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Flashcards in Estate Review Questions Deck (157):
1

Tenancy by the entirety may be severed in which way?
A. Either the husband or wife
B. Consent of one spouse
C. Joint spouses' creditors
D. Disability of income earner

C - It is not protected from the claims of both spouses' creditors

2

Which of the following type of property is included in the probate estate?
A. Life insurance owned by a decedent with a named beneficiary
B. Pension plan with a named beneficiary
C. Ownership of corporation
D. Joint tenancy with son and daughter

C - Assets passing by beneficiary designation are not subject to probate. Ownership of stock (sole ownership) is subject to probate.

3

Which of the following techniques can be used to avoid ancillary probate for a real estate investment in a state other than that of the decedent's residence?
I. JTWROS
II. Revocable living trust
III. Tenant in common
IV. Tenancy by the entirety
V. Testamentary trust
A. I, II, III, V
B. I, II, IV
C. I, IV
D. II, III, IV
E. III, V

B - Property owned as JTWROS or by tenancy by the entirety will not pass through probate. Revocable trusts do not go through probate. A testamentary trust is created in accordance with instructions contained in a person's will.

4

Mr. Axel wants to make sure his property interest passes to his son by his will. Which form of property ownership should he use?
A. Tenancy in common
B. JTWROS with his wife
C. Tenancy by the entirety

A Answers B and C pass to his wife.

5

Which of the following is community property?
A. Property received as a gift and placed in a joint checking account
B. Property received as an inheritance and placed in a separate account
C. Property received as a gift and used to purchase a new car in his/her name
D. Property received as an inheritance and used to purchase a vacation home

A - Where separate property is commingled with community assets, it becomes community property. In the other answers, the gift or inheritance was used to purchase separate property.

6

Mr. and Mrs. Neal live in California, a community property state. They have been buying stock in an account for years. Their basis is $500,000. The stock is now worth $1,000,000. If either of them dies, what will be the survivor's basis?
A. $0
B. $250,000
C. $500,00
D. $750,000
E. $1,000,000

E - Appreciated community property gets a full step-up in basis at the death. Reference Lesson 1, Page 1 middle of the page.

7

Linda lives in California (community property state) with her husband Bill. Linda inherited $50,000 some years ago. When she inherited the $50,000, she set up a money market account with her son as beneficiary. A few years ago, she used some of the money market funds to purchase an extra car for her son (to go to college). Her son recently graduated, and she sold the car. If she dies, how would the money market and the proceeds of the car sale be classified?
A. As joint tenancy with her son
B. As community property with her husband
C. As separately owned property
D. As tenancy in the common with her son

C - The inheritance was never commingled with other assets. She kept it separate from other assets.

8

Which of the following statements are correct for property ownership arrangements?
A. Community property can only be owned by spouses.
B. Tenancy by the entirety can be severed by either spouse.
C. Joint tenancy with the right of survivorship cannot be severed during the lifetime of either joint tenant.
D. Tenancy in common requires the consent of the cotenants if a tenant wants to dispose of his or her interest.

A - Tenancy by the entirety can be severed by mutual consent of both spouses. Under joint tenancy with rights of survivorship, each owner may set! his or her interest without the consent of the other. No consent is required in tenancy in common. The question is asking which statement is correct.

9

John and Betty are married and live in a community property state. Which of the following assets are community property?
I. All John's earnings during marriage
II. John's employer-provided life insurance
III. John's employer-provided profit-sharing plan
IV. Betty's inheritance from her father's estate
V. A business in Betty's name after they got married
A. All of the above
B. I, II, III, V
C. I
D. IV
E. V

B - All earnings during marriage and all fringe benefits are considered community property. Only property acquired prior to marriage or gifts and inheritance are considered separate property.

10

Tom and his son JR paid $1,000,000 for a vacation home held in JTWROS. Tom put up $750,000, and JR put up $250,000. If Tom dies, how much will the IRS try to include in his gross estate?
A. $0
B. $250,000
C. $500,00
D. $750,000
E. $1,000,000

E - JR will have to prove that he contributed $250,000 to the purchase of the home with his earned money; not a gift from his father.

11

Testate means which of the following?
A. Dying without a valid will
B. Dying with a valid will
C. Dying out-of-state
D. Dying in-state

B

12

Mr. Adams is single with no immediate family. He wants the executor of his will to pay his final bills and expenses. Besides his home, Social Security, and pension benefits, he has a small life insurance policy. How should the beneficiary of the life insurance policy be named?
A. Estate of the insured
B. His niece (the executor)
C. No beneficiary

A - By paying the proceeds to the estate of the insured, his executor will get the use of the proceeds and pay his final expenses. It is a small policy.
Estate Planning Quiz-Lesson 2

13

If your grandfather dies in 2014, which of the following items can be included in his gross estate?
I. Paid $108,000 in gift tax this year
II. A $2 million life insurance policy that you bought on his life 2 years ago
III. His claim for an income tax refund not yet received
IV. $5 million in his revocable living trust
V. The taxable gift of $5,520,000
A. l , II, IV, V
B. I, III, IV
C. I, IV
D. III, IV
E. IV

B - The $108,000 paid in gift tax is subject to the gross-uprule. The taxable gift is included in the tax base but not in the gross estate.

14

Which of the following items are deductible from your deceased grandfather's gross estate to calculate the adjusted gross estate?
I. Cash value whole life policy that decedent owned on his wife (the grandmother)
II. Gift tax payable
III. Debts of decedent
IV. Income tax paid this year
V. Interest on credit card debts
A. All of the above
B. II, III, IV, V
C. I, II, IV, V
D. II, III, V
E. III, V

D - The cash value of the insurance policy would be included in his estate. He was not the insured. He owns the CV and he died. She did not die. The income tax is already paid. Deductible debts include gift taxes payable, debts, and interest due. If a client dies owing a gift tax, like any tax due, your estate must pay the tax.

15

Are taxable gifts included in the taxable estate?
A. No
B. Yes
C. Maybe
D. Not enough information

A - Taxable gifts are added to the taxable estate.

16

Mr. Dell has a taxable estate of $7,340, 000. He has made no taxable gifts. If he dies today (2014), what is the net estate tax due?
A. $800,000
B. $814,000
C. $2,000,00
D. $2,100,000
E. $5,340,000

A - Taxable estate
$7,340,000
less exemption
5,340,000
2,000,000
Tax Base
40%
800,000

17

Mr. Elbert has a gross estate of $10,680,000. He leaves one half of his estate to his wife and the other one half of his estate to his children. If he dies today, what is the net estate tax due in 2014?
A. $0
B. $800,000
C. $2,000,000
D. $2,100,000
E. $5,340,000

A - One half ($5,340,000) passes by the marital deduction and one-half ($5,340,000) passes by the exemption.

18

Diane was an income beneficiary of a trust set up by her father. She was given a 5 or 5 power. At the time of Diane's death, the trust was worth $100,000, and she had exercised her 5 or 5 right this year. What amount of the trust is included in Diane's gross estate?
A. $0
B. $5,000
C. $10,000
D. $100,000

A - The question asked what amount of the trust is included. Nothing is included because she exercised her 5 or 5 right.

19

Bob and Beverly (married) own the following property interests.
Residence (JT)
$300,000
2 cars (JT)
$ 50,000
IRA (Bob)
$200,000
IRA (Beverly)
$200,000
Checking/money market (JT)
$ 50,000
Mutual funds (Beverly)
$200,000
Common stock (Bob)
$100,000
Life insurance (Bob) (owner/insured)
$ 20,000 CV
$200,000 DB
If Bob dies first, what would be the value of his gross estate?
A. $300,000
B. $500,000
C. $600,000
D. $700,000
E. $720,000

D Separately held
$300,000
1/2 of joint held +200,000
Life Insurance +200.000 (DB*) Gross Estate $700,000
*A UL or VUL life insurance policy with option B (increasing death benefit) or a whole life policy with dividends buying paid-up additions would affect the death benefit. But neither of these is listed. This is different from question #2. He is the insured and he dies. The cash value ceases at death.

20

Bob and Beverly (married) own the following property interests.
Residence (JT)
$300,000
2 cars (JT)
$ 50,000
IRA (Bob)
$200,000
IRA (Beverly)
$200,000
Checking/money market (JT)
$ 50,000
Mutual funds (Beverly)
$200,000
Common stock (Bob)
$100,000
Life insurance (Bob) (owner/insured)
$ 20,000 CV
$200,000 DB
If Beverly dies first, what would be the value of her gross estate?
A. $300,000
B. $500,000
C. $600,000
D. $700,000
E. $0

C - Separately held $400,000
1/2 of jointly held +200,000
$600,000
NOTE: Granted that in #7 and #8 there would be no tax due, but the exam still may ask to calculate what is in the gross estate.

21

Which of the following statements regarding power of appointment is correct?
A. A lapse of a general power subject to a 5 or 5 limitation will subject the holder to gift tax liability.
B. A release of a general power subject to a 5 or 5 limitation cannot subject the holder to a gift tax liability.
C. An exercise of a general power subject to a 5 or 5 limitation cannot subject the holder to a gift tax liability.
D. A lapse of a general power will subject the holder to a gift tax liability.

D - The others are written incorrectly. Please review the flow chart under general powers.

22

Which of the following powers held by the income beneficiary is (are) considered to be a general power of appointment, thus causing all the trust corpus to be included in the beneficiary's estate for federal estate tax purposes?
I. The power that can be exercised in favor of the holder for the holder's health, education, maintenance, and well-being
II. The power that can be exercised in favor of the holder subject to an ascertainable standard
A. I only
B. II only
C. Both I and II
D. Neither I or I

A - Well-being is not an ascertainable standard; therefore, it is a general power of appointment. A general power is included in the gross estate.

23

Mom wants to give her daughter $654,000 worth of stock. She inherited the stock some years ago for $220,000. What is the amount of taxable gift?
NOTE: Assume the annual exclusion is $14,000 for all questions.
A. $14,000
B. $206,000
C. $454,000
D. $640,00
E. $654,000

D - ($654,000 - 14,000) She can then use her $5,340,000 exemption to offset the gift tax, but the taxable gift is
$640,000.

24

From Question #1, what is the daughter's basis?
A. 0
B. 100,000
C. $207,000
D. $220,000
E. $454,000

D - The daughter gets her mother's basis ($220,000).

25

A client purchases property for $7,634,000. Now a few years later the property values have declined. He gifts it this year at a FMV of $6,634,000 to his son. If the client has not used any of his exemption, how much gift tax did he pay in 2014?
A. $0
B. $394,000
C. $400,000
D. $512,000
E. $517,600

D - Gift
$6,634,000
less annual exclusion
-14,000
less exemption
5,340,000
$1,280,000
$1,280,000 @ 40% = $512,000

26

If the son (Question #3) sells the property for $6,834,000, what is the amount of capital gain or loss?
A. $0
B. $200,000 capital gain
C. $214,000 capital gain
D. $800,000 capital loss

A - There is no gain or loss. It is between $6,634,000 and $7,634,000.

27

Mrs. Patrick wants to gift to the following family members and friends. Mr. Patrick has agreed to split gift. How much can she gift to the various family members and friends and not cause a taxable gift?
Son with wife and 2 children Daughter with husband and 1 child Old friend of the family
A. $84,000
B. $112,000
C. $168,000
D. $224,000
E. $238,000

D - There are eight persons at $28,000 each. He agreed to a split gift.

28

How much can one person gift to one person and pay no gift tax in 2014?
A. $14,000
B. $1,014,000
C. $5,000,000
D. $5,340,000
E. $5,354,000

E - The annual exclusion ($14,000) plus the gift exemption ($5,340,000)

29

Alice died during the current year with an estate of $3 million. Two years ago, she gifted $2 million (taxable gift) to her children and paid $435,000 of gift taxes and $500,000 of GSTT. What is the amount of her taxable estate?
NOTE:
A. Use the numbers as given, do not try to calculate them.
$0
B. $3,435,000
C. $5,000,000
D. $5,435,000
E. $5,935,000

B - The gift taxes paid ($435,000) will be brought back into the gross estate but not the GSTT. (NOTE: see page 2- 1.) The gross-up rule is limited to federal gift taxes only. It is only after the taxable estate calculation that taxable gifts are added back to get the tentative tax base. Taxable gifts are not in the gross estate or taxable estate. You must know the flow chart on page 2-1.

30

On what form is the estate tax filed?
A. Form 706
B. Form 709
C. Form 712
D. Schedule E
E. Form 709-A

A - The 709 is for gift tax and GSTT.

31

What is the gift tax exemption amount in 2014?
A. $14,000
B. $5,000,000
C. $5,264,000
D. $5,340,000
E. $5,354,000

D - The gift tax remains in force with a maximum exemption of $5,340,000. The exclusion is $14,000.

32

What is the exemption amount allowed against federal estate tax for 2014?
A. $1,000,000
B. $5,000,000
C. $5,250,000
D. $5,264,000
E. $5,340,000

E - The exemption amount of $5,340,000.

33

Which of the following is a taxable gift?
A. Grandmother pays for the tuition ($28,000) for her granddaughter.
B. Grandmother pays off the $28,000 credit card balance for her granddaughter.
C. Grandmother gifts $14,000 to five grandcl1ildren (no split gift).
D. Grandmother gifts $28,000 to five grandchildren (split gift with grandfather).

B

34

Mrs. Feathers purchased stock for $50,000. At the time of the gift of the stock to her daughter, the stock had a fair market value of $25,000. What are the income tax implications for the daughter if she sells it one year later for $70,000?
A. $20,000 long-term capital gain
B. $31,500 long-term capital gain
C. $45,000 long-term capital gain
D. $11,500 short-term capital gain and $20,000 long-term capital gain

A - The gain is measured using the donor's basis. ($50,000). There is no step-up in basis with a gift.

35

Tom, age 50, has substantial assets. He wants to gift the following assets to various family members. Match each asset to the appropriate family member to answer.
- Real estate still subject to depreciation
- Dividend paying growth stocks
- Municipal bonds
- High yield corporate bonds
Who should get the dividend paying growth stocks?
A. His sister (in a high tax bracket)
B. His mother (in a low tax bracket)
C. His son who has just graduated from college
D. His two-year-old grandson

C - The mother can use taxable income (high yield bonds) The sister can use the depreciation (Real Estate). The son can use income plus growth (Dividend paying stocks). The grandson can use tax-free income. The kiddie tax applies until the child turns age 24. This is a test-writer's evaluation question/answer. With the information provided, Answer C is the best answer.

36

Which of the following would produce a taxable gift?
A. A gift to a granddaughter to pay for college tuition of $28,000
B. A gift of car worth $28,000 to a spouse
C. A gift of $28,000 to a qualified charity
D. A payment ($28,000) to Dr. Johnson for a granddaughter's dentistry (pediatric)
Estate Planning Quiz - Lesson 3

A - The gift was to the granddaughter rather than directly to the educational Institution. If it were paid directly to the college, there would be no taxable gift.
Estate Planning Quiz - Lesson 4

37

Mrs. Todd recently had a minor stroke. Mr. and Mrs. Todd are in their late 80's. What should they do first?
A. Buy an LTC policy
B. Execute a durable power of attorney and a durable power of attorney for health care
C. Transfer all assets to their children so that they will not count as resources if they have to go into a nursing home using Medicaid
D. Place all their assets in an irrevocable family trust with their children/grandchildren as beneficiaries

B

38

Ted is legally incompetent. What type of documents can be drawn up by his attorney to help take care of him and his assets?
I. A durable power of attorney
II. A living will
III. A revocable trust
IV. A durable power of attorney for health care
A. All of the above
B. I, IV
C. II
D. III
E. None of the above

E - To be valid, the documents must be executed prior to the principal's incapacity.

39

What would be the main advantage of a springing durable power of attorney over a durable power of attorney?
A. It remains in effect throughout the principal's incapacity.
B. It can enable the attorney-in-fact to act only with regard to one or more specific tasks.
C. It becomes effective when the principal becomes incapacitated.
D. A competent principal may revoke the instrument at any time.

C - Answers A and D are true for both instruments. Answer B is spelling out the terms of a special power of attorney.

40

Why is nondurable power of attorney a disadvantage?
A. It does not survive the principal's incapacity.
B. It becomes effective as soon as it is executed.
C. It is relatively inexpensive and not time-consuming to execute.
D. It may be revoked at any time by a competent principal.

A - The other answers are advantages.

41

Which of the following is not an advantage of a durable power of attorney?
A. The document can help avoid the costs and delays of a competency proceeding.
B. Assets do not have to be re-titled or transferred.
C. The power ceases at death.
D. Activities transacted by the attorney-in-fact are private.

C - Some may view Answer C as an advantage. The question doesn't indicate that any additional documents exist. Therefore, this is a disadvantage. The durable power ceases when the principal dies.

42

Which of the following statements about trusts are correct?
I. The three parties to a trust are the trustor, the granter and the beneficiary.
II. Living (inter- vivos) trusts are always irrevocable.
III. Testamentary trusts can be established at death.
IV. A trust must have only one beneficiary.
V. The trustee holds legal title to the property in the trust.
A. I, III
B. III, V
C. III, IV, V
D. II, III, IV
E. I, II, V

B - The trustor and grantor are the same person. At death a revocable living trust becomes irrevocable. These trusts can have multiple beneficiaries. 'Only' makes it wrong.

43

Which of the following will be included in the gross estate of the granter?
I. Pour-over will assets
II. Joint life and survivor annuity (PV)
III. A gift to a charitable remainder trust (CRT) at death for the benefit of the grantor's spouse
IV. A funded revocable trust
V. A funded irrevocable trust
A. All of the above
B. I, II, III, IV
C. I, II
D. I, III, IV
E. II, IV

B - A pour-over will normally passes separately owned assets into a trust. A gift at death is included in the gross estate even if it is to a charity or to a wife. The CRAT is included because the spouse has an interest. Then it passes tax-free to the spouse by the marital. When she dies it passes to charity. The annuity is included.addresses how an annuity is included in the estate. Answer B is the only choice.

44

Sara Jane set up a revocable living trust. She placed all her income-producing assets in the trust. How will the income be treated for tax purposes?
A. Conduit to her
B. No tax due
C. Accumulated in the trust
D. Taxed at trust rates

A - The trust is tax-neutral (conduit).

45

Which of the following could be simple trusts?
I. 2503(b)
II. QTIP
III. Irrevocable
IV. Spray
A. I, II, III, IV
B. I, II
C. II, IV
D. II
E. III

A - In a sprinkle (or spray) trust, the trustee could distribute or accumulate income as the trustee thinks best. Both simple and complex trusts are irrevocable. QTIPs are simple trusts. Irrevocable trusts could be simple trusts.
Difficult, but really Answer A is the only choice.

46

Distributed net income (DNI) is a concept that has not been developed for which of the following purposes?
A. It limits the amount of distributions that may be taxable to the beneficiaries.
B. It advises beneficiaries of the amount of income the trust has earned.
C. It establishes the character of the amount taxable to the beneficiaries.
D. It limits the deduction a trust may receive for amounts distributed to beneficiaries.

B - DNI accounts for the income to the beneficiary.

47

Which of the following statements about trusts is not correct?
A. The trustee holds equitable title to the property in the trust.
B. The three parties to a trust are the granter, the trustee, and the beneficiary.
C. Testamentary trusts can be established at death.
D. A fiduciary relationship exists between the trustee and the beneficiary.

A - The trustee holds legal title to the property.

48

Beth's husband established a QTIP trust for her at his death. She is concerned because some of the assets are income nonproducing. Which of the following is correct?
A. She only has rights to income.
B. She should try to get the trustee to reposition assets to produce more income.
C. The ultimate trust beneficiaries, her children, can invade principal and then gift the money to her.
D. The trustee can do whatever the trustee wants with the assets.

B - To qualify as terminal interest property, the surviving spouse is normally given a power to make all of the trust assets income producing. She has a right to try to get the trustee to reposition the nonproducing assets. She could go to court and break the trust if it does not produce income.

49

Mr. Ingalls sets up an A, B, C trust arrangement before his death. The assets placed in the A trust go to Mrs. Ingalls (his second wife). The income from both the B and C trusts go to Mrs. Ingalls while living. At Mrs. Ingalls' death, who will ultimately receive the assets in all three trusts?
I. Mrs. Ingalls will specify the remainderman of the A trust.
II. Mr. Ingalls will specify the remainderman of the B trust.
III. Mrs. Ingalls will specify the remainderman of the B trust.
IV. Mr. Ingalls will specify the remainderman of the C trust.
V. Mrs. Ingalls will specify the remainderman of the C trust.
A. I, II, IV
B. I, II, V
C. I, III, IV
D. I, III, V

A - Mr. Ingalls has postmortem control of the B and C trust ultimate beneficiaries (remainderman).

50

Seth wants to set up a trust for his brother. He wants to gift $500,000 into an ILIT with Crummey provisions to provide only yearly income to his brother. If his brother uses his demand right, how much can be withdrawn during the first 30 days?
A. $0
B. $5,000
C. $14,000
D. $25,000 (5%)
E. $28,000

C - The Crummey clause provides a right of withdrawal equal to the lesser of the amount of annual exclusion or the value of the gift transferred. The noncumulative power to lapse is the 5 or 5 power.

51

Peggy and Joseph have been married for 10 years, second marriage for both. They both have children by prior marriages and none together. They each have approximately $8,250,000 in assets. To maximize their estate tax savings and provide the surviving spouse with only a stream of income from their respective assets, how would you allocate their assets should one of them die?
A. Zero to Trust A, $4,250,000 to Trust B, and $4,000,000 to Trust C
B. $4,000,000 to Trust A, $4,250,000 to Trust B, and zero to Trust C C. $5,340,000 to Trust B, and $2,910,000 to Trust C
D. $8,250,000 to Trust B, and zero to Trust C
E. Zero to Trust A, $3,250,000 to Trust B, and $5,000,000 to Trust C

C - Only $5,340,000 is exempted in 2014, the remainder should go into the C trust (2nd marriage).

52

John has a 12-year-old daughter. He and his wife want to give her a gift in a UTMA account for college education purposes. Which of the following would you suggest if John is in a 35% tax bracket?
A. Preferred stock paying a 6% dividend worth $28,000
B. A 5-year CD ($28,000) with a 6% rate
C. Waiting until his daughter turns age 24
D. A corporate bond paying 7% worth $28,000

B - The $1,680 is under the point where the kiddie tax starts ($2,000). In addition, there is a time element. His daughter will be going to school in approximately 5 years the CD will mature for face value. He should not wait until his daughter is age 24. This is a favorable tax situation. The corporate bond ($1,960) and the preferred stock have interest rate risk. This is subjective.

53

A 2503(b) trust income cannot be used for which of the following?
A. A minor
B. An adult
C. The donor
D. A child with a disability

C - The donor has gifted the property away.

54

Bill sets up an account for his 16-year-old son, Jim. Bill is concerned about Jim's spending habits. Jim may be going to college, but that isn't certain. Bill doesn't mind Jim getting income from the account in the future. Which of the following best suits Bill's situation with his son?
A. UGMA
B. UTMA
C. Section 2503(b)
D. Irrevocable trust with Crummey provisions

D - With a 2503(b) trust, principal doesn't have to be distributed. Income distributions are mandatory. The gifts to the trust will be gifts of a future interest. It is not a bad answer, but Answer D is a better choice. The irrevocable trust can solve all the concerns, but the son will have to waive his Crummey rights. It best suits Bill's situation.

55

Aunt Sara wants to make a gift to various young nieces and nephews. Which of the following gifts will qualify for the gift tax annual exclusion?
I. A gift to an irrevocable trust with Crummey provisions.
II. A gift to a 2503(b) trust
III. A gift to an UTMA account
IV. A gift to an irrevocable trust
A. I, II, III
B. I, III, IV
C. I, III
D. II, IV
E. IV
Estate Planning Quiz - Lesson 5

C - An irrevocable trust must have Crummey provisions. If Crummey is not stated, the gift is a future interest.

56

Felix owns a parcel of land in New York. The land is worth $500,000. His basis is $50,000. He would like to gift the land away to get a charitable deduction. (His AGI is $1,000,000.) In addition, he would like to improve his children's inheritance situation. Which of the following techniques for charitable transfers would be most appropriate for Felix?
A. Sell the property to a charity using a bargain sale
B. An outright gift to a charity and the purchase of a life insurance policy in an ILIT
C. A transfer of the property to a CRAT with a stream of income paid to Felix for his lifetime
D. A transfer of the property to a CLAT with a stream of income paid to a charity and the remainder to his children

B - The simplest answer is Answer B. Felix gets a charitable deduction, and the children get an estate and income tax free death benefit. In a bargain sale, Felix gets the cash and a partial income tax deduction, but he has gain to report on the sale portion. Although Answer c sounds good, Felix will get an income tax deduction, and the property will be out of his estate, but he does not improve his children's situation. The lead trust is unclear as to whether he will set up the trust while living or at death. In addition, the normal usage of a CLAT is for a large donation. $500,000 would be small. Answer D is not a bad answer, it just is not a very practical or as simple as Answer B.

57

Sue wants to gift NYSE stock to a local university. She has an AGI of $80,000. The stock was purchased over one year ago for $25,000. It is now worth $30,000. What would you suggest she do to get the maximum charitable deduction?
NOTE FROM INCOME TAX: An individual's deduction ceiling for gifts of appreciated long-term capital gains property to 50% organizations is 30% of AGI unless he/she elects to use the property's basis rather than fair market value (FMV). An individual using basis can deduct up to 50% of AGI.
A. Deduct $25,000 this year using basis
B. Deduct $24,000 this year using FMV
C. Deduct $30,000 this year using FMV
D. Sell the stock for $30,000 and donate the after-tax value to charity

B - This answer, though incomplete, is still the best answer of the four choices. Answer B is a total of $30,000 ($24,000 + $6,000). The $6,000 difference would be carried forward to next year. If she sells the stock, she would have to pay capital gains tax and would get a smaller charitable deduction. In addition, it says she wants to gift the stock, not sell the stock. The notewith the question has been added for your information as that notewould not be there when you take the exam. In the overall, FMV is better than basis. By using basis, she gets $1,000 more to deduct this year, but she losses $6,000 she can deduct next year. The present value of
$6,000 is a lot more than $1,000 (PV) this year.

58

Mr. Able wants to set up a tax-deductible fund to be used to support young talented individuals to enhance their abilities. What would you recommend Mr. Able do?
A. Private foundation
B. Revocable trust
C. CRT
D. CLAT
E. CLUT

A - From information from the prior pages

59

Which of the following charitable transfers allow for both a life annuity and term certain (up to 20 years)?
I. CRAT
II. CRUT
III. Pooled income fund
IV. Gift annuity
A. All of the above
B. I, II, III
C. I, II
D. II, III
E. III, IV

C - Pooled income and gift annuity do not allow a term certain other than the actual life of the beneficiary.

60

A lady has an estate of $10 million with an AGI of $500,000. She is terminally ill. She is inclined to give a portion of her estate to charity. What would you recommend?
A. Gift a portion to charity now
B. Do a CRAT now
C. Do a charitable gift annuity now
D. Make her interest known in her will/trust when she dies

A - By gifting now, she will be able to see the results of the gift while living, and she will get an income tax deduction. If she waits, she will not see either of these results at death.

61

Mrs. Poole (widow), age 65, would like to contribute a substantial sum to charity, but she needs income to replace the assets gifted. She would like an income stream that has some inflation hedge. She has many charities in mind but no specific charity. What would you recommend?
A. CRAT
B. CRUT
C. Pooled income fund
D. Charitable gift annuity
E. CLUT

B - The keys are the variable income and the ability to change the choice of charities.

62

Which of the following is/are charitable remainder trusts?
I. CRAT
II. CRUT
III. CLUT
IV. Pooled-income fund
A. I, II, IV
B. I, IV
C. II, IV
D. III

A - Even a pooled-income fund is considered a charitable remainder trust. A charitable lead trust works in reverse of the remainder trust. I forced you into A. There was no other answer.

63

What is the required minimum distribution in a CLUT to avoid payment of the 5% excise tax?
A. 2%
B. 5%
C. 8%
D. Distribute whatever was earned or nothing at all

D - Unlike the CRAT, CRUT and the family foundation where the 5% is required, there is no required minimum distribution with a CLUT.

64

Match the charitable technique with the corresponding description. CRAT
A. A charitable trust arrangement in which a fixed-income interest (worth at least 5% of the initial net FMV of the property paid in trust) passes at least annually to one or more non-charitable beneficiaries and a t the death of the last income beneficiary, the remainder interest passes to a qualified charity
B. A charitable trust arrangement in which a fixed percentage (at least 5% of the net FMV of the trust assets as revalued annually) is paid at least annually to one or more non-charitable income beneficiaries and at the death of the last income beneficiary, the remainder interest passes to a qualified charity
C. A fund maintained by a qualified charity that contains commingled donations from many sources and that allows a donor's estate an estate tax charitable deduction for the remainder interest
D. A tax planning device in which the donor transfers property inter vivos or by will to a trust whose earnings go to a charity for a certain period after which the trust corpus reverts to the donor or some other party
E. A tax-exempt organization operated exclusively for charitable purposes as specified in Section 501(c)(3)

A - CRAT pays a fixed income

65

Match the charitable technique with the corresponding description. CRUT
A. A charitable trust arrangement in which a fixed-income interest (worth at least 5% of the initial net FMV of the property paid in trust) passes at least annually to one or more non-charitable beneficiaries and at the death of the last income beneficiary, the remainder interest passes to a qualified charity
B. A charitable trust arrangement in which a fixed percentage (at least 5% of the net FMV of the trust assets as revalued annually) is paid at least annually to one or more non-charitable income beneficiaries and at the death of the last income beneficiary, the remainder interest passes to a qualified charity
C. A fund maintained by a qualified charity that contains commingled donations from many sources and that allows a donor's estate an estate tax charitable deduction for the remainder interest
D. A tax planning device in which the donor transfers property inter vivos or by will to a trust whose earnings go to a charity for a certain period after which the trust corpus reverts to the donor or some other party
E. A tax exempt organization operated exclusively for charitable purposes as specified in Section S01(c)(3)

B - A CRUT pays a fixed percentage of the assets as revalued annually. The percentage is fixed not the income.

66

Match the charitable technique with the corresponding description. Pooled income fund
A. A charitable trust arrangement in which a fixed-income interest (worth at least 5¡10 of the initial net FMV of the property paid in trust) passes at !east annually to one or more non-charitable beneficiaries and at the death of the last income beneficiary, the remainder interest passes to a heir
B. A charitable trust arrangement in which a fixed percentage (at least 5¡10 of the net FMV of the trust assets as revalued annually) is paid at least annually to one or more non-charitable income beneficiaries and at the death of the last income beneficiary, the remainder interest passes to a heir
C. A fund maintained by a qualified charity that contains commingled donations from many sources and that allows a donor's estate an estate tax charitable deduction for the remainder interest
D. A tax planning device in which the donor transfers property inter vivos or by will to a trust whose earnings go to a charity for a certain period after which the trust corpus reverts to the donor or some other party
E. A tax exempt organization operated exclusively for charitable purposes as specified in Section 501(c)(3)

C - This is a pooled income fund.

67

Match the charitable technique with the corresponding description. Charitable lead trust
A. A charitable trust arrangement in which a fixed-income interest (worth at least 5% of the initial net FMV of the property paid in trust) passes at least annually to one or more non-charitable beneficiaries and at the death of the last income beneficiary, the remainder interest passes to a heir
B. A charitable trust arrangement in which a fixed percentage (at least 5% of the net FMV of the trust assets as revalued annually) is paid at least annually to one or more non-charitable income beneficiaries and at the death of the last income beneficiary, the remainder interest passes to a heir
C. A fund maintained by a qualified charity that contains commingled donations from many sources and that allows a donor's estate an estate ta x charitable deduction for the remainder interest
D. A tax planning device in which the donor transfers property inter vivos or by will to a trust whose earnings go to a charity for a certain period after which the trust corpus reverts to the donor or some other party
E. A tax exempt organization operated exclusively for charitable purposes as specified in Section 501(c)(3)
Estate Planning Quiz - Lesson 6

D - This is a charitable lead trust.
NOTE: Answer E is a charitable trust.
Estate Planning Quiz - Lesson 7

68

Which of the following insurance policies will be included in the decedent's gross estate?
I. A $500,000 life insurance policy on the decedent that was transferred to an irrevocable life insurance trust two years before the decedent's death.
II. A $500,000 life insurance policy on the decedent that was transferred to the decedent's wife two years before the decedent's death.
III. A $500,000 life insurance policy on the decedent that was transferred to the decedent's wife four years before the decedent's death where the decedent retained the right to change the beneficiary.
IV. The decedent gave his children $20,000 two years before his death. The $20,000 was used by the children to buy a $500,000 policy on the life of the decedent.
A. All of the above
B. I, II, III
C. I, III , IV
D. II, IV

B - The three-year rule applies to all transfers including to a life insurance trust or to a spouse. Any incident of ownership, such as the right to change the beneficiary includes the policy in the estate. Answer IV has no incident of ownership by the decedent.

69

Richard's father, Joseph Leder, died in 2014 and was insured by a $1,000,000 policy purchased in 2011 (within three years of his death). Richard's mother was the applicant-owner and beneficiary. Joseph Leder signed as the insured. Monthly premium payments ($3,900) were paid by a corporation wholly owned by Joseph. Was the life insurance included in the estate of Joseph?
I. Yes, it was included because the corporation paid the premium.
II. Yes, it was included because Joseph died within three years of the policy issue.
III. No, the policy was excluded from Joseph's estate.
IV. No, the corporations can pay premiums for their key employees, and the policies will always be excluded from their estates.
A. I
B. I, II
C. III
D. III, IV
E. IV

C - This is a famous estate planning case. IRS has not been able to enforce the premium payor rule. Beamed theorywas the principal that the IRS used to show an incident of ownership. Mr. Leder owned the company which paid the premium. Premium payment is not an incident of ownership. Answer IV is too general an answer to be true. The word alwaysmakes it wrong.

70

Mr. Bailey would like to gift $514,000 (FMV) of appreciated property (basis $200,000) to his son. Mr. Bailey doesn't want to use his liquid assets to pay the gift tax (40%). He already has gifted $5,340,000. What would you suggest?
A. Do not make the gift
B. Use a net gift technique and have the son pay the gift tax of $142,857
C. Use a net gift technique and have the son pay the gift ta x of $146,857
D. Have the son pay the gift ta x of $200,000 using a reverse gift technique
E. Use the annual exclusions only to gift the property

B - The normal gift tax would be $200,000 ($500,000 x 40%). When the son pays the gift tax, it will be $142,857 ($200,000 Ö 1.40). The 1.40 is 1 plus the gift tax bracket (40%).

71

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?
I. Donor retains a life estate in the gift property.
II. Donor retains the power to revoke or amend the gift.
III. Donor gives more than $14,000 to one donee in one year.
IV. Donor dies within 3 years of the date of the gift.
A. I, II, III
B. I, II
C. II, IV
D. III, IV
E. I, II, III, IV

B - III would not cause the date-of-death value of the gifted property to be included in the gross estate. It is added to the taxable estate. IV is debatable. For example, life insurance would be included at date-of-death value if given within 3 years of death. IV is too broad an answer to be correct. In both Answers A and B is the word retain. Except for 529 plans, a retained interest of any kind is included in the gross estate.

72

John, age 38, and Mary, age 35, have limited assets at their stage in life. Other than a home (with a big mortgage), IRA and 401(k) accounts (limited), and some personal property, they have some cash and investments. They each individually have a $2,000,000 life policy with each other as primary beneficiary and their two children (8 and 10) as secondary beneficiaries. Which is the best beneficiary designation for their life insurance policies?
A. Leave unchanged
B. Change the primary beneficiary to the children
C. Set up a revocable living trust with exemption provisions and name the trust the beneficiary
D. Set up a testamentary trust with exemption provisions leaving the spouse the primary beneficiary and naming the trust the contingent beneficiary

D - A and B are wrong because the children are minors. They have limited assets except for life insurance. If the revocable trust is the named beneficiary, the life insurance ($2,000,000) and all other separate assets could go into the applicable credit amount trust at the first death. These assets could remain there for 40-50 years. Rather than leaving them in trust, when one spouse dies, the survivor should get all the assets (Answer D). In my opinion, Answer D is the more practical answer with the current $6,340,000 exemption or $10,680,000 if they both died.

73

Dr. Zenith and wife are German citizens living in the United States. If Dr. Zenith dies, he wants all his assets to pass to his wife. The U.S. assets are all in his name and total $6,340,000 (resident aliens). What will be the estate tax situation if he does not do a QDT (2014)?
A. The assets will pass tax-free to his wife using the unlimited marital deduction.
B. If she remains in the U.S. after his death, no tax will apply.
C. There will be a tax of $350,000 if she receives the assets at his death.
D. There will be a tax of $400,000 If she receives the assets at his death.
Estate Planning Quiz - Lesson 7

D - Tax base
$6,340,000
less exemption
5,340,000
1,000,000
$1,000,000 x 40% = $400,000
Estate Planning Quiz - Lesson 8

74

Which intra-family planning techniques are used when the property owner needs income?
I. GRAT
II. QPRT
III. Gift-leaseback
IV. An installment sale
V. SCIN
A. I, III, IV
B. I, IV, V
C. II, III, V
D. III
E. IV, V

B - See page 8-1

75

In which of the following intra-family techniques will nothing ever be included in the donor's gross estate should he or she die?
I. QPRT
II. SCIN
III. GRAT
IV. S corporation
V. Gift-leaseback
A. All of the above
B. I, II, III, V
C. I, III, V
D. I II, IV , V
E. II, V

E - The question says ever.The donor must outlive the term, or the QPRT and GRAT are included in the donor's estate. Unless the donor gives away all the S corporation stock, something will be included in the donor's gross estate. If II and V are correct and I and III are wrong, the S corporation can not be a right answer. In addition, without saying all the stock was given a way, I do not see how it can be correct. Completed gifts, except certain life insurance transfers and gift taxes paid are never included in the gross estate. There is no 3 year rule with them.

76

Why doesn't the private annuity intra-family technique work anymore?
A. It is treated like an installment sale.
B. It is treated like a SCIN.
C. It creates phantom income.
D. The property has a stringon it.

C - The private annuity creates phantom income.

77

Which of the following planning techniques are considered freezingtechniques?
I. GRAT
II. Re cap
III. QPRT
IV. Private annuity
V. SCIN
A. All of the above
B. I, II, III
C. II, III
D. IV, V
E. IV

A - With a GRAT and A QPRT, the assets are frozen when transfer is made (taxable gift). The donor must outlive the term. A recap is a freezing technique using preferred stock. With a private annuity or a SCIN, the property is transferred for a stream of income, and if the owner dies, no value is included in the estate.

78

Your client (married) has two main assets besides his home and personal property. He is a physician. He has an corporation, and it is producing a lot of income. In addition, he has purchased a new piece of x-ray equipment. He would like to pay for his daughter's college education with pretax dollars. Which of the following intra- family planning techniques would be appropriate if she is 13 years old?
A. Gift stock in his physician's practice (an S corporation) to his daughter
B. Gift and lease back the x-ray equipment
C. Use the x-ray equipment to establish an S corporation and slowly gift the stock to his daughter in about 4 years
D. Do an installment sale with his daughter

C - The keys to the solution are conduit income and new equipment. The new equipment could be depreciated, producing minimal income to the client for the next few years. Then when the daughter is at least 17, gift the stock at FMV. $28,000 of stock at 10% return might trigger a kiddie tax in 4 years, but in 4 years the $1,200 could be the standard deduction and $1,200 could be at 10%. Future years could trigger a kiddie tax. Why not take advantage of the standard deduction and the 10% bracket. Meaning, keep the income received under the kiddie tax parents' rate.

79

Which of the following assets should be transferred to a GRAT?
A. $2,000, 000 of treasury bonds paying 5%
B. $2,000,000 of corporate bonds paying 6%
C. $2,000,000 of municipal bonds paying 4%
D. $2,000,000 of junk bonds paying 7%
E. $2,000,000 of stock that is expected to appreciate

E - All the bonds will be worth about $2,000,000 after the term ends. Best answer for the exam - property likely to appreciate. It will be worth more than $2,000,000 at the end of the term. The main purpose of a GRAT is to save on future estate taxes. That is why answer E is the best answer. Income issues are a distant secondary issue.

80

Mr. Thomas, age 55, owns a regular C corporation outright. His two children, ages 26 and 28, work in the corporation. He has given you the following parameters in planning for the corporation (valued at
$10,000,000).
- He wants to freeze the value at $10,000,000
- He wants to maintain control
- He wants to gift stock equal to the annual gift tax exclusion plus his exempt amount
- He wants to use the corporation to provide him with retirement income. What would you suggest to Mr. Thomas?
A. Do a family-limited partnership with his children as limited partners, gifting partnership interests at a discount
B. Do a recapitalization with him retaining all the preferred shares and gifting the common shares to his children
C. Do a recapitalization with him retaining all the common shares and gifting all the nonvoting preferred shares to his children
D. Do an LLC with his children, gifting partnership Interests to his children

B - The word freeze suggests a recapitalization. Answer A, suggesting an FLP, is incorrect because the children cannot be limited partners and also be active in the business. Answer C is the reverse of Answer B, but when he owns the common shares, that doesn't freeze the value. Answer D would be a good answer, but it doesn't freeze the value either.

81

Which of the following statements concerning a Grantor-Retained Annuity Trust is incorrect?
A. A GRAT has a fixed Income for life.
B. The property has a string on it.
C. The gift portion of the GRAT transfer is a future-interest gift to the remainderman.
D. The GRAT only saves estate taxes if the grantor lives beyond the trust term.

A - The GRAT has a fixed income for a number of years.

82

Lance created an irrevocable life insurance trust that will pay income to his ex-wife for life and then to his children. Lance transferred a $1,000,000 term policy and $100,000 of high yield bonds to the trust. The income from the bonds will be used to pay the premiums on the policy, and all remaining income will be paid to his family. Which of the following is correct?
A. During Lance's lifetime, the income of the trust will be taxable to Lance.
B. During Lance's lifetime, income from the trust will be taxable at the trust rates.
C. During Lance's lifetime, the income of the trust will be split: the amount paid for insurance premiums to Lance and the amount accumulated to the trust.
Estate Planning Quiz - Lesson 8

A - The trust is tainted by a combination of trust income used to pay premium and support.
Estate Planning Quiz - Lesson 9

83

Mini-case questions 1-4 (NOTE: 1-3 Trust is set up for daughter.)
Mr. Substantial decided to gift $6,000,000 into an irrevocable trust for his daughter. He paid the gift tax. Mr. Substantial appointed an independent trustee who had discretion to distribute money to Mr. Substantial's daughter and her three children. The trust will be distributed after his daughter's death to her children.
What is the GSTT consequence at the daughter's death?
A. A taxable distribution
B. A taxable termination
C. A direct skip
D. No GSTT because he paid the tax

B - This is a taxable termination. The GSTT is paid by the trustee at the time of distribution. The $6,000,000 would be subject to gift tax at the time of transfer into the trust.

84

Mini-case questions 1-4 (NOTE: 1-3 Trust is set up for daughter.)
Mr. Substantial decided to gift $6,000,000 into an irrevocable trust for his daughter. He paid the gift tax. Mr. Substantial appointed an independent trustee who had discretion to distribute money to Mr. Substantial's daughter and her three children. The trust will be distributed after his daughter's death to her children.
What is the GSTT consequence of distributing income to the daughter?
A. A taxable termination
B. Conduit theory
C. No GSTT because Mr. Substantial paid the GSTT tax

B - There is no GSTT tax on distributing income to his daughter. However, the best answer is that the income will be income taxable to the daughter.

85

Mini-case questions 1-4 (NOTE: 1-3 Trust is set up for daughter.)
Mr. Substantial decided to gift $6,000,000 into an irrevocable trust for his daughter. He paid the gift ta x. Mr. Substantial appointed an independent trustee who had discretion to distribute money to Mr. Substantia1's daughter and her three children. The trust will be distributed after his daughter's death to her children.
What is the GSTT consequence of a $100,000 distribution to each of the children while his daughter is still alive?
A. A taxable distribution
B. A taxable termination
C. A direct skip
D. No GSTT because Mr. Substantial paid the GSTT tax

A - This is taxable distribution.

86

Mini-case questions 1-4 (NOTE: 1-3 Trust is set up for daughter. Question 4 changes the case information.)
Mr. Substantial decided to gift $6,000,000 into an irrevocable trust for his daughter. He paid the gift tax. Mr. Substantial appointed an independent trustee who had discretion to distribute money to Mr. Substantial's daughter and her three children. The trust will be distributed after his daughter's death to her children.
What is the GSTT consequence if his daughter dies before he sets up the trust (Question 1) and instead he gives the $6,492,000 directly to his daughter's children?
A. The GSTT is due on $1,000,000. 3 annual exclusions are allowed.
B. No GSTT is due to children being donees.
C. The taxable gift for gift tax purposes is $6,450,000.

A - The daughter's children (grandchildren) are the donees. Even the annual exclusion can be used for both the GST and gift tax. (6,492,000 - 42,000 = $6,450,000). But it is $1,000,000 over the GST exemption. Answer C is true but it doesn't answer the question.

87

Which of the following statements about a fiduciary is true?
A. Executors don't have to have any particular skill or knowledge in transferring property for an estate because they are supervised by the court.
B. A trustee receives powers from the probate court.
C. The institution that holds and manages property for the benefit of another is called a fiduciary.
D. The trustee is regulated in his or her investment activities by the court.

C - The executor will be called on to take responsibility for business, financial, and administration decisions during the estate settlement period. That takes some skill and knowledge. The trustee receives his or her powers from the trust instrument, including investment activities.

88

Fiduciary duties include which of the following?
I. To disclose facts affecting any transaction
II. To self-deal
III. To make assets productive
IV. To profit from the relationship
A. All of the above
B. I, II, III
C. I, III
D. II, IV
E. I

C

89

Mrs. Jackson died and left $150,000 to her grandson (a skip person). She had already used $5,340,000 of her GSTT. How much GSTT will be due at her death in 2014 if her maximum estate tax rate is 40%?
HINT: The estate tax affects the GSTT like in the practice questions.
A. $14,000
B. $36,000
C. $90,000
D. $126,000

B - No annual exclusion is available at death. $150,000 x 40% = $60,000 estate tax due. Then $150,000 Ð 60,000
= $90,000. $90,000 x 40% = $36,000 GSTT.

90

Mrs. Smith, age 90, gifts to the following persons.
- $200,000 to her grandson (His parents died in an accident.)
- $200,000 to her grand nephew
- $200,000 to her sister's daughter
- $200,000 to her housekeeper, age 50
- $200,000 to her friend, age 85
How much of her $5.34 million GSTT exemption did she use?
A. $0
B. $186,000
C. $372,000
D. $558,000
E. $774,000

C - The grandnephew ($186,000) and the housekeeper ($186,000) are skip-persons, but you may have forgotten to subtract the two annual exclusions ($14,000 each). The sister's daughter is not a skip person. The sister's granddaughter is a skip person. The grandson is no longer a skip person when both of his parents die. There is no generational gap. The grandson is no longer a skip person when both of his parents die. There is no generational gap.
Estate Planning Quiz - Lesson 10

91

Ted dies with assets consisting only of long-term investments. He leaves $5,000,000 to his children and the remainder to his wife. His basis in the investments is $5,000,000; his date of death value is $9,500, 000, and the six-month alternate valuation value is $10,700,000. What is the income tax basis of the investments if his family sells the assets?
A. $5,000, 000
B. $9,500,000
C. $10,700,000

B - The alternate valuation date cannot be elected. No estate tax is due. Assets get a step-up to date of death.

92

Special use valuation can be used for which of the following assets?
I. Real property
II. A closely held business
III. A farm
IV. A residential development
A. All of the above
B. I, III, IV
C. I, IV
D. II

B - Not enough is known about the closely held business. There is no indication of real property. Special use valuation can only be used for real property.

93

Which of the following are examples of income in respect of a decedent (IRD}?
I. Quarterly stock dividends declared but not paid
II. IRA with a CRT as a beneficiary (The spouse is the income beneficiary of the CRT)
III. Royalties receivable
IV. Life insurance death benefits
A. All of the above
B. I, II, IV
C. I, III
D. II, III
E. III

C - Dividends declared but not paid are IRD. The IRA will be paid to the CRT (tax-exempt). Life insurance death benefits are income tax free. The royalties receivable will be subject to IRD. Answer II is a tough answer. The IRA money goes into the CRT under charitable gifts. It is not subject to estate taxes. There is no IRD if no estate taxes are paid.

94

A widow inherits stock with a date of death FMV of $70,000. She and her husband held the stock jointly before his death (basis $20,000). She sells it nine months later for $80,000. What is the amount of capital growth?
A. $10,000 LTCG B. $35,000 STCG C. $35,000 LTCG D. $45,000 STCG E. $45,000 LTCG

C - Her basis for her half of the jointly held stock is $10,000, and she gets a step-up in basis on his half to $35,000 ($45,000 total). The holding period for property acquired from a decedent is long-term, regardless of the actual holding period. The capital gain is the sales price $80,000 less the basis $45,000 or $35,000.

95

What is the answer to question #4 if the property is held as community property?
A. $10,000 LTCG B. $35,000 STCG C. $35,000 LTCG D. $45,000 STCG E. $45,000 LTCG

A - She gets a full step-up in basis to $70,000.

96

Ted Matthews has died with a will passing various properties to his children. Ted is survived by his wife, Jackie. Jackie would like to disclaim some of the following properties. Which properties can be disclaimed by Jackie?
I. Land held in JTWROS with Jackie - Ted's will passes his share of the property to his daughter.
II. Residence held in tenancy by the entirety - Ted's will passes his share of the property to his son and daughter equally.
III. $200,000 life insurance policy on his life - Jackie is the primary beneficiary, and his children are the contingent beneficiaries.
IV. Rental property held in JTWROS with Jackie - Ted's will passes his share of the property to his son
A. All of the above
B. I, IV
C. II, III
D. I, III, IV
E. III

D - She can disclaim 1/2 of the JTWROS property. That is his 1/2, not her 1/2. She still retains her 1/2. The entirety cannot.

97

Bob and Mary are living together (not married). They have a common-law marriage. Bob dies intestate. Who will get Bob's assets?
A. Mary
B. Bob's relatives
C. 50% goes to Mary and 50% to Bob's relatives
D. The court will decide

D - He died without a valid will. The court will decide is the best answer.

98

Tim Foley and Alice Livingston were living together (not married) in California, a community property state. Tim and Alice bought their home using joint tenancy (JTWROS) for $200,000 some years ago. Tim died recently. Alice is going to sell the home for $1,500,000 (date of death value). What is her tax basis if she contributed $100,000 to the original house purchase?
A. $100,000
B. $500,000
C. $750,000
D. $850,000
E. $1,500,000

D - She does not get a full step-up in basis. Due to joint tenancy, she gets half step-up in basis.
Her basis
$100,000
His basis after step-up
+750,000
($100,000 to $750,000)
$850,000
NOTE: You might argue that this was a community property question. They were not married.

99

If she sells the home, what will be her recognized gain for income tax purposes?
A. $0
B. $400,000
C. $450,000
D. $500,000
E. $750,000

B - Her gain is calculated as follows:
Sale
$1,500,000
ss basis
- 850,000
less single exclusion (Section 121)
- 250,000
Taxable gain
$400,000
Since she files as single (they were never married), the 121 is $250,000.
Estate Planning Final

100

John dies owning the following items. Which of the following items are subject to probate?
I. A life insurance policy of $100,000 payable to his estate
II. An annuity contract with his wife as beneficiary
III. A parcel of land owned jointly (JTWROS) with his daughter that he contributed all the money to purchase
IV. A home that he owns in common with his wife
V. His sole proprietorship business
A. All of the items
B. I, III, V
C. I, IV, V
D. III, IV
E. IV, V

C - Using a beneficiary or joint tenancy allows assets to flow by contract. They are included in the gross estate. Life insurance payable to a person's estate is subject to probate.

101

Mr. Path and his daughter Jennifer own stock in JTWROS of survivorship. Which of the following is true?
A. If Mr. Path dies first, only 50% of the value of the stock will be included in his estate.
B. If Jennifer dies first, only 50% of the value of the stock will be included in her estate.
C. Any dividends paid by the stock can be split equally.
D. Mr. Path can leave his half-interest to his wife at his death.

C - 100% will be included in the estate of the non-spouse, Mr. Path or Jennifer, depending on who dies first. The survivor will have to show consideration to get it out of the estate. Joint tenancy passes by contract, not will.

102

Bill and Margie lived in California, a community property state. Bill and Margie just died in an auto accident. It was ruled that he died first (USDA). He had the following separate assets.
- Revocable trust (beneficiary, his wife, then children)
- 401(k) plan (beneficiary, his wife, then children)
- Life insurance (beneficiary, his wife, then children)
Bill had named his brother Robert as guardian and conservator of his estate should both he and his wife die. Which of the following is true?
A. All his separate assets will be included in his probate estate (community property).
B. All his separate assets will be included in his probate estate (guardianship rules).
C. Only the revocable trust and 401(k) will be included in his probate estate (community property).
D. None of the property will be included in his probate estate.

D - Bill's separate assets would automaticallypass by trust or beneficiary arrangements. The USDA is the uniform simultaneous death act.

103

Mr. Town has a gross estate of $6,500,000. In 2010, he has made taxable gifts of $1,000,000 (using then
$345,800 of his applicable credit amount). He paid no gift tax. He leaves all his assets to his wife. If he dies today, what is the estate tax due?
A. $0
B. $345,800
C. $400,000
D. $1,345,800
E. $7,500,000

A - The assets passing to his Wife pass estate tax-free that wipes out the gross estate of $6,500,000. The $6,500,000 tax base qualifies for the marital deduction. The $1,000,000 is wiped out by the $5,340,000 exemption. The answer is zero. The exemption wipes out the tentative tax. This is a good question using the chart on page 2-1.

104

Which of the following statements regarding the gross estate and/or probate estate are correct?
I. An estate can have a gross estate without having a probate estate.
II. Everything in the probate estate will also be in the gross estate.
III. The gross estate can sometimes have a smaller value than the probate estate.
IV. A tenancy in common will not be in the probate estate but will be in the gross estate.
A. All of the above
B. I, II, III
C. I, II, IV
D. I, II
E. III, IV

D - If Answer II is correct, then Answer III is wrong. A tenancy in common is subject to probate.

105

Match the following answers and asset ownership vehicles. Testamentary trust
A. Goes through probate/included in gross estate
B. Avoids probate/included in gross estate
C. No effect

C - In regards to the testamentary trust, the assets first go through probate. All debts and expenses are paid. After the estate is cleared, the remainder goes into the testamentary trust. The trust is not funded until all aspects of the probate estate are settled. It is not in the probate or gross estate. It does not exist until the estate is settled and all taxes are paid. A testamentary trust can be funded before death, but that is not its normal usage.

106

Match the following answers and asset ownership vehicles.
401(k) that has no named beneficiary (deceased is survived by spouse)
A. Goes through probate/included in gross estate
B. Avoids probate/included in gross estate
C. No effect

A

107

Match the following answers and asset ownership vehicles Business owned by decedent.
A. Goes through probate/included in gross estate
B. Avoids probate/included in gross estate
C. No effect

A

108

Frank gifts the following to various family members.
-$32,000 cash to Purdue for his nephew's college tuition (split gift)
-$34,000 cash to his daughter to purchase a new car (split gift)
-$44,000 cash to his son for the down payment on a home (split gift)
-A life insurance policy with a death benefit of $1,000,000 and a cash value of $52,000 to his wife
-Stock with an original basis of $10,000, now worth $44,000 to his mother (split gift) Do Frank and his wife have to file a gift tax return?
A. Frank must file a gift tax return for $19,000 (taxable)
B. Frank must file a gift tax return for $22,000 (taxable)
C. Frank must file a gift tax return for $44,000 (taxable)
D. Frank and his wife must file gift tax returns of $19,000 each (taxable)
E. Frank and his wife must file gift tax returns of $22,000 each (taxable)

D - A direct gift of tuition is not subject to gift tax. $34,000 to his daughter his split (less $28,000 exclusions) $3,000 taxable gift by him and $3,000 by his wife. $44,000 to his son is split (less $28,000 annual exclusion) $8,000 by him and $8,000 by his wife. The life insurance will pass by marital exclusion. The gift to his mother ls based on FMV and is also split, resulting in a taxable gift of $8,000 by him and $8,000 by his wife. Since they are above the
$14,000 annual exclusion, they will both need to file gift tax returns. A total of $19,000 ($3,000 + $8,000 +
$8,000) or 34,000 + 44,000 + 44,000 = 122,000 Ö 2 = 61,000 then 61,000 - 42,000 = 19,000. The $42,000 is
three $14,000 annual exclusions.

109

Your aunt gives you property with a basis of $1,200,000 and a FMV of $660,000. If you sell the property for
$1,400,000, what is the amount of capital gain?
A. $200,000
B. $540,000
C. $740,000
D. $1,400,000

A - Aunt's substituted basis
Between $660,000 and $1,200,000 no gain or loss
FMV date of gift $660,000
loss

110

Mrs. Thomas inherited low basis stock ($2 basis) from her father some years ago when the FMV was $20 per share and the alternative valuation was $18 (not elected). She gifted it to her daughter when the FMV was $40 per share. Her daughter just sold the stock at $60 per share. How much gain will Mrs. Thomas's daughter have to report?
A. $0
B. $20 per share
C. $40 per share
D. $42 per share

C - The daughter's basis is her mother's basis ($20 inheritance value). The gain is $60 less $20.

111

Mr. Starr set up a trust for his grandchildren's education (income only). He has a general power. The grandchildren must use the income for college purposes. If not used by the grandchildren, the trust provisions allow the next generation to use the income. If the income is not used, it reverts to Mr. Starr. If he dies before the grandchildren use the money, what's included in his (Mr. Starr's) estate?
E. Zero
F. Greater of $5,000 or 5%
G. Lesser of $5,000 or 5%
H. 100% of the trust value

D - I believe the whole trust is included under beneficial enjoyment because the reversionary interest exceeds 5%.

112

Which of the following is true about a testamentary trust?
A. It is subject to probate.
B. It reduces the decedent's taxable estate and taxes due.
C. It cannot be created before death.
D. It is generally not in force until after death.

D - The will is subject to the probate process. Estate taxes are paid by the executor of the estate (part of administration). The testamentary trust is generally funded after death by the will. It is normally set up at death but it can be set up while living, then it is just an irrevocable trust you do while living.

113

Which of the following assets will be part of a decedent's probate estate?
I. A general power of appointment held by the decedent
II. An insurance policy owned by the decedent in which his/her spouse is the insured.
III. Survivorship benefits in a qualified plan
IV. Real estate owned as tenants by the entirety
V. A POD account with the decedent's daughter as beneficiary
A. All of the above
B. None of the above
C. I, II
D. II, V
E. II

E - The question says probateestate not the gross estate. A general power will be in the gross estate, but it can't be probated. Tenancy by the entirety avoids probate but is included in the gross estate. In Answer II, the insured has not died. The owner died. The replacement value (the interpolated terminal reserve) will be included in the decedent's probate estate. This is one of two ways an insurance policy is included; the second is naming the beneficiary the estate of the insured.

114

Which of the following trusts could have ascertainable standard provisions (HEMS)?
I. This trust consists of assets (income & corpus) intended for the sole use, enjoyment or benefit of the surviving spouse.
II. This trust will provide the surviving spouse with a stream of income that will be paid for life yet also qualifies the property for the marital deductions
III. This trust qualifies for the marital deduction but is structured in such a way that the surviving spouse does not receive corpus during his/her lifetime and could receive income, if available, from the trust at the discretion of the trustee.
IV. This is an irrevocable trust established to receive assets that are disclaimed by the surviving spouse of a decedent.
A. I, III, IV
B. I, III
C. II, III, IV
D. II, IV

D - Trust I General Power of Appointment Marital ATrust
Trust II A QTIP has special powers for the surviving spouse (could have HEMS).
Trust III An Estate Trust has a general power of appointment. The spouse can receive income if it produces income. The assets in the estate trust generally don't produce income.
Trust IV A Disclaimer Trust (like a non-marital) enables the surviving spouse to receive income, but it is subject to an ascertainable standard (special could have HEMS)

115

Which of the following trust(s) can qualify for the marital deduction?
I. QDT
II. Bypass
III. QTIP
IV. Marital
A. I, II, IV
B. II, IV
C. I, III, IV
D. III

C - All the trusts can qualify except the bypass.

116

Mr. B died recently. As part of his estate planning, he gave a terminal interestin his house to Mrs. B (second wife). Will this terminal interest qualify for the marital deduction?
A. Yes
B. No
C. No, because it is not a QTIP trust

A - Normally a life interest (exception to the terminal interest rule) requires income, but allowing her to live in the home is the same as paying her housing expenses. Mrs. B has a beneficiary enjoyment.

117

Fred's daughter is age 11. He would like to set up a UTMA account with a substantial contribution for college education. Which of the following investments should he purchase in the UTMA account?
A. STRIPs
B. High yield corporate bonds
C. Growth stocks
D. Residential rental real estate

C - STRIPS and high yield corporate bonds produce income. This could cause kiddie tax problems. Always avoid similar investments. Residential real estate produces depreciation (losses) and may have too long a holding period to be an appropriate investment for a child.

118

Mr. Thomas dies. He was custodian/donor of his grandson's UTMA account. Was the custodian account included in Mr. Thomas' gross estate?
A. He only had a special power (adverse party); the UTMA account will not be included in his estate.
B. He had a general power; the UTMA account will be included in his estate due to beneficial enjoyment.
C. He only had a special power consent (of the donor); the UTMA account will not be included in his estate.
D. Since the UTMA was for educational purposes, the UTMA account will not be included in his estate.

B - If the donor/custodian dies before the child comes of age, it might be contended that the donor possessed a general power of appointment (beneficial enjoyment).

119

Richard Peterson purchased laser equipment to use in his practice. He leases the equipment to his P.A. (Professional Association) NOTE: A Professional Association is a corporation. It is a Personal Service Corporation. The lease payments produce substantial income. Richard would like to income splitextra cash flow with his children from the laser equipment lease without losing control. In addition, he would like to use up all remaining depreciation and take a retirement income from this asset (if it is still usable) but remove it from his estate for the benefit of his children. Which of the following intra-family techniques best fits the circumstances of this situation?
A. Private annuity
B. Installment sale
C. Family limited partnership
D. GRAT
E. Gift leaseback

C - With a private annuity and the GRAT, he would lose control and lose any remaining depreciation. The GRAT might be included in his estate (the string). With an installment sale, he would lose control, depreciation, and would not share extra cash flow with his children. The installment sale would be included in his estate. With a gift leaseback, he would lose control, and all the income would go to his children. In addition, the private annuity really doesn't work anymore.

120

The $2 million your grandfather gifted to you is low basis (almost nil), low dividend (3%) publicly traded stock. In order to maintain your style of living, you need a 7% return for life. Which of the following charitable techniques could meet your requirements?
A. Charitable gift annuity
B. Annuity Trust (CRAT)
C. Unitrust (CRUT)
D. Pooled Income Fund
E. Charitable stock bailout
Lamar and Alice Case (questions 22 - 35)
Lamar
- 61 years old
- Sole owner of Jerico, Inc., a demolition company, annual compensation is $250,000
- His only will (executed in 2012) includes the following provisions.
a) that $45,000 goes to a qualified charity to be chosen by his executor
b) that his automobile, municipal bonds, and income stock are left to his son Bob and daughter Sherrie in equal shares
c) that the Jerico, Inc. stock !s left 70010 to his wife Alice and 30% to his son and daughter in equal shares
d) complete and adequate clauses concerning guardianships, tax apportionment, contingent beneficiaries, executors (or personal representatives), and simultaneous deaths
Alice
- 59 years old
- A board member of a local nonprofit organization for the last 10 years and is paid $200 per month and reimbursed for her expenses
- Her only will (executed in 2012) includes the following provisions.
a) leaves everything outright to her husband Lamar
b) complete and adequate clauses concerning payment of debts and administrative expenses, executors (or personal representative), and tax apportionment
Lamar and Alice
- married 37 years, with two living children and two grandchildren
- in the 33% marginal income tax bracket for the current year
Sherrie (daughter)
- 36 years old, married with two children, ages 7 and 9
- the office manager for Jerico, Inc.1 annual salary $55,000
Lamar and Alice Statement of Financial Position
Assets
Liabilities and Net Worth
Cash/Cash Equivalents
Liabilities
Checking account (JT)
$6,000
Credit card balance (JT)
$6,000
Money market acct (JT)
38,000
Mortgage note balance (JT)
111,500
Total Cash/Cash Equivalents
$44,000
Total Liabilities
$117,500
Invested Assets
Jerico, Inc. shares (His)
$2,960,000
Municipal bonds (His)
1,235,000
Income stock portfolio (His)
1,187,000
Growth stock portfolio (JT)
300,000
Ins. policy # 1 (Alice's life)
82,0001
Ins. policy #2 (Lamar's life)
181,0001
Lamar's IRA2
508,000
Alice's IRA3
516,000
Total Invested Assets
$6,969,000
Use Assets
NET WORTH
$7,225,500
Personal residence (JT)
$240,000
Personal property (JT)
56,000
Automobiles (JT)
34,000
Total Use Assets
$330,000
TOTAL ASSETS $7,343,000 TOTAL LIABILITIES & NET WORTH
$7,343,000
1 Life insurance cash value
2 Children beneficiary
3 Children beneficiary
JT-Joint Tenancy with rights of survivorship

B - A CRAT can pay out a fixed percentage of the initial FMV (at least 5%). The specified amount must be paid at least annually to the beneficiary out of income and/or principal. With a CRAT, capital gains will be avoided. With a charitable gift annuity, only part of the capital gains are avoided. With a CRUT, a fixed percentage of the net FMV, as revalued annually, must be payable.

121

Analyze Lamar's current estate as presented in the narrative and financial statement. Lamar lives in a common-law state. If Lamar dies today and does not amend his will, what is the size of his probate estate?
A. $5,094,000
B. $5,382,000
C. $5,464,000
D. $5,732,000
E. $5,814,000

E - The following assets are included in his probate estate.
Jerico stock
$2,960,000
Muni bonds
1,235,000
Income stock
1,187,000
Insurance policy # 1
82,000
Insurance policy #2
350,000
Probate estate
$5,814,000
Why is the insurance included?
#1 policy - He owns the policy on his wife's life. She did not die; he died. Since he owned the policy, the interpolated terminal reserve is included in his estate and subject to probate. #2 - Ownership (irrevocable assigned to his wife) doesn't affect the beneficiary. He named his estate the beneficiary, and it never says the beneficiary was changed. The insurance carrier will make the check out to his estate and it will go through probate.

122

Analyzed Lamar's current estate as presented in the narrative and financial statement. Lamar lives in a common-law state. Using all the narrative and financial information plus information in previous question.
- Lamar dies in 2014, and Alice does not remarry.
- There is no change in the value of the estate assets as shown.
- Interests that are eligible for either the marital deduction or the charitable deduction will not be reduced by any death taxes, administrative expenses, or debts due and owed by the estate.
Additional information
Annual gift tax exclusion
$14,000
Same for years 2014-2018
State death tax credit
$0
Gift tax exemption amount available
$5,340,000
Funeral and administrative expenses
$78,250
Debts of decedent, mortgages, and liens
$58,750
Charitable deduction
$45,000
Calculate Lamar's gross estate.
A. $6,021,000
B. $6,309,000
C. $6,577,000
D. $6,659,000
E. $6,809,000

D - Probate estate
$5,814,000
1/2 jointly held
337,000
IRA
508,000
Gross estate
$6,659,000
NOTE: Debt on the jointly held property isn't subtracted to get the probate or gross estate. Debt is subtracted
from the gross estate to get the adjusted gross estate.

123

Lamar is considering a program of lifetime giving. He plans to set up irrevocable trusts for his grandchildren. Alice will not consent to gift splitting with Lamar. She plans to gift separately. If Lamar gifts the following amounts over the next 5 years, what will be the amount of taxable gift?
Gift made: 2014
$65,000
2015
$78,000
2016
$91,000
2017
$104,000
2018
$117,000
A. $42,000
B. $140,000
C. $315,000
D. $455,000

D - This is not a gift to a 2503{c) trust nor did the irrevocable trust use Crummey provisions. Therefore, the gifts are of a future interest and don't qualify for the annual exclusion [(not $455,000 - $140,000)]. NOTE: Just because it is an irrevocable trust does not mean it has Crummey provisions.

124

You have reviewed Lamar and Alice's first objective, and it contains the following three components.
Please select the one technique from the list below that you would recommend as the most appropriate for achieving fill components of their first objective.
I. To provide Alice with assets or a lifetime income stream to supplement her IRA and Social Security income without having the granter create and maintain a trust
II. To allow Lamar to make a transfer of property now to eventually benefit a qualified public charity while reducing their current income tax
III. To minimize the impact of inflation on Alice's standard of living (a) by assuring her of an income stream that has the potential to pay successively larger annual amounts without depleting the principal and (b) by allowing additional transfers to the charity in the future
A. Outright Charitable Gift
B. Charitable Pooled Income Fund
C. Charitable Remainder Annuity Trust (CRAT)
D. Charitable Remainder Unitrust (CRUT)

B - The answer is a Charitable Pooled Income Fund. A CRUT requires the client to do a trust. In a pooled income fund, the charity creates and maintains the trust.

125

You are now reviewing Lamar and Alice's second objective. It is independent of Question 29, and it contains the following three components.
Please select the one technique from the list below that you would recommend as the most appropriate for achieving all components of their second objective.
I. To create a trust (or trusts), to become operative at Lamar's death, that will provide Alice with a lifetime discretionary income stream while allowing the children an invasion right to at least some of the trust assets
II. To assure Lamar that his children ultimately will receive part of his assets upon Alice's death while allowing her to determine who will benefit from other assets
III. To make use of both Lamar's exemption amount and the marital deduction to minimize his estate tax, while excluding at least some of his assets from Alice's gross estate
A. Family Bypass (B) Trust
B. Combination Power of Appointment (A) and Estate Trusts
C. Q-TI P (C) Trust
D. Combination Power of Appointment (A) and Family Bypass (B) Trusts

D - The answer is a Combined Power of Appointment (A) and Family Bypass (''B) Trust.

126

Lamar and Alice have decided to purchase a second-to-die life insurance policy. In order to keep the proceeds out of their estate, they were advised to create an irrevocable life insurance trust. Lamar and Alice applied for the insurance, and the policy was issued to them. An irrevocable trust was drafted. The policy was transferred into the irrevocable trust, and 90 days later both Lamar and Alice were killed in a plane crash. The Internal Revenue Service wants to include the insurance in the estate for tax purposes. Which statements is/are correct?
I. The insurance will be included in the estate because the trust was drafted after the insurance was approved. The insurance will be included in the estate because the premiums were a gift from the insured.
II. The insurance will be included in the estate because the insureds transferred the policy within 3 years of death.
III. The insurance will not be included in the estate. The policy will not be included in the estate because of USDA (uniform simultaneous death act) provisions in the policy.
A. I, II, III
B. II, III
C. II, IV
D. I, III
E. III, IV

D - The initial ownership by Lamar and Alice causes the policy to be included in the estate. They applied for the policy. II is false. The premium payments didn't cause the inclusion. The initial ownership caused the inclusion (They applied). IV is false. USDA (Uniform Simultaneous Death Act) has nothing to do with the inclusion.

127

Lamar buys a custom van to be used in his business. He requests coverage from his agent within (60) days of purchase. The van is a substitute for his personal auto. Will the van be covered.
A. The van will be covered under his PAP.
B. The van will not be covered because he waited beyond the (30) day period.
C. The van will not be covered because it is used in business.
D. The van will be covered because Lamar called and requested coverage as a substitute for his personal auto.
E. The van will be covered because it will be owned by Lamar and used as a private passenger automobile.

C - Answer B is partially true. He did wait more than 30 days, but no accident occurred. So there was no loss. Answer C is the answer. Vans used in business cannot be covered by a personal auto policy; they have to be covered under a business policy.

128

Lamar and Alice have come to you for estate planning advice regarding gifting. They are concerned about some advice given to them by a financial planner.Which of the following is/are true?
I. The federal gift tax applies to all gratuitous transfers.
II. Gift splittingmeans that spouses may file a joint gift tax return.
III. If all the gifts of a donor in a given calendar year are present interests, a federal gift ta x return is not required unless the gifts to any one donee exceed $14,000 in value.
IV. If Lamar pays $16,000 for tuition to Chesapeake County Day School for his niece, this payment will result in a taxable gift of zero.
V. The $5,340,000 exemption is not elective; it must be used if available for gifts.
A. I, II, V
B. II, III, IV
C. III, IV, V
D. III, V
E. V

C - I is false. All gratuitous transfers are not subject to federal gift taxes. Examples are political contributions, payments of tuition directly to an educational institution, and direct payment of another person's medical and hospital bills. II is false. Spouses must file a gift tax return if one spouse consents to gift splitting.IV is a direct payment of tuition. V is true. You must use the exemption. If you exceed $5,340,000, then gift tax is payable at 40%.

129

Lamar and Alice are considering gifting to their grandchildren to avoid paying estate tax. Considering their prior gifting, which of the following about the GSST would be true in 2014?
I. The generation-skipping transfer tax provides an unlimited exemption for each donee.
II. The use of the $5.34 million exemption in the generation-skipping transfer tax is elective.
III. No annual exclusions are allowed for the generation-skipping transfer tax.
IV. The generation-skipping transfer tax is integrated with the federal estate and gift taxes so as to avoid double taxation.
V. The time at which the generation-skipping transfer tax is due can be at the time the donor makes the transfer or later.
A. I, III, V
B. II, IV
C. II, V
D. III, V
E. I

C - I is false. The exemption is per donor. II is true. III is false. Annual exclusions are allowable in the calculation of the generation-skipping transfer tax. IV is false. The generation-skipping tax is an additional tax and is intended to deter generation skipping transfers. V is true. Indirect skips cause the GSTT to be due later.

130

Lamar's home has a FMV of $240,000 and a replacement cost of $175,000. The home is covered for
$150,000 under an HO 3 with a coinsurance of 80% and a $11,000 straight deductible. Lamar's fireplace needs to be cleaned and causes a small fire with resulting damages of $5,000. How much will the insurance company apportion for this loss?
A. $1,916
B. $2,646
C. $3,000
D. $3,200
E. $4,000

E - With a replacement cost of $175,000, Lamar needs to have insurance coverage of at least $140,000 (80% of
$175,000). In fact, Lamar has $150,000. So he will get 100% coverage for a partial loss less the deductible. If the homeowner coverage exceeds 80%, then the claim is paid in full. See Insurance Lesson 3.

131

Lamar wants Bob (his son) and Sherrie (his daughter) to share more in his business and possibly reduce the future size of his estate. Which of the following techniques would reduce his future estate and benefit his son and daughter now?
A. 2032A Special Use Valuation
B. 303 Stock Redemption
C. 6166 Installment Sale
D. Recapitalization

D - Answer A is wrong. We don't know the value of the real estate, so 2032A can't apply, and 2032A is only available at death. Answers B and C are wrong. They are usable only at death. Answer D is correct. This is usable now and would reduce the size of his future estate by freezing the size of the asset. Also, his children would own the common shares and would benefit from the growth of the common shares.

132

Lamar's P&C agent has suggested that a single premium deferred annuity is a safe assetinvestment In Florida. He suggested that at retirement, Lamar could take a pure life annuity, and the income stream would be partially tax- free. If Lamar then dies, the annuity would be removed from his estate. Truth or fiction?
A. Lamar's P&C agent should stick to selling auto insurance and let us CFP practitioners handle an estate like this.
B. The income stream would be partially tax-free, but the remaining annuity would be included in the estate because Alice would be the beneficiary.
C. A pure life annuity would cease at Lamar's death.
D. The older the annuitant is when he receives the first annuity payment, the greater will be the amount of each payment.
E. This P&C agent is ok; he made true statements.

E - Answer B is false. If he took out a pure life annuity (at retirement), nothing would remain or be included in his estate. The annuity ceases at Lamar's death. Answers C and D are true. E is the best answer. The P&C agent made correct statements (Answers C and D). NOTE: Unless it says it is variable, it is a fixed annuity.

133

Lamar is considering a retirement plan for his company. He is interested in a matching type arrangement. Which of the following types of retirement plans are currently permitted to offer 401(k) provisions?
I. Money purchase plan
II. SEP
III. Profit-sharing plan
IV. Stock bonus plan
A. I, II
B. II, III
C. I, III, IV
D. III, IV
E. I, II, III, IV

D - Profit-sharing and stock bonus plans can have 401(k) provisions.

134

Lamar is thinking of taking his Social Security at age 66 and continuing to work for Jerico. Which of the following would be true?
I. Between 65 and 69, his benefits would be reduced $1 for every $3 earned.
II. He is eligible for retirement benefits as a current insured worker.
III. Alice would be eligible for the reduced benefits if he died today.
IV. Alice would be eligible at age 66 for retirement with a level of benefits at 50% of Lamar's PIA.
V. Automatic cost of living increases in OASDI benefits are based upon changes in the Consumer Price Index.
A. All of the above
B. I, II, III
C. II, III
D. III, IV
E. IV, V
Tom and Alice Mills Case (questions 36 - 52)
Tom Mills
- Age 47, works as a physician (internist)
- Earnings for the prior year $250,000
- Divorced 7 years ago, still has 3 years of alimony payments to go ($2,000 per month)
- Did a prenuptial agreement with Alice (second wife)
- All separately owned assets will be distributed as follows.
- Using a will and trust arrangement, the maximum exemption amount will go to a trust which will pay all income to Alice until Cynthia becomes 21. Then, the principal passes to Cynthia.
- Remaining assets to a Q-TIP trust for Alice's benefit; at her subsequent death the remaining assets pass to his two daughters equally.
Alice Mills
- Age 38, works as a junior high school principal
- Yearly salary $60,000
- Married Tom 5 years ago, no prior marriages
- Did a prenuptial agreement with Tom; all her separately owned assets to Sandy by will
Cynthia Mills
- 14-year-old daughter, lives with her father and her stepmother, Alice
- Child by Tom's first marriage
- Works part time at home for dad on a computer in an office in their home inputting medical data. (The computer is linked by internet to the office computer.)
- Some of the part-time earnings are for Cynthia to spend, and the remainder are deposited in a UTMA account. (Tom is custodian.)
- Tom has also contributed money to the UTMA account.
Sandra Mills
- 4 -year-old daughter to Tom and Alice
- needs specialized medical treatment due to a day-care accident last year
- Legal proceedings due to the accident have ended in a structured settlement (see structured settlement).
- Tom is hopeful Sandy will grow through these childhood problems as her body gains strength and matures.
Other facts
Tom and Alice have a happy, stable marriage. Alice likes Tom's house. The house is big enough for all family members to have their own space. Cynthia gets along very well with Alice. Cynthia's mother has left the area. She calls Cynthia occasionally, and Cynthia spends a month in the summer with her mother.
Structured settlement (Sandy)
- $2,000,000 compensatory damages
- $2,000,000 punitive damages
- Payments begin at age 21 and last for 40 years (certain) using either current interest rates or a guaranteed 6% (whichever is higher). In addition, any special education needs will be covered in full up to age 21.
Sun City Internal Medicine (a Personal Service Corporation)
Tom's practice is in a retirement community area. Much of the surrounding area is void of children because the retirement communities are for adults only, and the communities are growing, forcing out young people. Tom is happy because his practice is growing proportionately. Tom owns 50% of the PSC. One other doctor owns the other 50% and makes the same salary and has the same benefits. The last business value, for purpose of the buy-sell, was done last year ($400,000). The buy -sell is an entity purchase arrangement.
Tom and the co-owner are considering additional benefits to keep existing employees from being hired away by competing medical office (see employee benefits).
Sun City Junior High
Alice has been the principal at the junior high for the past 3 years. The junior high has lost 50% of its students because all the land and older houses are being bought up to develop retirement communities or retirement homes. In addition, the school facilities are old and dated. She is concerned the junior high will be consolidated into the county schools which are growing rapidly. If this occurs, she isn't sure what opportunities will be made available to her by the county school system.
Sun City Internal Medicine - Employee Benefits
Medical plan
- Plan - PPO/Indemnity plan - all Sun City employees covered automatically
- Option 1 - use PPO doctors and hospitals paying co-pay as indicated in the policy
- Option 2 - $1,000 calendar year deductible, 70/30 of the next $5,000, then 100% to $1 million of coverage
- Covered persons - Tom and Cynthia are covered under this plan.
- Premium - Tom pays for Cynthia's premium
401(k) plan
- Tom's current deferral - $17,500 per year (2014)
- Company matching contribution - up to 100% of deferral
- Profit-sharing contribution - enough to max out yearly benefits
- Beneficiary - Cynthia (daughter)
Disability
- All employees of the company are covered by a short-term disability policy (26 weeks).
- Benefits start 1st day accident and 8th day sickness.
- The definition of disability is the inability to perform his occupation (5 years) and then any occupation.
- The maximum benefit is $500 per week (bases on wages).
- Premiums are paid by the employer.
Buy-sell policy
- Type of policy - 15-year level term Death benefit - $250,000
- Owner - Sun City Internal Medicine
- Beneficiary - Sun City Internal Medicine
- Premium - Paid by Sun City Internal Medicine
Sun City has adequate business owners, workers' comp., and malpractice policies in force.
Sun City Junior High - Employee Benefits
Medical plan
- Plan - PPO/Indemnity plan
- Option 1 - use PPO doctors and hospitals paying co-pay as indicated in the policy
- Option 2 - $500 calendar year deductible, 70/30 of the next $5,000, then 100% to $1 million of coverage
- Covered persons - Alice and Sandy are covered under this plan.
- Sandy uses one of the PPO doctors (specialist) and a PPO hospital for treatment.
- Premium - Alice pays for Sandy's premium.
403(b) plan (Variable annuity)
- Alice's current deferral - $17,500 per year (2014)
- Beneficiary - Sandy (daughter)
- Investments - Alice is currently invested 100¡10 in a common stock fund.
Personal Insurance Policies
Flood policy
- Dwelling - $150,000
- Deductible - $1,000
- Contents - $75,000
- Premium - $1,000
Tom's individual disability policy
- Benefits - $10,000 per month
- Elimination period - 90 days
- Benefit period - to age 65 for accident or sickness
- Definition of disability - own occupation
- Options - partial disability, residual disability, and $1,200 Social Security rider
- Premium - $3,000 per year
Tom's individual universal life policy
- Death benefit - $250,000 (Option A level)
- Current cash value - $20,000
- Beneficiary - ex -wife (irrevocable)
- Premium - $2,000 per year
Homeowner's policy
- Dwelling - $150,000
- Contents - $75,000
- Liability - $50,000
- Med pay - $1,000
- Deductible - $500
- Premium - $450 per year
Auto policy
- Bl-PD - $100,000/$300,000/$50,000
- Med pay - $5,000/15,000
- UM - $100,000/$300,000
- Collision - $250 deductible
- Other than collision - $250 deductible
- Premium - $800 semiannual
Tom and Alice Mills Statement of Financial Position
Assets
Liabilities
Cash (JT)
$15,000
Credit cards (JT)
$2,000
Money market (T)1
100,000
Mortgage-Home (T)8
175,000
CDs (A)
25,000
CV life insurance (T)2
20,000
Total Liabilities
$177,000
1,000 shares XYZ stock (A)3
44,000
4,000 shares ABC fund (A)4
44,000
403(b) (A)
175,000
401(k) (T)5
515,000
IRA (T)6
120,000
Sun City (PSC)7
200,000
Net Worth
$1,540,000
Home (T)8
250,000
Personal property (JT)
100,000
Doll Collection (A)9
109,000
Total
$1,717,000
Total
$1,717,000
1 Municipal bond and stock holdings sold recently have been deposited in a money market account.
2 Ex-wife is the beneficiary of the $250,000 universal life insurance policy.
3 500 shares were inherited at $20 per share, and 500 shares were gifted to Alice at $22 per share (FMV) (basis
unknown).
4 2,000 shares were purchased at $7 per share 50 months ago, and 2,000 shares were purchased at $8 per share 10 months ago (all dividends and capital gains taken in cash).
5 Invested in 80% fixed income and 20% in balanced fund.
6 Invested 90% in a GNMA fund and 10% is a money market fund. The beneficiary is Alice.
7 Tom's basis is $10,000.
8 30-year fixed 9% mortgage taken out 6 years ago when he purchased the house after his divorce.
9 Basis (purchase or gift) of the total collection is $30,000. (NOTE: Neither daughter is interested in the collection.)
(JT) Joint tenancy
(T) Tom
(A) Alice
NOTE: Their 1040 tax form showed an AGI of $280,000 for last year. Tom estimates the AGI for this year will be the same with a marginal tax bracket of 33% (2014). Their capital gain rate is 15%.
Economic situation
Inflation is under control (2%); interest rates on fixed instruments are currently stable but low (4%) but are expected to rise, and the economy is good and improving.
As a financial planner, you have gathered all the information included in these pages. In addition, Tom and Alice have outlined these goals and objectives with you.
- They want to preserve cash flow and reduce interest rate exposure (home and investments).
- They would like to reduce their income taxes.
- Tom wants to retire at age 55. The patient load pressure continues to build.
- Alice would also like to retire in 8 years.
- They would like to limit probate and estate taxes should either of them die and at the death of the surviving spouse.
- They want to fund Cynthia's college education with pretax money if possible.
- They are seriously concerned about Sandy's ongoing medical and education needs.

E - Benefits are no longer reduced for ages 66. They are reduced $1 for $3 earned above a threshold until NRA (normal retirement age), but as written this is false. II is false. Currently insured workers are not eligible for retirement benefits. Only fully insured workers are eligible. III is false. Alice isn't eligible yet; she is only 59.

135

Which of the following financial planning functions still need to be done with this client and in what order?
I. Interview clients, identify preliminary goals
II. Collect, analyze, and evaluate client data
III. Implement financial strategies, plans, and products
IV. Prepare financial plan
V. Monitor financial plan
A. I, II, III, IV, V
B. II, I, IV, III, V
C. III, IV, V
D. IV, III, V

D - In the case, it says You have gathered all the information contained on these pages. The next step is to prepare a financial plan.

136

With regard to the business buy-out arrangement, if Tom dies first, what will be the value of the business in his estate, how much will the business pay to his estate, and how much of the proceeds will be subject to income tax?
A. $400,000, $200,000, $190,000
B. $250,000, $200,000, -0-
C. $200,000, $200,000, $190,000
D. $200,000, $200,000, -0-
E. -0-, $250,000, $40,000

D - The total business value (by agreement) is $400,000. He owns 50%. The company will purchase the stock from his estate, and the stock will get a step-up in basis. It appreciates to FMV at death just like any other appreciated asset.

137

In reviewing their personal insurance policies, which policies are deficient based on case information?
A. His disability - coverage
B. His universal life - beneficiary
C. Their homeowners - coverage
D. Their auto - coverage
E. Their excess - liability umbrella coverage
I. All of the above
II. II, III, IV, V
III. III, IV, V
IV. IV, V
V. V

C - Based on a salary of $250,000*, Tom has all the disability he can purchase (individual and group). Refer to Insurance Lesson 5. The universal life policy beneficiary agreement is due to a divorce decree. There are no deficiencies. The homeowners insurance liability limits are too low, not enough liability coverage is always a deficiency. There is no coverage for the doll collection.
*Their AGI is estimated to be $280,000. (given in case data). This is called a client evaluationquestion.
$100/$300/$50 for a professional is considered inadequate. He needs an umbrella and $100/$300/$50 auto coverage will not be enough. You may consider this unfair, but this is what the exam is like. Answer III (homeowners with only liability coverage of $50,000) forces you into answer C. There is no other possible answer.

138

Alice wants to purchase a car for $22,000. To fund the purchases, she will sell one of four stocks or mutual funds she owns. Considering their income tax position, which sale would be the most appropriate?
A. 500 shares of XYZ (inherited)
B. 500 shares of XYZ (gifted)
C. 2,000 shares of ABC Growth (short term)
D. 2,000 shares of ABC Growth (long term)

D - The smallest gain is the sale of the short-term mutual fund is $6,000 ($11 less $8 cost = $3 per share x 2,000 shares = $6,000), but the gain is taxed at 33% or $1,980 of tax. The gain on the long-term mutual fund ($8,000) is taxed at 15% or $1,200 of tax. Gain in the one stock would be $12,000 long-term and the other gain unknown (no basis was given).

139

If Tom is totally disabled for 6 months, how much disability income will he get in the 5th and 6th months of disability?
A. $500 a week plus $11,200 in the 5th month and the 6th month
B. $11,200 in both the 5th and 6th month
C. $500 a week plus $10,000 in both the 5th and 6th month
D. $500 a week in both the 5th and 6th month

A - The short-term policy will pay until the end of 26 weeks (for the first 6 months). The individual policy starts after 90 days (including the Social Security rider).

140

Sun City Internal Medicine is considering adding benefits for employees. Sun City has set aside a limited amount of money for two benefits. Which two benefits would you recommend based on the case data?
I. Add life insurance equal to two times compensation ($100,000 maximum)
II. Provide long-term disability integrated with Social Security to begin after 180 days based on 50% of salary Increase short-term disability coverage from $500 per week to 70% of salary
III. Provide group LTC coverage
IV. Provide group dental program with maximum benefits of $2,000 per year
A. I, II
B. I, III
C. I, V
D. II, V
E. III, IV

C - Short-term disability is usually based on payments per week, and its limits are low (not 70% of salary). Life insurance and a dental program look like the best choices considering a limited amount of money.Tom has sufficient long-term disability but has no personal life insurance. Although LTC could be a good answer, Tom is relatively young. The ages of the other doctor and employees are unknown. The benefit could be attractive and inexpensive or the opposite. This again, is a client evaluation question.

141

In regards to Sandra, which of the following is a weakness?
A. Sandra will never be able to obtain medical insurance.
B. If Alice loses her job, Sandra will never be able to obtain medical insurance.
C. If Alice loses her job, Tom and Alice may not be able to send Sandra to any specialized schools.
D. Tom and Alice have not set up an education program for Sandra.

D - Sandra currently has medical coverage under Alice's medical plan. If Alice loses her job, she can get coverage under Tom's medical plan with no preexisting under HIPAA. The settlement provides for specialized schooling only. There are potentially other education needs.

142

Cynthia is paid $7,240 by Sun City Internal Medicine for inputting medical data. Which of the following is true?
I. Cynthia will have to pay FICA tax on her earnings.
II. Cynthia will have to have tax withheld on her earnings.
III. Some of the earned income will be subject to the kiddie tax.
IV. Either Cynthia or her father Tom can use Cynthia's personal exemption but not both.
V. Deposits to Cynthia's UTMA account can cause unearned income to grow and be subject to the kiddie tax.
A. I, II, IV, V
B. II, III
C. II, IV
D. I, V
E. IV

A - Cynthia is 14 years old. The earned income is not subject to the kiddie tax. The deposits into the UTMA account can create unearned income subject to the kiddie tax (up to age 24).

143

If Tom was self-employed and paid Cynthia directly, which of the above answers would be correct?
A. I, II, IV
B. II, III
C. II, IV, V
D. I, V
E. IV

C - Cynthia's earnings would not be subject to FICA or self-employment tax because of the following. The real question is Is employment by a member of one's own family covered by Social Security?A child, under age 18, in the employ of a parent does not come under Social Security. She is still subject to kiddie tax.

144

Tom asked you what you would suggest in regards to his 401(k) investments.
A. You suggest changing asset allocation to 60-65% in U.S. Equities, 25-40% fixed 1 and 5-15% international. This should guarantee 10% over time.
B. You suggest changing asset allocation to more aggressive growth. Long-term investors can ride out short- term volatility.
C. You suggest changing gradually out of fixed into equities. Tom is a conservative investor.
D. You suggest leaving the account alone. This will allow Tom to ride out down markets.

C - Inflation and interest rates are low. Even if they rise, the stock market should still perform considering the economy is good to improving. Answers A and B have words like guaranteeand aggressive growthwhich just don't fit the case or client. Answer C is the best choice.

145

Tom and Alice feel most of their retirement income will be subject to ordinary income tax. They are willing to pay taxes now1 if necessary. Which of the following investments does not defer taxes?
A. Buying a business building
B. Private activity municipal bonds
C. Variable annuity
D. Variable life insurance
E. Deposits to nondeductible IRAs

B - All the remaining answers defer tax in some manner. If Tom and Alice buy the building, they can take the depreciation. Private activity bonds avoid 1040 taxes but are subject to AMT.

146

When Sandy receives her structured settlement, how will the payments be taxed?
A. A portion will excluded using the annuity exclusion/inclusion formula.
B. The compensatory portion is totally tax-free, and the punitive portion is taxed at ordinary income tax rates.
C. Both portions are taxed at ordinary income tax rates.
D. The compensatory portion is taxed based on the annuity exclusion/inclusion formula, and the punitive portion is taxed at ordinary Income tax rates.

B - Other than punitive damages, any damages received due to personal physical injuries or physical sickness are not includable in gross income. This is true whether the damages are received by suit or agreement or as a lump sum or periodic payments.

147

Tom is concerned about his lack of estate planning. Considering the facts in this case, which planning
techniques do you suggest he implement? HINT: Does it say what kind of trust he has?
I. Revocable Living Trust
II. Life Insurance Trust
III. Durable power of attorney (springing)
IV. Living will
V. QPRT
A. All of the above
B. I, II, III, V
C. I, III, IV
D. II, V
E. III, IV

C - He doesn't have a revocable living trust (probate). He does need a durable power of attorney and a living will (incompetence). Although it says he has a will and trust arrangement, it never states that it is a revocable trust. It could be a testamentary trust. A revocable trust has many benefits; avoids probate, privacy, incapacity, etc. it is good planning. They really do not have a very large estate. A life insurance trust is not needed. A QPRT at age 47 for a house worth $250,000 does not seem very practical under the circumstances.

148

What would cause their real estate asset (home) to appreciate more rapidly?
A. Refinance the existing mortgage with a new 30-year mortgage (fixed)
B. Refinance the existing mortgage with a new 15-year mortgage (fixed)
C. Buy a bigger home
D. Pay off the mortgage
E. None of the above

E - Mortgages don't affect appreciation. Does a bigger home appreciate more than a smaller home? I think E is the best answer. (My opinion)

149

Cynthia has $40,000 in her UTMA account currently. Tom feels Cynthia will need $100,000 to complete four years at college. Which of the following techniques would work best considering the facts in the case?
HINT: From question 53, she is paid $7,240 per year.
A. Pay Cynthia more per hour
B. Gift Cynthia $28,000 per year over the next four years
C. Do a gift leaseback with some of Sun City's office equipment
D. Rollover the $40,000 in Cynthia's UTMA to a 529 plan and gift $14,000 per year to the plan
E. Leave the UTMA alone and start gifting around $14,000 per year to a 529 plan

E - How many hours can a 14-year-old work per year? 500. She makes $7,240 or about $14.50/hour. It's hard to justify paying her more. Using $40,000 as a PV, an 5% return and 4 years, the payments (end), Tom needs to gift only a total of $14,000 per year to fund easily the $100,000. I would leave the UTMA alone (not triggering any taxes) and start a 529 plan. Tom can then contribute $14,000 to the 529 plan. The UTMA is partially funded by Cynthia's earnings. That should retain her money. Tom can always recover money from the 529 plan, but it should be his money. Answer C is a good answer. The gift lease-back would be paid with tax deductible dollars. However, this is unearned income and would be subject to the kiddie tax. This is client evaluation.

150

Tom owns a life insurance policy that was made part of the divorce settlement. If he dies, how will the policy affect estate taxes at his death?
A. The policy was part of a divorce settlement and will not be included in his estate.
B. It will have no effect on estate taxes at his death.
C. It will use $250,000 of Tom's applicable exemption amount.
D. It will use $10,000 (CV) of Tom's applicable exemption amount.
E. Only the remaining amount of alimony payments will affect Tom's exemption amount, not the death benefit of the policy.

C - Tom owns the policy (included in his estate). If the insured possessed any incidents of ownership at death, exercisable either alone OR IN CONJUCTION WITH ANY PERSON (such as the irrevocable beneficiary), then it's included in the insured's estate. With his ex-wife as beneficiary, he will have to use $250,000 of his exemption amount which will diminish the amount he can transfer into the bypass trust. Please review the bottom of page 7-1.

151

The divorce settlement requires the life insurance policy to remain in force for 20 more years (until his ex- wife is 65). Which of the following is the best tax alternative for Tom?
A. Transfer the existing policy to his ex-wife
B. Buy a 20-year term policy on his life
C. Buy a new universal life policy on his life
D. Let his ex-wife purchase a policy on his life (He pays premium.)
E. Do nothing for the next 20 years and take a chance he will not die
R.J. and Florence Case (questions 53 - 58)
R.J.
- Age 69, widower, is semi-retired
- Has three children and six grandchildren
- At his wife's death some years ago (1999), his wife left $600,000 in a By-Pass trust for R.J.'s benefit. R.J. is the income beneficiary but has special powers for withdrawals (HEMS) and a 5/5 power should he need it. R.J. isn't taking any distributions at this time and doesn't plan to take any distributions in the future.
- He and one of his sons are co-trustees. R.J. is investing the money in tax-free municipal bonds. He believes the money will double in 12 years at 6%. R.J.'s children are the trust beneficiaries (equally) at his death.
- All other funds were left to him, or he owned the assets outright.
- He had a quadruple bypass 3 years ago and is fully recovered.
- He has a revocable trust which is partly funded. All trust assets will go to his three children.
- He has never been charitably inclined, but this has changed since his quadruple bypass.
R.J.'s children
- One child, of the three, has both a go-nowhere job (no education) and is currently separated from her husband. R.J. has been financially supportive but is getting tired of being called for money.
- He loves all his grandchildren and has been supportive in giving them money for educational purposes and plans to continue to do so in the future.
Florence
- Age 65, divorced, retired
- Has one child and two grandchildren from a prior marriage
- Received a generous divorce settlement and gets a little alimony
- When she turned 60, she developed onset diabetes, and she has to watch her diet
- She has a simple will leaving all her assets to her only child.
Florence' s child
- Her daughter is happily married and a homemaker
- Her granddaughter has just graduated from medical school and is going to start her own practice.
- Her grandson is a total waste. He has been in and out of drug rehab programs.
Florence's Statement of Financial Position
Assets
Liabilities
Cash
$25,000
Margin1
$50,000
Stock portfolio1
1,250,000
Mortgage3
40,000
IRA2
1,500,000
Subtotal
$90,000
Equity mutual fund
300,000
Condo3
200,000
Net Worth
3,185,000
Total Assets
$3,275,000
Total Liabilities & Net Worth
$3,275,000
1Stock portfolio consists of recently purchased 1,000 shares of a stock at $60 per share. The account is margined (up 20% in 2014).
2IRA consists of her deposits into her IRA yearly, distributions (QDRO) from her ex-husband's plan, and a rollover of her funds from a profit-sharing plan.
3The basis of the condo is $50,000. The mortgage is 7% fixed with 5 years remaining.
R.J.'s
Statement of Financial Position
Assets
Liabilities
Cash (T)
$100,000
Margin account3
$800,000
Whole life (CV)1
30,000
Deep Hole Oil & Gas7 (T)
60,000
Pension plan2
2,000,000
(non-recourse loan)
Stock account3 (T)
2,000,000
Subtotal
$860,000
Variable annuity4
85,000
Equitable mutual fund5 (T)
1,250,000
Arizona LP6 (T)
25,000
Deep Hole Oil & Gas7 (T)
50,000
Residence8 (T)
400,000
Personal property
100,000
Auto
50,000
Net worth
$5,230,000
Total Assets
$6,090,000
Total Liabilities & Net Worth
$6,090,000
NOTE: (T) = Trust
1The death benefit of the whole life is $100,000. The beneficiaries are his children. His basis in the policy is
$40,000,
2The beneficiaries of the pension plan are his children.
3The stock account is heavily margined (up 30% in 2014).
4The basis of the variable annuity iS $50,000 and is invested primarily in a U.S. Smallcap fund (up 15% in 2014). He is the owner/beneficiary and his children are contingent beneficiaries.
5Purchased shares (30,000) mainly in down markets, average cost $15 per share
6The Arizona LP was purchased in 1995 for $250,000. He feels he would be lucky to get $25,000 for the partnership today. Since 1996, he has received little or no income. He hasn't been able to use (no passive income) the passive losses he received.
7R.J. had a big income for the prior tax year, so he purchased Deep Hole Oil & Gas to get a write-off. He purchased a working interest (general partnership). It's too early to tell the value of this partnership.
8The residence basis is $100,000.
R.J. and Florence
- Seriously dating since they met a year ago
- Have many interests in common including spending a lot of money
- The main subject of their disagreements is how they will handle their assets when they get married.
- The other subject of disagreement is where they are going to live after they get married; Florence will not live in his home.
- The children by both marriages are supportive but are concerned about their rightful inheritance.

D - If he transfers the existing policy to his ex-wife, he will have to get his current wife to consent to gift-splitting and file two gift tax returns. In addition, the policy will remain in his estate for 3 years. Answer B will accomplish nothing. It says, as written, Tom will buy a 20-year term policy. Then the policy still remains in his estate and is not tax deductible. If his ex-wife purchases a policy on his life, it is out of his estate, and it can qualify as alimony (income tax deductible).

152

R.J. realizes his estate is subject to estate taxes. He is wondering if his estate will qualify for any tax breaks or relief if he dies before marrying Florence. Considering the facts given in the case, would any of the following help him?
I. 6166
II. 2032A
III. Co-ownership discount
IV. 303
V. Blockage discount
A. I, II, IV
B. I
C. None of the above
D. III, V

C - He doesn't qualify for any of the answers.

153

Whether R.J. marries Florence or not, based on his financial statement, which estate tax reduction recommendations would or could you recommend?
I. A By-pass Trust
II. A Q-TIP Trust
III. A CRUT (either on him or Florence and him)
IV. A QDRO
V. A Disclaimer Trust
A. All of the above
B. I, II, III, IV
C. II, I
D. II
E. III

E - Most of his assets will go directly to his children. The bypass and disclaimer trust will not reduce his taxes because his assets go to his children by trust or beneficiary. The Q-TIP Trust will defer taxes not decrease them. A QDRO is a pension distribution due to divorce. A CRUT is an estate tax reduction technique.

154

R.J. is concerned about liquidity. Which of his assets will get a step-up in basis/value and will be liquid when he dies?
I. Whole life insurance
II. Pension plan
III. Stocks
IV. Variable annuity
V. Residence
A. I, III, IV
B. I, III
C. II, IV, V
D. III, IV
E. II, III

B - The pension plan and the variable annuity will get no step-up in basis, and they will be subject to both estate and income tax. The residence will get a step-up in basis but will not be liquid. The life insurance will be the face value/liquid. The premium paid is just a fraction of the death benefit is the basis. The death benefit has to be a step-up in value.

155

If R.J. and Florence get married, they are considering their combined estate would be almost $10 million. Taxes at the second death could be high (depends of the future tax laws). They are considering a second-to- die policy to cover these taxes. If they decide to purchase a policy, who should own the policy?
I. R.J. and Florence
II. All the children of both R.J. and Florence
III. All their grandchildren to avoid GST
IV. An ILIT with Crummey provisions
V. An irrevocable trust

D - If R.J. and Florence own the policy, it would be included in their estate, increasing estate taxes. It's not prudent to have four children of two marriages and own a policy like this. The grandchildren have problems, so having them own the policy isn't an option. An irrevocable trust without Crummey provision will make gifts of premium gifts of a future interest. These gifts will not qualify for the annual exclusion.

156

R.J. wants to set up a trust for his problem child (daughter). He wants to contribute money yearly to the trust, but his daughter would only get income (no 5 or 5 right). The residue would go to his grandchildren at her death (her children). She would receive all the earnings from the trust no matter how much it made. He realizes he will have to give the money away irrevocably but is desperate to get her on the right track. Which of the following trusts could work?
A. 2503(c)
B. 2503(b)
C. A Support Trust
D. A Grantor Trust
E. An Irrevocable Trust with Crummey provisions

E - The 2503(c) is for minors. The 2503(b) will work, but yearly gifts would be gifts of a future interest and won't qualify for the annual exclusion. A support trust is to discharge an obligation. R.J. doesn't have an obligation to a grown child. A granter trust would cause the income to be taxed to R.J. With regard to an irrevocable trust, please go back to Lesson 6. Yes, she could demand under the Crummey provisions, but none of the other trusts work.

157

R. J. has decided to make an outright gift to charity (assume the property is use related). Which of the following assets should he gift?
A. Whole life policy $100,000
B. Stock purchase 6 months ago for $150,000 now worth $30,000
C. Arizona LP
D. 1,000 shares of his Equity Mutual Fund with a current NAV of $30
E. Deep Hole Oil and Gas

D - Life insurance is considered ordinary income property. Even though the life insurance policy cost R.J. $40,000, the donor's maximum gift would be the fair market value of $30,000. The stock is STCG, and the gift would be based on basis. The Arizona LP would be like the life insurance. R.J. should hold the LP until disposition and take the loss. Finally, Deep Hole Oil & Gas, with a $60,000 non-recourse loan, will cause two major problems. The
$60,000 would be income taxable to R.J. as debt release, and the charity can't accept a gift which has debt associated with it. The equity mutual fund has appreciated. I believe it is the best answer.
A non-recourse loan is a loan from the bank to buy the partnership. His financial statement shows the loan as a liability, just like a mortgage loan.