Estate Planning Practice

Property can be transferred at death by:

the terms of a valid will. contract. operation of law.

Which of the following would NOT be considered income in respect of a decedent (IRD)?

Dividends declared on the decedent's stock after the date of death Income in respect of a decedent (IRD) is income to which the decedent was entitled at the date of death but had not yet received. Dividends declared after the date of death do not fall within this definition.

Which of the following statements regarding a springing power of attorney is CORRECT?

With a springing power of attorney, the attorney-in-fact's authority to act is delayed until the principal actually becomes incapacitated or incompetent. A springing power of attorney can be used in planning for the principal's possible incapacity.

Which one of the following statements about the elective share is correct?

The elective share can alter a decedent's estate distribution plan. The elective share may be elected in common law property states.

Which of the following are exceptions to the terminable interest rules qualifying for the marital deduction?

A bequest to the surviving spouse conditioned upon surviving for up to six months after the decedent's death (as long as the spouse survives the specified period) An interest for life if the surviving spouse also receives a general power of appointment Property for which the QTIP election is made Statement III is incorrect. The life insurance proceeds payable in installments to a spouse until remarriage are an example of a terminable interest that does not qualify for the marital deduction.

In which one of the following situations is ancillary probate necessary?

A decedent owned real estate in a state other than the decedent's state of domicile Ancillary probate is necessary when a decedent owned real estate in a state other than the decedent's state of domicile. Domicile is equivalent to a permanent residence; residence is simply where a person is residing or staying at any given time. A person's domicile and residence are most often in the same state.

Which one of the following statements regarding powers of appointment is CORRECT?

A power of appointment, whether general or special, can be exercised, released, or allowed to lapse by the holder.

Which of the following descriptions of a complex trust is CORRECT?

Can accumulate income A complex trust is permitted to accumulate income, make distributions in excess of current income, and make charitable distributions.

Which of the following objectives can be accomplished through a will?

Creating a presumption of survivorship in the event of simultaneous death Establishing a priority for eliminating bequests if the estate has insufficient assets to pay all debts, taxes, and bequests Naming a residuary beneficiary to take all assets that remain after specific bequests have been allocated Statement I is a correct statement. Statement III is incorrect because all estate assets cannot be given to a charity when the decedent is survived by a spouse and children, due to the spousal elective share statute and the nature of community property. Statement II is a correct statement and refers to the abatement and tax apportionment statutes. Statement IV is also correct.

Which of the following is a tax goal related to transfer taxes?

Freezing the value of assets subject to tax

Pele LaTerneau, who lives in a common law state, would like to make his brothers and sister part owners of the large farm holdings that he has acquired. He would like to give each of them an equal share while alive. If any of the owners were to die, he wants the remaining owners to assume the deceased's ownership rights. Given Pele's goals and situation, what is the most appropriate way for him to title the farm holdings for his brothers and sister?

In joint tenancy with right of survivorship

Transfers to which of the following trusts may be subject to gift tax?

Inter vivos trusts Statement I is correct; transfers to an irrevocable inter vivos trust are subject to gift tax because the grantor's transfers of assets to the trust constitute completed gifts. Statement II is incorrect; gift tax does not apply to testamentary trusts because transfers to the trust do not occur until the grantor's death. Testamentary trusts are subject to estate taxes and income taxes, but not gift taxes.

Which of the following are characteristics of the probate process?

It acts as a means of documenting title to property owned by the decedent. It serves as a forum for the admission and publication of a decedent's will. It serves as a forum for the submission and payment of creditors' claims. Probate is not a simple process, but it does serve as a forum for the admission and publication of a decedent's will and for the submission and payment of creditors' claims.

Which of the following people would be precluded from executing a legally valid contract?

John, age 80, who has a physical disability Statement II is correct. Legal incapacity is the standard against which a person is measured regarding the execution of certain legal documents. Theresa is legally incapacitated because she is a minor. Statement I is incorrect. A person who is disabled may or may not be legally incapacitated. In this case, John is not described as legally incapacitated.

Which of the following is a financial goal?

Maximizing benefits for a surviving spouse Not a Financial Goal The efficient transfer of assets at death Meeting the needs of dependents Control of assets

Which of the following statements regarding Medicaid planning for long-term care is CORRECT?

Medicaid planning is best done with the advice of an experienced Medicaid planning advisor or a qualified elder care attorney. Each state has its own asset and income levels for qualifying for benefits. Statements I and II are correct. Statement III is incorrect. The look-back period is 60 months. Statement IV is incorrect. If a client is married, the couple's residence is not a countable asset. Real estate other than the couple's primary estate is countable.

Which of the following statements regarding probate is CORRECT?

Neither I nor II The decedent's non-real estate assets are probated according to the laws of the state in which they are located. The decedent's real estate assets are probated according to the laws of the decedent's state of residence or domicile. Neither statement is correct. The decedent's real estate assets are probated according to the laws of the state in which they are located. The decedent's non-real estate assets are probated according to the laws of the decedent's state of residence or domicile.

A woman purchases a life insurance policy on her husband's life with her own funds. She is both the owner and beneficiary of the policy. Do the proceeds of the policy qualify for the marital deduction in the husband's estate, if he predeceases his wife?

No, because the proceeds of the policy are not included in the husband's gross estate. Property qualifies for the marital deduction only if it is included in the decedent's gross estate.

Which of the following are possible complications of closely-held and family-owned businesses?

Owners are often independent minded and feel their own oversight and control are crucial for the continued success of the business. Family issues may be involved.

Which of the following is a future interest in property?

Remainder A remainder is the right to the enjoyment of a property at some time in the future. A present interest gives an immediate right to use and enjoy the property.

Rick Stein dies as a resident of New Jersey. He owns a beach home in South Carolina. Which of the following statements regarding the probate of Rick's estate is CORRECT?

Rick's personal assets will be probated according to the laws of New Jersey. Rick's beach home will be probated according to the laws of South Carolina. Both statements are correct. A decedent's real estate is probated according to the laws of the state in which it is located. A decedent's personal assets are probated according to the laws of the decedent's state of residence or domicile.

Roberta Graham drafts a will that does not involve any estate tax planning and leaves all of her property to her surviving spouse. Which type of will is this?

Simple A simple will is one that does not involve any transfer tax planning and leaves all of the testator's property to the surviving spouse.

Which of the following estate planning arrangements can be used in planning for a client's unanticipated incapacity?

Springing durable powers of attorney. Revocable living trusts. Joint tenancies. Living wills.

Denise plans to establish a trust for the benefit of her four grandchildren. She wants to give the trustee discretion to distribute trust income in different amounts among the four beneficiaries. Which of the following trust provisions will accomplish Denise's objective?

Sprinkling (spray) provision The answer is sprinkling (spray) provision. A sprinkling (spray) provision gives the trustee the right to make distributions in different amounts among the permissible beneficiaries.

When Leah dies, she owes $5,000 in unpaid medical expenses. Which of the following statements concerning the tax treatment of these expenses is CORRECT?

The medical expenses are deductible on either the federal estate tax return (Form 706) or on Leah's final Form 1040. For the expenses to be deducted on Leah's final Form 1040, however, the deductions must be itemized and the expenses must meet the 10% of AGI floor.

A document that amends a will and must be executed with all the formalities and prerequisites of an original will is referred to as

a codicil. A will is amended by means of a document referred to as a codicil.

A will that is entered into probate in the testator's own handwriting and is not witnessed is

a holographic will. A holographic will is a will that is in the testator's own handwriting and is not witnessed.

The minority interest discount arises because minority shares

have no power to force dividends. cannot compel liquidation. cannot control corporate policy.

Which of the following statements regarding tenancy in common is CORRECT?

A right of partition is inherent in a tenancy in common. incorrect Tenants in common must own equal fractional interests in the property. Statement I is correct. Statement II is incorrect because tenants in common can own unequal fractional interests in the entire property.

Which of the following are factors that a financial planner should monitor for every client?

Changes in the client's objectives Changes in the client's marital status Changes in property laws Changes in the amount of lifetime gifts made by the client

Darren Allen died leaving a will that was written in his own handwriting. The will was not witnessed nor attested to by witnesses. This is an example of what type of will?

Holographic

In which of the following situations will the holder's power to appoint property on behalf of himself be considered a general power of appointment for federal estate tax purposes?

Neither The holder can exercise the power only for the holder's health, education, maintenance, or support (HEMS). The holder's right to exercise the power each year is limited to the greater of $5,000 or 5% of the total property subject to the power at the holder's death. Explanation The holder's power to appoint property on behalf of himself is not treated as a general power of appointment for estate tax purposes in either of these situations.

In his will, Luis Garcia leaves his residence and all tangible personal property to his spouse, Anita, and leaves the remainder of his estate to his two children in equal shares. If any of his beneficiaries predecease him, that beneficiary's share passes to the surviving beneficiaries in equal shares. Does Luis need to amend his will?

No; the will properly disposes of his entire estate. The will does dispose of his entire estate. No part of his probate estate will pass by intestacy laws.

Which of the following statements regarding tenancies in common are CORRECT?

Property is owned concurrently by 2 or more people. Each tenant's share is an undivided part of the entire property. There are no survivorship rights. Statement IV is incorrect. Tenants in common may own unequal shares but only as an undivided interest in the entire property.

Which of the following financial issues are critical in a cohabitation agreement between nonspouse cohabitants?

Responsibility for minor children. Titling of assets acquired during the relationship. Titling of assets acquired before the relationship. Allocation of debts if the relationship terminates or one party dies.

In which one of the following situations would a state's intestate succession laws be applied?

The decedent owned a residence that is community property in a community property state, and the decedent died without a will.

Which of the following statements regarding an unfunded irrevocable life insurance trust (ILIT) is CORRECT?

The grantor gifts cash to the ILIT each year to pay the policy premiums. The grantor of an unfunded ILIT gifts cash to the ILIT each year to pay the policy premiums. The gifts are considered to be future interest gifts, so the grantor must include Crummey powers in the trust to take advantage of the annual exclusion. An unfunded ILIT is not a grantor trust because there are no assets in the trust generating taxable income.

Which of the following statements regarding the income taxation of complex trusts is CORRECT?

The trust itself is a separate taxable entity. Incorrect Trust income is always taxable to the trust beneficiaries. Statement II is incorrect because the trust income from a complex trust is taxable to the trust itself unless it is distributed to the beneficiaries.

Which of the following is typically a reason for establishing a supplemental needs trust?

To pay for the needs of a beneficiary who is receiving public assistance while protecting assets from government attachment The answer is to pay for the needs of a beneficiary who is receiving pubic assistance while protecting assets from government attachment. A supplement (special) needs trust is established by clients who have a dependent who is developmentally disabled and receiving public assistance. The purpose of the trust is to pay for the beneficiary's supplemental needs that are not covered by assistance while at the same time protecting assets from governmental attachment.

Several of the steps involved in the process are Which one of the following lists the sequence of these steps correctly?

Understanding the client's personal and financial circumstances Identify and select goals Develop the recommendation(s) Implement the recommendation(s) The answer is I, III, IV, II. Understanding the client's personal and financial circumstances must be completed prior to identifying and selecting goals. From there, you can develop recommendation(s) and, with client agreement, implement recommendation(s).

All of the following transfers are subject to the federal gift tax except

a gift made by a U.S. citizen to a revocable trust. An incomplete transfer is not subject to the federal gift tax. A gift from a U.S. citizen to a revocable trust is an incomplete transfer because the donor retains the right to reclaim the property.

Assume that Grant places assets valued at $1 million into a grantor retained annuity trust (GRAT) with a trust term of 10 years. The remainder beneficiary of the GRAT is Marie. Which of the following statements regarding this GRAT is(are) CORRECT?

Grant will receive a fixed annuity payment from the trust each year during the 10-year trust term. If Grant survives the 10-year trust term, the FMV of the trust assets will not be included in his gross estate.

Which of the following is a premortem technique to increase estate liquidity?

Reduce the cash needs of an estate Sell illiquid assets

Which of the following would not be a source of estate liquidity?

Restructuring a closely held business from a sole proprietorship to an LLC

All of the following statements regarding the alternate valuation date (AVD) are correct except

the executor is allowed to choose which assets will be valued as of the decedent's date-of-death value and which will be valued at the AVD. The AVD election is essentially an all-or-nothing choice, and the executor is not allowed to choose which assets will be valued as of the decedent's date of death and which will be valued at the AVD. Some assets, however, are not allowed to be valued at the AVD. These assets include items sold after the death but before the AVD and wasting assets. Wasting assets are items that are guaranteed to devalue over time, such as annuities that have already been annuitized, copyrights, and patents.

Which one of the following describes a person who dies testate?

A person who dies with a valid will

Which one of the following describes a nuncupative will?

An oral will

Which of the following forms of ownership pass through probate when an owner dies?

Fee simple Community property

In her will, Jessica left some farmland to George, her husband, for life. Her will provided that George could appoint the property only to their two daughters at his death. Which of the following statements is CORRECT?

George has a special (limited) power of appointment. George has a special (limited) power of appointment because George cannot name/appointment himself, his creditors, his estate, or his estate's creditors as the new owner of the farmland, he has a special (limited) power of appointment. The value of the farmland will not be included in his gross estate.

Which of the following is an aspect of a client's estate that should be analyzed in Step 3 of the estate-planning process?

Identifying how titles to properties are held The remaining answer choices are items addressed in Step 1 - Understanding the Client's Personal and Financial Circumstances.

Which of the following statements correctly characterizes property interests held by the decedent that, at death, pass by operation of law?

If the property passes according to the operation of law, the property avoids probate. The titling on the instrument determines who shall receive the property.

Which one of the following is a characteristic of a revocable trust?

It will act as a will substitute because it names the people to receive title to the trust assets after the grantor's death. A revocable trust acts as a will substitute because it names the people to receive title to the trust assets after the grantor's death.

Which of the following statements regarding fee simple or absolute ownership of property is CORRECT?

Neither I nor II Fee simple ownership gives the owner only a lifetime right to use, possess or dispose of the property. Fee simple ownership gives the owner only a right at death to dispose of the property. Neither I nor II is correct as both statements are false. A fee simple right gives the owner the right during lifetime and at death to dispose of the property.

Which of the following is a written document in which one person (the principal) authorizes another person to act on the principal's behalf?

Power of attorney. A power of attorney is an instrument in writing by which one person, as principal, appoints another as agent and confers upon them the authority to perform certain specified acts or kinds of acts on behalf of the principal.

Which of the following forms of ownership may be held by spouses only?

Tenancy by the entirety. Community property.

Jackie and Carmen are sisters who own real estate together. Jackie owns an undivided 35% interest in the property and Carmen owns an undivided 65% interest. Jackie and Carmen both have the right to sell their interest in the property or to leave their interest to anyone they choose under their wills. Which of the following describes this form of concurrent ownership?

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

John Jones died in the current year with a probate estate of $4 million survived by his spouse, three children, and three grandchildren. In his will he placed all of his probate estate in a bypass trust in which his spouse and children are income beneficiaries, and his children and their lineal descendants are remaindermen per stirpes. Which one of the following statements is correct about the type and consequences of this transfer with regard to the federal generation-skipping transfer tax (GSTT)?

The assets placed in the bypass trust are an example of an indirect skip.

Which of the following statements regarding cross-purchase buy-sell agreements funded with life insurance is CORRECT?

The death benefits under the life insurance policies are generally subject to income tax. The increase of the basis of the surviving owner(s) in the purchased interest(s) will equal the purchase price paid under the cross-purchase buy-sell agreement. Statement I is incorrect because the death benefits received under the life insurance policies are generally not subject to income tax.

Which of the following property interests of a decedent will pass through probate?

The decedent's half interest in community property Property owned with the brother of the decedent as tenants in common Property owned as tenants in common may be transferred by will or pass via state intestacy laws. In either case, the property will pass through probate. A decedent's half interest in community property will also pass through probate. The other interests pass by contract (beneficiary designation) and are not subject to probate.

Which of the following estate planning techniques can be used by unmarried cohabitants to reduce estate tax due at the death of the first cohabitant to die?

The gift tax annual exclusion The estate tax charitable deduction A qualified personal residence trust (QPRT)

Which of the following statements regarding the gift tax annual exclusion is CORRECT?

The gift tax annual exclusion amount for 2020 is $15,000. The annual exclusion applies to as many donees each year as the donor chooses. Statements I and II are correct. Statement III is incorrect because the annual exclusion applies only to gifts of present interests.

Which of the following are requirements for a qualified domestic trust (QDOT)?

The noncitizen surviving spouse must receive all the income from the trust. The trustee must have the right to withhold federal estate tax on distributions of corpus to the surviving spouse. At least one trustee must be a U.S. citizen or U.S. corporation.

Which of the following statements regarding trusts is CORRECT?

The primary purpose is often asset management. Incorrect An inter vivos trust is a trust created by a decedent's will and made effective at death. Statement II is incorrect. An inter vivos trust is a trust made effective during the grantor's lifetime.

Which one of the following statements regarding the use of a revocable living trust to benefit an unmarried cohabitant at death is incorrect?

The property in such a trust that passes to the unmarried cohabitant will be entitled to the marital deduction. Since the parties are unmarried, no marital deduction is possible. Assets in a funded living revocable trust avoid probate. A will contest can be made only against a will, not a trust. Since the trust is revocable, the grantor retains effective control of the property.

Which of the following is generally required for executing a valid last will and testament?

The testator must be 18 or older. The testator must not be under the undue influence of another. The testator must have sufficient legal capacity to understand the consequences of creating a will. The will must be attested to and witnessed by the required number of nonbeneficiary individuals.

In which of the following situations would ancillary probate be necessary?

Thomas dies a resident of Virginia; he owns a ranch in Texas.

Don gave a parcel of land worth $25,000 to his niece seven years ago. Don used the gift tax annual exclusion and paid gift tax on the transferred property. When Don died last year, the property had appreciated in value to $100,000. What amount is included in Don's gross estate?

$0 Neither the gift nor the gift tax is included because the gift was made more than three years before death.

Walter has an estate valued at $20 million. He is married and has two adult children. In 2020, he and his CFP® professional decide to implement an estate plan using a bypass trust (B trust) and a marital deduction trust (C trust). Which of the following amounts will Walter leave to the bypass trust (B trust) in implementing his plan?

$11,580,000 To implement his bypass planning, Walter will leave an amount equal to the estate tax lifetime exemption ($11,580,000 in 2020) to the B trust and leave the remainder of his estate to the C trust.

Bill Donnelly's estate paid $8,175 in fees to appraisers and $2,380 in medical bills from his last illnesses that were not covered by his medical insurance. Bill's spouse, who was the personal representative of his estate, elected not to take the $5,000 fee to which she was entitled by statute. Bill's estate did pay his spouse the $705,000 to which she was entitled by virtue of her demand to receive an elective share under the appropriate state statute. Which of the following items may be deducted from Bill's gross estate to calculate his taxable estate?

$8,175 in appraisal fees $5,000 personal representative fee $705,000 elective share Appraisal fees are a deductible administrative expense if reasonable in amount. The personal representative's fee can be deducted only if actually taken. The medical bills may be deducted the same as any other valid debt since they were not reimbursed by insurance. Although passed by state statute to the spouse rather than by Bill's express direction, the elective share qualifies for the marital deduction and thus may be deducted from the gross estate to calculate the taxable estate. (LO 5-3)

Which of the following statement(s) regarding a Section 2503(c) trust is CORRECT?

A Section 2503(c) trust requires that income and principal be distributed when the minor reaches age 21. A Section 2503(c) trust does not require that the trustee distribute income annually.

Which one of the following statements concerning will substitutes is CORRECT?

A form of property ownership that has a right of survivorship feature is a form of will substitute. Property forms that have a right of survivorship feature are joint tenancy with right of survivorship and tenancy by the entirety. A decedent's interest in property held in one of these forms will pass outside of probate to the surviving tenant or tenants. Although a form of will substitute must be recognized by the state in which it is operative to be valid, the execution formalities of a will are not required. A will substitute does not have to be in the owner's handwriting. Insurance does not have a right of survivorship feature.

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 life insurance policy owned by the decedent with his wife as the insured

Gil and Tina are newlyweds who live in a community property state. Assuming no titling changes were made, which of the following assets would be separate property?

A parcel of land owned by Gil prior to marriage An antique desk Tina inherits from her aunt during the marriage A money market account gifted to Gil before marriage The assets in statements I, II, and III are all separate property.

"I give all the rest, residue, and remainder of my estate to..." is an example of what type of clause?

A residuary clause

Which of the following statements regarding the income tax filing requirements for trusts is CORRECT?

A trust that is taxable as a separate taxable entity must report its income on IRS Form 1041. IRS Form 1041 is due on the 15th day of the 4th month after the trust's taxable year ends. A domestic trust must file a Form 1041 if it has any taxable income for the year.

Which one of the following is a correct statement regarding the advantages and disadvantages of appointing an individual or institutional fiduciary?

An institutional fiduciary is likely to have fewer conflicts of interest with the beneficiaries than is an individual fiduciary. The answer is an institutional fiduciary is likely to have fewer conflicts of interest with the beneficiaries than is an individual fiduciary. If an individual fiduciary is also one of the beneficiaries under the trust or will, the fiduciary must do what is best for all beneficiaries, not just what is best for the fiduciary. Conflicts of interest are much less of a problem for institutional fiduciaries. For the same reason, institutional fiduciaries are much less likely to damage family relationships.

Chad Wilson recently died a resident of Ohio. When Chad died, he owned several bank accounts in his own name and a vacation house in West Virginia, also in his own name alone. His will leaves all of his assets to his son. The son's financial planner has recommended that the executor open probate proceedings in Ohio and West Virginia. Which of the following statements regarding the implementation of these probate proceedings is CORRECT?

Chad's real estate can only be probated in the state in which it is located. Chad's bank accounts can all be probated in a single state.

In which type of charitable transfer does the remainder interest pass to a noncharitable beneficiary?

Charitable lead trust (CLT) With a charitable lead trust, income payments go to a charity and the remainder interest either reverts to the donor or passes to noncharitable beneficiaries. With CRATs, CRUTs, and pooled income funds, the remainder interest passes to a charity.

Gifts of a remainder interest to charity may be deductible if the noncharitable beneficiary receives an income interest in which of the following ways?

Fixed annuity trust Unitrust Pooled income fund Statements I, II, and III are correct. Gifts of a remainder interest to charity may be deductible if the noncharitable beneficiary receives an income interest in any of these three ways.

Which of the following statements regarding the gross estate for estate tax purposes is CORRECT?

Gift tax paid on completed lifetime transfers made within three years of death is included in the gross estate. Any gift tax paid on transfers made within three years of death is included in the gross estate under the gross-up rule. Transferred property will be included in the transferor's estate if, at the time of death, the decedent retained the right to change the transferee's enjoyment of the property.

Which of the following is NOT a requirement of a typical will? It must be:

Handwritten. For most wills to be valid, they must be signed by the testator and dated. Many states require the signing of the wills to be witnessed by two or three competent individuals.

Heinrich and Sharon are married. Sharon is a U.S. citizen, but Heinrich is a citizen of Germany. Sharon's will leaves her entire estate, valued at $15 million, to Heinrich. Sharon dies unexpectedly in an automobile accident this year. In which of the following situations can Sharon's estate claim the estate tax marital deduction for the property passing to Heinrich under Sharon's will, assuming Heinrich is a U.S. resident on the day Sharon dies?

Heinrich remains a U.S resident and becomes a U.S citizen before the federal estate tax return is filed. The property passes to Heinrich under a qualified domestic trust (QDOT).

In which of the following types of coownership does a deceased owner's share pass automatically to the surviving owner(s) at death?

II only Tenancy by the entirety is a type of joint tenancy with right of survivorship (JTWROS) that can occur only between spouses. The surviving spouse receives the deceased spouse's interest automatically by right of survivorship. Tenancy in common and community property do not pass by survivorship.

Which of the following assets must be listed at their date-of-death value on the federal estate tax return even if the estate elects the alternate valuation date (AVD)?

Installment notes Wasting assets, such as installment notes, patents, and joint and survivor annuities, must be listed at their date-of-death value even if the estate elects the alternate valuation date.

Maria, the executor, is also the sole residuary beneficiary of Johnny's estate. Under which of the following circumstances should Maria waive the executor's fee?

Maria's income tax liability on the fee is larger than the estate tax savings from deducting the fee on the estate tax return. The fee paid to an executor is taxable income, while a bequest is not. It is desirable for Maria to waive the fees when her income tax on the fee is greater than the estate tax savings from deducting the fee on the estate tax return.

Which if the following is a nonfinancial goal?

Maximizing flexibility

Which of the following statements regarding probate is CORRECT?

Neither I nor II Incorrect Real estate owned by a decedent at death is probated according to the laws of the decedent's domicile. Personal assets owned by a decedent at death are probated according to the law of the state in which they are located, which is known as their situs. Neither I nor II are correct. Real estate is probated according to the law of its situs (where the property is located), and personal assets are probated according to the law of the decedent's domicile.

Which of the following decedent's estates is eligible to elect the alternate valuation date (AVD)? Tim, who dies in 2020, and whose estate tax base is $4.75 million Kathleen, who dies in 2020, and whose estate tax base is $65 million; all her property is held as JTWROS with her surviving spouse

Neither I nor II Neither estate can elect the alternate valuation date because the alternate valuation date is not available when there is no estate tax due. Tim's estate tax base is below the $11,580,000 lifetime exemption amount for 2020 and Kathleen's entire estate qualifies for the marital deduction.

Which of the following statements regarding probate is CORRECT?

Probate is necessary when a decedent dies testate. When a decedent dies testate (with a valid will), probate is necessary to prove the validity of the will and transfer the decedent's assets according to its provisions. Property held as tenancy by the entirety passes by operation of law (there are survivorship rights) and is not subject to probate.

In which of the following situations is the estate marital deduction available for a bequest to a surviving spouse who is not a U.S. citizen?

Property passes to the spouse through a qualified domestic trust (QDOT). The surviving spouse was a U.S. resident at the decedent's death, has been a resident alien at all times since the decedent's death, and becomes a U.S. citizen before the estate tax return is filed.

Which of the following is not a mistake, pitfall, or weakness?

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.

Which of the following will NOT pass according to the provisions in the decedent's will?

Real estate owned as joint tenancy with right of survivorship (JTWROS) with a spouse Death benefits from a qualified pension plan with a designated beneficiary Life insurance benefits payable to a named beneficiary Life insurance and death benefits from a qualified pension plan are payable to the named beneficiaries. Jointly held property will pass by operation of the law. Of the types of property listed here, only property held as tenants in common passes under the decedent's will.

With respect to the generation-skipping transfer tax (GSTT), which one of the following is an election that allows the donor or decedent's estate to be deemed the transferor of property that qualifies as an indirect skip?

Reverse QTIP election A reverse QTIP election is used to pretend that the regular QTIP election was not made, thus allowing the donor or decedent's estate to be deemed the transferor of the property with respect to the GSTT.

Grace owns several apartment buildings. She wants to create an arrangement that will allow her son, Sam, to manage her property if she ever becomes unable to do so herself. Grace does not want the arrangement to take effect unless she becomes incapacitated. Which of the following arrangements can be designed to meet Grace's needs?

Springing durable power of attorney for property Revocable standby trust Both of these arrangements can be designed to meet Grace's needs because they both can be set up to become effective only if she becomes incapacitated.

Two friends are planning to purchase a fishing lodge together. One friend will contribute 75% of the purchase price, and the other will contribute the rest. They prefer that the purchase of the lodge not generate any gift tax consequences for either of them. In addition, each friend has a will leaving all of his assets to his surviving spouse. They both want their interest in the property to pass under their will when they die. Which of the following forms of ownership would meet all of the friends' objectives?

Tenancy in common JTWROS will not meet all of the friends' objectives. JTWROS is incorrect because a gift will result if one friend contributes more than 50% of the purchase price. In addition, JTWROS property will not pass under the friends' wills. Statement II (tenancy in common) is correct. Taking title as tenants in common will not result in a taxable gift and will allow the property to pass under the friends' wills.

Two sisters plan to purchase an office building together. One sister will contribute 80% of the purchase price, and the other will contribute 20%. The sisters want title to the property to reflect their respective ownership shares of 80% and 20%, and they want the ability to leave their interests to whomever they choose under their wills. Which of the following forms of property ownership will meet the sisters' objectives?

Tenancy in common Tenancy in common is the only form of ownership that will meet the sisters' needs, because it will allow them to own different ownership percentages. In addition, there is no right of survivorship so the sisters can leave their interests to whomever they choose under their will. With JTWROS, the ownership interests must all be equal and there is a right of survivorship when one owner dies. Tenancy by the entirety and community property are available only to spouses.

What form of property ownership gives a right to possess and enjoy property for a fixed period?

Term of years A term of years is a type of ownership interest that is granted for a fixed period. One example is a lease.

Which of the following statements regarding the community property system is CORRECT?

The community property system generally assumes property acquired during the marriage belongs equally to both spouses. The community property system is followed in only a handful of states. Moving between community property and common law states does not automatically change ownership.

Which one of the following statements regarding beneficiary deeds is CORRECT?

The creator of the beneficiary deed has total control over the asset until death. Explanation Because the beneficiary deed is revocable, the grantor retains total control of the trust assets. Beneficiary deeds are used only with real property. Beneficiary deeds act as will substitutes and avoid probate. LO 4.4.1

Which of the following statements regarding cross-purchase buy-sell agreements funded with life insurance is CORRECT?

The death benefits under the life insurance policies are generally received tax free. The increase in the basis of the surviving owner(s) in the purchased interest(s) will equal the purchase price paid. The number of policies required may become cumbersome if there are a large number of businessowners.

Which of the following statements regarding the income tax consequences of lifetime gifts to individuals is CORRECT?

The donee may realize a gain or loss if she subsequently disposes of the gifted property. The double basis rule applies if the fair market value of the gifted property is less than the donor's adjusted basis. Statement I is incorrect because a gift is not included in the donee's gross income. Statements II and III are correct.

In which of the following situations is a qualified domestic trust (QDOT) necessary for the donor to receive an unlimited gift tax marital deduction?

The donor is a resident U.S. citizen and the donee spouse is a resident alien. The donor is a nonresident U.S. citizen and the donee spouse is also a nonresident U.S. citizen.

Which of the following statements regarding the group term life insurance provided by an employer are CORRECT?

The employer can deduct the premiums paid as a necessary and reasonable business expense. The death benefit of the policy will be included in the employee's gross estate. Statement II is false because group life premiums for amounts over $50,000 are considered income to the employee. Statement IV is false because death benefits would be received income-tax-free.

Joe made a gift of property to his niece in the amount of $50,000 on the condition that his niece pay any gift tax due. Joe has previously made prior taxable gifts in the amount of the applicable exclusion amount. His niece, however, has never made a taxable gift. Which of the following are CORRECT statements about the tax implications of making this gift?

The net amount of the gift (value of the gift minus gift taxes paid) minus the maximum annual exclusion amount will be included in Joe's estate tax calculation as an adjusted taxable gift. Joe will have taxable income to the extent that the gift tax paid by his niece exceeds Joe's adjusted basis in the property. Joe's niece will have a basis in the property equal to Joe's basis in the property as adjusted for gift taxes paid by her. If Joe's niece accepts this gift, she will have to pay a gift tax out of pocket.

Which one of the following statements is true regarding the establishment of a revocable joint tenancy bank account by a parent with their child?

The parent will be deemed to have made a gift to the child only if the child withdraws funds from the account for their own use. Once the child withdraws funds for their own use, the gift from the parent becomes complete. No gift is made until the child withdraws funds from the bank account because the parent can still withdraw all funds. If the child abuses the withdrawal right, it could cause major difficulties. This is a real and present danger when another person is added to the bank account.

Which of the following statements regarding durable powers of attorney is(are) CORRECT?

The power survives the incapacity of the principal. The power may be springing. A principal must be 18 and competent at the time the durable power of attorney is created. Statement II is incorrect; a durable power of attorney does not survive the death of the principal. Statements I, III, and IV are correct.

Jill, Sherry, and Peggy are each one-third owners of a closely held business and they have executed a buy-sell agreement. The agreement requires that Jill, Sherry, and Peggy each purchase and pay the premiums on an insurance policy that insures each co-owner and names the policyowner as the beneficiary. Which of the following correctly states an advantage or disadvantage of this buy-sell agreement?

The premiums paid are not deductible by the policyowner. Premiums paid are not income or gifts and the death benefit is what is included in the owner's gross estate.

Which of the following statements regarding durable powers of attorney is CORRECT?

The principal must be at least age 18 and legally competent. The power may be general or limited in scope. The power may be immediately effective or springing. The power does not survive the principal's death.

Which one of the following is an advantage of the probate process?

The probate process is court supervised. The duration of a probate estate depends on the size and complexity of the estate and can continue for several years in certain situations. Typically, the personal representative will not make distributions to beneficiaries until the probate estate is finalized.

Which of the following are characteristics of a gift-leaseback?

The property involved in the transaction usually is a business-related asset. The property involved in the transaction usually is gifted to a donee in a lower marginal income tax bracket. Statement II is false because in a gift-leaseback the donor relinquishes security and control of the gifted property. Statement IV is false because lease payments are income to the donee, not additional gifts.

Upon his death, Thomas left $150,000 to his granddaughter, Grace. Grace was his only heir after the death of his son and daughter-in-law (Grace's father and mother) several years prior. What are the GSTT consequences of this transfer?

The transfer is a direct skip, since Grace is the grandchild of Thomas, but GSTT will not be imposed according to the deceased parent skip rule.

Which one of the following statements best describes state intestacy laws?

They apply if the decedent died without a legally valid will. State intestacy laws apply when the decedent has not executed a legally valid last will and testament. These laws vary from state to state and may not reflect the decedent's wishes. Property passing under these laws is subject to probate.

Troy is the beneficiary of a trust. The trust gives Troy the power to direct distributions of trust income or principal to anyone he chooses, including himself, his creditors, his estate, and his estate's creditors. Which of the following statements regarding Troy's power over the trust assets is CORRECT?

Troy's power is a general power of appointment. Statement I is correct. Statement II is incorrect. Because Troy has a general power of appointment over the trust assets, the assets will be included in his gross estate for estate tax purposes.

Which of the following statements regarding property held as joint tenants with right of survivorship (JTWROS) is CORRECT?

Under a joint tenancy, each owner has an undivided interest in the property. All joint tenants have the right to sever their interest in the property without the consent of the other joint tenant(s). Statements I and III are correct. Anyone (including nonspouses) may establish a joint tenancy. A will is not necessary to pass the tenant's interest because it passes by operation of law (survivorship).

Justin and Nicole, an unmarried couple with no children, each own assets in excess of the estate tax exemption amount. They both are interested in reducing the value of their estates. What estate transfer technique would achieve this goal?

gifts to a qualified charity pA gift to a qualified charity will reduce the value of their estates. The marital deduction applies only to married couples. A revocable trust is not effective in reducing estate tax liability. Testamentary trusts will not reduce their estate.

One disadvantage of all will substitutes is that

if the will substitute form is irrevocable, there is a possibility of incurring gift taxes. Will substitute assets are distributed according to their beneficiary designations and are not subject to the probate process and therefore transfer in less time than probate assets. They allow a great deal of flexibility when a revocable form is used.

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?

incomplete gifts, such as a revocable trust qualified personal residence trusts (QPRTs) charitable remainder annuity or unitrusts (CRATs and CRUTs) pooled income funds (PIFs) Chapter 14 does not apply to incomplete transfers, QPRTs, CRATs, CRUTs, and PIFs.

Charitable remainder unitrust (CRUT)

it provides an annual income payment based on the market value of the trust assets as revalued each year and will provide a potential hedge against inflation.

A surviving spouse's interest in property that might terminate or fail upon the lapse of time or upon the occurrence or nonoccurrence of some contingency is known as a

terminable interest.

A trust that is created by a decedent's will and made effective at death is a(n)

testamentary trust. A testamentary trust is created by a decedent's will and becomes effective at death. A revocable or irrevocable living trust is made effective during the grantor's lifetime. Inter vivos trust is another term for living trust.

All of the following statements regarding Medicaid planning are correct EXCEPT:

the personal residence is a countable asset for married clients Correct planning is best attempted with the advice of a specialist such as a qualified elder law attorney attempts to spend down assets to become Medicaid eligible are subject to a 60-month look-back period each state has its own asset and income level requirements for Medicaid eligibility If a client is married, the personal residence is not a countable asset. Real estate other than the couple's primary residence is countable.

The generation-skipping transfer tax (GSTT) lifetime exemption for 2020 is which of the following amounts?

$11,580,000 The GSTT lifetime exemption amount for 2020 is $11,580,000.

Several years ago, Hugh and his son, John, bought a piece of land for $1 million. John can prove that Hugh contributed 65% of the purchase price and John contributed the remainder. They owned the property as joint tenants with the right of survivorship (JTWROS). The property was valued at $2 million last week when Hugh died. What amount will be included in Hugh's gross estate?

65% of the fair market value of the property on the date of Hugh's death ($1.3 million) will be included in Hugh's gross estate because Hugh contributed 65% of the purchase price.

Which of the following charitable remainder trusts permit additional contributions of property after inception?

Charitable remainder unitrusts (CRUTs) Only CRUTs permit additional contributions of property subsequent to inception.

Which of the following is a common mistake people make regarding estate planning?

Failure to give proper advice regarding funeral arrangements Improper disposition of assets

James Killeen executed a last will and testament which created a trust. This trust becomes effective at James's death. Which one of the following describes his trust and will?

James has created a testamentary trust and a complex will. A testamentary trust is a trust that is created in a will; a complex will includes a testamentary trust. James has created both of these.

All of the following statements regarding the effect of divorce or remarriage on estate planning are correct except

transfers between spouses under property settlements incident to a divorce are subject to income tax and gift tax. Correct a person who wants to disinherit a second spouse may want to use transfer methods other than a will to do so. people who remarry after a divorce may find it desirable to enter into a marital property agreement. a QTIP trust may be helpful for a spouse who has children from a previous marriage.

Tyrone dies on February 11. His gross estate includes publicly traded stock that has a market value of $4 million on Tyrone's date of death. Tyrone's estate sells the stock for $3.7 million on April 2. The same stock has a market value of $3.5 million on August 11. If Tyrone's estate elects the alternate valuation date, the stock will be valued at what amount in Tyrone's gross estate?

$3.7 million If an estate elects the alternate valuation date and sells an asset before the six-month valuation date, the asset must be valued at its sale price regardless of whether that price is more or less than the AVD value.

The Bells have decided to establish a charitable trust. Their goal is to receive an annual income from the trust during their lives, with the trust assets passing to charity when they die. Because they both expect to live a long time, they want the income from the trust to provide them with a potential hedge against inflation. Which of the following charitable trusts will best meet the Bells' objectives?

Charitable remainder unitrust (CRUT)

Cisero gifted 2,000 shares of his stock in a closely held corporation to his daughter. These shares constitute half of the total number of shares he owned in the corporation prior to the transfer. The value of Cisero's stock in this corporation prior to the transfer was $400,000. Which one of the following statements is CORRECT regarding the value of the stock transferred to his daughter?

Cisero would be able to claim a lack of marketability discount when computing his gift tax for this transfer.

Rhonda owns the following assets: A solely owned closely held business that comprises one-half of the value of her estate A collection of antique figurines that forms a substantial part of her remaining estate A residence owned with her husband as tenants by the entirety Rhonda's will bequests $10,000 to her only niece and leaves the balance of her estate to her husband if he survives her. Rhonda is looking for methods to provide the liquidity needed for her estate. Which one of the following actions would have the potential to improve the liquidity of Rhonda's estate?

Eliminating the bequest in her will to her niece

Elizabeth executes a qualified disclaimer of property left to her under her uncle's will. Because of the disclaimer, the property passes to Elizabeth's cousin, Roger. Which of the following statements regarding the effects of this disclaimer is CORRECT?

Elizabeth is treated as never having received the property. Statement II is correct. Statement I is incorrect because if Elizabeth executed a qualified disclaimer, she is treated as never having received the property and no gift takes place.

Jane has a gross estate estimated at $18 million. Approximately 75% of her estate is attributable to the value of personal property and collectible items. Jane is married but has no children. Her husband does not have a large estate because he spends money freely and foolishly. Because she is much older than her husband, Jane would like for him to benefit from her wealth after her death without giving him control over the principal either while he is alive or at his death. Jane wants as little of her estate assets as possible to go toward payment of estate taxes on either of their estates. She currently has no will but has come to you for advice regarding provisions she should put in a will. Which provision, if placed in her will, would be best to increase the liquidity of her estate and accomplish her other goals?

Establish a charitable remainder trust naming her husband as the income beneficiary and a qualified charity as the remainder beneficiary

Which one of the following is a CORRECT statement regarding the advantages and disadvantages of using a conservatorship to manage property left to a child?

Establishing the conservatorship can be costly and time consuming. A conservator has a narrower range of powers than a trustee and the actions most definitely are supervised by a court. A guardian manages the day-to-day personal care of a minor while a conservator manages the finances.

Your client has an estate valued at $3 million. Two months ago, his wife died. He and his deceased wife did not have any children together, but she had two children from a prior marriage. His will, drafted in 2007, leaves everything to his wife. Nocontingent beneficiary is named in the will, and it does not contain a residuary clause. Included in the client's estate are real estate holdings in three other states. He wants to retain lifetime ownership of these properties because of the income they provide him. He would like the real estate holdings to pass to his wife's children in equal shares upon his death. He would like the remainder of his estate to go to his brother. Which of the following are serious estate planning pitfalls that can be avoided if your client amends his will to carry out his objectives?

Having the estate pass under the laws of intestacy Having part of the estate pass to unintended beneficiaries Statement II is false because amending a will has no effect on whether probate can be avoided. Wills are probated. Statement III is false because amending a will has no effect on the estate tax calculation.

Which one of the following statements regarding Henry, who recently married for the first time, is CORRECT?

In a community property state, Henry's earnings from his job subsequent to the date of his marriage will be considered community property. Income earned after marriage is considered community property.

Assuming that the special valuation rules under IRC Chapter 14 apply to each of the following situations, which one of the following statements is CORRECT?

In a transfer in trust, the retention of an annuity or unitrust interest by the grantor is deemed to be a nonqualified interest.

Julio is concerned about his estate's liquidity. His statement of financial position reveals the following: AssetsLiabilitiesCash/checking account$5,000Mortgage note$171,190Mutual fund$116,000Auto note$ 28,800IRA$255,430Residence$325,000Automobile$28,800Personal property$65,000Total assets$797,623Total liabilities$199.990Net worth$597,633Liabilities and net worth$797,623 Which of the following actions would most immediately create a source of liquidity for his estate?

Purchase a whole life insurance policy This action would create an asset that will be available to provide liquidity exactly when it is needed―at Julio's death.

Carol owns 80% of IGU Corporation (one-half of the value of the stock is attributable to real estate owned by IGU). Currently, the value of Carol's stock in IGU is 64% of her projected adjusted gross estate. Carol is examining the implications of transferring three-quarters of her IGU shares to her children from her current marriage through her will. Her will leaves specified property valued at 10% of her estate to her spouse and the remainder of her estate to her children from her former marriage. Which of the following postmortem elections would not be adversely affected due to the proposed transfer of the IGU shares from Carol to her children from her current marriage?

The alternate valuation date This is the correct answer, since the transfer of the business interest would not directly affect the ability to qualify for the alternate valuation date, which applies only to post-death situations where the value of a decedent's estate declines after death. It is doubtful that gifting assets today would have any direct effect on the growth or decline in the value of the assets in an estate immediately after Carol's death. This postmortem election allows the decedent's estate to value all assets as of six months after the decedent's death, if such valuation both reduces the value of the gross estate and the total estate taxes due.

Which of the following are the tax implications of a 10-year term charitable lead trust with the donor's children as the remainder beneficiaries?

The donor's charitable gift tax deduction is determined by the present value of the charity's right to receive trust assets at the end of the 10-year term. The donor is liable for gift tax based on the entire value of the gift to the children as discounted to the date of the gift.

Upon his death, Thomas left $150,000 to his granddaughter, Grace. Grace was his only heir after the death of his son and daughter-in-law (Grace's father and mother) several years prior. What are the GSTT consequences of this transfer?

The transfer is a direct skip, since Grace is the grandchild of Thomas, but GSTT will not be imposed according to the deceased parent skip rule. The transfer is a direct skip, since Grace is the grandchild of Thomas, but GSTT will not be imposed according to the deceased parent skip rule.

Jacob and Wendy have been married for nine years and live in a common law state. They have two children, ages 4 and 2. In the same year they were married, Wendy insisted that they should each have wills. Since they had no children at the time, the wills they executed gave everything to the survivor, or if there was no survivor, to that person's brothers and sisters. Recently, the state in which Jacob and Wendy live has passed a statute allowing wills to be self-proved if they include language specified in the statute. Which of the following correctly state why Jacob and Wendy's current wills do or do not need to be amended?

Their wills need to be amended to provide for their minor children's personal care if there is no survivor. Their wills need to be amended to provide for the financial care of their children if there is no survivor.

Val owns an asset with a basis of $150,000. He gives the asset to his father, who is terminally ill. His father dies 6 months later when the asset has a fair market value of $250,000. Val inherits the asset from his father and sells the asset for $310,000. What is Val's capital gain?

This is a reverse gift because Val's father died within one year of receiving the gifted property and passed it back to Val. As a result, Val retains his original basis in the property. Here, Val's original basis is $150,000, so his capital gain is $160,000 ($310,000−$150,000).

Opal dies leaving an adjusted gross estate of $20 million, which includes several thousand shares of closely held stock. For Opal's estate to qualify for a Section 303 stock redemption, the value of the closely held stock must exceed at least what amount?

To qualify for a stock redemption under Section 303, the value of the closely held stock must exceed 35% of the decedent's adjusted gross estate.

Which of the following features apply to both the federal gift tax model and the federal estate tax model?

Unlimited marital deduction for qualifying transfers Unlimited charitable deduction for qualifying transfers Use of an applicable credit amount Statement IV is incorrect because only the gift tax model allows for an annual exclusion.

If Grant decides to help fund Max's and Sam's college educations using Section 529 plans, what is the maximum amount Grant can contribute to the plans without making a taxable gift in 2020, assuming no gift splitting?

$150,000

Jon and Bob own a house as tenants in common. Jon owns 30% and Bob owns 70%. They purchased the house 10 years ago for $125,000 and today the house is valued at $200,000. If Jon dies today, what amount is included in Joe's gross estate?

60,000 Because the property is owned as tenants in common, the amount included in the gross estate is based on Jon's share of the fair market value on the date of death. Therefore, the value included in Jon's gross estate is $60,000 (30% of $200,000).

Jud and Harry are equal partners in a small but thriving business. They recently signed a cross-purchase buy-sell agreement. They wish to use life insurance to fund their respective obligations in this agreement but want to do so with the least possible cost. Which one of the following types of insurance products is the most appropriate for Jud and Harry's situation?

A "first-to-die" joint lives policy

CLAT Or CLUT

A CLAT or CLUT will not meet the Bells' needs because charitable lead trusts provide an income interest to a charity and a remainder interest to noncharitable beneficiaries

Charitable remainder annuity trust (CRAT)

A CRAT provides a fixed annual income payment

All of the following property transfer mechanisms would be appropriate for a client who wishes to avoid probate except

titling property as tenants in common with her brother. Would avoid Probate naming her niece as beneficiary of her life insurance policy. transferring assets to a trust for the benefit of her grandchildren. titling property as joint tenants with right of survivorship (JTWROS) with her daughter

For taxable distributions from a trust, the generation-skipping transfer tax is paid by

transferee For taxable distributions, the liability for the tax falls on the transferee. The tax reduces the amount of the transfer available to the transferee.

Grant will receive a fixed annuity payment from the trust each year during the 10-year trust term. If Grant survives the 10-year trust term, the FMV of the trust assets will not be included in his gross estate.

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Purchasing an individually owned cash value life insurance policy addresses which of the following weaknesses?

Lack of estate liquidity Life insurance generates liquidity upon death of the insured.

Sam wants to leave some real estate to his wife, Inez, outside of probate when he dies. He would also like her to receive some interest in the real estate while he is alive. Sam does not want Inez to be able to transfer or encumber her interest in the real estate without his consent. Which one of the following is the most appropriate form of will substitute for Sam to use?

Place the property in tenancy by the entirety

Jack created an irrevocable trust in 2014 for the benefit of his son, Bill, and his granddaughter, Karen. This year, the trustee distributes $40,000 in trust income to Karen. For purposes of the generation-skipping transfer tax (GSTT) the $40,000 distribution to Karen is a

taxable distribution.

Which of the following statements regarding reverse QTIP elections is CORRECT?

A reverse QTIP election may be useful when a decedent passes property via a QTIP marital trust and the trust beneficiaries are grandchildren. A reverse QTIP election allows a decedent who passes property to his grandchildren via a QTIP marital trust to use the GSTT exemption.

Which of the following are factors that should be considered in selecting a trustee for a trust that will last for an extended period of time?

Appointing of co-trustees Appointing a contingent trustee Providing a method for the appointment of a successor trustee The age of the potential trustee

When she died, Roberta and her spouse, Patrick, owned a condo as joint tenants with right of survivorship (JTWROS). Their basis in the condo was $500,000, and the fair market value on the date of Roberta's death was $1,200,000. What is Patrick's basis in the home following Roberta's death?

Because Roberta and Patrick were spouses, Patrick receives a stepped-up basis of $600,000 in the 50% of the condo that is included in Roberta's gross estate. He retains his original basis of $250,000 in the 50% that is not included in Roberta's gross estate. Patrick's new basis is $850,000 ($250,000 + $600,000).

Of the following actions taken last year by Joan, which transfers must be included in calculating her total gifts for last year?

Writing a check to her mother for $3,600 to assist her in paying for recent surgery Placement of her brother's name jointly with her own on the deed to a commercial office building that she purchased Cancellation of an $25,000 debt owed to her by her best friend Incorrect Purchase of a certificate of deposit (CD) that is payable to her daughter on Joan's death Statement I is false because the gift has not been completed. The daughter only has a future interest in the CD.

Two sisters, Donna and Mary, own a home as joint tenants with right of survivorship (JTWROS). They purchased the home 10 years ago for $100,000. Donna contributed $40,000 and Mary contributed $60,000. Today, the home is valued at $180,000. If Donna died today, what amount would be included in her gross estate?

$72,000 For JTWROS property owned by non-spouses, the amount included in the gross estate is based on the decedent's percentage of contribution to the original cost of the property. Donna contributed 40% of the purchase price of the home, so 40% of its value is included in her gross estate ($180,000 × 40% = $72,000).

Greg died in 2020 and was survived by his wife and five children. At the time of his death, he owned the following property interests: Solely owned property valued at $16,000,000 Property owned in joint tenancy with right of survivorship (JTWROS) with his spouse, with his share valued at $1,000,000 Greg's will made no charitable bequests and provided that his entire estate go equally to his surviving children due to his wife having a large estate of her own. Other pertinent facts are: Greg made $1,000,000 in post-1976 taxable gifts. Greg's estate had $350,000 in allowable debts. Greg's estate had funeral and administrative expenses of $150,000. Greg's estate paid $60,000 in state death taxes. Which one of the following amounts most closely approximates Greg's net federal estate tax due? Use the Unified Federal Estate and Gift Tax Rates table.

1,944,000 Gross estate is $17,000,000. Subtract $560,000 in debts, expenses, and taxes to get $16,440,000. The marital deduction can be used for the JTWROS property, so subtract $1,000,000. Then you have to add $1,000,000 for adjusted taxable gifts leaving the tax base at $16,440,000. Tax on this number is $6,521,800 [($15,440,000 × 40%) + $345,800]. Subtracting the applicable credit amount of $4,577,800 from $6,521,800 equals $1,944,000.

Robin inherited 10 acres of land from her father, who died during the current year. A federal estate tax return was filed, and the land was valued at $25,000, its fair market value at the date of her father's death. Her father had purchased the land several years ago for $5,000. What is Robin's basis in the land?

25,000 The basis for inherited property is the fair market value at the date of death or the alternate valuation date if it is elected. The alternate valuation date was not elected, so Robin's basis in the land is $25,000.

Your client, a widow, has made the following lifetime gifts to her son in an effort to reduce the size of her gross estate: YearGiftTaxable Gift2012$323,000$310,0002016$254,000$240,0002020$465,000$450,000 If she used her applicable credit to offset gift tax liability on the gifts, what amount of applicable credit remains available to your client for gifts in 2020?

4,232,000 The total taxable gifts come to $1,000,000 and tax on the first $1,000,000 is $345,800. Subtract that from the 2020 applicable credit of $4,577,800 and the result is $4,232,000.

A qualified disclaimer must be received by the decedent's estate within how many months after the later of the date on which the date creating the interest was made or the day on which the person disclaiming the interest reaches age 21?

9 A qualified disclaimer must be received by the decedent's estate within nine months after the later of the date on which the date creating the interest was made or the day on which the person disclaiming the interest reaches age 21.

Bob, Frank, Hector, and Fermin are equal partners in a closely held business. Although the four partners work well together, their spouses and children do not. No partner is ready to quit the business and retire, but they are each worried about how the business would operate if this were to happen. Each partner is financially overextended and thus not able to pay a gift tax or capital gains tax, as they started the business from scratch and it has become very profitable. Which one of the following is the most appropriate business transfer technique for the partners to use considering these circumstances?

A cross-purchase buy-sell agreement among the partners

Which of the following are CORRECT statements about the filing requirements and/or the responsibility for payment as they relate to federal transfer taxes?

A donee can be held responsible for paying the gift tax on a transfer that she has received if the IRS cannot collect from the donor. The beneficiary is responsible for paying the generation-skipping transfer tax on a distribution from a trust and must file a tax form. Statement II is false as an estate tax return is always required. Statement IV is false because the exact opposite is true: A gift tax return, while not always required, is required when gift splitting is used.

Which of the following is a skip beneficiary for purposes of the generation-skipping transfer tax (GSTT)?

A related person who is at least two generations below that of the transferor. A trust in which the beneficiaries are skip persons and from which no non-skip person will benefit. An unrelated person who is younger than the transferor by 37½ years or more.

Which of the following statements regarding reversions is CORRECT?

A reversion is an example of a future interest. A reversion gives the owner (transferor) the right to have all or part of the transferred property returned after an intervening interest.

Mike and Jane, a married couple, bought a condominium 15 years ago for $200,000 (as joint tenants with right of survivorship). When Jane died, the condominium was valued at $500,000. Four years after Jane's death, Mike sold the condominium for $600,000. What is the amount of Mike's capital gain?

250,000 Mike receives a stepped-up basis in half of the condominium. He retains his original basis of $100,000 in the other half. His total basis at the time of the sale is $350,000, so his gain is $250,000.

Which of the following statements regarding the calculation of a trust's taxable income is CORRECT?

A deduction is available to a trust for distributions made to trust beneficiaries. A simple trust is entitled to a $300 annual exemption. Statements I and II are correct. Statement III is incorrect because a charitable deduction is available only to complex trusts and then only if the trust document authorizes charitable distributions.

Which of the following are reasons business succession planning is complex and challenging?

Determining the value of the business may be difficult. It may be difficult to find a buyer who has the resources necessary to purchase the business. Family issues may be involved if the business is closely-held or family owned. A new owner may have difficulty adapting to the idiosyncrasies of the owner's business.

Which of the following statements regarding the installment payment of estate taxes is CORRECT?

If an estate qualifies for the installment payment of estate taxes, interest must be paid during the five-year deferral period. Incorrect The installment payment of estate taxes is not available unless the closely held business interest is a corporation. Statement II is correct. Statement I is incorrect because installment payments are available to any closely held business (unincorporated or incorporated) as long as the qualifying conditions are met.

Which of the following statements regarding private foundations is CORRECT?

Private foundations are tax-exempt charitable organizations created by an individual or family to direct charitable contributions for a specific purpose.

Your client is the sole depositor of $30,000 in a bank account. He is considering naming his girlfriend as the other joint tenant on the account. You should inform him that one consequence of creating the joint tenancy with right of survivorship bank account would be that

all funds can be withdrawn by either the client or his girlfriend without gift tax consequences.

Your client died recently with a gross estate valued at $425,000. Her estate tax bracket is 34%. Her husband has a gross estate of $155,000. Her will (1) placed $350,000 in a trust that gave her husband and her mother life income interests payable annually, with the trust remainder going to her son from a previous marriage when both have died; and (2) left the residue to her daughter. Her husband was named executor. Most of her estate is in certificates of deposit and securities that recently have shown only minimal growth. During the last six months of her life, she had uninsured medical expenses of $30,000. She and her husband were in the 24% marginal income tax bracket at the time of her death. If her husband, as executor, came to you for advice, you should inform him that the most appropriate postmortem election for his wife's estate is

the claiming of medical expenses on her final income tax return.

All of the following are requirements for a charitable gift to be deductible for gift or estate tax purposes except

the subject of the gift can be property or the value of the donor's time or services. The subject of the gift must be property. The value of the donor's time or services does not qualify.

For taxable terminations of a trust, the generation-skipping transfer tax is paid by

the trust. For taxable terminations, the tax is paid by the trust. At the time of the termination, the skip person receives the proceeds reduced by the tax.

Which of the following statements about the QTIP election for federal estate tax purposes is CORRECT?

The executor makes the QTIP election on the federal estate tax return, Form 706. The executor may choose whether to make the QTIP election in total, to not make the election at all, or to make only a partial election. The executor makes the QTIP election on the federal estate tax return, Form 706. The executor may choose whether to make the QTIP election in total, to not make the election at all, or to make only a partial election.

Which one of the following is a CORRECT statement regarding a key person life insurance policy when used for liquidity planning purposes?

The insured is not the owner, nor is the estate of the insured the beneficiary of the policy. With a key person life insurance policy, the insured is not the owner, nor is the estate of the insured the beneficiary of the policy. The employer is usually the owner and beneficiary so that there is cash available upon the death of the key employee for the business to use in the transition process from the death of the key person until a replacement can be found, hired, trained, and become productive.

A person who wishes to provide for a loved one while removing an asset from his gross estate and avoiding probate would most likely utilize

an irrevocable trust. If a person wishes to remove an asset from his gross estate and avoid probate, neither a will nor a revocable trust would be appropriate. JTWROS ownership avoids probate but does not remove the asset from the gross estate. To achieve all of the listed goals, the person would have to establish an irrevocable trust.

If Marie dies today, which of the following statements is(are) CORRECT?

Marie has died intestate. The ABC stock will pass through probate. State intestacy law will determine who receives the ABC stock after Marie's death.

Which of the following statements regarding valuation discounts is CORRECT?

A lack of marketability discount typically ranges from 15% to 35% of the interest's proper fair market value (FMV). A key person discount may be applied if the stock of a closely held business is expected to decline in value if the key person for the business dies. Incorrect The fractional interest discount applies to the value of large blocks of publicly traded stock.

Which of the following assets is typically a good choice for lifetime gifting?

A life insurance policy on the life of a donor who is in relatively good health A life insurance policy on a donor who is in relatively good health is a good choice for a lifetime gift. It has a low gift tax value and a high potential estate tax value (i.e., the face value of the policy). Instead of gifting the loss property, it would be better for the donor to sell the property at a loss; use the realized loss to offset capital gains taxes; and then gift the cash. Thus, gifting a loss property will not be the best choice because another alternative in a similar question on the CFP exam will be more efficient.

Which of the following statements describing either a durable power of attorney for health care (DPOAHC) or a living will is(are) CORRECT?

A living will covers only a narrow range of medical situations. The form required for a living will depends on state law provisions. A DPOAHC involves the naming of a surrogate to make medical decisions on behalf of the patient. Statement II is incorrect. Unlike a power of attorney, a living will does not appoint a surrogate decision maker.

Which of the following statements regarding the relationship between a CFP certificant and a client are CORRECT?

All CFP certificants must disclose to clients the compensation that any party to the agreement could receive under the agreement. All CFP certificants owe a client the duty of care of a fiduciary when providing financial planning to a client. A CFP certificant must disclose terms under which the agreement permits the certificant to offer proprietary products. Options I and III are required by Rule 1.2. Option II is mandated by Rule 1.4 of the Rules of Conduct. Political affiliation is not required.

Which of the following statements regarding the generation-skipping transfer tax (GSTT) is CORRECT?

An annual exclusion amount is allowed for lifetime direct skips. Gift-splitting is allowed if both spouses elect it.

Which of the following statements regarding the role of executors in estate administration is(are) CORRECT?

An executor is considered to be a fiduciary. An executor should balance the needs of all beneficiaries.

An inter vivos trust is a trust that

An inter vivos trust is a trust that is made effective during the grantor's lifetime.

Carmen is considering estate-planning options and wants to gift assets to her loved ones. All of the following are advantages to Carmen when gifting her assets except

Carmen can take advantage of the annual exclusion for gifts of future interests. Correct Statements B)the future appreciation on Carmen's transferred assets will be removed from her gross estate. C)the gifted assets will be removed from Carmen's gross estate. D)gift tax paid is excluded from Carmen's gross estate, except for those taxes paid on gifts made within three years before her death. The gift tax annual exclusion only applies to gifts of a present (and not future) interest.

Bertha, a widow, lives in a state where the cost of probate is based on a percentage of the value of the probate estate. Therefore, she would like to reduce the value of her probate estate. She is retired and needs to retain all the income from her assets. She wants all of her estate to go to her daughter, Bobbie, and son, Ben, in equal shares, while minimizing the legal and administrative costs. She currently has the following property: A personal residence Rental real estate U.S. government savings bonds A stock portfolio Which one of the following will substitutes would not be appropriate for Bertha?

Changing the title of the rental real estate so that Bertha, Bobbie, and Ben are joint tenants This is inappropriate because Bertha needs to retain the income from the rental real estate. Placing the real estate in joint tenancy would avoid probate, but Bertha would be legally entitled to only one-third of the income. The children would be subject to possible gift tax if they allowed Bertha to take their shares of the income. A better solution would be to either transfer the real estate to the living revocable trust or to retain a life estate in it, with the remainder to the children.

Which of the following is a fiduciary relationship concerned with the property management of a ward?

Conservatorship This describes a conservatorship. A guardianship is a fiduciary relationship created to enable 1 person (the guardian) to manage the personal care and well-being of another (the ward). A trust and power of attorney are both private documents that do not involve court supervision or involvement.

Which of the following statements regarding the deemed allocation rules is CORRECT?

Deemed allocation rules for generation skipping transfers occurring at death apply automatically. Deemed allocations at death are made first to direct skips, with the balance being made on a pro rata basis based on the inclusion ratio. When a deemed allocation is made on a timely filed gift or estate tax return, the allocation will be effective as of the date of the transfer. When a deemed allocation is made on a timely filed gift or estate tax return, the allocation will establish the inclusion ratio of the transfer.

Elaine has consulted a CFP® professional for help in preparing her estate plan. She has a relatively small estate, and her main objective is to avoid probate. Which of the following actions will help Elaine achieve her objective?

Designate her daughter as beneficiary of her IRA Open a payable on death (POD) bank account with her son Transfer assets to a revocable living trust Statement IV is incorrect; property held as a tenancy in common does not avoid probate because there is no survivorship feature as there is with JTWROS. All of the other statements are correct.

Which one of the following statements is not correct regarding domestic partnerships?

Domestic partners have priority of visitation in hospitals pursuant to statute. Correct Statements Domestic partners may execute a domestic partnership agreement to have legal standing for division of property in the event the relationship terminates. Domestic partners might not be permitted to make funeral arrangements for a deceased domestic partner without written instruction. Domestic partners may create testamentary trusts to ensure they do not lose their property in the event the relationship ends before death.

Which of the following people is(are) legally incapacitated?

Donna, age 14 Alice, age 70, who suffers from severe mental dementia and does not recognize her husband of 40 years The answer is I and II. Examples of people who are legally incapacitated include minors and people with severe mental dementia. Statement III is incorrect. Carol is disabled but there is no indication she is legally incapacitated.

Benjamin, who is unmarried, lives in Illinois and owns his home. He also owns a second home in Florida and has several liquid assets. Benjamin's goal is to leave all of his assets, including the two residences, to his brother, Daniel, while incurring the least amount of transfer tax and administration fees as possible. Benjamin is currently the sole owner of each property. As his planner, you recommend that he consider a revocable trust and title the Florida property in the name of the trust to avoid the administrative costs of an ancillary probate in Florida. Since Benjamin's goal is to reduce taxes, placing the property in joint tenancy with his brother would not be advisable since a gift tax liability would be incurred. Benjamin can also place his Illinois residence and his other assets in trust to avoid probate and reduce the estate administration fees and costs. This is an example of avoiding which of the following mistakes, pitfalls, or weaknesses?

Failure to minimize taxes and costs

Which of the following trusts avoid probate?

Funded revocable Funded irrevocable Funded inter vivos All assets in trusts that are in existence at the time of the grantor's death avoid probate because the legal titleholder of the trust assets is the trustee, not the deceased grantor. A testamentary trust is created by the grantor's will, so the assets pass through probate before going into the trust.

Which of the following is not a broad category personal of financial planning goals?

Funding the collegiate education of a grandchild. Personal financial planning goals are typically thought of as tax versus non tax goals and financial and non financial goals. Funding collegiate education is not a broad category of a personal financial planning goal. It is, however, a type of financial non tax financial goal.

Dawn Fairchild's will leaves half of her real estate assets to her spouse, Marc, and the remaining half in equal shares to her children, James and Maria. The will has no residuary clause and their combined estates do not exceed the applicable exclusion amount. The relationship between Dawn and James has become so strained that she now wants to leave his share of the estate to Maria. Marc recently died, and Dawn is in the process of amending her will. Which one of the following estate planning pitfalls can be avoided by amending Dawn's will?

Having part of the estate pass under the laws of intestacy Without a residuary clause, the portion going to Marc under Dawn's present will pass by intestacy. Also, Dawn's personal property would pass by intestacy.

Which one of the following properly describes partial intestacy?

John Cooper dies after executing a will, but the will does not effectively dispose of all of his probate assets. Partial intestacy in this case would occur if John dies after executing a will, but the will does not effectively dispose of all of his probate assets.

John is a Ph.D. and the founder of Merryweather Industries Inc., a closely held company that specializes in storm chasing and weather reports. He owns 85% of the stock. His spouse, who is a registered nurse, and his son, who has just entered the business, hold the balance of the stock. Which of the following discounts might apply to transactions involving the Merryweather stock?

Key person discount if John dies Lack of marketability discount if John gifts stock to his son Minority discount if John gifts a small amount of stock to his son Statement II is incorrect. A blockage discount applies only to large blocks of publicly traded stock, so it would not apply to the Merryweather stock. Statements I, III, and IV are correct. A gift to John's son could include the minority interest discount and the lack of marketability discount. The loss of John, the Ph.D., would present profitability problems for the business because he is key person.

Lauren and Roger are spouses. Lauren has assets with a market value of $50 million titled in her name alone. Roger has assets valued at less than $1 million. Lauren drafts a will making an outright bequest of all of her assets to Roger. Which of the following are potential disadvantages of Lauren's approach?

Lauren will not use her estate tax applicable exclusion amount when she dies. Roger may become legally incapacitated and not be able to manage the property. When Roger dies, the property must be included in Roger's gross estate to the extent Roger has not spent it or consumed it during his lifetime. The DSUE amount may not be available in some circumstances.

Which of the following statements regarding the use of revocable living and testamentary trust in marital deduction planning is CORRECT?

Lifetime marital deduction planning is often implemented by establishing and funding a revocable living trust. Using a revocable living trust in marital deduction planning permits the grantor to implement transfer tax savings and avoid probate. Statements I and II are correct. Statement III is incorrect because the use of marital and nonmarital testamentary trusts in marital deduction planning can provide transfer tax savings but cannot accomplish probate avoidance.

Luis consults a CFP® professional for help in formulating an estate plan. Luis's primary objective is to avoid probate when he dies. Among his assets are a traditional IRA and the house he lives in. In helping Luis meet the specific goal of avoiding probate, the CFP® professional would consider which of the following items of information?

Luis's statement of financial position Beneficiary designation forms for the IRA The deed to Luis's house Statements I, II, and IV are correct. The statement of financial position will help determine what assets Luis owns and whether they are titled in a way that avoids probate (e.g., as joint tenants with right of survivorship). The same applies to the deed to Luis's house. The IRA beneficiary designation forms will determine whether the IRA will avoid probate because it is payable to a named beneficiary by contract. Statement III is incorrect. Whether Luis has children has no bearing on whether his estate will avoid probate. (Domain 3)

Which one of the following statements correctly explains an estate-planning issue faced by a same-sex cohabitating couple?

Most state and federal laws do not grant one member of the couple authority to make medical decisions for the other member absent a durable power of attorney for health care. The rights of each party to the increase in value of assets brought to the relationship or to receive financial support are not the same as those for a married heterosexual couple. However, will substitutes work equally well for such couples.

Which of the following statements regarding the attributes of property owned solely by one person is CORRECT?

Neither I nor II The maximum ownership interest a person may have is known as fee simple or absolute ownership. A lease is an example of a term for years.

Which of the following is generally required for executing a valid last will and testament?

Not be under the undue influence of another Have sufficient legal capacity to understand the consequences of creating a will The will is attested to and witnessed by the required number of nonbeneficiary individuals Statements II, III, and IV are correct. Statement I is incorrect because generally a person must only be 18 or older to execute a valid will.

Your client has made the following lifetime cash gifts: Total Gifts to DaughterTotal Gifts to Son2018$35,000$75,0002020$90,000$55,000 How much of your client's applicable credit is gone on December 31, 2020?

Remember the cumulative nature of the gift tax and the annual exclusion amount for present value gifts. The total gifts to the daughter and the son in 2018 are reduced by the $15,000 annual exclusion to arrive at a net taxable gift total of $80,000 ($35,000 − $15,000 + $75,000 − $15,000). The same applies to the 2020 gifts resulting in a net gift totaling $$115,000 ($90,000 − $15,000 + $55,000 − $15,000). To calculate the tax you need to first figure the tax on the total of the gifts from both 2018 and 2020 ($80,000 + $115,000 = $195,000). Tax on $195,000 would be $38,800 + 32% of $45,000 (the amount over $150,000) which is $14,400. $14,400 + $38,800 = $53,200.

Carrie is preparing her estate plan and wants to include instructions for her funeral. What method should she use?

She should leave a letter of personal instruction (side letter). Carrie should leave a letter of personal instruction (side letter). It can be as simple as a handwritten note containing her instructions to her personal representative.

A grandfather makes a gift of $15 million to his grandson. Which of the following statements is correct, assuming the predeceased parent rule does not apply?

The $15 million gift is a direct skip for generation-skipping transfer tax (GSTT) purposes. The value of the gift for gift tax purposes is $15 million minus the annual gift tax exclusion plus the amount of any GSTT paid on the transfer. Statements I and III are correct. Statement II is incorrect; because this is a direct skip, the grandfather is liable for any GSTT due.

Which of the following statements is CORRECT regarding a CFP® certificant's role in defining a client's financial goals, needs, and priorities?

The role of the planner is to facilitate the goal-setting process. The role of the planner is to assist clients in recognizing the implications of unrealistic goals and objectives. The role of the planner is to make sure a client's goals and objectives are consistent with the client's values and attitudes. The role of the planner in this process will involve exploring a client's expectations and time horizons.

Which of the following are features of the QTIP trust?

The surviving spouse receives the income from the trust for life. Property in the QTIP trust must be included in the surviving spouse's gross estate to the extent it is not consumed during the surviving spouse's lifetime.

Which of the following statements regarding marital property agreements (prenuptial agreements) is(are) CORRECT?

They are often implemented between prospective spouses who have children from previous marriages. They require full disclosure of the spouses' current assets (and future assets to the extent known). They may involve the relinquishment of marital property rights in the event of divorce or death.

Using a family member or friend as a personal representative (PR) of an estate rather than an institutional PR is advantageous because the family member or friend is more likely to do which of the following?

Waive the PR's fee Be concerned about the needs of individual beneficiaries Statement III is false because a family member or friend may very well have a conflict of interest if they are also a beneficiary of the will. Statement IV is false because a family member or friend will have less experience than an institutional PR.

Which one of the following options correctly states the deadline by which a qualified disclaimer must be received by a decedent's estate?

Within 9 months after the later of when the interest was made or the day on which the person disclaiming the interest reaches age 21 A qualified disclaimer must be received by the decedent's estate within 9 months after the later of when the interest was made, or the day on which the person disclaiming the interest reaches age 21.

Your deceased client's will gives some of his probate property outright to his spouse, who survived him. The will places the balance of the probate estate into a QTIP trust. Your client's spouse is also the designated beneficiary on all assets that pass by will substitute. No assets passed by intestacy. Which of the following statements about your client's estate are CORRECT?

Your client will have a taxable estate of zero if the QTIP election is made for the assets in the QTIP trust. Incorrect All assets passing either outright or in trust to the surviving spouse will qualify for the marital deduction only if your client's executor makes an election. Your client's estate will not be able to use any of his applicable credit amount, unless his spouse disclaims some estate assets. Your client's spouse cannot disclaim the assets placed in the QTIP trust. I, III, and IV are false statements. Unless structured as a qualified terminable interest property (QTIP) trust, all bequests that qualify for the marital deduction must use it regardless of the preferences of the decedent's executor; therefore, the assets transferred outright by the will, and by will substitute, will qualify for the marital deduction without an election (I). The client's estate will be able to use the decedent's applicable credit amount to the extent that the QTIP election is not made for any portion of the assets placed in the QTIP trust (III) Assets in a QTIP trust can be disclaimed (IV).

A legally binding agreement between future spouses that may restrict future transfers of property by the spouses and specify their marital property rights in the event of death or divorce is

a marital property (prenuptial) agreement

A transfer where at least one nonskip party has a current interest in the transferred property after completion of the transfer is known as

an indirect skip. An indirect skip is any transfer where at least one nonskip party has a current interest in the transferred property after completion of the transfer.

residuary clause

disposes of property in the estate that is not otherwise distributed in the will. For example, "I give all the rest, residue, and remainder of my estate to...."

All of the following methods for implementing intrafamily transfers involve making a gift to a family member except

private annuity. A private annuity involves a sale to a family member in exchange for the buyer's unsecured promise to pay a lifetime annuity to the seller.

Mary and her sister Della purchased several acres of land in Montana several years ago. They titled the property as joint tenants with right of survivorship (JTWROS). At the time of purchase, Mary paid $120,000 and Della paid $60,000 toward the $180,000 purchase price. Della died when the fair market value of the land was $240,000. Assuming Mary can substantiate her contribution toward the purchase price, what amount is included in Della's gross estate?

$80,000 When property is owned as JTWROS between nonspouses, the gross estate inclusion is based on relative contributions (or the consideration furnished rule). Because Della paid one-third of the purchase price, she will include one-third of the date-of-death value in her gross estate. Gross estate inclusion = ($60,000 ÷ $180,000) × $240,000 = $80,000. If Mary had provided no substantiation of her contribution, the entire value of the property ($240,000) would be included in Della's gross estate because she died first.

Sam and Sue paid $100,000 for their home five years ago. Its fair market value was $150,000 when Sam died. What was Sue's basis in the home after Sam's death if the home was held as community property? (CFP® Certification Examination, released 01/99)

$150,000. Both halves of community property receive a stepped-up basis equal to the fair market value at the death of the first spouse.

Ruby made the following payments this year. Which one would be a taxable gift?

$21,000 to her granddaughter so she could pay her college tuition The only taxable gift here is the gift to her granddaughter. Even though the payment is for tuition, it is not a qualified transfer because it was not made directly to the college. The gift paid to Lakeside Hospital is a nontaxable qualified transfer because it was paid directly to the hospital. The gift to her son is less than the annual exclusion, and the payment to the school for her grandson is a qualified transfer.

Tina gives investment real estate to her aunt, who is terminally ill. Tina's basis in the property is $100,000, and the property has a fair market value (FMV) of $500,000 at the time of the gift. Tina's aunt dies seven months after the date of the gift, when the FMV of the property is $600,000. Tina inherits the same property from her aunt under her aunt's will. What is Tina's basis in the property after she receives it under her aunt's will?

$400,000 This is a reverse gift, and the boomerang rule of Section 1014(e) applies because Tina's aunt died within one year of receiving the gift and transferred it back to Tina. Under the boomerang rule, Tina takes her own, unchanged carryover basis ($100,000) in the property.

Tom received a gift of bonds from his cousin. The bonds had a 10-year maturity and were selling at a premium because of their high 9% coupon rate. The cousin's basis was $42,000, and the fair market value on the date of the gift was $60,000. The cousin paid gift tax of $4,500. The cousin did not have the annual exclusion available for this gift. What is Tom's basis in the bonds?

$43,350 for gains and $43,350 for losses Because the property was appreciated property as of the date of the gift, a portion of the gift tax paid is allocated to the donee's basis in the property. Thus, Tom's basis is calculated as follows: $42,000 + [(18,000 ÷ 60,000) × 4,500] = $42,000 + $1,350 = $43,350. Gain basis and loss basis are the same when the FMV of the property exceeds the donor's adjusted basis at the time of the gift.

Jerry creates a charitable remainder annuity trust (CRAT) and funds it with property having a fair market value (FMV) of $5 million. For Jerry to be eligible for an income tax charitable deduction, the present value of the charity's remainder interest at the trust's inception must be at least

$500,000. In a charitable remainder annuity trust or unitrust, the present value of the charity's remainder interest at the inception of the trust must be at least 10% of the initial FMV of the transferred property. In Jerry's case, the present value of the charity's remainder interest must be at least $500,000 ($5 million × 10%).

William dies on March 3, 2020, and is survived by his wife, Margie, and their three-year-old son, Max. For which of the following tax years is Margie eligible to file an income tax return using married filing jointly filing status?

2019 2020 Margie is eligible for married filing jointly status for 2019 and 2020. She may be eligible to elect qualifying widow status for 2021 if she provides a home for their qualifying dependent, Max.

Michael and Marie, spouses, bought a three-bedroom town house 20 years ago for $175,000 and titled it as joint tenants with right of survivorship (JTWROS). Michael furnished all of the funds used to purchase the property. When Marie died last month, the property was valued at $500,000. What amount will be included in Marie's gross estate?

250,000 One-half of the house's value will be included in Marie's gross estate. When spouses are joint tenants, 50% of the value of the property is included in the decedent's gross estate, regardless of the spouses' contributions toward the acquisition.

Which one of the following assets is subject to probate?

A condo held as tenancy in common with a sibling

Which of the following statements regarding a funded irrevocable life insurance trust (ILIT) is CORRECT?

A funded ILIT holds title to a life insurance policy on the grantor's life and also income-producing assets that may be used to pay the policy premiums. A funded ILIT is a grantor trust. Both statements are correct. A funded ILIT is a grantor trust because it uses trust income to pay the premiums on life insurance covering the grantor's life.

Which of the following gifts qualify for a gift tax annual exclusion?

A gift in which the donee receives the immediate and unrestricted right to use, possess, or enjoy the gift 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.

Abby is a business owner and she wants to provide her key employee with an additional benefit in light of her stellar work performance. Abby is interested in securing a life insurance policy for her key employee. Which type of policy should Abby give to her employee?

A split dollar life insurance policy A split dollar life insurance policy can be used to retain the services of key employees by providing them with more insurance protection than the employee could otherwise afford. A key person life insurance policy provides no direct benefits to the employee. This type of policy is often used to provide the business with money to continue operation after the key employee dies. A first-to-die life insurance policy provides a death benefit at the first death, and is most commonly used among spouses or two owners in a cross-purchase buy-sell. A group term life policy would have to be offered to all employees diminishing its value solely to her key employee. A split dollar plan is the best choice.

Ancillary probate

Ancillary probate is necessary when a decedent owned real estate in a state other than the decedent's state of residence (domicile). Three ways to avoid ancillary probate are (1) to give the property away prior to death, (2) to place the property into a trust, usually a revocable living trust (RLI), or (3) sell the property prior to death.

Which of the following is a tax-related financial goal?

Deferring the recognition of gain Non tax-related Maximizing benefits for a surviving spouse Minimizing nontax transfer costs Maintaining a satisfactory standard of living

Your client has determined that she needs to do something before she dies to ensure that her estate will have sufficient liquidity at her death. Which of the following actions, if taken by your client, could potentially give her estate increased liquidity?

Establish and fund an irrevocable life insurance trust (ILIT) with all life insurance policies on her life in which she has any incidents of ownership Purchase another life insurance policy on her own life naming her estate as beneficiary Enter into a cross-purchase buy-sell agreement with her business partners

Which of the following statements regarding the valuation of property for the purpose of applying the generation-skipping transfer tax (GSTT) are CORRECT?

For direct skips during life, the valuation date is the date of completion of the gift. For direct skips at death, the valuation date is the same as the valuation date used for estate tax purposes. If special use valuation is used for the estate tax calculation, the same value is used for a direct skip of such property in computing the GSTT. For indirect skips, the valuation date is the value of the property on the date that a taxable distribution or termination occurs.

Which one of the following is a true statement about the generation-skipping transfer tax (GSTT)?

GSTT on indirect skips cannot be immediately determined upon completion of the transfer. GSTT on indirect skips cannot be immediately determined upon completion of the transfer because it is not immediately known how much of the transfer will go to the skip party.

Ned, age 65, made the following transfers this year. Which of the transfers would be subject to generation skipping transfer tax (GSTT)?

Gift of $25,000 to a coworker's son who is 25 years old The gift to the coworker's son is subject to the GSTT because the coworker's son is an unrelated person who is younger than Ned by 37½ years or more. A gift to a nine-year-old niece is not subject to GSTT because she is only one generation apart and a related person.

Which of the following wills is totally handwritten by the testator?

Holographic Most states allow a will that is 100% handwritten by the testator to be accepted for probate. Of course, a formal will, drawn up by an attorney is preferable. The testator likely will not have all wishes fulfilled because he probably is not sufficiently knowledgeable to write such an important and often complex document.

Which of the following statements concerning income earned by spouses in a community property state is CORRECT?

Income earned by each spouse after marriage is considered community property. The answer is income earned by each spouse after marriage is considered community property. Even though earned by only one spouse, such earnings are considered community property.

Antwan consults a CFP® professional for advice concerning a fishing cabin he plans to purchase with his brother. Antwan and his brother want to share ownership of the cabin, but they are unsure whether they should take title as tenants in common or as JTWROS. Which of the following information should the CFP® professional obtain before making a recommendation to Antwan?

How much each brother plans to contribute toward the purchase price of the cabin. Whether Antwan wants to pass his interest in the cabin under his will when he dies. Both statements are correct. Statement I is correct because if the brothers decide to take title as joint tenants with right of survivorship (JTWROS), a taxable gift may result if one brother contributes more toward the purchase price than the other. Statement II is also correct; if Antwan wants to pass his interest in the cabin under his will, taking title as JTWROS will not be an option because title will pass automatically to the surviving brother by right of survivorship. (Domain 2)

Steve and Susan live together but are not married. Which of the following statements regarding the estate and gift tax ramifications of this living arrangement is(are) CORRECT?

If Steve gifts stock to Susan, the gift tax marital deduction will be unavailable. If Susan dies without a will, Steve might not receive any of Susan's property. Statement I is correct because the marital deduction applies only to married couples, not cohabitants. Statement II is incorrect because the annual exclusion will be available on gifts from Steve to Susan as long as they are present-interest gifts. Statement III is correct because unmarried cohabitants generally have no intestacy rights.

If Arthur and Tasha make gifts to all three of their children today 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 2020) 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.

Which of the following statements regarding installment sales is CORRECT?

Installment sales allow the seller to remove an appreciating asset from the seller's gross estate. Installment sales have both an estate tax advantage and an estate tax disadvantage. The estate tax disadvantage associated with installment sales can be avoided by using a self- canceling installment note (SCIN) or private annuity. All of these statements are correct. One disadvantage of a regular installment sale is that the balance of the loan principal and the interest since the last payment are included in the deceased's gross estate. A SCIN or a single life private annuity overcomes this disadvantage. However, SCINs and private annuities have other rules that must be obeyed.

Rosa wants to create a trust and fund it immediately with cash and securities. She wants the trust to be able to make distributions of both income and principal (corpus). Which type of trust will meet Rosa's needs?

Inter vivos complex trust Rosa needs an inter vivos trust if she wants it to become effective during her lifetime. It must be a complex trust because it will distribute principal.

Billy owned a piece of undeveloped land (valued at $100,000) in San Jose, California, with his three brothers as tenants in common. If Billy dies, what value will be included in Billy's gross estate?

It cannot be determined from the information given. Tenants in common own an undivided interest in the property, but they may own unequal shares. These facts do not state what percentage of the property Billy owns.

Which of the following statements regarding probate is CORRECT?

Probate may be costly and create delays in the distribution of assets. Probate is open to public scrutiny. Probate protects creditors. Probate provides heirs and/or legatees with clear title to property.

Which of the following trusts would be most useful in providing an income for a dependent child who is receiving government benefits without jeopardizing his eligibility for government assistance?

Supplemental needs trust A supplemental or special needs trust is used for beneficiaries who are receiving governmental assistance. The purpose of the trust is to pay for the beneficiary's needs that are not covered by the assistance without affecting the beneficiary's eligibility for the assistance.

Which of the following statements regarding gift splitting is CORRECT?

The annual exclusion can be doubled to $30,000 (for 2020) even if one spouse makes the entire gift. Statement II is incorrect because gifts made from community property or from JTWROS property owned by spouses do not require a gift-splitting election.

Which of the following are valid considerations when attempting an intrafamily estate freeze transaction?

The application of the Chapter 14 rules How the business owner can maintain control of the business after the transaction How to shift appreciation in the value of the business to younger family members The identities of the persons to be given interests in the entity

Which one of the following statements regarding a general power of attorney is incorrect?

The authority of the attorney-in-fact will always survive the principal's incompetency. Correct Statements The authority of the attorney-in-fact can vest immediately, upon execution of the power of attorney. Actions taken by the attorney-in-fact pursuant to the terms of the instrument creating the power are legally binding on the principal. The authority of the attorney-in-fact can vest certain circumstances occur. The authority of the attorney-in-fact will survive the principal's incompetency only when the power of attorney is durable.

Which of the following statements regarding split dollar life insurance offered to an employee as a benefit is not correct?

The death benefit received by the employer is subject to income tax. Life insurance death benefits usually are not subject to income tax unless the transfer-for-value rule applies. This rule usually would not apply to a split dollar agreement. Split dollar life insurance usually is offered only to certain employees as an added benefit to induce them to remain with the company. An actual written agreement is made to specify the obligations of each party to pay premiums and the right of each party to policy proceeds or benefits among other matters.

David Hendricks, age 55, and Jessica Hendricks, age 53, have been married for 22 years. They live in a community property state and have a son, Milton, age 17. David separately owns $50,000 in assets. He also possesses community property with Jessica in the amount of $25,000. David also owns a $300,000 life insurance policy for which his estate is the beneficiary. Upon David's death, which of the assets will be subject to probate?

The death proceeds of David's life insurance policy David's separately owned assets David's half interest in the community property Individually owned assets of the decedent are subject to probate at death. David's half interest in the community property will also pass through the probate process. The life insurance proceeds are part of the probate estate because David's estate is the beneficiary.

Which of the following would cause the proceeds of life insurance on the decedent's life to be included in the decedent's gross estate?

The decedent possessed any incidents of ownership in the policy at the time of death. The proceeds are payable to the decedent's estate. The proceeds are payable to an ILIT and must be used to pay the estate tax on the decedent's estate. Statement IV is incorrect as far as the question goes. The proceeds will not be included in the decedent's gross estate if the decedent gifted the policy more than three years before the date of death. If more information had been given, the answer could change. Even if the policy was transferred more than three years before the date of death other factors could still end up placing the death proceeds into the descendant's gross estate. For example, the original beneficiary was the deceased's estate and this was not changed after the transfer. Another example would be that the primary beneficiary for the policy died before the decedent in question and the decedent's estate is the secondary beneficiary. It is always important to follow life insurance death benefits to their final end before deciding anything about them.

Omar died on September 8. His will left all of his possessions to his mother. At the date of death, his possessions were: Adj. BasisFMVPersonal residence$10,400,400$10,800,000 Common stock$200,000$500,000 Dividends on above stock (declared 9/30)$2,000$2,000 Medical insurance reimbursement (check received 8/31 but not cashed)$2,500$2,500Cash$42,000$42,000

The dividend is not included in the gross estate because it was declared after Omar's death. Therefore, $10,800,000 + $500,000 + $2,500 + $42,000 = $11,344,500.

Phil recently died owning a farm on the outskirts of town. The nearby land has been valued at over $100,000 per acre as developed commercial real estate. Farmland is valued far below that price. Which of the following conditions must be met for Phil's farmland to be valued under Section 2032A special use valuation?

The net value of the qualified real and personal property must equal at least 50% of the adjusted value of Phil's gross estate. The value of the real estate must be at least 25% of the adjusted value of the adjusted value of Phil's gross estate. The family cannot sell the farm to a nonqualified individual for 10 years without causing recapture problems. Statement I is incorrect because the property must have been owned by the decedent or a member of the decedent's family, and used as a farm or closely held business, for five of the last eight years. Note that Statement II refers to the farming operation as a business, and not the underlying real estate.

Which of the following are valid concerns when an applicant for long-term nursing home benefits under Medicaid transfers title to his or her personal residence to his or her community spouse?

The possibility the parties may divorce Whom the community spouse may leave the residence to when he or she dies The community spouse's creditors The terms of an existing mortgage on the residence

Stewart's gross estate is $17.4 million. His federal estate taxes payable are $2 million, his state estate taxes are $625,000 and his estate administration expenses are $1 million. Assuming his estate owns closely held stock and qualifies for a Section 303 stock redemption, what is the maximum dollar amount of stock that may be redeemed under Section 303?

Under Section 303, only an amount of stock equal to the total of the decedent's federal and state estate taxes plus administration expenses is eligible for the favorable tax treatment. In Stewart's case, the maximum amount of stock that may be redeemed under Section 303 is $3,625,000 ($2,000,000 + $625,000 + $1 million).

Which of the following factors indicate that an institutional fiduciary, rather than a family member, should be appointed?

When it is likely that the beneficiaries will contest the decedent's will or cause conflict When the assets in the estate are complex to manage Incorrect When individual attention to the beneficiaries and the family dynamic is necessary When familiarity with the extent and location of assets is necessary Statement III is false because an institutional fiduciary would not know the family situation better than a family member. Statement IV is false because a family member would have better knowledge of the extent and location of assets.

Which of the following factors indicate that an institutional fiduciary, rather than a family member, should be appointed?

when it is likely that the beneficiaries will contest the decedent's will or cause conflict when the assets in the estate are complex to manage Incorrect when individual attention to the beneficiaries and the family dynamic is necessary when familiarity with the extent and location of assets is necessary Statement III is false because an institutional fiduciary would not know the family situation better than a family member. Statement IV is false because a family member would have better knowledge of the extent and location of assets.

Larry died intestate. This means that Larry died

without a valid will. A person who dies intestate dies without a valid will. If a person dies with a valid will the person has died testate.

Which one of the following best describes a codicil?

A document modifying a previous will A codicil is a document that modifies or amends a previous will.

The estate tax applicable credit amount of $4,577,800 in 2020 effectively shelters what amount of taxable property transfers from the estate tax?

11,580,000 The applicable credit amount of $4,577,800 in 2020 shelters $11,580,000 in taxable transfers at death.

Fifteen months before his death, Eddie gave a painting valued at $600,000 to his son and paid gift tax of $30,000 on the gift. At the date of Eddie's death, the painting had a fair market value of $700,000. What amount is included in Eddie's gross estate as a result of the gift?

30,000 The gross estate includes any gift tax paid on gifts made within three years of death. The value of the gift would not be included in the donor's gross estate, but would be added to his taxable estate as an adjusted taxable gift.

In calculating the generation-skipping transfer tax (GSTT) on subject transfers, what is the federal transfer tax rate that applies for 2020?

40% The tax rate that is used to tax transfers subject to the GSTT is the maximum federal estate tax rate in effect. In 2020, this applicable tax rate is 40%.

Jack and Diane, a married couple, recently purchased a vacation home in their state of residence, which is a community property state. Assuming Jack dies, what percentage of the total ownership interest in the vacation home can Jack transfer under his will?

50% Only the portion owned by the decedent can be transferred by will. In a community property state, spouses own an equal undivided interest in all community property accumulated during their marriage.

Mike and Kim have been married for 20 years. Last year they were able to pay off the remaining balance of the 15-year mortgage on their home, which they own as joint tenants with right of survivorship (JTWROS). Mike does not work and Kim provides financial support for both of them. All mortgage payments have been made possible because of Kim's income. If Kim died, what percentage of the home's value would be included in her gross estate?

50% Regardless of which spouse furnished the consideration, one-half of the value of JTWROS property is included in the gross estate of the first spouse to die.

Maggie placed a farm she owned in a revocable trust for the benefit for her 2 adult sons, Don and Jim. Under the terms of the trust, she retained the right to determine what percentage of income would go to each son after consulting with an independent trustee. The value of the farm was $600,000 at the time of Maggie's death and $500,000 at the time of the transfer. What amount is included in Maggie's gross estate?

600,000 The date-of-death value of the trust assets ($600,000) will be included in Maggie's gross estate because Maggie retained the right to revoke the trust.

Dorothy, age 73, is single. She has one granddaughter who is 16 years old. Dorothy wants to help fund the granddaughter's college education. If Dorothy decides to open a Section 529 plan for her granddaughter, what is the maximum amount Dorothy can contribute to the plan in 2020 without making a taxable gift, assuming she has made no prior gifts to the granddaughter?

75,000 Dorothy can contribute a maximum of $75,000 to the Section 529 plan in 2020 without making a taxable gift. To spread a large gift to a 529 plan over more than one year, the donor must file a Form 709 Gift Tax Return and check a box that affirmatively elects to spread the gift over more than one year. The donor will also be required to document the use of the annual gift tax exclusion for the large 529 contribution in subsequent years if a Form 709 is required because of taxable gifts made to anyone. On the other hand, if there is not another reason to file a gift tax return for any gifts for the remaining years, then a gift tax return is not required simply to document the use of the annual gift tax exclusion for that year.

Mary placed $20,000 each in custodial accounts for each of her four sons last year. She is the custodian of the account and has the power to distribute or withhold income and principal for the boys. If Mary dies, how much of this $80,000 transferred to her sons is included in her gross estate?

80,000 The entire balance of the custodial accounts ($20,000 × 4 = $80,000) is included, because as custodian, she retained the power to distribute or withhold income and principal.

Mario is 53 years old and would like to establish a revocable protection plan for his assets that can be funded in the event of his incapacity. He is intrigued by the idea of a trust, but he does not want to be required to fund the trust unless and until he becomes incapacitated. Which one of the following planning tools should Mario use?

A contingent standby trust A contingent standby trust is used for incapacity planning because it is revocable (if the grantor regains competency) and does not have to be funded until and unless the grantor becomes incompetent. A supplemental needs trust is used for beneficiaries who are applying for or receiving government benefits, such as Medicaid and/or Supplemental Social Security Income (SSI). A Section 2503(c) trust is used to hold property for a beneficiary who is a minor, until such time as the minor is 21 under federal law.

Which of the following statements regarding the income tax rules applicable to trusts is CORRECT?

A deduction is available to a trust for distributions made to trust beneficiaries. A charitable deduction is allowable for complex trusts but not for simple trusts. The 10% income tax bracket applies to trusts. Tax-exempt income is not taxable to a trust.

Which of the following statements regarding discharge of indebtedness is NOT correct?

A discharge of indebtedness occurs when a legal indebtedness owned by an individual is discharged or satisfied, and the individual's gross earnings have been decreased the same as if the individual had earned income in the same amount. A discharge of indebtedness occurs when a legal indebtedness owned by an individual is discharged or satisfied, and the individual's net worth has been increased the same as if the individual had earned income in the same amount.

Which one of the following is not a correct statement of the generational assignment rules for the generation-skipping transfer tax (GSTT)?

A generation-skipping transfer cannot be made to a collateral heir of the transferor or the transferor's spouse or former spouse. A generation-skipping transfer is made whenever the transfer is made to a transferee who is deemed to be two or more generations younger than the transferor or the transferor's spouse or former spouse. A collateral heir is anyone who is related to the transferor but is not in the transferor's lineal line such as grandnieces and grandnephews. While grandnieces and grandnephews are not in the transferor's lineal line, they are in the lineal line of the transferor's grandparent and are two generations more removed from this grandparent than is the transferor. Therefore, the transferor can make a generation-skipping transfer to these transferees.

Which of the following gifts made two years before the donor's death will be included in the gross estate at full date-of-death value?

A gift in which the donor retains an income interest for life Donor's residence transferred into joint tenancy with donor's daughter Life insurance policy (cash value $5,000) transferred by the deceased to an irrevocable trust Only gifts of life insurance (within three years of death), and incomplete gifts (retained interests) are included in the gross estate. Other gifts are added to the taxable estate at the date of gift value.

Which of the following statements regarding qualified transfers in payment of educational or medical expenses is CORRECT?

A gift is excluded from taxable gifts if made directly to an educational institution for the tuition of the individual or to a provider of medical services for medical care received by the individual. Statement II is incorrect because there is no $30,000 annual limit on the exclusion for payments of medical services or for educational expenses for another person. The exclusion for qualified transfers is not limited in amount or who can be the donee.

Which of the following statements regarding a rental property owned jointly with right of survivorship (JTWROS) is CORRECT?

A gift is made when the name of the noncontributing joint owner (the donee) is added to the deed.

Mary Sue died during the current year. Which of the following would be included in Mary Sue's gross estate at the full date-of-death value?

A gift of property worth $80,000 given by Mary Sue to her cousin four years ago. Mary Sue retained a life estate in the gifted property. A residence Mary Sue purchased and titled as joint tenants with rights of survivorship (JTWROS) with her daughter several years ago. Death benefits from a life insurance policy on Mary Sue's life that Mary Sue transferred to an irrevocable life insurance trust (ILIT) two years ago. Statement I is correct. Mary Sue retained a life estate in the gifted property; therefore, the full fair market value of the gift is included in her gross estate. Statement II is correct. When property is held as JTWROS, the amount included in the gross estate is based on the parties' relative contributions to the purchase price of the property. Because Mary Sue purchased the residence, the entire value of the residence is included in her gross estate. Statement III is incorrect because the gift is not included in the gross estate, even if made within three years of death. Note that any gift tax paid out of pocket resulting from the gift would have been included in the gross estate. Statement IV is correct because the policy was transferred to an ILIT within three years of death. Therefore, the proceeds would be included in the decedent's gross estate.

Which of the following are characteristics of community property?

A joint interest is held by spouses. Upon the death of a spouse, both halves of community property receive a stepped-up basis. One-half of the value of community property is a probate asset when the first spouse dies. Statement IV is incorrect. There is no right of survivorship in community property. All the other statements are correct.

Which of the following statements regarding a living trust is CORRECT?

A living trust is a probate-avoidance method in which property is transferred to a trust during an individual's lifetime and is distributed according to the terms of the trust. Because the trust rather than the grantor owns and manages the trust assets at the time of the grantor's death, the trust assets do not pass through probate. The main point of probate is to transfer ownership of property when someone passes away. Assets in a trust do not go through probate because the trust owned the asset before the date of death and also after the date of death so there is no need to change ownership of the trust property to someone else.

Roberta Molinaro recently inherited cash proceeds of $105,000 from her mother's estate. Roberta wants to assist her adult children with their educational needs, and when she dies she wants them to receive title to the unexpended cash inheritance. Roberta wants to leave the cash to her children without intervention by the probate court. She also wants to have exclusive control during her life and to avoid gift tax on any transfer. Which one of the following statements concerning the most appropriate form of will substitute for Roberta is CORRECT?

A payable on death (P.O.D.) bank account will provide her with access to the cash while she is alive, and it will also allow her children to receive the remaining cash at her death without going through probate. A POD account does not allow designated beneficiaries to have any control over the asset until the owner's death. An account solely in Roberta's name would require probate. A joint bank account with the children would allow them to have some control before Roberta's death.

Nancy is a widow with four children and nine grandchildren. In preparing her will, she wants to leave her entire estate to her children equally. If any of her children are not living when she dies, she wants that child's share of her estate to be split equally among that child's living children. Which one of the following will provisions best meets Nancy's needs?

A provision calling for a per stirpes distribution A provision calling for a per stirpes distribution best meets Nancy's needs because with a per stirpes distribution, members of a designated class inherit property as members of the class. In other words, the children of a deceased child would split their deceased parent's share equally. With a per capita distribution, the children of a deceased child would each receive a share equal to the shares received by the surviving children. A simultaneous death provision is used in the wills of spouses to create a presumption as to the order of death if both spouses die simultaneously. A survivorship clause provides that a beneficiary must survive for a specified period beyond the testator's death to receive a bequest.

Kathy Vetter wants to transfer several tracts of income-producing property to her nephew, Gerald, at her death while also bypassing probate. During her lifetime, Kathy wants to retain control of the property and retain all of the income generated by it. Which one of the following is the most appropriate form of will substitute for Kathy? Consider carefully the stated justification in selecting your answer.

A revocable trust, since it allows Kathy control over the property during her lifetime The answer is a revocable trust because it will accomplish all of Kathy's objectives: there will be no loss of control until her death, the trust property will avoid probate, and Kathy will be able to enjoy all trust income. Since this trust is revocable, all income will be taxed to Kathy by the grantor trust rules. A T.O.D. designation can be used only for individual securities or brokerage accounts, not real estate. Answer C would give Gerald an immediate interest in the property.

All of the following statements regarding powers of appointment are correct except

A special power of appointment held at death must be included in the holder's gross estate. Correct Statements A)A special power of appointment, does not give the holder the right to appoint property to himself, his creditors, his estate, or the creditors of his estate. B)A power of appointment is a right given to designate the disposition of property subject to the power. C)A general power of appointment gives the holder the unlimited right to appoint property to: himself, his creditors, his estate, or the creditors of his estate. A special power of appointment held by the holder at death is not included in the holder's gross estate. The right to designate the disposition means the ability to name the new owner of the property.

Which of the following statements regarding powers of appointment is CORRECT?

A special power of appointment is usually not included in the holder's gross estate. Incorrect A general power of appointment is not included in the holder's gross estate if the holder does not exercise the power during the holder's lifetime. A power of appointment cannot lapse. Statements I and III are incorrect. The property does not avoid inclusion in the gross estate just because the holder of the general power fails to exercise the power during the holder's lifetime. A power of appointment can lapse if it is not exercised. However, if a general power of appointment lapses, the holder of the power is treated as having made a gift to whoever gets the property subject to the general power of appointment.

In which of the following does a taxable distribution occur?

A taxable distribution occurs when a nonskip party still has an interest in the remaining trust property but an actual distribution of trust property is made to a skip party. Code Section 2612 defines a taxable distribution as any distribution from a trust to a skip person other than a taxable termination or direct skip.

Which of the following statements regarding legal and equitable ownership of property is CORRECT?

A trust is a common example of property ownership in which legal and equitable ownership is split between different parties. Trust beneficiaries have equitable ownership of the trust assets.

All of the following statements regarding incapacity planning are correct EXCEPT:

All of the following statements regarding incapacity planning are correct EXCEPT: Correct a durable power of attorney for health care (DPOAHC) appoints a surrogate decision maker to act when the principal is unable to give informed consent. a durable power of attorney for health care (DPOAHC) is always a springing power. a living will addresses only the situation of a terminal illness. A living will does not appoint a surrogate decision maker; it is a direct instruction from the patient to his physician. A DPOAHC is always a springing power because if the drafter is legally able to make the medical decisions, the surrogate decision maker is not allowed to overrule the drafter's decision.

Which of the following is a characteristic of a living will?

Allows an individual to specify, in advance, his wishes about medical treatment and artificial life support under specific circumstances. A living will is a legal document in which an individual specifies what types of medical treatment and artificial life support measures he wishes in the event of an emergency. A durable power of attorney allows the principal to appoint an agent to manage his affairs in the event of incapacity. Incorrect Has the same function as a living trust. Appoints an agent to manage an individual's affairs in the event of incapacity. Allows an individual to make property bequests before death.

Janis owns the Pretty Little Celluloid Shop as a sole proprietor. Janis is now 63 years old and is ready to retire. She has a gross estate estimated at $3.9 million, and the value of the business constitutes $2.45 million of that amount. Janis would like to transfer the business to her daughter and remove all future appreciation of it from her estate. In addition, she would like to receive an income stream from the business for the rest of her life. Which one of the following is the most appropriate form of business transfer for Janis to use to best achieve her objectives?

An installment sale of the business to her daughter An installment sale will only provide income for a period of time. The remaining two options don't generate income, but simply bring her daughter in as co-owner.

If Margaret dies and is survived by her spouse and two minor daughters, which of the following items will be included in her gross estate?

An inter vivos irrevocable trust established by Margaret in which she retained the power to allocate the income distributions between her two daughters who are named beneficiaries of both income and corpus. Stocks worth $90,000 in a revocable trust that Margaret established for the benefit of her mother. Margaret will receive income for life. When Margaret dies, the property will be held in trust for her mother for life, after which the corpus will be distributed to Margaret's daughters. The death proceeds from a life insurance policy Margaret owns on her own life. All of these statements are correct. The value of the trusts will be included, because Margaret retained the right to affect beneficial enjoyment or control of the income. The death proceeds from the life insurance policy are included in her gross estate because Margaret has incidents of ownership in the policy when she dies.

Which of the following statements regarding property owned as joint tenancy with right of survivorship (JTWROS) is CORRECT?

Each tenant owns an equal fractional share in the property. Joint tenants have the right to sever their interests in the property during life without the consent of the other joint tenant(s). JTWROS property avoids probate. Statement III is incorrect because JTWROS property passes to the surviving tenants by operation of law, regardless of the decedent's will provisions. All of the other statements are correct.

Which of the following statements regarding community property is CORRECT?

Assets inherited by one spouse during marriage generally are not community property. Assets purchased with community assets by either spouse during marriage are community property. Each spouse is deemed to own a one-half interest in property acquired during the marriage regardless of which spouse acquired, earned, gained, or is otherwise responsible for ownership of the property. Statement III is incorrect because community property does not avoid probate. There are no rights of survivorship with community property. Statement IV is incorrect because assets acquired before marriage remain separate property. Statements I and II are correct.

Which one of the following is a tax implication of assets transferred by a revocable will substitute?

Assets transferred by a revocable will substitute may receive a stepped up basis. Assets transferred by a revocable will substitute may receive a stepped up basis because they are included in the decedent's gross estate.

Marco has become charitably inclined since suffering serious health issues. He wants to establish a charitable trust that will provide him with an annual income for life with the remainder to charity. He also wants to be able to make additional contributions to the trust on an ongoing basis. Which of the following charitable trusts will meet his needs?

Charitable remainder unitrust (CRUT) A charitable remainder unitrust (CRUT) is the only answer choice that will meet Marco's needs. With a charitable lead trust (CLT), the noncharitable beneficiary receives only a remainder interest and not an annual income interest. With a charitable remainder annuity trust (CRAT), no additional contributions are permitted after the trust is established.

Which of the following circumstances would cause the date-of-death value of the gifted property to be included in the donor's gross estate?

Donor transfers property to a revocable trust. Donor makes a gift of real estate and retains a life estate in the gifted property. The donor retained a power to revoke in Statement I and a life estate in Statement II. Both situations require the gifted property to be included in the gross estate. Statements III and IV are incorrect because the donor did not retain any interest in the gifted property.

Diana was recently diagnosed with a life-threatening illness that will require her to undergo prolonged treatments and several surgeries. She is concerned that her treatments may eventually leave her incapacitated. She wants to give her daughter the right to make crucial medical decisions for her if her treatments incapacitate her to the point she cannot make decisions for herself. Which of the following documents best meets Diana's needs?

Durable power of attorney for health care (DPOAHC) A durable power of attorney for health care (DPOAHC) will become effective if Diana is ever incapacitated and will grant the attorney-in-fact (her daughter) the power to make health decisions for her. A living will would not create a power of attorney but only states Diana's wishes should she ever become terminally ill. A nondurable power of attorney would cease to be effective if Diana ever became incapacitated. A springing power of attorney for property would not allow the daughter to make medical decisions in her place if she became incapacitated. It would only allow the daughter to deal with her property.

A document that appoints a surrogate decision maker in non-terminal medical situations when the patient is incapacitated is a:

Durable power of attorney for health care. A durable power of attorney for health care empowers the attorney-in-fact to act on behalf of the patient-principal in non-terminal medical situations regarding such issues as access to and disclosure of medical records and personal information, psychiatric care, releases of medical personnel, and life support provisions pertaining to mechanical respiration, cardiac resuscitation, organ transplants or blood transfusions.

Which of the following powers of attorney enables a principal to grant powers that remain in effect throughout the principal's incapacity?

Durable power of attorney. A durable power of attorney enables a principal to grant powers that remain in effect throughout the principal's incapacity.

Which of the following estate planning tools would allow an attorney-in-fact to expedite the principal's Medicaid eligibility, arrange for in-home or nursing home care, hire necessary health care personnel, or employ companions?

Durable power of attorney. A durable power of attorney it allows the attorney-in-fact to make decisions for the principal during the period of incapacity. This power is especially useful when the principal anticipates the need for someone to manage the principal's affairs in the near future.

Your client and his spouse have combined gross estates of $17.5 million, owned in equal shares, that include the following: (1) real estate with their share valued at $4.0 million, owned by them and their son as joint tenants with right of survivorship (all three provided equal contributions); and (2) individual life insurance policies, owned by each spouse on their own life—each policy has a face value of $1.75 million and names their three children as equal beneficiaries. Which of the following are disadvantages of using the will substitutes described?

Each estate might be faced with inadequate funds to pay taxes and administrative expenses due to the current beneficiary designations on the life insurance policies. The estate of the first spouse to die will be denied a marital deduction for the insurance benefits due to the current beneficiary designations on the life insurance policies. While there are unlikely to be large administrative expenses since neither spouse's estate has any probate property, there will be some (e.g., to complete and file the estate tax return) and there will certainly be estate taxes due at both spouses' deaths. Neither estate has the liquidity to pay these expenses and taxes. There will be no marital deduction for the life insurance death benefits, as the designated beneficiaries for each policy are the children. The first spouse to die will have to include one-third of the total real estate in their gross estate, but only one-half of this amount will go to the surviving spouse and thus qualify for the marital deduction. The remaining portion will go to the son. The estate of the first spouse to die will have estate tax liability on only one-sixth of the real estate due to the marital deduction for the other one-sixth that goes to the surviving spouse.

Which one of the following is a true statement about taxable distributions?

Each skip person who received a taxable distribution is responsible for paying the GSTT due. If the skip person is incompetent, it is the responsibility of the fiduciary of the trust making a taxable distribution to pay the GSTT out of additional trust funds. Each skip person who receives a taxable distribution is responsible for filing the return and paying the GSTT due. The return used for reporting a taxable distribution is Form 706GS(D). If any GSTT due on a taxable distribution is paid out of the trust, an amount equal to the tax paid is treated as an additional taxable distribution to the benefited skip party. The recipient of the distribution is responsible for paying the GSTT. If the skip person is incompetent, her financial guardian is responsible for filing the return and paying the GSTT due out of the incompetent person's funds.

Eliza Ellis purchased a life insurance policy on her own life. Eliza is not married and does not have any children, but she is fond of her neighbor and some of her close relatives. She has expressed some concern about owing estate taxes at her death; however, she refuses to implement any trust planning for her estate. Accordingly, Eliza executed a will that leaves all of her personal property to her neighbor, and all of her remaining assets to her close relatives. She has named her estate as the beneficiary of her life insurance policy. Which of the following are CORRECT statements regarding the advantages or disadvantages of the life insurance policy beneficiary designation?

Eliza's estate may use the life insurance policy death benefit to pay any estate taxes due. The life insurance policy death benefit will be included in Eliza's gross estate. The life insurance policy death benefit will be distributed according to the terms of the will. Statement II is false because the proceeds can be used for whatever purpose the PR deems most appropriate.

Which of the following situations correctly state concerns that a single person might have that would not be as critical for a married individual?

Establishing a lifetime gifting program Executing a health care proxy Executing a document stating her preference of persons to be appointed as her guardian and/or conservator Lifetime gifting may be of more importance because the marital deduction is not available at death to delay taxation of wealth. A health care proxy may be of more importance because these instruments may be needed sooner than with a married person since there is no spouse to care for the single incapacitated person. A statement of preference as to a guardian or conservator may be of more importance because without such a statement a court is likely to appoint a blood relative who might not be who the protected person would have chosen. No person (even a spouse) may take legal action with regard to the property owned solely by an incompetent person without previously being appointed to do so under a durable power of attorney, or taking the more expensive route of being appointed as the incompetent person's conservator.

Your client, age 74, has an estate consisting of solely owned assets valued at $4.5 million. His will, drafted in 2012, leaves his entire estate to his spouse. No contingent beneficiary is named, and the will has no residuary clause. He would like his children to receive a tract of land worth $1 million that is located in an out-of-state resort area. Your client has made $300,000 in adjusted taxable gifts to date. Which of the following are pitfalls that can be avoided if your client takes the actions described?

He can avoid subjecting the estate to an ancillary probate procedure by placing the out-of->state property in joint tenancy with right of survivorship with his children. He can avoid causing part of the estate to pass to unintended beneficiaries by amending his will to name contingent beneficiaries and adding a residuary clause. Answer choice II is false because wills always go through probate. Answer choice IV is false because he is not going to owe any estate tax based on the size of his estate, so adding a charitable bequest would have no effect.

Roger Gomez has just learned that he has an inoperable brain tumor and has less than one year to live. He has come to you to get his financial affairs in order. Which of the following would be appropriate recommendations to make to Roger?

He should put those assets that he wants to leave to a specific individual into an appropriate form of will substitute, if possible. He should consider executing a living will and/or a medical durable power of attorney. Incorrect He should establish a grantor-retained income trust (GRIT) with a five-year term, and transfer all of his assets into it to reduce his gross estate and avoid probate. He should consider making a reverse gift of any highly appreciated assets that he has. Assets placed in a will substitute form can be enjoyed by the recipient at an earlier date than if they had to go through probate, and such assets will also lower administrative costs. He should make a living will and/or a medical durable power of attorney so that his wishes regarding extraordinary medical measures to keep him alive will be known and can be carried out should he become incompetent to voice such wishes or make such decisions at the end of his life. Assets placed in the GRIT would still be included in his gross estate if he died during the five-year term. Making a reverse gift would accomplish its main purpose, which is to eliminate gain in the asset by receiving a stepped-up basis from the deceased donee, only if the donee lives for more than one year after the gift (and Roger outlives the donee). The purpose of eliminating the gain is so that the asset can be sold at little or no tax cost. It is only after such sale that liquidity has been improved. It is doubtful that Roger will live long enough to get the desired step-up in basis, let alone accomplish the subsequent sale.

Charles Sorensen purchased a vacation home. Charles wants the bulk of his estate to pass to his spouse. However, he plans to pass the vacation home to his adult children. Charles does not have a will and does not intend to make one. Which one of the following statements concerning the most appropriate form of titling for the commercial real estate owned by Charles is CORRECT?

Holding it in joint tenancy with right of survivorship with his children will allow the property to pass directly to them without the consent of the surviving spouse. If held as JTWROS, the property will pass to the children by right of survivorship. Since Charles does not have a will or intend to make one, the property would pass by intestacy, and his spouse would get at least part of the vacation home. The property would go to his spouse, not his children, if held in tenancy by the entirety. Any portion of the property still owned by Charles at death would pass by intestacy, and his spouse would receive at least part of the property if tenancy in common is used.

Which one of the following statements is a basic feature of the generation-skipping transfer tax (GSTT)?

If a spouse consents to gift splitting on a transfer of a direct skip during life, the consenting spouse becomes the deemed transferor of half the property. If a spouse consents to gift splitting on a transfer of a direct skip during life, the consenting spouse becomes the deemed transferor of half the property for gift and GSTT purposes.

Which of the following statements regarding the portability of the estate tax lifetime exemption amount between spouses are CORRECT?

If a surviving spouse remarries, only the unused exemption amount of the last predeceased spouse is available to the surviving spouse. Portability means that a married couple with total assets of $23,160,000 in 2020 might elect to use no lifetime exemption amount in the estate of the first spouse to die and use the entire $23,160,000 in the second spouse's estate. Both of these statements are correct. However, to benefit from portability, the estate of the first spouse must file a timely Form 706 Estate Tax Return and elect to allow portability for the surviving spouse's estate. If the first spouse to die does not have a Form 706 filed with the election made in a timely manner, then the second spouse to die will not benefit from portability.

Elizabeth and Tyler have been clients of yours for many years. In a recent meeting they share that in the last year three new grandchildren have joined the family. You recommend reviewing their beneficiary designations. This is an example of avoiding which of the following mistakes, pitfalls, or weaknesses?

Improperly arranged life insurance The answer is improperly arranged life insurance because it is the only answer choice which addresses changes in beneficiary designations. The remaining answer choices would also be good to avoid, but they do not involve beneficiary arrangements whereas life insurance certainly does.

Which of the following statements regarding grantor-retained income trusts (GRITs) is CORRECT?

In a GRIT a grantor transfers property to a trust for some period and retains the right to income from the trust. To avoid the zero valuation rules under Chapter 14, the income interest in a GRIT must be in the form of a qualifying annuity or unitrust payment. Statements I and III are correct. Statement II is incorrect because if the grantor survives the income period, the trust assets are not included in the grantor's gross estate.

Which of the following statements regarding sale-leasebacks is CORRECT?

In a sale-leaseback, a senior family sells fully depreciated business property to a junior family member and then leases it back. The senior family member can deduct the lease payments made to the junior family member if there is a valid business purpose for the sale and an arm's-length rental payment.

All of the following statements regarding transfers of property at death are correct except

Intestacy laws are standard from state to state. Correct Property can be transferred at death by will, by contract, or by operation of law. Transfers at death by contract include life insurance proceeds and retirement plan death benefits with named beneficiaries. Death benefits from retirement plans pass to named beneficiaries outside the will.

Jorge is in the highest current marginal income tax bracket. He owns several thousand shares of rapidly appreciating growth stock that he wants to transfer to his three minor children. Income will not be used for legal support obligations. He wants to have some control over the distribution of income from this stock while affording himself the gift tax annual exclusion for the total value of this and subsequent transfers to the maximum amount allowed. He also wants this stock to be available to his children when they reach age 21. Jorge does not want income from the stock to be taxed to him. Which one of the following is the most appropriate lifetime transfer technique for Jorge to use to best achieve his objectives?

Irrevocable trusts structured under the provisions of Internal Revenue Code Section 2503(c) A 2503(c) trust accomplishes all of Jorge's goals: maintaining control until the children reach 21, getting the annual gift tax exclusion, and giving the corpus to the children at age 21. Outright gifts cannot do all of that. A 2503(b) trust does not require the corpus to be distributed at age 21 and net gifts leave gift tax payable by the children which is definitely not one of Jorge's goals.

Which of the following are important characteristics of the gift tax marital deduction?

It allows the donor to avoid gift tax liability on the amount of the gift in excess of the annual exclusion amount. It allows the donor to avoid gift tax liability on a gift to a donee spouse. Statement I is false because there would be no gift tax liability for the spouse. The marital deduction would transfer estate tax liability, but not gift tax liability. Statement II is false because it allows the donor to avoid gift tax on 100% of the value.

Which of the following statements regarding the complexities and challenges of business succession planning is CORRECT?

It may be difficult to determine the value of the business. Finding a buyer who has the resources to purchase the business may be difficult. Family issues may be involved if the business is closely held or family owned. A new owner may have difficulty adapting to the idiosyncrasies of the owner's business.

Shirley owns 75% of the stock in a closely held corporation. She also is the company's founder and chief executive officer. If Shirley dies, which of the following valuation discounts may be available to her estate for federal estate tax purposes?

Lack of marketability discount Key person discount Statements II and IV are correct. Shirley's estate may be allowed the lack of marketability discount (statement II) and a key person discount (statement IV) because Shirley is a key person in a closely held corporation. A blockage discount (statement I) applies only to stock of publicly traded companies, and a minority interest discount (statement III) does not apply because Shirley owns a majority interest in the company.

Jason and Julie are married. It is a second marriage for both spouses, and Jason has a son from his previous marriage. Jason owns assets valued at $20 million, which are all titled in his separate name. In planning his estate, Jason wants to ensure that his entire estate qualifies for the marital deduction, but he also wants to ensure that his assets will pass to his son after Julie dies. Which of the following recommendations will meet Jason's objectives?

Leave his assets to a C (QTIP) trust Explanation A C (QTIP) trust is the only recommendation that will meet Jason's objectives. The assets in a C (QTIP) trust will qualify for the marital deduction, and Jason can designate who receives the assets after Julie dies because Julie does not have to have a general power of appointment over the trust assets. With an A trust, the assets will qualify for the marital deduction, but because Julie must have a general power of appointment over the trust assets she can determine who receives them after she dies. With a B trust, Jason can designate who receives the assets when the trust terminates, but the assets do not qualify for the marital deduction. Assets titled as JTWROS would qualify for the marital deduction when Jason dies, but Julie would own them outright after Jason's death and could leave them to whomever she chooses. LO 5.3.3

Martina is age 70 and lives alone. She wants to draft a document that will inform her personal representative of her funeral wishes and the location of important personal papers in case she dies unexpectedly. Which one of the following document best fits her needs?

Letter of personal instruction A letter of personal instruction, or side letter, will best meet Martina's needs because it does not have to satisfy any formal requirements and can be acted upon more quickly than the provisions in a will.

In the absence of an extension, what is the due date of the federal estate tax return (Form 706)?

Nine months after the date of death

Louis Allen inherited a parcel of real estate. Five years ago, he changed the title to joint tenancy with right of survivorship with his wife, Eve. Louis would like to will the property to John, his son from a previous marriage. Which one of the following statements correctly identifies whether Louis's goal will be met?

No, it will pass to Eve as the surviving joint tenant regardless of the terms of the will. This is true because of Eve's right of survivorship. There will be no testamentary transfer from Louis to John because Eve will receive Louis's share in the property by right of survivorship. John will not receive the property. Eve will receive Louis's share in the property by right of survivorship and Louis's share of the property will receive a step-up in basis. Eve will own the entire property upon Louis's death.

Which one of the following is a characteristic of probate?

Often a costly and complex process Probate is often a costly and complex process. Information regarding the estate becomes a matter of public record and generally there are delays in estate administration. Probate applies whether a person has a will or dies intestate. This is because one of the major points of probate is transferring ownership. The ownership of the deceased's property that is not transferred by operation of law (joint tenancy with right of survivorship) or by contract (beneficiary designations) must be transferred by probate. Now the question becomes, "Will the probate court seek to follow the instructions of the deceased as expressed by a valid will or does the probate court transfer ownership according to the state-set order of distribution because the deceased did not have a valid will?"

Which of the following statements regarding property owned as joint tenancy with right of survivorship (JTWROS) are CORRECT?

Ownership is transferred to the surviving joint tenant by operation of law when one owner dies. The property passes outside of probate when one owner dies. A portion of the property may be included in a deceased owner's gross estate. Property owned in joint tenancy with right of survivorship (JTWROS) will transfer to the surviving co-owner automatically by operation of law, rather than by the probate process. A portion of the asset's value may be included in the decedent's gross estate. Both spouses and nonspouses can hold property as JTWROS.

Which of the following is property that passes by contract and avoids probate at death?

Pensions with a named beneficiary other than the decedent's estate. Life insurance with a named beneficiary other than the decedent's estate. Profit-sharing plans with a named beneficiary other than the decedent's estate.

Which of the following statements regarding the effect of divorce or remarriage on estate planning are CORRECT?

People who remarry after a divorce may find it desirable to enter into a marital property agreement. A QTIP trust may be helpful for a spouse who has children from a previous marriage.

Peter Jenkins recently remarried after divorcing his first spouse last year. He has asked you for advice on updating his estate plan to reflect his new marital status. His existing will leaves all of his property to his first spouse. He does not want to leave any of his property to his new spouse and he wants all of his property to pass to his children from his first marriage when he dies. Which of the following recommendations would you make to Peter?

Peter should redo his will to reflect his new marital status. If Peter's new will disinherits his second spouse, she may still be able to claim a share of his estate when he dies by electing against the will. Both of these statements are correct. New wills are called for after a divorce. State laws concerning electing against the will allow spouses to claim a certain, state-set percentage of a deceased spouse's estate. Because Peter is remarried, his new spouse could make a claim against his probate estate by electing against the will. This is different than contesting the will. Electing against the will does not contest the validity of the will. It simply says, "As a spouse, I claim my state-set percentage of the probate estate." This contingency can be addressed by decreasing the probate estate or by leaving the spouse the state-set percentage of the probate estate. In some cases, the rich spouse can fund an irrevocable life insurance trust (ILIT) with a policy for the benefit of the new spouse. While this would not guarantee Peter's surviving spouse won't attempt to elect against the will, money from the ILIT would lessen the need for her to do so.

Which one of the following factors is most likely to cause estate shrinkage?

Placing title to real estate located in a state other than the state of domicile in the client's sole name This would cause an ancillary probate proceeding, and thus require two sets of estate administrative expenses, which will increase estate liquidity problems, thereby increasing estate shrinkage. All other options are postmortem elections used to reduce federal estate taxes, thereby reducing estate shrinkage.

Jeanette recently contributed $100,000 in securities to a local not-for-profit hospital. Jeanette's securities will be commingled in a fund with property donated by other donors, and Jeanette is entitled to a pro rata share of the annual income from the fund for life. Which of the following best describes this type of charitable donation?

Pooled income fund This type of charitable donation involves a pooled income fund. Pooled income funds are often established by public charities to encourage contributions of cash or property and to spare donors the expense of having to draft a CRAT or CRUT.

Which of the following statements regarding the portability of the gift tax lifetime exemption amount is CORRECT?

Portability means that a surviving spouse can use any portion of a predeceased spouse's lifetime exemption amount that remained unused when the predeceased spouse died. Statement I is correct. Statement II is incorrect because a surviving spouse may apply the predeceased spouse's unused lifetime exemption amount both to gift taxes due on lifetime gifts and to any estate tax due on transfers at death.

Which one of the following statements is CORRECT regarding probate of real property?

Probate of the decedent's real property must be conducted in the state in which the real property was located. Real property must be probated in the state in which it is located.

Which of the following are considered to be community property when owned by spouses while living in a community property state?

Property acquired through the efforts of either spouse during their marriage Community property rules assume that both people in the marriage are contributing equally to the wealth of the family. Notice that the exceptions (acquisition before marriage and by receipt as a gift or inheritance) are clearly not a combined effort of the married couple. The marriage has no bearing on the acquisition of these assets. Property acquired by one spouse by gift or inheritance, and property owned by one spouse before marriage is not subject to community property law. Property purchased with the income from separate property is generally considered separate property.

Which of the following are alternatives to probate when disposing of property?

Property held as tenants by the entirety Property held within a revocable living trust Property held within an irrevocable trust Proceeds of a life insurance policy with a named beneficiary other than the estate All of the answer choices are substitutes for the probate process. Revocable living trusts become irrevocable at the death of the grantor. Also, a trust—not the donor—is the legal owner of all trust assets. Therefore, the property held by all trusts, except for a testamentary trust, escape probate.

Which of the following assets avoid probate?

Property held within an irrevocable trust Property owned as a joint tenancy with right of survivorship (JTWROS) Proceeds of a life insurance policy with a named beneficiary other than the estate of the decedent Assets for which the beneficiary is the estate of the decedent (e.g., a life insurance policy) must pass through probate.

Which of the following constitute alternatives to the probate process?

Property held within an irrevocable trust at the grantor's death Property held as joint tenancy with right of survivorship Property titled in a funded revocable living trust at the date of the decedent's death Proceeds of a second-to-die life insurance policy with a named beneficiary other than the decedent's estate All of the answer choices are substitutes for the probate process. Revocable living trusts become irrevocable at the grantor's death and avoid probate if they are funded during the grantor's lifetime.

Carlos executes a will that leaves his entire estate to a general power of appointment trust (a trust) in favor of his spouse, Margot. If Carlos dies before Margot, which of the following statements regarding this arrangement is CORRECT?

Property in the A trust qualifies for the marital deduction in Carlos's estate. Statement I is correct. Statement II is incorrect because property in the A trust is included in the gross estate of the second spouse to die to the extent it has not been spent or consumed during life.

Which of the following property interests will pass as directed under a decedent's will if the decedent is married at the time of death?

Property owned in fee simple Property owned as tenants in common The decedent's half interest in community property The property described in statements I, II, and III will be included in the probate estate and pass under the decedent's will. Property owned as tenants by the entirety includes the right of survivorship and passes to the surviving spouse by operation of law.

Which one of the following property interests of a decedent will pass through probate?

Property owned with the decedent's brother as tenants in common Property owned as tenants in common may be transferred by will or pass via state intestacy laws. In either case, the property will pass through probate. The other interests listed pass by contract (beneficiary designation) or by operation of law/survivorship rights (tenants by the entirety).

All of Mark Howard's property has been placed into a revocable trust. Mark is the trustee of this trust until he dies or becomes incompetent. Mark, his spouse, and his children are all income beneficiaries of the trust, with income to be distributed at the trustee's sole discretion. At Mark's death or his incompetency, his spouse is appointed successor trustee. The trust is to continue until his spouse's death, when the trust assets are to be distributed per capita at each generation to Mark's surviving descendants. Which one of the following correctly identifies advantages or disadvantages Mark can achieve by using this method of estate transfer at death?

Providing a stepped-up basis in estate assets to the beneficiaries of his estate Since the trust assets will be in Mark's gross estate (because he has retained the right to revoke), they will be entitled to a step-up in income tax basis. The trust assets will be subject to the claims of Mark's creditors (option b.) because the trust is revocable. Option c. is incorrect because the trust assets will be valued in his gross estate at fair market value as of the date of death or six months later (the alternate valuation date). Option d. is incorrect because Mark will still have to report all trust income under the grantor trust rules because the trust is revocable.

All of the following are considered incidents of ownership in a life insurance policy for estate tax purposes except

the right to pay policy premiums. The right to pay the premiums on a life insurance policy is not considered an incident of ownership.

Which of the following correctly identify a premortem technique that can be used to reduce the cash needs of an estate?

Retitling property as joint tenants with right of survivorship (JTWROS). Executing a will that includes a self-proving clause and meets all legal formalities required by state law. Statement III is false because real estate and closely held businesses can only help increase cash available, but won't reduce cash needs. These will increase cash needs if liquid assets are used to acquire these assets. Statement IV is false because this will require ancillary probate which will increase cash needs, not decrease cash needs.

Brenda wants to create a trust and fund it immediately with $2 million in stocks and bonds. She wants the trust to be able to distribute income and principal to her niece and to make annual distributions to the Salvation Army. She also wants the ability to rescind the trust in the future. Which type of trust will meet Brenda's needs?

Revocable inter vivos complex trust Brenda needs a revocable inter vivos complex trust. The trust must be revocable for Brenda to be able to rescind it. It must be inter vivos if it is created and made effective during Brenda's life. It must be a complex trust to distribute principal and make charitable distributions.

All of the following statements regarding testamentary capacity to make a valid will are correct except

the testator need not have reached the age of 18. In most states, an individual must be 18 years of age or older to execute a will.

Cora Trout, age 79, has an estate that includes her personal residence valued at $120,000, and $18,000 in a bank account that is solely in her name. She would like to arrange her estate so that she maintains exclusive control of the assets during her lifetime, but at her death the assets will pass to her friend, Mabel Berger, outside of probate. Based on Cora's goals and situation, which of the following statements is CORRECT about will substitutes that she could use?

She should place the bank funds in a payable on death (P.O.D.) account with Mabel as beneficiary. She should change the title on her personal residence to indicate a life estate reserved for her lifetime and a remainder to her friend, Mabel. Statement I is false because tenancy in common will require probate for her share. Statement II is false because she would not have exclusive control over the account in joint tenancy.

Which of the following assets will pass through probate?

Solely owned real estate Solely owned real estate will be subject to the probate process. Statements I and III are incorrect because assets transferred to a decedent's survivors by operation of law or under the terms of a contract are not subject to probate. In addition, property owned in JTWROS passes automatically to the survivor without the delay of probate.

If Tasha created a trust for her daughter, Payton, which of the following trust provisions might she use to help deal with Payton's financial irresponsibility?

Spendthrift provision A spendthrift provision prohibits the trust beneficiary from assigning the beneficiary's interest to creditors and denies creditors the right to demand that the trust pay the beneficiary's debts.

Kurt is establishing a trust for the benefit of his nephew, Lloyd, age 26. Lloyd has a history of financial irresponsibility and has run up significant amounts of debt since he got out of college. Kurt wants to ensure that Lloyd is not able to assign his interest in the trust to a creditor and that Lloyd's creditors cannot demand that the trustee pay Lloyd's debts. Which of the following trust provisions will accomplish Kurt's objective?

Spendthrift provision Explanation A spendthrift provision prohibits the beneficiary from assigning the beneficiary's interest to a creditor and denies creditors the right to demand that the trustee pay the beneficiary's debts. LO 3.1.4

Which one of the following elections permit a surviving spouse to elect to take a percentage of the deceased spouse's estate if surviving spouse is dissatisfied by what the deceased spouse gave her in the will?

Spousal elective share statute The spousal elective share statute permits a surviving spouse to elect to take a percentage of the deceased spouse's probate estate if she is dissatisfied by what the deceased spouse gave her in the will.

Which of the following statements regarding the effect of remarriage or divorce on estate planning are CORRECT?

Spouses who divorce will probably want to redo their wills and trusts to reflect their new marital status. A spouse who wants to disinherit a second spouse may want to use transfer methods other than a will to do so. Both of these statements are correct. The reason a will might not be able to disinherit a spouse in some states is that a spouse can elect against the will and receive the state set percentage of the probate estate.

Tasha and her mother, Marleen, meet with the Marleen's financial advisor to get a better understanding of Marleen's estate and financial planning. Marleen has recently updated her will but Tasha fears there may be gaps in her mother's planning. In light of Marleen's poor health, which of the following estate-planning devices should Marleen include in her overall estate planning?

Springing durable power of attorney for health care Advance medical directive Because Marleen is in poor health, there may soon be a need for someone else to step in and manage both her health care and her assets, making springing powers of attorney for health care and property desirable. She should also execute an advance medical directive (living will) so her physicians are informed of her wishes regarding end-of-life care. Tasha does not need a special needs trust. A qualified domestic trust (QDOT) is not appropriate, as Marleen does not have a nonresident alien spouse.

Bill Jenkins owns a vacation home in another state. Bill wants to include his new wife, Edna, on the title to the vacation home. His primary concern is to avoid probate without making it possible for Edna to dispose of the property before his death without his consent. Which one of the following statements concerning the most appropriate form of titling and the corresponding rationale is CORRECT?

Tenancy by the entirety will prevent lifetime disposition without Bill's consent. Explanation Tenancy by the entirety requires the consent of both spouses to dispose of property. JTWROS does not. Sole ownership will require probate. Tenancy in common will not eliminate the need for ancillary probate as Bill's share of the property will require probate unless other plans are made. LO 4.3.1

Which one of the following statements regarding property agreements between unmarried cohabitants is incorrect?

The agreement should state how the cohabitation must be terminated if the relationship is held to be a common-law marriage. If the parties are deemed to be married under the common law, then their relationship must be terminated in the same manner as that of a couple married by statutory procedures—i.e., there must be a divorce pursuant to state statutes. Listing property owned by each party will prevent subsequent disputes about whether the property was meant to be affected by the agreement and disputes about when the property was acquired if there is no hard evidence of when it was acquired. Stating how property and debts acquired during cohabitation is to be treated is one of the most important functions of a property agreement. An agreement on this issue is extremely important because state laws regarding division of property between unmarried cohabitants are not highly developed. Thus, the agreement gives the parties certainty.

Which of the following statements regarding a Section 2503(b) trust is CORRECT?

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.

When does a will most adequately dispose of the testator's estate?

the will disposes of the testator's real, tangible, and intangible personal property, and includes a residuary clause. The key is the residuary clause that is missing from the remaining answer choices.

Marvin donated $250,000 to a donor-advised fund established with a public charity. Under this arrangement, he has the right to recommend who should receive future grants from the charity. Which of the following statements regarding this donor-advised fund is CORRECT?

The public charity may place restrictions on future grants. Marvin is eligible for an immediate income tax charitable deduction. Under this arrangement, Marvin may name several charitable recipients. Marvin is eligible for an immediate charitable deduction (when the initial donation is made to the donor advised fund), although the grants to the receiving charities may be spread out over several years.

Barry Albee's only will, drafted in 2013, includes the following provisions: Disposes of his household and personal effects by reference to a tangible personal property memorandum Leaves $250,000 in cash to each of his five grandchildren Leaves the family mansion to his brother Sam Leaves the remainder to the Barry Albee Revocable Trust Provides that debts shall be apportioned equally among the beneficiaries The will was signed by two witnesses, one of whom is Barry's brother, Sam. Barry's gross estate is valued at $2,862,000. The Albee mansion, worth $1.2 million, has a mortgage of $1 million. Barry has not created the Barry Albee Revocable Trust and has not drafted a tangible personal property memorandum. Which of the following statements is CORRECT regarding whether specific will clauses should be drafted or amended?

The tangible personal property clause should be amended to provide for disposition if a personal property memorandum is not in existence at the time of Barry's death. The debts clause should be amended to clarify whether the mortgage on the Albee mansion left to Barry's brother Sam is to be considered a debt for purposes of this clause. The remainder clause should be amended to provide for disposition if the Barry Albee Revocable Trust is not in existence at the time of Barry's death.

Eloise contributed a $100,000 stock portfolio to a trust for her granddaughter, Susan. Eloise's basis in the portfolio is $30,000. The trustee is Susan's uncle, but Eloise retains the right to control, change, or rescind the trust at her discretion. What are the gift tax implications of this transfer?

The transfer is not subject to gift tax because the gift is not complete. There is no gift tax due in this case because the gift is incomplete. Eloise retains the right to control, change, or rescind the trust at her will. An incomplete gift is not subject to gift tax. If the question said Susan was given trust assets, then the assets transferred to Susan would have been a gift from Eloise.

Which of the following statements regarding a family limited partnership (FLP) is CORRECT?

The transfer of the limited partnership interests to the junior family members may qualify for both a minority interest discount and a lack of marketability discount for federal gift tax purposes. The transfer of the limited partnership interests to the junior family members may qualify for both a minority interest discount and a lack of marketability discount for federal gift tax purposes. Limited partnership interests (not general partnership interests) are transferred to the junior family members and may qualify for valuation discounts. The transfer of such interests is a present interest and is eligible for the gift tax annual exclusion. An advantage of the FLP technique is that the senior family member retains the ability to control the business via retention of the general partnership interest.

Which of the following will a client expect an estate planner to be able to explain in relation to a transfer from one generation to another that is at least two generations removed from the transferor's generation?

The transfer will incur a tax in addition to any gift or estate tax The time at which the GSTT must be reported and when it will be due Who is responsible for reporting and paying the GSTT Ways in which the GSTT may be avoided or reduced All of these are important for an estate planner to know in order to help the client understand the consequences prior to deciding to make any GSTs.

Each of the following are characteristics of the tenancy by the entirety form of property ownership except

property that is owned by more than two individuals.

Daniel, age 70, consults a CFP® professional for help with his estate plan. He tells the CFP® professional that he owns substantial assets, all titled in his name alone, and that he is married to Roberta, who is 60 years old. Daniel and Roberta have no children together, but Daniel has two children from a prior marriage. Daniel tells the CFP® professional that he wants to ensure that Roberta has sufficient income to support herself if he should die first and that he wants to minimize the estate tax payable when he dies to the extent possible. Which of the following additional information should the CFP® professional obtain before making a recommendation to Daniel?

The value of Daniel's assets Whether Roberta has any sources of income and, if so, their amounts Whether Daniel wants any of his assets to ultimately pass to his children Whether Roberta is a U.S. citizen All of these statements are correct. Statement I is correct because the value of Daniel's assets will determine whether his estate might be subject to estate tax when he dies. Statement II is correct because the amounts of Roberta's income sources will determine whether Daniel needs to leave her any assets to ensure she has sufficient income to support herself. Statement III is correct because if Daniel wants to ensure that any of his assets ultimately pass to his children, he will need to limit Roberta's ability to control the disposition of the assets when she dies. Statement IV is correct because if Roberta is not a U.S. citizen, a QDOT will be necessary to ensure that any assets Daniel leaves to her will qualify for the marital deduction. (Domain 2)

Which one of the following is an advantage of all will substitutes?

They avoid the probate process.

Which of the following statements regarding Crummey trusts is CORRECT?

They usually provide a withdrawal right equal to the lesser of the amount of available annual exclusion or the value of the gift property transferred. They require that beneficiaries receive notification of their withdrawal rights. Statement III is incorrect. There can be gift tax consequences to the beneficiaries if the right to withdraw lapses and the amount exceeds the greater of 5% of corpus or $5,000 annual amount (5 or 5 power).

Vince died during the current year. His estate consisted of the following assets: Which assets will be included in Vince's probate estate?

Traditional IRA invested in a global stock fund and a balanced mutual fund—Vince's cousin, who died two years ago, was the designated beneficiary. This beneficiary designation was never changed by Vince. Life insurance policy with a cash value of $55,000 and death benefit of $500,000—the policy is on the life of Vince's sister. Vince's daughter is the named beneficiary. Land held as tenancy by the entirety with Vince's spouse. The IRA will be included in his probate estate because the named beneficiary predeceased Vince. The life insurance policy will be subject to probate because the insured (Vince's sister) is still alive. Therefore, the death benefit will not be paid out, and the insurance policy can be left to Vince's heirs in his will. The installment note receivable will be subject to probate. The land will not be subject to probate because it is held as a tenancy by the entirety. Tenancy by the entirety passes by operation of law and avoids probate.

Casey Atkins (age 68) and his wife, Margie (age 71), are a retired butler and nanny, respectively. They have one daughter, Gwen (age 38), and three minor grandchildren. They have no wills. They have a small combined estate consisting of the following assets: Grandmother's house (inherited and owned as equal JTWROS by Casey and his daughter, Gwen) $85,000 Personal residence (owned as equal JTWROS by Casey and Margie) $165,000Life insurance, $150,000 death benefit on Casey's life (owned by Casey; Margie and Gwen are named beneficiaries)$77,000 Classic automobiles (owned by Casey; need many repairs $95,000 Checking account and CDs (owned JTWROS by Casey and Margie) $38,000 Personal and household items (owned as equal JTWROS by Case and Margie) $78,000 Casey would like to be assured that both his daughter and grandchildren benefit from his most valuable asset, the classic automobile collection. The Atkinses would like to avoid probate. Given his assets and goals, which is the most appropriate will substitute for Casey?

Transferring the title to the antique automobiles to a revocable trust with Gwen and the grandchildren as the remainder beneficiaries. This will accomplish his goals of benefiting both Gwen and the grandchildren with the classic automobile collection, and of avoiding probate (since the legal owner of the automobiles will be the trust). Adding Margie as a joint tenant on the grandmother's house, adding Gwen to the checking account, or a P.O.D. designation of Gwen on the bank accounts and the CDs are not necessary because the assets already will avoid probate since they are in JTWROS with Gwen or Margie.

Which of the following statements regarding the income taxation of simple trusts is CORRECT?

Trust income is taxable to the trust beneficiaries. incorrect The trust itself is a separate taxable entity Statement II is incorrect because a simple trust is a conduit for distributions of income to the beneficiary and taxation occurs at the beneficiary level.

Which of the following factors should a business owner consider when creating a succession plan?

Whether the owner wants to transfer the business during life or at death If the owner wants to gift the business, whether the owner has sufficient income from other sources to make up for the loss of business income If the owner wants to transfer the business during life, whether the owner wants to retain control of the business until death

Which of the following statements regarding springing and nonspringing powers of attorney is CORRECT?

With a springing power of attorney, the attorney-in-fact's authority to act is delayed until the principal becomes incapacitated or incompetent. Both springing and nonspringing powers of attorney are used in planning for the principal's possible incapacity.

Which one of the following types of statutes may give a replacement bequest to a beneficiary who was given a specific asset in a decedent's will when that asset is not available at the testator's death?

ademption statute When a will identifies specific property to go to an heir, but that property is no longer in the decedent's estate, ademption statutes allow for a replacement item or cash equivalent.

All of the following techniques for making intrafamily transfers involve making a sale or a loan to a family member except

corporate recapitalization. A corporate recapitalization involves a gift to a family member, not a sale or loan.

Which one of the following will substitutes is not unilaterally revocable by the original owner of the affected asset if the owner is still competent?

property titled in tenancy by the entirety The original owner cannot unilaterally revoke either the half interest given to the other spouse at the time of titling or the half interest that the other spouse can get by surviving the original owner.

One advantage of all will substitutes is that

they pass outside of the probate process. Incorrect they are not included in the gross estate. they are irrevocable. they are revocable.

The clause in a will that disposes of real property is known as a

devise This is the correct term for a clause in a will that disposes of real property. A bequest is the term for a clause in a will that disposes of personal property. Legacy is an alternate term for a clause in a will that disposes of personal property, especially cash. A general bequest is the term for a bequest payable out of the general assets of the estate—i.e., those that are not specifically identifiable. Real estate is a specifically identifiable asset.

Jack Skelton recently died. His will leaves everything in equal shares to his wife, Elsie, and their three children. Elsie, who was named executrix, has discovered to her horror that Jack was indebted to virtually every person and business in town. So many claims have been filed against his estate that if they were all paid, Elsie and her children would get absolutely nothing from his estate. Which of the following laws would not help Elsie and her children retain some portion of Jack's estate?

elective or spousal share statutes. Even though an elective or spousal share statute may grant her a larger percentage of Jack's estate than did his will, the percentage is applied only after payment of all valid claims.

If a decedent's property does not pass to someone by will substitute or by will, and there are no legal heirs under the applicable state intestate succession statute, the property will

escheat to the state. The property will be held by the state in trust for a stated number of years, and if no legal heirs under the intestacy statutes come forward, the property escheats to the state.

The largest and most complete interest in property that one can own is

fee simple. The maximum ownership interest a person can have in property is known as fee simple.

All of the following statements regarding a preferred stock recapitalization freeze transaction are correct except

if shares are gifted to other family members, they are valued as of the date of completion of the recapitalization. A minority interest discount may be warranted if the transferred shares do not give their owner a controlling interest in business decisions. A lack of marketability discount may be warranted if there are restrictions on the sale of the stock imposed either by the corporation or by market conditions. The Chapter 14 rules would likely apply to such a transaction. Thus, the preferred shares should have a cumulative right to the dividends.

All of the following statements regarding step-up in basis at death are CORRECT except

if the decedent acquired property as a gift within one year of death, and if the donor of the gift to the decedent is the same person (or that person's spouse) to whom the property passes from the decedent's estate, the property receives a stepped-up basis at the decedent's death. Stepped-up basis is not available when a donor gives property to a donee in anticipation of the donee's death, if the donee dies within one year and the donee's will makes a bequest of the property back to the donor.

A durable power of attorney:

is a practical alternative for caring for the property of incapacitated clients. A durable power of attorney is a practical alternative for caring for the property of incapacitated adults. A durable power of attorney is effective until revoked, or terminated by death or the terms of the power, but is not terminated by incapacity. The extent of the durable power of attorney is limited only to the intent of the principal as expressed in the writing conveying the power. The durable power of attorney may confer upon the attorney-in-fact (not the executor) the right to act to the extent the principal could have acted, if the principal were present and able to act. A durable springing power of attorney may be effective immediately upon execution or may be made effective upon the principal's incapacity.

All of the following are characteristics of tenancy by the entirety except

it is recognized in all states. Tenancy by the entirety is a limited form of joint tenancy with right of survivorship that can exist only between spouses. It provides protection against the claims of each spouse's individual creditors, but not against the claims of joint creditors. It is not recognized in all states.

Belinda died without a valid last will and testament. All of her property was owned in her sole name. Which of the following goals did Belinda NOT achieve by electing this method of estate transfer at death?

maintaining postmortem liquidity By dying intestate, Belinda will provide estate beneficiaries with a stepped-up basis in estate assets. She will also be able to maintain control of and therefore liquidity before she dies, but since her entire estate is going through probate, there will be less estate liquidity postmortem because any liquidations will need court approval. Avoiding probate is not an issue because with solely-owned assets, her estate is going through probate with or without a will.

All of the following are techniques that can be used to prevent a child from a prior marriage from being disinherited except

making the child a contingent beneficiary on a life insurance policy. If the child is a contingent beneficiary on a life insurance policy, there is no certainty that he or she will ever receive anything; therefore, this technique would not prevent the child from being disinherited. With this technique, the child is given a vested interest in the property and a right to receive more of the property if he or she survives other joint tenants. Since the QTIP trust is irrevocable and the remainder interest is vested, it can be used to protect the child's inheritance. Although the gifts may have to be managed by a conservator, they cannot be used to benefit anyone except the child.

Use of the generation-skipping transfer tax (GSTT) exemption for lifetime skips is

not mandatory. Unlike the applicable credit amount that is used to keep a taxpayer from having to pay gift or estate taxes that would otherwise be due, use of the GSTT exemption for lifetime skips is not mandatory.

All of the following are methods to avoid probate except

owning real estate in states where the decedent is not domiciled. Owning real estate in other states is not a method to avoid probate. Typically a probate proceeding must be conducted in each state in which the decedent owned real property. Probating real estate in another state from a client's state of domicile is known as ancillary probate. Ancillary probate can be prevented by transferring the real estate to a revocable trust. It can also be prevented by gifting the property or selling the real estate if the situation warrants.

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?

pourover will A codicil is a document that amends or adds provisions to a will. A power of appointment is a legal device by which one person confers authority on another person to dispose of property on behalf of the person conferring the authority. A testamentary trust is a legal entity that has an obligation to keep or use property for the benefit of another and becomes operative only upon the death of the person who created it in their will.

All of the following statements regarding probate are correct except

probate is private in nature. correct probate can be costly and complex. probate provides for an orderly administration of the decedent's assets. probate can delay the distribution of assets to heirs.

When the owner-grantor transfers property and has the right to have all or part of the transferred property returned after an intervening interest, the owner-grantor's interest is known as a

reversion A reversion, also known as a reversionary interest, implies that an interest in the property is granted for a finite duration only and that the property will then return to the grantor. For example, the grantor could grant a life estate in the property to his mother, with the stipulation that the property would revert to him at her death.

Which one of the following is not appropriate for the use of a codicil?

revoking an existing will Execution of a codicil is not a recognized way to revoke an existing will. A codicil is often used to add a new provision to a will or to delete or amend a provision of a will.

The purpose of a qualified domestic trust (QDOT) is to

secure the marital deduction for property passing to a surviving spouse who is not a U.S. citizen. The purpose of a QDOT is to secure the marital deduction for assets passing to a noncitizen spouse.

Placing assets in joint tenancy with right of survivorship (JTWROS) with a spouse will assure the original owner that

the assets will avoid probate upon the original owner's death, so long as the joint tenant is still living. Placing an asset in JTWROS is a form of will substitute that passes outside of the probate estate.

Which of the following is an estate planning strategy that is available to unmarried cohabitants?

the charitable deduction. The charitable deduction is available to an unmarried cohabitant on the same basis as it is to all other taxpayers. Gift splitting is available only between legally married spouses. The marital deduction is available only for qualifying transfers between legally married spouses.

All of the following statements regarding the election to use the alternate valuation date (AVD) on the federal estate tax return are correct except

the executor is allowed to select which assets will be valued at the AVD and which will valued as of the decedent's date of death. If the executor elects to use the alternate valuation date, the election must be applied to all eligible assets in the gross estate; the executor is not allowed to choose among the assets.

If included as part of your married client's gross estate, which of the following property interests qualify for the marital deduction?

A life income interest in a testamentary charitable remainder trust to his wife as the only noncharitable beneficiary A life estate interest in, and a general power of appointment over, the family residence (titled in his name only) to his wife Incorrect A trust with income distributable at least annually to his wife and his children, with the remainder to the children at his wife's death A stock portfolio owned in joint tenancy with right of survivorship by the client and his brother Statement II is false because income is also paid to the children and to qualify for the marital deduction, income must only be payable to the spouse. Statement IV is false because JTWROS property owned with his brother will not qualify for the marital deduction. The spouse is completely left out of that property, so no deduction is available.

Michael and Marie are currently saving for Max's and Sam's high school educations by investing in CDs that are in the children's names. They are concerned that Max and Sam might cash in the CDs and use the funds for noneducational purposes once they reach the age of majority, which is age 18 in the state where the Andersons live. Which of the following planning alternatives might alleviate the Andersons' concerns?

Establishing trusts for the children's benefit Statement I is incorrect because with a custodial account, the account legally belongs to the child once the account is established. The children could still access the accounts when they turn 18. Statement II is correct. Establishing trusts would allow the Andersons to specify a date when the income and principal will be distributed to the children.

Rollie plans on purchasing some U.S. savings bonds with his son, Steven. He has been told that he can title the bonds either as "Rollie or Steven" or "Rollie payable on death to Steven." Which of the following statements are CORRECT regarding advantages and disadvantages of these two methods of titling?

Estimate a client's potential federal gift tax liability

Which of the following statements correctly identify estate planning activities that can be performed by a financial planner who is not also a licensed attorney?

Estimate a client's potential federal gift tax liability Advise a client that he or she needs a new will Statements I and IV are actions only a licensed attorney can perform. Planners can certainly estimate gift tax liability and determine if a current will meets client estate planning goals.

Manuel is evaluating the assets in his estate to determine his liquidity. Manuel owns assets such as collectibles, rental property, and closely held business interests. Which premortem liquidity planning technique(s) would benefit Manuel?

Manuel could reduce or eliminate the collectibles from his estate to enhance liquidity. Manuel could reduce or eliminate the rental property from his estate to enhance liquidity. Manuel could reduce or eliminate the closely held business interests from his estate to enhance liquidity. Reducing or eliminating assets such as rental property, collectibles, and closely held business interests before death can enhance an estate's liquidity position because these assets are inherently more difficult to value and require more time and effort to administer. These assets are likely to generate higher administration expenses than other property, increase the liquidity requirements of an estate, and lead to estate shrinkage.

Mary owns a $100,000 life insurance policy on the life of her spouse, Jenny. She names their son, Mark, as the revocable beneficiary. If Jenny dies,

Mary has not made a taxable gift and is not required to pay income tax on the proceeds from the policy. Because Mary is the owner of the policy and has named Mark as the revocable beneficiary, the payment of the death proceeds will be treated as a gift from Mary to Mark. This is an example of the "unholy trinity." It is never advisable for there to be three different people in the positions of owner, insured, and beneficiary. In this question, Mary is the owner. When Jenny dies, an asset owned by Mary gives money to Mark. Thus, Mary has gifted Mark the death benefits (minus the annual gift tax exclusion). The life insurance policy would not be in Jenny's estate when she died because she did not own the policy. If Mary wants Mark to get the death benefits, she should gift the policy to Mark so that he would own the life insurance policy and receive the death benefits when the insured dies.

When Marsha dies, her will leaves her entire estate to her surviving spouse, Daniel. Marsha's will provides that if Daniel does not survive Marsha by 90 days the estate will pass to their adult children. Daniel has sufficient assets of his own and would prefer that Marsha's property pass directly to their children now, instead of to him, but he wants to avoid making a taxable gift to them. Which of the following postmortem estate planning techniques would enable Daniel to achieve his objective?

Qualified disclaimer A qualified disclaimer will achieve Daniel's objective because it constitutes a refusal by Daniel to accept the property and allows the property to pass directly to her children without any gift tax consequences. A partial QTIP election is used to qualify a terminable interest for the marital deduction, and a reverse QTIP election is used to permit the decedent's estate to use the generation-skipping transfer tax exemption for QTIP property. An election against the will allows a surviving spouse who has been disinherited under the deceased spouse's will to claim a share of the deceased spouse's estate.

Rolando owned a parcel of real estate as an equal tenant in common (TIC) with his wife, Liz, and his brother, Sam. Rolando and Liz each contributed $50,000 to the original purchase price, and Sam contributed $20,000. Rolando recently died and is survived by Liz and Sam. Which of the following statements are CORRECT concerning a tax implication of this form of property ownership?

Rolando's estate must include one-third of the property's fair market value (FMV) as of the date of death. When they took title as TIC, both Rolando and Liz made a gift to Sam. Rolando's estate must include one third of the date of death FMV of the property because that is his percentage share of ownership. Contribution by the parties would be relevant only if the property were owned in joint tenancy. Sam obtained a one-third ownership interest, but paid less than one-third of the purchase price; thus, Rolando and Liz each have made a gift to Sam. Liz will not automatically receive Rolando's interest, as tenancy in common has no right of survivorship feature.

Which of the following statements regarding property owned as joint tenants with right of survivorship (JTWROS) between spouses is CORRECT?

The entire value of the property is included in the gross estate of the decedent spouse and the entire value of the property receives a stepped-up basis. Incorrect One-half of the property is included in the gross estate of the decedent spouse and one-half of the property receives a stepped-up basis. Statement I is incorrect because only one-half of the property is included in the gross estate of the decedent spouse and only one-half of the property receives a stepped-up basis. The stepped-up basis from the deceased spouse's half is added to the surviving spouse's original basis to determine the surviving spouse's new basis. This is different from community property in which both the deceased spouse and the surviving spouse receive a stepped-up basis.

Which of the following are CORRECT statements about the nontax characteristics of a pooled income fund?

The principal is distributed to the charitable beneficiary at the end of the noncharitable beneficiary's life. Incorrect It involves a trust created by the grantor solely for the benefit of that grantor and the charity. It must pay a fixed dollar amount to the noncharitable beneficiary annually. The income that can be paid to the noncharitable beneficiary is limited to 10% of the original principal unless the beneficiary is older than a specified age. Statement I is false because a pooled income fund is not a grantor trust. Statement II is false because income payments are based on returns of the fund in proportion to the donor's contribution relative to the total value of the fund. Statement IV is false because there is no limitation on the income percentage. A pooled income fund is like owning a mutual fund as joints tenants with right of survivorship (JTWROS) with a charity along with many other co-owners who all get a share of the income.

Your client established a funded revocable life insurance trust and transferred a $500,000 face value whole life insurance policy on his life into it. Your client's father was named trustee. The client has made no other lifetime gifts. If the client dies 18 months after establishing the trust, one disadvantage of this life insurance planning technique is that

the face amount of the transferred policy will be includible in the client's gross estate.

For direct skips, the generation-skipping transfer tax is paid by

the transferor or the transferor's estate. For direct skips, the tax is imposed on the transferor or the transferor's estate. Therefore, the direct-skip beneficiary receives the full amount of the transfer, while the remainder of the transferor's estate is diminished by the transfer.