Module 1: The Estate Planning Process, Goals, and Property Ownership Quiz 1

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

A - The remaining choices are tax-related financial goals.

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

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

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

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

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

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

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

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

You are a CFP® Certificant. A client has come to you for assistance. You should inform the client of which of the following? I. You can provide the client with "fill-in-the-blank" durable power of attorney forms for both finances and health care, as well as living wills, and help the client complete and execute these documents. II. You can be involved in data gathering, identifying goals, and identifying possible weaknesses and problem areas in the client's current situation. III. Your primary role will be working with and coordinating other financial planning professionals. IV. You can review the client's current documents to interpret the contents and indicate what the legal implications of the document are for the client. A) II and III B) III only C) II, III, and IV D) I only

A - Both II and III are legitimate and accepted roles of an educated financial planner (such as a CFP®) in the process. A financial planner is not legally or ethically prohibited from assisting a client with his or her estate plan but cannot advise a client regarding the content of the documents mentioned in Statement I. Interpreting the contents of a client's documents and informing him/her of the legal implications of those documents is not part of the financial planner's role because it usually involves some interpretation of state law, which is considered the unauthorized practice of law.

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

A - Carrie should leave a letter of personal instruction or side letter. It can be as simple as a handwritten note to her personal representative containing her instructions.

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

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

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

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

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

A - The answer is pourover will.

Which of the following types of property will be treated as separate property assuming the couple always has lived in a community property state? A) Real estate acquired by one spouse before the marriage B) A coin collection purchased by one spouse during the marriage C) A tax-exempt bond purchased by one spouse with the after-tax proceeds of her salary D) A closely held business interest purchased by one spouse during the marriage

A - The real estate acquired before the marriage is separate property.

Fred and Ethel live in a community property state. They acquired property during their marriage and classified it as separate property pursuant to a formal legal agreement. What is the effect of the formal legal agreement? A) The property is community property. Property classification cannot be changed pursuant to a formal legal agreement. B) The property is separate property so long as the formal legal agreement is valid (i.e., recognized by local law and entered into with the requisite intent). C) The property is separate property so long as the formal legal agreement is valid (i.e., recognized by local and federal law and entered into with the requisite intent). D) The property is community property. In community property states all property acquired during a marriage is considered community property.

B - A formal legal agreement will prevail if it is valid (i.e., recognized by local law and entered into with the requisite intent).

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

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

Which of the following statements regarding joint tenancy with right of survivorship is CORRECT? I. Property owned as a joint tenancy with right of survivorship avoids probate when the first owner dies. II. When a joint tenancy is created in real estate a joint tenant who contributes more than his or her share of the purchase price makes a gift to the other joint tenant. A) Neither I nor II. B) Both I and II. C) II only. D) I only.

B - Both statements are correct.

Which of the following statements concerning titling of assets captures its importance in estate planning? 1. Titling determines how the income of an asset as well as the proceeds from its sale would be split. 2. The distribution of income or sales proceeds not in fact divided as title dictates likely will create unintended gift and income tax consequences. A) Neither I and II B) Both I and II C) II only D) I only

B - Both statements are true.

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

B - JTWROS can be used by anyone, including spouses; only spouses can use TBE and CP.

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

C

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

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

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

C - All of these are advantages of owning property as JTWROS.

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

C - All would be examples of activity useful in establishing the client and planner relationship.

Which of the following statements about the importance of properly arranging the ownership and beneficiary designation are CORRECT? I. The identity of the beneficiary can affect whether the proceeds are available for the intended purpose. II. Life insurance could be a source of income replacement for a surviving spouse. A) II only B) Neither I nor II C) Both I and II D) I only

C - Both statements are true.

Which of the following statements concerning the transfer of a life insurance policy is correct? I. The matured death benefit is always excluded from gross income. II. The matured death benefit may be only partially excludible from gross income and partially includible in gross income. A) Both I and II B) II only C) Neither I nor II D) I only

C - If a life insurance policy has been transferred during the life of the insured, the death proceeds may be partially taxed under the transfer for value rules assuming there are no exceptions available.

Which of the following statements about analyzing the liquidity of an estate are correct: I. Payment of the decedent's debts must be considered. II. Payment of the estate's cost of administration such as appraisal fees must be considered. III. The ease of securing a death certificate must be determined to estimate how quickly survivorship benefits can be paid. A) I and II B) II and III C) I, II, and III D) I and III

C - Statements I, II and III are true.

Which of the statements about maintaining liquidity of an estate are correct? I. Premortem liquidity needs are not considered. II. Postmortem liquidity needs are met primarily with life insurance. A) Both I and II B) I only C) II only D) Neither I nor II

C - The need for premortem liquidity should be considered to meet the retirement needs of a client. Life insurance is the most likely source of liquidity at the death of a decedent.

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

D - A community property interest is subject to probate administration.

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

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

Which of the following is an advantage of spouses holding property jointly with right of survivorship? I. Total administration expenses and attorney fees may be reduced because the property avoids probate at the death of the first spouse. II. The surviving spouse now has a basis equal to the fair market value of the property at death of first spouse. A) II only. B) Neither I nor II. C) Both I and II. D) I only.

D - However the basis in the hands of the surviving spouse is the sum of her basis plus 1/2 the fair market value at date of the decedent's death.

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

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

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

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

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

D - This statement merely recognizes a well-established fact and does not constitute the unauthorized practice of law.