Practice exam review

Question 1

when should a premarital agreement NOT be considered?

Answer 1

when one or both parties are unwilling to make a full disclosure of all of their income and assets to the other party!

it is good to consider in situations where:

• each party has wealth and wants to protect their financial independence
• if there is significant difference in wealth between parties
• if either party has significant/ ongoing obligations, rights, and/or children from previous marriage
• if either party is considering making a substantial gift to the other in consideration of the marriage

Question 2

factors to consider when deciding whether to equalize estates at death of first spouse (or defer estate taxes till surviving spouse death)…

Answer 2

1 - age and health of surviving spouse
2 - whether combined assets exceed 2 unified credit exceptions
3 - whether surviving spouse might want to make gifts to children (or others)
4 - whether estate(s) have substantial appreciation potential

Question 3

what benefits will a properly drafted ILIT offer?

Answer 3

1 - proceeds NOT taxed in estate of decedent
2 - trust is NOT subject to probate
3 - if life income offered and basis transfers to heirs, proceeds will be excluded from income recipient’s estate too
4 - trust will NOT direct trustee to pay other items (e.g. taxes)

Question 4

what does a “pourover” provision in a will do?

Answer 4

transfers assets from an estate into a trust created earlier (before the will was created)

Question 5

what does the marital deduction accomplish?

Answer 5

• effectively treats husband and wife as a single economic unit for gift and estate taxes
• if all property is added, and total exceeds limit, it could result in excess estate taxes being paid.
• property qualifying for marital deduction is included in surviving spouse’s estate if not consumed or disposed.

Question 6

characteristics of a revocable trust

Answer 6

• grantor may add or remove assets during life
• gains from trust assets are NOT frozen if trust is revocable – must accept gains when incurred / grown
• income distributed from a trust is reported as income on the recipient’s tax return
• S121 $250k house capital gain remains available for principal residence
• assets remaining in trust are included in grantor’s estate
• assets distributed at death receive a new basis (except installment notes)
• assets distributed from trust at death avoid probate, and are transferred per Trust document (NOT will)

Question 7

best estate planning strategy for married couples wanting to minimize taxes over both deaths

Answer 7

bequeath applicable exclusion to a bypass trust, providing assets equal to remaining estate tax credit available, and taking advantage of unified credit at the first death.

Do NOT - give surviving spouse General POA, or use a QTIP with balance for spouse, or exclusion to spouse – ALL of these options put value in surviving spouse’s estate

Question 8

Joyce’s gross estate was $1,000,000. Her funeral costs were $16,000. She left $20,000 to charity and $14,000 to a community hospital. Total amount of home mortgage (owned in JTWROS with her spouse) was $100,000. The home was valued at $200,000. She had personal consumer debt of $15,000. Her spouse was her personal representative and waived his fees. She left $260,000 in cash outright to her spouse. What is her taxable estate?

Answer 8

AGE: $1,000,000 - $16,000 (admin cost) - $50,000 (1/2 debt from the mortgage) - $15,000 (credit card debt) = $919,000

Taxable Estate: $919,000 - $310,000 (marital deduction) - $34,000 (charitable deduction) = $575,000

The maritable deduction is calculated as follows:

The total amount of the home is $200,000 therefore her portion would be $100,000. If the debt is $100,000 then her portion is $50,000. So she would be leaving $100,000 - $50,000 = $50,000 to the spouse for the home. So total marital deduction is $260,000 + $50,000 = $310,000.

Question 9

cross-purchase plan characteristics

Answer 9

• Life insurance owned by surviving partner will not be included in Decedent’s probate estate
• Life insurance and/or disability insurance premiums to fund the agreement are NOT tax deductible as an ordinary business expense
• Surviving Partner receives an increased cost basis in Decedent’s stock equal to the amount paid to redeem the shares from Decedent’s estate
• The transaction side-steps the entity and thus avoids constructive dividend concerns

Question 10

what advice can a CFP give for an estate plan

Answer 10

I. CANNOT Advise the client to make her revocable trust irrevocable.

II. Calculating the value of the client’s probate estate.

III. Advising the client on the need for diversification in her investment portfolio.

IV. Advising the client that title of assets would be better as community property.

V. CANNOT Explaining the strategic use of the annual gift tax exclusion.