Estate Planning Flashcards
(166 cards)
1
Q
What are four time delays that estate owners face?
A
Answer:
Complications involving property disputes Complications involving tax returns Complications involving accountings Complications involving property receipts
2
Q
When most people think of probate court, they think about the probate of the estates of the decedents. What are three other major areas of focus for the probate process?
A
Answer:
Probate of estates and the supervision of trusts Guardianships and conservatorships Commitment of the mentally ill
3
Q
Once an interested party has been given notice and fails to contest the probate process within _______ months from the date of the last publication that the will has been admitted to probate, the interested party is barred from raising any further challenges to the probate of the will.
A
Answer:
Once an interested party has been given notice and fails to contest the probate process within six months from the date of the last publication that the will has been admitted to probate, the interested party is barred from raising any further challenges to the probate of the will.
4
Q
For the personal representative of either the testate or intestate estate, what does administration usually involve?
A
Answer:
An inventory of all probate assets, payment of creditors’ claims, and distribution of the probate estate according to the terms of the decedent’s will, or according to the laws of intestacy, if the decedent dies without a will.
5
Q
What are four time delays that estate owners face?
A
Answer:
Complications involving property disputes Complications involving tax returns Complications involving accountings Complications involving property receipts
6
Q
What additional costs may be involved in the probate procedure?
A
Answer:
Additional costs for probate may include appointment of guardians, conservators, or appraisers. Many of these costs can be eliminated if the probate process is avoided—the appointment of guardians is always a part of the probate process, therefore, probate substitutes will NOT avoid the cost associated with that selection.
7
Q
What are the common reasons for probate settlement?
A
The common reasons for probate settlement are judicious settlement of beneficiaries’ disputes in the probate court and provision of legal titleholder to the client.
8
Q
What does the provision of legal titleholder do?
A
Answer:
The provision of legal titleholder helps to avoid property or title disputes.
9
Q
Can a will dispose of real property of the decedent located in a state other than that of the decedent’s residence?
A
Yes, a valid will can be used to dispose of separately-owned assets wherever the assets are located. However, in order to dispose of real estate which the decedent owned as a separate asset, the estate will be subject to an additional procedure.
10
Q
What additional procedure is required to dispose of real estate of the decedent that is located in a state other than that of the decedent’s residence?
A
Answer:
Ancillary probate procedure is required to dispose of real estate of the decedent that is located in a state other than that of the decedent’s residence. Ancillary probate is needed if property is located in more than one state even if the decedent did not execute a will.
11
Q
Which of the following is not a reason to avoid probate?
- The cost associated with the probate process
- When a will is probated, it is a private document and only heirs have the ability to view it
- The probate process can be lengthy and subject to time delays
A
- When a will is probated, it is a private document and only heirs have the ability to view it
12
Q
Which of the following is not a reason to avoid probate?
- The cost associated with the probate process
- When a will is probated, it is a private document and only heirs have the ability to view it
- The probate process can be lengthy and subject to time delays
A
When a will is probated, it is a private document and only heirs have the ability to view it
13
Q
John owns the following assets:
Which of the following assets will be subject to probate?
A 401k worth $500,000
A car owned in his individual name
A stock portfolio worth $1,000,000 held in his revocable trust
A savings account held in his name
A checking account held in JTWROS with his spouse
A
car & savings acct
14
Q
Which of the following is not subject to probate and does not require consent of others to transfer ownership?
Individual Owner
Joint Tenancy With Right of Survivorship
Tenants by the Entirety
Tenants in Common
A
JTWROS
15
Q
Which of the following is not a characteristic of the probate process?
The probate estate most likely requires an inventory of all assets that are subject to probate
Letters testamentary are given by the probate court giving authority to act on behalf of the estate
If the descendent dies intestate, the will must be filed with the probate court
Ancillary probate is required when the decedent owned individual property in a state other than their state of residence
A
If the descendent dies intestate, the will must be filed with the probate court
16
Q
Given the manner in which the client’s assets are owned, a will may never transfer any property. So, why is a will still the most important estate planning document?
A
Answer:
(1st) it is only within the provisions of the will that the decedent can appoint the executor of the estate. (2nd) if the decedent has minor children, it is only within the provisions of the will that the guardians for the minor children may be appointed.
17
Q
Given the manner in which the client’s assets are owned, a will may never transfer any property. So, why is a will still the most important estate planning document?
A
Answer:
(1st) it is only within the provisions of the will that the decedent can appoint the executor of the estate. (2nd) if the decedent has minor children, it is only within the provisions of the will that the guardians for the minor children may be appointed.
18
Q
What are the basic execution requirements of a will, regardless of the state of residence?
A
Answer:
The testator must be the age of majority, at least 18 years of age. The testator is the person who is creating the will. The testator must be of sound mind and have mental capacity. In other words, the testator must know the nature and extent of his or her property and know who the "natural objects of their bounty," rightful heirs, would be. The will must be declared the last will and testament of the testator. The will must be in writing, signed by the testator, and witnessed by competent witnesses.
19
Q
What are the most common types of wills? (Check all that are true.) simple wills holographic wills pour-over wills joint wills nuncupative wills
A
All are common
this is a stupid question
20
Q
What are two disadvantages of a joint will?
A
Answer:
(1) Upon the death of the first spouse, the survivor may not have the ability to change the terms of the will. (2) The first spouse's property interests are often construed as being terminable interests and therefore will not qualify for the marital deduction.
21
Q
What are some of the elements the power of attorney should include?
A
Answer:
Should be very specific as to which aspects of the principal's affairs it covers. Should include a provision authorizing the agent to make elections with respect to retirement plan assets. Should include a provision dealing with making annual exclusion or lifetime gifts. Should give the agent authority to transfer assets into a trust created by the principal.
22
Q
To qualify for Social Security disability benefits on the wage earner’s record:
An unmarried child must be…?
A
Answer:
under 18 under 19 and a full-time high school student or 18 or older with a disability that started before age 22
23
Q
To qualify for Social Security disability benefits on the wage earner’s record:
A spouse must be…?
A
Answer:
age 62 or older caring for a child who is disabled or under 16 50 or older and disabled before the wage earner's death or within seven years after death
24
Q
An ex-spouse must be…?
A
Answer:
50 or older disabled and married to the wage earner for 10 years or longer
25
Which statement is correct?
A mutual will can also be a reciprocal will
A pour-over will transfers property into a testamentary trust
Property will avoid intestacy if the owner has a valid will at death
An elective share statute allows the heirs to take a percentage of the decedent's estate in lieu of property left to them in the will.
A will can change the beneficiary of a trust
✔ A mutual will can also be a reciprocal will.
A mutual will is an agreement to bequeath property to another person, and with a reciprocal will, both spouses agree to leave their entire property interests to each other. So in this case, a mutual will can also be a reciprocal will.
Why the other answers are incorrect:
A pour-over will transfers property to a trust that must exist prior to the decedent's death. A testamentary trust is created by a will, which goes into effect after the testator dies.
Partial intestacy can occur if the will lacks a residuary clause, or if property is bequeathed to an ex-spouse, in some states.
An elective share statute only applies to a surviving spouse- not to all heirs.
Only a revocable trust document can change the terms of a trust or change the trust beneficiaries- not a will. People can write anything they want in their will, but that doesn't mean their property will be distributed that way. For example, if you hold property as JTWROS with your spouse, but your will appoints the property to your son, then your son won't receive the property even though it was bequeathed to him in the will. So the way in which property is owned and titled may dictate how property is ultimately transferred to others.
26
```
What type of power of attorney can represent the principal before and after the principal becomes incapacitated?
Springing durable power of attorney
Durable power of attorney
Health care power of attorney
Non-durable power of attorney
```
Durable power of attorney
Why the other answers are incorrect:
A springing POA becomes activated when doctors certify that the principal is mentally incompetent.
A health care power of attorney is used when the principal is unable to make medical decisions for himself- not before
A non-durable POA goes into effect immediately but ceases when the principal becomes incapacitated.
27
Which statement is NOT correct
A Standby revocable trust must be created before the grantor becomes incompetent.
A plenary guardian is limited to only managing a ward's property and financial affairs.
Limited guardianships can be awarded to manage only specific aspects of an incompetent person's care, giving that individual some control over his circumstances.
If a trustee of a Special Needs trust pays for something that is already covered by a government program, then benefits may be reduced by this amount.
A plenary guardian is only limited to managing a ward's property and financial affairs – is not correct.
A plenary guardian can also manage a ward's personal care in addition to the ward's property and financial affairs.
Why the other answers are correct:
A Standby revocable trust must be created before a grantor becomes incompetent, because only a grantor can create a trust—not the grantor's agent.
Guardians can be awarded full or limited guardianships.
Special Needs trusts are created to pay for additional services that government benefits do not provide.
28
```
At what dollar value will an individual with disabilities lose their eligibility to receive SSI benefits if the ABLE 529 exceeds:
$50,000
$150,000
$100,000
$11,700,000
```
$100,000
29
```
How much in countable assets can you have and still qualify for Medicaid?
$5000
$2000
$2500
$14000
```
$2,000
30
```
How long is the look-back period for Medicaid?
60 months
5 months
6 years
30 months
```
60 months
31
```
Which of the following is not an Activity of Daily Living?
Eating
Toileting
Excercising
Bathing
```
Exercising
32
What are two considerations that an offer from a viatical settlement firm primarily depends on?
Cash value of policy and insured's life expectancy
Face value of policy and insured's life expectancy
Cash value of policy and illness that the insured has
Face value of policy and cash value of policy
Face value of policy and insured's life expectancy
33
Mr. Smith would like to name his son as his Power of Attorney. He would like his son to not have any authority to act on his behalf until the time when Mr. Smith becomes incapacitated. Which type of POA should Mr. Smith have?
Non-Durable Power of Attorney
Durable Power of Attorney
Springing Power of Attorney
Springing Power of Attorney
34
Which of the following is not typically the basis for a will contest?
The testator of the will is not of sound mind
The testator was deceived by fraud
The testator specifically omitted a child
The testator suffered from an insane delusion
The testator specifically omitted a child
35
CFP Board Released Question 1996
Which one of the following goals can be accomplished using a "pour over" provision in a will?
transfer of assets from an estate into a trust created prior to the "pour over" provision
minimization of estate taxes resulting from assets owned prior to the existence of the "pour over" provision
transfer of assets from an estate to the estate of another person who died within the past three years
reduction of probate expenses during administration
transfer of assets from an estate into a trust created prior to the "pour over" provision
36
CFP Board Released Question 1996
Doris Jenkins is a 71 year-old widow with a son and daughter ages 43 and 45 and six grandchildren. Doris has an estate currently worth $572,000 which includes her home worth $250,000 and a life insurance policy on her life with a face value of $160,000. Her children are named as primary beneficiaries. Doris recently suffered a severe stroke that left her paralyzed on her right side. She is home from the hospital but her health will continue to decline and she will need to go into a nursing home within one year. The only estate planning she has done to date is to write a will in 1989 which left all her assets to her children equally. Of the following estate planning considerations, which is/are appropriate for Doris at this time?
(1) Transfer ownership of her home to her children so it will not be counted as a resource should she have to go into a nursing home and apply for Medicaid.
(2) Execute a durable general power of attorney and a durable power of attorney for health care.
(3) Place all of her assets in an irrevocable family trust with her children as beneficiaries.
(4) Start a gifting program transferring assets up to the annual exclusion amount to each of her children and grandchildren.
(1) , (2), (3) and (4) only
(2) and (3) only
(1) and (4) only
(4) only
(2) only
(2) only
37
Lifetime gifting also has nontax advantages. What are the three nontax advantages?
Answer:
Watching the donee enjoy the gifted property
Allowing the donor to witness how a donee utilizes the gifted asset
Making the donor feel good about being able to make a gift
38
Gerald Carter owns an asset which is worth $100,000 today. It is anticipated that the asset will appreciate at the rate of 10% per year, i.e., in 10 years it will be worth approximately $260,000. If the property is given away now, the gift tax is computed on the $_________ (less the annual exclusion if allowable).
Answer:
$100,000 is the correct answer. If the asset is not given away and it becomes part of the estate (ten years from today), the estate tax is computed on approximately $260,000. Thus, a gift made currently removes future appreciation from the estate.
39
If the spouses are still married, the entire gift is returned to the community estate. However, if the community has been terminated by divorce or death, what percentages of the gift will the spouse have the right to recapture?
```
Choose the best answer.
20 percent
50 percent
80 percent
100 percent
```
20 percent
✔ 50 percent
80 percent
100 percent
The spouse has the right to recapture only one-half of the gift. The other half is allowed to remain with the donee. Therefore, it is advisable to obtain both spouses' consent prior to the lifetime transfer of community assets.
40
The tax rates are applied to ______ _______ taxable gifts rather than only to taxable gifts made in the current calendar year.
Answer:
The tax rates are applied to total lifetime taxable gifts. The gift tax is based on the value of the property transferred. It is computed on a progressive schedule based on cumulative lifetime gifts.
41
Which of the following choices would be included in a broad definition of a gift? (Check all that are true.)
transfers of partnership interests
cancellation of a debt
gifts of royalty rights
gifts of checks or notes to third parties
All of the choices are included in the definition of a gift. Even the forgiving of a note or cancellation of a debt may constitute a gift.
42
Name three other reasons individuals give property away during their lifetime?
Answer:
Enjoyment of seeing the donee use and enjoy the gift.
Opportunity for the donor to see how well or how poorly the donee manages the business or other property.
Provision for the education, support and financial well-being of the donee.
43
A gratuitous transfer of property by a family-owned corporation to the father of the shareholders of a corporation could be treated as a gift from which of the following choices?
```
Choose the best answer.
Children to their father
Children to the corporation
Father to his children
Father to the corporation
```
✔ Children to their father
Children to the corporation
Father to his children
Father to the corporation
A gratuitous transfer of property by a family-owned corporation to the father of the shareholders of a corporation could be treated as a gift from the children to their father.
44
Does the right to use property such as money at no charge constitute a gift of property?
Answer:
Yes, interest-free and below-market-rate loans are treated as taxable gifts. A gift tax is imposed on the value of the right to use the borrowed money, the so-called foregone interest, generally the going rate of interest the money could earn in the given situation.
45
A father transferred property to his children at a price below the fair market value. In return he received noninterest-bearing notes rather than cash, and in the children's behalf he continued to make certain payments with respect to the property. Do you think the IRS would constitute this as a gift?
The court found these actions showed that in reality he was not dealing with his children at arm's length. It is possible that the same result could occur if the father employed the son at a wage of $50,000 a year but the son rendered services worth only $20,000 a year. The IRS could claim that the $30,000 difference constituted a gift.
46
A well-known golfer contracted with a company to make pictures depicting his form and golf style. In return the golfer was to receive a lump sum of $120,000 plus a 50 percent royalty on the earnings of the picture. But before any pictures were made, he sold his father the right to his services for $1. The father, in turn, transferred the rights to the contract to a trust for his son's three children. The income would be taxable to whom?
the company
the golfer
the father
the three children
The court held that the entire series of transactions had no tax effect and that the income was completely taxable to the golfer .
47
If a grandmother purchases a U.S. savings bond that is registered as payable to her and to her two children as co-owners, no gift is made to the grandchildren until one of them ___________ the bond for cash.
No gift is made to the grandchildren until one of them surrenders the bond for cash. Federal rather than state law governs transfer of U.S. government bonds. Even if state law requirements for a valid gift are met, for tax purposes no completed gift has been made until the registration is changed in accordance with federal regulations.
48
There are certain valuation problems unique to the gift tax. What are these problems associated with?
1. Indebtedness with respect to transferred property
2. Restrictions on the use or disposition of property
3. Transfers of large blocks of stock
4. Valuation of mutual fund shares
5. Valuation of life insurance and annuity contracts
49
Let's assume the donor transfers a $100,000 building subject to a $40,000 mortgage on which he or she is personally liable. The donor's creditors collect the $40,000 by proceeding against the pledged building and the donee is subrogated to that creditor's rights against the donor-debtor. Effectively, the donee now stands in the shoes of the creditor. How much more can the donee collect from the donor?
```
Choose the best answer.
$0
$40,000
$80,000
$100,000
```
The donee can collect an additional $40,000 from the donor.
50
Chris established an irrevocable trust for his two sons and four grandchildren. He funded the trust with $2 million of securities. The income is payable to his sons for life and the remainder in trust will be distributed to his grandchildren. One son is addicted to opioids and Chris retains the power to withhold distributions to him and to vary the amount of trust income distributed to each son in a given year. Chris also has the power to change the beneficiaries of the trust. What are the tax consequences to Chris for establishing this trust?
The transfer of securities to the trust is a taxable gift. ✘
The trust assets are removed from Chris's estate. ✘
The transfer of securities to the trust is an incomplete, non-taxable gift. ✔
The trust assets will be included in Chris's estate. ✔
The transfer of securities to the trust is an incomplete, non-taxable gift; and the trust assets will be included in Chris's estate. Chris created an irrevocable trust but retained the right to exercise control over the trust assets. Therefore the transfer of securities to the trust is an incomplete gift. The fair market value of the trust will be included in Chris's estate when he dies assuming he does not relinquish control over the trust prior to his death.
51
```
Susan gifted her life insurance policy to her best friend Beth. From a gift tax perspective, what value would Susan use for the value of the gift?
Value of the death benefit
cash value in the policy
cash value plus unearned premium
the replacement cost
```
In the case of a whole life policy, the value of the gift is generally equal to the interpolated terminal reserve plus unearned premium at the date of the gift.
52
Which of the following does the IRS not consider a gift?
Payment made to a grandchild for tuition
Reimbursement to your father for medical expenses paid
Gratuitous services
Buying a car for a friend
Payment made to a grandchild for tuition ✘
Reimbursement to your father for medical expenses paid ✘
Gratuitous services ✔
Buying a car for a friend ✘
The IRS does not consider gratuitous services and promises to make a gift as subject to gift tax. Direct payment of tuition made to a school for a grandson is a qualified gift which is exempt from gift taxes. Money given to a grandchild to pay for tuition is subject to gift taxes.
53
All of the following are requirements for a disclaimer except?
The refusal or rejection of the benefits must be in writing
The date of the person disclaiming has to be over 21 years old
The written rejection must be received by the transferor no later than 9 months
You may have benefited from the property prior to the disclaimer
The refusal or rejection of the benefits must be in writing
The date of the person disclaiming has to be over 21 years old
The written rejection must be received by the transferor no later than 9 months
✔ You may have benefited from the property prior to the disclaimer
You may NOT have benefited or accepted the property prior to disclaiming the property..
54
Which of the following does not reflect the intent to make a gift?
Was the donor legally competent to make the gift?
Was there clear acceptance of the gift by the donee?
Full consideration was provided to the seller
A delivery to the donee of the subject matter of the gift or the most effective way to command dominion and control of the gift.
Was the donor legally competent to make the gift? ✘
Was there clear acceptance of the gift by the donee? ✘
Full consideration was provided to the seller ✔
A delivery to the donee of the subject matter of the gift or the most effective way to command dominion and control of the gift. ✘
If full consideration was given, then it would not qualify as a gift rather a legal transaction between a buyer and a seller.
55
Which of the following does not reflect the intent to make a gift?
Was the donor legally competent to make the gift?
Was there clear acceptance of the gift by the donee?
Full consideration was provided to the seller
A delivery to the donee of the subject matter of the gift or the most effective way to command dominion and control of the gift.
Was the donor legally competent to make the gift? ✘
Was there clear acceptance of the gift by the donee? ✘
Full consideration was provided to the seller ✔
A delivery to the donee of the subject matter of the gift or the most effective way to command dominion and control of the gift. ✘
If full consideration was given, then it would not qualify as a gift rather a legal transaction between a buyer and a seller.
56
There are certain valuation problems unique to the gift tax. What are these problems associated with?
Answer:
Indebtedness with respect to transferred property
Restrictions on the use or disposition of property
Transfers of large blocks of stock
Valuation of mutual fund shares
Valuation of life insurance and annuity contracts
57
If a married individual in a common-law state gives their son a gift worth $20,000 and the requisite gift splitting election is made, for purposes of the gift tax computation, how much is that individual considered to have given?
```
Choose the best answer.
$5,000
$10,000
$20,000
$40,000
```
For purposes of the gift tax computation, that individual is considered to have given only $10,000. Their spouse is treated as giving the other $10,000, even if, in fact, none of the gift was her property.
58
If one person has a one-half interest in a tenancy in common, how would a cash gift of $6,000 to the tenancy be treated?
```
Choose the best answer.
$3,000 gift to that person
$6,000 gift to that person
$9,000 gift to that person
$12,000 gift to that person
```
✔ $3,000 gift to that person
$6,000 gift to that person
$9,000 gift to that person
$12,000 gift to that person
If one person has a one-half interest in a tenancy in common, a cash gift of $6,000 to the tenancy would be treated as a $3,000 gift to that person. This would be added to other gifts made directly by the same donor to determine how much of the exclusion would be allowed.
59
Assume a donor places $10,000 into a Section 2503(b) trust that is required to pay his 10 year-old daughter all income until she reaches age 25. Assume a 6.0% Section 7520 rate which results in a Table B factor amount of .582735 for 15 years. What is the present value of the income the daughter will receive for the next 15 years?
```
Choose the best answer.
5,872
5,822
5,827
5,728
```
5,872
5,822
✔ 5,827
5,728
$5,827 , that is, $10,000 times 0.582735. If the income were payable for her entire life, the present value would jump to almost $9,621. The donor can take an annual exclusion equal to the PV of the income interest, or $5,827, in the year the trust is created.
60
A life insurance trust will typically provide no payments to beneficiaries unless they survive the ___________.
A life insurance trust will typically provide no payments to beneficiaries unless they survive the insured.
61
Jerry gave his wife a remainder interest in his Italian villa. Which statement is correct?
Choose the best answer.
A marital deduction is not available to Jerry to reduce the value of this gift.
The Italian villa will be included in his wife's estate when she dies.
Jerry can make a Q-TIP election on his gift tax return to qualify the gift for a marital deduction.
The Italian villa will be included in his wife's estate when she dies.
Explanation: Jerry did not give his wife terminable interest property because he gave his wife a remainder interest in the villa- not a life estate. Therefore, a marital deduction is available to reduce the value of this remainder interest gift. The FMV of the villa will be included in his wife's estate when she dies.
Why the other answers are incorrect:
A marital deduction is not available to Jerry to reduce the value of this gift. This statement is not correct. Jerry can take a marital deduction because a remainder interest is not terminable interest property (TIP).
Jerry can make a Q-TIP election on his gift tax return to qualify the gift for a marital deduction. This statement is not correct. The gift of the remainder interest in the villa is not TIP therefore a QTIP election cannot be made.
62
David made a charitable gift of $40,000 in 2021. What is the amount of David's gift tax charitable deduction?
Answer: $25,000.
The gift to charity is reduced by an annual exclusion of $15,000 for a remaining gift tax charitable deduction of $25,000. David's gift tax liability is zero.
63
The formula used to compute the donee's gift tax is:
The donor's tentative tax ÷ (1+donor's gift tax rate)
64
Identify the statement(s) below that correctly identify(ies) gift giving likely to result in favorable tax consequences. (Check all that are true.)
An advantage of giving property with a current value that is less than its basis ("loss property") is that when the recipient sells the property the loss is available to offset any gains.
Elderly taxpayers should give highly appreciated, low basis property in preference to cash.
Making net gifts is a technique for clients who do not have very much in liquid assets and who want to make taxable gifts.
The donee can depreciate, depreciable property based on its value for gift tax purposes.
An advantage of giving property with a current value that is less than its basis ("loss property") is that when the recipient sells the property the loss is available to offset any gains. ✘
Elderly taxpayers should give highly appreciated, low basis property in preference to cash. ✘
Making net gifts is a technique for clients who do not have very much in liquid assets and who want to make taxable gifts. ✔
The donee can depreciate, depreciable property based on its value for gift tax purposes. ✘
65
In order to determine whether or not an asset will be included under IRC 2033, what are three questions that needs to be answered?
What is the "type" of property which is to be included?
Was the decedent's interest in the property sufficient for inclusion?
Did the decedent hold this property interest on the date of death?
66
Jack, who had never married, died last year. Two years before his death he paid gift tax of $15,000 as a result of making the following gifts (these were the only gifts he made that year).
stock worth $40,000 to Mickey
a $300,000 (proceeds value) life insurance policy on his life to Molly. (The policy was worth $5,000 at the time of transfer.)
At Jack's death, the stock had increased in value to $70,000 and the life insurance company paid the $300,000 to Molly. Consider the two transfers and the gift taxes paid when answering the following questions.
By how much will Jack's gross estate be increased?
```
Choose the best answer.
$15,000
$60,000
$315,000
$355,000
```
$315,000.
Jack's gross estate included the $300,000 life insurance policy and the $15,000 gift taxes paid two years before his death.
67
If the two gifts had been made four years before Jack's death, how much would his gross estate have been increased by?
```
Choose the best answer.
zero
$15,000
$30,000
$300,000
```
Zero.
Neither the life insurance policy nor the gift taxes paid four years prior to Jack's death would be included in his gross estate.
68
During his lifetime, Stuart transferred property to his wife, Mona, for her lifetime. Upon Mona's death, the property was to return to Stuart if he was living. If he was not living, the property was to go to Stuart's daughter, Ellen. What's the outcome if Stuart dies before Mona?
Answer:
Stuart's daughter can obtain the possession or enjoyment of the property only if she survives Stuart.
69
Max transferred his estate to his daughter with the condition that she would receive income until age 30, at which age she would receive the principal, if she were not married. Max retained the power to distribute the income to his son if his daughter married. When Max died, his daughter was age 26 and had not married. What amount is included in Max's gross estate?
Answer: The value of the daughter's remaining income interest for 4 years is included in Max's gross estate because the transfer of income is a revocable transfer. Only the value of property subject to this revocable power is included in the gross estate, not the entire value of the property. In this case, Max did not retain the right to transfer the principal because his daughter will receive it in 4 years when she turns 30.
70
The decedent has retained the power to alter, amend, revoke, terminate or affect the beneficial enjoyment of property, which can be transferred if what powers are retained?
Answer:
The power to change the beneficiaries
The power to hasten or delay the timing within which a beneficiary can enjoy or receive property
The power to increase or decrease the property allocated to a beneficiary
71
If Stan and his wife, Shelley, purchase 100 shares of AT&T for $50,000 and hold the property as joint tenants with rights of survivorship, even if the entire contribution was made by Stan from his salary, what percentage would be included in his estate?
```
Choose the best answer.
20%
50%
80%
100%
```
Only 50% will be included in his estate. If the stock is worth $120,000 at that time, $60,000 will be included in his estate.
72
Stan and his son Bill purchased 200 shares of stock for $100,000. Bill contributed $60,000. At Bill's death, 60% of the value of the stock at that time is includable in Bill's estate. If the stock has an estate tax value of $120,000, how much would be includable in Bill's estate?
```
Choose the best answer.
$60,000
$72,000
$100,000
$120,000
```
$72,000
If the stock has an estate tax value of $120,000, $72,000 (0.60 x $120,000) would be includable.
73
If a $1,000,000 marital deduction was allowed at Sam's death for property left to his wife, Sadie, at Sadie's death the value of such property at the time of her death will be included in whose estate?
```
Choose the best answer.
Sam
Sadie
Beneficiary
Trust
```
At Sadie's death the value of such property at the time of her death will be included in her estate.
However, if the election were made to transfer the same $1 million into a QTIP (qualified terminable interest property) trust, the executor must agree in the election to include the QTIP assets then remaining in Sadie's estate.
74
Which combination of the following statements about the marital deduction is true? (Check all that are true.)
The marital deduction has the effect of treating the husband and wife as one economic unit for gift and estate taxes.
Property that qualifies for the marital deduction is excluded from the surviving spouse's estate.
Qualifying all of the decedent's property for the marital deduction may result in more estate tax being paid at the surviving spouse's death.
A qualified domestic trust is used to provide for the spouse when there has been a second marriage.
A marital deduction transfers all of a decedent spouse's property to the surviving spouse at death. The surviving spouse has total control and use over the inherited property therefore the property is included in their estate at death. If the inherited property appreciates in value over time, then the marital property may be taxed at a higher rate in the surviving spouse's estate, A qualified domestic trust, or QDOT, is used to allow a non-U.S. citizen who is the spouse of a U.S. citizen to qualify for the unlimited marital deduction to keep the estate from being subject to federal taxes upon the first death.
75
A general power of appointment exists when an individual has the right to _______ of property that he or she does not own, including giving it to himself or herself.
Answer:
A general power of appointment exists when an individual has the right to dispose of property that he or she does not own, including giving it to himself or herself.
76
Your client owns a whole-life insurance policy with a death benefit of $200,000 on the life of his spouse. The policy has a cash value of $13,500 of which the dividends are used to purchase additional paid-up life insurance. Their son is the named beneficiary. If the spouse were to die today, which of the following is true? (Check all that are true.)
The client continues to own the policy for the benefit of the son.
A taxable gift of the life insurance proceeds has been made from the client to the son.
The client receives an amount equal to the cash value, and the son receives the remainder of the life insurance proceeds tax-free.
The son must be at least 14 years old in order to collect the proceeds.
The client receives the proceeds of the life insurance policy but must hold them in a life insurance trust for the benefit of the son.
A taxable gift of the life insurance proceeds has been made from the client to the son.
77
What are the federal estate taxes based on?
Answer:
Generally, federal estate taxes are based either on 1) the fair market value of the transferred property as of the date the decedent died, or 2) the value of the property six months after the date of the decedent's death, which is the alternate valuation date.
78
If the additional tax is imposed, it is due _____ months after the date of the disposition of the property or the cessation of its use as a farm or as part of the closely held business. The qualified heir who received such property is personally liable for the additional tax imposed.
If the additional tax is imposed, it is due six months after the date of the disposition of the property or the cessation of its use as a farm or as part of the closely held business. The qualified heir who received such property is personally liable for the additional tax imposed.
79
Bob and Jane are married in a non-community property state. Bob passed away this year. Bob and Jane owned a house as tenants by the entirety. They purchased the home for $200,000. The current market value is $850,000. What is Jane's new cost basis in the
home?
$200,000
$850,000
$525,000
$425,000
$525,000- Bob's share will be included in his estate and get stepped up to $425,000. Jane's share will remain at $100,000, and she will inherit Bob's share of $425,000 equaling a total of $525,000.
80
```
Which of the following are assets subject to IRD?
Real Estate
Deferred Annuities
EE Bonds
Commission
CDs
```
Deferred Annuities
EE Bonds
Commission
81
Which of the following will not be included in the individual's gross estate?
Grantor created and retained a life estate in trust
A gift of $15,000 cash
Life insurance policy transferred to an irrevocable trust 1 year ago
Revisionary interest in property greater than 5%
A gift of $15,000 cash
82
All of the following are features of a commercial annuity except:
They are usually funded with cash.
When determining its payout terms commercial annuity companies use actuarial tables to determine their payout.
A single-life annuity ends at the annuitant's death and is not included in the gross estate.
The amount included in the gross estate for the decedent who owns a joint and survivor commercial annuity is determined using government valuation tables.
✔ The amount included in the gross estate for the decedent who owns a joint and survivor commercial annuity is determined using government valuation tables.
This statement refers to a private annuity. With a commercial annuity, the value of the survivorship interest included in the gross estate is the amount that the same insurance company would charge for a single annuity on the survivor at the time of the annuitant's death.
83
Which of the following are requirements needed to qualify for the special use valuation rule?
At least 75% of the gross estate, less debts and mortgages, must be qualified farm or closely held business real property.
Property must pass to a qualified heir defined under IRC Section 2023A(e)
At the decedent's death the property must be involved in qualified use defined by IRC Section 2032A(b)(2)
Real property must be owned by the decedent or a member of his or her family or in a closely held business for an aggregate of 10 years or more of the 15-year period ending on the date of the decedent's death.
Property must pass to a qualified heir defined under IRC Section 2023A(e) ✔
At the decedent's death the property must be involved in qualified use defined by IRC Section 2032A(b)(2) ✔
84
Two years ago Fred bought a $400,000 policy on his wife's life and named himself beneficiary. He died last month and left the policy to his wife in his will. Policy value: $190,000. What amount of life insurance was included in Fred’s gross estate?
Nothing is included in Fred's estate.
$190,000.
$400,000
$190,000 is included in Fred's gross estate. Fred is the owner but not the insured of the policy. A marital deduction is available to his estate because his wife is the new owner of the policy.
85
Six years ago, Barbara, who was married, bought a $60,000 policy on her mother's life, and named her children beneficiaries. Barbara died last week and the value of the policy was $12,000. What amount of life insurance was included in Barbara’s gross estate?
Nothing is included in Barbara's estate.
$60,000
$12,000
$12,000 is included in Barbara's gross estate (the policy's replacement cost) because Barbara is the owner but not the insured. Can Barbara's estate use a marital deduction to offset an estate tax? In this case, the spouse is not the new owner of the policy and no new owner was named in the policy or in Barbara's will.A marital deduction is equal to the amount her spouse would receive through intestacy. For example, if Barbara's state provides the surviving spouse with one-half of the decedent spouse's estate, then a marital deduction is available for $6,000 in Barbara's estate.
86
Three years ago Don bought a $100,000 policy on his wife Irene's life, and named their children as beneficiaries. Two years ago he irrevocably assigned the policy to his wife. Policy value: $24,000. What amount of life insurance was included in Don’s gross estate?
Nothing is included in Don's estate.
$24,000
$100,000
Nothing is included in Don's estate.
The 3-year rule does not apply in this situation because Don was not the owner and the insured of the life insurance policy. When a policy owner, who is not the insured, transfers a policy to a person or a trust, it is removed from the owner's estate as of the date of transfer.
87
Oliver is the holder of a power of appointment over assets in a trust established by his mother. There is no restriction as to the permissible appointees, but Oliver cannot appoint more than the greater of $5,000 or 5% of the trust assets every year. Assuming Oliver did not exercise his withdrawal right in the year of his death, what amount is included in his gross estate?
Nothing is included in Oliver's gross estate.
The fair market value of the trust is included in Oliver's gross estate.
The greater of $5,000 or 5% of the trust is included in Oliver's gross estate.
Oliver's withdrawal right is restricted to the greater of $5,000 or 5% of the trust corpus therefore that amount will be included in his gross estate.
88
Roy's wife died 6 years ago, and he became sole owner of their home, which was valued at $700,000. Two years ago, Roy created a life estate in his home, giving his daughter the remainder interest. Roy remarried last year and gave up his interest in his home, which was valued at $900,000. When Roy died last week, the FMV of his old home was $960,000. What amount is included in Roy's gross estate?
Nothing is included in Roy's gross estate.
$900,000
$960,000
$960,000.
Roy relinquished the life estate in his home last year but he did not outlive the transfer for 3 years. Per IRC 2036, the fair market value of the home will be included in Roy's gross estate.
89
Which of the following gifts made two years before the donor's death will be included in the gross estate at full date-of death value? (Check all that are true.)
a gift of $50,000 cash which is split equally between a son and daughter-in-law
a gift in which the donor retains an income interest for life
donor's residence transferred into joint tenancy with donor's daughter
stock worth $30,000 given to a friend
life insurance policy (cash value $5,000) transferred by the deceased to an irrevocable trust
a gift of $50,000 cash which is split equally between a son and daughter-in-law ✘
a gift in which the donor retains an income interest for life ✔
donor's residence transferred into joint tenancy with donor's daughter ✔
stock worth $30,000 given to a friend ✘
life insurance policy (cash value $5,000) transferred by the deceased to an irrevocable trust ✔
Donor's residence transferred into joint tenancy with donor's daughter is included in the donor's estate due to the contribution rule. The daughter did not contribute towards the acquisition cost of the residence, therefore the FMV of the home is included in the donor's gross estate.
90
What are some tangible properties included in the gross estate?
jewelry
| other personal effects
91
What are a few things to keep in mind with the alternate valuation election?
The executor must file it on the estate tax return if the election is made.
All estate assets will be valued on the alternate valuation date.
If the alternate valuation date election is made, and any property is distributed, sold or disposed of prior to the six-month valuation date, the disposed of asset will be valued on the date it was transferred or sold, even if prior to the alternate valuation date.
Certain types of property diminish in value as time goes on. For instance, the present value of an annuity reduces each time a payment is made. Therefore, the alternate valuation date is not available for any asset whose value is affected by the mere passing of time. For these assets, the general fair market value on the date of death rule is applied.
92
```
Funeral expenses, subject to certain limitations, are deductible. Deductions are generally limited to a reasonable amount. Such expenses would include: (Check all that are true.)
interment
burial lot or vault
grave marker
perpetual care of the grave site
transportation
```
All choices are true
93
To qualify for the marital deduction, qualified terminable interest property (QTIP) must meet which of the following conditions? (Check all that are true.)
The surviving spouse must have a general power to appoint the property.
All of the income must be paid out either to the surviving spouse or to the children of the decedent and the surviving spouse.
The executor must make the QTIP election.
The surviving spouse must be entitled to make lifetime gifts to family members directly from the QTIP.
The surviving spouse must have a general power to appoint the property. ✘
All of the income must be paid out either to the surviving spouse or to the children of the decedent and the surviving spouse. ✘
The executor must make the QTIP election. ✔
The surviving spouse must be entitled to make lifetime gifts to family members directly from the QTIP.
94
What's the tax on a tentative tax base of $1,000?
```
Choose the best answer.
$100
$120
$180
$200
```
The tentative tax of $180 is computed by applying the appropriate rates specified in the IRS Gift and Estate Tax Rate Schedules to the tentative tax base. Different tax rate schedules apply depending on the year of death. These rates are progressive.
95
Which of the following is not a step of the estate tax calculation?
Calculate the federal estate tax payable
Determine the value of the gross estate
Determine the taxable estate
Determine the value of the probate estate
Determine the value of the probate estate is not part of the estate tax calculation.
96
When should the alternate valuation date be used?
When the value of the estate has increased from the date of death
When the value of the estate has decreased from the date of death
When the value of the estate has not fluctuated from the date of death
The alternate valuation date is never appropriate
When the value of the estate has decreased from the date of death
97
If the executor sold property from the estate prior to the alternate valuation date, what day is used to value the asset sold?
The fair market value on the date of death
The asset would not be added to the estate
The purchase price on the date the asset was sold
The alternative valuation
The purchase price on the date the asset was sold
98
```
All of the following are deducted from the gross estate to arrive at the adjusted gross estate except?
Funeral and Administrative Expenses
Gift Taxes Paid
Debts and taxes
Casualty and theft losses
```
Gift taxes paid may be added back to the gross estate if the 3-year rule applies, but they are not deducted from the gross estate.
99
If an estate qualifies for Section 6166, how long do they have to pay the estate tax attributed to the closely held business?
2 annual installments
14 annual installments
10 annual installments
None – all taxes owed the date the 706 is filed.
14 annual installments. For the first 4 years is interest only, the next 10 years are principle and interest payments.
100
Which of the following is not a deduction allowable against the adjusted gross estate?
Mortgages where the decedent was personally liable and property was includable in their estate.
Loss to property caused by fire during the month prior to the decedent's death.
Income taxes unpaid but reportable for some tax period prior to the decedent's death
Funeral expenses of the decedent
Loss to property caused by fire during the month prior to the decedent's death.
101
Claudia owned a $800,000 home which she retitled to JTWROS with her son Nate. The taxable gift to Nate was $386,000 but her unified credit was available to fully offset the gift tax. Claudia died and the FMV of the home was $1 million. Which of the following statements is correct?
On Claudia's IRS Form 706, $386,000 will be added back as an adjusted taxable gift.
The value of the home included in Claudia's gross estate is $500,000.
The value of the home included in Claudia's gross estate is $1 million.
Nate will receive a new stepped up basis to $500,000.
The value of the home included in Claudia's gross estate is $1 million.
Claudia was a sole owner of the home, and she gifted one-half to Nate when she added his name to the deed and retitled the property as JTWROS. The percentage of contribution rule applies to property owned by non-spouses. Nate did not contribute to the purchase price therefore the full FMV of the home, $1 million, will be included in Claudia's gross estate. The taxable gift of $386,000 will not be included in the estate tax calculation as an adjusted taxable gift because the value of the home is included in the gross estate. Nate will inherit the home with a new step-up in basis of $1 million.
102
Decedent had made substantial lifetime gifts such that her estate is in the 40% marginal bracket. In the will, she made a bequest of $100,000 to her adult son with no special arrangements, or allocations, for the payment of the estate taxes. The balance of her estate goes to her husband. How much of this bequest will the son actually receive, assuming no other bequests to him from her estate?
$60,000 because estate taxes of $40,000 would be charged against the bequest
$55,000 because the $10,000 per beneficiary exclusion reduces the taxable amount
$90,000 because the $10,000 per beneficiary exclusion applies even for adult children
$100,000 because the estate tax will be paid from the residual estate
$60,000 because estate taxes of $40,000 would be charged against the bequest
Estate taxes must be paid in the decedent's estate, therefore the son will not receive $100,000 since estate taxes would be charged against the bequest.
103
Which of the following circumstances would definitely cause the date-of-death value of the gifted property to be included in the donor's gross estate?
Donor retains a life estate in the gift property.
Donor retains the power to revoke or amend the gift.
Donor gives more than $15,000 to one donee in one year.
Donor dies within three years of the date of the gift.
Donor retains a life estate in the gift property. ✔
Donor retains the power to revoke or amend the gift. ✔
Donor retains a life estate in the gift property and donor retains the power to revoke or amend the gift are correct because when a donor gifts property but retains a life estate, the FMV of the property is included in the donor's estate at death. A donor who can revoke a gift, or who transfers property to a revocable trust, will include the value of the gift or the trust assets in his estate at death.
104
Which phase in the lifetime planning cycle do clients look at the assets they have and determine how the assets they have accumulated will provide for themselves and/or their spouses during their lifetimes?
a. Wealth Accumulation
b. Wealth Preservation
c. Wealth Distribution
d. None of the above
b
105
Which of the following is not a reason to have an estate plan?
a. To provide financial security and protection to family members and provide for heirs with special needs.
b. To designate the person(s) who will manage affairs and assets in case of a legal incapacity or death
c. To allow your family to decide how your assets will be divided upon one s death
d. Estate planning can minimize the time and expenses associated with the probate process and reduce or even eliminate probate expenses through the proper titling of assets or trusts.
Correct c.
To allow your family to decide how your assets will be divided upon one s death
Response Feedback:
To allow your family to decide how your assets will be divided upon one’s death.
To control the passing of property interests to desired heirs. An estate plan can transfer particular assets to named beneficiaries, bequeath general legacies or sums of money to beneficiaries, and determine how and when the heirs may use the assets bequeathed to them. An estate plan can also provide a stream of income to the surviving spouse and minor children during the probate process. If an estate is properly planned, in most cases will contests and other intra-family disputes can be avoided.
106
Which of the following statements correctly describes federal transfer taxes?
Select all that apply
a. The federal gift and estate tax are separate transfer taxes that are unified and interrelated under a federal transfer tax system.
b. It is mandatory that the unified credit be used to offset the tax on all taxable gifts, whether taxable gifts are made to individuals or taxable transfers are made to trusts.
c. Lifetime gifts and testamentary transfers are subject to the same gift and estate tax rate schedule.
d. Each taxpayer has a unified credit that is available to offset gift and/or estate taxes up to the exemption equivalent amount.
All of the above statements are correct.
107
Which of the following is correct about community property?
a. At the death of the first spouse, all assets held as community property receives a full step-up in cost basis.
b. All assets held as community property passes through probate
c. Any assets held as fee simple in a community property state are automatically considered community property
d. All property is considered community property owned by a married couple
Correct a.
At the death of the first spouse, all assets held as community property receives a full step-up in cost basis.
108
Ron and his neighbor, Terry, own a lot together that is adjacent to their properties. The property is held as tenancy in common. Which of the following statements is not correct?
a. Ron and Terry can have unequal ownership in this property
b. There is no right of survivorship between Ron and Terry
c. All the property is included in the probate estate of the first co-owner to die
d. If Ron bequeaths the property to his wife at his death, his wife will co-own the property with Terry
c.
All the property is included in the probate estate of the first co-owner to die
109
A tenancy by the entirety may be terminated in which of the following ways?
a. death, whereby the survivor takes the entire estate
b. mutual agreement
c. divorce, which converts the estate into a tenancy in common or a joint tenancy
d. severance, whereby one spouse transfers his or her interest to a third party without the consent of the other spouse
Correct a. death, whereby the survivor takes the entire estate
Correct b. mutual agreement
Correct c. divorce, which converts the estate into a tenancy in common or a joint tenancy
110
Which of the following does not pass through the probate process?
a. Property held as tenancy in common
b. Community property
c. Life estate
d. 401(k) assets that have no named beneficiary
e. Business property owned by the decedent
c. Life estate
Response Feedback:
Life estates, either created by an owner in property for the benefit of the owner or gifted to a beneficiary in trust, do not go through the probate process.
111
All of the following are advantages of the probate process except:
a. Court supervision of executor's activities
b. Inventory of estate assets
c. Privacy of decedent's will
d. Validation of decedent s will
c. Privacy of decedent's will
Privacy of decedent’s will. One of the disadvantages of probate is that it is a public process. The remaining statements represent the advantages of probate.
112
Which of the following techniques can be used to avoid the ancillary probate of a home owned in a state other than the state of residence?
A. Title the home as tenants in common with a surviving spouse
B. Bequeath the home to the surviving spouse by will
C. Transfer ownership of the home to a revocable trust
D. Title the home in one person's individual name
c. Transfer ownership of the home to a revocable trust. Assets that are owned by a trust will pass per the terms of the trust and will not be subject to probate. Assets owned in an individual’s name will pass through probate.
113
A trust established and funded while the grantor is living is known as:
a. A living trust
b. An inter vivos trust
c. An irrevocable Trust
d. Either A or B
d Either A or B – a living trust or an inter vivos trust. An irrevocable trust can be created during the grantor’s life but cannot be alter or changed once the document has been executed. The grantor has lost control of those assets.
114
Mr. Pierce is 93 years old and incapacitated. Mrs. Pierce is 88. She wants some kind of plan in place if she becomes incapacitated or dies, but she does not want to lose control of their assets until that time. What would you suggest?
a. Durable power of attorney
b. Revocable Trust
c. Springing durable power of attorney
d. Supplemental trust
Correct b.
Revocable Trust
115
A pre-marital agreement should not be considered by individuals contemplating marriage in which one of the following situations?
a. when one or both parties are unwilling to make a full disclosure of all their income and assets to the other party
b. when each party has significant wealth and wishes to protect his/her financial independence
c. when there is a significant difference in the wealth of each party
d. when one or both parties have ongoing obligations, rights and/or children from a previous marriage
e. when one party is considering making a substantial gift to the other in consideration of the marriage
a when one or both parties are unwilling to make a full disclosure of all their income and assets to the other party
116
Janine made the following transfers this year. Which transfer is an incomplete gift?
a. A gift of the remainder interest in her beach house that she gave to her son Leo
b. $75,000 that Janine transferred to her revocable trust
c. A distribution of $20,000 made from Janine s revocable trust to her daughter Lindsay
d. A portfolio of bonds Janine transferred to an irrevocable trust she established for her father
b $75,000 that Janine transferred to her revocable trust. A transfer to a revocable trust is an incomplete gift that is not subject to gift taxes.
117
If a client's primary goal in making lifetime gifts to his children is to lower his estate taxes, he should make gifts of property that
a. are expected to depreciate significantly in the future.
b. are expected to appreciate significantly in the future.
c. have already depreciated significantly.
d. have already appreciated significantly.
Correct b.
are expected to appreciate significantly in the future.
118
Larry decided that he would start to gift assets to his family members to reduce the amount of his overall estate. Below is a list of gifts that Larry made this year. How much of his lifetime exclusion did he use?
$14,000 to his niece Nicole
$54,000 to Boston University for his nephew’s tuition
$100,000 for a down payment for his daughter
$85,000 to Mass General Hospital for his mother’s medical expenses
$96,000 to his daughter, Grace, to reimburse her for medical expenses
a. $349,000
b. $174,000
c. $335,000
d. $166,000
d Correct d.
$166,000
Response Feedback:
$166,000 which is made up of:
$100,000 -$15,000 = $85,000
$96,000 - $15,000 =$81,000
The gift to Nicole is less than the annual exclusion amount, the $54,000 was paid directly to the university as well as the $85,000 to the hospital; therefore, these gifts did not reduce Larry’s lifetime exemption amount.
119
What techniques represent some tax-oriented advantages of gifting?
a. A donor can use an annual exclusion to reduce the value of a taxable, present-interest gift
b. Gift-splitting is available to a married couple to reduce the value of a taxable gift
c. The unified credit must be used to offset taxes on inter vivos taxable gifts that do not exceed the exemption equivalent amount
d. All of the above
d All of the above. All of the above answers represent some tax oriented advantages of gifting.
120
Assume a married individual in a common-law state gives their son, Bob, a gift worth $28,000 and their daughter, Anna, a gift of $20,000. The requisite gift splitting election is made for purposes of the gift tax computation. How much is that individual considered to have given?
a. $48,000
b. $24,000
c. $22,000
d. $34,000
b $24,000- For purposes of the gift tax computation, that individual is considered to have given only $24,000. Their spouse is treated as giving the other $24,000, even if, in fact, none of the gift was her property.
121
Which of the following gifts would constitute a taxable gift?
a. $25,000 to the donor's adult child
b. $10,000 to a friend
c. $35,000 paid to a friend for medical expenses
d. $15,000 to a college to cover a friend's tuition
a and c
$25,000 to the donor's adult child and $35,000 paid to a friend for medical expenses. Had the individual paid the medical expenses directly to the medical provider, it would not have been a taxable gift.
122
What is the importance of a Crummey Power?
a. It allows a gift to be a future interest gift
b. It allows a gift to be a present interest gift
c. Beneficiaries have a set period to withdraw the funds
d. Both B and C
e. None of the above
d Both B and C- it allows a gift to be a present interest gift and qualify for the annual exclusion gift by allowing the beneficiaries have the right to withdraw funds within a set time period.
123
Wally purchased a private annuity two years ago that would pay him $30,000 for life. At his death, the annuity will pay his wife, Deana, $15,000 per year for life. Wally died last week and his executor must determine the value of his gross estate. Deana is age 64 and the § 7520 rate is 6%. What amount of the annuity is included in Wally s gross estate?
a. Nothing- the annuity ends at Wally s death
b. The PV of Deana s future income stream of $152,477
c. The amount the insurance company would charge for a single annuity on Deana s life.
d. The value of the annuity multiplied by the cost basis.
b A private annuity is valued at the PV of the surviving spouse’s income stream. Using an annuity factor of 10.1651 multiplied by $15,000, Wally will include $152,477 in his gross estate. Note that Wally’s estate will receive a marital deduction for the same amount.
124
Ali was one of several beneficiaries of an irrevocable trust created by his grandmother. Ali was given the right to withdraw the greater of $5,000 or 5% of the trust corpus each year. Ali withdrew $100,000 from the trust the day before he died. The value of the trust was $2 million. What amount subject to the withdrawal was included in Ali s gross estate?
a. $5,000 is included in Ali s gross estate
b. The $100,000 that Ali had withdrawn from the trust but had not yet spent is included in his gross estate.
c. The $2 million value of the trust is included in his gross estate
d. Nothing is included in his estate because a special power of appointment is not included in a holder’s gross estate
Correct b.
The $100,000 that Ali had withdrawn from the trust but had not yet spent is included in his gross estate.
Response Feedback:
Ali withdrew 5% of the trust assets ($100,000) the day before he died. Because he withdrew the maximum amount from the trust in the year of death, nothing subject to the 5-and-5 power is included in his gross estate. However, the total value of property he owned is included in his gross estate. Therefore the $100,000 he withdrew from the trust but did not spend is also included.
125
Which of the following statements regarding the alternate valuation date is not correct?
a. When the alternate valuation date is elected, all property in the estate is valued six months after the decedent s death.
b. There must be a decrease in the total value of the gross estate and estate tax liability six months after death.
c. An estate passing to a surviving spouse by a marital deduction qualifies for an alternate valuation date election.
d. An annuity is valued at the date of the owner s death.
c Correct c.
An estate passing to a surviving spouse by a marital deduction qualifies for an alternate valuation date election.
Response Feedback:
A marital deduction eliminates an estate tax liability when all property passes directly to the surviving spouse and therefore would not qualify for an alternate valuation date election.
126
Why are adjusted taxable gifts from 1976 added to the taxable estate?
a. To increase the estate tax because the tax rate is progressive
b. To decrease the tentative tax base
c. To apply a partial unified credit to lifetime gifts
d. To reach the exemption amount of $11,580,000
a
To increase the estate tax because the tax rate is progressive
Response Feedback:
Adjusted taxable gifts are added to the taxable estate to increase the estate tax, which is progressive and cumulative, ranging from 18% to 40%.
127
Identify the situation in which an estate tax marital deduction cannot be taken.
a. A husband established a testamentary trust by will that gave his wife the income interest for life. His executor made a QTIP election on IRS Form 706.
b. A wife bequeathed her husband $10 million in cash.
c. A husband gave his non-citizen wife $2 million.
d. A wife established a testamentary trust that gave her son the income interest for two years and her husband the remainder interest.
c A husband gave his non-citizen wife $2 million.
Response Feedback:
A marital deduction is not available for property bequeathed to a non-citizen spouse unless a QDOT is established.
128
Wesley established an irrevocable trust six years ago which he funded with dividend-paying securities worth $3 million. His partner, Owen, was the remainder beneficiary of the trust and Wesley was the income beneficiary. Wesley filed IRS Form 709 for the remainder interest gift of $850,000 in the year the gift was made. Wesley died last week when the trust was valued at $3.7 million. Which statement correctly identifies the consequences of this transfer?
a. $850,000 is included as an adjusted taxable gift on Wesley's estate tax return.
b. The tax paid on the remainder interest gift is included in Wesley's gross estate under the gross-up rule.
c. The $3.7 million trust is added to Wesley's gross estate.
d. Wesley cannot use a full unified credit of $4,625,800 on his estate tax return to offset his estate tax because he used a portion of the credit six years ago against the taxable gift.
Correct c.
The $3.7 million trust is added to Wesley's gross estate.
Response Feedback:
Wesley created a life estate in the trust therefore the FMV of the trust is included in his gross estate at death. The remainder interest gift he made to Owen is not added to his estate tax return as an adjusted taxable gift. Wesley did not pay a gift tax on the remainder interest gift so it is not subject to the gross-up rule. The full unified credit is restored on his IRS Form 706.
129
Jane is named as Jesse's executor. Which of the following is not a step that Jane will have to take with respect to settling Jesse's estate?
Selected Answer:
Correct c.
Making Jesse's funeral arrangements
Response Feedback:
Making Jesse’s funeral arrangements. While Jane may help in making funeral arrangements, that is not a requirement of the probate process.
130
Let's assume A is owner and insured on a life insurance policy with a face amount of $50,000. The annual premium on this policy is $5,000, and the interpolated terminal reserve cash value is $14,000. The total premium paid on this policy was $10,000. What is the value of the charitable gift if A absolutely-assigns the $50,000 policy to Charity C?
Since the policy would be sold at a gain, the value of the policy is greater than the total premium paid, so the value of the charitable gift would be $10,000, the donor's basis. On the other hand, if the value of the policy is less than the total premium paid, then the charitable deduction would equal the replacement cost of the policy.
131
Let's assume the donor owns a capital asset, which qualifies as a long-term capital asset, for example, corporate stock. The value of the stock on the date of the gift is $30,000. The donor's AGI is $60,000. Since a long-term capital asset is being gifted, what is the maximum charitable deduction the donor can take?
```
Choose the best answer.
$4,500
$9,000
$18,000
$27,000
```
Since a long-term capital asset is being gifted, the maximum charitable deduction the donor can take is $18,000 (30% of $60,000).
132
Which of the following is NOT an example of a generation-skipping transfer?
Choose the best answer.
A trust for child's lifetime, then to grandchildren established by will
Gifts to great niece per will
A trust created for grandchildren by a will
A trust set up for spouse and children by a will
✔ A trust set up for spouse and children by a will
The trust for spouse and children is the only example that did not benefit a skip person.
133
Calculate the total GST tax, assuming no growth, if the value of the transfer is $5 million, the federal and state taxes are $750,000, charitable deductions were $150,000 and $3.5 million GST exemption is available. Assume the maximum GST tax rate is 40%.
Answer:
The applicable fraction is .8537, the inclusion ratio is .1463, and the applicable rate is .0585. The total GST tax is $292,600.
134
Tom and Pam Monson have an estate of $2,200,000 and plan to use life insurance and leveraging to maximize the utilization of their GST tax exemptions for the benefit of their five children and their issue. The transferors make annual gifts to the trust to pay the life insurance premiums. Those annual gifts are exempt from gift tax under the annual exclusion. In addition, the transferors allocate GST exemption to the annual gifts. The premiums are $25,000 per year for 16 years, for a total of $400,000 of premium (assume $200,000 given by each spouse). The insurance is the survivorship type, which only pays when the survivor dies.
How much of the $1,000,000 life insurance policy will be exempt from GST taxes?
Since all of the $400,000 premium had GST tax exemption allocated to it, all of the $1,000,000 of insurance proceeds paid at the second spouse's death will be sheltered from generation-skipping transfer tax.
135
William creates a trust that benefits only his child, Henry, during Henry’s life. At Henry’s death, the trust continues for the benefit of Henry’s son, Bob, for his lifetime. No GST exemption was allocated to this trust. At Henry’s death, which situation will occur?
A taxable termination has occurred and a GST tax must be paid
A taxable distribution has occurred and a GST tax must be paid
A direct skip has occurred and a GST tax must be paid
No tax is due
A taxable termination has occurred and a GST tax must be paid
136
Which of the following is an example of a direct skip?
John gives a check for $20,000 to his niece
Alan gives a painting worth $18,000 to his grandson
Fran pays $30,000 directly to a University for his granddaughter's tuition
Joan gives jewelry worth $35,000 to her granddaughter whose mother is deceased
Alan gives a painting worth $18,000 to his grandson
137
Which of the following statement(s) is correct?
A taxable distribution and taxable termination are tax exclusive.
A taxable distribution is tax exclusive and taxable termination is tax inclusive.
A taxable distribution is tax inclusive and taxable termination is tax exclusive.
A taxable distribution and taxable termination are tax inclusive.
A taxable distribution and taxable termination are tax inclusive.
138
Which of the following is/are correct about the GSTT?
A non-relative skip person is someone who is 37 years younger than the transferor.
A taxable distribution occurs when a non-exempt trust makes a distribution of income to a skip person.
A taxable distribution occurs when a child dies and the only remaining beneficiary on the continuing trust is the grandchild.
The transferor should allocate GST exemption on gifts made during their life to non-skip persons on form 706.
A taxable distribution occurs when a non-exempt trust makes a distribution of income to a skip person. ✔
139
Which statement(s) is correct?
A reverse Q-TIP election is used if the decedent’s GST exemption is equal to the estate tax applicable credit
A transferor can allocate their GST exemption to a Grantor Retained Annuity Trust when the trust is funded.
If a beneficiary is given a General Power of Appointment, the trust property will be included in his estate and his executor can allocate his GST exemption to the trust property that is transferred to skip persons from the decedent's will.
An inclusion ratio of “one” means that all taxable distributions and taxable terminations will be exempt from a GST tax.
If a beneficiary is given a General Power of Appointment, the trust property will be included in his estate and his executor can allocate his GST exemption to the trust property that is transferred to skip persons from the decedent's will.
140
Which statement is not correct?
Direct skips are tax exclusive.
The GST exemption is portable and therefore a decedent’s unused GST exemption can be passed to a surviving spouse.
The GST exemption is allocated on the 709 or 706 to determine the inclusion ratio.
Exempt and Nonexempt trusts have an inclusion ratio of zero and one respectively.
The GST exemption is portable and therefore a decedent’s unused GST exemption can be passed to a surviving spouse.
141
Oscar bought his granddaughter, Chloe, a condo in the town where she is attending medical school. The condo cost $400,000. He also bought Chloe furniture for the condo and a new car to drive to school. These expenses cost an additional $100,000. Finally, Oscar paid Chloe's $60,000 tuition to Duke this year. Which statement is not correct?
Oscar can reduce the value of the taxable gifts he made this year by an annual exclusion of $15,000.
Oscar can reduce the GST tax by an annual exclusion of $15,000.
The payment of tuition to Duke is an exempt gift that is not subject to gift tax or GST tax.
The gift tax and the GST tax for these taxable gifts are offset by Oscar's unified credit.
✔ The gift tax and the GST tax for these taxable gifts are offset by Oscar's unified credit.
A gift tax is offset by each person's unified credit, and a GST tax is offset by a GST exemption. The unified credit and the GST exemption can eliminate gift taxes and GST taxes for lifetime gifts that do not exceed $11,700,000 per person.
142
When one is looking to set up a trust, what are the types one is most likely to encounter?
```
Revocable
Irrevocable
Family member as a beneficiary/Exclusion of a family member
Charitable
Testamentary (after death)
Living (or inter vivos)
```
143
What are three common estate-planning tools that can be used to avoid probate in the distribution of testator's property at death?
joint tenancy with rights of survivorship
beneficiary designations
revocable trusts
144
What are the tax implications of revocable trusts?
For federal income tax purposes, all income is taxed to the grantor at the grantor's tax rate, since he is considered the owner of the trust corpus.
No gift tax is generated by establishing or funding a revocable trust since the gift is not completed until the trust becomes irrevocable.
Since the grantor has not irrevocably disposed of any assets, the entire trust corpus will be included in the grantor's estate for federal estate tax purposes.
145
What is the primary advantage of a sprinkling trust?
The primary advantage of a sprinkling trust is the flexibility it provides to the trustee in making income distributions to beneficiaries who may not have a need for income in one year but could have such a need in a subsequent year.
146
Which power is a general power of appointment?
You create a trust for your husband and sister and retain the power to invade the corpus for your husband's health care expenses.
You have the power to direct in your will who will receive assets from your mother's trust.
You have the right to exercise a power only with the beneficiary's consent.
You have a power to make distributions to your children from a trust created by your father.
✔ You have the power to direct in your will who will receive assets from your mother's trust.
Answer: You have the power to direct in your will who will receive assets from your mother's trust.
You have been given a general power of appointment to appoint the trust property to anyone you choose at your death- including your estate.
You create a trust for your husband and sister and retain the power to invade the corpus for your husband's health care expenses.
is incorrect because you have a limited power of appointment according to an ascertainable standard, which can only be exercised for health care.
You have the right to exercise a power only with the beneficiary's consent.
is incorrect because you have the right to exercise a power only with the beneficiary's consent. The remainder beneficiary has an adverse interest in the trust, and since you need the beneficiary's permission to exercise the power, you have a limited power of appointment.
You have a power to make distributions to your children from a trust created by your father.
D is incorrect because you have a power to make distributions to your children from a trust created by your father. This power is limited because you cannot appoint property to yourself; only to your children as your father directed in the trust document.
147
Which statement is NOT correct?
No taxable gift is made when a beneficiary may withdraw the greater of $5,000 or 5% of the trust corpus, but allows his power to lapse.
When a holder releases a general power of appointment he is making a gift to the other beneficiaries in the trust.
Only lapsed amounts that exceed the greater of $5,000 or 5% of the trust corpus is taxed.
A general power of appointment that is exercised before death will be included in the holder's estate.
✔ A general power of appointment that is exercised before death will be included in the holder's estate.
The last option is not correct because if you exercise or release a general power of appointment before you die, that property is removed from your estate.
The first option is correct because when the beneficiary lets his power lapse he has made a gift to the other trust beneficiaries. But it isn't a taxable gift, because he can't take out more than $5,000 or 5%.
The second option is correct because a release or an exercise of a general power of appointment is a gift to the other beneficiaries in trust.
The third option is also correct because you are only taxed on the lapsed amounts that exceed $5,000 or 5% of the trust corpus. You are not taxed on lapsed amounts that equal $5,000 or less.
148
Which statement is NOT correct?
Choose the best answer.
No taxable gift is made when a beneficiary may withdraw the greater of $5,000 or 5% of the trust corpus, but allows his power to lapse.
When a holder releases a general power of appointment he is making a gift to the other beneficiaries in the trust.
Only lapsed amounts that exceed the greater of $5,000 or 5% of the trust corpus is taxed.
A general power of appointment that is exercised before death will be included in the holder's estate.
✔ A general power of appointment that is exercised before death will be included in the holder's estate.
The last option is not correct because if you exercise or release a general power of appointment before you die, that property is removed from your estate.
The first option is correct because when the beneficiary lets his power lapse he has made a gift to the other trust beneficiaries. But it isn't a taxable gift, because he can't take out more than $5,000 or 5%.
The second option is correct because a release or an exercise of a general power of appointment is a gift to the other beneficiaries in trust.
The third option is also correct because you are only taxed on the lapsed amounts that exceed $5,000 or 5% of the trust corpus. You are not taxed on lapsed amounts that equal $5,000 or less.
149
Is a revocable trust a "grantor trust?"
Answer: Yes
A typical revocable living trust is a 'grantor trust.' It affords no asset protection or income tax advantages, and is not designed to do so. It is designed primarily to avoid probate.
150
Under distributable Net Income (DNI) rules, what is the trust’s deduction?
DNI
The greater of the amount distributed or DNI
The actual amount distributed to the beneficiary
The lesser of the amount distributed or DNI
✔ The lesser of the amount distributed or DNI
151
```
Under what circumstances does a revocable trust become irrevocable?
Death
Bankruptcy
Incapacity
Divorce
Both A and C
```
Both A & C
152
The grantor will pay income tax on any income produced by a trust for all of the following reasons except?
Grantor receives income
Grantor indicates income should be paid to his/her spouse
Grantor does not have any unexpired interest or residual control over trust
Grantor states the income should be used to satisfy his legal obligations
✔ Grantor does not have any unexpired interest or residual control over trust
153
Which of the following income tax considerations is correct with respect to a trust beneficiary?
If the asset is held by the trust, the basis of the asset will have no impact on the tax consequences to the beneficiary.
When income is distributed to a trust beneficiary, it will be taxed to the trust.
The income tax consequences on the sale of an asset will be the same whether it is owned by a trust or owned by a beneficiary.
If a trust contains a provision that allows the trustee to make income distributions to the grantor of the trust, but no income is distributed, income tax will be paid by the trust.
✔ If a trust contains a provision that allows the trustee to make income distributions to the grantor of the trust, but no income is distributed, income tax will be paid by the trust.
154
Which of the following is correct in regards to simple and complex trusts?
Complex trusts are required to pay out all income
Simple trusts can only distribute corpus to charities.
Complex trusts are responsible for paying the income tax on distributions to the beneficiaries.
Simple trusts have a personal exemption of $300 as a separate entity
✔ Simple trusts have a personal exemption of $300 as a separate entity
155
If a trust is recognized as a Grantor Trust, who pays the taxes?
The trust
The beneficiary/beneficiaries
The Grantor
Both A and C
✔ The Grantor
156
All of the following are items of IRD except:
Unpaid life insurance commissions
Unpaid life insurance cash value
Life insurance death benefit proceeds
Unpaid life insurance cash value ✔
| Life insurance death benefit proceeds ✔
157
The Paul Daniels estate has an estimated FMV of $2.8 million. The principal asset in the estate is Daniels Farms, an unincorporated business that Paul operated for the last 15 years. The total FMV of the farm operation is $1.5 million, of which $1.3 million is the value of the land. Paul’s will leaves the land and all other assets used in the farming operation to his son, John who will continue the farming operation. The estate has administrative expenses and debts totaling $200,000.
Does Daniels Farm qualify for special use valuation in Paul Daniels’ estate?
Answer: Yes
50% Test: 1.5/2.8 = 54%
25% Test: 1.3/2.8 = 46%
158
What is the purpose of trying to qualify a stock redemption as a Sec. 303 redemption?
```
Choose the best answer.
Avoid being taxed as dividends
To extend control beyond family members
Avoid being taxed as capital gains
To break the chain of family attribution
```
✔ Avoid being taxed as dividends
IRC Sec. 303 allows a corporation to make a distribution in redemption of a portion of the stock of a decedent that will not be taxed as a dividend to use to pay death taxes and other expenses.
159
Dan's gross estate is $2,250,000, administrative and funeral costs are $250,000. To qualify for Sec. 303 redemption, the value of the stock in question must exceed what?
```
Choose the best answer.
$350,000
$700,000
$2,000,000
$1,000,000
```
35% ($2,250,000 - $250,000) = $700,000
160
The Jim Bradley estate has an estimated FMV of $6.1 million. The estate has administrative expenses and debts totaling $400,000. The largest asset in Jim’s estate is his interest in Birchwood Industries, a closely held corporation. The FMV of Jim’s stock interest at death was $2.8 million. This amount is 25% of the value of all voting shares of Birchwood Industries stock. The corporation has real estate interests associated with the business worth $6.4 million.
Does this estate qualify for special use valuation?
Yes
No
✔ No
No. The 50% Test 2.8/6.1 = 46% The 25% Test: 1.6/6.1 = 26%. Jim owned 25% of Birchwood Industries therefore 25% of the corporation's real estate is $1,600,000 which is used to calculate the 25% Test.
Note: the estate qualifies for IRC Sections 303 & 6166 by meeting the 35% test 2.8/5.7 = 49%
161
```
Jill died with a gross estate of $3,100,000. The administrative and funeral costs were 175,000. In order to qualify for a section 303 stock redemption, the value of the stock must exceed what amount?
$970,500
$1,023,750
$1,000,750
$1,100,500
```
✔ $1,023,750
35%
162
Which of the following statements are true in regards to a Self-Canceling Installment Note?
Any outstanding installment payments are included in the business owner’s estate.
A SCIN has a provision to have the note partially or fully cancelled before the note matures or at the business owner’s death.
The buyer pays a discount on SCINs since the actual payment received by the seller may be less.
Any unrealized capital gains must be recognized when the note is cancelled or at the owner’s death.
Any outstanding installment payments are included in the business owner’s estate. ✘
A SCIN has a provision to have the note partially or fully cancelled before the note matures or at the business owner’s death. ✔
The buyer pays a discount on SCINs since the actual payment received by the seller may be less. ✘
Any unrealized capital gains must be recognized when the note is cancelled or at the owner’s death.
163
```
When looking at a cross purchase agreement, which type of policies would be considered for each owner?
Life insurance
Health insurance
Disability insurance
Long term care insurance
```
Life insurance ✔
Health insurance ✘
Disability insurance ✔
Long term care insurance ✘
164
Which statement is correct regarding corporate stock redemptions?
Redemption of all the deceased shareholder's stock by the corporation is treated as a dividend distribution
It is preferable for a corporation to have redeemed stock treated as a dividend rather than as capital gains.
The shareholder's estate is obligated to sell all of the deceased owner's stock to the corporation, which guarantees a market for the stock in the shareholder's estate.
Life insurance premiums used to fund the agreement are deductible by the corporation.
✔ The shareholder's estate is obligated to sell all of the deceased owner's stock to the corporation, which guarantees a market for the stock in the shareholder's estate.
Answer: Corporations want to avoid having the stock redemption treated as a dividend distribution because it is taxed as ordinary income rather than as a sale or exchange, which is treated as a capital gain. Redemption of all of a shareholder's stock results in a complete termination of the shareholder's interest, and is treated as a capital gain.
165
Which of the following is true in regards to life insurance and sinking funds?
Premiums paid by the corporation on the insurance policies are taxable to the shareholders.
Death proceeds that are received by the insurance corporation are taxable as ordinary income.
In a tax year that the corporation’s taxable income is retained for paying insurance premiums in excess of the accumulated earning credit, they should show the retention is necessary to meet reasonable needs of the business.
Life insurance premiums used to fund the purchase of an owner’s interest are deductible.
✔ In a tax year that the corporation’s taxable income is retained for paying insurance premiums in excess of the accumulated earning credit, they should show the retention is necessary to meet reasonable needs of the business.
166
Which of the following statements does not apply to both a CRAT and a CRUT?
Selected Answers:
Correctc.
Additional contributions of property may be made into the trust
