AWMA Test Review 1 Questions
and Answers All Correct
The four basic types of grantor Retained trusts: - Answer ✅ 1. Grantor retained annuity
trust (GRATs),
2. Grantor retained unitrusts (GRUTs)
3. Grantor retained interest trusts (GRITS)
4. Qualified personal residence trusts (QPRTs)
Grantor Retained Annuity Trust (GRAT) - Answer ✅ the grantor retains the right to
receive an annuity amount from the trust at least annually. This annuity amount is
usually expressed as either a fixed dollar amount or a fixed percentage of the initial fair
market value of trust assets, which means that the annuity amount will not change over
time. If GRAT assets earn income at a rate in excess of the assumed 7520 interest rate
in this circumstance, the remainder beneficiaries of the GRAT will be entitled to trust
assets remaining
in the trust at the end of the trust term, free of any gift tax. Thus, the transaction is a way
of transferring wealth during life without the payment of gift tax, and without the
limitation of the annual exclusion!
Grantor Retained Unitrust (GRUT) - Answer ✅ In a GRUT, the grantor retains the right
to receive a unitrust amount from the trust at least annually. This unitrust amount is
expressed as a fixed percentage of the net fair market value of trust assets as valued at
least annually, although the
trust may provide that the grantor is entitled to trust income in excess of the unitrust
amount. IRC Section 2702 also allows the payment to increase each year by not more
than 120% of the previous year's figure. In addition, the amount will vary each year with
the current value of trust assets.
Grantor Retained Income Trust (GRIT) - Answer ✅ In a GRIT, the grantor retains the
right to receive a stated percentage or all of the income produced by trust assets at
least annually. Note that in this type of trust the grantor is not assured of getting any
stated amount. If no income is earned, no amount is distributed to the grantor. In light of
this, the amount the grantor receives each year will vary. The present value of the
income interest is computed under IRC Section 7520 by multiplying an income factor
found in Table B in IRS Publication 1457 times the fair market value of all of the trust
assets. Because of the gift tax effect of IRC Section 2702, this type of trust is
seldom used.
Qualified Personal Residence trust (QPRT) - Answer ✅ The grantor funds the trust with
a personal residence rather than income producing assets, and retains a right to live in
,the personal residence for the term of the trust. If the grantor outlives the term of the
trust, the value of the residence is not included in the grantor's gross estate. However, if
the grantor does not outlive the trust term, the value of the residence is included in the
grantor's gross estate, and a credit will be provided for any gift tax paid on the initial
transfer.
Intentionally Defective Grantor Trust (IDGT) - Answer ✅ First, if the IDGT is irrevocable,
any assets contributed to the trust, including the asset's future appreciation, are
removed from both the grantor's gross estate and that of their spouse. Second, the
income tax that the grantor pays on trust income that is distributed to the children is an
excellent way to remove additional assets from the grantor's gross estate at no
additional gift tax cost. Third, and most importantly, the trust's income tax status can be
used to remove additional assets from the grantor's gross estate through an installment
sale of assets to the trust. If properly done, this sale will not trigger either income or gift
tax for the grantor.
Incentive Stock Options (ISOs) - Answer ✅ they are a form of equity compensation that
allow and employee to purchase stock of their employer in a tax-favored manner. Tax
advantage = no income is recognized on the grant or even on the exercise of the option.
When the ISO is exercised and the stock is purchased by the employee, there are no
regular income taxes due, this does not occur until the stock is actually sold. The
employee then recognizes an amount of income that is the difference between he
amount realized from the sale of the stock and the price paid for the option. Assuming
certain holding periods requirements were met, any gain is taxed at the lower capital
gains rates.
Disqualifying disposition - Answer ✅ Occurs if the holding period requirement for an
ISO is not met.
Holding period requirement = 2 years from the grant date and 1 year from the exercise
date
Nonqualified Stock Option (NSO) - Answer ✅ a right granted by a corporation, its
parent, or one of its subsidiaries to one or more of its employees on a discriminatory
basis to acquire shares of the corporations stock. An NSO is the right to purchase a
specified number of shares of employer stock at a given time and price
Restricted Stock plan - Answer ✅ a form of equity compensation plan that gives an
executive the right to receive shares of stock at some point in the future provided that
certain conditions are met. Shares of stock are granted
to an employee at no cost or at a bargain price,
subject to the restriction that they will not be sold or disposed of for a specified period of
time. Shares become available to employees only
after a specified time elapses. Excess of fair market value of stock over employee cost
is
taxable as ordinary income after period of restriction lapses.
, Stock Appreciation Rights (SAR) - Answer ✅ a form of incentive or compensation that
gives an executive the right to compensation based on the appreciation in value of a
specified number of shares of stock over a specified period of time. A SAR is nothing
more than an imaginary unit that tracks the value of the stock of an employer. They
provide a method for an employee to obtain the benefit of a stock option plan without
having to make the necessary capital outlay required to purchase the stock.
Performance Unit or Share Plans - Answer ✅ a form of incentive or compensation plan
that gives and executive the right to compensation in the form of cash, shares of stock,
or other property following the satisfaction of performance-related conditions or vesting
requirements. Typically for senior level executives. The goal of a performance program
is usually tied to a substantial increase in earnings per share of the employer's common
stock over a given period of time, typically three to five years.
Difference between performance unit or and share plans - Answer ✅ Under a
performance unit program, each unit is valued at a designated amount. In a
performance share program, units are valued in concert with the value of the company
stock. As this is essentially the only distinction between the two plans, both will be
referred to here as performance programs.
Phantom Stock Plans - Answer ✅ A form of long term incentive plan used by
businesses to award executives with potential value without stock dilution. The
employer grants the employee "phantom shares" that resemble actual stock but are
really only a commitment to pay the employees cash upon fulfillment of certain
conditions such as time of employment or growth in the value of actual company stock.
It is a cashless method of providing deferred comp through an unfunded and unsecured
promise by the employer.
Stock Bonus Plans - Answer ✅ they are essentially profit sharing plans in which
employer contributions generally are made with employer shares. The regulations
define a stock bonus plan as a plan established and maintained to provide benefits
similar to those provided by a profit sharing plan, except for the fact that benefit
distributions are made in the form of stock
Employee Stock Ownership Plan (ESOP) - Answer ✅ a defined contribution plan
meeting the requirements of section 401a of the IRC. It must be designed to invest
primarily in employer securities, must pass through the voting rights on stock held to the
participants, and must allow participants the right to require that benefits be distributed
in the form of employer securities. The participants must be allowed to require the
employer to repurchase the distributed securities if they are not publicly traded - "put
option). Max contribution is 25% of total comp
Split dollar Life insurance plans - Answer ✅ a contractual agreement whereby the
employer and employee share the costs and benefits of a permanent life insurance
policy on the life of a key executive. While such plans offer employers a flexible, cost-
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