the policy vests at age 21, the policy value or proceeds would be included in the gross estate of the child if the child were to die prior to age 21.
Another way to make these gifts is to take advantage of the Uniform Transfers to Minors Act, wherein an adult is named custodian for the minor child and manages the property, and distributes the property to the minor at age 21 (or 18, depending upon state law).
The Crummy trust (named after the first person to successfully use this trust) allows the annual exclusion to be available for gifts made to such a trust, provided the beneficiary(s) have a reasonable opportunity to demand distribution of the amounts contributed to the trust. The grantor makes a gift to the Crummey Trust, which is an irrevocable, living trust, and usually the beneficiaries are the grantor’s children or grandchildren. The beneficiary(s) are notified when property has been transferred to the trust, and they are also notified that they have a period of time (such as 60 or 90 days) to withdraw some portion of the transferred property. The fact that the beneficiary(s) has been given notice of the right to withdraw property at the same time that the property is transferred to the trust, is in effect, giving the property to the beneficiary(s) outright, and thus, qualifying for the $10,000 annual exclusion.
Rarely, if ever, will the beneficiary(s) withdraw any funds, and after a short period (stated in the trust) of time, the beneficiary(s) powers lapse. According to law, a lapse will not be treated as a taxable gift from each beneficiary to all other beneficiaries, provided the amount is $5,000 or less.
The value of a life insurance policy for gift tax purposes, is the interpolated terminal reserve (definitely an actuarial calculation) plus any unearned premium, instead of the policy face amount, making it a very popular method of saving taxes. (What this means is that the reserves plus unearned premium is less than the face amount). Under the Irrevocable Life Insurance Trust (ILIT), an insurance policy on the life of the grantor is owned by the irrevocable living trust. If the grantor lives for more than 3 years after the trust has been established (so that “anticipation of death” is not considered), since all incidents of ownership are relinquished, the policy proceeds would not be part of the grantor’s taxable estate.
If the policy was purchased by the trustee and at the discretion of the trustee, the three-year waiting period is not required. The premiums are paid by the trustee either from the trust funds, or directly from the grantor.
By using this trust, death proceeds can be invested or distributed to trust beneficiaries by methods not available under life insurance settlement options, therefore the proceeds are usually paid in a lump sum and the trustee is responsible for the disbursement of the proceeds according to requirements established by the grantor prior to his death.
Also, by using a life insurance trust instead of a gift of life insurance outright, the $10,000 annual exclusion can be made for the policy, as well as for premiums paid on the policy by the donor. However, if the policy has been assigned to the trust, or when the premiums are paid on policies in the trust, the $10,000 annual exclusion may not be available unless a Crummey provision is part of the trust agreement. Therefore, the gift of a policy in trust and future premium payments can be fully taxable gifts that are later added back to estate for estate tax purposes. There is no income tax savings if the policy insured either the donor or his/her spouse.
A Charitable Remainder Trust (CRT) is a living and irrevocable, tax-exempt trust whereby the donor gives property to a charity, but reserves an income stream from the trust to himself (or someone else), with the residual trust amount (trust corpus), also called remainder interest, passed to a charity. The CRT is an excellent method of helping a charity and at the same time, save on transfer taxes.
There are two types of CRT’s. The charitable remainder annuity trust (CRAT), pays a fixed amount to the income beneficiary at least annually. The amount is not changed during the lifetime of the trust and no additional assets may be contributed to a CRAT.
The charitable remainder unitrust (CRUT) pays a certain, fixed percentage of the fair market value of its assets to the income beneficiary, minimum annually. The assets of the trust are valued each year, so the income will vary accordingly. Additional contributions can be made to a CRUT.
CONSUMER APPLICATION
Ozzie wants to leave most of his assets to his church, Wesley Methodist, but he needs money to live on so he does not want to make a charitable contribution to the church at this time. Therefore, he establishes a charitable remainder trust, with Wesley as the beneficiary, but Ozzie would get income from the corpus each year. Ozzie has other assets tied to the stock market, so he has income the is pretty much inflation-free. Therefore, he elects a CRAT which would pay him a steady income, regardless of the market.
Since, under a CRT, the grantor gives up the ownership and control of the property that is transferred to the CRT, while the CRT saves estate taxes, the heirs lose the value of the property, which is a disadvantage to many. Therefore, by establishing an irrevocable life insurance trust, with death benefits approximately equal to the value of the property that is transferred to the CRT, this problem can be solved. The premiums for the policy should be considerably below the income from the trust. If it is “structured” properly, the death benefits proceeds will not be included in the grantor’s gross estate.
It is interesting to review various approaches used by financial and estate planners since the law was enacted. It is quite evident that there has been a lot of thought gone into any recommendations as to how to approach estate planning by building on what has worked in the past, and still plan for more fluidity that was ever necessary before. Using a family trust seems to be a “given” but with certain peculiarities to apply for different situations as they arise.
The trusts should be “grantor” trusts (where an individual places their own assets into the trust) and therefore any trust tax would not be applicable, or at the least, neutral.
The trust should be set up so that it has a bypass provision (i.e. a trust which removes the assets from a surviving spouse’s estate, thereby excluding such assets from Federal Estate Tax upon the death or the surviving spouse). In effect, when the first spouse dies, the trustee can set up a new, irrevocable trust funded by either the decedent’s assets, or a sum of money that equals the assets. These assets would then be exempt from estate taxes and a step-up in basis, up to whatever the maximum is in the year that the deceased spouse dies. If this date is prior to 2010, there would be no federal estate taxes, and the step-up basis would be limited to $1.3 million. After 2010 there would be no federal estate taxes (assuming the law remains basically the same) and the step-up basis would also be at $1.3 million. In either event, there would be state death taxes in some amount, probably.
The trust should probably also have a Qualified Terminable Interest Property Trust (Q-TIP) (also called a “C” Trust) provision, which would allows the trustee to set up a new irrevocable trust to hold all, or some, of the decedent’s assets and these assets would not be included in the decedent’s taxable estate, but will be in the surviving spouse’s estate. Therefore, there are no estate taxes on the assets in the decedent’s estate, but are deemed to be in the surviving spouse’s estate. It makes no difference if the first spouse dies before or after 2010 because there will be no estate taxes on these assets as they are protected by being in the surviving spouse’s estate. However, if the first spouse dies in 2010 or later, the amount in this trust will get a step-up in basis of up to $3 million because assets have been technically transferred to the surviving spouse.
The trustee should be given a lot of flexibility at the death of the first-to-die spouse, which will allow the trust to fund the trust – either the Q-TIP or Bypass – so as to achieve the minimum taxation from the state and federal governments.
It has been pointed out by knowledgable professional estate planners that before this 2001 act, the By-pass provision would have been in the trust with specific instructions as to how much and when to place the assets into the trust. But with the complicated law with so many variables, it is not possible to determine with any degree of accuracy, exactly what is the best planning strategy. It could be that one could have either (or both) a capital gains tax because of a step-up in basis, and an estate tax problem. This leaves three choices:
Which choice will result in the least taxes? There is no way to know until one of the spouse’s dies. Therefore, the estate planner must plan for several contingencies, which could be more expensive to the estate owner because of the creation of trusts, which will be more complicated and more difficult to function properly after the death of the first spouse.
Capital gains tax must be considered if the basis is substantial, particularly if it also considers the personal residence, but if there is little concern about capital gains taxes, the trust could be established with only the By-pass trust provision. (Refer to the section on the By-pass trust earlier described).
A different estate planning problem arises if the estate is quite large and the exemption of $1.3 million of $3 million step-ups in basis would not apply. Then the vehicle of life insurance, in particular, would apply quite well. The death benefit of the life insurance policy would provide the cash to pay the capital gains tax.
If the owner of the estate expects the estate to be worth at least $1 million by 2010 (or $2 million if married) or will be dead before that date, it would be an excellent idea to completely review the existing plans in view of the changes in the tax laws. When the estate owner estimates the worth of the estate – now and later – everything should be considered, including any assets he/she is liable to inherit, the amounts in pension plans, and even the value of the death benefit of the life insurance policies.
The principal provisions that one should look for, are those that pertain to flexibility. The heirs or trustees must be able to take advantage of these new exceptions, the step-up in basis and the lower tax rates. Add to that the fact that no one knows what the tax laws will be when death strikes, and the importance of a good estate planner has gained considerably because of the new tax laws.
As time goes on, there will be many bright, professional estate planners, who will fine-tune the estate planning process to take advantage of not only the new tax laws, but also be prepared for changes which will inevitability occur. In the political climate of the next few years where there is and will be more balance between the political parties in Washington, changing (“tinkering” or “improving” the tax act, depending upon which political party is doing the changing…) is almost a certainty.
What will happen if and when the act ceases to exist, is anybody’s guess. It is doubtful that the act will simply die, as there would be chaos as the courts, the government and regulatory bodies – federal and state – and the Internal Revenue Service should try to agree on what law was in effect. So will congress simply take the high road and simply extend it as it is? Given the history of most laws, particularly as complicated as this act, it will demand some changes along the way. “Fine-tuning” is what Congress call it.
Nothing that the estate planner can anticipate in the planning process can be relied upon to be completely valid in the near future. This means that estates worth more than $1 million (per person) will need to have their plan reassessed every 2 or 3 years – or at least until there is a modicum of stability in the system so the process of long-term planning will be legitimate.
For those who will probably not live past the year 2009, the process of estate planning for the various death taxes, should remain about the same as they have been for several years. Some amount of federal estate taxes will be paid by the estates through 2009, as well as state death taxes. In addition, the full step-up in basis will still be around through 2009, lending a stabilizing effect to typical estate planning.
Now comes the “iffy” part. It is fair to say that the earlier that the owner of an estate dies during the period between 2001 and 2009, the more likely it is that the estate will have to pay estate taxes, and the higher that rate will be. If, for example, the client has a short life expectancy, certain techniques will need to be applied to mitigate the effects of the estate taxes. These techniques will include, but is not limited to, family and QTIP trusts for married couples; irrevocable life insurance trusts to provide tax-free benefits to pay these estate taxes (just like today); using gifts, either the annual exclusion or the unified gift tax credit; annuities, which frequently reduce the size of the taxable estate; and of course, charitable giving, before the estate owner dies and after they die.
It really comes down to planning an estate, with the major change in death tax planning depending upon what the tax rate is when an individual dies. Who is to say that a younger person will live beyond 2010 when major changes in estate taxes will occur, or at a point between now and then, when the tax rates and exclusions are different.
It must be remembered in estate planning, that even if the federal estate taxes expire in 2010, the step-up in basis will be partially lost, which will mean that capital gains taxes will be paid by heirs of estates as the larger estates shift from estate taxes to capital gains taxes under this 2001 act. Then with the likelihood that states will increase rates or reduce exemptions, will just add to the conclusion that it is necessary to create very flexible plans for many people and these plans will be quite a bit more complicated that what was necessary in the past.
At least for another 8 years, life insurance will continue to be the most effective way of providing funds to pay estate taxes. But now the problem is that the ownership of life insurance must be structured so that at the death of the insured estate owner, the life insurance proceeds will not be subject to estate tax. This continues to be the primary reason to use life insurance in estate planning.
If the estate tax is eliminated during the lifetime of the insured, then the game has changed. If the estate tax is eliminated, the benefit of the life insurance policy will be to provide the insured with lifetime income-tax free access to the cash value that can be used for other purposes.
There are several methods that help to solve the problem of accumulating funds available from life insurance, if they are not needed to pay estate taxes. At this time, because of the complexity and newness of the tax code changes, these methods are not widely known. One example is that described in the following Consumer Application.
CONSUMER APPLICATION
Louis had an estate plan established, with provisions for a life insurance policy to pay the estate taxes. With the introduction of the 2001 tax laws, he became concerned as to what would happen if he survived to year 2010 and the policy proceeds were not needed as there would be no estate taxes. His estate planner and attorney suggested that he establish an irrevocable trust that would (1) remove from his taxable estate, the policy proceeds when he died, and at the same time, (2) Louis would have access to the cash values of the policy, income-tax free, during his lifetime.
The trustee has the authority to make loans or withdrawals to the insured using the tax-free proceeds from the policy.
The trust has the provision that the trust is terminated if the present federal estate tax is repealed.
NOTE: The establishment of a trust such as that illustrated in the above Consumers Application would require the services of an attorney. The trust as described above was developed by a tax attorney who has a copyright on that particular trust so details as to how this trust can be developed cannot be described in this text and is presented for illustrative purposesd only.
Irrevocable life insurance trusts are certainly nothing new, however with the new tax act, starting in 2010 (unless the IRS makes an adverse ruling in the meantime) a transfer of money or property to a trust will be treated as a taxable gift UNLESS the trust is treated as wholly owned by the donor of the trust (or donor’s spouse) under the grantor trust provisions of the IRS Code. According to some tax specialists, this rule will stand, even if there are withdrawal powers in the “Crummey” trust. Whether this is a way that the IRS can finally do away with the Crummey trust, or not, the point remains that this area needs to be scrutinized by a good tax attorney if the Crummey trust is an important part of an existing estate plan.
This new provision can obviously affect transfers of cash to be used to pay insurance premiums, to an irrevocable trust – unless the trust is treated as only by the donor (or donor’s spouse) under the provision of the IRS code. This law should be kept in mind when drafting any irrevocable insurance trusts.
The $1.3 million as a step-up in basis (for single persons) who die - using discount rate of 7%, that would equate to $660,000 in total basis in today’s dollars - is the available step-up to members of the family heirs after the parent’s death. Therefore, when stocks, real estate and other assets are liquidated by the family member heirs after 2009, obviously there may be considerable federal capital gains taxes, not to mention state income taxes, that are due and payable.
Considering life insurance because of its unique income tax situation during the lifetime of the insured and after death, should still be an important arrow in the quiver of the estate planner, as the income-tax free distribution during lifetime and at death will continue. Therefore cash value life insurance will be indispensable in avoiding the financial strain of federal capital gains taxes and state income taxes, regardless. The net gain in the value of life insurance when related to other and taxable forms of investing, will be approximately 25%, or to be more accurate, the total of the federal capital gains tax rate, plus the state income tax rate (if any).
It is probable that because of the income tax basis step-up at death, the charitable remainder annuity trusts and unitrusts (CRAT & CRUT, discussed earlier) that are funded with securities or other assets that are highly appreciated in value, will be used in order to avoid the capital gains taxes when these assets are sold. So, as the charitable remainder trusts become more popular, the life insurance vehicle should become more popular as a means to replace wealth.
In particular, after the estate tax is repealed, the life insurance policy is a great vehicle to be used to replace the wealth of the family. When a charitable remainder trust is used to create these income tax advantages, the family heirs will no longer benefit from the (current) estate tax law savings, which can amount to as much as 55% (when the charitable trust assets pass to the designated charity at the death of the trust donor or donor’s spouse).
For example, at the present time, if a donor dies and leaves a substantial estate, for every dollar that the donor leaves to the family, (if the estate is in the 55% estate tax bracket), elementary arithmetic shows that there is only 45 cents left for the family. Therefore, every dollar left to a charity would cost the family only 45 cents. The 45 cents is what is needed to be replaced by life insurance.
When (if) the federal estate tax is repealed, it will cost the family a dollar for every dollar left to charity because the family will receive no estate tax benefit as a result of the charitable gift, therefore a dollar of life insurance is needed to replace the dollar that goes to the charity.
The Income in Respect to a Decedent (IRD) deduction enables the recipient(s) to deduct certain IRD items, such as benefits paid under qualified retirement plans and taxable IRAs which are subjected to both estate tax and after income tax following the owner’ death. If the federal estate tax is eliminated, this deduction will also be eliminated. If, for instance, the estate was in the 55% bracket and if the IRD recipient was in the 45% marginal income tax bracket (both state and federal) the benefit of the IRD would be approximately 25% (45% x 55% = 24.75% to be exact).
The result of the estate tax repeal would, therefore, mean that proceeds of an IRA or other IRD benefits would be fully subject to ordinary income tax, even if the IRA assets would have been eligible for capital gain tax rate treatment if the assets would be held outside the IRA – which may exceed 40%.
In summary, assuming that life insurance policy proceeds will always be exempt from income tax, there is no need for any IRD deductions of the proceeds. The recipients of IRD items, such as IRA distribution, will be subject to ordinary income tax under the new law and will, therefore, lose the income tax deduction which presently is worth up to 25%.
It would be hard to argue against using life insurance for estate planning today, and even if the estate tax is repealed after 10 years, life insurance will still be a very valuable source of liquid funds. For maximum flexibility, irrevocable trusts which are designed to remove life insurance proceeds from the taxable estate will allow the insured to take advantage of the income-tax free cash values if the policy is not needed to pay estate taxes, and will provide income-tax free proceeds for any purpose.
When (and if) the estate tax repeal actually happens as planned, because of the new carryover income tax basis rule, the insured (and family) will benefit from the tax advantages offered by life insurance. In addition, as indicated earlier, they will benefit from the income tax advantages of life insurance as a result of the repeal of the income tax deduction for estate taxes paid on income in respect of a decedent (IRD).
STUDY QUESTIONS
Chapter 7
1. Life Insurance
A. is not used by Financial Planners.
B. is never used in retirement planning.
C. plays an important role in estate planning.
2. One of the basic objectives looked at by a financial planner is
A. cash objectives.
B. what color car the client wishes to purchase.
C. how to avoid income taxes.
3. Estate planning is concerned with
A. the accumulation of wealth to be used in retirement.
B. maintaining the standard of living.
C. with the distribution of property at death.
4. A person who dies without a Will
A. dies testate.
B. dies intestate.
C. leaves his/her property to the state.
5. A “living will”
A. is one that has been changed.
B. leaves all property to a spouse tax-free.
C. is a legal instrument, which states an individual’s desires as to the use of life sustaining measures.
6. When a living person creates a Trust and transfers property to,
A. it is an inter vivos trust.
B. it is known as testamentary trust.
C. the property must be real estate.
7. With a revocable trust
A. the grantor cannot change the trust.
B. the grantor can change the trust.
C. only the beneficiary can change the trust.
8. __________________ provision of the Internal Revenue Code allows for an unlimited deduction for property left to the surviving spouse.
A. A business deduction.
B. The life insurance deduction.
C. The marital deduction.
9. A living and irrevocable trust, wherein the donor gives property to a charity but receives income from the property for life, is called a
A. Crummey trust.
B. Bypass trust.
C. Charitable Remainder trust.
10. At least until the year 2010, _________________, will continue to be the most effective way of providing funds to pay estate taxes.
A. the marital deduction.
B. the gift tax exclusion.
C. life insurance.
11. A Will gives the maker the opportunity to
A. name an executor.
B. avoid probate.
C. change the “beneficiary” on a life insurance policy.
12. The grantor of a trust
A. cannot be the trustee.
B. can charge beneficiaries, if the trust is revocable.
C. can avoid estate taxes, by using a revocable trust.
13. The Economic Growth and Tax Relief Reconciliation Act 2001 (EGTRRA)
A. eliminates income taxes in the year 2010.
B. reduces the Gift Tax Rate to 35% in the year 2010.
C. increases the Federal Estate Tax Rate and reduced the Federal Gift Tax Rate in the year 2010.
14. Life insurance is usually purchased
A. with a lump sum.
B. to evade income taxes.
C. to replace income lost by the death of the wage earner.
15. Estate Planning deals with
A. the distribution of an individual’s property at death.
B. maintain a standard of living.
C. the accumulation of wealth through investing.
Answers to Chapter Seven Study Questions