Estate Planning

In 2021, Shannon gifts 10,000 shares of XYZ stock valued at $11,715,000 to her adult son, Alan. No Previous lifetime gifts

$11,715,000 -$15,000 $11,700,000

Qualified remainder interest.

- It is a qualified remainder interest in every respect. - It meets the definition of and functions exclusively as a qualified interest from the creation of the interest. - It is noncontingent because it is payable to the beneficiary or the beneficiary's estate in all events. - All other interests in the trust, other than the noncontingent remainder interest, are qualified annuity interests or qualified unitrust interests.

Tax Goals Related to Income Tax

1. Shifting the receipt of income (For high tax bracket taxpayers, particularly those with large gross estates, retaining income-producing assets may be inconsistent with their goals. However, there can be great benefit in shifting such income to a taxpayer with a smaller gross estate, since he likely won't incur an estate tax liability, especially if he is in a lower income tax bracket). 2. Shifting the taxation of income (If income is taxable to a family member who is in a lower marginal tax bracket, family wealth as a whole is increased. An outright transfer of title to an income-producing asset will ensure that all future income from the asset will be taxed to the new owner). 3. Obtaining a stepped-up basis (The higher a person's basis in a capital asset, the less capital gains tax that will have to be paid when the asset is sold. Generally, to obtain a step-up in basis, a transferee must have received an asset as a result of the transferor's death (known as "stepped-up basis"). 4. Deferring the recognition of income and gain (Although there are some exceptions, it is usually best to delay payment of income tax because of the time value of money, especially if the taxpayer anticipates being in a lower tax bracket in future years. This is one goal, of course, of qualified retirement plans).

Factors that would be relevant in determining the value of gifted assets: 1. FMV on last day (high + low) /2 (60+56/2=58) 2. FMV on next day (high +low) /2 (62+58/2=60) 3. Count days between last trade and gift date (last day trade 7-8, gift date 7-12) 3 days! 4. Count days between gift date and 1st trade after gift 1 day 5. Multiply #1 x #4 58 6. Multiply #2 x #3 180 7. Add results of 5+6 and divide by results 3+4

236/4

Which of the following is considered to be a gift for federal gift tax purposes that qualifies for the gift tax annual exclusion? A) A transfer of property to fund a revocable trust B) A gift to a political organization for its use C) Property settlement transfers pursuant to a written divorce agreement D) A payment of cash to a favorite nephew to assist with his college tuition

A payment of cash to a favorite nephew to assist with his college tuition. Because it's not made directly to an educational institution (which would be excludible as a qualified transfer), the payment of cash to a favorite nephew to assist with tuition is both a gift and one that qualifies as a present interest for purposes of the gift tax annual exclusion. The gift to a political organization is a gift, but there is no gift tax liability. The transfer of property to fund a revocable trust is an incomplete transfer; gift taxes do not apply. A property settlement transfer that is a part of a written divorce agreement or decree between divorcing spouses is not considered a gift.

In light of the multiple possible estate goals which of the following would be plausible candidates for estate planning? A)All of these B)A client whose wealth is concentrated in a real estate business. C)A recently married couple expecting their first child. D)A Pennsylvania domiciled client with a condo in Vail, Colorado.

A) All of these. All are potential clients to deal with issues of liquidity, need for a guardian and avoidance of ancillary probate.

Which of the following is an advantage of owning property as joint tenants with right of survivorship (JTWROS)? 1. When one tenant dies, the property passes directly to the surviving joint tenant. 2. Each joint tenant with a right of survivorship has a right to sever or partition the property without the consent of the joint tenant. 3. JTWROS is convenient for certain types of assets, such as bank accounts, because either tenant has access to the account.

A) I, II, and III. All of these are advantages of owning property as JTWROS.

Which of the following statements about the federal gift tax are CORRECT? 1. The federal gift tax applies to all gratuitous transfers. 2. Gift splitting means that spouses may elect to file a joint gift tax return. 3. The unlimited gift tax marital deduction has the effect of abolishing the terminable interest rule. 4. Taxable gifts for prior years must be added to taxable gifts for the current year to determine the tax bracket(s) applicable to the current year's taxable gifts

A) IV only. Certain gratuitous transfers, such as political contributions and direct payment of medical and tuition expenses, are exempt from the gift tax. Statement II is incorrect, as there is no such thing as a joint gift tax return. A marital deduction can be taken only when the gift to the surviving spouse is not a gift of a terminable interest. Thus, one does not abolish the other.

Which one of the following statements regarding different forms of property co-ownership is CORRECT? A) Joint tenancy with right of survivorship (JTWROS), tenancy by the entirety (TBE), and community property (CP) are all forms of co-ownership that can be used by a husband and wife. B) Joint tenancy with right of survivorship (JTWROS), tenancy by the entirety (TBE), and community property (CP) are all forms of co-ownership that do not require a probate proceeding when one tenant dies. C) Tenancy by the entirety (TBE) and tenancy in common are the only two forms of co-ownership specifically for spouses. D) Joint tenancy with right of survivorship (JTWROS), tenancy by the entirety (TBE), and tenancy in common are all forms of co-ownership that require the consent of other co-owners before an owner can sell his or her interest in the asset.

A) Joint tenancy with right of survivorship (JTWROS), tenancy by the entirety (TBE), and community property (CP) are all forms of co-ownership that can be used by a husband and wife. JTWROS can be used by anyone, including spouses; only spouses can use TBE and CP.

All of the following statements about fee simple ownership are correct EXCEPT: A)Property owned at death is not eligible for a step-up in basis to fair market value. B)The owner in fee simple has complete control and dominion over the property. Property owned in fee simple is entitled to a step-up in basis to fair market value at death. C)Property owned at death is subject to probate administration. D)Property owned at death is 100% includible in the gross estate.

A) Property owned at death is not eligible for a step-up in basis to fair market value.

Which one of the following actions would probably not constitute the unauthorized practice of law by a nonattorney financial planner? A)Telling a client that property that is titled in joint tenancy with right of survivorship will pass outside of probate at his or her death B)Drafting a power of attorney for a client C)Advising a client to conduct business as a partnership rather than a corporation D)Advising a client to change from sole ownership of property to joint tenancy with right of survivorship (JTWROS).

A) Telling a client that property that is titled in joint tenancy with right of survivorship will pass outside of probate at his or her death. This statement merely recognizes a well-established fact and does not constitute the unauthorized practice of law.

Edward and Dennis are brothers who share the ownership of a farm they purchased together. Edward owns an undivided 40% interest in the property, and Dennis owns an undivided 60% interest. They both have the right to sell their interest in the farm or to leave their interest in the farm to anyone they choose under their will. Which this form of ownership do they have? A)Tenancy in common B)Community property C)Joint tenancy with right of survivorship (JTWROS) D)Tenancy by the entirety

A) Tenancy in common. Edward and Dennis own the farm as a tenancy in common because each party owns an undivided interest in the farm and their interests are unequal. The property is not held as JTWROS because each owner can dispose of their interest by will. Community property and tenancy by the entirety can only be owned by spouses.

All of the following statements regarding joint tenancies with right of survivorship are CORRECT except A)jointly held property can be transferred by will. B) in joint tenancy the ownership percentages must be equal. C) joint tenancy with right of survivorship is similar to tenancies in common in that there may be two or more joint tenants who may or may not be related to each other. D) jointly held property passes to the surviving joint owners when one of the joint owner dies.

A) jointly held property can be transferred by will. Jointly held property cannot be transferred by will. It passes to the surviving joint tenants by operation of law outside of the will. While there is no legal restriction that joint tenancy with right of survivorship (JTWROS) owners must be related, it would almost never be correct for people with no feelings of long-term connection to choose to be JTWROS because the property would pass to the other joint tenant upon death.

Arnie attended a recent seminar about the importance of asset protection. He wants to know which of the following would not provide that protection. A)Placing assets in a revocable trust. B)Placing assets in an entity like a corporation or LLC. C)Placing assets in trust with a spendthrift clause. D)Gifting assets away before incurring any legal judgments.

A)Placing assets in a revocable trust. Assets in a revocable trust would be subject to Arnie's ability to demand them. Accordingly, there is no asset protection.

Which of the following statements regarding the consequences of holding property jointly is CORRECT? A)When spouses are joint tenants with a right of survivorship, 50% of the value of the property will be included in the gross estate of the first spouse to die. B)A tenancy in common is treated the same as a joint tenancy with the right of survivorship when one owner dies. C)The federal estate tax treatment of jointly held property is the same for spouses and nonspouses. D)Joint tenancy with right of survivorship can exist between spouses only.

A)When spouses are joint tenants with a right of survivorship, 50% of the value of the property will be included in the gross estate of the first spouse to die. A tenancy in common is not treated the same way as a joint tenancy with right of survivorship because a tenancy in common does not provide a right of survivorship. Joint tenancy is not limited to spouses, and the treatment of joint tenancy for estate tax purposes is different for spouses and nonspouses. Spouses are always defined as having each contributed half towards the purchase of the property. For estate taxes, nonspouse decedents are initially assumed to have contributed 100%, and thus will be estate taxed on 100% of the property unless the other joint tenancy with right of survivorship (JTWROS) can be shown as having made an actual contribution to the purchase of the JTWROS property.

Which of the following types of property will be treated as separate property in a community property state? (Assume the couple has always lived in a community property state.) A. Bonds acquired by one spouse before the marriage B. Stocks purchased by one spouse during the course of the marriage C. An IRA in one spouse's name but fully funded during the course of the marriage D. A coin collection purchased by one spouse out of his own salary during the marriage

A. Bonds acquired by one spouse before the marriage. Of the properties listed, only the bonds are separate property.

Which of the following is a nonfinancial goal of estate planning? A. Efficient transfer of assets at death B. Preserving business value C. Delaying payment of tax due D. Maximizing benefits for a surviving spouse

A. Efficient transfer of assets at death. This is a nonfinancial goal of estate planning because it is more about the process than the assets themselves. Preserving business value and maximizing benefits for a surviving spouse are both nontax financial goals of estates planning. Delaying payment of tax due is a tax-related financial goal of estate planning.

All of the following are common mistakes people make or weaknesses of estate plans except A. maintaining adequate liquidity. B. improper titling of assets. C. failure to give advice on funeral arrangements. D. improperly arranged life insurance.

A. Maintaining adequate liquidity. Adequate liquidity is a positive thing, not a mistake. The common mistakes made or weaknesses in existing estate plans listed are the following: Failure to recommend necessary changes to a will Improper disposition of assets Improper titling of assets Improperly arranged life insurance Lack of estate liquidity Failure to avoid ancillary probate, provide business planning, minimize taxes and costs Failure to give advice on funeral arrangement

Which of the following statements regarding a Section 2503(b) trust is CORRECT? A) The beneficiary's right to trust income is a present interest that qualifies for the annual exclusion. B) Trust principal must be distributed to the beneficiary at age 21. C) The trustee has discretion over how often income is distributed. D) The trust income is not taxable to the beneficiary

A. The beneficiary's right to trust income is a present interest that qualifies for the annual exclusion. In a Section 2503(b) trust, the trust income must be distributed to the beneficiary at least annually, and the trust income is taxable to the beneficiary. A distribution of trust principal does not have to be made by age 21. The minor's right to income is a present interest that qualifies for the annual exclusion.

Step 6: Implementing the Recommendation(s)

Again, actions and responsibilities for both the client and the planner must be mutually determined and agreed upon. However, in the end the client is the person determining how to pursue the goals, needs, and priorities and deciding who is responsible for implementation. This may entail other financial professionals. If so, the planner should indicate why another professional should be involved and why this person is qualified to serve the client. This is the step during which appropriate products and services are engaged.

Which of the following questions would be appropriate in planning with life insurance? A)How is the policy currently owned? B)How would a soon-to-be-issued policy be owned? C)All of these D)Is the amount of insurance coverage adequate?

All of these. These would be appropriate as among the most important questions to be initially raised.

Example of Section 2701

Assume that Dan is the sole owner of a closely held business, but he wants to begin involving his adult children in the business so that they can run it when he is ready to retire. Upon the advice of his financial planner (who is working with Dan's attorney), Dan incorporates the business as a regular C corporation with two classes of stock: preferred and common. Dan retains all the preferred shares (senior equity interests), which have voting rights and a cumulative preferred dividend right to 2% of the stock's value annually. Dan gives all the common shares (junior equity interests) equally to his two children over time. These common shares do not have voting rights or a preference in the payment of income. Dan has transferred a corporate interest to a family member, and he has retained a controlling interest in the corporation. Therefore, the value of Dan's retained distribution right can be subtracted from the value of the entire corporation so that he will pay gift tax only on the remainder, which is the value of what he gave his children

Carrie is preparing her estate plan and wants to include instructions for her funeral. What method should she use? A)She must include these instructions in a formal, notarized list of instructions drawn up by her attorney. B)She should leave written instructions to one or more family members likely to survive her and be involved in funeral arrangements. C)She should include her instructions in her will because it will be the first thing that will be read after her death. D)She must include these instructions in a codicil to her will.

B) She should leave written instructions to one or more family members likely to survive her and be involved in funeral arrangements. Carrie should leave a letter of personal instruction or side letter. It can be as simple as a handwritten note to her personal representative containing her instructions.

Which of the following statements about the gift tax charitable deduction is NOT correct? A) A charitable gift tax deduction is given only for the portion of the contribution in excess of any value the donor receives from the charity. B) The charitable gift tax deduction is limited by the type of property gifted, the type of charitable donee, and the donor's adjusted gross income (AGI). C) A gift of a partial interest will qualify for a charitable deduction only if it meets the requirements of the Internal Revenue Code and IRS regulations. D) To qualify for a charitable deduction, a gift must be of cash or property.

B) The charitable gift tax deduction is limited by the type of property gifted, the type of charitable donee, and the donor's adjusted gross income (AGI). The charitable gift tax deduction is unlimited for qualifying transfers. For income tax purposes, the charitable deduction has limits based on the type of charitable donee, the type of property gifted, and the donor's AGI (adjusted gross income).

James leases an office building for use in his business. The lease gives James the right to use the building for 10 years in exchange for annual lease payments of $100,000. What type of ownership interest does James have in this building? A)Life estate B)Term of years C)Remainder D)Future interest

B)Term of years. James's interest under the lease is a term of years because it gives him the right to possess and use the building for a given period. It is not a future interest because the right to enjoy the benefits of the property occurs immediately.

Which of the following intrafamily property transfers are subject to the special zero valuation rules under Chapter 14? 1. Corporate recapitalizations 2. Partnership capital freezes

Both I and II. Both statements are correct; corporate recapitalizations and partnership capital freezes are both subject to the special zero valuation rules under Chapter 14.

Which of the following statements concerning titling of assets captures its importance in estate planning? 1. Titling determines how the income of an asset as well as the proceeds from its sale would be split. 2. The distribution of income or sales proceeds not in fact divided as title dictates likely will create unintended gift and income tax consequences.

Both I and II. Both statements are true.

Which of the following statements regarding types of gifts is CORRECT? A) A gift of a future interest is not subject to gift tax. B) The gift tax applies to incomplete gifts. C) A gift of a future interest is not eligible for the gift tax annual exclusion. D) Indirect gifts, such as the payment of another's expenses, are not subject to the gift tax.

C) A gift of a future interest is not eligible for the gift tax annual exclusion. Indirect gifts, such as the payment of another's expenses, may be subject to the gift tax. The gift tax does not apply to incomplete gifts. The gift tax applies to gifts of future interests as well as to gifts of present interests.

Which of the following are essential in establishing and defining the client & planner relationship? A)Understanding the personal and financial circumstances of the client. B)Determine how the planner is compensated. C)All of the above. D)Determine what the planner is to do or not do.

C) All of the above.

Which of the following is an advantage of spouses holding property jointly with right of survivorship? 1. Total administration expenses and attorney fees may be reduced because the property avoids probate at the death of the first spouse. 2. The surviving spouse now has a basis equal to the fair market value of the property at death of first spouse.

C) Both I and II. However the basis in the hands of the surviving spouse is the sum of her basis plus 1/2 the fair market value at date of the decedent's death.

Which of the following is not a tax goal related to income tax? A) Obtaining a stepped-up basis B) Shifting receipt of income C) Freezing or reducing the value of assets subject to tax D) Deferring the recognition of income and gain

C) Freezing or reducing the value of assets subject to tax. Freezing or reducing the value of assets subject to tax is a tax goal related to transfer taxes, not income taxes.

Which of the following is a nontax-related financial goal? A)Freezing or reducing the value of assets B)Leveraging the use of exclusions C)Maximizing flexibility D)Shifting the receipt of income

C) Maximizing flexibility. The remaining choices are tax-related financial goals.

Assuming that a decedent left no valid last will and testament, which of the following assets will pass by the laws of intestate succession? A)Property in which decedent had a life estate in a vacation home with the remainder to decedent's sister. B)Property held by the decedent and his spouse as tenants by the entirety C)Property held by the decedent and his spouse as traditional community property D)Property held by decedent and his brother as joint tenants with right of survivorship.

C) Property held by the decedent and his spouse as traditional community property. The remaining options are will substitutes and do not expose property to probate.

Which of the following is a type of trust in which the grantor has not completed a transfer for gift tax purposes, and has retained the power to rescind the trust? A) Complex B) Simple C) Revocable D) Irrevocable

C) Revocable. A revocable trust is a trust in which the grantor retains access to the income and property of the trust.

All of the following statements about the major forms of property ownership are correct EXCEPT: A)Property held as joint tenant with right of survivorship is partitionable without the consent of the other joint tenant. B)A tenancy by the entireties is only available to married spouses. C)A community property interest is not subject to probate. D)A tenants in common interest is subject to probate.

C)A community property interest is not subject to probate. A community property interest is subject to probate administration.

Which one of the following is a document that designates a trust as the recipient of all property that has not been otherwise disposed of upon the death of the decedent? A)Power of appointment B)Codicil C)Pourover will D)Testamentary trust

C)Pourover will. The answer is pourover will.

Which of the following is a financial goal? A) Control of assets B) Meeting the needs of dependents C) Maximizing benefits for a surviving spouse D) The efficient transfer of assets at death

C. Maximizing benefits for a surviving spouse. The other answer choices are nonfinancial goals.

All of the following statements regarding tenancy by the entirety are CORRECT except A. tenancy by the entirety includes a right of survivorship. B. tenancy by the entirety can exist only between spouses. C. tenancy by the entirety is recognized in all states. D. half of the value of property held as tenancy by the entirety is included in the gross estate of the first spouse to die.

C. Tenancy by the entirety is recognized in all states. Tenancy by the entirety is recognized in some common-law states only.

Which of the following situations does not require the filing of a federal gift tax return? A) A donor transfers to one donee a future interest valued at less than the annual exclusion amount. B) A donor makes a transfer to one donee of a present value for more than the annual exclusion, but has not used any applicable credit amount. C) A donor and spouse agree to split a present interest gift to one donee valued at more than the annual exclusion, but less than twice the annual exclusion amount. D) A donor makes a transfer to one donee of a present interest valued at less than the annual exclusion, but has used all of his applicable credit amount to offset the tax on prior gifts.

D) A donor makes a transfer to one donee of a present interest valued at less than the annual exclusion, but has used all of his applicable credit amount to offset the tax on prior gifts. This is the correct answer because there is no requirement to file a federal gift tax return if the gift by a donor is of a present interest valued at less than the annual exclusion amount. The donee's applicable credit amount situation is irrelevant to whether a return must be filed.

Estate planners are often asked to assess whether a client's estate plan has adequate provisions to accomplish client objectives. Which of the following would be appropriate questions to ask and answer? A)Competency of intended beneficiaries. B)Marital and family status of client. C)How titles to property are held. D)All of the above.

D) All of the above. All would be appropriate questions and there would also be many other appropriate questions to raise to analyze the client's current position and potential courses of action.

Which of the following statements best describe the potential for improper planning with life insurance? A)Tax-inefficient ownership of the policy B)Lack of awareness of how the transfer for value rules work. C)Insufficient coverage D)All of these

D) All of these. All of the statements are true. Life insurance works best if there is adequate coverage undiminished by estate and income taxes.

Which of the following is not a mistake, pitfall, or weakness? A)Failure to minimize taxes B)Improper arrangement of life insurance C)Lack of estate liquidity D)Providing business planning

D) Providing business planning. The answer is providing business planning because it is the only answer choice which would be a strength in an estate plan. The remaining choices are, in fact, mistakes, pitfalls, and weaknesses.

When Craig's uncle died, Craig inherited the right to live in his uncle's home for as long as Craig lives. The will also provides that when Craig dies, the home will pass to Craig's daughter, Monica. What type of interest does Monica have in the home at the uncle's death? A)Life estate for a term of years B)Life estate C)Fee simple D)Remainder

D)Remainder. Monica has a remainder interest in the home because she has the right to possess and enjoy the home after the intervening right of someone else (Craig). Her remainder interest runs for her lifetime and not a fixed number of years. A fee simple interest represents absolute ownership of property. Monica does not have absolute ownership of the home at the uncle's death. Craig has the life estate.

Jason purchased a tract of land for $100,000. Two years later, the land was valued at $160,000, and Jason added his daughter's name to the title as joint tenant with a right of survivorship. Jason dies when the land has a fair market value of $200,000. What amount is included in Jason's gross estate? A. $80,000 B. $100,000 C. $160,000 D. $200,000

D. $200,000. The value of the land included in Jason's gross estate is based on the consideration furnished rule. Because Jason contributed the entire purchase price of the land ($100,000), the entire FMV of the land ($200,000) at Jason's date of death is included in his gross estate.

Which of the following statements regarding the attributes of property owned solely by one person is(are) CORRECT? I. The maximum ownership interest a person may have in property is known as fee simple or absolute ownership. II. The owner of a life estate has the right to possess and use property for the remainder of that person's life or for the remainder of someone else's life. III. A lease is an example of a term of years.

D. All of these statements are correct.

Which of the following documents would a planner need to properly analyze a client's estate planning situation? A. The statement of financial position B. The cash flow statement C. An existing will D. All of these

D. All of these. Each of these documents—along with any advance directives, life insurance policies, and any other legal or contractual documents a client may have—will be needed to properly analyze the client's situation. No two clients are alike, so what a planner will need will vary.

Which of the following statements regarding community property is CORRECT? A. If a couple lives in a common-law state, they can elect to treat their property as community property to obtain a full step-up in basis at the death of the first spouse. B. Upon the death of the first spouse, community property will generally pass automatically to the surviving spouse by right of survivorship. C. Community property states do not allow married people to own property separately. D. If a couple moves from a community property state to a common-law state, separate property will generally remain separate property.

D. If a couple moves from a community property state to a common-law state, separate property will generally remain separate property. Couples living in common-law states cannot elect to treat their property as community property. Community property generally does not include a right of survivorship, and community property states do allow married people to own property separately in some circumstances, such as when a spouse receives property through an inheritance or gift. Also, property brought into the marriage can be separate property. Finally, the couple could affirmatively choose to retitle assets as separate property. This is sometimes done for asset protection purposes when one spouse is more liable to lawsuits. For example, if a surgeon is married to a teacher, for legal liability purposes, it can be advantageous for the teacher to own the family's property instead of the surgeon.

Estate Planning Mistakes, Pitfalls, and Weaknesses

Failure to Recommend Necessary Changes to a Will, Improper Disposition of Assets, Improper Titling of Assets, Improperly Arranged Life Insurance, Lack of Estate Liquidity, Failure to Avoid Ancillary Probate, Failure to Provide Business Planning, Failure to Minimize Taxes and Costs, Failure to Give Proper Advice Regarding Funeral Arrangement

Financial Goals in Estate Planning

Financial goals, of course, deal with the topic of money and may be further divided into nontax and tax issues. 1. Preserving Business Value 2. Maximizing Flexibility 3. Maximizing Benefits for a Surviving Spouse 4. Minimizing Nontax Transfer Cost 5. Maintaining a Satisfactory Standard of Living 6. Maintaining Adequate Premortem and Postmortem Liquidity

Tax Goals Related to Transfer Taxes

Freezing or reducing the value of assets subject to the tax. Because transfer taxes generally are assessed on the value of the property transferred as of the date of transfer, the benefits of this goal are obvious. This goal is always achieved by an outright (nontrust) gift, because all future appreciation in value of the asset will be the responsibility of the new owner. Leveraging the use of exclusions, exemptions, reductions, and credits. Leveraging means taking actions that will increase the benefit of these tax-saving items, such as making lifetime gifts to take advantage of the gift tax annual exclusion and the tax-exclusive nature of the gift tax. Delaying payment of a tax due. The benefits of this goal are the same as those of the income-tax-related goal of deferring the recognition of income and gain discussed previously. In addition to the benefits brought about because of the time value of money, delaying payment of a transfer tax may be necessary to meet liquidity needs.

Life Estate

Gives a person the right to possess and use the property for the remainder of the individual's life or for the remainder of someone else's life.

Which of the following statements regarding gift splitting is CORRECT? 1. The annual exclusion can be doubled to $30,000 (for 2021) even if one spouse makes the entire gift. 2. Gifts made from community property or JTWROS property held by spouses require a gift-splitting election.

I only. Statement II is incorrect because gifts made from community property or from JTWROS property owned by spouses do not require a gift-splitting election.

hich of the following are valid considerations when attempting an intrafamily estate freeze transaction? 1. The application of the Chapter 14 rules 2. How the business owner can maintain control of the business after the transaction 3. How to shift appreciation in the value of the business to younger family members 4. The identities of the persons to be given interests in the entity

I, II, III, and IV. All of these are valid considerations when attempting an intrafamily estate freeze transaction.

Which of the following transfers are gifts for purposes of the gift tax statutes? 1. Kurt creates an irrevocable trust providing that his son is to receive income for life and his grandson the remainder at his son's death. 2. Kurt purchases real property and has the title conveyed to himself and to his brother as joint tenants. 3. Kurt creates an irrevocable trust giving income for life to his spouse and providing that upon her death the corpus is to be distributed to his daughter. 4. Kurt purchases a U.S. savings bond made payable to himself and his spouse. The spouse later surrenders the bond for cash to be used for her benefit.

I, II, III, and IV. All of these transfers are gifts for purposes of the gift tax statutes. Statement IV falls under the gift tax statutes, but the unlimited marital deduction may be utilized to offset any possible gift tax due.

Chapter 14 of the Internal Revenue Code governs federal gift taxation of lifetime intrafamily transfers. To which of the following transfers does Chapter 14 not apply? 1. Incomplete gifts, such as a revocable trust 2. Qualified personal residence trusts (QPRTs) 3. Charitable remainder annuity or unitrusts (CRATs and CRUTs) 4. Pooled income funds (PIFs)

I, II, III, and IV. Chapter 14 does not apply to incomplete transfers, QPRTs, CRATs, CRUTs, and PIFs.

Which of the following statements concerning gifts of appreciated property are CORRECT? 1. The donor's holding period carries over to the donee. 2. Generally, the donor's basis carries over to the donee. 3. If the donor paid gift tax on the gift, the donee's basis is increased by a portion of the gift tax paid.

I, II, and III. All of these statements are correct.

Which of the following statements regarding QTIP trusts are CORRECT? 1. QTIP trusts allow a terminable interest to be left to the surviving spouse and still qualify for the estate tax marital deduction. 2. Assets in a QTIP trust are usually included in the gross estate of the second spouse to die. 3. QTIP trusts are useful when the first spouse to die has children from a prior marriage.

I, II, and III. All of these statements are correct. The QTIP is included in the estate of the second spouse to die at the same percentage as the first spouse took as a marital deduction. If 100% of the QTIP was taken as a marital deduction when the first spouse dies, then 100% of the QTIP is included in the second spouse to die's gross estate. If the first spouse's estate only took a martial deduction for 70% of the QTIP, then only 70% of the QTIP's value when the second spouse to die passes away is included in the estate of the second spouse to die.

Which of the following statements regarding gift splitting are CORRECT? 1. The annual gift tax exclusion allows spouses who consent to split their gifts to transfer up to $30,000 (for 2021) to any one person during any calendar year without gift tax liability, if the gifts are of a present interest. 2. To qualify for gift splitting, a couple must be married at the time the gift is made. 3. For gift tax purposes, spouses must file a joint income tax return to qualify for the gift splitting benefits. 4. Both spouses must consent to the use of gift splitting and at least one gift tax return must be filed.

I, II, and IV. Spouses do not have to file a joint income tax return to elect gift splitting. The other statements are correct.

Which of the following correctly describe a mistake, pitfall, or weakness and actions that can be taken to avoid such problems? 1. If a client has recently remarried, updating the will and powers of attorney is necessary. If a person is the sole owner of real estate in a state other than the state of his or her domicile, the person can avoid ancillary probate by executing a new will that leaves such property to a trust. 3. If the testator of a will wants to restrict his adult children's access to their inheritance after his death, the testator should place their share of the estate into a trust established under the will which includes the limitations on distributions desired. 4. To minimize the costs of estate administration, will substitutes such as completion of beneficiary designation forms should be considered.

I, III, and IV. Option II would not avoid ancillary probate as the new will would have to be probated the same as the old will. Updating a will whenever a significant life change occurs is necessary to keep this document up-to-date and aligned with the client's goals. Option III places the estate assets in a testamentary trust with the trustee directed to make distributions subject to the limitations desired by the grantor. Assets distributed through a will substitute such as a beneficiary designation form will avoid the delay and expense of probate administration.

Lionel Trane has made the following lifetime transfers: -Gave his spouse a remainder interest worth $56,000 in a parcel of real estate after his death -Funded a Section 2503(c) trust for the benefit of his daughter with $60,000 of common stock; his spouse did not split this gift. -Paid his mother's medical bill to the community hospital in the amount of $15,000 -Established a revocable trust for his only grandchild with $8,000 in cash Which of the following statements describe the tax impact of Lionel's lifetime transfers on subsequent lifetime transfers that Lionel may wish to make? 1. The gift to his spouse will reduce the amount of future lifetime taxable transfers that he can make without having to pay the gift tax out of pocket. 2. Establishing and funding the trust for his daughter will reduce the amount of future lifetime taxable transfers that he can make by the value of the gift, minus one annual exclusion, without having to pay the transfer tax out of pocket. 3. Paying his mother's hospital bill will have no effect on subsequent lifetime transfers. 4. Establishing the revocable trust will have no effect on subsequent lifetime transfers.

II, III, and IV. The gift to his spouse will have no effect because no part of it will be taxable. The entire amount will be covered by the unlimited marital deduction because the gift of a vested remainder is not a terminable interest. Also, since it is a future interest gift, the remainder interest is not entitled to an annual exclusion. The gift to the daughter's trust is entitled to an annual exclusion by the terms of Section 2503(c) even though it technically is not a present interest gift. Direct payment of medical expenses to the provider is exempt from gift tax. A revocable trust is revocable and therefore is not a completed gift.

If in 2021 Arthur and Tasha make gifts to all three of their children and elect gift splitting, what is the total amount of gifts that will be covered by their annual exclusions?

If a married couple elects to split gifts up to $30,000 (in 2021) in gifts to each donee will be covered by their annual exclusions. Arthur and Tasha can make a total of $90,000 ($30,000 × 3) to their three children and have the gifts covered by their annual exclusions.

Spousal Joint Tenants

If spouses take title to property as joint tenants, there are no gift tax implications on the acquisition date of the property, regardless of the amount each spouse contributed to the acquisition of the property. Furthermore, for estate tax purposes, when the first spouse dies, the decedent spouse's gross estate includes only half (50%) of the value of property. EX: At his death, Dan and his spouse, Heather, owned their home in a common-law state as JTWROS. Their basis is $500,000. The home has a date-of-death fair market value of $700,000. Because Dan and Heather were spouses, only half of the property is included in Dan's gross estate, and Heather's new tax basis in the home is $600,000 ($350,000 step-up in basis on the half interest included in Dan's gross estate plus a $250,000 basis in the other half already owned by Heather).

Nonspousal Joint Tenants (Consideration Furnished Rule)

If the owners contributed an unequal amount to the acquisition price, the owner contributing more of the purchase price makes a gift to the other owner(s) equal to the amount contributed in excess of an equal contribution. For estate tax purposes, the consideration furnished rule applies if the joint owners were not spouses at the time of the first joint tenant's death. Because of this rule, the property at death is included in the decedent's gross estate to the extent that the surviving joint tenant cannot prove that he actually contributed to the purchase price. Thus, a rebuttable presumption is created: unless the surviving joint tenant can prove that he actually contributed to the acquisition of the property titled as JTWROS, the deceased joint tenant's gross estate must include 100% of the property's value.

Which of the following statements regarding the concept of gift splitting in federal gift tax law is CORRECT? A) Spouses can elect to split some gifts but not split other gifts made within the same calendar year. B) Gifts of community property require a gift splitting election. C) The gift splitting election may be made by any related party who joins in the making of the gift. D) In non-community property states, the donor spouse must file a gift tax return even if the split gift value is less than the annual exclusion.

In non-community property states, the donor spouse must file a gift tax return even if the split gift value is less than the annual exclusion. If a married couple elects to split gifts, a gift tax return must be filed by the donor spouse even if the split brings the total gift to less than the annual exclusion amount. One exception to this is where the married couple lives in a community property state. In that instance, each spouse is considered to already own a one-half interest in the property gifted (meaning that the filing of a return to indicate spousal consent is not required). The purpose of filing the gift tax return, even though the gift is less than the annual exclusion for either spouse, is to document the gift splitting to the IRS.

Transfer of Property- Joint tenants with right of survivorship

In states where joint tenancy with right of survivorship tenants are deemed to own property equally, the donor tenant's share is the total FMV of the property divided by the total number of owners. Thus, if there are three joint tenants and the entire property is gifted, each is deemed to own one-third of the property and is responsible for one-third of the gift tax. In states where joint tenants can own property in unequal shares, the value of the transfer would be the same as for tenants in common.

Joint Tenancy With Right of Survivorship

Involves the co-ownership of property by two or more people, each of whom owns an undivided, equal interest in the entire property. The fundamental characteristic of property owned as JTWROS (whether these owners are spouses or nonspouses) is that the property passes to the surviving owner(s) by right of survivorship or "by operation of law." There is no need for either owner to write a will to pass the property to the other.

Tenancy by the Entirety

Is a limited form of joint tenancy with right of survivorship that can exist only between spouses. This form of ownership is recognized only in some common-law states and, unlike JTWROS between spouses, neither spouse may sever the survivorship right of the other without mutual consent. As in JTWROS between spouses, only half of the value of property held as TE is included in the gross estate of each spouse, and the basis of the property is calculated in the same manner as with JTWROS property held by spouses. Finally, TE features creditor protection from the claims of each spouse's separate creditors (but not joint creditors). This feature is not available when spouses title property as JTWROS.

Tenancy in Common

Is the ownership of property by two or more people, each of whom owns an undivided but possibly unequal (fractional) interest in the entire property. For example, if there are two owners, one tenant in common might own a 40% undivided interest and the other a 60% undivided interest in the property. The undivided interest of each owner is treated as being owned outright and can be sold, donated, willed, or passed through intestate succession.

Which of the following statements concerning the transfer of a life insurance policy is correct? 1. The matured death benefit is always excluded from gross income. 2. The matured death benefit may be only partially excludible from gross income and partially includible in gross income.

Neither I nor II. If a life insurance policy has been transferred during the life of the insured, the death proceeds may be partially taxed under the transfer for value rules assuming there are no exceptions available.

Which of the following charitable remainder trusts can be revoked by the grantor after they are established? 1. Charitable remainder annuity trusts (CRATs) 2. Charitable remainder unitrusts (CRUTs)

Neither I nor II. Neither is correct. For a trust to qualify as a CRAT or a CRUT, the trust must be irrevocable upon inception.

Non-Financial Goals

Nonfinancial goals are often more important to clients than financial goals because they have to do with the people they love. 1. Meeting the Needs of Dependents 2. Proper Distribution of Assets 3. Efficient Transfer of Assets at Death 4. Asset Protection 5. Control of Asset

Step 2: Identifying and Selecting Goals

One of the most important steps is to mutually define the client's personal and financial goals, needs, and priorities. This must be done before any recommendations are made or enacted. Developing an effective estate plan requires gathering complete and accurate quantitative and qualitative information about the client.

Annual exclusion

Only the gift tax allows a deduction annually for a limited amount of gifts of a present interest by any donor to each donee in a calendar year. The annual exclusion amount is indexed annually for inflation to the next lowest multiple of $1,000. The maximum annual exclusion amount for 2021 is $15,000.

Transfers Exempt From Gift Tax

Political Organization Exemption, Educational Exemption( The payment must be made directly and exclusively to the qualifying educational organization, and it must be for tuition. No educational exemption is allowed for amounts paid for books, supplies, dormitory fees, board, or other similar expenses that do not constitute direct tuition costs), Medical Exemption ( The gift tax does not apply to an amount paid on behalf of an individual to a person or institution that provided medical care for the individual. The payment must be made directly and exclusively to the care provider),

Applicable Exclusion Amount

Refers to the dollar value of taxable gifts or a taxable estate that will generate gift or estate tax liability equal to the applicable credit amount. Any person can avoid paying a gift tax out of pocket if the cumulative amount of the person's taxable gifts is less than the maximum gift tax applicable exclusion amount for that year. For example, in 2021, an individual could have cumulative taxable gifts valued at $11.7 million and avoid payment of any gift tax out of pocket because the gift tax applicable credit amount ($4,625,800) is equal to the tax on $11.7 million. Only if their cumulative taxable gifts exceed $11.7 million would there be any out-of-pocket gift tax liability

Chapter 14 Rules: Code Section 2701

Section 2701 sets the rules for lifetime transfers of corporate or partnership interests where there is no established market for such interests. Must meet 4 prerequisites: 1. There must be a transfer of an equity interest in a closely held corporation or partnership. 2. The transfer must be made to a member of the transferor's family. 3. The transferor or an applicable member of the transferor's family must keep an applicable retained interest in the corporation or partnership. In other words, the transferor is not giving her entire interest. An applicable retained interest is - a distribution right, but only if immediately before the transfer, the transferor and applicable family members hold control of the entity; or - a liquidation, put, call, or conversion right. 4. There are senior and junior equity interests in the entity. (A difference of voting rights, without more, is insufficient.)

Chapter 14 Rules: Code Section 2702

Section 2702 deals with transfers in which a trust or a term of years is involved. It applies only to lifetime transfers, and therefore, has an effect only on valuation for gift tax purposes. There are only three types of qualified retained interests for a transaction subject to Section 2702.

Transfer of Property- Tenants by the entirety and community property ownership

Since tenants by the entirety and community property ownership are forms of property ownership reserved solely for married couples, each person is deemed to own half of the asset regardless of contribution. Therefore, for gift tax purposes, each person's share is equal to 50% of the FMV of the asset. (Note: For probate estate purposes, community property assets go through probate, while tenancy by the entirety assets do not.)

Which of the following statements regarding community property is CORRECT? 1. Community property can exist only between spouses. 2. Community property includes a right of survivorship at the death of the first spouse.

Statement 1 is correct. Statement II is incorrect because community property does not include a right of survivorship. Community property is in the probate estate and the deceased spouse has the right to will the property to anyone.

Which of the following gifts qualify for a gift tax annual exclusion? 1. A gift in which the donee receives the immediate and unrestricted right to use, possess, or enjoy the gift 2. A gift in which the donee's possession or enjoyment commences at some time after the gift is made

Statement I is correct because it defines present-interest gifts, which qualify for the gift tax annual exclusion. Statement II is incorrect because it defines a gift of a future interest, which is not entitled to an annual exclusion.

Estate Planning Process

Step 1.: Understanding Personal and Financial Circumstances Step 2: Identifying and Selecting Goal Step 3: Analyzing the Client's Current and Potential Alternative Courses of Action Step 4: Developing the Recommendation(s) Step 5: Presenting the Recommendation(s) Step 6: Implementing the Recommendation(s) Step 7: Monitoring Progress and Updating the Implemented Recommendations

Transfer of U.S. Government Savings Bonds

The U.S. government has issued five types of savings bonds: Series E and H bonds, Series I bonds, and Series EE and HH bonds. When a lifetime transfer is made of any of these bonds, the value of the transfer is measured by the redemption value of the bond as of the transfer or valuation date, as determined from tables published periodically by the Bureau of the Fiscal Service and the Treasury Department.

Step 7: Monitoring Progress and Updating the Implemented Recommendations

The client and the planner must mutually define what, how, when, and by whom monitoring will be done. The monitoring process involves periodic review with the client so that the estate planner is aware of changes in the client's objectives and situation. When changes do occur, the entire estate planning process is repeated, beginning with the first step, in an effort to modify the plan so that it is once again appropriate for the client's objectives and circumstances.

Step 3: Analyzing the Client's Current and Potential Alternative Courses of Action

The financial planner must analyze the collected data to identify factors that will affect the estate plan, such as -the value of the gross estate -the amount of any previous taxable gifts, including generation-skipping transfers and any gift or generation-skipping transfer taxes paid -the types of property interests held; -how titles to properties are held -health, insurability, and life expectancy status -financial needs for education, retirement, etc. -competency of beneficiaries -current and anticipated marginal income tax brackets -applicable state law -marital and family status of the client -wealth that the client may obtain in the future by gift or inheritance; -existing and anticipated obligations and liabilities of the client

Step 1: Understanding Personal and Financial Circumstances

The first step in the estate planning process is to understand the client's personal and financial circumstances. This accomplished by obtaining qualitative and quantitative information, determining if it is sufficient to properly assess the client's situation and addressing any incomplete information.

What is the gift tax lifetime exemption amount for 2021?

The gift tax lifetime exemption amount for 2021 is $11,700,000.

Why was the gift tax established?

The gift tax was established to deter people from transferring their assets away during their life, thus avoiding the estate tax that Congress imposed on the transfer of wealth at death. Without the gift tax, people could avoid the estate tax simply by giving all of their property away prior to death. Congress passed legislation in 1932 imposing a gift tax on the gratuitous transfer of wealth during an individual's lifetime.

Transfer of Property- Tenants in Common

The value of a gift of property owned as tenants in common is the FMV of the donor's percentage share at the date of transfer. For example, if the donor owned and transferred 40% of the subject property, the value of the transfer would be 40% of the total FMV of the property on the date of completion of the transfer.

Applicable credit amount

This amount is used to offset any tax liability owed by an estate or donor. The applicable credit amount is equal to the tax on an amount of taxable transfers that Congress has declared taxpayers should not have to pay out of pocket.

Qualified annuity interest

This interest includes a right to receive a fixed amount that must be payable to (or for the benefit of) the holder of the annuity interest at least annually. A fixed amount means: - a stated dollar amount, but only to the extent the amount does not exceed 120% of the stated dollar amount payable in the preceding year; or - a fixed fraction or percentage of the initial FMV of the property transferred to the trust, as finally determined for federal tax purposes, but only to the extent that the fraction or percentage does not exceed 120% of the fixed fraction or percentage payable in the preceding year.

Qualified unitrust interest

This interest includes a right to receive a periodic payment, at least annually, of a fixed percentage of the net FMV of the trust assets determined annually, but only to the extent the fraction or percentage does not exceed 120% of the fixed amount payable in the preceding year

Step 4: Developing the Recommendation(s)

Using information from the prior steps, you can begin examining estate planning techniques that may be appropriate for the client's goals and situation. First, it is important to consider several alternatives, including staying on the client's current path. Second, the planner should develop recommendations concerning the client's progress toward her goals, needs, and priorities.

Step 5: Presenting the Recommendation(s)

When presenting each recommendation, you should make a reasonable effort to assist your clients in understanding their current situations regarding their estates, the estate planning recommendations and their impact on the ability to meet the clients' goals, needs, and priorities. In doing so, you should avoid presenting your opinions as fact.

Chapter 14 Rules: Code Section 2703

ection 2703 does not apply to any option, agreement, right, or restriction that meets stated conditions. These conditions include the following: 1. The arrangement must be a bona fide business arrangement. 2. The arrangement cannot be merely an attempt to transfer property to family members for less than full and adequate consideration in money or money's worth. 3. The terms of the arrangement must be comparable to those of similar arrangements entered into by persons in an arm's-length transaction.