Advanced Estate Planning Techniques Flashcards

Under the special use valuation election (IRC §2032A), farm or closely held business real property may be valued at its actual use value rather than fair market value, subject to a maximum reduction of approximately:

Answer: $1,390,000 (indexed for inflation)

IRC §2032A permits a reduction in the value of qualified real property up to the indexed limit (approximately $1.39 million in recent years), reducing the estate tax burden for qualifying farms and businesses.

A self-canceling installment note (SCIN) differs from a standard installment sale because the note automatically cancels at the seller's death, which creates what income tax consequence for the buyer?

Answer: The buyer recognizes cancellation of debt income at the seller's death

When a SCIN is cancelled at the seller's death, the buyer generally recognizes ordinary income equal to the amount of debt forgiven, as it constitutes cancellation of indebtedness income.

The 'estate equalization' strategy is most beneficial for married couples where one spouse has a significantly larger estate because it:

Answer: Ensures both estates fully utilize the applicable exclusion amount

Estate equalization transfers assets between spouses so that each estate is sized to fully utilize the applicable exclusion amount, avoiding the scenario where one spouse's estate far exceeds their exclusion while the other's is underutilized.

Which of the following is a key advantage of using a 'super-charged CRAT' or 'accelerated charitable remainder trust' strategy?

Answer: Funding a CRAT with a deferred annuity to defer trust payouts and extend the charitable deduction period

A supercharged CRAT is funded with a deferred annuity that accumulates inside the trust on a tax-deferred basis, deferring distributions and potentially extending the charitable benefit period.

For a Grantor Retained Annuity Trust (GRAT) to be successful as a wealth transfer tool, the assets transferred must grow at a rate exceeding:

Answer: The IRC Section 7520 rate (120% of the applicable federal midterm rate)

A GRAT transfers wealth to heirs only to the extent trust assets outperform the §7520 hurdle rate; if assets grow faster than that rate, the excess passes to heirs gift-tax free.

A 'zeroed-out GRAT' is structured so that the present value of the retained annuity payments equals the full value of assets transferred, which means the taxable gift at inception is:

Answer: Zero, eliminating any gift tax at formation

A zeroed-out GRAT is designed so the present value of retained annuity payments exactly equals the contribution, resulting in a zero taxable gift at creation while still transferring excess returns to heirs.

When planning for a client with significant closely held business interests, the 'installment sale to defective grantor trust' technique is preferred over a direct GRAT primarily because:

Answer: There is no mortality risk — the strategy succeeds even if the grantor dies during the note term

Unlike a GRAT where the grantor must survive the term for the strategy to succeed, a sale to an IDGT for an installment note succeeds regardless of when the grantor dies because the note is included in the estate, not the trust assets.