Estate Planning Practice Questions
In 2018, Roland established an inter vivos irrevocable trust naming his wife as the sole income beneficiary of the trust. All income must be distributed annually. At his wife's death, the balance of the trust will be in her gross estate. The trust was funded with $3 million in cash and assets. Which one of the following most closely approximates Roland's taxable gift for this transfer?
$0
Assume that in 2023, Grant pays $30,000 directly to State University in payment of Alex's tuition. What is the amount of the taxable gift, assuming Grant makes no other gifts to Alex for the remainder of the year?
$0 The payment of tuition directly to a qualified educational institution is a qualified transfer, and is not considered a gift for gift tax purposes.
Greg died in 2022 and was survived by his wife and five children. At the time of his death, he owned these 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 these amounts most closely approximates Greg's net federal estate tax due? Use the Unified Federal Estate and Gift Tax Rates table.
$1,408,000 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 add $1,000,000 for adjusted taxable gifts, leaving the tax base at $16,440,000. Tax on this number is $6,521,800 [($16,440,000 less $1,000,000 = $15,440,000 × 40%) + $345,800]. Subtracting the applicable credit amount of $5,113,800 from $6,521,800 equals $1,408,000.
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 2023, assuming no gift splitting?
$170,000 Under Section 529, a donor can contribute up to $85,000 for each beneficiary without making a taxable gift. The total contribution he can make to both grandchildren without making a taxable gift is $170,000.
Mike and Jane, a married couple, bought a condominium 15 years ago for $200,000 as joint tenants with right of survivorship (JTWROS). When Jane died, the condominium was valued at $500,000. Four years after Jane's death, Mike sells the condominium for $600,000. What is the amount of Mike's capital gain?
$250,000 Mike received a stepped-up basis in one-half of the condominium at Jane's death. 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.
Your client, a widow, has made these lifetime gifts to her son in an effort to reduce the size of her gross estate: YearGiftTaxable Gift2012$323,000$310,0002016$254,000$240,0002023$467,000$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 2023?
$4,768,000 The total taxable gifts come to $1,000,000 and tax on the first $1,000,000 is $345,800. Subtract that from the 2023 applicable credit of $5,113,800 and the result is $4,768,000.
Your unmarried client has made these lifetime cash gifts: Total Gifts to DaughterTotal Gifts to Son2018$35,000$75,0002023$92,000$57,000 How much of your client's applicable credit is gone on December 31, 2023?
$53,200 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 and $17,000 for the gifts in 2023 to arrive at a net taxable gift total of $80,000 ([$35,000 − $15,000] + [$75,000 − $15,000]). The same applies to the 2023 gifts resulting in a net gift totaling $115,000 ([$92,000 − $17,000] + [$57,000 − $17,000]). To calculate the tax, you need to first figure the tax on the total of the gifts from both 2018 and 2023 ($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. The sum of $14,400 and $38,800 = $53,200.
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 Jon'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).
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).
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?
$850,000
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
Darwin, age 60, has an estate valued at $15 million. Included in the valuation of his estate are the following: A small U.S. Treasury note that is subject to changes in market value One-half ownership in Coeur d'Alene Estates, a private real estate development owned as a joint tenant with rights of survivorship with his sister, Anne 800,000 shares of Untell Inc., a public corporation traded on a major exchange; 50,000 shares of this stock are traded daily A joint and last survivor annuity that names his daughter, Ruthie, as the surviving annuitant When Darwin dies, which one of the following valuation techniques would most effectively reduce the value of his gross estate, and why?
A blockage discount on the publicly traded stock, because the stock is difficult to sell on a public exchange at one time and in such a large quantity
Which of the following statements regarding the goals of estate planning is CORRECT?
A client may have to choose between two or more estate planning techniques that will achieve his or her objectives.
Jose and Maria have been married for 50 years. They have three children and seven grandchildren. Their estate is $30 million. They do not want to rely on the deceased spouse's unused exemption (DSUE) because they have seen a lot of tax law changes through the years. They would like to arrange their assets so there are no estate taxes when the first spouse dies. Maria wants to be sure their son, Fred, receives their vacation home when the second of them passes away. Jose wants to ensure their daughter Amelia eventually takes possession of their family home upon the second of the couple to die. Other than these assets, they are fine with allowing the survivor to control the remaining property. Which of the following will best allow them to accomplish all three goals?
A combination of an A trust and a B trust
Which statement regarding bank accounts owned jointly with right of survivorship (JTWROS) is CORRECT?
A gift is made when the noncontributing joint owner (the donee) makes withdrawals.
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
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?
A pure life private annuity sale of the business to her daughter
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?
An entity buy-sell agreement between the business and each partner
Andy, age 68, has a gross estate currently valued at $2,500,000 that consists primarily of highly appreciated growth securities. Within the last six months, Andy transferred $500,000 worth of these securities to his wife, Harriet. His cost in these securities was $200,000. Harriet recently died. The fair market value of the transferred securities at the time of her death was $500,000. The securities passed to Andy under the terms of Harriet's will. Which one of the following is an income tax implication of the transfer of stock?
Andy's basis in the stock is $200,000. The basis Harriet received from the lifetime gift from Andy would be the same as Andy's. Because she did not live for more than one year, the property does not qualify as a reverse gift and get a stepped-up basis. The basis will remain $200,000.
The preliminary computation of assets in the Hugh Campbell Estate indicates the following: Farm land$6,000,000Farm machinery3,000,000Residue of Campbell estate11,000,000Total gross estate$20,000,000Administrative expenses(300,000)Debts of decedent (mortgage on farm land only)>(900,000)Other Deductions(1,200,000)Adjusted gross estate$18,800,000Taxable estate$18,800,000 Hugh, a U.S. citizen, purchased the farm land six years before his death and personally farmed the land throughout this same period. Hugh's will leaves the land and farm machinery to his son, Hobart, who hopes to continue farming the land. Why is the Campbell estate NOT entitled to use special use valuation in the calculation of estate tax due?
Because the combined value of the farm land and farm machinery, less secured debts, does not exceed 50% of the gross estate as adjusted for secured debts
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? I. Grant will receive a fixed annuity payment from the trust each year during the 10-year trust term. II. If Grant survives the 10-year trust term, the FMV of the trust assets will not be included in his gross estate
Both I and II
Which of the following statements regarding a springing power of attorney is CORRECT? I. With a springing power of attorney, the attorney-in-fact's authority to act is delayed until the principal actually becomes incapacitated or incompetent. II. A springing power of attorney can be used in planning for the principal's possible incapacity.
Both I and II
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
Your client, age 65, has a gross estate valued at $18.7 million. He and his second wife have two teenage children. In addition, your client has two children from his first marriage who are in their mid-30s. His objectives are to: leave an income stream and a portion of his estate to his current wife; leave a portion of his estate in trust for the teenage children from his current marriage; ensure that the children from his first marriage receive a portion of his estate; and reduce his federal estate tax liability. Which one of the following transfers is most appropriate for achieving the client's objectives?
Combination A-B-C (power of appointment, family bypass, and QTIP) trust arrangement
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
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.
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? 1. 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 41.66% of the property's FMV at the date of death, unless his personal representative can prove contribution by Sam. IV. After Rolando's death, Liz will be entitled to receive 83.33% of the income from the property because she will receive Rolando's interest by right of survivorship.
I and II
Tasha and her mother, Marleen, meet with a 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. If Marleen is in poor health, which of the following estate planning devices should Marleen include in her overall estate planning? I. Springing durable power of attorney for health care Advance medical directive Special needs trust IV. Qualified domestic trust (QDOT)
I and II
Which of the following are CORRECT statements regarding the characteristics and purpose of a "no contest" clause? I. This type of clause is used when a close family member is disinherited in a will. This type of clause imposes a penalty for contesting the validity of provisions in a will. This type of clause prohibits contesting the validity of provisions in a will. IV. This type of clause prevents a person from contesting a will if he or she has feloniously caused the death of the testator.
I and II
Which of the following are characteristics of a gift-leaseback? I. 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. The donor retains security in the gifted property. IV. The lease payments made by the donor to the donee are considered additional gifts.
I and II
Which of the following correctly identify a premortem technique that can be used to reduce the cash needs of an estate? I. 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. Investing in real estate, such as rental properties, and retaining closely held business interests. IV. Purchasing real property in multiple states for investment purposes.
I and II
If included as part of your married client's gross estate, which of the following property interests qualify for the marital deduction? I. A life estate interest in, and a general power of appointment over, the family residence (titled in his name only) to his wife 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 life income interest in a testamentary charitable remainder trust to his wife as the only noncharitable beneficiary IV. A stock portfolio owned in joint tenancy with right of survivorship by the client and his brother
I and III
Which of the following are CORRECT statements about the filing requirements and/or the responsibility for payment as they relate to federal transfer taxes? I. 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. A federal estate tax return need not be filed unless an estate owes estate taxes in excess of the unified credit. The beneficiary is responsible for paying the generation-skipping transfer tax on a distribution from a trust and must file a tax form. IV. A federal gift tax return need not be filed for a gift that is split with the donor's spouse.
I and III
Which of the following are characteristics of the probate process? I. It provides for the orderly distribution of property that passes by will or intestate succession to the ultimate beneficiary. It usually provides a longer time period for the filing of claims than if assets were to pass outside of probate. It provides for systematic administration of the decedent's estate. IV. It provides for administration of all of the decedent's gross estate.
I and III
Which of the following regarding state property law elections and allowances are CORRECT? I. Family settlement agreements may require court approval. An election against the will can be made by the deceased's surviving children. A homestead exemption prevents surviving family members of the decedent III. from losing certain property due to the claim of an unsecured creditor.
I and III
Which of the following statements regarding the group term life insurance provided by an employer are CORRECT? I. The employer can deduct the premiums paid as a necessary and reasonable business expense. No part of the premiums that the employer pays will be considered income to any of the employees. The death benefit of the policy will be included in the employee's gross estate. IV. The beneficiary of the death benefit will have taxable income to the extent that the death benefit exceeds the value of premiums paid by the employer.
I and III
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? I. Their wills need to be amended to provide for their minor children's personal care if there is no survivor. Their wills do not need to be amended to provide for the children because of intestacy statutes. Their wills do not need to be amended to be self-proving, as they will be grandfathered since they were already validly executed. IV. Their wills need to be amended to provide for the financial care of their children if there is no survivor.
I and IV
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? I. Having the estate pass under the laws of intestacy Having the estate assets distributed through probate Having the estate pay any estate tax IV. Having part of the estate pass to unintended beneficiaries
I and IV
Your client has an estate valued at $4 million. Two months ago, his wife died. He and his now deceased wife did not have any children together, but she had two children from a prior marriage. His will, drafted in 2012, leaves everything to his wife. No contingent 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? I. Having the estate pass under the laws of intestacy Having the estate assets distributed through probate Having the estate pay any estate tax IV. Having part of the estate pass to unintended beneficiaries
I and IV
If Marie dies today, which of the following statements is(are) CORRECT? I. Marie has died intestate. II. The ABC stock will pass through probate. III. State intestacy law will determine who receives the ABC stock after Marie's death.
I, II and III
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? I. 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. IV. If Joe's niece accepts this gift, she will have to pay a gift tax out of pocket.
I, II, III, and IV
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? I. 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. IV. The DSUE amount may not be available in some circumstances.
I, II, III, and IV
The CFP Board Rules of Conduct prohibits a CFP® certificant from doing which of the following activities? I. Borrowing money from a client who is not in the business of lending money II. Loaning money to a client III. Establishing relationships that might compromise the planner's objectivity (i.e., create a conflict of interest) without adequate disclosure IV. Omitting facts where that disclosure would mislead clients
I, II, III, and IV
Which of the following are factors that a financial planner should monitor for every client? I. Changes in the client's objectives Changes in the client's marital status Changes in property laws IV. Changes in the amount of lifetime gifts made by the client
I, II, III, and IV
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? I. Appointing of co-trustees Appointing a contingent trustee Providing a method for the appointment of a successor trustee IV. The age of the potential trustee
I, II, III, and IV
Which of the following are reasons business succession planning is complex and challenging? I. 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. IV. A new owner may have difficulty adapting to the idiosyncrasies of the owner's business.
I, II, III, and IV
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? I. 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 IV. The terms of an existing mortgage on the residence
I, II, III, and IV
Which of these statements best describes a CFP® certificant's role in defining a client's financial goals, needs, and priorities? I. 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. IV. The role of the planner in this process will involve exploring a client's expectations and time horizons.
I, II, III, and IV
Which of these statements regarding the federal gift tax return IRS Form 709 is CORRECT? Mary gives her son a remainder interest in her condo worth $14,500. George gives $5,000 of separate property to his son. If Mary, George's wife, elects to split the gift with George, they must file a gift tax return. George and Mary give $20,000 of community property to their son. No gift tax return need be filed. An extension of time for filing the gift tax return does not extend the time for payment of the gift tax
I, II, III, and IV
Minnie has made a gift of all her common stock in a closely held corporation to her son and daughter. The gifted shares constitute 20% of the issued and outstanding common stock of the corporation. Minnie will retain 30% of the preferred shares of the corporation, which will pay her a fixed, cumulative annual dividend. Which of the following would be relevant in arriving at the value of the gifted shares for gift tax purposes? The fair market value (FMV) of Minnie's interest in the corporation prior to the gift The FMV of Minnie's preferred shares in the corporation at the time of the gift A lack of marketability discount A blockage discount A minority interest discount
I, II, III, and V
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 owned by Gil before marriage that has not been commingled with community assets.
I, II, and III
Which of the following features apply to both the federal gift tax model and the federal estate tax model? I. Unlimited marital deduction for qualifying transfers Unlimited charitable deduction for qualifying transfers Use of an applicable credit amount IV. Allowance of an annual exclusion
I, II, and III
Which of the following is a skip beneficiary for purposes of the generation-skipping transfer tax (GSTT)? I. 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. III. An unrelated person who is younger than the transferor by 37½ years or more.
I, II, and III
Which of the following statements regarding cross-purchase buy-sell agreements funded with life insurance is CORRECT? I. 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. III. The number of policies required may become cumbersome if there are a large number of businessowners.
I, II, and III
Which of the following are prerequisites for application of the generation-skipping transfer tax (GSTT)? I. A gratuitous completed transfer Transferee deemed to be two or more generations younger than the transferor Transfer qualifies as a direct skip transfer IV. No exceptions or exemptions from the normal rules apply
I, II, and IV
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? I. The gift tax annual exclusion The estate tax charitable deduction A qualified domestic trust (QDOT) IV. A qualified personal residence trust (QPRT)
I, II, and IV
Which of the following are CORRECT statements concerning a buy-sell (business continuation) agreement funded with life insurance? I. The business is a party to the contract if a stock (entity) redemption plan is used. With a cross-purchase plan, the surviving shareholder's new cost basis is equivalent to his or her old cost basis plus the life insurance proceeds used to purchase the deceased shareholder's interest at the price established by the agreement. A cross-purchase plan is preferable to a stock (entity) redemption plan when all shareholders are in a higher income tax bracket than the corporation. With a stock (entity) redemption plan, premiums paid by the corporation on life insurance to fund the purchase are taxable income to the shareholders because they will eventually benefit. V. Under a stock (entity) redemption plan, the value of the deceased's business interest is included in his or her gross estate, while the life insurance proceeds used to purchase his or her business interest are excluded.
I, II, and V
In which of the following situations is a qualified domestic trust (QDOT) necessary for the donor to receive an unlimited gift tax marital deduction? I. The donor is a resident alien and the donee spouse is also a resident alien. 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. IV. The donor is a nonresident alien and the donee spouse is a resident U.S. citizen.
II and III
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? I. Advise a client as to who would receive property under the state intestacy statutes Estimate a client's potential federal gift tax liability Advise a client that he or she needs a new will IV. Draft a living will for a client to execute
II and III
Which of the following statements regarding cross-purchase buy-sell agreements funded with life insurance is CORRECT? I. 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. III. The number of policies required may become cumbersome as the number of businessowners increases.
II and III
You are a CFP® certificant with ABC Financial Solutions. A client has come to you for estate planning assistance. You should inform the client of which of the following? You cannot ethically provide the client with any estate planning assistance and must refer the case in its entirety to an attorney. II. You can be involved in data gathering, identifying estate planning goals, and identifying possible weaknesses and problem areas in the client's current situation. III. Your role will be working with and coordinating specialists such as attorneys, accountants, and trust officers whose expertise will be necessary to analyze tax and legal implications of suggested actions and to draft needed documents. You can review the client's current estate planning documents to interpret the contents and indicate what the legal implications of the document are for the client.
II and III
Which of the following are characteristics of the probate process? I. It facilitates the administration of an estate without publicity. It provides for distribution of property through a judicially supervised process. It results in reduced administrative costs and expenses to the estate. IV. It establishes a method for an orderly filing and paying of creditor claims against the estate.
II and IV
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? I. Establishing custodial accounts (i.e., UGMA or UTMA) for the children's benefit II. Establishing trusts for the children's benefit
II only
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? I. 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. The entire value of the assets gifted to the trust will be removed from the donor's gross estate only if he or she outlives the 10-year term. IV. Each year, as the trust pays income to the charity, the donor receives a charitable income tax deduction for that amount.
II only
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. 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.
II only
Of the following actions taken last year by Joan, which transfers must be included in calculating her total gifts for last year? I. Purchase of a certificate of deposit (CD) that is payable to her daughter on Joan's death 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 IV. Cancellation of an $25,000 debt owed to her by her best friend
II, III, and IV
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? I. "Rollie or Steven" would not avoid probate of the bonds. "Rollie payable on death to Steven" would give Rollie sole control of the bonds during his life. "Rollie payable on death to Steven" would allow Rollie to remove Steven as beneficiary. IV. "Rollie or Steven" would allow the survivor to become the sole owner of the bonds without the bonds going through probate.
II, III, and IV
Which of the following characteristics are required for a power of appointment trust ("A" trust) to qualify for the marital deduction? I. Authorization to the trustee to split trust income between the surviving spouse and other family members Mandatory distribution of all income earned by the trust to the surviving spouse at least annually Control by the surviving spouse over the ultimate disposition of the trust assets IV. Inclusion of the trust corpus in the surviving spouse's gross estate
II, III, and IV
Which of the following are important characteristics of the gift tax marital deduction? I. It enables the donor to avoid gift tax liability by transferring the entire liability for gift taxes to the donee spouse. It allows the donor to avoid gift tax liability on up to one-half of the value of the gifted property that is received by the donee spouse. It allows the donor to avoid gift tax liability on the amount of the gift in excess of the annual exclusion amount. IV. It allows the donor to avoid gift tax liability on a gift to a donee spouse.
III and IV
During her lifetime, Ella has made several property transfers. As her financial advisor, which of the following transfers would you tell her are completed transfers fully subject to gift tax for the purpose of calculating her federal gift tax liability? The $5,000 in cash for each of her nieces and nephews that she placed in a revocable trust last year for their benefit The $13,000 she paid four years ago to Pembroke Hospital to pay off her mother's medical bill III. The $8,000 remainder interest given to her son, Zeke, two years ago in the Ella D'Arno Irrevocable Grantor Retained Income Trust The $9,000 in cash she gave six years ago to her then husband, Roberto (this was her sole gift to Roberto that year)
III only
Which of the following are CORRECT statements about the nontax characteristics of a pooled income fund? I. 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 principal is distributed to the charitable beneficiary at the end of the noncharitable beneficiary's life. IV. 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.
III only
Last year, Gloria made the following gifts: $10,000 in cash to her husband, Geno Labor and services worth $5,000 to the Preserve Foundation, a qualified public charity $8,000 to a Section 2503(b) trust with her father as the mandatory income beneficiary and her children as the remainder beneficiaries $15,000 worth of non-income-producing real estate to a Uniform Transfers to Minors Act (UTMA) account for her son, Lance Her husband, Geno, refuses to sign the consent section of the Form 709 that Gloria must file. Which of the following reductions can Gloria claim from her total gift calculation? A marital deduction of $10,000 for the gift to her husband, Geno A charitable deduction of $5,000 for the gift to the Preserve Foundation An annual exclusion of $8,000 for the transfer to the Section 2503(b) trust IV. An annual exclusion of the maximum amount for the gift to the UTMA custodial account Gift splitting of all gifts except the gift to Geno
IV only
Lou inherited a parcel of real estate. Five years ago, he changed the title to joint tenancy with right of survivorship (JTWROS) with his wife, Eve. Lou would like to will the property to John, his son from a previous marriage, so John can use the property to start a business. What is one disadvantage of holding the property in its current form?
If Lou predeceases Eve, the property will pass to Eve as surviving joint tenant without regard to the terms of Lou's will.
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.
Which one of the following states a basic feature of the IRC Chapter 14 special valuation rules?
In a transfer of a closely held business interest to which these rules apply, they make any distribution right retained by the transferor that is not fixed in time and amount subject to gift tax.
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 of corporate or partnership interests, the retention of an interest that will pay a fixed cumulative dividend by the donor will constitute a qualified interest.
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)
George has a gross estate valued at $3.7 million. His estate consists almost entirely of publicly held stock owned solely by him. He owes no debts. George's only living relative is a nephew whom he hasn't seen or heard from for 30 years. George has not executed a valid will. If George were to die in the current year without change in any of the related facts, which one of the following is a disadvantage of the probate process for him?
It will not allow distribution of his estate without incurring considerable cost in attempting to locate his nephew.
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
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
Sharon gives Patrick the absolute right to use her vacation house for life and upon Patrick's death, all rights to the house are assumed by Sharon again. What types of property interests do Sharon and Patrick have, respectively?
Reversion and life estate
Your client, Rafer, owns a vacation home in another state. Rafer recently married for the second time and wants to include his new wife, Edna, on the title to the vacation home. At your last client meeting, he stated that his primary concern is that this property be left to Edna outside probate at his death while restricting her disposition of the property prior to his death without his consent. Rafer revoked his old will upon his marriage to Edna, but has not yet executed a new will. You are researching property ownership to identify the most appropriate form of titling for the vacation home in preparation for your next meeting with your client and his attorney. Which one of the following statements presents the most appropriate form of titling for the vacation home?
Tenancy by the entirety will prevent lifetime disposition without Rafer's consent.
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.
Andrew and Alicia are husband and wife who live in a community property state. Soon after their marriage they began establishing an emergency fund using money that each earned from their respective jobs. This fund was used to meet unexpected expenses as they arose. Three years ago, Alicia liquidated a bond fund that she had purchased prior to their marriage, and placed the proceeds in the emergency fund. There have been many deposits and withdrawals from the fund since that time. Last year, Andrew filed for divorce. Alicia is seeking to recover the full value of the bond fund proceeds that she placed in the emergency fund as her sole and separate property, and half of the remaining emergency fund. Andrew claims he is entitled to half of the entire emergency fund. Which one of the following statements is CORRECT regarding Andrew's and Alicia's rights in the emergency fund?
The entire emergency fund is community property, and Alicia and Andrew are each entitled to one-half of the total emergency fund.
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.
Paul and Cheryl are husband and wife who initially lived in a community property state. Soon after their marriage they began establishing an emergency fund using money that each earned from their respective jobs. This fund was used to meet unexpected expenses as they arose. Three years ago, Cheryl liquidated stock that she had purchased prior to her marriage, and placed the proceeds in the emergency fund. There have been many deposits and withdrawals from the fund since that time. Last year, Paul filed for divorce. Cheryl is seeking to recover the full value of the stock proceeds that she placed in the emergency fund as her sole and separate property, and half of the remaining emergency fund. Paul claims he is entitled to half of the entire emergency fund. Which one of the following statements is CORRECT regarding Paul's and Cheryl's rights in the emergency fund?
The stock proceeds are community property, and Cheryl and Paul are each entitled to one-half of the total emergency fund.
Joaquim is contemplating the sale of his solely owned business to his son in the form of a private annuity transaction. Which one of the following statements is CORRECT regarding the disadvantages of this type of transaction?
The transaction will not allow Joaquim to realize the full value of the business if he dies prior to his actuarial life expectancy.
Robert is the sole income beneficiary of a charitable remainder unitrust (CRUT) established by his recently deceased wife in her will. A qualified public charity will receive the trust remainder at Robert's death. Which one of the following is a CORRECT statement regarding the effect of this trust on the potential liquidity of Robert's estate at his death?
The trust represents neither a potential cash requirement nor a potential source of liquidity for Robert's estate.
Which one of the following statements describes a basic feature of one of the special valuation rules under IRC Chapter 14?
These rules cannot apply to a buy-sell agreement between two unrelated partners.
Ruth established a Section 2503(c) minor's trust for her 5-year-old granddaughter, Frances, and funded it with $20,000 of income-producing real estate. Ruth named herself as trustee. Which one of the following statements is CORRECT regarding this transfer?
This trust will allow Ruth to determine when Frances will be entitled to receive income from the trust.
Frank is a widower. He has a $17.2 million estate consisting primarily of undeveloped real estate and life insurance. His children are the beneficiaries of his life insurance. His will leaves $900,000 of probate assets to each of his three children, with the residue to his cousin, James. Frank learned that his estate may have liquidity problems when he dies. Which one of the following techniques is the most appropriate to increase liquidity in Frank's estate?
Transfer existing life insurance policies to an irrevocable life insurance trust with his children as beneficiaries, which allows the trustee to purchase some of the hard-to-sell property from the estate and/or to loan funds to the estate
Last year, your client and his wife gave their adult son a one-third interest in a commercial office building. Each has a one-third interest as tenants in common. If your client dies while still owning the property as a tenant in common, an estate tax implication of this form of property ownership is that
one-third of the value of the property will be included in your client's gross estate.
All of the following items of property would be considered community property in a community property state except
real estate received by one spouse during marriage as an inheritance from her mother.
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
For purposes of the generation-skipping transfer tax, any payment of income or principal from a trust to a person two or more generations junior to the donor's generation is a
taxable distribution.
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.
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
the client's contributions to the account will be excluded from his probate estate.
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 purposes of the generation-skipping transfer tax (GSTT) all of the following are considered skip persons except
the transferor's ex-spouse, who is 40 years younger than the transferor.
