Jay and JoAnn Bateman learn that you are a Certified Financial Planner and come to you for help with their estate plan. They have done some reading and learned that they can delay payment of the estate tax by taking advantage of the marital deduction after one of them dies. They also wish to maximize both their estate & gift tax exemption and GST exemption. Jay is in poorer health than JoAnn and you expect that he will die first. You recommend that he now set up an irrevocable life insurance trust (ILIT) to handle his life insurance and when he dies his other assets pass into a credit shelter trust (CST) to maximize the estate and gift tax exemption and then for any residual assets over the $5,430,000 exemption in the CST to be placed into a QTIP trust. Jay and Joann plan to allocate generation-skipping tax (GST) exemption to the ILIT trust but not the CST and QTIP trusts. Jay and JoAnn have three kids: Amber Ryan and Tyler. Amber has two children and Ryan has three children. Tyler has no children.

Jay wants the CST trust to be set up to benefit JoAnn and his children, then to his grandchildren per stirpes. What tax issue arises for the CST trust if Ryan predeceases JoAnn?

The death of Ryan is a taxable event for generation-skipping tax purposes. What is the name of this event

One way to fix this problem is to allocate GST exemption to the CST trust before Jay passes away. What is another way to fix this problem, but after Jay dies (1 point)?

On what schedule of form 706 does the trustee allocate GST exemption (1 point)?

Now assume you that you are working with Jay in figuring out how to use life insurance in their estate plan. Jay wants to set up an ILIT so that these policies will not be in his gross estate. How would you recommend Jay sets up the trust if he already has existing life insurance policies? Would placing these policies into an irrevocable trust be a taxable event? What other issues with respect to incidence of ownership would you warn Jay about (5 points)?

How would you recommend he sets up the trust if he did not have any existing life insurance policies? Why (3 points)?

Assuming that Jay creates an unfunded ILIT, he would likely need to transfer funds to the ILIT to allow the trustee to pay the premiums on the insurance. Could Jay use the gift tax annual exclusion for these transfers? If not, why and what is one way you can fix this problem (3 points)?

What is a Crummey power and does it come with a general, special or limited power of appointment (3 points)?

A Crummey lapse results in a taxable gift to the other beneficiaries of the trust. What are two ways to establish irrevocable trusts to avoid this problem (2 points)?

Assume Jay sets up an ILIT to benefit his children and grandchildren. If Crummey powers are given to the beneficiaries, do the transfers to the trust qualify for the GST tax annual exclusion? If not, why not? (3 points)?

Lets say that Jay had only $500,000 of GST exemption left to allocate to a $1.5 million transfer to an irrevocable trust. What is the inclusion ratio for this trust (2 points)?

If the trust directed that $750,000 went to the children and $750,000 went to the grandchildren what would Jays GST tax liability be (2 points)?

Now assume the same as question 12 but you split the trust into two separate irrevocable trusts, one with an inclusion ratio of one and the other with an inclusion ratio of zero. What would be Jays GST tax liability be (2 points)?