Estate Planning ALL

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.

all

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.

all

Which of the following types of transfers are subject to the generation-skipping transfer tax (GSTT)? Direct skips Taxable terminations Taxable distributions

all

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

William dies on March 3, 2021, 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? 2020 2021 2022

all

Assuming Anthony decides to use the AATB Family Limited Partnership (FLP) to begin transferring wealth to his children, which of the following statements regarding this wealth transfer technique is CORRECT? Anthony will make gifts of limited partnership interests to the children. Anthony's gifts to the children will not qualify for the gift tax annual exclusion. Anthony will retain control over the FLP by keeping the general partnership interest. Anthony's gifts to the children may take advantage of valuation discounts. A) II only B) I, III, and IV C) I and III D) I, II, III, and IV

1, 3, 4 Statement II is incorrect because Anthony's gifts of the limited partnership interests to the children will qualify for the gift tax annual exclusion.

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

1,2

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 Executing and giving someone a durable power of attorney

1,2,3 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.

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?

1.3 million 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.

A grandfather is considering making gifts to his grandchildren in 2021. Assuming the grandfather has made no previous generation-skipping transfers, the generation-skipping transfer tax (GSTT) lifetime exemption amount available to the grandfather in 2021 is

11.7

The estate tax applicable credit amount of $4,625,800 in 2021 effectively shelters what amount of taxable property transfers from the estate tax?

11.7 The applicable credit amount of $4,625,800 in 2021 shelters $11,700,000 in taxable transfers at death.

Wallace has an estate valued at $20 million. He is married and has two adult children. In 2021, 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 Wallace leave to the bypass trust (B trust) in implementing his plan?

11.7million To implement his bypass planning, Wallace will leave an amount equal to the estate tax lifetime exemption ($11,700,000 in 2021) to the B trust and leave the remainder of his estate to the C trust.

Which of the following charitable trusts may invest in tax-exempt securities? Pooled income fund Charitable remainder annuity trust (CRAT) Charitable remainder unitrust (CRUT) A) III only

2, 3

Jason wants to contribute $10 million to a charitable trust. He expects to receive a large inheritance in a few years, so he wants to receive an income interest from the trust for only 15 years and not for life. Which of the following charitable trusts will meet his needs? Pooled income fund Charitable remainder annuity trust (CRAT) Charitable remainder unitrust (CRUT)

2, 3 Statement I is incorrect because in a pooled income fund, the donor (or one or more named beneficiaries) must retain a life income interest. Retained term interests are not allowed. Statements II and III are correct.

A decedent is a U.S. citizen who owned a farm immediately prior to the date of his death. Which of the following conditions must be met before special use valuation is allowed for estate tax purposes? The value of the farm must constitute at least 75% of the decedent's gross estate. The farm must pass to a qualified heir. The decedent or a member of his family must have materially participated in the operation of the farm for at least five out of the eight years prior to his death. The farm must continue to be used as a qualified use for at least 10 years after the decedent's death.

2, 3, 4

Alice is interested in making deductible charitable contributions, but she does not want to incur the expense of drafting a private trust agreement. Which of the following planning techniques will meet her needs? Charitable remainder trust Charitable gift annuity Charitable lead trust Pooled income fund

2, 4 Charitable gift annuities and pooled income funds do not involve the use of private trust agreements. Statements I and III are incorrect because charitable remainder trusts and charitable lead trusts involve the use of private trust agreements.

Which of the following are CORRECT statements about the responsibility for payment of the federal generation-skipping transfer tax? When a taxable termination occurs, the beneficiaries receiving distributions from the trust are responsible for paying any generation-skipping transfer tax that may be due. The estate of a decedent is responsible for paying any generation-skipping transfer tax due on a direct skip transfer made by the decedent's will. When a taxable distribution occurs, the trustee of the trust making the distribution is responsible for paying any generation-skipping transfer tax that may be due. The donor is responsible for paying any generation-skipping transfer tax due on a direct skip made during life.

2, 4 Option I is incorrect because upon a taxable termination, the trustee is responsible for paying any GST tax due; also, there may not be any distributions with a taxable termination. Option III is incorrect because upon a taxable distribution, the beneficiary receiving the distribution is responsible for paying any GST tax due.

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 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 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. He should consider making a reverse gift of any highly appreciated assets that he has.

2,3 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.

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 lead trust (CLT) Charitable remainder annuity trust (CRAT) Charitable remainder unitrust (CRUT)

3 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 meet the basic requirements for a charitable gift to be deductible for income, gift or estate tax purposes? When Grandpa died, his estate tax was enormous. To lower his estate tax, his heirs decided to contribute $1 million in his name to the Red Cross. A qualified appraisal must generally accompany a tax return reflecting donations of property valued in excess of $3,500. Contributions are only deductible if they are made to a charity as defined by the Internal Revenue Code. Contributions of a split interest must be made in the form of a specified trust or remainder interest.

3,4 Statement I is incorrect. Contributions from an estate directed by the heirs are not deductible for estate tax purposes. Only charitable contributions directed by the decedent are deductible for estate tax purposes. Statement II is incorrect. Qualified appraisals are required when a donated property is in excess of $5,000. Statement III is correct. Only contributions to an organization defined by the Internal Revenue Code are deductible. Statement IV is correct. There are rules about split interest gifts which must be followed. LO 7.2.2

Which of the following statements regarding an estate's need for liquidity is NOT correct? A) Real estate is a liquid asset. B) Selling illiquid assets to increase estate liquidity can be undesirable. C) Savings and checking accounts owned by the decedent at death are possible sources of estate liquidity. D) Liquid assets are assets that can be quickly converted to cash without a significant loss of principal.

A

Which one of the following statements regarding a qualified domestic relations order (QDRO) is correct? A) A QDRO can identify the nonparticipant spouse as an alternate payee. B) A QDRO can force the plan administrator to increase benefits. C) A QDRO can require the plan administrator to provide a benefit option that the plan does not otherwise provide. D) A QDRO cannot identify a dependent as an alternate payee.

A A QDRO can identify the nonparticipant spouse as an alternate payee. A QDRO can identify a dependent as an alternate payee. A QDRO cannot force the plan administrator to increase benefits or provide a benefit option that the plan does not otherwise provide.

All of the following statements regarding charitable gift annuities (CGAs) are correct except A) a CGA presents no risk to the donor-annuitant because the agreement is secured. B) with a CGA, the donor transfers cash or appreciated property to a charity in return for the charity's promise to pay an annuity to the donor or other designated annuitant. C) the donor of a CGA is eligible for an immediate income tax deduction for the full amount transferred. D) the annuity payable under a CGA may be for one or two lives using a joint and survivor payment.

A A charitable gift annuity presents some risk to the donor-annuitant because it is unsecured. The donor of a gift tax annuity receives an income tax charitable deduction for the difference between the FMV of the assets transferred and the present value of the annuity.

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? A) Charitable remainder unitrust (CRUT) B) Charitable lead unitrust (CLUT) C) Charitable remainder annuity trust (CRAT) D) Charitable lead annuity trust (CLAT)

A A charitable remainder unitrust (CRUT) will best meet the Bells' needs because 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 CRAT provides a fixed annual income payment. 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. This is the opposite of what the Bells want.

Which one of the following statements regarding planning with a nonresident alien spouse is correct? A) A gift to an alien spouse may qualify for a super annual gift tax exclusion. B) Gift splitting is allowed if one spouse is a nonresident alien and the other spouse is a resident alien. C) If a U.S. spouse transfers property to a nonresident alien spouse, he or she may use the unlimited federal marital deduction. D) A non-citizen spouse cannot gift property to a U.S. spouse.

A A gift to an alien spouse may qualify for a super annual gift tax exclusion pursuant to IRC Section 2523. Gift splitting is not allowed if either spouse is a nonresident alien. The unlimited federal marital deduction is not available to a nonresident alien regardless of the donee spouse's residency or the donor spouse's citizenship status.

Assume that in 2021, Anthony sells all of his stock in Benson's Animal Care Center to Nicole for $1 million. All of the following statements regarding this sale are correct except A) the stock will be included in Anthony's gross estate when he dies. B) this transaction is a bargain sale. C) Anthony makes a gift of $1.25 million as a result of the transaction. D) Anthony realizes a taxable gain of $975,000 as a result of the transaction.

A Because this is an example of a bargain sale, the value of the stock will not be included in Anthony's gross estate. The difference between the fair market value of the stock ($2.25 million) and the purchase price received ($1 million) is treated as a gift. The difference between Anthony's basis ($25,000) and the purchase price ($1 million) is treated as taxable gain.

Carrie is preparing her estate plan and wants to include instructions for her funeral. What method should she use? A) She should leave a letter of personal instruction (side letter). B) She should include her instructions in her will because it will be the first thing that will be read after her death. C) She must include these instructions in a formal, notarized list of instructions drawn up by her attorney. D) She must include these instructions in a codicil to her will.

A 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.

If Anthony died today, all of the following estate tax features would apply to his estate except A) modified carryover basis for most inherited assets. B) $11.7 million exemption amount. C) portability of unused exemption lifetime amount between spouses (subject to some restrictions). D) 40% top estate tax rate.

A For decedents dying in 2021, the estate tax lifetime exemption amount is $11.7M million, the top estate tax rate is 40%, and portability of the unused exemption amount is available between spouses. Inherited assets, other than income in respect of a decedent, generally receive a stepped-up basis.

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. You can be involved in data gathering, identifying estate planning goals, and identifying possible weaknesses and problem areas in the client's current situation. 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

A II and III

All of the following statements regarding pooled income funds are correct except A) the property contributed by each donor is kept separate within the fund. B) the charity receiving the remainder interest must be a 50% charity. C) no donor or income beneficiary may be a trustee of the fund. D) the property in the fund is managed by the charity.

A In a pooled income fund, the property contributed by each donor must be commingled with the property contributed by other donors. All the other statements are correct.

Which of the following is the definition of income in respect of a decedent (IRD)? A) Income to which the decedent was entitled, but had not yet received, at the date of death B) Income earned by a decedent's estate following the decedent's death C) Income earned on inherited assets after a decedent's estate is closed D) Income the decedent received within six months before the date of death

A Income in respect of a decedent (IRD) is income to which the decedent was entitled, but had not yet received, at the date of death.

Which of the following are important characteristics of the gift tax marital deduction? 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. It allows the donor to avoid gift tax liability on a gift to a donee spouse.

A 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.

Generally, for generation-skipping transfer tax (GSTT) purposes the measure of value is A) the property's fair market value (FMV). B) the lower of the property's cost or fair market value (FMV). C) the value of the property adjusted for depreciation. D) the transferor's initial cost of the property.

A The measure of value is generally the property's FMV.

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) An entity buy-sell agreement between the business and each partner B) A cross-purchase buy-sell agreement among the partners C) A private annuity agreement among the partners D) A preferred stock recapitalization of the business

A This is the best choice because only four policies are required with an entity purchase plan as compared to the 12 policies a cross-purchase plan would require. Neither a private annuity nor a preferred stock recapitalization make sense for this scenario as the partners are not family members. LO 3.2.3

John Cie, before he was sworn in as governor of his state, established a trust to manage his property through a corporate trustee, without his direction or input, for an irrevocable period of six years—the length of his term of office. As he intends to live solely from his salary as governor, none of the trust income is to be distributed to him. At the end of the six-year term, the principal of the trust will revert to John, but all accrued income is to be distributed equally to John's spouse and to his children, who are currently five and nine years of age. Which one of the following is a correct statement regarding this trust? A) At least one-third of the income of this trust will be taxable to John even though he will never receive it. B) The income will be taxed to the trust until distributed, and to the recipients upon distribution. C) The income of this trust will be taxable to John, as his spouse has retained a reversionary interest that exceeds 5% of the value of the trust at its creation. D) The income of this trust will be taxable to John because he has retained the power to revoke the trust.

A This trust is subject to one of the grantor trust rules since the trust income is accumulated and one-third of the income will be distributed to the grantor's spouse (and possibly all of the income will be taxed to John because of his reversionary interest). The grantor trust rules apply to at least part of the income. John's spouse has retained nothing, and John has not retained such powers.

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?

B 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 are CORRECT statements concerning a buy-sell (business continuation) agreement funded with life insurance? 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. 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. A) I and III B) I, II, and V C) II and IV D) II, III, and IV

B When shareholders are in a higher income tax bracket than the corporation, a stock (entity) redemption, not a cross-purchase plan, is preferable because payment of premiums by the corporation provides a greater economic benefit to the shareholders than payment of salaries and/or dividends to them which will be taxed at a higher rate before they are used to pay premiums. Under a stock redemption plan, the premiums are paid by the corporation with after-tax dollars (i.e., premiums are not deductible to the corporation) and therefore are not taxable income to the shareholders.

Assume the Bensons decide to update their wills. Which of the following should be included in their new wills? Provision for guardians of minors Funeral instructions Beneficiaries for retirement accounts A) II and III B) I only C) I and II D) III only

B Statement II is incorrect. Because the will is often read after the funeral, funeral instructions should be included in a side instruction letter. Statement III is incorrect. Retirement plan assets will automatically pass to the beneficiaries designated on each plan account, regardless of the will.

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 I and II

Which of the following statements regarding qualified personal residence trusts (QPRTs) is CORRECT? A QPRT may have an interest in more than one residence. There are no restrictions on who may occupy a residence that is owned by a QPRT.

Both I and II

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.

Both I and II Both of these statements are correct. If the executor takes a partial QTIP election, then only that percentage of the QTIP is in the estate when the initial surviving spouse dies. For example, when Ahmed died, his executor chose a partial QTIP election for 45% of Ahmed's QTIP. When Marsha, Ahmed's widow, dies, only 45% of the QTIP at her death will be in her gross estate.

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? A) Springing power of attorney for property B) Nondurable power of attorney C) Durable power of attorney for health care (DPOAHC) D) Living will

C 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.

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 A) the client's contributions to the account will be excluded from his gross estate. B) all funds can be withdrawn by either the client or his girlfriend without gift tax consequences. C) the client's contributions to the account will be excluded from his probate estate. D) the other joint tenant, his girlfriend, may not withdraw the funds from the account without his consent.

C A joint tenancy with right of survivorship (JTWROS) designation is a will substitute that will allow this asset to pass outside of probate. The girlfriend, once added, can make withdrawals without his consent. The account value will be included in his gross estate and, since the girlfriend did not contribute to the account, any withdrawals she makes are gifts.

For purposes of the generation-skipping transfer tax (GSTT) all of the following are considered skip persons except A) an unrelated person who is younger than the transferor by 37½ years or more. B) the transferor's grandchild. C) the transferor's ex-spouse, who is 40 years younger than the transferor. D) a trust in which all of the beneficiaries are two or more generations below the transferor.

C A transferor's spouse or ex-spouse is not a skip person, regardless of age. Also, any children of a spouse or ex-spouse are only one generation below the spouse(s). For example, if a 70-year-old married a 30-year-old who already has a 3-year-old child from a different relationship, the 30-year-old spouse is legally considered to be of the same generation as the 70-year-old and the stepchild is only one generation below the 70-year-old. LO 7.1.1

Which of the following persons are not typically given priority in state statutes regarding health care proxies? A) A patient's legally married spouse B) A patient's blood relative C) A patient's unmarried cohabitant D) A patient's child named as power of attorney for health care

C Priority for appointment as a health care proxy is given to a patient's legally married spouse, if any, and then to the patient's blood relatives, especially if they are the attorney-in-fact for a DPOAHC.

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? A) $0 for gains and $0 for losses B) $43,350 for gains and $43,350 for losses C) $50,000 for gains and $42,000 for losses D) $48,000 for gains and $40,000 for losses

D 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.

In which of the following does a taxable distribution occur? A) A taxable distribution occurs whenever an interest in trust property terminates (by death, lapse of time, release of power, or otherwise). B) A taxable distribution occurs when a distribution is made to a skip party at the termination of the trust. C) A taxable distribution occurs when a distribution is made to a skip party as the result of the death of a nonskip party. D) 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.

D 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 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. 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. Each year, as the trust pays income to the charity, the donor receives a charitable income tax deduction for that amount. A) I and IV B) I, II, and III C) I and III D) II only

D In a charitable lead trust, the charity receives the income with the remainder to a noncharitable beneficiary. The present value of this remainder interest is taxable. Therefore, the charitable gift tax deduction I is the present value of the income interest. III is incorrect as the entire value of the trust assets is removed from the grantor's gross estate no matter when the grantor dies. IV is incorrect as the amount of the charitable income tax deduction is based on the value of the gift to the charity in the year the gift is made, not on income earned.D I

Assume Anthony dies today and his estate qualifies for a Section 303 stock redemption with respect to the Benson's Animal Care Center common stock. Which of the following statements regarding this redemption is CORRECT? Benson's Animal Care Center can redeem some of Anthony's stock in the corporation and have the transaction treated as a sale rather than a dividend. There is no limit on the dollar amount of stock that is eligible for the favorable tax treatment under Section 303. A) Both I and II B) Neither I nor II C) II only D) I only

D Statement II is incorrect because the stock that can be redeemed under Section 303 is limited to an amount equal to the total of the decedent's federal and state estate taxes plus administrative expenses.

Which of the following regarding state property law elections and allowances are CORRECT? 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 from losing certain property due to the claim of an unsecured creditor. A) I and II B) I, II, and III C) II and III D) I and III

D Statement II is incorrect. An election against the will protects a surviving spouse, not the surviving children, from potentially being disinherited.

Which of the following statements regarding charitable gift annuities (CGAs) is CORRECT? A) The donor of a CGA is eligible for an income tax deduction equal to the fair market value (FMV) of the donated property. B) Only cash, and not appreciated property, may be donated to charity in a CGA. C) A CGA is usually secured and presents no risk to the donor-annuitant. D) A CGA is a contract between a donor and a qualified charity in which the donor transfers cash or appreciated property to the charity in exchange for an annuity. Explanation

D The donor is eligible for an income tax deduction equal to the FMV of the donated property minus the present value of the annuity to be received. A CGA is unsecured and presents some risk to the donor.

All of the following are issues unique to unmarried persons in nontraditional family relationships except A) ensuring that a nonrelative has control of, or is included in, medical decisions affecting an unrelated person. B) ensuring that nonrelatives receive the assets that they wish them to have. C) eliminating or minimizing transfer taxes without the use of gift splitting and the marital deduction. D) qualifying transfers at death to an unrelated person for a step-up in income tax basis.

D The step-up in income tax basis at death is governed by the Internal Revenue Code, and is available regardless of whether the decedent and the recipient of property are related or married to each other. Distribution of estate assets must not be left to the laws of intestate succession in this situation, or the unrelated party will receive nothing. Related persons are given priority to make these decisions if the patient has not appointed someone according to state law while he or she is competent to do so. Gift splitting and the marital deduction are unavailable to persons who are not legally married. Therefore, other means must be found to reduce transfer taxes.

Case Study Question Which one of the following statements regarding the Rules of Conduct that relate to the area covered by the Principle of Professionalism is CORRECT? A) Disclosure need only be made once in a financial planning relationship. B) A CFP® certificant is free to negotiate an additional compensation agreement for payment outside of the agreement for the certificant's compensation from his or her employer with regard to a client, without having to notify the employer of such outside agreement. C) A CFP® certificant has a duty not to disparage fellow CFP® certificants working for the same financial planning firm, but has somewhat different standards for CFP® certificants working for other firms. D) A CFP® certificant cooperates with fellow certificants to enhance and maintain the profession's public image and improve the quality of services.

D There are many parts of the Rules of Conduct that relate back to the Principle of Professionalism; among them is not disparaging others whether they are at your firm or another firm. At any time during a client-planner relationship, new information that affects the relationship must be disclosed. Negotiating an additional compensation agreement for payment outside of the agreement for the certificant's compensation from his or her employer with regard to a client, without having to notify the employer of such outside agreement is a good way to get terminated from your employer and most definitely is not professional behavior.

Which of the following is a fiduciary relationship concerned with the property management of a ward? A) Power of attorney B) Guardianship C) Trust D) Conservatorship

D This describes a conservatorship. A guardianship is a fiduciary relationship created to enable one 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.

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?

D 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.

Jaleel is concerned that there will not be sufficient liquid assets in his estate to cover the necessary expenses at his death. Which of the following is NOT a way to improve the liquidity position of his estate? A) Eliminating specific cash bequests from his will B) Placing a nonexoneration clause in his will C) Selling his art collection prior to death D) Assuring that any real estate purchased in another state is titled solely in his name

D This is the correct answer because assuring that any real estate purchased in another state is titled solely in Jaleel's name would have an adverse effect on the liquidity position of an estate. Real property titled solely in Jaleel's name must be probated, and probate of real estate must occur in the state in which the property is located. Therefore, real estate located in a state other than where the primary probate is occurring requires a separate, additional probate known as ancillary probate. Probate proceedings—particularly those conducted far from the location of the personal representative and beneficiaries—add to estate administrative expense, which increases the need for additional cash.

Which one of the following statements regarding the use of a revocable living trust to benefit an unmarried cohabitant at death is incorrect? A) The property in such a trust will not be subject to a will contest. B) The property in such a trust will not be subject to probate. C) The property in such a trust will remain under the control of the grantor until death. D) The property in such a trust that passes to the unmarried cohabitant will be entitled to the marital deduction.

D 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 constitutes a direct skip for purposes of the generation-skipping transfer tax (GSTT)? A) A testamentary bequest from father to son B) A transfer in trust granting a life estate to daughter, remainder to grandson C) A transfer in trust benefiting the remainder person (granddaughter) after the death of the life tenant (son) D) A lifetime gift from grandmother to granddaughter

D A direct skip for purposes of the GSTT is any transfer in which only skip parties (defined as individuals at least two generations below the transferor) have an interest. The transfers in trust may also be taxable for GSTT purposes but are not classified as a direct skip.

Thatcher is concerned because he has a significant amount of secured debt and does not want his personal representative (PR) to have to use his liquid assets to pay off these debts. Which of the following is a premortem strategy that Thatcher can use to achieve his goals? A) Thatcher's PR can sell the secured property. B) Thatcher can make a qualified disclaimer of the secured property. C) Thatcher's PR can use the alternate valuation date. D) Thatcher can use a nonexoneration clause.

D) A nonexoneration clause can be placed in a will, to the effect that the beneficiary who receives property burdened by a mortgage must accept the property subject to the mortgage. The remaining answer choices are postmortem, not premortem, liquidity planning techniques.

Which of the following statements regarding the development of a cash flow plan to maintain an estate's liquidity is NOT correct? A) The timing of some of the estate's cash outflows will be fairly predictable. B) The executor should anticipate that there may be a delay in receiving life insurance proceeds on the decedent's life. C) The cash flow plan should be flexible enough to account for the possibility of unexpected expenses. D) In developing a cash flow plan for an estate, it is generally not possible to reduce the estate's cash needs.

D) It may be possible to reduce the estate's cash needs by using special elections available under the estate tax laws—for example, Section 2032A, special use valuation for farm property; Section 303, stock redemption from a closely held corporation; or Section 6166, installment payment of estate taxes. In fact, gifting assets while alive can reduce the gross estate, and thus, estate taxes. Further, the strategic use of gifting can also help an estate qualify for the special elections just noted. For example, gifting nonbusiness assets increases the percentage of the estate held as a farm or business. It also may be possible to address the estate's cash needs by using life insurance trusts and reducing debts over time while the client is alive.

Which of the following statements regarding the use of the alternate valuation date (AVD) for estate tax purposes is NOT correct? A) Wasting assets must be valued at their date of death fair market value, even if the AVD election is made. B) The AVD election cannot be made unless it results in a reduction of the amount of federal estate tax owed by the decedent's estate. C) The AVD election allows the executor to value estate assets at their fair market value six months after the decedent's date of death. D) The executor is allowed to pick and choose which assets will be valued as of the decedent's date of death value and which will be valued at the AVD.

D) The AVD election is an all-or-nothing choice, and the executor is not allowed to pick and choose which assets will be valued as of the decedent's date of death and which will be valued at the AVD.

Which of the following statements regarding a taxable termination is CORRECT? A taxable termination cannot occur as long as at least one nonskip beneficiary has an interest in the trust property. If a taxable termination occurs, the skip person is responsible for paying any generation-skipping transfer tax (GSTT) that may be due. A taxable termination occurs when an interest in a trust is terminated because of death or lapse of time, resulting in a skip beneficiary holding interests in the trust.

I and III Statement II is incorrect; if a taxable termination occurs, the trustee is responsible for paying any GSTT that may be due.

Which of the following statements regarding the estate tax lifetime exemption amount is CORRECT? The estate tax lifetime exemption amount is $11,700,000 for 2021. The estate tax lifetime exemption amount is not portable between spouses.

I only

Which of the following are advantages of establishing an irrevocable life insurance trust (ILIT)? Avoidance of probate for trust assets Flexibility in distribution of trust assets to beneficiaries Removal of life insurance death proceeds from decedent-insured's gross estate

I,II,III These are all advantages of establishing an ILIT.

Which of the following statements regarding durable powers of attorney is(are) CORRECT? The power survives the incapacity of the principal. The power survives the death 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.

I,III,IV

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 property must have been owned by Phil (or a member of his family) and used as a farm for three of the past five years. II. 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

II

Juan and Maria are spouses. Juan has children from a previous marriage. When he dies, he wants to ensure that Maria has sufficient income to support herself for the rest of her life, but he also wants to ensure that the remainder of his estate passes to his children when Maria dies. Which of the following marital trusts may allow Juan to meet his goal of controlling the ultimate disposition of the trust property? General power of appointment trust (A trust) Bypass trust (B trust) QTIP trust (C trust)

II and III

Which of the following forms of ownership do NOT pass through probate when an owner dies? Fee simple Tenancy by the entirety Community property Joint tenancy with right of survivorship (JTWROS)

II and IV Joint tenancy with right of survivorship (JTRWOS) and tenancy by the entirety do not pass through probate because they both include a right of survivorship and pass to the surviving joint owner(s) by operation of law.

A grandfather wants to transfer commercial real estate to a trust and retain an income interest from the property for 10 years. He wants to ensure that the income interest from the trust will provide a potential hedge against inflation. At the end of the 10 years, he wants the real estate to pass to his three grandchildren equally. Which of the following trusts would satisfy the grandfather's objectives? Grantor retained annuity trust (GRAT) II Grantor retained unitrust (GRUT)

II only

Which of the following statements regarding grantor retained annuity trusts (GRATs) is CORRECT? If the grantor dies before the end of the trust term, the assets in the GRAT are not included in the grantor's gross estate. It is possible to zero out a transfer to a GRAT so that no taxable gift is made when assets are transferred to the trust.

II only

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? 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. II. Your client will have a taxable estate of zero if the QTIP election is made for the assets in the QTIP trust. 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.

II only

Roxanne, a widow, has a gross estate valued at $999,000. One-fourth of her estate is in raw land held for speculation, and another large portion is in a closely held partnership, valued at $380,000. Roxanne's will leaves all property to her son, with all debts, expenses, and taxes to be paid from the residue. She has employer benefits of about $200,000, payable to her son. Five years ago, she created an irrevocable life insurance trust, which is the owner and beneficiary of a $150,000 life insurance policy on her life; her son is the only beneficiary of the trust. She has made prior taxable gifts of $600,000. Which of the following postmortem techniques are available and advisable to increase liquidity in Roxanne's estate if she were to die today? A Section 6166 extension and installment payment of taxes An election of special use valuation for the raw land A request to the trustee of the irrevocable insurance trust to purchase some of the hard-to-sell property from her estate A Section 303 stock redemption

III only This estate will not qualify for a Section 6166 extension and installment payment of taxes because the raw land is less than 35% of her adjusted gross estate. A special use valuation is not allowed because the land is not a farm. Section 303 does not apply because the business is not incorporated.

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

Which of the following are examples of gift giving that are likely to result in favorable tax consequences? An advantage of giving property with a current value that is less than its basis (loss property) is that when the recipient sells the property the loss is available to offset any gains. Elderly taxpayers should give highly appreciated, low basis property in preference to cash. Making net gifts is a technique for clients who do not have very much in liquid assets and who want to make taxable gifts. The donee can depreciate depreciable property based on its value for gift tax purposes.

Statement I is incorrect; the double basis rule would not permit this favorable treatment. Statement II is incorrect; at the date of death, the property basis would be adjusted to fair market value. Statement III is correct. Statement IV is incorrect; the property would be depreciated on the basis of its adjusted basis, not its fair market value.

Which of the following are characteristics of the probate process? 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. It provides for administration of all of the decedent's gross estate. A) II and IV B) I and III C) I and II D) III and IV

Statement II is false because there is a shorter, not longer, time period for the filing of claims than if assets were to pass outside of probate. Statement IV is false because gross estate is used only for estate tax purposes and the probate process has nothing to do with that calculation.

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). Upon the death of one joint tenant, the property passes as directed by the decedent's will. 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 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. Joint tenancies may only be established between spouses. All joint tenants have the right to sever their interest in the property without the consent of the other joint tenant(s). A will is necessary to pass a joint tenant's interest in the property to the other joint tenant at death.

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).

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

the assets will avoid probate upon the original owner's death, so long as the joint tenant is still living.

Who owns equitable title to trust assets?

the beneficary

A partnership has two partners. Each partner owns an equal share, and the fair market value of the partnership is $3 million. If the partners implement a cross-purchase buy-sell agreement funded with life insurance, each policy will have a death benefit of

$1.5million

Davis died in 2021 and was survived by his spouse and two children. At the time of his death, he owned the following property interests: Solely owned property valued at $6 million Property owned in joint tenancy with right of survivorship (JTWROS) with his spouse, with his share valued at $2 million Davis's will made no charitable bequests and provided that his entire probate estate go equally to his surviving children. Other pertinent facts include the following: Davis made $1 million in post-1976 taxable gifts. Davis's estate had $170,000 in allowable debts. Davis's estate had funeral expenses of $80,000. Davis's estate had administrative expenses of $100,000. Davis's estate paid $50,000 in state death taxes. Which of the following amounts most closely approximates Davis's federal estate tax base (also known as his tentative tax base, which is the amount with which he enters the estate tax table)?

$6,600,00

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?

$7.0 million 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 statements regarding private foundations is CORRECT? The amount of the income tax charitable deduction for contributions to a private foundation depends partly on whether the foundation is a 50% organization or a 30% organization. Private foundations are tax-exempt charitable organizations created by an individual or family to direct charitable contributions for a specific purpose. A disadvantage of private foundations is the donor's inability to control the investment and distribution of contributed money.

1, 2 Statements I and II are correct. Statement III is incorrect because an advantage of private foundations is the donor's ability to control the investment and distribution of contributed money.

When a married couple divorces, one estate planning issue that may arise is allowing one spouse access to retirement benefits earned by the other spouse. This goal can be achieved by use of a qualified domestic relations order (QDRO). Which of the following statements correctly identifies an advantage or a disadvantage of a QDRO? An advantage of using a QDRO is that it can be used to satisfy the plan participant's obligation to pay child support, alimony, or marital property rights. An advantage of using a QDRO is that it can force the plan administrator to accelerate the distribution of benefits to the alternate payee. A disadvantage of using a QDRO is that distributions to an alternate payee who is the participant's spouse are taxable to him or her to the same extent they would have been to the participant. An advantage of using a QDRO is that if the participant's spouse is the alternate payee, his or her interest may be distributed to an IRA owned by the spouse. A) II, III, and IV only B) II and IV only C) I and III only D) I, III, and IV only

1, 3, 4

Danielle is establishing a grantor retained annuity trust (GRAT). Her life expectancy is 10 years. To achieve optimum estate tax results, the term of the GRAT should be which one of the following periods?

8 years

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 separate property so long as the formal legal agreement is valid (i.e., recognized by local law and entered into with the requisite intent). B) 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). C) The property is community property. Property classification cannot be changed pursuant to a formal legal agreement. D) The property is community property. In community property states all property acquired during a marriage is considered community property.

A

Which of the following items is NOT deducted from the gross estate to arrive at the adjusted gross estate? A) State death taxes B) Funeral expenses C) Administration expenses attributable to property subject to claims against the estate D) Casualty losses incurred during the period of estate administration

A

Which one of the following persons would be the most well-suited to serve as a witness to a living will? A) A person in the drafting attorney's office B) A person who works for the patient's medical provider C) A beneficiary of the will D) A person related by blood or marriage

A A witness should be a disinterested party. Since a person in the drafting attorney's office is likely to be disinterested in the patient's financial and medical affairs, he or she can serve as a witness to a living will. A witness should be a disinterested party. Since a person related by blood or marriage is likely to have an interest in the patient's financial andor medical affairs, he or she should not serve as a witness to a living will. A witness should be a disinterested party. Since a person who works for the patient's medical provider is likely to have an interest in the patient's medical affairs, he or she should not serve as a witness to a living will.

A transfer where at least one nonskip party has a current interest in the transferred property after completion of the transfer is known as A) an indirect skip. B) a taxable distribution C) a direct skip. D) a taxable termination

A 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.

The alternate payee's interest in retirement plan benefits subject to a qualified domestic relations order (QDRO) may be distributed in all of the following ways except A) directly to the alternate payee before the plan participant is eligible for withdrawals from the plan. B) to a qualified plan in which the alternate payee is a participant. C) to an IRA owned by the alternate payee. D) in periodic payments to the alternate payee after the plan participant reaches reti

A The plan benefits may be paid directly to the alternate payee, but not before the plan participant is eligible for withdrawals from the plan. The plan benefits may be paid to an IRA owned by the alternate payee. The plan benefits may be paid in periodic payments to the alternate payee after he or she reaches retirement age. The plan benefits may be paid to a qualified plan in which the alternate payee is a participant if the plan allows.

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? A) 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. B) The transfer is a direct skip to a collateral heir, so GSTT will be imposed. C) The transfer is a direct skip, since Grace is the grandchild of Thomas, so GSTT will be imposed. D) The transfer is an indirect skip.

A The transfer is a direct skip to a lineal heir, since Grace is the grandchild of Thomas; however, since Grace's parents are deceased, the deceased parent skip rule applies and GSTT is not imposed. The deceased parent skip rule allows a transferee to move their generation if they are a descendant of a parent of the transferor and their parent is dead at the earliest time the transfer became subject to either gift or estate tax. LO 7.1.2

Which one of the following assets is subject to probate?

A condo held as tenancy in common with a sibling

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.

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

A person who dies with a valid will

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.

"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 is a method by which assets can be transferred both during life and at death? A) Irrevocable trust B) Testamentary trust C) Right of survivorship D) Beneficiary designation

A) An irrevocable trust can be used to transfer assets both while the grantor is alive (inter vivos) and when the grantor is dead (testamentary).

Which of the following statements correctly describes the gross-up rule? A) Gift taxes paid on gifts made within three years of the date of death must be included in the gross estate. B) Gift taxes paid on any gifts made during the decedent's lifetime must be included in the gross estate. C) The value of any gifts made within three years of the date of death must be included in the gross estate. D) Gift taxes paid on gifts made within five years of the decedent's death must be included in the gross estate.

A) Gift taxes paid on gifts made within three years of the date of death must be included in the gross estate. The gross-up rule states that gift taxes paid on gifts made within three years of the decedent's death must be included in the gross estate. This is an example of being taxed on a tax. The deceased is estate taxed on the gift taxes paid out of pocket within three years of death (not the value of the gifts on which the gift taxes were paid).

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

A) Maintaining liquidity B) Maintaining a satisfactory standard of living C) Avoiding ancillary probate D) Obtaining a stepped-up basis ANSWER

Which of the following is a premortem technique to increase estate liquidity? A) Sell illiquid assets B) Making a DSUE election C) Taking advantage of eligible deductions on the estate tax form 706 D) Use of the homestead exemption

A) Sell illiquid assets The remaining options are postmortem techniques.

Which of the following is typically a reason for establishing a supplemental needs trust? A) To pay for the needs of a beneficiary who is receiving public assistance while protecting assets from government attachment B) To receive assets that are transferred under the grantor's will C) To plan for the grantor's potential legal incapacity and avoid probate if the grantor dies D) To make medical decisions on behalf of a beneficiary who is terminally ill

A) 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.

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

Which of the following correctly explains why a beneficiary who received nonprobate assets by will substitute may agree to the use of all or part of the assets to meet estate liquidity needs?

All of these. All three answers correctly explain why a beneficiary who received nonprobate assets by will substitute may agree to the use of all or part of the assets to meet estate liquidity needs. First, without the aid of such nonprobate beneficiaries, the personal representative (PR) may be forced to liquidate probate assets to meet cash needs. If the nonprobate beneficiary also is to receive a bequest, it may be considerably reduced or eliminated because in a forced liquidation of estate assets, the estate is likely to have to sell assets far below their fair market value, and administrative expenses will be greatly increased. Second, if taxes are equitably apportioned, the PR usually has authority to withhold the probate share of a beneficiary who has received a nonprobate asset that generates estate tax or to sue such beneficiary for her share of the taxes. Finally, if property received by a nonprobate beneficiary was included in the decedent's gross estate, and estate taxes are not paid, the IRS has the right to pursue nonprobate beneficiaries to collect such tax. In some cases, this might involve the filing of a lien against the property that the beneficiary received from the decedent.

Ronald James wants to establish a trust for his financially challenged adult daughter. He wants to contribute money yearly to the trust, but his daughter would get only the income. The residue or remainder would go to his grandchildren (her children) at her death. Ronald wants the daughter to receive all the earnings from the trust with no limitations. He realizes that she will probably just give the money away, but wants to otherwise protect her from her creditors. Which one of the following trusts should you recommend that Ronald establish for the benefit of his daughter?

An irrevocable trust, including spendthrift provisions

The estate planning tool that 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 is a A) power of appointment. B) durable power of attorney. C) will. D) living will.

B A durable power of attorney allows the attorney-in-fact to make decisions for the principal during a period of incapacity.

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) A family partnership of the business with her daughter as co-partner B) A pure life private annuity sale of the business to her daughter C) A recapitalization of the business with her daughter as co-shareholder D) An installment sale of the business to her daughter

B 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.

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? A) Place the undeveloped real estate in a qualified terminable interest property (QTIP) trust and make the QTIP election B) 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 C) Change the beneficiary on his life insurance to his estate D) Amend his will to place the undeveloped real estate in an estate trust

B Neither a QTIP trust nor an estate trust will change the liquidity situation. Naming the estate as beneficiary would cause that asset to go through probate and doesn't change the dollar amount that the children will receive.

All of the following statements regarding step-up in basis at death are CORRECT except A) if the fiduciary of the decedent's estate elects the alternate valuation date (six months after the date of death) for the valuation of property for federal estate tax purposes, then the taxpayer takes a basis equal to the FMV of the property at the alternate valuation date. B) 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. C) the property's appreciation will escape taxation because of the step-up in basis to the property's current FMV. D) if the property is includable in the gross estate of the decedent for federal estate tax purposes, the taxpayer receiving the property takes a basis in the property equal to its FMV as of the date of the decedent's death.

B 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.

If Anthony dies today, which of the following statements regarding the interests left under Anthony's will is CORRECT? Tara receives a present interest in Anthony's assets. The Bensons' children receive a present interest in Anthony's assets. A) Neither I nor II B) I only C) Both I and II D) II only

B Tara receives a present interest in Anthony's assets because she receives an income interest. Statement II is incorrect because the children's remainder interest in the trust assets is a future interest.

Which one of the following statements about the use of a springing durable power of attorney is correct? A) The attorney in fact has immediate authority to act for the principal. B) The attorney in fact generally must obtain a letter from the principal's physician prior to acting. C) The attorney in fact's authority will survive the principal's death. D) The attorney in fact receives title to the principal's property.

B The answer is the authority of the attorney in fact under a durable power of attorney will survive the principal's incompetency, but not his or her death. The authority of the attorney in fact is not immediate in a springing durable power of attorney, as it does not "spring into action" until the occurrence of a stated event—usually the principal's incompetency. The attorney in fact does not take title to the principal's property but merely has authority as the principal's agent to deal with the principal's property according to the terms of the instrument. A springing power of attorney becomes effective upon incapacity, which generally must be confirmed by two physicians.

Which of the following is NOT a potential advantage of a buy-sell agreement funded with life insurance? A) It guarantees there will be a buyer for the business when an owner dies. B) Premiums paid on the life insurance policies used to fund the agreement are tax deductible. C) It can fix the value of the business for estate tax purposes. D) It provides liquidity for a deceased businessowner's estate.

B The premiums paid on a life insurance policy used to fund a buy-sell agreement are not tax deductible.

Which of the following are prerequisites for application of the generation-skipping transfer tax (GSTT)? A gratuitous completed transfer Transferee deemed to be two or more generations younger than the transferor Transfer qualifies as a direct skip transfer No exceptions or exemptions from the normal rules apply A) III and IV B) I, II, and IV C) II and III D) I and II

B These are the three prerequisites for application of the GSTT. Transfers can qualify as either a direct or indirect skip and be liable for the GSTT. The times at which the GSTT must be reported and will be due depends in the first instance on whether the GST is a direct or indirect skip. LO 7.2.2

James was gifted a house during the current year. At the date of the gift, the house had a fair market value (FMV) of $175,000, and the donor's adjusted basis was $105,000. The donor paid a gift tax of $12,000 on the gift. The donor did not have the annual exclusion available for this gift. What is James's basis in the house?

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. Therefore, James's basis is calculated as follows: donor's adjusted basis + [(unrealized appreciation ÷ FMV at date of gift) × gift tax paid]. Or, here, $105,000 + [($70,000 ÷ 175,000) × $12,000] = $109,800. $105,000 + $4,800 = $109,800.

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.

Both

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.

Both II and III

Which of the following is NOT a benefit of using a will substitute for liquidity planning? A) A will substitute allows for flexibility if it is revocable. B) A will substitute will reduce estate administration expenses. C) A revocable will substitute will remove the asset from the gross estate. D) A will substitute can avoid ancillary probate on assets owned outside of a decedent's state of domicile.

C

Which of the following statements regarding the annual exclusion for purposes of generation-skipping transfer tax (GSTT) is(are) CORRECT? The annual exclusion amount is $15,000 for 2021. The annual exclusion is allowed for lifetime direct skips. The annual exclusion is allowed for testamentary direct skips. A) II and III B) I only C) I and II D) I, II, and III

C

Which one of the following actions would probably not constitute the unauthorized practice of law by a nonattorney financial planner? A) Advising a client to change from sole ownership of property to joint tenancy with right of survivorship (JTWROS). B) Drafting a power of attorney for a client C) 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) Advising a client to conduct business as a partnership rather than a corporat

C

If Anthony died today, what amount of life insurance proceeds would be included in his probate estate? A) $250,000 B) $1,750,000 C) $0 D) $25,000

C Because of the beneficiary designations, the proceeds of Policy 1 would pass by contract to the four children, and the proceeds of Policy 2 would pass by contract to Tara. None of the proceeds would be included in Anthony's probate estate.

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? A) The testamentary transfer from Lou to John will occur without Eve's consent. B) Lou's one-half will not qualify for the marital deduction when it passes to Eve. C) If Lou predeceases Eve, the property will pass to Eve as surviving joint tenant without regard to the terms of Lou's will. D) The property will be included in Lou's gross estate based upon his relative contribution.

C By owning the property as JTWROS, Lou can only transfer his interest in the property to John in his will if he survives Eve. If Lou dies before Eve, the property will pass to her by right of survivorship. Lou's interest would qualify for the marital deduction when it passes to Eve. The relative contributions toward purchasing the property are irrelevant with spouses. Each spouse is defined by law as having contributed half. Also, even though Lou has made no contribution to acquire this property (it was inherited), his original basis would be the stepped-up basis from the person from whom he inherited the property. If he dies before Eve, Lou's will can have no effect upon JTWROS property. None of the property will be received by John if Lou predeceases Eve unless the current ownership form is changed.

For taxable distributions from a trust, the generation-skipping transfer tax is paid by A) the transferor or the transferor's estate. B) the trustee. C) the transferee. D) both the transferor and transferee, jointly.

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

Which one of the following is a true statement about taxable distributions? A) The trust involved in a taxable distribution is responsible for paying any GSTT due. B) The return used to report a taxable distribution is the federal estate tax return, Form 706. C) Each skip person who received a taxable distribution is responsible for paying the GSTT due. D) The grantor of the trust is responsible for paying any GSTT due.

C 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.

All of the following statements regarding the alternate valuation date (AVD) are correct except A) the AVD election cannot be made unless it results in a reduction to the total value of the decedent's gross estate. B) the AVD election allows the executor to value estate assets at their fair market value six months after the decedent's date of death. C) 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. D) a beneficiary who intends to sell an asset inherited from the estate may prefer that assets be valued at their date-of-death value rather than the lower AVD value.

C 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.

If Anthony died today, what amount of life insurance proceeds would be included in his gross estate for estate tax purposes? A) $1,500,000 B) $0 C) $1,750,000 D) $250,000

C The death benefits of the whole life policy ($1.5 million) and the variable universal life policy ($250,000) would both be included in Anthony's gross estate. The death benefit from the whole life policy is included because Anthony transferred ownership of the policy within three years of his death. The death benefit from the variable universal life policy is included because Anthony owned the policy on his life at his date of death.

Which of the following is an example of unauthorized practice of law? A) A financial planner advising her clients that their current will does not reflect their goals. B) A financial planner explaining how federal estate, gift, and income tax liability affect an estate plan, and which estate planning documents could be used to achieve desired objectives. C) A financial planner advising a client to place solely owned property into joint tenancy with right of survivorship. D) A financial planner explaining to his clients the dangers of using legal forms obtained from the internet.

C The financial planner is advising the client to give up his or her legal rights in the property, and, therefore, is practicing law. The remaining options are merely providing advice, which is exactly what a planner is expected to do.

Ned, age 65, made the following transfers this year. Which of the transfers would be subject to generation skipping transfer tax (GSTT)? A) Gift of $40,000 to his son to buy a new car B) Gift of $15,000 to a nine-year-old niece C) Gift of $25,000 to a coworker's son who is 25 years old D) Payment of $150,000 directly to a qualified educational institution to pay for granddaughter's tuition

C 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.

Use of the generation-skipping transfer tax (GSTT) exemption for lifetime skips is A) allowed only for the wealthy. B) only applicable in $15,000 increments. C) not mandatory. D) mandatory.

C 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.

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? A) The son must pay a premium for the right to cease making payments whenever his father dies. B) The son's obligation to make the annuity payments will cease when Joaquim reaches his actuarial life expectancy. C) The transaction will not allow Joaquim to realize the full value of the business if he dies prior to his actuarial life expectancy. D) This transaction would be subject to the IRC Chapter 14 rules.

C Annuities, even private ones, are based on life expectancy and if he does not reach that age, the full value will not be paid out. Additionally, if Joaquim lives beyond life expectancy, he will continue to be paid. Private annuities are based on FMV so they would not be subject to Chapter 14 rules. The payment of a premium for the right to cease making payments whenever his father dies applies to self-cancelling installment notes (SCINs), not private annuities

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

Can accumulate income

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 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. The donor is a nonresident alien and the donee spouse is a resident U.S. citizen. A) III and IV B) II and IV C) I and III D) II and III

D

Rosy wants to establish a trust for her three grandchildren that will accomplish all of the following objectives: Exclude all assets transferred to the trust from her gross estate Protect the trust assets prior to distribution from the creditors of any beneficiary Keep the trust assets from disqualifying a beneficiary for public assistance benefits such as Medicaid Have all income produced by the trust taxable to someone other than herself Which one of the following trust provisions would NOT help to achieve one or more of these objectives? A) A provision making all distributions from the trust-of both principal and income-subject to the absolute discretion of a corporate trustee B) A provision granting each beneficiary a general power of appointment C) A spendthrift provision D) A provision making the trust irrevocable

D

Which of the following statements regarding income in respect of a decedent (IRD) is CORRECT? A) IRD is usually not included in a decedent's gross estate. B) IRD receives a stepped-up basis at the decedent's death. C) IRD is not included in the recipient's gross income. D) IRD is gross income that a decedent was entitled to when alive but had not received.

D

If Anthony died today, the residence would be included in his gross estate for estate tax purposes at which of the following amounts? A) $750,000 B) $0 C) $1,000,000 D) $500,000

D Although the residence is valued at $1 million at Anthony's death and Anthony contributed 75% of the purchase price, 50% of the value of the residence is included in Anthony's gross estate because the residence is owned jointly by spouses.

For taxable terminations of a trust, the generation-skipping transfer tax is paid by A) the transferor or the transferor's estate. B) both the transferor and transferee, jointly. C) the transferee. D) the trust.

D 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 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. A) Neither I nor II B) Both I and II C) I only D) II only

D 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.

Catherine Rich established trusts under Internal Revenue Code Section 2503(c) for each of her eight grandchildren this year and funded each trust with $926,000. Earlier this year, Catherine also paid $25,000 to the local community hospital for medical bills incurred by her niece. Assuming that all of Catherine's children are living at the time of these transfers, which one of the following statements are CORRECT regarding application of the generation-skipping transfer tax (GSTT) to these transfers? A) The transfer to pay medical bills is a direct skip. B) The transfer to pay medical bills is an indirect skip. C) The transfers to the trusts are indirect skips. D) The transfers to the trusts are direct skips.

D The transfers to the trusts for the grandchildren are direct skips because each grandchild is a lineal descendant of a grandparent of Catherine and is two generations further removed from this grandparent than is Catherine. The trusts are skip parties because each trust has only one beneficiary who is a skip party in relation to Catherine. The payment of the medical bills is exempt from GSTT because the provider is paid directly.

All of the following are techniques commonly used to preplan for management of a non-minor's assets except A) a funded revocable living trust. B) a durable power of attorney. C) a joint convenience checking account. D) a living will.

D A living will is a document used to preplan for medical situations in which the maker is unable to make medical decisions. It is not used to handle financial assets. A funded revocable living trust is commonly used as the vehicle to hold an incompetent person's assets. A durable power of attorney will allow the attorney-in-fact to manage an incompetent person's assets.

Which of the following is a written document in which one person (the principal) authorizes another person to act on the principal's behalf? A) Trust document B) Codicil C) Prenuptial agreement D) Power of attorney

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

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.

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

Failing to avoid ancillary probate Ancillary probate is an avoidable mistake. The remaining choices of examples of activity that avoids or reduces the likelihood of a mistake during the estate planning process.

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 The recommendations made will reduce or avoid taxes and costs that would otherwise be incurred.

Barclay Askew, a sculptor, recently discovered he is terminally ill, and has two or three years to live. He would like to make a charitable gift to his alma mater, Universal University, which is a 50% qualified charity. His goal is to maximize his charitable income tax deduction, even if he has to carry this deduction over to later years. He has the following assets that he could gift: A bronze sculpture that he created and recently sold for $32,000, but repossessed because the buyer failed to make payments on it; Barclay has estimated his costs total $10,000, with $3,000 for space rental and $7,000 for materials; because he is a famous artist, the value of his artistic contribution is at least an additional $15,000 Stock A worth $30,000 that he was given three years ago by a benefactor; the benefactor's basis in the bonds was $5,000, and she paid $1,000 in gift tax Stock B that he bought 10 months ago on a tip from another benefactor; he paid $15,000 for the stock, but the stock has skyrocketed in value and is currently worth $35,000 Assuming Barclay's current year AGI is $62,000, which one of the following is the best strategy for achieving his goals?

Gift Stock A to his alma mater

Which of the following statements regarding the transfer-for-value rule is CORRECT? The transfer-for-value rule provides that if a life insurance policy is sold, the death proceeds may not be fully excludable from income taxation. The sale of a life insurance policy to a partnership in which the insured is a partner will result in the loss of the income tax exclusion on the death proceeds. The transfer-for-value rule may apply in the context of a buy-sell agreement, depending on the identity of the parties to the agreement.

I and III

Which of the following statements regarding the income taxation of complex trusts is CORRECT? The trust itself is a separate taxable entity. Trust income is always taxable to the trust beneficiaries.

I

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 Be free from any conflicts of interest with the other beneficiaries Have the specialized knowledge and expertise required of a PR

I and II

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.

I and II

Which of the following statements regarding entity purchase buy-sell agreements is CORRECT? I. When used by a corporation, these agreements are also known as stock redemption plans. II. The business entity itself purchases the interest of an owner who dies. III. The business entity is entitled to an income tax deduction for the premiums it pays on any life insurance policies used to fund the agreement.

I and II

Which of the following forms of ownership pass through probate when an owner dies? Fee simple Tenancy by the entirety Community property Joint tenancy with right of survivorship (JTWROS)

I and III

Which of the following laws were designed to provide for the needs of a surviving spouse or dependent children? Homestead exemption Family allowance statute Family benefits statute

I and III

After Chester dies, his estate incurs administrative expenses of $5,000 and casualty losses of $2,000. On which tax return(s) may Chester's executor elect to deduct these expenses and losses? Form 706 (estate tax return) Chester's final Form 1040 Form 1041 (fiduciary income tax return)

I and III The executor may elect to deduct the expense and losses on either the federal estate tax return (Form 706) or the fiduciary income tax return (Form 1041). The decision will depend on the relative marginal tax rates applicable to each return.

Which of the following statements regarding the income taxation of simple trusts is CORRECT? Trust income is taxable to the trust beneficiaries. The trust itself is a separate taxable entity

I only

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.

I, II, III, IV

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 Retitle her house as tenants in common with her sister

I, II, and III

Debra is the majority stockholder in the Jernigan Family Corporation. Her interest in this corporation is the sole asset in her estate other than her personal-use assets. She understands that if she were to die today, an unacceptably large amount of her assets, including the closely held business interest, would have to be sold to pay her estate administrative expenses and death taxes. She would like to do something with her interest in the Jernigan Family Corporation to prevent the need for such a sale because she would like her children to receive her shares. Which of the following actions have the potential to increase the liquidity of Debra's estate? Have the corporation purchase a key person life insurance policy on Debra Gift shares in the Jernigan Family Corporation to her children Amend her will to place her shares into a testamentary trust for her children Establish an irrevocable life insurance trust (ILIT), and fund it with a policy on her life

I, II, and IV Statement III is false because leaving her assets to heirs in a testamentary trust will not increase liquidity or decrease cash needs. The remaining answer choices will all help her achieve her goals.

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? Joint tenancy with right of survivorship (JTWROS) Tenancy in common

II only 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.

Brenda is a certified public accountant. During the current year, she performs the following charitable activities. Which of them qualify for a charitable deduction? Brenda donates her services to help audit a local charity's books. Brenda spends 40 hours working at the local homeless shelter. Brenda donates her used car to the local Goodwill center. Brenda allows a local charity to use her home for a fundraising event.

III only

Assume Anthony decides to use a corporate recapitalization to transfer ownership of Benson's Animal Care Center to Nicole and Ryan. All of the following statements regarding this transaction are correct except A) Anthony will make gifts of the voting preferred stock to his children. B) Anthony will exchange his common stock for voting preferred stock and nonvoting common stock. C) any future appreciation in the business will be attributed to the nonvoting common stock. D) Anthony will retain the right to income from the business via dividend rights associated with the preferred stock.

In a corporate recapitalization, Anthony will exchange his common stock for voting preferred stock and nonvoting common stock. He will then make gifts of the nonvoting common stock to his children. Anthony retains the right to income from the business via dividend rights associated with the preferred stock. Any future appreciation of the business is attributed to the nonvoting common stock, so the value of Anthony's interest is frozen.

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.

Which of the following statements about how qualification for special use valuation increases liquidity for the estate of a decedent is CORRECT?

It can lower the value of certain estate assets. If the property meets the criteria for Section 2032(A), a significant reduction from the fair market value is available; this can reduce taxes owed, and therefore, increase liquidity.

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 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.

Kevin and Carol are spouses who live in a community property state. Which of the following assets would NOT be considered community property?

Municipal bonds inherited by Carol from her father during their marriage Gifts and inheritances received by one spouse during marriage are not considered community property. The other choices are all examples of community property, because the assets were purchased with community property funds.

Which of the following statements regarding probate is CORRECT? 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

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

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.

Bernard donates $1 million to a charity. The money will be commingled in a fund with property donated by other donors, and Bernard will receive 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

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

Assuming that a decedent left no valid last will and testament, which of the following assets will pass by the laws of intestate succession?

Property held by the decedent and his spouse as traditional community property The remaining options are will substitutes and do not expose property to probate.

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.

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.

Which of the following statements regarding an estate's need for liquidity is NOT correct?

Real estate is a liquid asset. Real estate is actually an illiquid asset.

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

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

Ellen's primary estate distribution objective is to have her assets avoid probate when she dies. Which of the following types of property ownership will meet her objective? Joint tenancy with right of survivorship (JTWROS) Tenancy in common Fee simple (outright ownership)

Statement I is correct. Property owned as JTWROS passes at death to the surviving owner(s) by right of survivorship and does not pass through probate. Statements II and III are incorrect. Property owned as tenancy in common or as fee simple (outright ownership) is included in the probate estate.

Which of the following statements regarding community property is CORRECT? Community property can exist only between spouses. Community property includes a right of survivorship at the death of the first spouse.

Statement I is correct. Statement II is incorrect because community property does not include a right of survivorship. Community property is in the probate estate and the deceased spouse has the right to will the property to anyone.

Which of the following statements regarding supporting organizations is CORRECT? A supporting organization is usually formed to support the activities of another qualified public charity. A major advantage of a supporting organization is that the donor or the donor's family can control its activities.

Statement I is correct. Statement II is incorrect; a major disadvantage of a supporting organization is that its activities must be controlled by the public charity it supports and not by the donor or the donor's family.

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 Whether Luis has any children 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.

Several of the steps involved in the process are Understanding the client's personal and financial circumstances Implement the recommendation(s) Identify and select goals Develop the recommendation(s) Which one of the following lists the sequence of these steps correctly?

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).

Several of the steps involved in the process are Develop the recommendation(s) Implement the recommendation(s) Identify and select goals Analyze potential alternate courses of action Which one of the following lists the sequence of these steps correctly?

The answer is III, IV, I, II. Understanding the client's personal and financial circumstances must be completed prior to identifying and selecting goals. From there, you can analyze the client's current course of action and potential alternative courses of action. After analysis, you can develop recommendation(s) and present them to the client. With client agreement, you can help implement recommendation(s) and, of course, monitor and update as needed.

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?

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.

Which one of the following is not a goal that a business owner can reasonably expect to achieve in a preferred stock recapitalization?

Totally eliminate the value of the business from her gross estate

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 trust that must pay out all of its income to the beneficiaries each year and cannot distribute any trust principal is

a simple trust

All of the following statements regarding trusts are correct except

a testamentary trust is a trust that is made effective during the grantor's lifetime.

An insured purchases a life insurance policy on her own life. Which of the following conditions must be met to exclude the death benefits from the insured's gross estate? The insured's estate is not the beneficiary. The insured has no incidents of ownership in the policy on the date of death. The insured did not transfer ownership of the policy within three years of death.

all

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

all

Rupert's gross estate is valued at $13.6 million using fair market valuations. His largest asset is a chicken breeding business, with real estate valued at $10.81 million and equipment valued at $1.4 million. Which of the following facts would Rupert's executor need to know to determine whether the real estate used in the chicken breeding business will qualify for special use valuation under Code Section 2032(a)? To whom the real estate will go according to Rupert's will How long Rupert or a member of his family has owned the real estate and how it has been used in the business The amount and types of gifts Rupert made within three years of his death The amount of all secured debts on the business property

all

The minority interest discount arises because minority shares have no power to force dividends. cannot compel liquidation. cannot control corporate policy.

all

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.

all

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.

all

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. The decedent gifted the policy more than three years before the decedent's death.

all. 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.

Which of the following is NOT an example of a person's lineal heirs? A) Great-grandchild B) Grandniece C) Child D) Grandchild

b Explanation A person's lineal heirs are those persons with whom he shares a common ancestor and who are in the same line as him, such as his children, grandchildren, and great-grandchildren. A grandniece is a collateral heir, not a lineal heir. LO 7.1.1

Which of the following statements regarding private foundations is CORRECT? Private foundations are tax-exempt charitable organizations that may be created by an individual to direct charitable contributions for a specific purpose. If a private foundation is an operating foundation, contributed funds are used for the foundation's own charitable purpose.

both

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.

both

Which of the following statements regarding supplemental needs trusts is(are) CORRECT? A special needs trust is typically used to help with the needs of a dependent who is developmentally disabled and who is receiving some form of government assistance. Special needs trusts are not permitted in all states. A) Neither I nor II B) Both I and II C) I only D) II only

both

Which of these is CORRECT regarding the generation-skipping transfer tax (GSTT)? An annual exclusion amount is allowed for lifetime direct skips. Gift splitting is allowed if both spouses elect it.

both

Frank is 83 years old. His second wife, Fannie, is 25. Frank has one grandchild, Bert, who is 30. Bert is the son of Frank's daughter, Ruth, who is deceased. From Frank's perspective, which of the following is a skip person? Fannie Bert

both Neither Fannie nor Bert is a skip person. Although Fannie is more than 37½ years younger than Frank, she is not a skip person because she is Frank's spouse. Although Bert is a related person who is two or more generations below Frank, he moves up one generation under the predeceased parent skip exception because he is the son of Frank's deceased child.

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 I and II

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

private annuity.

All of the following statements regarding probate are correct except

probate is private in nature.

Which of the following estates could use the alternate valuation date to value estate assets for federal estate tax purposes? An estate with an estate tax base of $1 million An estate valued at $20 million in which all assets pass to the surviving spouse and qualify for the marital deduction

neither An estate cannot use the alternative valuation date when the estate tax base is less than the estate tax exemption equivalent ($11,700,000 in 2021) or when all assets pass to the surviving spouse and qualify for the marital deduction.

Which of the following decedent's estates might be eligible to elect the alternate valuation date (AVD)? Jeanine, whose gross estate is $50 million. She leaves her entire estate outright to her surviving spouse. Kim, whose gross estate is $6.5 million. She leaves her entire estate to charity.

neither Neither estate can elect the AVD because the AVD is not available when there is no estate tax due. Jeanine's entire estate qualifies for the marital deduction, and Kim's entire estate qualifies for the charitable deduction.

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. Property owned as tenancy by the entirety may only be owned by husband and wife.