UNIT 11. Exam Estate Planning for Investment Clients

The trust that is used by the generation immediately below the decedent's generation to receive only an income interest in the family wealth is called the "next generation trust." True False

False A "generation-skipping trust" is used so that the generation immediately below the decedent's generation receives only an income interest in the family wealth, thus delaying imposition of the estate tax to a future generation.

A "skip person" is someone who is one or more generations below the person who makes a transfer. True False

False A "skip person" is someone, like a grandson to a grandfather, who is two or more generations below the person who makes a transfer.

A UGMA account can be used for the benefit of an adult child. True False

False A UGMA account can be used for the benefit of a child up to a maximum age, as specified by state law.

Life insurance proceeds are estate tax free. True False

False Life insurance proceeds can be subject to estate tax.

The opinion of an investment professional is often adequate in determining if a deed creates joint tenancy between two clients. True False

False Only an adviser who is authorized to practice law in the client's state may answer such a question.

Under certain circumstances, a date of six months after the decedent's death can be used as the estate valuation date. True False

True Although the usual estate valuation date is the date of the decedent's death, under certain circumstances a date of six months after the decedent's death can be used.

Community property acquired during a marriage generally belongs one-half to the husband and one-half to the wife, regardless of whose name is on the title. True False

True In community property states, regardless of whose name is on the title, community property acquired during a marriage belongs one-half to the husband and one-half to the wife.

Which one of the following statements about the marital deduction is false? The limit on the marital deduction for gift tax is lower than the limit for the estate tax marital deduction. The marital deduction merely delays tax. The marital deduction is unlimited in amount for qualifying transfers to a spouse who is a U.S. citizen. It may not be wise for the first spouse to die to give everything to the surviving spouse in a manner that will qualify for the marital deduction.

X The limit on the marital deduction for gift tax is lower than the limit for the estate tax marital deduction. The marital deduction is unlimited for qualifying transfers to a U.S. citizen spouse for both gift and estate tax. The marital deduction merely delays tax. The marital deduction delays tax only until the recipient spouse gives the property away or dies with it. The marital deduction is unlimited in amount for qualifying transfers to a spouse who is a U.S. citizen. The marital deduction is unlimited for qualifying transfers to a U.S. citizen spouse. It may not be wise for the first spouse to die to give everything to the surviving spouse in a manner that will qualify for the marital deduction. It may not be wise to qualify every transfer for the marital deduction for two reasons: (1) the first spouse to die will not be able to use his or her credit amount, and (2) the second spouse to die will have only one credit amount available to shelter the tax on the combined estates.

A Crummey power is a type of power of appointment. a condition for the use of gift splitting for gifts made to a trust. a trust provision that limits a beneficiary's right to assign his or her interest while it is still in the trust. the right of a trustee to distribute trust income or principal in unequal amounts to the beneficiaries.

X a type of power of appointment. A Crummey power is a type of power of appointment. a condition for the use of gift splitting for gifts made to a trust. A Crummey power does not place conditions on the use of gift splitting. a trust provision that limits a beneficiary's right to assign his or her interest while it is still in the trust. This statement describes a spendthrift provision. the right of a trustee to distribute trust income or principal in unequal amounts to the beneficiaries. This statement describes a sprinkle or spray provision.

If there is no will, a person is said to die intestate. testate. ex-testate.

X intestate. Intestate refers to the situation where a person dies without a will. testate. Testate refers to the situation where a person dies with a will. ex-testate. The proper term for a situation where a person dies without a will is intestate.

A person who wants to provide directives concerning life-sustaining medical measures that are to be used on that person would execute a Crummey power. a living will. a pourover trust.

a Crummey power. A Crummey power is used to make additions to the trust qualify for the gift tax annual exclusion. X a living will. People create a "living will" when they want to dictate ahead of time their wishes concerning life-sustaining medical measures that are to be used on them. a pourover trust. A pourover trust allows estate assets to be added to the trust after death.

Gift splitting allows a sister and brother to contribute up to twice the maximum annual exclusion amount to an individual with no gift tax liability. a married couple to double their allowable annual exclusions. a father and son to contribute up to the maximum annual exclusion amount to an individual with no gift tax liability.

a married couple to double their allowable annual exclusions. Gift splitting allows a gift of property owned by one spouse to be treated as if it were made one-half by each spouse, thereby doubling the allowable annual exclusions.

Trusts can provide income tax savings. gift tax savings. estate tax savings. all of the above.

all of the above. Trusts can provide savings in income tax, gift tax, and estate tax.

The gross estate is best defined as all property owned by the decedent. all property that is subject to the federal estate tax. all property in the probate estate.

all property owned by the decedent. The gross estate includes all the property that is subject to the federal estate tax, whether or not owned by the decedent, and whether or not included in the probate estate. X all property that is subject to the federal estate tax. The property that is subject to the federal estate tax is considered the gross estate. all property in the probate estate. Property in the probate estate is only one possible element of the gross estate.

A living will is irrevocable. applies only when a patient is terminally ill and incompetent to make medical decisions. is usually broad in scope.

applies only when a patient is terminally ill and incompetent to make medical decisions. Only when a patient is terminal and incompetent to make medical decisions will the provisions of a living will apply.

A type of trust from which the grantor receives all income earned by the trust is a grantor retained income trust (GRIT). grantor retained annuity trust (GRAT). grantor retained unitrust (GRUT).

grantor retained income trust (GRIT). The GRIT provides for the grantor to receive each year all of the income from the trust.

If a decedent dies intestate, her property would likely escheat to the state. her property would go to her surviving spouse for life, then to her children. her property would be distributed to her family and friends. her property that does not pass by will substitute will be distributed according to her state's intestate succession statute.

her property would likely escheat to the state. Intestate property escheats to the state only if the surviving kin are too remote to receive an inheritance. her property would go to her surviving spouse for life, then to her children. Intestate distributions are always present interest transfers, not a future interest as is given to the children in this statement. her property would be distributed to her family and friends. Intestate succession statutes make no distributions to friends of the deceased. X her property that does not pass by will substitute will be distributed according to her state's intestate succession statute. In these circumstances, state law determines who receives which property and in what amount.

A contingent (standby) trust is funded at the time it is executed. is an irrevocable trust. is funded at some point in time after it is initially established. is usually created in a person's will.

is funded at some point in time after it is initially established. The contingent trust is funded if, and only if, the grantor becomes incompetent, which may be many months or years after it is established.

A recipient of gifted property receives a basis in the property equal to its fair market value at the time of the gift. receives the decedent's income tax basis if the value of the property equals or exceeds the donor's basis. receives a basis equal to what a willing buyer would pay for the property.

receives the decedent's income tax basis if the value of the property equals or exceeds the donor's basis. The recipient receives the decedent's income tax basis if the value of the property equals or exceeds the donor's basis.

A custodial account for a minor is established under Internal Revenue Code Section 2503(c). a revocable transfer of property. required to terminate when the minor reaches the age of majority as specified by state law. not subject to the federal gift tax at its creation.

required to terminate when the minor reaches the age of majority as specified by state law. Custodial accounts must terminate when the minor reaches the age of majority as specified by state law.

Ownership between spouses is an essential characteristic of tenancy in common. joint tenancy. tenancy by the entirety.

tenancy by the entirety. Tenancy by the entirety is a type of joint ownership specifically between spouses.

The valuation date for gifts is the date the donor originally purchased the gifts. the date on which the donee takes possession of the gifts. the date on which the transfer is completed.

the date on which the transfer is completed. The date of completion of the gift is the valuation date for gifts.

All of the following assets in a decedent's estate require probate except the decedent's interest in property held in tenancy in common. the decedent's interest in a limited partnership. the decedent's interest in property held in joint tenancy with right of survivorship that the decedent left to his son in his will. the decedent's interest in property that he owned in fee simple when the decedent had no will.

the decedent's interest in property held in joint tenancy with right of survivorship that the decedent left to his son in his will. Right of survivorship property bypasses probate.

All of the following assets would be included in a decedent's gross estate except an irrevocable trust established ten years before his death; decedent was the trustee, and an income beneficiary at his death. an irrevocable trust established by the decedent five years before his death that named the decedent as the sole remainder beneficiary after the ten-year trust term. a power of appointment held by the decedent over a trust established by the decedent's brother that allowed the decedent to use the power to appoint the trust property to anyone the decedent chose. the decedent's vested interest in a single life annuity on the decedent's life.

the decedent's vested interest in a single life annuity on the decedent's life. Because no payments will be made to a survivor as a result of the decedent owning this asset, there is nothing to include in the decedent's gross estate.

A tax disadvantage of making a lifetime gift rather than a transfer at death is that the gift tax is tax exclusive. the annual exclusion is available only for present interest gifts. the marital deduction is larger for estate taxes. the gift tax exclusion amount is not portable between spouses, but the estate tax exclusion amount is portable.

the gift tax exclusion amount is not portable between spouses, but the estate tax exclusion amount is portable. There is no portability of the gift tax exclusion amount, but the estate tax exclusion amount is portable.

Which one of the following is not a federal transfer tax? the gift tax the estate tax the generation-skipping transfer tax the income tax

the income tax There are now only three federal transfer taxes; the income tax is assessed on the accumulation of wealth, not its transfer.

The marital deduction for a recipient spouse who is a U.S. citizen is a maximum of $1 million. a maximum of $10 million. unlimited.

unlimited. For a recipient spouse who is a U.S. citizen, the marital deduction is unlimited.

An investment professional who is not an attorney is engaged in the unauthorized practice of law when he or she counsels a client regarding the rules of the federal estate tax. meaning of estate planning terms. advisability of having a will. validity of a living will.

validity of a living will. Determining the validity of a living will is not an allowable activity for an investment professional.

The main difference between a revocable living trust and a contingent (standby) trust is the type of assets that can go into each. the duration of each trust. when trust funding occurs.

when trust funding occurs. A revocable living trust is funded when the trust is created. A contingent trust is funded only after the grantor becomes incapacitated.

Tenancy in common is a form of property ownership that can be used only by a husband and wife. has a right of survivorship feature. will require probate upon the death of a tenant. allows each tenant to sell his or her share only with the consent of the other.

will require probate upon the death of a tenant. Property held in tenancy in common is subject to probate.