VOLKOV, I need you

quick multiple choice format :slight_smile: 1. Grantor moves assets into a GRAT. Value - pv of annuity > 0, gift taxes must be paid by… a. grantor b. beneficiaries c. trust pays gift taxes 2. Regarding the income, during the life of the GRAT. Income tax can be paid by… a. grantor b. beneficiaries c. can choose who pays income tax (defective or complete from income tax point of view) 3. At maturity, regarding estate tax a. no estate tax has to be paid by anybody (only if grantor has died) b. I am wrong and there is something else I am missing… If you are not Volkov but you do know the answers… PLEASE HELP :slight_smile: Thanks a lot

Just a bid, but I go (A) © and (A)

Is gift tax part of the LOS?.. I’ve no idea about your problem, however, the article below might be helpful:) http://www.chamberlainlaw.com/assets/attachments/51.pdf I havent read it for I havent even looked thru the notes and should spend more time on that. :frowning:

gift tax is included in some IPS questions, for return requirement calculations (for example, I remember the inger family where the father makes a gift of 15k p.a. to one of his sons, although I could be wrong, I am not sure). In that particular example, if I remember correctly (I don´t have here the books), actually the father pays the gift tax for GRAT and other trust calculations, i don´t expect this to be tested in the exam, is just to try to understand, because to be honest this one of the subjects that i will have to memorize, as i don´t understand even 20% of this s*t

  1. Grantor moves assets into a GRAT. Value - pv of annuity > 0, gift taxes must be paid by… a. grantor b. beneficiaries c. trust pays gift taxes >> a 2. Regarding the income, during the life of the GRAT. Income tax can be paid by… a. grantor b. beneficiaries c. can choose who pays income tax (defective or complete from income tax point of view) >> a or trust itself. Beneficiers cannot pay tax :slight_smile: 3. At maturity, regarding estate tax >> you dont pay estate tax as long as you paid gift tax, but if you die before your GRAT maturies then there is a tax liability (dont remember exactly the case) everything said is IMHO and from my memory only a. no estate tax has to be paid by anybody (only if grantor has died) b. I am wrong and there is something else I am missing…

ok… so, if I got it: 1. beneficiaries don´t pay anything (unless grantor dies) 2. income tax can be paid by the grantor or the trust 3. gift tax, if any, can only be paid by the grantor 4. no estate tax is paid by anybody (unless grantor dies) right?

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Wow! Hala_madrid you must be a wonderful friend and many thanks for went extra miles explaining all this to me!!! And I’d better go on with my notes now:( Good luck with your Exam!! hala_madrid Wrote: ------------------------------------------------------- > gift tax is included in some IPS questions, for > return requirement calculations (for example, I > remember the inger family where the father makes a > gift of 15k p.a. to one of his sons, although I > could be wrong, I am not sure). In that particular > example, if I remember correctly (I don´t have > here the books), actually the father pays the gift > tax > > for GRAT and other trust calculations, i don´t > expect this to be tested in the exam, is just to > try to understand, because to be honest this one > of the subjects that i will have to memorize, as i > don´t understand even 20% of this s*t

hala, sorry was in meetings earlier, so couldn’t respond csk and yourself summarized it quite well. I’ll just add a few comments below. hala_madrid Wrote: ------------------------------------------------------- > quick multiple choice format :slight_smile: > > 1. Grantor moves assets into a GRAT. Value - pv of > annuity > 0, gift taxes must be paid by… > > a. grantor > b. beneficiaries > c. trust pays gift taxes When GRAT value at initiation is greater then PV of the annuity payments to the grantor, than constitutes a gift to beneficiaries, which creates a taxable event and grantor has to pay tax on it. As I said earlier in my posts, if you are smart about creating the GRAT, you would try to minimize the difference between value of the GRAT and PV of the annuity to the grantor, to avoid paying gift tax. However, if your sole purpose to move substantial funds to the beneficiaries through GRAT, and in your situation gift tax is lower than inheritance tax beneficiaries would have to pay, then yeah you can set up a GRAT with minimal PV to the grantor, and pay full gift tax on the difference. Wich is still more tax efficient that outright inheritance transaction. > > 2. Regarding the income, during the life of the > GRAT. Income tax can be paid by… > > a. grantor > b. beneficiaries > c. can choose who pays income tax (defective or > complete from income tax point of view) During the life of the trust, taxes are paid either by the trust itself or by the grantor. Grantor can maximize the value of the gift that will be passed to beneficiaries by paying taxes himself, this way essentially he just giving the funds to future beneficiaries avoiding paying estate tax on them. Think of it this way, every dollar that trust has to spend is the dollar that beneficiaries wont get. So if trust spends $100 in taxes, and then upon grantors death he gives $100 to beneficiaries through regular inheritance, they will pay 50% (or whatver that inheritance tax is) tax on it and get only $50. If the grantor chooses to compensate GRAT for taxes, he pays same $100 (so from grantor standpoint he is no better or worse off, since he pays $100 irregardless) but in this situation trust didn’t lose $100 and this $100 will go to beneficiaries at the end not subject to any additional tax. > 3. At maturity, regarding estate tax > > a. no estate tax has to be paid by anybody (only > if grantor has died) > b. I am wrong and there is something else I am > missing… With typical GRAT (which is complete from estate tax standpoint, i.e., not defective from estate tax standpoint) all the gift taxes are paid at the outset and GRAT is not subject to any additional inheritance tax. If grantor dies when GRAT is still in place then whole tax efficiency is negated, the assets of the GRAT will be transfered to the grantor’s estate and will be subject to estate tax (beneficiaries may get an exemption on some amount, since the gift had value at the beginning and the gift tax was paid on it, however, this calculation is very complex, and for the exam purpuses there is no need to go in these details). One exception to this would be if GRAT is created defective from estate tax standpoint at the outset (which I don’t even think happens in practice, since the whole point of the GRAT is to transfer funds to beneficiaries in tax efficient way, but I suppose everything is possible). In this situation, beneficiaries will pay the estate tax, and no gift tax is paid at the outset when the GRAT is created. > If you are not Volkov but you do know the > answers… PLEASE HELP :slight_smile: > > Thanks a lot For the exam purposes, the 4 points in your summary are sufficient as far as GRATs are concerned.

thanks a lot, really good post my last one: a structure (GRAT or whatever) will be “more efficient” if the assets are transfered to beneficiaries without any penalty, right? if the structure (again, GRAT or whatever) pays anything (and not the grantor of beneficiries), that “lowers tax efficiency”? agree with this point of view? thx

I agree, but all tax efficieny in the context is “relative” if I give you $100 without any structure and you have to pay $50 tax on it, you only get $50 if I use any other structure (GRAT or anything else) and reduce the tax bill to $40, the structure is tax efficient, relativelly speaking if I able to reduce tax liability to $0 (who wouldn’t love it), the tax efficiency is maximized so, in case of GRAT, the structure itself (i.e., trust) can still pay taxes on income, but if it is structured properly it is still able to pass money to beneficiaries more efficiently than straight inheritance

good to know i got most of this down cold :slight_smile:

I am adding this thread to favourites (in my computer at work, in my laptop, and in my home computer) thanks again

glad I could help :slight_smile: