Estate Planning Chapter 7
When applying for Medicaid, the look back period for transfers of income and assets to family members is ____ months? A. 12. B. 60. C. 9. D. 36.
B. 60.
A FLP offers all of the following advantages except: A. A convenient way to gift assets that are generally difficult to break into easily giftable pieces. B. A method of keeping appreciation of the FLP assets taxable to the older generation rather than heirs. C. A means of giving away property while still maintaining control. D. Significant discounts in valuing transfers of partnership interests.
B. A method of keeping appreciation of the FLP assets taxable to the older generation rather than heirs.
Perry's father sold the family business to him using a private annuity. The private annuity was structured such that Perry would pay his father $40,000 per year plus interest, for the remainder of his father's life. At the date of the sale, Perry's father's life expectancy was 20 years and Perry's father was in great health. After six years, Perry's father died of a heart attack and Perry sold the business for $2,000,000 six months after his father's death. What is Perry's capital gain/loss on the transaction? A. $240,000. B. $1,760,000. C. $1,960,000. D. $2,000,000.
B. $1,760,000. A buyer's adjusted basis of property purchased with a private annuity is equal to the sum of all annuity payments paid. In this scenario, Perry made six annuity payments of $40,000, or a total of $240,000. Since he sold the property for $2,000,000, his gain is calculated by subtracting his basis from the sales price to arrive at $1,760,000 ($2,000,000-$240,000).
John is 67 years old, and would like to transfer some of his assets to his adult son, Murray. John does not want to incur any gift tax liability, and also needs some cash flow, so he is considering selling the assets to his son. A friend recently informed John that a self-canceling installment note (SCIN) is a good planning strategy. Which of the following statements regarding self-canceling installment notes (SCINs) is/are correct? 1. To be effective, a SCIN must reflect a risk premium to compensate the seller for the possibility of cancellation. 2. A seller of a SCIN may accept security without jeopardizing the installment sale treatment. 3. At the seller's death, the present value of any remaining SCIN balance is excluded from the seller's gross estate. 4. A SCIN is a debt ordinarily extinguished at the seller's death. A. 1 only. B. 1 and 3. C. 3 only. D. 1, 2, 3, and 4.
D. 1, 2, 3, and 4.
Maxine agrees to purchase Jacob's property utilizing a private annuity. Jacob's table life expectancy is ten years at the date of the agreement and the property has a fair market value of $400,000. The private annuity payment is $45,000 per year, and Maxine dies after making two payments. At Maxine's death, what amount is included in her gross estate with regards to the private annuity and the transferred property? A. $400,000. B. $0. C. $90,000. D. $310,000.
A. $400,000.
Bobby, a single man, owned a building with a fair market value of $2,000,000. Bobby's adjusted basis in the building was $1,000,000. This year, Bobby agreed to sell the building to his adult son, Robby for $1,300,000. What is the amount of Bobby's taxable gift? A. Bobby has made a taxable gift of $685,000. B. Bobby has made a taxable gift of $300,000 C. Bobby has made a taxable gift of $2,000,000. D. Bobby has made a taxable gift of $700,000.
A. Bobby has made a taxable gift of $685,000. The discount of $700,000 ($2,000,000 - $1,300,000) is treated as a gift eligible for the annual exclusion, thus creating a taxable gift of $685,000 for 2019.
Zelda, a single woman, transferred $2,000,000 to a GRAT naming her two sons as the remainder beneficiaries, while retaining an annuity with a present value of $860,000. If this is the only transfer that Zelda made during the year, what is Zelda 's total taxable gift for the year? A. $1,110,000. B. $1,970,000. C. $1,140,000. D. $2,000,000
C. $1,140,000. The present value of the expected future remainder interest is a gift of a future interest subject to gift tax. The value of the expected future remainder interest is $1,140,000 ($2,000,000 - $860,000). Because this is a gift of a future interest, it does not qualify for the annual exclusion.
In 2020, Roxanne paid Badlaw University $12,000 for her nephew's tuition and gave her nephew $25,000 in cash. Roxanne is single and did not make any other gifts during the year. What is the amount of Roxanne's taxable gifts for the year? A. $0. B. $2,000. C. $10,000. D. $24,000.
C. $10,000.
Kane transferred $5,500,000 to a GRAT naming his two children as the remainder beneficiaries while retaining an annuity valued at $500,000. If this is the only transfer Kane made during the year, what is Kane's total taxable gift for the year? A. $0. B. $4,972,000. C. $5,000,000. D. $5,487,000.
C. $5,000,000. The remainder interest is a taxable gift from Kane to his children equal to the value of the property contributed to the GRAT less the value of the annuity retained, $5,500,000-$500,000 = $5,000,000. Because the remainder interest is a gift of a future interest it is not eligible for the annual exclusion.
Jennifer purchased her mother's home through the use of a SCIN. Under the terms of the SCIN, Jennifer was to pay her mother $22,000, plus interest and a SCIN premium, per year for 10 years. If Jennifer's mother died after six payments were made, what would be Jennifer's adjusted basis in the home? A. $88,000. B. $0. C. $132,000. D. $220,000.
D. $220,000. The buyer's adjusted basis in property transferred through the use of a SCIN is the fair market value of the property on the date of the sale regardless of the number of payments made by the seller. In this case, the fair market value of the property must have been the annual principal payments times the expected term of the SCIN, or $220,000 ($22,000 x 10).
Which of the following statements regarding a Qualified Personal Residence Trust (QPRT) is/are true? 1. The grantor must survive the trust term to realize any estate tax savings. 2. After the trust term, the house will revert back to the grantor. 3. The grantor will have a taxable gift upon the creation of the QPRT. 4. A QPRT is generally inappropriate for vacation homes. A. 1 and 2. B. 2 and 4. C. 1 only. D. 1 and 3.
D. 1 and 3. If the grantor dies during the trust term, the entire value of trust property is included in the grantor's gross estate. At the end of the trust term, ownership of the house will be transferred to the beneficiaries. The taxable gift will be based on the fair market value of the house (on the date of transfer) less the present value of the right to live in the house. Vacation homes are often transferred to QPRTs.
Marie is the founder and sole owner of Purple Cakes Bakery. Allen has offered to buy her business for a price Marie considers reasonable, but Allen does not have all of the funds necessary to pay for the business at the current time. Marie is in good health, her true life expectancy is much greater than the IRS life expectancy factor, and she wants to accept Allen's offer. Allen is not related to Marie and has good credit. Given these facts, which transfer method should be used to transfer the business to Allen? A. Self-Canceling Installment Note. B. Private Annuity. C. Grantor Retained Annuity Trust. D. Installment Sale
D. Installment Sale Marie would sell the business to Allen utilizing an installment sale and would charge a reasonable rate of interest. Because Allen would not have to pay the full sale price at the date of the transfer, he would not need to have all of the funds necessary at that time. Because Allen is not related to Marie, she would not have any reason to enter into a GRAT, SCIN, or Private Annuity, which may inequitably benefit Allen. The best situation would be for Marie to sell the business to Allen in an outright cash sale, but that is not an option in this problem
Which of the following statements regarding a Grantor Retained Annuity Trust (GRAT) is/are true? 1. When the trust is established, a taxable gift occurs based on the present value of the remainder interest of the trust assets. 2. The gift that occurs when the GRAT is created is eligible for the annual exclusion. 3. For estate planning purposes, a GRUT (Grantor Retained Unitrust) is preferable to a GRAT if the assets in the trust are expected to appreciate in value. 4. The beneficiaries of a GRAT will not receive a step-up in basis of the trust property if the grantor survives the trust term. A. 3 and 4. B. 1 and 4. C. 2 and 3. D. 1, 2, and 4.
B. 1 and 4. A taxable gift will occur when the GRAT is established. The gift will not be eligible for the annual exclusion, since it is not a present interest gift. A GRUT will result in a higher annuity payment to the grantor each year (if the assets are appreciating in value). For estate planning purposes, the grantor would want to remove assets from the estate. Therefore, a GRUT would be inappropriate because it would bring a higher amount into the grantor's estate each year than the GRAT. If the grantor survives the trust term, the beneficiaries will not receive a step up in basis of the trust assets. If the grantor died during the trust term, the trust assets would be included in the grantor's gross estate; therefore, the heirs would receive a step up in basis.
Which of the following statements regarding a Grantor Retained Annuity Trust (GRAT) is/are true? 1. At the end of the GRAT term, a taxable gift will occur when trust assets are transferred to the beneficiary. 2. If the grantor dies during the trust term, a pro rata share of the trust assets will be included in the grantor's estate. 3. Interest and dividends earned by assets in a GRAT are taxed to the grantor. 4. If the grantor survives the trust term, none of the trust assets are included in the grantor's gross estate. A. 1, 2, and 4. B. 3 and 4. C. 1 and 4. D. 2 and 3.
B. 3 and 4. A taxable gift will occur when the GRAT is established, not at the end of the GRAT term. If the grantor dies during the trust term, the entire value of the trust assets is included in the grantor's gross estate, not a pro rata portion. The trust is a grantor trust; therefore, all income will be taxed to the grantor. Statement 4 is correct. If the grantor survives the trust term, none of the trust assets will be included in the grantor's gross estate. However, the taxable gift (that occurs when the trust is established) must be added back to the taxable estate as a prior taxable gift.
Marie is the founder and sole owner of Purple Cakes Bakery. Allen has offered to buy her business for a price Marie considers reasonable, but Allen does not have all of the funds necessary to pay for the business at the current time. Marie is in good health, her true life expectancy is much greater than the IRS life expectancy factor, and she wants to accept Allen's offer. Allen is not related to Marie and has good credit. Given these facts, which transfer method should be used to transfer the business to Allen? A. Grantor Retained Annuity Trust. B. Installment Sale C. Private Annuity. D. Self-Canceling Installment Note.
B. Installment Sale Marie would sell the business to Allen utilizing an installment sale and would charge a reasonable rate of interest. Because Allen would not have to pay the full sale price at the date of the transfer, he would not need to have all of the funds necessary at that time. Because Allen is not related to Marie, she would not have any reason to enter into a GRAT, SCIN, or Private Annuity, which may inequitably benefit Allen. The best situation would be for Marie to sell the business to Allen in an outright cash sale, but that is not an option in this problem
Alton would like to transfer the ownership of his Picasso painting to his son Edgar, but Alton would like to continue to have the painting hanging in his house. Which of the following would you recommend to Alton? A. QPRT. B. TPPT. C. CRAT. D. FLP.
B. TPPT. Alton's son Edgar is not a charity so a CRAT is incorrect.. A QPRT, or Qualified Personal Residence Trust, is a special form of a GRAT to which the grantor contributes his personal residence. A FLP would be more appropriate for transferring ownership of a family business than ownership of a painting. TPPTs or Tangible Personal Property Trusts are funded with personal property and the grantor retains the right to use the property that has been transferred to the trust.
In a typical family limited partnership: A. A discount is allowed on the gifts only if the children's interest as a group will be less than 50%. B. The children or grandchildren receive limited partnership interests. C. The family limited partnership should be funded with assets that are not expected to appreciate faster than the 7520 rate. D. The owners of the closely held business immediately upon the creation transfer general partnership interests to their children or grandchildren.
B. The children or grandchildren receive limited partnership interests.
Before her death, Gemma loaned Clay $400,000 in return for a note. The terms of the note directed Clay to make monthly payments including interest at the applicable federal rate. If Gemma dies before the note is repaid, which of the following affects the valuation for Gemma's gross estate? 1. Clay's inability to make payments timely. 2. The market rate of interest. 3. The remaining term of the note. 4. Gemma forgives the note as a specific bequest in her will. A. 1 only. B. 1 and 2. C. 1, 2, and 3. D. 2, 3, and 4
C. 1, 2, and 3. If Gemma dies before Clay repays the note, the note is included in Gemma's gross estate at the fair market value of the note plus any accrued interest due at Gemma's date of death. This fair market value is affected by the interest rate, maturity date, and Clay's ability to make the note payments, but not by Gemma's forgiveness of the note in her will. The forgiveness of the note is deemed a specific bequest and the fair market value of the note is still included in Gemma's gross estate.
Which of the following statements regarding private annuities is correct? A. If a seller dies before the end of the private annuity term, the buyer continues to pay the annuity to the seller's estate. B. A private annuity must include a risk premium to compensate the seller for the possibility of cancellation at the seller's death. C. A private annuity cannot give the seller a security interest in the property. D. With a private annuity, the buyer must make the annuity payments for the lesser of the term of the annuity or the life of the seller.
C. A private annuity cannot give the seller a security interest in the property. A private annuity cannot give the seller a security interest in the property or the private annuity treatment is disallowed. Answers a and d are incorrect because a private annuity requires the buyer to pay the annuity payment for the remaining life of the seller. Answer b is incorrect because the risk for the buyer in the private annuity is that the seller lives longer than his life expectancy and the buyer overpays. To compensate for this risk, the buyer does not have to make the payments if the seller dies before his life expectancy.
Which of the following statements regarding SCINs is correct? A. If the seller outlives the SCIN term, the buyer continues to pay the SCIN payment until the seller's death. B. If the seller dies before the end of the SCIN term, the seller is deemed to have made a taxable gift to the buyer equal to the difference between the payments made and the total principal payments due on the SCIN. C. The payments received by the seller under a SCIN are treated as interest income. D. A SCIN can give the seller a collateral interest in the property sold.
D. A SCIN can give the seller a collateral interest in the property sold.
Which of the following statements is true? A. Missy transfers rental property to a Family Limited Partnership (FLP) in return for a 99% limited partnership interest and a 1% general partnership interest. Missy immediately begins a gifting program by gifting a portion of the limited partnership interests to her children and grandchildren. Six years after the initial formation of the FLP, Missy continues to own the 1% general partnership interest and 45% of the limited partnership interests in the FLP. Because Missy does not own a majority (greater than 50%) of the interest in the FLP, Missy cannot control the operations of the FLP. B. Angela transferred her home to a QPRT in 2017. She retained the right to live in the home for 10 years, and at the end of the term, the home transfers to Angela's three children. Angela dies in 2019, when the home has a fair market value of $250,000. The value of the home is excluded from Angela's gross estate because the children are the remainder beneficiaries of the QPRT. C. Rose has been diagnosed with an illness that is expected to substantially reduce her life expectancy. Before she dies, Rose would like to transfer her extremely valuable art collection to her wealthy daughter. The art collection is displayed in Rose's home, but Rose really needs money for her living expenses for the remainder of her life. A TPPT would be the most appropriate transfer device to fulfill Rose's desires. D. Earl has four children - Kenny, Tim, Aaron, and Cathy. Earl's will directs all of his property to be divided equally among his four children, and if any child predeceases Earl, that child's heirs will inherit Earl's property per capita. Cathy died two years before Earl. Cathy had three children. At Earl's death, Kenny will receive 1/6 of Earl's estate
D. Earl has four children - Kenny, Tim, Aaron, and Cathy. Earl's will directs all of his property to be divided equally among his four children, and if any child predeceases Earl, that child's heirs will inherit Earl's property per capita. Cathy died two years before Earl. Cathy had three children. At Earl's death, Kenny will receive 1/6 of Earl's estate Cathy's surviving heirs become equal heirs in Earl's estate because Cathy predeceased Earl. Accordingly, each heir receives 1/6 (Kenny, Tim, Aaron, Cathy's three kids) of Earl's estate. Plain per capita is by the head. Per capita per generation is different. The value of the home transferred to the QPRT will be included in Angela's gross estate because Angela died during the term of the QPRT. NLY the general partner can control the operations of a limited partnership and Missy is the general partner so she CAN control the operations of the FLP. A PPT would not fulfill Rose's desires because the TPPT would only give Rose the right to use the art for the rest of her life, and would not provide any income.
A rolling GRAT is actually a series of: A. Codicils attached to a GRAT allowing it to last for the grantor's lifetime. B. GRATs with long terms. C. Remaindermen who are the same person. D. GRATs with short terms.
D. GRATs with short terms. to reduce the likelihood that the grantor will die during the trust term.
Which of the following is NOT true regarding an intentionally defective grantor trust (IDGT)? A. The trust income will be taxed to the grantor. B. The gift to the trust is typically cash, which is then used as seed money to purchase assets from the grantor at FMV. C. The grantor does not recognize income tax on the sale of the asset to the trust. D. If the grantor dies during the term of the trust, the full value of the trust is included in his or her gross estate.
D. If the grantor dies during the term of the trust, the full value of the trust is included in his or her gross estate. If the grantor dies during the term of the trust, the trust assets are not included in the gross estate. However, if the asset was sold under an installment note, the PV of the remaining payments will be included in the gross estate. This effectively freezes the value that is included in the gross estate and ensures that future appreciation after the sale will not be subject to transfer taxes
