Estate Planning Test Review
A father deeded a house as a gift to his daughter 10 years ago but retained the right to live in it until his death. He died this year while still living in the house. The following are relevant facts: The father bought the property in 2000 for $160,000. The fair market value of the property when the gift was made in 2006 was $240,000. The father filed a timely gift tax return but paid no gift tax because of the basic credit amount. The fair market value of the property at the father's death was $290,000. The daughter sold the property 3 months after her father's death for $290,000. She had a gain of?
$0 The house is included in the father's gross estate under Sec. 2036 since he retained a life estate in the house until his death. Under the basis adjustment rules of Sec. 1014, the daughter takes a basis in the house equal to the date-of-death fair market value for income tax purposes. Since the daughter sold the house at its date-of-death value, her gain is zero for income tax purposes.
Allen died last month and was survived by his spouse, Ellen. Among the items of family property are the following: A $400,000 life insurance policy on Allen's life with Ellen designated as beneficiary (Ellen has been the owner of the policy ever since it was issued 4 years ago), the family residence with a fair market value of $200,000 (Allen and Ellen own the residence jointly with the right of survivorship even though Allen purchased it in 1988 with his separate funds), and a $10,000 bank account (Allen and Ellen own the account jointly with the right of survivorship even though Ellen made all the deposits). What amount of the family property will be included in Allen's gross estate for federal estate tax purposes?
$105,000 The life insurance is not included because Allen held no incidents of ownership in the policy within 3 years of death. One-half of the property held jointly by Allen and Ellen will be included under Sec. 2040. Thus, the answer is $105,000.
A decedent died on January 1, 2016. The facts concerning the decedent's estate are as follows: Estate tax payable before credits = $2,465,000. Funeral and administrative expenses = $75,000. Basic credit amount = $2,125,800. State death taxes paid = $15,900. Based on the above information, the net federal estate tax payable is?
$339,200 The net federal estate tax payable is calculated as follows: estate tax before credits, less basic credit amount (2016): $2,465,000 - $2,125,800 = $339,200
A wife decides she is going to transfer some property to her husband when she dies. Upon her death, her will states that a $100,000 bank account and a $500,000 house with a $200,000 mortgage will pass to her husband outright. In addition, a trust with $500,000 of assets will pay income for life to her sister and then will pass to her husband after the death of her sister. The present value of the husband's remainder interest in the trust is $150,000. How much would qualify for the federal estate tax marital deduction?
$400,000 The $100,000 bank account, and the house will qualify for the marital deduction. However, only the net value of the house will qualify - $500,000 - $200,000 = $300,000. $300,000 house plus $100,000 bank = $400,000 marital deduction. None of the trust will qualify because it is a potentially terminable interest. It is not certain that anything will pass to the husband. Property also has to go to the husband in order to qualify.
Mary Bennett and her husband purchased property 22 years ago for $100,000 and titled it in joint names with the right of survivorship. However, the entire contribution for the property came from funds that Mary had inherited from her father. When Mary died last year, the property was worth $800,000. What is her husband's basis in the property?
$450,000 Half of the property will be included in Mary's estate, for which her husband will receive a stepped-up basis of $400,000. He will continue to have a $50,000 basis in the half of the property that was not included in her estate. Thus, his total basis is $450,000.
The following are facts concerning a decedent's estate: Gross estate = $6,800,000. Funeral and administrative expenses = $75,000. Marital deduction = $400,000. Post-1976 adjusted taxable gifts = $50,000. State death tax = $48,000. The tentative tax base for this estate is?
$6,327,000 The tentative tax base is computed as follows: Gross estate, less deductions, plus post-1976 adjusted taxable gifts ($6,800,000 - $523,000 + $50,000) = $6,327,000. Deductions are as follows: funeral and administration $75,000, marital deduction $400,000, state death tax deduction $48,000.
The following are facts concerning a decedent's estate: Taxable estate = $8,800,000. Post-1976 adjusted taxable gifts = $150,000. Post-1976 gifts made to a qualified charity = $300,000 The tentative tax base of this estate is?
$8,950,000 Once the taxable estate is determined, the amount of adjusted taxable gifts made after 1976 is added to the taxable estate. The sum of these two figures is the tentative tax base.
Among the assets in a decedent's gross estate is stock in a closely held corporation that was left to a nephew. The interest passing to the nephew is required to bear the burden of all estate taxes and expenses. The relevant facts about this estate are as follows: Adjusted gross estate = $7,700,000. Fair market value of stock in the closely held corporation = $3,300,000. Administration and funeral expenses = $35,000. Federal and state estate taxes = $945,000. Bona fide debts of the decedent = $60,000. What amount of closely held corporate stock can be redeemed under IRC Sec. 303 so that the redemption will be treated as a sale or exchange rather than a dividend distribution?
$980,000 The calculation of the amount redeemable under Sec. 303 involves two steps. First, the estate must be eligible for Sec. 303. The estate is eligible only if the value of the closely held stock exceeds 35 percent of the adjusted gross estate. In this question the estate qualifies since the value of the stock is over 42 percent ($3,300,000 divided by $7,700,000) of the adjusted gross estate. The second step involves determining the amount redeemable. Since the nephew's bequest is liable for estate expenses and taxes, the amount of stock redeemable ($980,000) is equal to the sum of estate expenses and death taxes (not, however, the debts of the decedent): Funeral and administrative expenses + federal and state estate taxes = maximum Sec. 303 redemption ($35,000 + $945,000 = $980,000)
Charitable Remainder Trusts
- fixed annuity to noncharitable beneficiary(ies) - remainder to charity Requirements: -Fixed annuity at least 5% original value of trust assets to noncharitable beneficiary(ies) -Charitable remainder interest must be at least 10% original trust value -Annual/more payments to one/more noncharitable beneficiary(ies) alive at trust creation Duration: - Life/lives noncharitable beneficiary(ies) - 20-year/less term
Charitable Lead Trust
-Income to charity -Remainder to non-charitable beneficiary(ies) Requirements: Form: Charitable Lead Annuity Trust (CLAT) Guaranteed annuity interest Charitable Lead Unitrust (CLUT) Guaranteed unitrust interest Duration: - Life/lives living at decedent's death Term not limited by 20-year rule Payments by insurance company/similar organization Remainder to non-charitable beneficiary(ies)
Requirements of a Qualified Disclaimer
-The refusal must be in writing. -The refusal must be irrevocable. -The writing must be received by the transferor, or the transferor's legal representative, or the holder of the legal title to the property no later than 9 months after the later of (1) the date on which the transfer creating the interest is made (date of death) or (2) the date the person disclaiming becomes 21. -The person disclaiming must not have accepted the interest or any of its benefits. -Because of the refusal, someone other than the person disclaiming must receive the property interest. The person making the disclaimer cannot in any way influence the selection of who will be the recipient of the disclaimed property
What is the Special Use Valuation Rules?
1. Decedent was U.S. citizen/resident 2. Business = to at least 50% adjusted gross estate 3. Real property at least 25% of adjusted gross estate 4. Business owned/used at least 5 of 8 prior years 5. Decedent/family materially participated at least 5 of 8 prior years 6. Continued special use during 10 years after decedent's death
What are the requirements of a QTIP?
1. Spouse entitled to income from property; 2. Power to appoint property limited to spouse; 3. Unconsumed property included in spouse's estate
All the following statements regarding the marital deduction are true EXCEPT
A QTIP can qualify for the marital deduction and accumulate all income for the life of the surviving spouse. A QTIP can qualify for the marital deduction but all income must be paid to the surviving spouse for life.
In which of the following situations in 2016 will a child's income be taxed at the parent's highest marginal tax rate?
A 17-year-old child earns $10,000 income from a trust created by grandparents. Children above age 19 (or 24 for a full-time student) are taxed at their rates for their income. kiddie tax rules are inapplicable to earned income of children. Child's unearned income is not taxed at the parents' highest income tax rate until it exceeds $2,100 (2016)
Which of the following interests in real property gives the owner of the interest the most control over the property?
A Fee Simple Estate. A Life Estate, Remainder Interest & Retained Interest involve limitations on the holder's property interest. The holder of a life estate, remainder interest, or retained interest does not own the property in all events since some possessory term in the property belongs to another interest holder.
Which of the following is a gift for federal gift tax purposes?
A father waives the interest payment his son was to pay on a $50,000 interest-bearing note evidencing to the father. Forgiveness of money owed is considered a gift unless it is in a business context.
All the following are true regarding pooled income funds EXCEPT
A pooled income fund cannot pay any money back to the donor. Pooled income funds are akin to mutual funds run by charities. The fund pays out income to the grantor for life and upon the grantor's death, the charity keeps the remainder.
All the following statements concerning the inclusion and valuation of all or part of a commercial annuity in the estate of an annuitant are correct EXCEPT
A life annuity with no period certain is includible in proportion to the amount of the total cost received as payments by the decedent prior to death. A pure life annuity terminates at the annuitant's death, and nothing remains to be included in the decedent's estate.
Which of the following items would be included in a decedent's gross estate for federal estate tax purposes?
A life insurance policy on the decedent's life that was transferred by the decedent 2 years earlier to an irrevocable trust for the benefit of her children. The transfer was less than 3 years prior to the decedent's death. The amount of the wrongful death claim belongs to the decedent's estate and not the decedent, since the claim was initiated by the estate after the decedent died.
When the calculation of the federal estate tax is made, which of the following is a credit against the amount of federal estate tax due?
Allowable foreign death taxes administration expenses, federal income taxes due as of the date of death, and administration expenses are incorrect because they are deductions from the amount of the gross estate, not credits against the tax due.
Which of the following statements concerning income taxation of trusts and estates is correct?
An estate is allowed an exemption of $600. Trusts and estates have a much different tax system than corporations, as they are taxed on retained income. A complex trust has an exemption of $100. Grantor trust taxation is irrelevant to the taxation of estates. Grantor retained trusts are taxed to the grantor as if the trust did not exist for tax purposes.
All the following statements concerning the federal income taxation of estates are correct EXCEPT
An estate is taxed at a flat income tax rate. Estates are taxed at progressive income tax rates.
All the following statements concerning the filing of the federal estate tax return and the payment of federal estate tax are correct EXCEPT
An extension of time to file the estate tax return both extends the time for payment of the taxes due and delays the date interest begins to accrue on any unpaid taxes. An extension of time to file the estate tax return does not automatically extend the time for payment of the taxes due and does not prevent interest from accruing on any unpaid taxes beginning on the date the return was originally due.
Which of the following statements concerning installment sales of property is correct?
Any installment payments due at the time of death are included in the seller's gross estate at their present value. Installment reporting merely requires one payment to occur in a tax year later than the year of sale. Gain is realized upon each payment. Each installment payment will be treated as part return of basis and part taxable gain, if any.
Cost Basis Differences
Assets acquired by purchase or contract: For assets purchased or acquired contractually, the basis equals the purchase price. See IRC (Internal Revenue Code) § 1012. Assets acquired by gift or trust: The general rule is that assets acquired by gift or trust receive transferred basis (also called carryover basis). See IRC § 1015. Put simply, gifted assets retain the donor's basis. This means that the value of the asset at the time of transfer is irrelevant to computing the donee's new basis. The general rule does not apply, however, if at the time of transfer the donor's adjusted basis in the property exceeds its fair market value and the recipient disposes of the property at a loss. In this situation the asset's basis is its fair market value at the time of transfer. See Treas. Reg. § 1.1015-1(a)(1). Assets acquired by inheritance: Assets acquired by inheritance are eligible to receive stepped-up basis, meaning the fair market value of the asset at the time of the decedent's death.
Sam Silver purchased a joint life annuity for himself and his good friend from an insurance company. Assuming Sam contributed the entire purchase price, how will the annuity be valued at his death for purposes of determining his gross estate?
At the present value cost of a single life annuity for his friend at the time of his death. the value of commercial annuity contracts is based on the cost of comparable contracts issued to the surviving annuitant as of the date of the decedent's death.
The full proceeds of a life insurance policy would be included in the decedent's gross estate in all the following situations EXCEPT
At the time of death, the decedent owned a premium-paying whole life policy on the life of another person. If, at the time of death, the decedent owned a premium-paying whole life policy on the life of another person, the amount includible in the decedent's gross estate is the value found by adding the unearned portion of the last premium to the interpolated terminal reserve.
All the following are can be deducted from the adjusted gross estate EXCEPT
Attorney fees Attorney fees would have already been deducted from the gross estate to arrive at the adjusted gross estate. As such, they cannot be deducted again.
Special Use Calculation
Average Annual Gross Cash Rental for Comparable Land in the same area MINUS average annual state and local RE Taxes for comparable land DIVIDED by Average Annual Effective Interest Rate for a new Federal Land Bank Loan
Income earned but unpaid at the time of a decedent's death is deemed to be income in respect of a decedent (IRD). Which of the following statements concerning IRD is correct?
The income is taxable to the person or entity receiving it. IRD is reportable by the individual or entity that actually receives it: either the decedent's estate or a beneficiary.
The proceeds of a life insurance policy on the life of a decedent would be included in the decedent's gross estate in which of the following situations? I. if the decedent possessed incidents of ownership in the policy at death, but it was impossible for him or her to exercise the rights at death II. if the decedent possessed incidents of ownership in the policy at death but could not exercise the rights without the consent of some other person
Both I and II
Which of the following requirements must be met in order for the transfer of a reversionary interest taking effect at death to be pulled into a decedent's gross estate? I. The possession or enjoyment of the transferred property can be obtained only by the beneficiary's surviving the decedent. II. The decedent retained a reversionary interest that was worth more than 5 percent of the value of the transferred property immediately before death.
Both I and II
Which of the following statements concerning payment of gift or estate tax is (are) correct? I. The donor of the gift is primarily liable for the gift tax. II. If the donor or estate for any reason fails to pay the tax when it falls due, the donee or heirs become liable to the extent of the value of the gift.
Both I and II
Which of the following statements concerning the marital deduction is (are) correct? I. Federal estate tax and state death taxes may be payable from a surviving spouse's share of the estate. II. Subject to certain qualifying provisions, terminable interests passing to a surviving spouse can qualify for the marital deduction.
Both I and II
Which of the following statements concerning the marital deduction is (are) correct? I. Generally, the marital deduction is limited to the amount of property actually passing to the surviving spouse II. To take full advantage of the marital deducation, a spouse can leave all of his or her property to the surviving spouse through a will.
Both I and II
Suppose in 2016 when the annual exclusion is $14,000, Tom makes a gift of $50,000 to his wife, Maggie, and a gift of $20,000 to his son, Matt. If Tom and Maggie elect to split gifts, which of the following statements concerning the amount of annual exclusions each spouse can claim for federal gift tax purposes is correct? I.Tom's annual exclusions total $24,000. II. Maggie's annual exclusion is $10,000.
Both I and II Both I and II are correct. Tom would have an annual exclusion of $14,000 on the gift to his wife and an annual exclusion of $10,000 on the split gift to his son. Maggie would have an annual exclusion of $10,000 on the split gift to her son. Remember, $14,000 is the maximum annual exclusion per person in 2013. If the total gifts made by the grantor to a given person during the year is less than the annual exclusion amount, the amount of the annual exclusion for that person is the total amount of the gifts.
Bart's dad gave him $100,000. Because Bart is a successful professional, he did not need the money and refused to accept it. Bart's dad then gave the money to Bart's sister. Which of the following statements concerning the taxation of the gift is (are) correct? I. If, in refusing the gift, Bart gave his dad a qualified disclaimer, Bart's dad is considered to have made a transfer to Bart's sister that is subject to the federal gift tax. II. If, in refusing the gift, Bart stated the property needed to go to his sister instead, Bart is considered to have made a transfer to his sister that is subject to the federal gift tax.
Both I and II are correct. You must follow the requirements of a qualified disclaimer in order to not be treated as transferring the property to the next beneficiary, in this case - his sister.
All the following statements concerning estates and trusts are correct EXCEPT
Both estates and trusts come into being by operation of law. A trust is created by the action of a grantor (settlor).
All the following statements concerning the computation of federal estate tax are correct EXCEPT
Casualty losses are deductible from the gross estate only to the extent they are reimbursed by insurance. Losses due to theft, fire, and floods are deductible from the gross estate but only to the extent they are not reimbursed by insurance.
Which of the following items is a deduction from a decedent's gross estate in determining the adjusted gross estate?
Claims against the Estate Marital Deduction is incorrect because the marital deduction is a deduction against the adjusted gross estate to determine the taxable estate.
All the following are factors that must be considered in determining whether an estate tax return must be filed EXCEPT
the amount of gifts made to a spouse that qualifies for the gift tax marital deduction A gift qualifying for the gift tax marital deduction is not considered a taxable gift and therefore is not a factor in determining the filing requirements of a federal estate tax return.
Entity Purchase Buy-Sell vs Cross Purchase Buy-Sell
Entity Purchase Buy-Sell: Partnership makes payments to estate to liquidate decedent-partner's interest Cross Purchase Buy-Sell: Surviving partners purchase decedent partner's interest
All the following statements concerning the inclusion of property held in joint tenancy with right of survivorship in the estate of the first tenant to die are correct EXCEPT
Even if the decedent's estate can prove that the decedent did not contribute to the purchase of the joint tenancy with persons other than a spouse alone, the decedent's fractional share of the property is included in the decedent's estate. If the decedent's estate can prove that the decedent did not contribute to the purchase of the joint tenancy with persons other than the spouse alone, none of the jointly held property is included in the decedent's estate.
True or False - A revocable trust is not permitted to hold an unincorporated business interest.
False A revocable trust may hold a sole proprietorship or partnership interest. This is a business continuation technique that may be used to prevent the termination of an unincorporated business by operation of law at the death of an owner.
True or False - The situs of a trust is always the same as the grantor's domicile because the law of the grantor's state of domicile governs the grantor's property.
False One of the advantages of creating a trust is that one may choose the situs of the trust as well as the laws that will govern its administration. It need not be the domicile of the grantor or any state in which the grantor has a residence.
True or False - The individual who creates a power of appointment in another (that is, the donor of the power) is the person who exercises the power in favor of the donee at some time in the future.
False The donor of a power is the person who gives another (the donee) the right to designate who will receive the property (the appointee) at some future date. The donor is not the individual who exercises the power over the property. He or she gives the donee the power to be exercised at some future time during lifetime or by will.
True or False - Under the blockage rule, a block of stock is valued at its full listed market value?
False Under the blockage rule, a block of stock is valued with consideration of an appropriate discount for a transfer of a large quantity of stock at one time.
Which of the following statements concerning federal estate tax is correct?
For all estates required to file a return, a federal estate tax return must be filed within 9 months of death unless an extension is granted.
Henry, Harry, and Hobie form a closely held corporation, XYZ Corp. Each one receives 100 shares of stock. The three shareholders enter into a stock redemption (entity purchase) buy-sell agreement so that when one dies, the remaining shareholders can continue the business in coequal ownership. If Henry dies prematurely, which of the following statements concerning this arrangement is correct?
Harry and Hobie continue to own the same number of shares as they did prior to Henry's death. it is XYZ Corp. that is obligated to purchase Henry's shares from the estate. XYZ will retire Henry's shares, which leaves Harry and Hobie with 100 shares each.
Mrs. Jones would like to buy more life insurance but wants to avoid inclusion of the insurance in her gross estate at death. If Mrs. Jones creates an irrevocable trust to apply for the life insurance policy, which of the following trust terms is (are) recommended? I. a provision for Mrs. Jones to replace the trustee II. a provision directing the trustee to pay Mrs. Jones's estate taxes
I and II are incorrect because either provision would cause the proceeds paid to the trust to be included in Mrs. Jones's estate.
Which of the following statements concerning the activities of a fiduciary/trustee is (are) correct? I. A trustee must treat the remainder beneficiaries and present interest beneficiaries equally and in accordance with the trust document. II. The trustee is charged with making sure that the client/donor's intentions are correctly expressed in the final estate planning documents, trust, and will.
I only I is correct because the trustee needs to treat beneficiaries equally. II is incorrect because the lawyer is charge with that task, not the trustee.
Which of the following statements is (are) correct? I. If the decedent is personally liable for the indebtedness, the full value of the property is included in the gross estate, and the estate is allowed a deduction for the amount of the debt. II. A promise to forgive indebtedness is considered a completed and taxable gift.
I only II is incorrect because a promise to forgive is not a completed gift and forgiveness of indebtedness is only considered a completed gift when it is actually forgiven.
If a trust that is required to pay out "all the income" to the beneficiaries received $5,000 in capital gains from the sale of assets and $3,000 from dividends on the stock it held, which of the following statements concerning this income is (are) correct? I. $3,000 (the amount of the dividends) would be distributed and taxed to the beneficiaries. II. $5,000 would be retained in the trust and not taxed until it is eventually distributed to the beneficiaries.
I only II is incorrect because although the $5,000 of capital gains is considered corpus for purposes of determining how much must be distributed to the beneficiaries, it is considered income for tax purposes and thus the $5,000 retained by trust is taxed to the trust. Capital gains are considered corpus, rather than income, in terms of trust law, but are considered income for tax purposes.
Which of the following statements concerning the availability of the marital deduction in the case of a resident-alien spouse is (are) correct? I. A surviving resident-alien spouse is eligible for the marital deduction if the surviving spouse becomes a U.S. citizen before the decedent spouse's estate tax return is filed and remains a U.S. resident after the death of the citizen spouse. II. If a resident-alien spouse is the first to die, the marital deduction is not allowed for property transferred to the surviving citizen spouse.
I only II is incorrect because if a resident-alien spouse is the first to die, the marital deduction is allowed for property transferred to the surviving citizen spouse.
If the redemption of stock to pay death taxes qualifies for Sec. 303 treatment, which of the following statements is (are) correct? I. If the stock was held as a capital asset in the hands of the decedent at the time the exchange was made, the redemption qualifies for capital gains treatment, rather than being treated as a dividend. II. If the value of the stock increased prior to the decedent's death, the estate realizes a taxable gain from the redemption.
I only II is incorrect because if the value of the stock increased prior to the decedent's death, the estate realizes no taxable gain from the redemption because the stock receives a new stepped-up basis.
Which of the following statements concerning state death taxes is (are) correct? I. The federal state death tax deduction is allowed only if a federal estate tax Form 706 return must be filed. II. State estate and inheritance taxes are generally imposed at the same rate regardless of the relationship of the deceased to the beneficiary.
I only II is incorrect because states that impose an inheritance tax often have tax rates that vary with the relationship of the beneficiary to the decedent.
Suppose Jessie places income-producing property in a trust with the income to be paid annually to her father for life and, at her father's death, the remainder payable to her daughter. The annual exclusion would be allowed for which of these gifts? I. the gift of the trust income to be paid annually to her father for life II. the gift of the remainder interest to her daughter
I only II is incorrect because the annual exclusion is allowed for present-interest gifts but not future-interest gifts. The gift of the remainder interest to Jessie's daughter is a future-interest gift because the daughter's possession and enjoyment commences at some period in time after the gift was made.
Which of the following statements concerning federal gift and estate taxes is (are) correct? I. The donor's gross estate includes the amount of any gift taxes paid by the donor on gifts made within 3 years of death. II. Gifts made within 3 years of death are brought back into the donor's gross estate.
I only II is incorrect because the general rule is that completed gifts are not brought back into a decedent's gross estate. There are exceptions, however; transfers of property with retained rights and gifts of life insurance policies within 3 years of death are brought back into a decedent (insured's) gross estate.
Which of the following statements concerning an estate freeze as an effective estate planning technique is (are) correct? I. With an estate freeze, the appreciation in property subject to the freeze accrues to someone other than the original owner. II. With an estate freeze, the owner transfers all interests in the property during his or her lifetime.
I only II is incorrect because with an estate freeze, the owner retains enough strings attached to the property (a retained interest) to provide himself or herself with a current income stream. With a gift, the owner transfers all interests in the property during his or her lifetime.
Which of the following statements concerning the tax treatment of a charitable-lead annuity trust (CLAT) and a charitable-lead unitrust (CLUT) is (are) correct? I. A lead trust pays income for life to a non-charitable beneficairy and then the remainder goes to the charity. II. Interests placed in CLATs and CLUTs can qualify for a charitable estate tax deduction.
II only I is incorrect because CLATs and CLUTs pay income first to a charity and then upon the death of the life in being, the remainder goes to a non-charitable beneficiary.
Which of the following statements concerning estate planning using life insurance is (are) correct? I. One benefit of using life insurance to fund an ILIT is that the arrangement avoids any generation skipping transfer tax issues. II. Crummey powers are often used on life insurance trusts to help the premium payments to the trust qualify for the present interest annual exclusion.
II only I is incorrect because ILITs are still subject to GSTT if the premiums are over $14,000 a year or if the contributions to the trust does not qualify as a present interest. II is correct - The Crummey power, named after a taxpayer from the landmark tax case in 1968, is an often-used trust provision that allows a gift that would otherwise be a future interest gift to be treated as a present interest gift, and thus be eligible for the annual gift tax exclusion
Which of the following statements concerning an irrevocable trust is (are) correct? I. A transfer of property to an irrevocable trust is ineffective for the purpose of reducing the grantor's gross estate. II. An irrevocable trust is treated as a completed gift for tax purposes at the time of the transfer.
II only I is incorrect because gifting to an irrevocable trust will reduce a grantor's gross estate unless certain powers or rights are retained by the grantor.
Which of the following powers held by the income beneficiary is (are) considered to be a general power of appointment, thus causing all or a portion of the trust corpus to be includible in the beneficiary's gross estate for federal estate tax purposes? I. the power to withdraw the greater of $5,000 or 5 percent of trust corpus in any one year II. the power to direct the trustee to pay the beneficiary's personal debts
II only I is incorrect because it is a special power of appointment.
Which of the following statements concerning state death taxes is (are) correct? I. When no federal estate tax is due, no state death tax is payable. II. In inheritance tax states, the amount of state death taxes applied to property passing to beneficiaries varies with the beneficiary's relationship to the decedent.
II only I is incorrect because many states impose a state death tax, regardless of federal estate taxation. Inheritance tax is imposed on the assets inherited from a deceased person. Some states and a handful of federal governments around the world levy this tax. The tax rate on inheritances depends on the value of the property received by the heir or beneficiary and his relationship to the decedent.
Which of the following statements concerning valuation for gift tax purposes is (are) correct? I. The value of a life insurance contract is equal to the aggregate gross premium paid, regardless of when the contract was gifted. II. Annuities and other assets that diminish in value over time are valued at present value at the date of death.
II only I is incorrect because only a life insurance policy gifted immediately after purchase has a value for gift tax purposes equal to the gross premium paid. A paid-up life policy has a value equal to the premium payable for the same type of single-premium policy based on the insured's age on the date of the gift. A premium-paying policy has a value equal to the interpolated terminal reserve plus any unearned premiums.
If a closely held business interest is more than 35 percent of the decedent's adjusted gross estate, which of the following statements concerning the deferral of payment of estate tax attributable to that business interest under Sec. 6166 is (are) correct? I. Payments of tax attributable to the business interest may be deferred for up to approximately 15 years from the due date and then be paid in installments. II. If a payment is late (more than 6 months overdue) or the business is sold, all remaining unpaid estate tax becomes due and payable immediately upon notice and demand of the Internal Revenue Service.
II only I is incorrect because payments of tax attributable to the business interest may be deferred for up to 5 years from the due date and then be paid in installments.
Which of the following statements concerning the valuation of stock of a closely held corporation for federal estate tax purposes is (are) correct? I. Revenue regulations establish a fixed formula of valuation that must be used in all closely held corporation situations. II. When assets are valued at cost on the corporation's books, adjustments are necessary to reflect the difference between true market value and cost when determining the value of the closely held corporation's stock.
II only I is incorrect because revenue regulations reaffirm that no fixed formula of valuation can be devised that is applicable to all closely held corporation situations. The value of closely held corporation stock must be determined on an individual basis.
If Tom, Jerry, and Janet, three close friends, hold property in joint tenancy with right of survivorship and Tom dies first when the property is worth $300,000, which of the following statements concerning the amount included in Tom's gross estate is correct?
If Tom's estate can prove that Jerry and Janet paid the entire purchase price of the property because Tom was out of work at the time, no amount of the joint tenancy would be included in Tom's estate at the time of his death. The special automatic one-half inclusion rule applies when the joint property with right of survivorship is held solely by a husband and wife. If Tom's estate can prove that the joint tenancy originally belonged to Jerry, none of the joint tenancy would be included in Tom's gross estate. If Tom's estate can prove that the joint tenancy originally belonged to Jerry, none of the joint tenancy would be included in Tom's gross estate.
If a trust earns $20,000 in income, all the following statements concerning the taxation of the income are correct EXCEPT
If the $20,000 is taxable income and the trust distributes $25,000 to its sole beneficiary, the beneficiary is taxed on $25,000. If the $20,000 is taxable income and the trust distributes $25,000 to its sole beneficiary, the beneficiary is taxed on $20,000. The remaining $5,000 is considered an income-tax-free distribution of trust corpus.
Which of the following statements concerning the alternate valuation date allowed for federal estate tax purposes is correct?
If the alternate valuation date is selected, that date applies to all assets in the estate, subject to a few exceptions. If property is distributed or sold before the alternate valuation date, the property is valued as of the date of distribution or sale, not the 6-month date.
All the following statements concerning the valuation of life insurance gifts are correct EXCEPT
If the policy is in the premium-paying stage at the time it is transferred, the value of the gift is the sum of the premiums paid to the date of transfer. If the policy is in the premium-paying stage at the time it is transferred, the value of the gift is generally equal to the interpolated terminal reserve plus the unearned premiums on the date of the gift.
A wife owns a $100,000 whole life insurance policy on her husband's life. She has named her son as revocable beneficiary. Which of the following statements concerning the life insurance is correct?
If the wife dies before her husband and bequests the policy to him upon her death, the transfer will qualify for the marital deduction. correct because it is a present transfer to the husband at death and not subject to any terminable interest, as such the value of the policy qualifies for the marital deduction.
All the following statements concerning property are correct EXCEPT
Life insurance is tangible personal property. Life Insurance is intangible personal property.
Which of the following statements is (are) correct? I. Generally, the use of a revocable living trust is driven by a desire to avoid taxes. II. While estates need to file income tax returns, complex trusts do not need to file income tax returns.
Neither I nor II Statement I is incorrect because revocable living trusts are usually driven by non-tax reasons as a revocable living trust is simply taxed as if the grantor did nothing tax wise. Statement II is incorrect because both estates and complex trusts need to file annual income tax returns.
Which of the following statements concerning advance medical directives is (are) correct? I. In most states, a living will may provide direction in nonterminal, as well as terminal, medical situations. II. Medical durable powers of attorney are limited to decisions concerning artificial-life-support issues.
Neither I nor II I is incorrect because a living will is limited to decisions concerning artificial-life-support issues. II is incorrect because medical durable powers of attorney may provide direction in non-terminal, as well as terminal, medical situations.
Which of the following statements concerning property held as tenancy in common is (are) correct? I. Because each ownership portion is an undivided part of the whole property, a single tenant cannot sell his or her interest in the property. II. Tenancy in common can be used only with real property.
Neither I nor II I is incorrect because although each ownership portion is an undivided part of the whole property, a single tenant can sell his or her interest in the property. II is incorrect because tenancy in common can be used with either real or personal property.
Which of the following statements concerning the taxation of income in respect of a decedent (IRD) is (are) correct? I. For income tax purposes, IRD is taxed to the decedent's estate, regardless of who receives the income. II. If IRD is subject to income taxation, it is not included in the decedent's gross estate for estate tax purposes.
Neither I nor II I is incorrect because for income tax purposes, IRD is taxed to the estate or the beneficiary who receives the income. II is incorrect because IRD can be subject to both income and estate taxation. A deduction for the amount of the additional federal estate tax attributable to the inclusion of the IRD in the decedent's gross estate is given to the party to whom the income was taxed.
Which of the following statements concerning ownership rights is (are) correct? I. If one is the legal owner of property, he or she must also be the equitable owner. II. A trustee has beneficial ownership of property in his or her care.
Neither I nor II I is incorrect because it is quite possible to have legal ownership in one person and equitable ownership in another. II is incorrect because a trustee is only the legal owner of trust property. The beneficiary of a trust is the equitable owner of the trust property and is entitled to the trust income.
A father and son have been farming land owned by the father for the past 12 years. Just prior to his death the father was offered $3 million for his farm because of its possible use as a shopping center. The son would like to continue to farm the land if it can be included in his father's estate at its current-use value. Additional facts are as follows: Average annual gross rentals from nearby farms of similar acreage are $160,000. Average annual state and local real estate taxes on the farm are $32,000. The interest rate for loans from the Federal Land Bank is 8 percent. For federal estate tax purposes, the farm-method valuation formula would result in a current-use value for the farm of?
Net comparable income ($160,000 less $32,000) = $ 128,000 Capitalized net income $128,000/.08 = $1,600,000
All the following statements concerning situations in which certain items can be deducted either on the federal estate tax return or on income tax return are correct EXCEPT
Once a decision has been reached as to whether it is more advantageous to take the allowable deductions on the estate tax return or the estate's income tax return, all of the deductible items must be deducted from that one return. Once a decision has been reached as to whether it is more advantageous to take the allowable deductions on the estate tax return or the estate's income tax return, the waiver may be filed for a portion of the deductible items while the rest are allowed for estate tax purposes.
Which of the following statements is true regarding a charitable remainder unitrust (CRUT)?
Payments from a CRUT are variable, which requires the trust assets to be revalued each year. CRUT pays out to an individual first and then remainder to the charity, not to the grantor's estate; term payment from the CRUT can also be permissible under current law; donor can add more money to a CRUT over time.
A man has established a revocable inter vivos trust and has named the trustee the beneficiary of all his life insurance policies. His will provides that all of his residuary estate will "pour over" to the trust. All the following statements concerning this arrangement are correct EXCEPT
Probate costs will be eliminated in the administration of the man's estate. Probate costs will be imposed on the estate-administered assets that will pour over to the trust at death.
Which of the following statements concerning a testamentary trust is correct?
Property that passes via a will and goes into a testamentary trust goes through probate. Testamentary trusts (not inter vivos trusts) are created at death. Testamentary trusts are limited in duration only by their terms and the rule against perpetuities. Reversionary interest could be granted to a third party.
All the following statements concerning the taxation of property transfers are correct EXCEPT
Property transferred at death that receives a stepped-up basis is not included in the decedent's gross estate. Property transferred at death receives a stepped-up basis because it is included in the decedent's gross estate.
All the following statements concerning estate liquidity are correct EXCEPT
Residuary beneficiaries impact liquidity needs. Residuary beneficiaries have no real impact on liquidity needs because they are just receiving whatever is left over.
In which of the following situations has a transfer been completed for gift tax purposes?
Sally calls her stockbroker and tells the broker to purchase 100 shares of Company X and title them jointly to her and her husband with rights of survivorship. With a check, no gift is made until the check is cashed. A gift causa mortis is a conditional gift that is complete only at the donor's death. A gift of funds does not occur until the son makes a withdrawal from the account.
All the following statements concerning powers of appointment are correct EXCEPT
Testamentary power must be exercised before the death of the donee. A testamentary power is exercisable only at the death of the donee through the provisions of the donee's will.
Which of the following statements regarding the generation skipping transfer tax (GSTT) is correct?
The GSTT is seen most frequently in situations where a grandparent transfers property to a grandchild. GSTT is a flat tax, GSTT liability depends on the type of distribution, sometimes the trustee is liable for paying the taxes, GSTT on top of gift & estate taxes already due.
Which of the following statements concerning the valuation of property for federal estate tax purposes is correct?
The IRS often uses the adjusted book value method for valuing a closely held business. With farm or business real estate, the executor can elect special-use (current-use) valuation if certain requirements are met. Where stock has an established market and quotations are available, selling prices on the valuation date are used if available (or if not, the weighted average of the selling prices before and after the valuation date is used). The IRS uses the capitalization of the business's adjusted earnings as one of the methods to determine the value of the stock in a closely held corporation. The value of a single-premium life insurance policy owned by the decedent on the life of another is equal to its replacement cost.
On January 1 of this year, a father gave his daughter a $100,000 ordinary life insurance policy on his life and filed a timely gift tax return. Premiums are paid annually. The pertinent facts concerning the policy are the following: Date of issue: July 1, 15 years ago. Premium paid on July 1 of this year = $1,600. Terminal reserve on July 1 of last year = $10,000. Terminal reserve on July 1 of this year = $12,000. What is the value of the policy for federal gift tax purposes?
The calculation of the value of a life insurance policy for gift or estate tax purposes is as follows: Interpolated terminal reserve plus unearned premium at the time of valuation. Since the time of the gift, January 1 of this year, falls at the midpoint of the time interval presented, the interpolated terminal reserve is $11,000 (the sum of $10,000 and $12,000 divided by two). Since one-half of the annual premium ($800) is unearned as of January 1 of this year, the value of the policy on January 1 of this year, for gift tax purposes is $11,800 ($11,000 + $800 = $11,800)
Which of the following statements concerning a general power of appointment is correct?
The gross estate includes the value of all property subject to a general power of appointment possessed by a decedent at the time of death. The holder of the general power may designate himself or herself as the property owner. What is described is a special power of appointment, which would not cause inclusion in the power holder's estate. The donor can give a general power of appointment that is exercisable only during the donee's lifetime, only at death, or both during life and at death. The holder of a general power has an unlimited right to use the corpus of a trust for his or her own benefit.
Which of the following adjustments is made to the adjusted gross estate to calculate the taxable estate for federal estate tax purposes?
The marital and charitable deductions are subtracted from the adjusted gross estate. Gift taxes payable on post-1976 gifts are subtracted from the tentative tax to calculate the estate tax payable before credits. The basic credit amount and the credit for prior transfers are subtracted from the estate tax payable before credits to calculate the net federal estate tax payable.
All the following statements concerning the unlimited estate tax marital deduction are correct EXCEPT
The marital deduction is available against all death taxes imposed by state law. State laws vary, and some states don't exempt transfers to a surviving spouse for death tax.
All the following statements concerning the estate taxation of life insurance proceeds are correct EXCEPT
The proceeds must be excluded from the policyowner - insured's gross estate if payable to the surviving spouse because of the marital deduction. Although proceeds payable to a surviving spouse qualify for the marital deduction, they are included in the gross estate if the insured held incidents of ownership at death or within 3 years of death.
Which of the following statements concerning the qualification of property for the federal estate tax marital deduction is correct?
The property interest must be includible in the surviving spouse's estate at death unless consumed or given away. Surviving spouse must receive a beneficial interest in property and be a U.S. citizen if the property is to be eligible for the marital deduction.
Sarah gave her sister, Janet, a gift of property valued at $200,000 that was subject to $120,000 of indebtedness. (Ignore the annual exclusion.) All the following statements concerning gift tax valuation are correct EXCEPT
The property is valued for gift tax purposes on the date the gift is made or, alternatively, 6 months after the date the gift is made. Property transferred during lifetime is valued for gift tax purposes on the date the gift is made. Unlike estate tax valuation, no alternate valuation date is allowed for gift tax valuation.
Which of the following statements concerning the use of Crummey powers with an irrevocable life insurance trust is correct?
The right to exercise the Crummey powers must exist for a reasonable period of time each year. Crummey powers are used to make an irrevocable life insurance trust a present-interest gift. If there are several beneficiaries, Crummey powers should be given ratably to each. The way the powers are stated, there is no danger that the beneficiary can request an amount greater than the grantor's annual addition.
All the following statements concerning qualifying terminable interest property (QTIP) are correct EXCEPT
The rules for QTIP permit the surviving spouse to be given the right to direct that the property will go to the surviving spouse's children during the surviving spouse's lifetime. The conditions for qualifying terminable interest property require that no one can be given the right to direct that the property will go to anyone (other than the spouse) during the surviving spouse's lifetime.
A woman is the income beneficiary of an irrevocable trust created by her mother. Which of the following powers given to her by the trust will cause all the assets in the trust to be includible in her gross estate for federal estate tax purposes?
The testamentary power to direct the trustee to use trust assets to pay her estate taxes or debts owed upon death Only general powers of appointment are included in the gross estate by the holder of the power.
All or part of the income from a trust will be taxed to the grantor in all the following situations EXCEPT
The trustee holds the power to withhold income temporarily from a current-income beneficiary. If the trustee holds the power to withhold income temporarily from a current-income beneficiary, the grantor-trust rules do not apply, and thus the trust income is not taxed to the grantor.
Which of the following statements concerning the responsibilities of trustees is correct?
The trustee's duties and powers do not terminate until the termination of the trust. The trustee's powers are generally derived from the trust instrument. The trustee's powers are generally derived from the trust instrument. A trustee is not required to make an accounting to the court.
Which of the following is true regarding retained interest gifts?
To John, but at John's death back to the grantor is an example of a reversionary interest. Stock and most other assets can be placed in a GRAT, especially income producing assets like stock. A GRUT provides more estate tax benefits if the grantor outlives the retained interest term. The value of the QPRT is included in the estate if the person has a life estate.
All the following statements concerning the deferral of payment of estate tax under Sec. 6166 for estates that hold closely held business interests are correct EXCEPT
To qualify for such a deferral, the estate must hold a closely held business interest valued at greater than 65 percent of the adjusted gross estate. The threshold value of closely held business interests is in excess of 35 percent of the adjusted gross estate for Sec. 6166 qualification.
True or False - Assuming there are no future-interest gifts, no gift tax return is required to be filed until a present-interest gift to one individual in a calendar year exceeds the current annual gift tax exclusion amount.
True
Which of the following statements concerning the income taxation of estates and trusts is correct?
Trusts and estates are subject to the same rate of income taxation. Trusts and estates are both taxed using a hybrid method for income taxation known as the sharing concept. The general rule is that the trust or estate pays income tax on the amounts of income retained, while the beneficiaries pay tax on the trust or estate income distributed, or deemed distributed, to them.
Which of the following statements concerning the generation-skipping transfer tax (GSTT) in 2016 is correct?
Tuition payments made to an educational institution by a grandmother on behalf of her grandson are excluded from both the gift tax and the GSTT. GSTT applies when aggregate transfers to all transferees two or more generations below the transferor exceed $5.45 million (2016), not $5.45 million to each individual transferee. GSTT is a flat tax. in order for gifts in trust to qualify for the GSTT annual exclusion, the trust must meet several restrictive requirements, such as providing a present interest (current income interest or Crummey power) and having only one beneficiary with lifetime/death receipt of trust property.
All the following constitute basic elements of a gift for gift tax purposes EXCEPT
Valuation on a fair-market-value basis. The valuation of a gift is not an element of the gift for gift tax purposes.
All the following statements concerning community property are correct EXCEPT
When a married couple moves from a community-property state to a common-law state, marital property acquired in the community jurisdiction becomes separate property. When a married couple moves from a community-property state to a common-law state, the character of marital property acquired in the community jurisdiction does not change unless the parties expressly take steps to change the property to a character other than its community identity.
Which of the following statements concerning corporate buy-sell agreements is correct?
With a cross-purchase agreement, the sale of stock by a decedent shareholder's estate is treated as a sale or exchange, allowing the estate favorable capital gains treatment. With an entity (stock redemption) purchase agreement, each surviving shareholder's percentage of ownership increases proportionately when the decedent shareholder's stock is redeemed. you would only need 4 policies to fund the Entity Redemption buy-sell agreement.
Which of the following examples of a terminable interest left to a surviving spouse qualifies for the federal estate tax marital deduction?
a property interest that passes to the surviving spouse only if the spouse actually survives the decedent by 3 months a property interest that passes to someone else if the surviving spouse remarries, a life estate in property, and a life interest in a trust over which the surviving spouse has a special power of appointment are incorrect because they are nondeductible terminable interests. The last 2 may become eligible for a marital deduction only if the executor makes a QTIP election.
Complex Trust
• accumulation of income allowed • distributions of corpus allowed • charitable contributions allowed • taxed on income retained • deduction for actual distributions • $100 exemption (no standard deduction) • beneficiaries taxed on distributable net income
Simple Trust
• treated as conduits • require current distribution of all net income • deduction for distributable income • no distributions of corpus • $300 exemption (no standard deduction) • no charitable contributions/distributions • beneficiaries taxed on distributable net income