Estate Planning Exam 3 questions well
answered
Arm's Length Transaction - correct answer ✔✔ is a transfer generally between unrelated parties
in the form of a sale, an installment sale, or an exchange. Each of these transactions involves a
transfer of property between individuals for valuable consideration based on the fair market
value of the transferred property. These types of transfers usually have NO impact on the
transferor's gross estate.
sale - correct answer ✔✔ is the direct transfer property to another for money or property of
equal fair market value.
Installment sale - correct answer ✔✔ is a sale of the property in which the buyer makes a series
of installment payments to the seller. The effect of the transaction is that they buyer pays the
seller the purchase price of the property over a specified term plus interest at the current
market rate.
exchange - correct answer ✔✔ is a mutual transfer of assets of equal fair market values
between individuals.
private annuity - correct answer ✔✔ unlike a commercial annuity, is a transaction between two
(usually related) private parties. The seller/ annuitant sells an asset to a buyer generally in
exchange for an unsecured promise from the buyer to make fixed payments to the annuitant for
the remainder of the annuitant's life.
section 7520 rate - correct answer ✔✔ the interest rate used for determining the interest
portion of each payment and the present value of the private annuity.
, Self canceling installment note - correct answer ✔✔ a transfer device that can be used when
the transferor is in poor health. The SCIN transaction involves a sale for the full fair market value
of the property transferred over a term defined by the seller. The unique feature of a SCIN is
that if the seller dies before all of the installment payments have been made, the note is
cancelled and the buyer has no further obligation.
Grantor Retained Trusts - correct answer ✔✔ are irrevocable trusts in which assets are
transferred to a family member while the grantor retains an income stream (GRIT, GRAT, GRUT)
Grantor retained income trusts - correct answer ✔✔ are irrevocable trusts in which the grantor
retains an income interest in the trust for the term of the trust
•Are used to transfer property at a lower gift tax value to beneficiaries.
•The value of the gift equals the FMV of the property transferred minus the value of the
retained annuity interest.
•=FMV- present value of retained interest
Grantor retained annuity trusts - correct answer ✔✔ is an irrevocable trust that pays a fixed
annuity to the grantor for a defined term and pays the remainder interest of the trust to a non-
charitable beneficiary at the end of the GRAT term.
-The GRAT is funded by the grantor with a transfer of property, and the annuity can be stated
dollar amount, fixed fraction, or a percent of the initial FMV of the property transferred
-Annual annuity payments are made to the grantor, these payments are valued at the 7520 rate
of interest
-An appropriate time to consider using a GRAT is when the transferor holds property that is
expected to appreciate at a rate greater than the section 7520 interest rate applicable to the
GRAT
-Greatest risk of a GRAT is failure to survive GRAT term, causing the value of the annuity
payments specified in the GRAT to be included in the grantors gross estate
answered
Arm's Length Transaction - correct answer ✔✔ is a transfer generally between unrelated parties
in the form of a sale, an installment sale, or an exchange. Each of these transactions involves a
transfer of property between individuals for valuable consideration based on the fair market
value of the transferred property. These types of transfers usually have NO impact on the
transferor's gross estate.
sale - correct answer ✔✔ is the direct transfer property to another for money or property of
equal fair market value.
Installment sale - correct answer ✔✔ is a sale of the property in which the buyer makes a series
of installment payments to the seller. The effect of the transaction is that they buyer pays the
seller the purchase price of the property over a specified term plus interest at the current
market rate.
exchange - correct answer ✔✔ is a mutual transfer of assets of equal fair market values
between individuals.
private annuity - correct answer ✔✔ unlike a commercial annuity, is a transaction between two
(usually related) private parties. The seller/ annuitant sells an asset to a buyer generally in
exchange for an unsecured promise from the buyer to make fixed payments to the annuitant for
the remainder of the annuitant's life.
section 7520 rate - correct answer ✔✔ the interest rate used for determining the interest
portion of each payment and the present value of the private annuity.
, Self canceling installment note - correct answer ✔✔ a transfer device that can be used when
the transferor is in poor health. The SCIN transaction involves a sale for the full fair market value
of the property transferred over a term defined by the seller. The unique feature of a SCIN is
that if the seller dies before all of the installment payments have been made, the note is
cancelled and the buyer has no further obligation.
Grantor Retained Trusts - correct answer ✔✔ are irrevocable trusts in which assets are
transferred to a family member while the grantor retains an income stream (GRIT, GRAT, GRUT)
Grantor retained income trusts - correct answer ✔✔ are irrevocable trusts in which the grantor
retains an income interest in the trust for the term of the trust
•Are used to transfer property at a lower gift tax value to beneficiaries.
•The value of the gift equals the FMV of the property transferred minus the value of the
retained annuity interest.
•=FMV- present value of retained interest
Grantor retained annuity trusts - correct answer ✔✔ is an irrevocable trust that pays a fixed
annuity to the grantor for a defined term and pays the remainder interest of the trust to a non-
charitable beneficiary at the end of the GRAT term.
-The GRAT is funded by the grantor with a transfer of property, and the annuity can be stated
dollar amount, fixed fraction, or a percent of the initial FMV of the property transferred
-Annual annuity payments are made to the grantor, these payments are valued at the 7520 rate
of interest
-An appropriate time to consider using a GRAT is when the transferor holds property that is
expected to appreciate at a rate greater than the section 7520 interest rate applicable to the
GRAT
-Greatest risk of a GRAT is failure to survive GRAT term, causing the value of the annuity
payments specified in the GRAT to be included in the grantors gross estate
