Estate Planning Flashcards

Question

When is due date of estate tax return?

Answer 1

The due date of the estate tax return is **nine months after the decedent's date of death**, however, the estate's representative may request an extension of time to file the return for up to six month

Answer 2

**If the testator contemplates that a family member will object to who they have left their money to (for example: charity), or if the transfer is not the norm (for example: nontraditional beneficiaries), then they may want to avoid probate.** * **Persons in non-traditional relationships should avoid probate!!!** * **There are other ways of transferring party to the non-traditional partner:** * Lifetime gifts * Named beneficiary of a contract (life insurance, IRA) * State Titling laws with survivorship (JTWROS) * State Trusts law where surviving partner is the trust beneficiary

Answer 3

* The executor (testate) or administrator (intestate) is appointed by the probate court. * The personal representative (executor or administrator) will manage and distribute the estate and take the following actions. * Marshal assets. * Post legal notices. * Pay the debts, costs and taxes from assets in probate. * From what assets? * **Compile list of of assets** * Manage and distribute the estate

Answer 4

**ADEMPTION EXAMPLE (extinguish)** Kristi leaves the car to Bill, but the car has been sold when she dies.Bill gets nothing. **ABATEMENT EXAMPLE (reduction)** The will says $100K to Chad and $100K to Brad, and the testator dies with only $100K in total, then each person’s bequest would be reduced to $50K.

Answer 5

**What Property Passes through Probate?** * Fee Simple Property * Tenancy in Common Property * Community Property * Invalid beneficiary designations to contracts such as insurance, annuities, IRAs, etc. **What Property Passes Outside Probate?** * State contract law retitles to beneficiary directly * Life insurance contracts * Annuity contracts * IRAs, SEPs, SIMPLEs, & qualified plans * Pay-on-Death (bank accounts) & Transfer-on-Death accounts (investment accounts) * State titling law with survivorship features (JTWROS, TE) * State trust law (property already retitled to trust)

Answer 6

**Common Duties of Executor and/or Administrator** * Locates and assembles all of the decedent's property. * Safeguards, manages, and invests property. * Advertises in legal newspapers that the person has died and that creditors and other interested parties are on notice of the death and opening of probate. * Locates and communicates with potential beneficiaries of the decedent. * Pays the expenses of the decedent. * Pays the debts of the decedent. * Files both federal and state income, fiduciary, gift tax, and estate tax returns (such as Forms 1040, 1041, 709, and 706 for federal tax purposes) and makes any required tax payments. * Distributes remaining assets to beneficiaries according to the will or to the laws of intestacy. * Closes the estate formally or informally.

Answer 7

gift tax return

Answer 8

**Direct** * A direct payment of cash or transfer of property from one person to another. * Example of a direct gift: Aunt Martha writes a check for $15,000 to her favorite nephew, Martin. **Indirect** * An indirect transfer on behalf of a donor for the benefit of a donee. * Makes a payment for someone else. * Titles property jointly (there are exceptions). * Below-market rate loans. * Gift loans, interest free loans, below market rate loans, in which phantom interest income must be imputed for the interest income they would have earned had the loan arrangement been bona fide * **Forgiving debt is a form of an indirect gift". For example: Joe loans Laureen $50,000 for her to buy a new car. Six months later, Joe forgives the loan, he has made an indirect gift to Laureen.** * Another example: A titles a vacation home JTWROS with B and receives no consideration in return. This would be an indirect gift of ½ the value of the vacation home. **Complete** Completed gifts are gifts that have come to fruition. * The donor has released all control over the asset and the donee can be identified. * Renunciation of retained or reversionary interests. **Incomplete** * Incomplete gifts are gifts that have not yet come to fruition. * They are not taxable gifts for gift tax purposes. * Joint bank accounts may be incomplete gifts, but are not completed until noncontributing party withdraws funds from the account". For example: Joe opens a joint bank account with his daughter Sydney. Joe contributes $25,000 to the account and Sydney contributes zero. This is an incomplete gift, until Sydney withdraws funds from the account. Once Sydney withdraws funds, the funds withdrawn represent a completed gift. * An example of an incomplete gift would be if a gift is revocable, such as a transfer to a revocable trust. A revocable gift is not a gift for gift tax purposes. **Reversionary Interests** An interest that has been transferred by a transferor and subsequently reverts back to the transferor. * If donor renounces his retained or reversionary interest, or trust becomes irrevocable by election or death of transferor, or at the direction of trust, then it would be a completed gift for gift tax purposes * Example: Chuck transfers property to a trust for five years for the benefit of Robbie. At the end of the five years the property reverts back to Chuck. Since the property reverts back to Chuck, his interest is a reversionary interest and the value of the gift is less than the full value of the property. **Net Gifts** * Normally the donor is responsible for all gift taxes. * A net gift is a gift made on the condition that the donee pay any gift tax. * The donor will have taxable income to the extent that any gift tax paid by the donee exceeds the donor’s adjusted basis in the property transferred. YOu include in gross income (for gift tax) any gift tax paid IN EXCESS of cost basis

Answer 9

**Annual Exclusion** All individuals (donor) may gift up to $16,000 (for 2022) tax free per donee each year (adjusted for inflation). The gift must be of a present interest to qualify for the annual exclusion. Use it or lose it! For non-U.S. citizen spouses (donees) * “Super Annual Exclusion” = $164,000 (for 2022) indexed

Answer 10

Fair Market Value (FMV) at the date of the gift. Real estate will need an appraisal. Publicly traded securities are valued at the high and low trading price for the day. Bonds are valued at the present value (PV) of the expected future payments. Discounts may be allowed for: * lack of marketability - A reduction in the fair market value of a transferred asset because the interest is more difficult to sell to the public. * lack of liquidity - The inability to convert to cash without experiencing price concessions. * lack of control - Owning a minority interest in a company is not as valuable as having a majority or controlling interes

Answer 11

Married spouses (donor) can elect to split gifts effectively doubling the annual exclusion per donee to $32,000 (for 2022). Split gifts require a gift tax return (Form 709) to be filed. Split gifts must be elected for all gifts for that year. Split gifts only count for the time during the year which a couple was married. No gift-splitting for community property (no 709 returns needed). No 709 on jointly held property. Married couples in community property states (Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, and Washington), and in Wisconsin where Marital Property Laws have been adopted, are **not required to split gifts** because a gift by either spouse is deemed to have been divided by each spouse.

Answer 12

A provision that allows the trust beneficiary to withdraw some or all of any contribution to the trust for a limited period so as to create a gift of a present interest. The donee does not have to withdraw, the mere right creates the present interest. May limit to annual exclusion or less, converting a future interest in trust to a gift of present interest. 5/5 Lapse Rule * A taxable gift occurs when the power to withdraw in excess of $5,000 or 5% of the trust assets is lapsed by the powerholder. * This only comes into being when there is more than one beneficiary Ex: ExP: Harry and Wendy transfer to an irrevocable trust $90,000 naming their three children (Adam, Billy, and Christopher) as the beneficiaries. The trust provisions include a right to withdraw an amount equal to one-third of any contribution for 30 days for each beneficiary up to the annual exclusion limit for both spouses ($32,000 total for 2022). * After 30 days, Adam has lapsed the power to withdraw $30,000. * Adam has made a gift of one-third of $30,000 to each of Adam, Billy, and Christopher. * The gift to himself is no problem, but the gift of one-third of $30,000 ($10,000) to each of Billy and Christopher violates the 5/5 Lapse Rule (5% of $30,000 assets = $1,500 and $5,000 whichever is higher) and has therefore made a taxable gift of $8,333 ($10,000 - $1,667) to each of Billy and Christopher. (One-third of $5,000 = $1,667) * When presumably, Billy and Christopher also lapse, they likewise have made taxable gifts which are gifts of a future interest and therefore do not qualify for the annual exclusion and require the filing of a gift tax (709) return.

Answer 13

**Qualified Transfers** * A qualified transfer is a payment made by a donor for someone else paid directly to: * A qualified educational institution for tuition and fees. * A medical care provider for qualifying medical expenses. * The key is that it must be paid directly to the institution. * A qualified transfer does not count against the annual exclusion or applicable lifetime exclusion amounts. **Political organizations, qualified transfers, payments for legal support, payments between divorcing spouses and transfers within a business setting are not subject to gift tax.** **Transfers in a Business Setting** * Transfers in a business setting are presumed to be compensation, and therefore not a gift. * De minimis gifts are the exception to the compensation rule. **PaymentsPayments for Legal Support** Payments for legal support are not gifts. Legal support does not necessarily stop at age 18 (state law will rule). **Payments to Divorcing Spouses** Payments pursuant to a divorce decree are nontaxable property settlements and therefore are not gifts. There is a carryover income tax basis for property transferred from one spouse to the other. Alimony payments are deductible for income tax by the payor and includible as income by payee for divorces finalized prior to 12/31/18. Divorces finalized or materially modified after 12/31/18 will not be deductible by the payor, or includible as income to the payee. Transfers in the year of the termination of the marriage are considered part of the original divorce decree.

Answer 14

**Gifts to Spouses** * There is an unlimited marital deduction allowance for transfers between married people. * The transferee spouse must be a U.S. citizen. * There are different rules for non-U.S. citizens. * There is a super annual exclusion for non-US citizen spouses, since they do not receive the unlimited marital deduction $164,000 in 2022. **Charitable Gifts** * There is an unlimited gift and estate tax deduction for gifts and bequests made to a qualified charity.

Answer 15

* Adjusted Gross Estate * Less Marital deduction * Less Charitable deduction * Less State Death Tax Deduction * Equals Taxable Estate * Plus Post ‘76 gifts – added back to gross up total gifts. * Equals Tentative Tax Base

Answer 16

* An estate tax is paid by the executor or the administrator. * If there is no executor or administrator, then the person in receipt of the property must pay. * If the executor distributes to heirs before paying tax, then the executor may be personally liable.

Answer 17

Return * Form 706 is due 9 months after death. * Extension to file (but not to pay) can be granted for an additional 6 months. Penalties * Failure to file - 5% per month up to 25% * Failure to pay - 0.5% per month up to 25% * Failure to file is reduced by failure to pays Memory techniques to help remember form numbers: * 706 = “six feet under” is an estate tax return * 709 = “nine lives” is a gift tax return

Answer 18

Pays a fixed annuity to the grantor for a defined term. The remainder interest is transferred to a noncharitable beneficiary at the end of the GRAT term. * There is a gift = The PV of remainder interest (FMV - PV of annuity = gift). If the grantor dies during the GRAT term, then the value of the trust is included in the gross estate of the transferor, so no estate tax is saved. Best property to use is property that is expected to appreciate at a rate greater than the 7520 rate (federal rate). Risk – the grantor dies too early. If grantor outlives the term, then the remainder interest is removed from the gross estate.

Answer 19

A specialized form of a GRAT for a personal residence. The grantor receives use of the house transferred instead of money. A QPRT is ideal if the house is appreciating faster than the Section7520 interest rate and the family plans to keep the home. Gift equals the present value of the remainder interest (calculated like a GRAT). If the grantor dies during the QPRT term then the entire asset is included in the grantor’s gross estate.

Answer 20

A partnership is created to transfer assets generally to a younger generation. There are two interest components: General and Limited Partnership (LP) interests. 1% general partner is the transferor. 99% limited partner which these are gifted to the lower generation by making use of the annual gift tax exclusion amount. An FLP takes advantage of valuation discounts. An FLP is used when the transferor is intent on gifting all or part of the asset while maintaining control of the entity. FLPs are designed to get portions of the gross estate out using the annual exclusion and valuation discounts.

Answer 21

**Simple Trust** A trust that requires all of the trust income to be distributed on an annual basis to the beneficiaries and does not have a charitable organization as one of its beneficiaries. **Complex Trust** * If the trust is revocable then it is not a completed gift. * If the trust is irrevocable then it is generally a completed gift(unless the grantor has a retained interest).

Answer 22

**Fo**r income tax purposes, trusts are treated as hybrid entities. * Income of the trust that is distributed is taxed to **beneficiaries**. * Income of the trust that is accumulated is taxed at **trust rates.**

Answer 23

**Revocable Trusts** * Avoids probate. * Provides for management of the grantor’s assets if grantor is incapacitated. **Irrevocable Trusts** * Used to achieve estate and gift objectives. **Inter Vivos Trust** * Created during life. (ex: GRAT) * Opposite of test trust **Testamentary Trusts** * **Created at death.** **Standby Trust** * Unfunded or minimally funded. * Waiting for triggering event which is usually incapacity. **Pourover Trust** * Receives assets from another source**.** **Grantor Trust** * Inter vivos trust for the grantor. * Grantor pays all income tax. **Funded or Unfunded** * A funded trust has received property from the grantor. * An unfunded trust has been drafted but not funded.

Answer 24

**Inter Vivos Revocable** * Important in states with high probate costs. * Privacy is maintained. * No notice requirements. * Terms are confidential. * Will contests are discouraged. * State law controls, but generally more difficult. * NOT effective for reducing estate taxes because the grantor still controls the assets. **Inter Vivos Irrevocable Trusts** * Completed gift! * Use annual exclusion - remember need a present interest. * Distributions of income are considered a present interest. * Crummey (do not forget “5-and-5” power) Provision creates a present interest. **Irrevocable Life Insurance Trusts (ILIT)** * The trust owns a life insurance policy - The life insurance policy is a future interest. * Need a present interest to use annual exclusion. **Bypass Trusts (Credit Shelter or B)** Spouse can still get the income, HEMS, “5-and-5.” (health, education, mainteneance, support) Usually Testamentary, but can be Inter Vivos and exclude future appreciation **Power of Appointment Trust** Generally used to take advantage of the unlimited marital deduction. May be used to avoid Generation Skipping Transfer Tax. **Qualified Terminable Interest Property (QTIP) Trust (also called the “C” or “Q” trust)** Used to take advantage of the unlimited marital deduction. **Grantor Retained Income/Interest Trust (GRITs)** Grantor retains an interest in the trust (usually an income interest). GRATS, GRUTS, QPRTS, TPPTs. **Grantor Retained Annuity Trust (GRAT)** Fixed percentage of the initial contribution for life or for a term of years is paid to the grantor. Transfer future appreciation out of estate without gift/estate tax consequences. If the grantor dies within the trust term, the FMV of the trust property is brought back into the gross estate. **Grantor Retained Unitrust (GRUT)** Fixed percentage of the current value of the trust assets is paid to the grantor. Need to revalue assets every year. Not as popular as a GRAT. **Qualified Personal Residence Trust (QPRT)** Personal residence trust. **Tangible Personal Property Trust** Personal property - artwork, antiques, etc. **Dynasty Trust** Long periods of time. Used to avoid transfer tax at the death of each generation. **Grantor Trust** Income taxed to grantor. Completed transfer for gift and estate tax purposes. Incomplete transfer for income tax purposes. **Totten Trusts (Pay on Death Bank Accounts)** Payable on Death (POD) accounts (not really trusts). **Blind Trusts** Revocable trust used when self management might be a conflict of interest (e.g., a politician).

Answer 25

* A married couple is considered one single economic unit thus entitled to unlimited transfer between husband and wife if citizens. * The advantages of the unlimited marital deduction: * It defers the payment of estate taxes generally to the death of the second spouse. * It creates the ability to fund the estate of the second-to-die spouse. * The requirements for the unlimited marital deduction include the following: * The parties must be married at the date of death or on the date of the gift. * There is a citizen requirement - discussed later. * The limitations of the unlimited marital deduction: * Remember - net value!!! * Only the assets the surviving spouse actually receives are deductible for the unlimited marital deduction. The marital deduction is the the attached example $800K, not the full $1,000,00 of gross estate because you have to take into account administrative expenses.

Answer 26

Exceptions to the rule: * 6 month survival contingency. * Remember back to the wills chapter, the survivorship clause cannot require that the spouse survive by more than 6 months; otherwise, the unlimited marital deduction may not apply. * A terminable interest where the spouse has a general power of appointment. * A QTIP trust. * A Charitable Remainder Trust where the spouse is the only noncharitable beneficiary. The idea behind the terminal interest rule is that you only get an unlimited marital deduction if the property goes outright to the spouse or meets an exception to the rule.

Answer 27

**Term Insurance** * Coverage for a definite period of time. * Funds temporary income needs. * Can be used as a hedge (to cover estate tax) when engaging in GRATs, GRUTs, QPRTs, etc., when may result in estate tax inclusion if grantor does not survive the term. **Universal Life** * A term policy with a cash accumulation feature. * The premium is flexible. * May fund permanent needs. **Variable Universal Life** * Universal life with the ability of the owner to determine how to invest the cash accumulation. **Whole Life** * Permanent insurance. * Funds permanent need. * Invested by insurer-though usually pays a minimum guaranteed return. Even if cash account runs out, life insurance is guaranteed to remain in force provided the insured pays the premium. **Second-to-Die Insurance** * Covers two parties (usually spouses) and pays only when the second person dies. * Useful when one party is uninsurable. * Often used to pay estate tax at second spouse’s death. * Can be term or permanent. * May be whole life or UL and is usually owned by an ILIT.

Answer 28

* I.R.C. Sec 2033 – Life insurance on someone else’s life * The interpolated terminal reserve plus any unearned premium will be included in the gross estate. * Life insurance on the insured/decedent’s life * The death benefit will be included in the gross estate. * I.R.C. Sec. 2035 – The three year rule A policy owned by the decedent on his **own life** that are assigned within 3 years will be included in the decedent’s gross estate at the face value (Death Benefit).

Answer 29

**Solution:** The correct answer is A. Answers B and C will not pass through probate because they pass by operation of law or state contract law. Answer A will pass through probate because it is owned fee simple by the decedent. The fact that the house is subject to a mortgage does not affect whether it passes through probate.

Answer 30

**Solution:** The correct answer is D.

Answer 31

**Solution:** The correct answer is D. The house and the car will transfer under the will. The life insurance policy will transfer outside the probate process because of the named beneficiaries. The 401(k) plan will transfer to Uncle Joe’s probate estate because there is no listed beneficiary. Since the will does not cover the 401(k) plan, the asset will transfer via the state’s intestate succession laws.

Answer 32

**Solution:** The correct answer is E.

Answer 33

**Solution:** The correct answer is C. The fact that probate provides clear title to heirs and legatees is an advantage, not a disadvantage, of the process. All of the other options are disadvantages of the probate process.

Answer 34

**Solution:** The correct answer is B. Abatement is the reduction in an estate when there is insufficient assets to satisfy all legatee provisions. A surety bond is a bond posted by the administrator of the probate process. Letters testamentary is the document given to the executor from the probate court authorizing the executor to act on behalf of the estate.

Answer 35

* Manage and distribute the estate * Distribute specific bequests * What if the asset no longer exists? * Ademption – Extinction of right * Then distribute the remaining assets * What if there are not enough assets to satisfy all bequests? * Abatement - Reduction ADEMPTION EXAMPLE (extinguish) Kristi leaves the car to Bill, but the car has been sold when she dies.Bill gets nothing. ABATEMENT EXAMPLE (reduction) The will says $100K to Chad and $100K to Brad, and the testator dies with only $100K in total, then each person’s bequest would be reduced to $50K.

Answer 36

**Solution:** The correct answer is A.

Answer 37

A person who inherits under a valid will.

Answer 38

**Solution:** The correct answer is C. Property owned JTWROS follows the actual contribution rule for inclusion in the gross estate. Therefore, since Natalie contributed 60% of the property, her estate will include 60% of the Fair Market Value (60% × $1,000,000 = $600,000). Tenants by entirety follows the 50/50 contribution rule because they are married people. Comm prop follows 50/50 too.,

Answer 39

**Solution:** The correct answer is D. The deemed contribution rule ALWAYS applies between spouses so it must be used for community property and TE since the marital relationship is a requirement of the ownership interest. JTWROS can be between spouses, and then it is assumed a 50% contribution rule too, BUT JTWROS can also be used by non-spouses and then the actual contribution rule applies

Answer 40

**Solution:** The correct answer is B.

Answer 41

**Solution:** The correct answer is B. The property could be titled either as Tenancy in Common or Joint Tenancy with Rights of Survivorship. The property could not be owned at Tenancy by the entirety or Community Property because Sylvia and Rachel are not married. Fee Simple is not an option either because there is more than one owner.

Answer 42

**Solution:** The correct answer is A. Gary does not own any interest in the property. Sherri purchased the home before she was married to Gary. At the time of marriage, the property remained Sherri’s separate property. When Sherri died, her interest (100%) transferred to Casey. Thus, Gary does not own any of the property and does not have any basis in the property. Casey will have a basis of $200,000.

Answer 43

**Solution:** The correct answer is A. The car is owned by Evan as fee simple. There is no indication that Chris or Jenn retained any interest in the car after the gift. Even though Evan is married, a gift to an individual would not be community property.

Answer 44

**Solution:** The correct answer is B. Co-owners of tenancy in common property are not liable for the debts of their co-owners. Thus, the bank can only seize Rustin’s portion of the property to satisfy his debt.

Answer 45

**Solution:** The correct answer is B. This is an indirect gift since the donor is forgiving an obligation of the donee.

Answer 46

**Direct** * A direct payment of cash or transfer of property from one person to another. * Example of a direct gift: Aunt Martha writes a check for $15,000 to her favorite nephew, Martin. **Indirect** * An indirect transfer on behalf of a donor for the benefit of a donee. * Makes a payment for someone else. * Titles property jointly (there are exceptions). * Below-market rate loans. * Gift loans, interest free loans, below market rate loans, in which phantom interest income must be imputed for the interest income they would have earned had the loan arrangement been bona fide * Forgiving debt is a form of an indirect gift". For example: Joe loans Laureen $50,000 for her to buy a new car. Six months later, Joe forgives the loan, he has made an indirect gift to Laureen. * Another example: A titles a vacation home JTWROS with B and receives no consideration in return. This would be an indirect gift of ½ the value of the vacation home. **Complete** Completed gifts are gifts that have come to fruition. * The donor has released all control over the asset and the donee can be identified. * Renunciation of retained or reversionary interests. **Incomplete** * Incomplete gifts are gifts that have not yet come to fruition. * They are not taxable gifts for gift tax purposes. * Joint bank accounts may be incomplete gifts, but are not completed until noncontributing party withdraws funds from the account". For example: Joe opens a joint bank account with his daughter Sydney. Joe contributes $25,000 to the account and Sydney contributes zero. This is an incomplete gift, until Sydney withdraws funds from the account. Once Sydney withdraws funds, the funds withdrawn represent a completed gift. * An example of an incomplete gift would be if a gift is revocable, such as a transfer to a revocable trust. A revocable gift is not a gift for gift tax purposes. **Reversionary Interests** An interest that has been transferred by a transferor and subsequently reverts back to the transferor. * If donor renounces his retained or reversionary interest, or trust becomes irrevocable by election or death of transferor, or at the direction of trust, then it would be a completed gift for gift tax purposes * Example: Chuck transfers property to a trust for five years for the benefit of Robbie. At the end of the five years the property reverts back to Chuck. Since the property reverts back to Chuck, his interest is a reversionary interest and the value of the gift is less than the full value of the property. **Net Gifts** * Normally the donor is responsible for all gift taxes. * A net gift is a gift made on the condition that the donee pay any gift tax. * The donor will have taxable income to the extent that any gift tax paid by the donee exceeds the donor’s adjusted basis in the property transferred.

Answer 47

**Solution:** The correct answer is D. An outright gift with no limitations or future requirements directed to a specific named donee is considered a completed gift.

Answer 48

**Solution:** The correct answer is A. Until Shane removed funds, this was an incomplete gift, once Shane removed money, the gift was complete, to the extent he took funds.

Answer 49

**Solution:** The correct answer is B. Because Jane’s basis in the property was greater than the FMV of the property on the date that she gifted the property, Christopher will be subject to the double basis rules. All but "B" are correct; it's important to remember that double basis gifts will NEVER be adjusted for gift tax paid since there was no appreciation on the transfer date.

Answer 50

**Solution:** The correct answer is B. A payment made directly to an individual to reimburse him for medical expenses is not a qualified transfer. To be a qualified transfer, the payment must be made directly to the healthcare provider. All of the other options are true.

Answer 51

* A qualified transfer is a payment made by a donor for someone else paid directly to: * A qualified educational institution for tuition and fees. * A medical care provider for qualifying medical expenses. * The key is that it must be paid directly to the institution. * A qualified transfer does not count against the annual exclusion or applicable lifetime exclusion amounts. Political organizations, qualified transfers, payments for legal support, payments between divorcing spouses and transfers within a business setting are not subject to gift tax.

Answer 52

**Solution:** The correct answer is B.

Answer 53

**Solution:** The correct answer is C. A completed gift does not occur until the donee withdraws money from the account for her own benefit.

Answer 54

**Solution:** The correct answer is C. There is no gift to Shane until Shane withdraws funds, as a result this is an incomplete gift.

Answer 55

**Solution:** The correct answer is B. Taxable gifts is a term meaning net of annual exclusions. **Recipient** **Amount** **Gift split** **- annual excl.** **- Charitable Deduction** **- Marital deduction** **= taxable** Evan$62,000\*016,0000046,000Stephen$20,000016,000004,000Heather$51,000\*016,0000035,000Total133,000048,0000085,000 \*Gifts of community property reflect Chris' half of the property for the gift. The car for Evan and the cash for Heather are community property.

Answer 56

**Solution:** The correct answer is A. Publicly traded securities are valued at the average of the high and the low trading price for the day of the gift.

Answer 57

**Solution:** The correct answer is B.

Answer 58

**Solution:** The correct answer is C. $2,639,559

Answer 59

**1.691(d)-1** [**Amounts**](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=661fb5529bda5e7b12e0c516a1a1473f&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1) **received by surviving** [**annuitant**](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=4dc1cb5bdba7642a9158aae7b5c05f0d&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1) **under joint and survivor** [**annuity contract**](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=15078a40eb4c0ca19773d5f6beb1ec78&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1)**.** ## Footnote **(a)** ***In general.*** Under section 691(d), annuity [payments](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=1ee8b271eb9ee59e360e16676f011b3d&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1) received by a surviving [annuitant](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=4dc1cb5bdba7642a9158aae7b5c05f0d&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1) under a joint and survivor [annuity contract](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=15078a40eb4c0ca19773d5f6beb1ec78&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1) (to the extent indicated in [paragraph (b)](https://www.law.cornell.edu/cfr/text/26/1.691(d)-1#b) of this section) are treated as [income](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=1c07283120860b02c14e93d17bce07df&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1) in respect of a decedent under section 691(a) for the [purpose](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=8e7a841e0b1b57eefeaeda24b0307077&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1) of [allowing](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=88bc621669e0e301f18847de820acec8&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1) the deduction for estate tax provided for in section 691(c)(1)(A). This section applies only if the deceased [annuitant](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=4dc1cb5bdba7642a9158aae7b5c05f0d&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1) died after December 31, 1953, and after the [annuity starting date](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=98bd4448f0c29f7dd2ee125fe8f28514&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1) as [defined](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=9bc15e20ef3eaa4f45fd661aa756d465&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1) in section 72(c)(4). **(b)** ***Special value for surviving annuitant's payments.*** Section 691(d) provides a special [value](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=6835fc02ac053f3a944233ed2f208269&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1) for the surviving [annuitant](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=4dc1cb5bdba7642a9158aae7b5c05f0d&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1)'s [payments](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=1ee8b271eb9ee59e360e16676f011b3d&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1) to determine the [amount](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=661fb5529bda5e7b12e0c516a1a1473f&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1) of the estate tax deduction provided for in section 691(c)(1)(A). This special [value](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=6835fc02ac053f3a944233ed2f208269&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1) is determined by multiplying: **(1)** The excess of the [value](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=6835fc02ac053f3a944233ed2f208269&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1) of the annuity at the date of death of the deceased [annuitant](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=4dc1cb5bdba7642a9158aae7b5c05f0d&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1) over the total [amount](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=661fb5529bda5e7b12e0c516a1a1473f&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1) excludable from the [gross income](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=738000a3c4dedccb805a8fb4d9377fb2&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1) of the surviving [annuitant](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=4dc1cb5bdba7642a9158aae7b5c05f0d&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1) under section 72 during his [life expectancy](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=564d30d03abc28ceb49b7968bc972770&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1) period (see [paragraph (d)(1)(i)](https://www.law.cornell.edu/cfr/text/26/1.691(d)-1#d_1_i) of this section) by **(2)** A fraction consisting of the [value](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=6835fc02ac053f3a944233ed2f208269&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1) of the annuity for estate tax [purposes](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=0ad2de56cb198dce23b0b55179137f16&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1) over the [value](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=6835fc02ac053f3a944233ed2f208269&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1) of the annuity at the date of death of the deceased [annuitant](https://www.law.cornell.edu/definitions/index.php?width=840&height=800&iframe=true&def_id=4dc1cb5bdba7642a9158aae7b5c05f0d&term_occur=999&term_src=Title:26:Chapter:I:Subchapter:A:Part:1:Subjgrp:12:1.691(d)-1).

Answer 60

What is the IRD tax deduction? Income in respect of a decedent (IRD) is income that was owed to a decedent at the time he or she died. Examples of IRD include retirement plan assets, IRA distributions, unpaid interest and dividends, salary, wages, and sales commissions, to name only a few. Items of IRD, along with other estate assets, are eventually distributed to the beneficiaries of an estate. While the beneficiaries receive most assets of the estate income-tax free, IRD assets are generally taxed at beneficiaries’ ordinary income tax rates. However, if a decedent’s estate has paid federal estate taxes on the IRD assets, a beneficiary may be eligible for an IRD tax deduction based on the amount of estate tax paid. Best of all, the IRD deduction is not subject to the 2% floor, as are other miscellaneous itemized deductions. With tax advisors and attorneys focused on the estate-tax return and the transfer of assets, it is easy to overlook the potential for heirs to benefit from IRD deductions. Here’s how to make sure you get the tax benefits you deserve Examine the decedent’s estate-tax return To determine if you can benefit from the IRD tax deduction, obtain a copy of the decedent’s estate-tax return (IRS Form 706) from the executor or administrator of the estate. Look to see if the estate paid an estate tax (for 2017, estates valued at less than $5.49 million will not owe estate tax). Then, take note of the value of any items of IRD you inherited. If estate tax was paid on those items, it is likely that you can claim the IRD deduction. If the decedent’s estate did not pay estate tax on the IRD assets, then the beneficiaries can claim no IRD deduction.

Answer 61

**Solution:** The correct answer is B. $2,610,200

Answer 62

funeral expenses last medical expenses admin expenses debts losses during administration

Answer 63

**Solution:** The correct answer is C. A SCIN is a note with a self canceling premium payment attached so that the note will cancel at the transferor’s death. The GRAT, QPRT and the GRUT are irrevocable trusts and will result in a current taxable gift.

Answer 64

**Solution:** The correct answer is C. Answer C is a false statement because bargain sales usually occur among related parties. All of the other statements are true.

Answer 65

The correct answer is d. Option a describes an invalid holographic will. Option b describes a situation in which the testator is not “of sound mind” and therefore cannot make a valid will. If the decedent dies without a valid will, he is said to have died intestate.

Answer 66

The correct answer is a. A will can be revoked by physically destroying the will. None of the other answers would effectively revoke Dawson’s will.

Answer 67

A power that “springs” into existence upon some defined event or determination (e.g., the principal is unconscious or leaves the country.) Ex: **Power of Attorney for Property** * Specific type of power of attorney (may be durable or not and springing or not). * This power of attorney is used to allow an agent to manage the principal’s property.

Answer 68

Correct Answer is A

Answer 69

Answer: C Giving Jessie the power to pay his own creditors creates a general power of appointment over the assets. The other powers do not benefit Jessie and, thus, do not create a general power of appointment.

Answer 70

* A power of appointment may or may not be included in a general power of attorney. * A limited power of appointment may or may not be included in a limited power of attorney. * The ability for the agent to appoint assets of the principal to: * Himself * His estate * His creditors * His estate’s creditors

Answer 71

The correct answer is d. Under the will Pete and Fred will each receive 1/3 shares. Lucy's 1/3 share will flow to her children, with each of them receiving 1/2 of the 1/3 share.

Answer 72

Correct option is **C** **Explanation:** The correct answer is c. Joint tenancy requires equal ownership. Option a is incorrect because joint tenancies may be established by spouses or nonspouses. Option b is incorrect because if the two were married, each would be deemed to have contributed 50%, therefore only 50% would be included in the gross estate of the first spouse to die. Nothing will be included in the probate estate. Option d is incorrect because if the property is held as a joint tenancy then the property will transfer automatically at the first tenant's death, regardless of what the will dictates.

Answer 73

Answer: B The correct answer is b. Kathi’s one-half interest in the home will have a basis of $100,000 due to a step-to fair market value of both halves at Darrin’s death because the property is owned as community property.

Answer 74

The correct answer is a. Because the property is owned JTWROS they automatically own 50% each. Answer b is incorrect because if Natalie were to die today, then her share of the condominium would transfer to Kate. Answer c is incorrect because if Kate died today, then Natalie’s new basis would be $500,000 (Natalie’s original $300,000 basis and Kate’s step-to fair market value basis of $200,000 based on the contribution rule). Answer d is incorrect because if they disagree on how the property is being managed then either one can easily sell their share to any person. They do not need the consent of the other party.

Answer 75

Property owned jointly with a nonspouse may be subject to estate tax on 100% of its value at your death. If the surviving joint tenant is not your spouse, tax law presumes that the entire value of joint property must be included in your taxable estate. Even though this property is not a part of your probate estate, it is still a part of your taxable estate for estate tax purposes to the extent of your contribution.

Answer 76

Answer : a. If the decedent is a resident of one state and owns real property in another state.

Answer 77

Answer: A A. Name Julie as the beneficiary of Jackie's retirement plan By naming julie as the beneficiary of jackie's retirement plan, Jackie can make sure that after her death Julie would be provided for. As a beneficiary is the person who will get all the assets of the person after his/ her death. Of all the options given this is the most suitable one as here they don't even have to move in together or even Jackie won't eve nhave to write a will. That is why, the correct option here is OPTION A.

Answer 78

Answer is option B The probate estate shall consist only the personal residence and the life insurance policy. Life insurance policy is included because the beneficiary was dead at Nate’s death. Car is not included because the ownership is of JTRWROS , it gets transferred by operation of law. IRA is not considered because there beneficiary is alive and thus it gets transfers through contract law.

Answer 79

Answer A. This option has the most inherent risk.

Answer 80

C When a donor makes a gift of property the donee will take the property at the donor's adjusted basis. The holding period of the donee will include the holding period of hte donor for purposes of subsequent transfers and the determination of short or long term gains. The gift tax associated with the appreciation is added to the donors original adjustede basis to determine the donee's basis. $20,000 +($47,000 X $80,000/$100,000) = $57, 600. $150,000 - $57,600 = $92,400

Answer 81

Correct option: a. Donald should make sure that he does not contribute more than $16,000 for each nephew, or $48,000 in total, each year.

Answer 82

**Ans: Option d.** Kevin transfers $20,000 to his ex-wife, Cindy, to help support their kids. They were divorced five years ago. **Reason:** Option a would not result in gift tax because the gift does not exceed the annual exclusion. Option b is incorrect because a person can gift an unlimited amount to his or her spouse without incurring gift tax. Option c is incorrect because transfers in a business setting are presumed to be compensation.

Answer 83

Answer: A Key persom

Answer 84

Answer A Gift tax on gifts within 3 years of date of death is included in gross estate. But as in this case the gift was made more than 3 years before death, so $0 would be included in Bernard's gross estate with regards to this gift.

Answer 85

**Solution:** The correct answer is B. The failure-to-file penalty of $90,000 (5% × $600,000 × 3 months) is reduced by the failure-to-pay penalty of $9,000 (.5% × $600,000 × 3 months), creating an adjusted failure-to-file penalty of $81,000. Adding the failure-to-pay penalty of $9,000 to the adjusted failure-to-file penalty creates a total penalty of $90,000.

Answer 86

**Solution:** The correct answer is C. Answer a is incorrect because the buyer of a SCIN only makes payments until the earlier of (1) the seller’s death or (2) the term set forth in the SCIN. Answer b is incorrect because each payments received by the seller consists of (1) interest income, (2) capital gain, and (3) return of adjusted basis.

Answer 87

ANswer A the above will be the answer.. TPPT is Tangible Personal Property Trusts enables the transfer of ownership of things like furniture, paintings etc.

Answer 88

**Solution:** The correct answer is D. Answer d is correct because Cathy’s surviving heirs become equal heirs in Earl’s estate because Cathy predeceased Earl. Accordingly, each heir receives 1/6 (Kenny, Tim, Aaron, Cathy’s three kids) of Earl’s estate. Answer a is incorrect because the value of the home transferred to the QPRT will be included in Angela’s gross estate because Angela died during the term of the QPRT. Answer b is incorrect because ONLY the general partner can control the operations of a limited partnership and Missy is the general partner so she CAN control the operations of the FLP. Answer c is incorrect because a TPPT would not fulfill Rose’s desires because the TPPT would only give Rose the right to use the art for the rest of her life, and would not provide any income.

Answer 89

The correct answer is d. Maxine bought the property utilizing the private annuity. Maxine’s gross estate will include the fair market value of the property purchased. The expected present value of the remaining private annuity payments will be a debt of the estate.

Answer 90

**Solution:** The correct answer is D. Because the trust does not include a Crummey provision, the transfer to the trust is a gift of a future interest and is not qualified to be offset by the annual exclusion. Therefore, the entire transfer to the trust is subject to gift tax.

Answer 91

**Solution:** The correct answer is B. Paul holds the legal title to the property as trustee for the trust. Greer as the beneficiary holds the equitable title. A life estate identifies the person who has a current beneficial right in the property, which in this case would be Greer.

Answer 92

**Solution:** The correct answer is A. Price’s executor would fund the testamentary bypass trust with the difference between the applicable estate tax credit equivalency at Price’s death (2022 - $12,060,000) and the funding amount of the inter vivos bypass trust ($5,250,000). In this case, the amount would be $6,810,000 ($12,060,000 - $5,250,000)

Answer 93

**Solution:** The correct answer is C. Totten trusts are used to avoid probate, not to lower the value of the gross estate. All of the other techniques can be used to lower the value of an individual’s gross estate.

Answer 94

**Solution:** The correct answer is C.

Answer 95

**Solution:** The correct answer is B.

Answer 96

KEY TAKEAWAYS * A charitable remainder annuity trust (CRAT) is a type of gift transaction in which a donor contributes assets to a charitable trust that then pays a fixed income to a designated noncharitable beneficiary. * Noncharitable beneficiaries receive their income in the form of an annuity, which is typically calculated as a fixed percentage of the initial value of trust assets. * The annuity distribution value must be at least 5% but no more than 50%. * When a CRAT’s term is up, any funds that remain in the trust are donated to one or more previously selected charitable beneficiaries. Pros and Cons of a CRAT The chief pro of a CRAT is its tax savings. The trustor not only gets a partial tax deduction for their donation to the trust; they also can see a reduction in [_capital gains_](https://www.investopedia.com/terms/c/capital_gains_tax.asp), [_gift_](https://www.investopedia.com/terms/g/gifttax.asp), and estate taxes. Another advantage is that unlike with a [_charitable lead trust_](https://www.investopedia.com/terms/c/charitableleadtrust.asp), a trustor or their designated noncharitable beneficiary can get a regular income stream from a CRAT while simultaneously donating money to charity from the trust.² After death, the CRAT protects the money from creditors or greedy family members, passing it on instead to charity as directed by the trustor.¹ The greatest con of a CRAT is that it is irrevocable, giving the trustor no access to or control over the funds in the trust and making it difficult to impossible to alter the terms of the trust. Also, because it is a fixed annuity, the payment to the noncharitable beneficiary cannot grow if the CRAT’s investments do particularly well in any given year, as it can with a CRUT.¹ A third disadvantage is that a CRAT is a complex construction whose creation and administration can be complicated and costly. It is important to run a thorough [_cost-benefit analysis_](https://www.investopedia.com/terms/c/cost-benefitanalysis.asp) to make sure that it is the best use for the assets you are planning to put into it.

Answer 97

**Solution:** The correct answer is B. Only CRUTs permit additional contributions to the trust after its inception. CRATs do not permit additional contributions.

Answer 98

**Solution:** The correct answer is C. When an individual transfers property in exchange for a charitable annuity, the value of the property less the value of the retained annuity is the value of the charitable deduction. In this case, $87,000 - $40,000 = $47,000.

Answer 99

**Solution:** The correct answer is $0 For a contribution to a university where the donor receives the right to purchase tickets to athletic events, none of the contribution will be allowed as a charitable contribution. The price of the actual tickets is not deductible.

Answer 100

**Solution:** The correct answer is D. Political organizations are not qualifying charitable organizations. The other options are all considered qualified charitable organizations under Section 170(c).

Answer 101

**Solution:** The correct answer is C. Of the options, only an outright bequest to a resident alien spouse who becomes a U.S. citizen before the estate return is filed qualifies for the unlimited marital deduction.

Answer 102

**Solution:** The correct answer is A. The interpolated terminal reserve plus any unearned premium will be included in your client’s gross estate. In this instance, the value is probably zero because only one premium payment had been made.

Answer 103

**Solution:** The correct answer is A. Retaining the right to determine the ultimate beneficiary will cause inclusion in George’s gross estate. The trust may be allowed to lend money to George’s estate. Inclusion will occur when the trust is required to lend money. George must survive for three years before the asset will not be included in his gross estate. George can still pay the premiums on the policy without causing inclusion in his gross estate.

Answer 104

**Solution:** The correct answer is B. Sarah can exchange the policy for an annuity income tax free. While Sarah is not terminally ill, she is chronically ill because she is unable to perform 2 of the 6 activities of daily living (eating and bathing). Thus, surrendering her policy for accelerated benefits will not cause her to be subject to income tax. The loan is not considered a taxable distribution because the policy is not a MEC. If her son purchases the policy then Sarah has transferred the policy for value. This will cause the policy to be taxed in the son’s income when Sarah dies.

Answer 105

**Solution:** The correct answer is A. The facts do not indicate that Betty has a qualifying dependent that would allow her to claim Head of Household or Qualifying widow. Taxpayers who do not remarry in the year their spouse dies can file jointly with the deceased spouse. For the **two years following the year of death**, the surviving spouse may be able to use the Qualifying Widow(er) filing status. The surviving spouse ***must*** be eligible to claim their ***son***, ***daughter***, stepson, or stepdaughter as a dependent in each of these ***qualifying*** years.

Answer 106

**Solution:** The correct answer is C. A net capital loss of an estate or trust will reduce the taxable income of the estate or trust, but **no part of the loss is deductible by the beneficiaries**. If the estate or trust distributes all of its income, the capital loss will not result in a tax benefit for the year of the loss.

Answer 107

**Solution:** The correct answer is C. The payment of the remainder is a taxable termination. The distribution at age 25 is a taxable distribution.

Answer 108

**Solution:** The correct answer is A. John is Beth’s child and is not a skip individual. The fact that John is more than 37.5 years younger than Beth is irrelevant because the age is only important for non-lineal descendants.

Answer 109

* Fixed percentage of the initial contribution for life or for a term of years is paid to the grantor. * Transfer future appreciation out of estate without gift/estate tax consequences. * If the grantor dies within the trust term, the FMV of the trust property is brought back into the gross estate.

Answer 110

**Grantor Retained Unitrust (GRUT)** * Fixed percentage of the current value of the trust assets is paid to the grantor. * Need to revalue assets every year. * Not as popular as a GRAT.

Answer 111

**Solution:** The correct answer is A. A 2503(b) trust requires the trustee to make annual income distributions to the minor beneficiary. Robbie has created a 2503(b) trust. A 2503(c) trust allows income to be accumulated within the trust until the minor beneficiary attains the age of majority and the transfer of property to the trust qualifies for the annual exclusion. A Totten Trust is a bank account which includes a payable on death clause. An IDGT is a grantor trust which requires the grantor to pay the income tax on the income of the trust.

Answer 112

A **2503(b**) trust may hold property in trust for the lifetime of the beneficiary (or beneficiaries), and must make income distributions to the beneficiary (or beneficiaries) on an annual basis. Gifts made to a 2503(b) trust will partially qualify for the gift tax annual exclusion. The portion qualifying for the gift tax annual exclusion equals the present value of the income interest that the child will receive over the term of the trust. **2503(c)** Allows income to be accumulated in the trust, and allows the grantor to qualify the entire gift to the trust up to the annual exclusion amount for the gift tax annual exclusion, but can have only one beneficiary.

Answer 113

**Solution:** The correct answer is D. A second-to-die life policy provides insurance for a lower cost than insuring each spouse individually. Due to the unlimited marital deduction, there is no need for liquidity until the death of the second spouse. The ILIT keeps the insurance proceeds from being included in the gross estate of either spouse as long as neither has any incidence of ownership in the trust or policy.

Answer 114

1, 2, and 4.

Answer 115

**Solution:** The correct answer is B. Option b describes a situation in which the use of a QDOT would be unnecessary because Raul became a U.S. citizen prior to the due date of the estate tax return and therefore, any property transfers to Raul would qualify for the unlimited marital deduction. Option c is not correct because there is no unlimited martial deduction available if Harold does not have a surviving spouse. Option a & d are not correct because the surviving spouse is not a U.S. citizen.

Answer 116

**Solution:** The correct answer is A. Property that transfers to the second-to-die spouse is eligible for the marital deduction and, to the extent that it is not consumed, will be included in the second-to-die spouse’s gross estate at the fair market value at his date of death, including any appreciation that may have occurred since the first-to-die spouse’s estate. Therefore, future appreciation of an asset is not sheltered by using the unlimited marital deduction.

Answer 117

**Solution:** The correct answer is A. The probate estate will include the personal residence. The life insurance policy is not included because there was a named beneficiary. The car is not included because of the JTWROS ownership, thus it transfers by operation of law. The IRA is not included because there is a living named beneficiary and thus will transfer via contract law.

Answer 118

**Solution:** The correct answer is B. Riley and Melissa are skip persons in relation to Kenny. Riley is a skip person because of her lineal line standing as a grandchild. Melissa is a skip person because of the age requirement for nonlineal descendants. Because Kenny and Melissa are not married, the nonlineal rules apply. She is more than 37 1/2 years younger than Kenny. Kole is not a skip person because he is the blood son of Kenny. Therefore, the lineal rules apply and the age rules do not apply.

Answer 119

**Solution:** The correct answer is B. The transfer to the trust is a direct skip, because all parties in interest to the trust are direct skips. Normally the charitable organization would be a non-skip person, but because a specific charity has not been named, no charity actually has an interest in the trust. Because the trust is a direct skip, GSTT is due for the current year, and future distributions will not be subject to GSTT.

Answer 120

**Solution:** The correct answer is A. A deduction for the unpaid medical expenses could be deducted on Kenny’s final income tax return or the estate tax return. The executor may elect to deduct unpaid medical expenses as of the date of the decedent's death on form 1040 or form 706, but not on both forms.

Answer 121

**Solution:** The correct answer is A. Retaining the right to determine the ultimate beneficiary will cause inclusion in Kenny’s gross estate. The trust may be allowed to lend money to Kenny’s estate. Inclusion will occur when the trust is required to lend money. Kenny must survive for three years before the asset will not be included in his gross estate. Kenny can still pay the premiums on the policy without causing inclusion in his gross estate.

Answer 122

**Solution:** The correct answer is B. Transferring the qualified plan assets is the best choice because they are IRD assets and subject to ordinary income in the hands of the beneficiary. Since charities are not subject to income tax, they are the best beneficiary of the asset.

Answer 123

**Solution:** The correct answer is A. The interpolated terminal reserve plus any unearned premium will be included in Kenny’s gross estate. In this instance, the value is probably zero because only one premium payment had been made.

Answer 124

**Solution:** The correct answer is D. A 2503(c) trust would accomplish Kenny’s goals. A 2503(b) trust would require annual distributions of income. UGMA and UTMA accounts are not trusts and limit the control the donor has over the assets.

Answer 125

**Solution:** The correct answer is C. A guardianship clause can be used to identify Kenny’s preferred legal guardian of Kole. A no-contest clause would not discourage Kati or Karli because they do not stand to inherit anything. A survivorship clause could be used to require Melissa to survive six months. A simultaneous death clause only addresses situations where two individuals die in the same cause of action and it is unclear as to which died first. Overqualification is not an issue in this instance because Melissa and Kenny are not married.

Answer 126

**Solution:** The correct answer is A. Foreign charitable organizations are not qualified charitable organizations and contributions to such organizations do not qualify for a charitable deduction. It is always the responsibility of the donee to determine the deductibility of his contribution.

Answer 127

**Solution:** The correct answer is D. Answer d is not an issue when deciding whether to deduct the adjusted basis or the fair market value since the transfer generally does not create a capital gain. All of the other options are issues to consider.

Answer 128

**Solution:** The correct answer is C. The present value of the expected future remainder interest is a gift of a future interest subject to gift tax. The value of the expected future remainder interest is $52,000 ($100,000 - $48,000). Because this is a gift of a future interest, it does not qualify for the annual exclusion.

Answer 129

**Solution:** The correct answer is B. All of the other answers are features of a testamentary trust.

Answer 130

**Solution:** The correct answer is B. Additional contributions may not be made to a CRAT. CLATs and CLUTs are not charitable remainder trust.

Answer 131

**Solution:** The correct answer is B. The deduction of charitable donations in the form of cash is limited to 60% of AGI. Karli’s AGI is $40,000, so the deduction of any cash donations to a public charity will be limited to $24,000. The services provided are not a charitable contribution.

Answer 132

**Solution:** The correct answer is C. Answer a is incorrect because a QTIP is not the same as a “B” trust. Answer b is incorrect because the income of the trust must be paid to the spouse, not to any other beneficiary. Answer d is incorrect because the surviving spouse does not choose the remainder beneficiaries of the QTIP.

Answer 133

**Solution:** The correct answer is D. Answers a, b, and c are all requirements of the unlimited marital deduction. Answer d is incorrect because only the net value, not the gross value, of qualifying property left to the surviving spouse is included in the marital deduction. The term “net value” for marital deduction purposes equals the gross value of the qualifying property left to the surviving spouse less any taxes, debts, or estate administration expenses payable out of the spousal interest.

Answer 134

* transfers that include a revocable beneficiary designation, or a transfer to a revocable trust are incomplete transfers which are not gifts for gift tax purposes * the creation of joint bank accounts are the purchase of US savings bonds are treated differently from other apparent joint gifts, because a completed gift does not occur until the noncontributing party with draws money for their own benefit

Answer 135

any interest which includes a possibility that property transferred by the decedent may return to him or his estate or the possibility that property transferred by the decedent may become subject to a power of disposition by him. FMV of a decedent's revisionary interest is calculated as of the moment befiore his death. usually included in gross estate

Answer 136

Ex: don and his wife diane own a tract of land jt with rights. Tract of land has a FMV of $600k at Diane's DOD. at the time tract of land was purchased, don paid full purchase price of $120K. Diane's gross estate will include 50% or $300K., relkated to the tract of land because the actual contribution rule does not apply to property owned jointly between spouses.

Answer 137

the power to name who will enjoy or own property gross estate of a decendenti 8includes any assets over which the decedent had a power of appointment over

Answer 138

includes life insurance proceeds in gross estate if the estate was the bene or the decedent had incident's of ownerhssip in the policy

Answer 139

reduction in the value of an asset transferred and is often allowed is the asset transferred represents a minority interest in a business. usualy bet5wen 15-50% lack of marketability = usuallyt 15-50%

Answer 140

average of the high and low trading price

Answer 141

any interst accrued but not yet paid is added to value of the FMV of any securities at death

Answer 142

funeral expenses last medical expesnses administrative expenses debts of the decedent losses during estate administration

Answer 143

adjusted gross estate less the unlimited charitable and marital deductions

Answer 144

- federal estate tax return - only needs to be filled if decedent's gross estate plus adjusted taxable gifts, is greater than the applicabl estate tax credit equivalency when required, form 706 and payment of any estate tax owed is due nine months after DOD FTF = 5%/mo. of tax still not paid up to 25% FTP = .5%/mo. of unpaid tax up to 25%

Answer 145

comm prop does not have an automatic right of survivorshup at the death of one spouse and at the death of a decdeeent who owns comm prop wit hhis spouse only one half of the FMV of a propy is includded uin the gross estate

Answer 146

an irrevocable trust that pays a fixed anuity (income interest ) to the grantor for a defined term and pays the remainder interest of the trust to a noncharitable bene at end of grat term * if grantor dies within annuity term, the FMV of the value of the prop within the GRAt (as of DOD) is inlcuded in his gross estate * grantor includes annuity payments in his gross income * no income tax consequences on the initial transfer to the GRAT becausse for tax pruposes, the grantor is still d33eemed to own all assets in the GRAT

Answer 147

similar to grat but pays a fixedd percentage of trust's assets each year less suitable for hard to value assets

Answer 148

special form of GRAT. grantor contributes personal residence to a trust and instead of receiving an annuity in dollars, the grantor receives use of the residence as the annuity component if grantor dies before the expiration of the trust term the FMV is included in the grantor's gross estate

Answer 149

simliar to QRPT except it is funded with personal property, not real property. (artweork, antiques, and other items )

Answer 150

primary purpose of transferring assets to younger generations using valuation discounts one or more members of a family transfer highly appreciating property to a limited partnership in return for both the one percent general and the 99 percent limited partnership interests. LP are passive investors with limited liability and no management rights upon creation no income or gift tax consequences because entity created is owner by same persons, who owned it before the transfer. once FLP is created the owner of the GP and LP interests values the LP interests. LP interests are usually valued with a substantial discount. original transferror (grantor) then begins annual gifting program utilizing the discounts, the gift tax annual exclusion to transfer LP interests to younger family members original owner/transferor can maintain control of the property transferred to the limited partnership byh only retaining a smal GP interest

Answer 151

any transfers that happened 60 months prior to applying for Medicaid will be included in penalty (amount of money gifted or transferred in 60 months prior to application divided by the cost of the nursing home)

Answer 152

JTWROS and TE

Answer 153

some trusts are created by will (test trust) or are created (but not funded) prior to grantor's death waiting for assets to be transferred to them pursuant to the terms of the grantor's will

Answer 154

a spendthrift clause combined with a provision that allows the trustee to make distribution soley on a discretionary basis is a very strong and effective asset protection tool most popular uses of a trust is to avoid probate. alternative to the probate process is the use of a revocable living trust. Rev trusts do not avoid estate taxes, it only avoids probate fees and expenses

Answer 155

mandate the distribution of all trust income complex - can retain income

Answer 156

The trust is allowed to deduct distributiuouns to benes frolm its taxable income. Therefore trustsa can eliminate income by making distributions to benes

Answer 157

transfers to irr trust are taxed for gift tax purposes

Answer 158

allows bene of trust to withdraw any contribution mad3e to the trust within a cetain period of time 5 and 5 power must be considered (withdrawal right of bene can be no more than $5K or 5% of trust)

Answer 159

irrevocable inter vivos trust often referred to as an irrevocable life insreuance trust prupose: prevent LI proceeds from being included in TE. Prevents an insured party from having incidents of ownership in a LI policy on his life. when a person owns a LI policy on his own life the proceeds are includ. in his estate. provided that an insured person did not have incidents of ownershuip within three years of his death, it is not included in TE

Answer 160

aka credit shelter trust. can be either inter vivos or testamentary. most common : creation at individual;s death for couple who have over $12 mln and less thatn $24 in joint assets can avoid federal estate taxes by transferring 12.06 in property to a bypass trust at death of first spouse. while it will be subject ot estate tax, (since it will not qualify for marital deduction) the decedents' applicable estate tax credit will be available to completely offset estate tax income of trust can be payable to surviving spouse. upon surviving spouse death, the assets in bypass trust pass to children and are not included in surviving spouse's gross estate

Answer 161

typically created at the death of the frist spouse to die, grants the surviging spouse a lifetime right to the income of atrust while transferring remainder interest to individuals of grantor's choosing. qualifies for unlimited marital deduction assets are included in gross estate of surviving spouse

Answer 162

gpoa (general power of appt) trust, QTIP (qualified terminal int. property) trust, outirght transfers to spouse

Answer 163

* a six month survival contingency * a terminable interest either ouright or in trust, over which the survivng spouse has a GPOA * a qtip trust * a char4itable remainder tryst (Crt) (b) Terminable interests. A “terminable interest” in property is an interest which will terminate or fail on the lapse of time or on the occurrence or the failure to occur of some contingency. **Life estates, terms for years, annuities, patents, and copyrights are therefore terminable interests**.

Answer 164

“A trust” creates a terminable interest for a survigin spouse that will require the uncomsumed assets to be included in the surviving spouse's gross estate and thus qualify the transfer of the property to the trust for the unlimited marital deduictiojn

Answer 165

1. property must be included in gross estate 2. property must be transferred to surviving spouse 3. interest must not be a terminable interest unless it meets one of the exceptions

Answer 166

“ c trust” allows a decedent to qualify a transfer for the marital deduction at death yet still control the ultimate disposition of property holds property for benefit of surviving spouse and makes income distributions to the surviving spouse at least annnually. at surviving spouse's death trust property will transfer to remainder beneficiary as determined by grantor of QTIP trrust

Answer 167

$164K. no estate transfers at death that qualify for marital deduction. THe $164K must be made while U.S. citizen spouse is alive. solutions: become citizen before finalizing of estate tax return or createa a QDOT (used when surviging spouse is not a u.s citizen)

Answer 168

needs analysis, human value method, capitalized income

Answer 169

second to die policy pays DB at death of second spouse - usually objective is to provide liquidyty to pay estate taxes at death of second spouse (usualy owned by an ILIT)

Answer 170

transfer for value rule does not apply (exceptions are); transfer of a life insurance policy to: - spouse - partner of insured - insured - corporation in which the insured is a shareholder * transferre who takes the transferor's basis in the contract

Answer 171

potential issue arises when owner/insured transfers a life insurance policy to a charity and dies within three years of the transfer. Could require inclusion in gross estate. But since there is an unlimited charitable deduction, there is not estate tax when an individual dies owning a life insurance policy on life of another person the value of the policy wil be included in his gross estate note: a new life insurance policy bought withing the ILIT would not be subject to three year look back. three year lookbacks does not apply to sale of a policy

Answer 172

excise tax in addition to gift of estate tax imposed on the transfer of property to a donee (other than a spouse) who is two more generations younger than the donor annual exclusion $16K GSTT applies to (3) taxable transfer: 1. direct skip 2. taxable distirbution 3. taxable termination

Estate Planning Flashcards

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