Estate Planning: Final Exam

Which of the following laws were designed to provide for the needs of a surviving spouse or dependent children? I. Homestead statute II. Family allowance statute III. Family benefits statute A. I and II B. II only C. II and III D. I, II, and III

A. I and II Statement III is false because there is no such thing as a family benefits statute. LO 4.3.1

Which of the following property transfers between family members are subject to the special zero valuation rules under Chapter 14? I. Corporate recapitalizations II. Partnership capital freezes III. Buy-sell agreements A. III only B. I, II, and III C. I and II D. II and III

B. I, II, and III All of these property transfers between family members are subject to the special zero valuation rules under Chapter 14. In other words, these types of transfers must comply with the rules under Chapter 14 of the Tax Code or the transfer will have negative gift tax consequences. LO 2.1.3

Which of the following statements regarding an entity-purchase buy-sell agreement is CORRECT? I. Under the entity approach, the surviving partners purchase the interest of a partner who dies. II. Under the entity approach, the number of life insurance policies required to fund the agreement is one per partner or shareholder. A. II only B. Both I and II C. Neither I nor II D. I only

A. II only Statement I is incorrect because it is the partnership entity that becomes the purchaser in the buy-sell agreement. The partnership buys the interest of a partner who dies. LO 3.2.1

Sharon gives Patrick the absolute right to use her vacation house for life and upon Patrick's death, all rights to the house are assumed by Sharon again. What types of property interests do Sharon and Patrick have, respectively? A. Reversion and life estate B. Fee simple estate and reversion C. Life estate and reversion D. Interest for a term of years and life estate

A. Reversion and life estate Sharon has a reversion, because she receives the property back when Patrick dies (i.e., the property reverts to her). Patrick has a life estate, because he is entitled to use and possess the property during his life. LO 1.3.2

A grandfather is considering making gifts to his grandchildren in 2020. Assuming the grandfather has made no previous generation-skipping transfers, the generation-skipping transfer tax (GSTT) lifetime exemption amount available to the grandfather in 2020 is A. $15,000. B. $11,580,000. C. $1,000,000. D. $4,577,800.

B. $11,580,000. The GSTT lifetime exemption amount for 2020 is $11,580,000. LO 7.1.1

Which of the following are characteristics of a revocable living trust that transfers all of a person's assets at death? I. It allows trust assets to receive a stepped-up basis at the grantor's death II. Trust assets will be included in the grantor's gross estate III. It ensures protection of trust assets from the claims of the grantor's creditors during life IV. Trust assets will be included in the grantor's probate estate A. I and IV B. I and II C. II and III D. III and IV

B. I and II Assets in the revocable trust will receive a stepped-up basis at death (option I) as long as they are included in the decedent's gross estate (option II), as they will be under the transfer sections. The trust assets will not be included in the grantor's probate estate (option IV) as the trust acts as a will substitute. Because the trust is revocable, the grantor's creditors can still get at trust assets during life (option III). LO 4.4.2

Which of the following is a part-gift, part-sale of an asset for less than full and adequate consideration? A. Net gift B. Reverse gift C. Bargain sale D. Outright gift

C. Bargain sale A bargain sale is a sale for less than full and adequate consideration. It is considered to be part sale and part gift. LO 3.1.3

Which of the following marital trusts restrict who may serve as trustee? I. Qualified terminable interest property trusts (QTIPs) II. Qualified domestic trusts (QDOTs) A. Both I and II B. Neither I nor II C. II only D. I only

C. II only Statement I is incorrect. QDOTs and QTIPs include similar provisions, but only a QDOT restricts who may serve as the trustee. LO 8.3.1

Which one of the following is a method by which assets can be transferred both during life and at death? A. Right of survivorship B. General power of attorney C. Irrevocable trust D. Testamentary trust

C. Irrevocable trust An irrevocable trust can be used to transfer assets both while the grantor is alive (inter vivos) and when the grantor is dead (testamentary). LO 3.1.1

Which one of the following individuals is the holder of a "legal" interest? A. The remainder beneficiary of a trust B. The income beneficiary of a trust C. The trustee of a trust D. The income and remainder beneficiary of a trust

C. The trustee of a trust The trustee of a trust holds a legal interest and has no right to enjoy or consume the trust property unless he or she is also a beneficiary of the trust.

Which one of the following statements describing characteristics, strengths, weaknesses, advantages, or disadvantages of a durable general power of attorney is NOT correct? A. The power of attorney must be in writing. B. A disadvantage is that the authority of the agent does not survive the principal's death. C. An advantage is that the powers given to the agent can be as broad or as narrow as the principal wants. D. It takes effect only after the principal is incompetent.

D. It takes effect only after the principal is incompetent. This is the only statement that is not true. A durable power of attorney takes effect upon its execution and delivery to the agent unless a different effective date is expressly stated in the instrument. A durable power of attorney survives the principal's incompetency, but not the principal's death (B). LO 8.1.1

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 of the following will provisions best meets Nancy's needs? A. A provision calling for a per stirpes distribution B. A survivorship provision C. A simultaneous death provision D. A provision calling a per capita distribution

A. A provision calling for a per stirpes distribution This 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. LO 3.3.2

One common estate planning concern of unmarried persons who live together in a close relationship is avoiding exposure to a lawsuit regarding the ownership of property and rights to income earned by the other person when the relationship ends. Which one of the following techniques can be used to address this type of problem? A. Entering into a property ownership and settlement agreement prior to, or early in, the cohabitation relationship B. Accumulating a large estate and focusing on liquidity planning C. Use of a QDRO (qualified domestic relations order) D. Use of a funded ILIT

A. Entering into a property ownership and settlement agreement prior to, or early in, the cohabitation relationship The other techniques are more appropriate to solve other problems. For example, another problem that cohabiting couples have is not being able to defer the estate tax at the death of the first cohabitant because they are not entitled to a marital deduction. Therefore, general liquidity planning to pay estate taxes that will be due at the death of the first cohabitant becomes a major focus of estate planning. A funded ILIT might be used to provide the needed liquidity without increasing the gross estate so that other assets will be available to pass to the surviving cohabitant under the deceased's will. A QDRO is used in the case of the separation or divorce of a married couple to protect one spouse's interest in the other spouse's employee benefit plans—it is available only to couples who are married. LO 8.4.1

Warren's will leaves his house (with the home furnishings), car, and bank accounts to his wife, with the residue to his children. Warren also owned a life insurance policy on his life that named his estate as beneficiary. Four years ago, he assigned the ownership of the policy to his wife, Karen, giving her all incidents of ownership; she has not changed the beneficiary of the policy. The premiums on the policy were paid from a joint bank account held in the names of Warren and Karen. Which one of the following is an estate tax implication for Warren's estate? A. His gross estate will include the policy proceeds because they are payable to his estate. B. The value of the policy is excluded from his gross estate because the assignment to Karen eliminated all his incidents of ownership. C. His estate escapes taxation of the insurance death benefit because the assignment occurred more than three years before his death. D. The marital deduction eliminates the value of the policy from his taxable estate.

A. His gross estate will include the policy proceeds because they are payable to his estate Regardless who owns the policy, if Warren is the insured and the death benefits are paid to Warren's estate, they will become an asset of his estate and be subject to estate tax. The policy proceeds would go to his children under the will and thus would not receive an estate tax marital deduction. It is always important to follow life insurance benefits until they find their final owner. In this case, it was not enough to know the death benefits would be in his estate. You also have to know who gets the proceeds to know if they are eligible for the marital deduction or not. LO 5.2.2

Which of the following statements regarding the annual exclusion for purposes of generation-skipping transfer tax (GSTT) is(are) CORRECT? I. The annual exclusion amount is $15,000 for 2020. II. The annual exclusion is allowed for lifetime direct skips. III. The annual exclusion is allowed for testamentary direct skips. A. I and II B. I, II, and III C. I only D. II and III

A. I and II Statement III is incorrect because the annual exclusion is not allowed for testamentary direct skips. LO 7.1.1

Which of the following statements regarding Medicaid planning for long-term care is CORRECT? I. Medicaid planning is best done with the advice of an experienced Medicaid planning advisor or a qualified elder care attorney. II. Each state has its own asset and income levels for qualifying for benefits. III. Assets transferred to others are subject to a 12-month lookback period. IV. If a client is married, the couple's residence is a countable asset. A. I and II B. II, III, and IV C. IV only D. I, II, III, and IV

A. I and II Statement III is incorrect. The lookback period is 60 months. Statement IV is incorrect. If a client is married, the couple's residence is not a countable asset. Real estate other than the couple's primary estate is countable. LO 8.2.1

One premortem liquidity planning technique is to reduce the client's potential gross estate. Which of the following actions may reduce the client's gross estate? I. Placing assets in a grantor-retained annuity trust (GRAT) with a 10-year term that names the client's child as remainderman II. Placing assets in a revocable living trust that disperses its assets to the client's child at the client's death III. Placing assets in an irrevocable trust in which the client is neither a beneficiary nor trustee IV. Placing assets in an irrevocable trust in which the client as sole trustee has discretion to distribute income A. I and III B. I, III, and IV C. II, III, and IV D. II and IV

A. I and III The assets in the GRAT will be removed from the grantor's gross estate if he survives the trust term. If the grantor of a trust retains no beneficial interest in his trust, or control over it by virtue of being trustee, no part of the trust assets will be included in his gross estate (unless the three-year inclusionary rule applies). Assets in a revocable trust (option II) are always included in the grantor's gross estate. If the grantor as trustee has discretion to distribute income (option IV), the grantor is deemed to have retained the power to determine beneficial enjoyment of the trust assets, and those assets are included in his gross estate. LO 6.2.1

Rick placed his portfolio of income-producing stock valued at $200,000 into an irrevocable trust. The trust provides that the trustee is to pay to Rick 7% of the initial value of the trust annually for a period of 12 years. After the 12-year term, the trustee is directed to pay the remaining assets in the trust to Rick's daughter. Which of the following are CORRECT statements regarding the income, gift, or estate tax implications of this trust arrangement? I. Rick will owe a gift tax based on the present value of the remainder interest given to his daughter. II. Taxation of the income earned by this trust will be affected by the grantor trust rules. III. If Rick dies during the 12-year term of the trust, the trust assets will be included in his gross estate. IV. The right that Rick has retained in this trust is considered to be "qualified" for purposes of the Chapter 14 rules. A. I, II, III, and IV B. II and IV C. I and III D. I and IV

A. I, II, III, and IV This is an example of a grantor-retained annuity trust (GRAT). The interest retained by Rick is deemed to be qualified for Chapter 14 purposes because it is an annuity amount. Payment of the 7% is not dependent upon the trust assets earning any income. The 7% must be paid regardless of trust earnings. The retained interest is qualified, so the normal valuation rules apply, and Rick will have to pay gift tax only on the present value of the remainder interest given to his daughter and not the entire fair market value of the trust assets. Because trust income may be given to the grantor (Rick), the grantor trust rules apply. If Rick dies during the trust term, the assets will be included in his gross estate by virtue of Code Section 2036 (one of the transfer sections) because he retained the right to receive trust income for a period that did not in fact end before his death. LO 3.1.4

Minnie has made a gift of all her common stock in a closely held corporation to her son and daughter. The gifted shares constitute 20% of the issued and outstanding common stock of the corporation. Minnie will retain 30% of the preferred shares of the corporation, which will pay her a fixed, cumulative annual dividend. Which of the following would be relevant in arriving at the value of the gifted shares for gift tax purposes? I. The fair market value (FMV) of Minnie's interest in the corporation prior to the gift II. The FMV of Minnie's preferred shares in the corporation at the time of the gift III. A lack of marketability discount IV. A blockage discount V. A minority interest discount A. I, II, III, and V B. I and III C. I, II, III, IV, and V D. II, IV, and V

A. I, II, III, and IV When a donor gives less than all of his or her interest in the asset, the amount of the gift is determined by subtracting the value of what is retained from the value of the donor's interest prior to the gift (option I). Since Minnie's retained interest in the corporation is qualified for Chapter 14 purposes, the FMV of the preferred shares (option II) becomes relevant. If her retained interest were not qualified, the Chapter 14 rules would require that it be valued at zero. A lack of marketability discount (option III) is possible since this is a closely held corporation for which there is no established market to trade the shares. Blockage discounts (option IV) apply only to publicly traded stock. A minority discount (option V) is possible since the gifted shares cannot control the corporation. LO 2.1.2

Gil and Tina are newlyweds who live in a community property state. Assuming no titling changes were made, which of the following assets would be separate property? I. A parcel of land owned by Gil prior to marriage. II. An antique desk Tina inherits from her aunt during the marriage. III. A money market account owned by Gil before marriage that has not been commingled with community assets. A. I, II, and III B. I and III C. II only D. I and II

A. I, II, and III The assets in statements I, II, and III are all separate property. LO 1.3.3

Gary and Georgeann have the following objectives: - If Gary predeceases Georgeann, to provide her exclusively with a mandatory stream of income from the assets included in his gross estate - To ensure that Gary's children from his prior marriage will ultimately receive the income-producing assets upon Georgeann's death - To prevent assets used to provide income to Georgeann from being included in her gross estate Which of the following estate planning techniques would accomplish Gary and Georgeann's first objective of providing a mandatory stream of income? I. A power of appointment (A) trust II. A qualified terminable interest property (QTIP) (C) trust, with an election III. A QTIP (C) trust, without an election A. I, II, and III B. II and III C. II only D. I only

A. I, II, and III The key portion of their first objective is that Gary wants Georgeann to have a mandatory income stream. All of these trusts must grant the surviving spouse a mandatory income stream to qualify for the marital deduction. In a QTIP trust, there is a mandatory income stream to the surviving spouse whether or not the election is made. The election affects only tax goals, not distribution goals. LO 6.2.3

Which of the following transfers made last year by 70-year-old Vaughn involve a generation-skipping transfer for purposes of the federal generation-skipping transfer tax (GSTT)? I. A gift of $16,000 to a Uniform Transfers to Minors Act (UTMA) custodial account established by Vaughn's son, Goddard, for Goddard's 9-year-old daughter, Tiffany II. A transfer of $100,000 to an irrevocable trust in which he retained the right to income for 10 years with the remainder to his 27-year-old grandnephew III. A gift of a $28,000 remainder interest in rental real estate to his 22-year-old grandson, Max, whose parents were killed in an airplane accident two years ago IV. A gift of $20,000 cash to his 30-year-old personal secretary V. A transfer of $120,000 to a revocable trust that gives Vaughn's son, Goddard, the right to the income for life and then gives that right to his granddaughter, Tiffany, for her life; Tiffany is given a testamentary power of appointment over the trust corpus A. I, II, and IV B. III and IV C. II, III, and V D. I only

A. I, II, and IV The GSTT applies to transfers to, or for the benefit of, a skip person. A skip person is either a lineal or collateral descendant (or the spouse of such a descendant) of the grandparents of the transferor or transferor's spouse or former spouse who is two or more generations below that of the transferor, or an individual (other than the transferor's spouse or former spouse) who is not such a descendant but who is more than 37½ years younger than the transferor. Transfers I and IV are generation-skipping transfers. Transfer II involves a GST, which is indirect because there is an intervening interest that must expire before the grandnephew can receive the remainder interest. Options III and V do not involve generation-skipping transfers. III - is not a GST because, for the purposes of direct skips, if the child of a transferor is deceased at the time of the transfer, the lineal descendants of that child move up one generation. V - since the GSTT follows gift tax rules for lifetime transfers, transfer V does not involve a GST because there is no completed gift—the trust is revocable. LO 7.1.2

During her lifetime, Ella has made several property transfers. As her financial advisor, which of the following transfers would you tell her are completed transfers fully subject to gift tax for the purpose of calculating her federal gift tax liability? I. The $5,000 in cash for each of her nieces and nephews that she placed in a revocable trust last year for their benefit II. The $13,000 she paid four years ago to Pembroke Hospital to pay off her mother's medical bill III. The $8,000 remainder interest given to her son, Zeke, two years ago in the Ella D'Arno Irrevocable Grantor Retained Income Trust IV. The $9,000 in cash she gave six years ago to her then husband, Roberto (this was her sole gift to Roberto that year) A. III only B. I and IV C II and IV D. I, II, and III

A. III only Completed transfers subject to gift tax include completed transfers that are entitled to the gift tax marital and charitable deductions. Therefore, these reductions are irrelevant and gifts that involve marital or charitable deductions are subject to the gift tax rules. On the other hand, completed transfers covered entirely by the gift tax annual exclusion are not subject to gift tax because they are not included in the donor's total calendar year gifts. Said differently, the amounts subject to gift taxes are what is included in the donor total calendar year gifts even if some or all of the gifts eventually wind up being gift tax deductible. This is similar to asking what is in the gross estate even if the asset will later be estate tax free due to the marital or charitable deduction. The remainder interest in a grantor retained income trust (Option III) is included in the donor's total gifts, in spite of the retained income interest. In fact, the retained interest with a GRIT is also included as a taxable gift because of the Chapter 14 rules. The retained interest is a taxable gift with a GRIT in the sense that with a GRIT the retained income interest is valued at zero because the retained interest is not a qualified interest. With the GRIT the transfer is complete—the grantor cannot take the assets back. Option I is not subject to gift tax because gifts to the revocable trust are incomplete gifts. Option II, direct payments to a medical provider on another person's behalf, are not subject to gift tax by statute. Option IV, the cash given to her husband six years ago, was not subject to gift tax because of the annual exclusion, although it was a completed transfer. LO 2.1.2

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

A. If Lou predeceases Eve, the property will pass to Eve as surviving joint tenant without regard to the terms of Lou's will. 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. LO 1.3.2

Which of the following statements about intestacy is CORRECT? A. Intestacy allows a client to achieve the goal of controlling assets during life, but not disposing of assets, according to his or her desires at death. B. Intestacy does not allow a client to achieve the goal of controlling assets while alive and does not allow for disposing of assets according to his or her desires at death. C. Intestacy does not allow a client to achieve the goal of controlling assets, but does allow disposing of assets according to his or her desires at death. D. Intestacy allows a client to achieve the goals of controlling and disposing of assets according to his or her desires.

A. Intestacy allows a client to achieve the goal of controlling assets during life, but not disposing of assets, according to his or her desires at death. At death, the state intestacy statutes govern to whom the asset will be disposed. LO 3.3.3

Shawn has died, and his will directs that all of his probate estate be paid to the trustee of a testamentary trust established in his will. The trust contains the following provisions: - The sole income beneficiary of the trust is Shawn's surviving spouse - The remainder beneficiaries are Shawn's children by a prior marriage - Income is to be paid on an annual and mandatory basis - A bank trust department is appointed trustee - The trust term ends 10 years from Shawn's death Is Shawn's estate eligible to make a qualified terminable interest property (QTIP) election? A. No, because Shawn's spouse does not have a qualifying income interest B. Yes, because all necessary prerequisites have been met C. No, because Shawn's spouse is not given a general power of appointment over the trust D. No, because the trust assets will not be paid to the estate of Shawn's spouse at her death

A. No, because Shawn's spouse does not have a qualifying income interest The income interest of Shawn's spouse lasts only for 10 years, and not for her lifetime, which is necessary for a qualifying income interest, which is required for a QTIP trust. B -- all prerequisites have not been met C&D -- Payment of trust assets to the spouse's estate and giving the spouse a general power of appointment would require that the trust assets be included in the spouse's gross estate, but still would not entitle Shawn's estate to make the QTIP election. LO 5.3.3

All of Mark's property has been placed into a revocable trust. Mark is the trustee of this trust until he dies or becomes incompetent. Mark, his spouse, and his children are all income beneficiaries of the trust, with income to be distributed at the trustee's sole discretion. At Mark's death or his incompetency, his spouse is appointed successor trustee. The trust is to continue until his spouse's death, when the trust assets are to be distributed per capita at each generation to Mark's surviving descendants. Which one of the following correctly identifies advantages or disadvantages Mark can achieve by using this method of estate transfer at death? A. Providing a stepped-up basis in estate assets to the beneficiaries of his estate B. Shifting taxation of income produced by the trust assets C. Protecting estate assets from the claims of his creditors D. Freezing the value of his assets for estate tax purposes

A. Providing a stepped-up basis in estate assets to the beneficiaries of his estate Because the trust assets will be in Mark's gross estate (because he has retained the right to revoke), they will be entitled to a step-up in income tax basis. C -- The trust assets will be subject to the claims of Mark's creditors because the trust is revocable. D -- The trust assets will be valued in his gross estate at fair market value as of the date of death or six months later (the alternate valuation date). B -- Mark will still have to report all trust income under the grantor trust rules because the trust is revocable. LO 4.1.2

Your client, Rafer, owns a vacation home in another state. Rafer recently married for the second time and wants to include his new wife, Edna, on the title to the vacation home. At your last client meeting, he stated that his primary concern is that this property be left to Edna outside probate at his death while restricting her disposition of the property prior to his death without his consent. Rafer revoked his old will upon his marriage to Edna, but has not yet executed a new will. You are researching property ownership to identify the most appropriate form of titling for the vacation home in preparation for your next meeting with your client and his attorney. Which one of the following statements presents the most appropriate form of titling for the vacation home? A. Tenancy by the entirety will prevent lifetime disposition without Rafer's consent. B. Tenancy in common with Edna will eliminate the need for ancillary probate. C. Sole ownership will enable Rafer to leave the home to Edna outside probate. D. Joint tenancy with right of survivorship between Rafer and Edna will allow the writing of a new will to control the disposition of the property.

A. Tenancy by the entirety will prevent lifetime disposition without Rafer's consent. Tenancy by the entirety has a survivorship feature, which will pass the property to Edna outside of probate and will not allow Edna to transfer her interest while Rafer is alive without his consent - Joint tenancy would allow Edna to transfer her interest without Rafer's consent, and because the form of property ownership does not affect either owner's right to make a will. - Tenancy in common would neither eliminate the need for probate nor prevent Edna from selling her interest. - Sole ownership by Rafer would require probate to transfer the property to Edna, plus she would have no interest in the property until Rafer died. LO 1.3.1

Which of the following terms best describes the trusts created in Michael's will for the benefit of his 4 children? A. Testamentary trusts B. Grantor-retained trusts C. Inter vivos trusts D. Marital trusts

A. Testamentary trusts These are testamentary trusts because they are created by Michael's will and made effective at his death. An inter vivos trust is made effective during the grantor's lifetime. A marital trust is established for the benefit of a surviving spouse and is designed to take advantage of the estate tax marital deduction. A grantor-retained trust is established during the grantor's lifetime and is designed to allow the grantor to retain income or the use of transferred property for a limited time. LO 9.2.2

Fred and Ethel live in a community property state. They acquired property during their marriage and classified it as separate property pursuant to a spousal agreement. What is the effect of the spousal agreement? A. The property is separate property so long as the spousal 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 spousal 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 spousal agreement. D. Community property laws supersede a spousal agreement.

A. The property is separate property so long as the spousal agreement is valid (i.e., recognized by local law and entered into with the requisite intent). Federal law does not apply. LO 4.1.1

Jacob, who is not married, owns the following assets: (1) investment accounts worth $6 million; (2) a life insurance policy worth $5 million; (3) a house worth $2.5 million; (4) retirement accounts worth $2 million; and (5) tangible personal property worth $1 million. Jacob created a revocable living trust that names his three children as the beneficiaries, and he funded the trust with all of his assets except the retirement accounts. Which one of the following is a CORRECT statement regarding the effect of this trust on the potential liquidity of Jacob's estate at his death? A. The trust assets will be included in Jacob's gross estate and will be available to meet estate liquidity needs. B. The trust will shield Jacob's estate from an estate tax liability, and therefore is sufficient to meet estate liquidity needs. C. The trust represents neither a potential cash requirement, nor a potential source of liquidity. D. The trust does not represent a potential cash requirement, but does represent a potential source of liquidity.

A. The trust assets will be included in Jacob's gross estate and will be available to meet estate liquidity needs. The estate is already below the exclusion amount so the trust won't have any effect on estate tax. LO 6.1.1

The preliminary computation of Dorothy Rohler's estate tax is as follows: Dorothy Rohler Estate Tax 3,000 Shares Dart (1/3 of total o/s shares) $9,200,000 Real estate 3,000,000 Remainder of Rohler Estate 1,785,000 Gross Estate $13,985,000 Administrative expenses (75,000) Debts of the decedent (75,000) Adjusted gross estate $13,835,000 Charitable deduction $220,000 Marital deduction 0 Taxable Estate $13,615,000 Dorothy bequeathed her shares of Dart Inc. to her two nephews. They currently participate in the business and plan to hold the shares indefinitely. She made no lifetime taxable gifts. Assuming death in 2020, does the Rohler estate qualify to use the Section 6166 installment method of paying the estate tax generated by the Dart Inc. shares? A. Yes, because the value of the business exceeds 35% of the adjusted gross estate. B. No, because the stock included in the estate fails to exceed 50% of the taxable estate. C. Yes, because the value of the business exceeds 35% of the taxable estate. D. Yes, because the stock included in the estate exceeds 20% of the company's stock.

A. Yes, because the value of the business exceeds 35% of the adjusted gross estate. The percentage test for Section 6166 is whether the value of the stock held by the estate exceeds 35% of the adjusted gross estate, not the taxable estate. Therefore, 35% of $13,835,000 = $4,842,250. The percentage of the company stock owned by the estate is relevant only when aggregating stock ownership in two or more companies to meet the 35% (not 50%) requirement. LO 6.3.2

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. 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. B. A CFP certificant cooperates with fellow certificants to enhance and maintain the profession's public image and improve the quality of services. C. Disclosure need only be made once in a financial planning relationship. D. 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.

B. A CFP certificant cooperates with fellow certificants to enhance and maintain the profession's public image and improve the quality of services. A -- 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. C -- At any time during a client-planner relationship, new information that affects the relationship must be disclosed. D -- 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. LO 9.1.1

C.J.'s taxable income fluctuates from year to year. Her adjusted gross income this year is $60,000, but it will probably be less in the future. Her major objective is to reduce income taxes for the current year. She plans to contribute $35,000 to the American Red Cross. Which one of the following is the most appropriate property for C.J. to gift to the American Red Cross to maximize her current-year charitable income tax deduction? A. A tract of farmland, held long term, valued at $35,000 with a basis of $22,000 B. A life insurance policy with a face value of $35,000; net premiums, paid by C.J., of $24,000; and a replacement cost of $30,000 C. A stock, held short term, valued at $35,000 with a basis of $19,000 D. A stamp collection she inherited, held long term, valued at $35,000 with a basis of $12,000

B. A life insurance policy with a face value of $35,000; net premiums, paid by C.J., of $24,000; and a replacement cost of $30,000 A gift of the life insurance policy will allow C.J. to take a current-year income tax deduction of $24,000, which is more than any other listed asset. Gifting the stock would allow a current deduction of $19,000. It is rarely wise to gift short-term capital gain property because only the basis can be deducted. The stamp collection is use-unrelated tangible personal property. What will the Red Cross do with a stamp collection? They will sell it and use the proceeds for their charitable work. Donations that are sold by the charity within two years of the gift are consider use-unrelated. That limits the charitable deduction to the basis. Thus, that gift would only allow a current deduction of $12,000. The farmland is ordinary income property. If you own farmland, you are a farmer by definition. The deduction for ordinary income property is always limited to the basis. In this case, donating the farmland to charity would only allow a maximum current-year deduction of $22,000. LO 7.2.2

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 the trust irrevocable B. A provision granting each beneficiary a general power of appointment C. A provision making all distributions from the trust-of both principal and income subject to the absolute discretion of a corporate trustee D. A spendthrift provision

B. A provision granting each beneficiary a general power of appointment A general power of appointment would not accomplish any of the stated objectives and would actually prevent the second and third objectives. LO 7.2.1

Assume that in 2020, Rose makes a gift of $25,000 in cash to Samantha. For purposes of the generation- skipping transfer tax (GSTT), which type of transfer is this? A. Qualified transfer B. Direct skip C. Taxable distribution D. Taxable termination

B. Direct skip This is a direct skip because it is an outright gift to a skip person. A taxable distribution is a distribution made from a trust to a related person 2 or more generations below the transferor's generation. A taxable termination occurs when an interest in a trust is terminated, resulting in a skip person holding interests in the trust. A qualified transfer is a transfer that is not subject to the generation-skipping transfer tax, such as a payment made directly to an educational institution for tuition or fees. LO 9.3.1

Roy died in 2020, and his estate consists of the following assets: 350 shares of Black & Blue Inc, a closely held corporation (100% of outstanding shares) $5,250,000 Real estate (rapidly appreciating) $2,100,000 Remainder of estate 1,300,000 Gross estate $8,650,000 Administrative expenses (includes PR fee) $(55,000) Debts of the decendent (90,000) (145,000) Adjusted gross estate $8,505,000 This year, before he died, Roy made a cash gift of $200,000 to his son, Edward. This is the only taxable gift that Roy ever made. Roy's wife, Thelma, was named personal representative (PR) of his estate in his will, which left the Black & Blue Inc. stock to Edward and the remainder of his estate to Thelma. Thelma is in the lowest income tax bracket. Which one of the following is the postmortem planning technique that is available to and advisable for Thelma and/or Roy's estate? A. Election of a Section 303 stock redemption B. Election by Thelma to waive her PR fee of $15,000 C. Election to use the alternate valuation date D. Election by Thelma and the estate to split the gift to Edward

B. Election by Thelma to waive her PR fee of $15,000 The alternate valuation date is incorrect because the gross estate would most likely increase due to the rapidly appreciating real estate, and since there is no estate tax due using fair market value, the alternate valuation date would not decrease an estate tax liability. While waiving the PR fee will increase the adjusted gross estate, there will be no increased estate taxes since the tax base is less than the applicable exclusion amount. Also, the fee would then pass to Thelma income tax free as a distribution of estate assets. Splitting the gift would unnecessarily waste Thelma's applicable credit amount without any benefit to the estate. A Section 303 stock redemption is not available to the estate or its beneficiaries (to pay funeral and administrative expenses) because the business doesn't exceed 35% of the adjusted gross estate when the transfer within three years of death is considered. LO 6.3.1

Charles purchased a parcel of commercial real estate. He wants the bulk of his estate to pass to his wife. However, he plans to pass the commercial real estate to his adult children. Charles does not have a will and does not intend to make one. Which one of the following states the most appropriate form of titling for the commercial real estate to accomplish his objectives? A. Holding it in sole ownership will allow him to pass the property to his children without the surviving spouse taking a share of the property. B. Holding it in joint tenancy with right of survivorship with his children will allow the property to pass directly to them without the consent of the surviving spouse. C. Titling it in tenancy in common with his children is preferable because it will pass to them automatically by operation of law at his death. D. Titling it in tenancy by the entirety will accomplish his testamentary goals and reduce the amount of federal estate tax payable.

B. Holding it in joint tenancy with right of survivorship with his children will allow the property to pass directly to them without the consent of the surviving spouse. Because Charles refuses to execute a will, a will substitute must be used to convey the property without it going through probate. Sole ownership would require probate by means of the intestacy statutes that always give something to a surviving spouse. Tenancy by the entirety can be used only between husband and wife. Tenancy in common does not have an automatic survivorship feature, and therefore, Charles's share of the property would be distributed in probate by the intestacy statutes. LO 3.1.1

Which of the following correctly state characteristics of the laws of intestate succession (intestacy)? I. If a decedent has a surviving spouse, the spouse is certain to get some part of the intestate estate, assuming there are remaining assets after payment of debts and taxes, if the felonious homicide statutes do not apply. II. If a decedent has a surviving spouse and children, the children are more likely to receive some part of the intestate estate if they are children from a prior marriage rather than from the decedent's final marriage. III. If a decedent has any heirs, no matter how remote, the intestate property will not escheat to the state. IV. Heirs who have identical degrees of kinship to the decedent will receive equal shares. A. I, II, and III B. I and II C. III and IV D. II and III

B. I and II I -- is obviously correct II -- Intestacy statutes tend to give intestate property to children from a prior marriage since it is uncertain that the surviving spouse would leave any part of the decedent's property to such children. Statements III and IV are incorrect: III -- Some states prohibit remote heirs from inheriting by way of the intestacy statutes. IV -- Whether heirs who have identical degrees of kinship to the decedent inherit equally will depend upon whether the intestacy statutes distribute by representation (or per stirpes) or per capita at each generation. LO 4.3.1

Which of the following are CORRECT regarding the estate tax marital deduction? I. The marital deduction is for property that is included in a decedent's gross estate that passes, or has passed, to the surviving spouse in a qualifying manner. II. The marital deduction is not allowable for property bequeathed by the decedent to the spouse if the spouse does not survive the decedent. III. Generally, there is no marital deduction for an interest in property passing from the decedent to the surviving spouse when an interest in the same property also passes to some other person without full consideration, and that person or his heirs may enjoy the property after the surviving spouse's interest terminates. IV. If the surviving spouse is the only noncharitable beneficiary of a qualified CRAT or CRUT, the marital deduction is allowed for the interest passing to the spouse. V. The marital deduction is never available for property passing outright to a surviving spouse who is a noncitizen. A. I and III B. I, II, III, and IV C. II, III, and V D. II and IV

B. I, II, III, and IV Only option V is incorrect—the marital deduction is not available for property passing to a surviving spouse who is a noncitizen unless the surviving spouse either becomes a U.S. citizen before the date on which the decedent's estate tax return is filed or the property passes to a QDOT (qualified domestic trust) prior to that date. Option I is the classic definition of the estate tax marital deduction. Option II is true because in these circumstances the property will not pass to the decedent's spouse. Option III is correct because it describes a terminable interest. Option IV is correct because such a situation is an exception to the terminable interest rule. LO 5.3.2

Which of the following situations involve an indirect generation-skipping transfer? I. A grandfather gives his daughter a life estate in his mansion, with the remainder to his only grandchild II. A transfer of $1 million to an irrevocable trust in which the grantor retains the right to the income of the trust for his life with the remainder to the grantor's grandchild III. A transfer of $1 million to an irrevocable trust in which the income beneficiaries are the grantor's grandchildren, and the remainder beneficiaries are the grantor's great-grandchildren IV. A transfer of $1 million to an irrevocable trust in which the income beneficiaries are the grantor's children and grandchildren, but the grantor also gives a grandchild a general power of appointment over half the trust assets A. I and II B. I, II, and IV C. II and III D. I and IV

B. I, II, and IV Option III is a direct skip because all the beneficiaries of the trust are skip parties (persons who are two or more generations younger than the transferor). In all other options, there is at least one skip party and one nonskip party who have an interest in the property—the definition of an indirect skip. In option II the nonskip party is the grantor, as a nonskip party is anyone with a current interest in the transferred assets who is not a skip party. LO 7.1.2

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? I. Have the corporation purchase a key person life insurance policy on Debra II. Gift shares in the Jernigan Family Corporation to her children III. Amend her will to place her shares into a testamentary trust for her children IV. Establish an irrevocable life insurance trust (ILIT) and fund it with a policy on her life A. I and II B. I, II, and IV C. II and III D. I, III, and IV

B. I, II, and IV Statement III is false because establishing a testamentary trust will not increase liquidity, but will decrease it since they would go to the children rather than be available for estate cash needs. LO 6.2.3

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? I. You cannot ethically provide the client with any estate planning assistance and must refer the case in its entirety to an attorney. II. You can be involved in data gathering, identifying estate planning goals, and identifying possible weaknesses and problem areas in the client's current situation. III. Your role will be working with and coordinating specialists such as attorneys, accountants, and trust officers whose expertise will be necessary to analyze tax and legal implications of suggested actions and to draft needed documents. IV. 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, III, and IV B. II and III C. III only D. I only

B. II and III Both statements II and III are legitimate and accepted roles of a non-attorney financial planner in the estate planning process. The other answers are incorrect for various reasons. A financial planner is not legally or ethically prohibited from assisting a client with his or her estate plan. Interpreting the contents of a client's estate planning documents and informing him or her of the legal implications of those documents is not part of the non-attorney financial planner's role in estate planning since it usually involves interpretation of state law, which is considered the unauthorized practice of law. LO 1.1.1

Ricky and Lucy, a married couple with two young children and minimal assets, are considering creating an estate plan. Which one of the following statements is CORRECT? a. Ricky and Lucy do not need an estate plan since they own minimal assets that do not exceed the applicable exclusion amount. B. Ricky and Lucy should create an estate plan even though their assets do not exceed the applicable exclusion amount. C. Ricky and Lucy do not need an estate plan since they do not have any financial concerns. D. Ricky and Lucy need an estate plan to reduce their estate tax exposure.

B. Ricky and Lucy should create an estate plan even though their assets do not exceed the applicable exclusion amount. There are many non-tax reasons for developing an estate plan, such as planning to meet the needs of their dependent children. With minimal assets, they will not be faced with having to address estate taxes. LO 2.2.1

Calvin is a married taxpayer whose income is subject to the maximum marginal income tax rate. He would like to transfer some property to his adult daughter, who is just starting out in business and currently is in a significantly lower income tax bracket. Calvin's major objective is to reduce his own income tax liability. The following assets are available for Calvin to give to his daughter: Cash - Basis $75,000 -- FMV $75,000 Corporate bond - Basis $85,000 -- FMV $75,000 Rental real estate - Basis $50,000 -- FMV $75,000 Leased equipment - Basis $69,000 -- FMV $75,000 The corporate bond is returning income. The rental real estate also is producing significant taxable income after 30 years of sizable depreciation deductions; Calvin's daughter would retain the property for its income and use it as collateral. The equipment was recently purchased and is generating large depreciation deductions. Assuming that each property is producing approximately the same amount of income, which one of the following is the most appropriate property to gift to the daughter? A. The cash B. The rental real estate C. The leased equipment D. The corporate bond

B. The rental real estate Gifting the rental real estate will eliminate both the rental income and the unrealized capital gain, thereby accomplishing Calvin's objective of reducing his income tax liability. Additionally, giving the rental real estate will eliminate its future appreciation potential. D -- The corporate bond would not be good property to give as it is loss property, which Calvin could use to offset other capital gains. B -- Calvin can also use the depreciation deductions generated by the leased equipment (option b.) against other income. A -- Giving the cash will not likely reduce Calvin's taxable income as much as the rental real estate. LO 2.3.1

Glen, 58, transferred 300 shares of stock to his son, Drew, in exchange for a joint and survivor private annuity. The annuity provides $2,000 per month to Glen during his lifetime. If Glen predeceases his wife, Nelda, she also will receive $2,000 per month for the rest of her life. What is one estate tax implication of this intrafamily transfer? A. The value of payments made by Drew to Glen within three years of Glen's death will be includible in Glen's gross estate. B. When Glen dies, the present value of the future payments to Nelda will be included in his gross estate. C. If Glen has received annuity payments at death equal to the fair market value of the transferred property on the transfer date, his gross estate will not include any amount as a result of this transaction. D. If the amount of annuity payments received at death is less than the fair market value of the shares on the date of transfer, the difference, less one annual exclusion amount, will be included in Glen's estate tax calculation as an adjusted taxable gift.

B. When Glen dies, the present value of the future payments to Nelda will be included in Glen's gross estate. Because this is a joint and survivor annuity, there is something left at Glen's death to transfer, and thus an asset on which to impose a transfer tax (i.e., estate tax). The correct value of this asset is the present value of the future payments to Glen's wife, Nelda. Thus, the value of the future payments to Nelda will be in his gross estate. However, because she is his wife and the payments meet the LAME restrictions (Lifetime, Annual, Mandatory, and Exclusive), the same value will be eligible for the marital deduction. Notice that the answer said the value would be in his gross estate. It did not say the value would be in his estate tax base/tentative tax base. The only portion of payments made under the annuity prior to Glen's death that will be includible in his gross estate are the unconsumed portion (if any) of such payments. A private annuity is a sale transaction. As long as the present value of the annuity at the time of transfer equals the fair market value of the shares at the time of transfer, there is no gift even if Glen dies prior to receiving the fair market value of the shares. LO 3.1.1

Last year, your client and his wife gave their adult son a one-third interest in a commercial office building. Each has a one-third interest as tenants in common. If your client dies while still owning the property as a tenant in common, an estate tax implication of this form of property ownership is that A. your client's estate will be entitled automatically to a marital deduction of one-half of the date-of-death value. B. one-third of the value of the property will be included in your client's gross estate. C. one-half of the value of the property will be included in your client's gross estate. D. the entire value of the property will be included in your client's gross estate because his estate cannot prove contribution by the other tenants in common.

B. one-third of the value of the property will be included in your client's gross estate. Each tenant in common owns their share of the property and as owner, that share is included in the gross estate of each. LO 1.3.1

Which one of the following is the least important consideration in selecting a competent personal representative (PR)? A. Being willing to accept the fiduciary responsibility B. Having knowledge and competency in dealing with financial matters C. Being a blood relative of the testator D. Recognizing when to retain competent professional assistance

C. Being a blood relative of the testator Picking a relative as an executor is the least important consideration. Choosing an executor requires a careful examination of a person's traits. Honesty, financial competency, common sense, and a willingness to accept the appointment are far more important considerations than whether the person is related to the testator, is a beneficiary, or will serve without compensation. The goal is thorough, effective, and efficient administration of the deceased's estate. LO 8.5.1

Although Grant and Rose are currently in good health, they are concerned that they may become ill in the future and not be able to manage their own affairs. They want to ensure that Marie will be able to manage their financial affairs if either of them becomes incapacitated. Which of the planning devices best meets their needs? A. Guardianship B. Living will C. Durable power of attorney (DPOA) D. Special needs trust

C. Durable power of attorney (DPOA) A durable power of attorney (DPOA) best meets their needs because a DPOA allows the agent to continue acting on the principal's behalf even if the principal becomes incapacitated. A living will provides for the suspension of medical care if the drafter becomes terminally ill. A guardianship is a court-supervised proceeding that allows the guardian to manage the personal care and well-being of the ward. Special needs trusts are established to provide supplemental benefits for beneficiaries who are receiving governmental assistance. LO 9.2.1

Gustav and Frieda, husband and wife, want to pay the least amount of estate tax possible on their combined gross estates. They own $8 million in assets as joint tenants with right of survivorship. Gustav owns $7 million of assets in his sole name, and Frieda owns $4 million of assets in her sole name. Make the following assumptions: - Gustav will be the first to die. - Neither estate will have any adjusted taxable gifts. - Neither estate will have any debts or administrative expenses. - Unless otherwise directed, all of Gustav's probate estate will go to a noncharitable beneficiary other than Frieda. Assume that no deceased spousal unused exclusion (DSUE) amount will be available to Frieda. If the actions described below were taken, which one of the following transactions will accomplish their objective? A. Gustav should have his will fund a testamentary marital trust with $2 million, and the rest of his probate estate should go to a bypass trust. B. Gustav should have his will fund a testamentary bypass trust with $5 million in assets. C. Gustav and Frieda should immediately sever $6 million of the $8 million joint tenancy property and place $3 million in Gustav's sole name, and $3 million in Frieda's sole name. D. Gustav should transfer $1 million of his sole assets to Frieda immediately.

C. Gustav and Frieda should immediately sever $6 million of the $8 million joint tenancy property and place $3 million in Gustav's sole name, and $3 million in Frieda's sole name. This option comes closest to equalizing Gustav and Frieda's taxable estates. They are both below the applicable credit amount, and it's good to have Frieda with a taxable estate below $11.58 million. Thus, each spouse would be able to use his or her estate tax applicable credit amount and they would avoid paying any estate taxes out-of-pocket. Although part of Frieda and Gustav's credit amount is wasted in all options, enough is used to prevent payment of tax by equalizing their estates. LO 5.3.2

Herbert, who lives in a common-law state, has a will that gives his entire probate estate in equal shares to his three children. All of Herbert's $16,800,000 gross estate is owned in his sole name except for his residence, which is owned as joint tenants with right of survivorship with his wife. Herbert's interest in this residence is valued at $500,000. Despite having been married for 30 years, Herbert's wife has no substantial estate of her own. Herbert has made $400,000 in adjusted taxable gifts since 1976. Herbert's wife is named personal representative (PR) of his estate. Assuming Herbert is survived by his wife and children, which one of the following is a disadvantage of the probate process for Herbert? A. Herbert's wife will not be allowed to elect against the will unless she disclaims her right to receive Herbert's interest in the house. B. The probate process will not allow Herbert's children to disclaim any part of his estate so that Herbert's wife can receive more of his estate. C. Herbert's wife will have the right to elect against the will even though she is named as the PR of the estate. D. Herbert's estate will have to pay estate tax because the marital deduction will be too small to eliminate all tax.

C. Herbert's wife will have the right to elect against the will even though she is named as the PR of the estate. With no substantial estate of her own, Herbert's wife will be tempted to elect against the will to get part of the probate estate. While the amount she can get by this election is controlled by state law, and this amount may be reduced by the value of his interest in the residence, most states will allow a surviving spouse (especially in a marriage of this duration) to receive a substantial portion of the probate estate. While option a. states a correct consequence of the way that Herbert has elected to dispose of his property, this consequence is not due to the probate process, and thus, is not a disadvantage of that process. The probate process does not restrict the right to disclaim. A spouse can elect against the will and retain what is given to him or her by will substitute. The amount given by will substitute is simply deducted from the amount given by making the election, and the spouse receives the difference from the probate estate. LO 4.1.2

Which of the following are characteristics of the unified tax system that are common to both testamentary transfers and lifetime gifts? I. Availability of the marital deduction II. Use of adjusted taxable gifts in calculation of the tax III. Availability of the annual exclusion amount IV. Availability of an applicable credit amount A. I, II, and IV B. I, II, and III C. I and IV D. III and IV

C. I and IV The annual exclusion (option III) can be used only for lifetime gifts. Only the estate tax uses adjusted table gifts (option II) in making the tax calculation. Gift taxation uses taxable gifts, not adjusted taxable gifts. Adjusted taxable gifts start out as cumulative lifetime taxable gifts and then subtracts the taxable gifts made for property that actually ends up in the gross estate. For example, a donor placed his home in a qualified personal residence trust (QPRT), resulting in $120,000 of taxable gifts. The QPRT was scheduled to last for 10 years; however, the donor died after four years, so the value of the home was in his estate. To avoid double taxation, his taxable gift of $120,000 from when the QPRT was established is subtracted from his cumulative lifetime gifts. Although the estate and gift tax applicable credit amounts (option IV) were different in the recent past, each tax does have an applicable credit amount. LO 5.1.1

Your client, Jonathan, is the sole owner of an apple orchard. Land values are beginning to increase rapidly. He is planning to retitle the property as equal joint tenants with right of survivorship (JTWROS) with his three adult children. Which of the following are CORRECT advantages and disadvantages of changing the title to JTWROS with his children? I. The property will avoid probate by being automatically transferred to the surviving tenants. II. Jonathan's children will have no rights regarding the property while Jonathan is alive. III. Some of the future appreciation of the property can be shifted to his children in order to minimize transfer taxes. IV. Future appreciation of the property cannot be shifted to his children because, when he dies, 100% of the value of the orchard will be part of his gross estate because he is the only tenant who has made a contribution for his or her interest. A. IV only B. II and III C. I and IV D. I, II, and III

C. I and IV The other options, II and III, describe features of a tenancy in common, not features of JTWROS among nonspouse tenants. Unless the applicable state law permits, JTWROS does not provide a right of testamentary control, the ability to create unequal interests among the tenants, or the ability to include property in a tenant's federal gross estate based on the fractional interest owned, rather than on the tenant's contribution (when held among non-spouses). LO 4.4.3

The Chapter 14 zero valuation rules focus on proper valuation of assets at the time of transfer for purposes of determining gift tax. Which of the following statements regarding the Chapter 14 valuation rules is CORRECT I. An estate freeze involving the intrafamily transfer of corporate stock or partnership interests generally results in an immediate gift tax based on the entire value of the business held by the senior family member. II. In the case of buy-sell agreements, the Chapter 14 rules do not apply to transfers between nonfamily members. A. Both I and II B. II only C. I only D. Neither I nor II

C. I only Statement II is incorrect because in the case of buy-sell agreements, the Chapter 14 valuation rules apply to transfers between nonfamily members as well as transfers between family members. LO 3.2.2

Which of the following state a premortem purpose of selling an illiquid asset? I. Illiquid assets may be sold to increase estate liquidity. II. Illiquid assets may be sold to ensure fair market value is received for the property. III. Illiquid assets may be sold to reduce estate shrinkage. IV. lliquid assets may be sold to reduce estate administration expenses. A. II and IV B. I and IV C. I, II, III, and IV D. I and III

C. I, II, III, and IV All of these are purposes of selling an illiquid asset. LO 6.2.2

Meredith has completed a preferred stock recapitalization of a business that had been solely owned by her. She retained all preferred shares in the new business entity and gifted all nonvoting common shares to her three children in equal shares. Her preferred shares have a fixed liquidation value and a cumulative right to a fixed amount of income. Which of the following are CORRECT statements regarding the effect of this transaction upon the liquidity of Meredith's estate? I. She has reduced the cash needs of her estate because she has reduced the size of her gross estate. II. She has increased the potential cash resources of her estate by establishing a market for the shares in the corporation owned at death. III. She has decreased the cash needs of her estate by completely eliminating the business as an asset of her probate estate. IV. If her estate will owe transfer taxes, she has increased the potential cash needs of her estate by using some of her applicable credit amount to pay the gift tax for the gifts to her children. A. I and II B. III and IV C. I, II, and IV D. II, III, and IV

C. I, II, and IV I -- Meredith's gross estate has been reduced immediately by the value of the shares she gave to her children (option I). It will be reduced further in the future because of any business income that goes to her children, and by the appreciation in the value of the business that will also go to the children because her shares have a fixed liquidation value. II -- One purpose of a transaction such as this one is to create a pool of motivated buyers for the portion of the business interest that is not gifted to them (option II). IV -- The gifts to the children will cause Meredith to use her applicable credit amount (option IV). To the extent it is used, it will not be available to cover any estate tax due at her death. The business will remain an asset of her probate estate because of the preferred shares that she has retained in her name (option III) LO 3.2.2

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

C. I, III, and IV Appraisal fees are a deductible administrative expense if reasonable in amount. The personal representative's fee can be deducted only if actually taken. The medical bills may be deducted the same as any other valid debt because they were not reimbursed by insurance. Although passed by state statute to the spouse rather than by Bill's express direction, the elective share qualifies for the marital deduction and thus may be deducted from the gross estate to calculate the taxable estate. LO 5.2.2

Which of the following are characteristics or consequences of establishing a T.O.D. (transfer on death) account? I. If the named beneficiary is the owner's spouse, the transfer will qualify for the gift tax marital deduction. II. Assets in an account titled in this manner will avoid probate. III. Assets in an account titled in this manner will be included in the owner's gross estate. IV. The owner can change the named beneficiary at any time prior to death if still competent. A. I and III B. I and II C. II, III, and IV D. III and IV

C. II, III, and IV II -- T.O.D. assets will avoid probate III & IV -- The beneficiary designation is revocable until death, so the assets in the account are included in the account owner's gross estate and would receive an estate tax marital deduction if the named beneficiary is the owner's spouse at death. Only option I is an incorrect statement. Because titling an account in this manner is not a completed gift, the transfer is not subject to gift tax and does not qualify for the gift tax marital deduction. LO 4.4.1 (pg 177, 178)

Which one of the following states a basic feature of the IRC Chapter 14 special valuation rules? A. These rules apply to any intrafamily transfer of assets for which there is no established market if the interest retained by the transferor is of the same type as the interest transferred. B. In a transfer of property in trust to which these rules apply, they make any income interest retained by the transferor that is a unitrust right subject to gift tax. C. In a transfer of a closely held business interest to which these rules apply, they make any distribution right retained by the transferor that is not fixed in time and amount subject to gift tax. D. These rules apply to a transaction between family members to acquire, use, or sell at fair market value property for which there is no established market.

C. In a transfer of a closely held business interest to which these rules apply, they make any distribution right retained by the transferor that is not fixed in time and amount subject to gift tax. A retained distribution right that is not fixed in time and amount must be valued at zero, which requires the transferor to pay gift tax not only on the value of what was given away, but also on the value of what the transferor retained. Retention of a unitrust right by the transferor will allow this right to have a value greater than zero, which can then be deducted from what the transferor owned prior to the transfer. Therefore, the transferor will have to pay gift tax only on the value of what was transferred to others. The Chapter 14 rules do not apply to any transfer for which there is an established market, or where the interest transferred is of the same type as the interest retained. Any transaction to acquire, use, or sell property at fair market value, even between family members, is not subject to the Chapter 14 rules. LO 2.1.3

Which of the following statements is CORRECT concerning income earned by spouses in a community property state? A. Income earned by each spouse after marriage is considered community property only if it is commingled. B. Income earned by each spouse prior to marriage is considered community property. C. Income earned by each spouse after marriage is considered community property. D. Income earned by each spouse prior to and after marriage is considered community property.

C. Income earned by each spouse after marriage is considered community property. Even though earned by only one spouse, such earnings are considered community property. LO 3.3.3

Grant would like to give a gift to his alma mater, Baylor University. However, he wants to be sure that his wife, Rose, will continue to receive an income stream from the gifted assets for the rest of her life and that the income stream has the potential to keep up with inflation. Grant also wants the option of making future gifts to Baylor University under the same conditions. Due to his distrust of lawyers, he does not want to bear the expense and hassle of setting up this gifting arrangement or having anything to do with its future administration. Given Grant's objectives, which one of the following is the most appropriate charitable giving technique for him to use? A. Outright charitable gift B. Charitable remainder annuity trust (CRAT) C. Pooled income fund (PIF) D. Charitable remainder unitrust (CRUT)

C. Pooled income fund (PIF) A pooled income fund is created and maintained by the charity and allows additional contributions by a donor. The income payments to Rose from a pooled income fund would have the potential to keep up with inflation—the fund's investments would need to produce income that increased in value at a rate greater than inflation. A. -- Gifting the property will not work because giving property outright means that the grantor retains no interest in the property—such as an income stream. B -- A CRAT will not work because (1) it is created by the donor; (2) it has a fixed dollar income stream that will not increase with inflation; and (3) future additions to principal cannot be made. D -- A CRUT will not work because a CRUT is created (and usually administered) by the donor. LO 7.2.2

Andrew and Alicia are husband and wife who live in a community property state. Soon after their marriage they began establishing an emergency fund using money that each earned from their respective jobs. This fund was used to meet unexpected expenses as they arose. Three years ago, Alicia liquidated a bond fund that she had purchased prior to their marriage, and placed the proceeds in the emergency fund. There have been many deposits and withdrawals from the fund since that time. Last year, Andrew filed for divorce. Alicia is seeking to recover the full value of the bond fund proceeds that she placed in the emergency fund as her sole and separate property, and half of the remaining emergency fund. Andrew claims he is entitled to half of the entire emergency fund. Which one of the following statements is CORRECT regarding Andrew's and Alicia's rights in the emergency fund? A. The stock proceeds are Alicia's separate property, and she should be entitled to recover these funds in full as well as one-half of the remaining emergency fund. B. The bond fund proceeds are community property, and Alicia and Andrew are each entitled to a percentage of the total emergency fund equal to their respective contributions. C. The entire emergency fund is community property, and Alicia and Andrew are each entitled to one-half of the total emergency fund. D. The entire emergency fund is separate property, and Alicia and Andrew are each entitled to a percentage of the total emergency fund equal to their respective contributions.

C. The entire emergency fund is community property, and Alicia and Andrew are each entitled to one-half of the total emergency fund The answer is the entire emergency fund is community property, and Alicia and Andrew are each entitled to one-half of the total emergency fund. LO 1.3.3

Which of the following estate planning techniques is useful for nonspouses in nontraditional relationships? I. Convert individually owned property into joint tenancy with right of survivorship (JTWROS) II. Establish a revocable living trust naming the other partner as beneficiary at death III. Rely on intestate succession laws to pass property to the other partner IV. Name the other partner as beneficiary of qualified retirement plans and IRAs A. I, II, III, and IV B. III only C. II and IV D. I, II, and IV

D. I, II, and IV Statement III is incorrect because intestate succession laws generally do not recognize the rights of unmarried domestic partners to inherit property from one another. LO 8.4.1

Archer's current estate plan disposes of his entire estate as follows: - $1,500,000 outright to his wife, Doris - $11,800,000 in a family bypass trust for his children Archer has not made any lifetime taxable gifts. He estimated the estate tax on the current plan to be $160,000 if he were to die in 2020. He is considering a suggestion to restructure his estate plan as follows: - $90,000 outright to his wife, Doris - $11,580,000 in a family bypass trust for his children - $1,630,000 in a qualified terminable interest property (QTIP) trust payable to his children at his wife's death What amount of tax, if any, will the proposed plan save Archer's estate assuming death in 2020 after the restructured plan is implemented, and the QTIP election is made for the entire amount placed in the QTIP trust? A. $0 B. $59,000 C. $31,000 D. $160,000

D. $160,000 Answering this question requires calculating the estate tax liability under the proposed plan and comparing such liability with that of the existing plan. -- Under the proposed plan, the bequests to Archer's wife and the QTIP trust will receive marital deductions in a corresponding amount and thus will incur no estate tax. (We are told to assume that the QTIP election is made.) -- The bequest to the family bypass trust will incur an estate tax of $4,577,800, which will be negated by Archer's estate tax applicable credit amount. -- Because the proposed plan will generate no estate tax due, it will save $160,000—the estimated tax on the existing plan. LO 2.3.1

Assume that Marie's parents give Michael and Marie 1,000 shares of XYZ stock on July 8, 2020, which is a Wednesday. The only trades of XYZ stock that week are as follows: Date High Low Closing Price July 7 $32 $28 $29.50 July 10 $35 $31 $31.50 What is the value of the gift for gift tax purposes? A. $30,000 B. $31,500 C. $32,000 D. $31,000

D. $31,000 The value of the gift is determined as follows: FMV for last trade date before gift: ($32 + $28) ÷ 2 = $30 FMV for first trade date after gift: ($35 + $31) ÷ 2 = $33 Business days from last trade date to gift date: 1 Business days from gift date to first trade date: 2 Prorated before gift FMV: $30 × 2 = $60 Prorated after gift FMV: $33 × 1 = $33 FMV for gift tax purposes: ($60 + $33) ÷ 3 = $31 Total value of gift: 1,000 × $31 = $31,000 LO 9.2.2

Hal has a gross estate currently valued at $11.5 million. He intends for his wife, Leslie, and two minor children to be the primary beneficiaries of his estate. Hal wants to provide their minor children with current income from some of his investments until they reach the age of majority without having any of the income taxable to him. His primary tax goal is to reduce his federal estate tax liability when he dies. Which one of the following is the most appropriate trust arrangement for Hal to use to accomplish all of his objectives regarding property to be used to benefit the children? A. A 15-year grantor-retained income trust (GRIT) B. A revocable living trust C. A qualified domestic trust D. A Section 2503(b) trust with his children as both income and remainder beneficiaries

D. A Section 2503(b) trust with his children as both income and remainder beneficiaries An irrevocable transfer to a Section 2503(b) trust in which Hal has no retained interest (or discretion as trustee) will achieve both objectives of not having income taxable to Hal and not having the assets included in his gross estate. Hal must make sure that none of the income from the trust is used to satisfy his legal obligation of support to the children to avoid the grantor trust rules. The other options would not accomplish Hal's objectives. C -- A qualified domestic trust is used to transfer property to a noncitizen spouse at death. B -- A revocable living trust would be included in Hal's gross estate. A -- Income from a GRIT would be taxable to Hal under the grantor trust rules. LO 3.1.2

Which of the following statements regarding the goals of estate planning is CORRECT? A. An estate planner is in the best position to determine which goals the client should prioritize. B. An estate planner must choose between two or more estate planning techniques that will achieve his or her client's objectives. C. A client and an estate planner must mutually agree on the client's most important estate planning objective in the event that all such objectives cannot be satisfied. D. A client may have to choose between two or more estate planning techniques that will achieve his or her objectives.

D. A client may have to choose between two or more estate planning techniques that will achieve his or her objectives. Although there may be two or more techniques that will achieve the client's stated objectives, the client's choice will be based on a preference for one technique's characteristics or tax consequences over those of the other technique(s). LO 1.2.1

Which of the following is an example of unauthorized practice of law? A. 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. B. A financial planner advising her clients that their current will does not reflect their goals. C. A financial planner explaining to his clients the dangers of using legal forms obtained from the internet. D. A financial planner advising a client to place solely owned property into joint tenancy with right of survivorship.

D. A financial planner advising a client to place solely owned property into joint tenancy with right of survivorship. 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. LO 4.2.1

Which statement regarding bank accounts owned jointly with right of survivorship (JTWROS) is CORRECT? A. There are no gift tax consequences with JTWROS accounts. B. A gift is made upon the creation of the donee's interest. C. There is a gift whenever a person uses personal funds to open a joint bank account. D. A gift is made when the noncontributing joint owner (the donee) makes withdrawals.

D. A gift is made when the noncontributing joint owner (the donee) makes withdrawals. There is no gift when a person uses personal funds to open a joint bank account. There is a gift when the other joint owner (the donee) makes a withdrawal—the gift is the amount withdrawn LO 1.3.2

Assume that Michael and Marie own their personal residence as a joint tenancy with right of survivorship (JTWROS) and that they originally purchased the residence for $100,000 several years ago. If Michael dies in 2020, which of the following statements is(are) CORRECT? I. The residence will pass through Michael's probate estate. II. The residence will pass to Marie under Michael's will. III. Marie's basis in the residence after Michael's death will be $175,000. A. I only B. II and III C. I and II D. III only

D. III only Statements I and II are incorrect because the residence passes to Marie by operation of law. It is not included in Michael's probate estate, and it does not pass under his will. Statement III is correct. Marie receives a stepped-up basis in one-half of the residence ($125,000), which is added to her existing basis of $50,000 in the other half of the property. LO 9.2.2

Margie is the sole owner of a successful business that constitutes the vast majority of her wealth. Margie never married, nor does she have any children or close relatives. Because of her health, she has been advised to retire, but cannot afford to do so unless she can get some value for the business. Burt, one of her employees, has offered to purchase the business, but has little money of his own, and it is unlikely he could obtain a loan for even a down payment, let alone the full value of the business. Burt has been a good "second in command," but Margie has doubts about his ability to successfully lead the business. Which one of the following is the most appropriate form of business transfer technique for Margie to use to achieve her objectives if she decides to accept Burt's offer? A. A gift leaseback transaction so that she can control the business until she dies B. A private annuity sale transaction so that she can be assured of receiving payments until she dies C. A cross-purchase buy-sell agreement D. An installment sale transaction with the purchase price being the fair market value of the business

D. An installment sale transaction with the purchase price being the fair market value of the business An installment sale would allow Margie to get full value for the business, report her capital gain on an installment basis, and secure the promised payments by a lien on the assets and accounts receivable of the business. A -- A gift leaseback transaction would not allow Margie to successfully transfer her business, but perhaps some business equipment. In addition, Margie would incur a gift tax liability for any assets transferred and would still need a plan for her business interest. B -- With a private annuity, the seller must report all gain in the year of sale. Because Burt cannot get a loan for the down payment, Margie would have to pay the capital gains tax out of her own funds rather than in installments as she receives the payments under the installment sale. C -- A cross-purchase buy-sell agreement would not allow Margie to retire immediately, and it is appropriate only when the contracting parties are already owners of the business. LO 3.2.1

Which one of the following is a characteristic of the unified tax system that is NOT common to both federal gift taxation and federal estate taxation? A. Availability of the marital deduction B. Availability of an applicable credit amount C. Availability of the charitable deduction D. Availability of the annual exclusion amount

D. Availability of the annual exclusion amount This is the correct answer because the annual exclusion only applies to qualifying lifetime transfers of wealth (i.e., for federal gift taxation).There are no similar exclusions for wealth transfers at death, only deductions for certain transfers and credits that apply against any tax that is due. LO 5.1.2

Marin, age 43, has a gross estate valued at $6.1 million. She married Steve, age 38, 10 years ago. They have four children, ages 4 through 9. Steve has problems holding on to money. Marin wants to ensure that Steve receives adequate income after her death, if she should die first, but she does not want him to be entitled to principal at any time. She would like all her property to pass to their children in equal shares after Steve's death. Which one of the following transfers is most appropriate for Marin? A. Placing the entire estate in a power of appointment (A) trust B. Placing the entire estate in a 2503(c) trust C. Equalizing the taxable estates using an (A) trust and a QTIP trust D. Creating a family bypass (B) trust equal to the estate tax applicable exclusion amount, with the remainder in a qualified terminable interest property (QTIP) trust

D. Creating a family bypass (B) trust equal to the estate tax applicable exclusion amount, with the remainder in a qualified terminable interest property (QTIP) trust Marin does not want Steve to be entitled to principal at any time, so a power of appointment trust will not work since it is entitled to the marital deduction and gives the spouse a general power of appointment. A 2503(c) trust is incorrect because such a trust is designed for minors, not an adult. While a QTIP trust can be a marital trust if the proper election is made, the corpus of this trust never comes under the unlimited control of the surviving spouse. The corpus of a bypass trust by definition bypasses the surviving spouse's control. LO 5.3.1

Fran and her husband, Dan, own their residence in joint tenancy with right of survivorship. Until recently, the property was held solely in Fran's name. Then, at the suggestion of her advisors, Fran changed the title. Dan furnished no consideration at the time of transfer. Which one of the following statements concerning the gift tax treatment of the transfer from Fran to Dan is CORRECT? A. Fran has made a taxable gift of one-half of the value of the residence because Dan paid no consideration. B. Dan has made a taxable gift of one-half of the value of the property. C. There is a taxable gift of one-half of the value of the residence, less the amount of the annual exclusion. D. Fran has no gift tax liability because the annual exclusion and the gift tax marital deduction reduce the taxable gift to zero.

D. Fran has no gift tax liability because the annual exclusion and the gift tax marital deduction reduce the taxable gift to zero. Although Fran has made a gift to Dan, it is not a taxable gift because of the annual exclusion and the marital deduction. The word taxable means that after all applicable deductions (gift splitting, annual exclusion, marital, and charitable deductions) a value still remains to be gift taxed. LO 2.2.2

Your client has an estate valued at $4 million. Two months ago, his wife died. He and his now deceased wife did not have any children together, but she had two children from a prior marriage. His will, drafted in 2012, leaves everything to his wife. No contingent beneficiary is named in the will, and it does not contain a residuary clause. Included in the client's estate are real estate holdings in three other states. He wants to retain lifetime ownership of these properties because of the income they provide him. He would like the real estate holdings to pass to his wife's children in equal shares upon his death. He would like the remainder of his estate to go to his brother. Which of the following are serious estate planning pitfalls that can be avoided if your client amends his will to carry out his objectives? I. Having the estate pass under the laws of intestacy II. Having the estate assets distributed through probate III. Having the estate pay any estate tax IV. Having part of the estate pass to unintended beneficiaries A. I and II B. II and III C. III and IV D. I and IV

D. I and IV Statement II is false because probate, especially from CFP Board's perspective, should be avoided and wills go through probate. Statement III is false because amending a will won't have any effect on the estate tax calculation, and the estate isn't even close to large enough to worry about estate taxes. LO 1.2.2

Which of the following statements regarding the federal gift tax return IRS Form 709 is CORRECT? I. For a calendar-year taxpayer, an extension of time for filing IRS Form 1040 also extends the time for filing IRS Form 709. II. George gives $5,000 of separate property to his son. If Mary, George's wife, elects to split the gift with George, they must file a gift tax return. III. George and Mary give $20,000 of community property to their son. No gift tax return need be filed. IV. An extension of time for filing the gift tax return does not extend the time for payment of the gift tax. A. I, II, and III B. III and IV C. I and II D. I, II, III, and IV

D. I, II, III, and IV All of the statements are correct. LO 2.1.1

Last year, Gloria made the following gifts: - $10,000 in cash to her husband, Geno - Labor and services worth $5,000 to the Preserve Foundation, a qualified public charity - $8,000 to a Section 2503(b) trust with her father as the mandatory income beneficiary and her children as the remainder beneficiaries - $15,000 worth of non-income-producing real estate to a Uniform Transfers to Minors Act (UTMA) account for her son, Lance Her husband, Geno, refuses to sign the consent section of the Form 709 that Gloria must file. Which of the following reductions can Gloria claim from her total gift calculation? I. A marital deduction of $10,000 for the gift to her husband, Geno II. A charitable deduction of $5,000 for the gift to the Preserve Foundation III. An annual exclusion of $8,000 for the transfer to the Section 2503(b) trust IV. An annual exclusion of the maximum amount for the gift to the UTMA custodial account V. Gift splitting of all gifts except the gift to Geno A. II and V B. I, II, and III C. I and IV D. IV only

D. IV only Option IV is correct Option I is false because if the gift is a present interest gift to a spouse (or to a qualified charity) the annual exclusion must be taken before the marital deduction (or charitable deduction). Option II is incorrect because only a gift of cash or property qualifies for a charitable deduction. Option III is wrong because the gift to a Section 2503(b) trust must be allocated part to the income interest and part to the remainder interest based on the term of the trust; only the portion of the $8,000 allocated to the mandatory income right (not the full amount gifted) will qualify for the annual exclusion. Option V is false because Geno has refused to consent to gift splitting. Gifts to a custodial account are entitled to the gift tax annual exclusion up to the maximum amount. LO 2.1.1

Betina is a single taxpayer in the maximum current marginal income tax bracket. She owns stock that has appreciated rapidly in recent years. Five years ago, she paid $18,000 for the stock, which now has a fair market value of $72,000. She would like to gift the stock to her nephew, Jerry, who is in the lowest marginal income tax bracket. Which one of the following is an income tax implication of Betina's proposed transfer? A. Jerry's basis is limited to income tax paid on the stock's net appreciation over the five years Betina owned the stock. B. Jerry receives a stepped-up basis in the stock based upon its fair market value at date of transfer. C. Betina receives an income tax deduction for the excess of the stock's fair market value over her cost basis. D. Jerry's basis is Betina's cost in the stock plus an adjustment for the portion of anygift tax paid out-of-pocket on the transfer that is due to the appreciation of the stock since the original owner purchased it, if gift taxes are actually paid out-of-pocket.

D. Jerry's basis is Betina's cost in the stock plus an adjustment for the portion of any gift tax paid out-of-pocket on the transfer that is due to the appreciation of the stock since the original owner purchased it, if gift taxes are actually paid out-of-pocket. The donee of a gift assumes the donor's basis with an adjustment for the portion of gift tax paid out-of-pocket (if any) that is attributable to the gain element (fair market value of gift minus donor's basis). Betina has not paid any income tax on the gain, and would therefore make Jerry's basis zero; Jerry will assume Betina's basis as adjusted. Income tax deductions are not allowed for gifts to noncharitable beneficiaries. LO 7.2.1

Conrad owns a closely held partnership interest that currently represents 60% of the value of his adjusted gross estate (one-half of the closely held business value is real estate). Conrad is concerned about paying sizable estate taxes at his death, so he is considering the inter vivos transfer of part of the partnership interest to his son. If Conrad decides to make the transfer, his partnership interest will be reduced to 30% of his adjusted gross estate. His will bequeaths $30,000 cash to his favorite qualified charity, the business interest to his son, and leaves the rest of the estate to his wife. A disadvantage for Conrad of transferring the business interest, while he is alive, to his son is that the estate will no longer qualify for which of the following? A. The marital deduction for property given to his spouse B. A Section 303 stock redemption C. The alternate valuation date D. Section 6166 installment payment of estate taxes

D. Section 6166 installment payment of estate taxes Transferring the business property will prevent more than 35% of Conrad's adjusted gross estate from being attributable to the value of a closely held business (ownership of real estate is irrelevant). The alternate valuation date is incorrect, as there is no indication that the value of any estate assets was declining, and if they were, the estate could still qualify for this benefit after the transfer. The marital deduction would still be available regardless of the transfer of the business property. A Section 303 stock redemption cannot be used because Conrad owned an interest in a partnership, not a corporation. LO 6.3.3

Georgia established a trust over which she retained the power to revoke. She transferred $150,000 of income producing securities to the trust. The trust sold some of the securities and purchased life insurance on Georgia's life, using the income from the remaining securities to pay the premiums. Excess income is to be accumulated in the trust. Georgia died two years and 364 days after the creation of the trust. Which one of the following statements correctly describes a disadvantage of this trust arrangement for Georgia? A. She gives up the power to control the disposition of the insurance proceeds through transfer to the trust. B. She must include the policy proceeds in her estate as a transfer within three years of death but could have excluded them if she had lived only a few days longer. C. She cannot take advantage of the gift tax annual exclusion because payment of the premiums constitutes a future interest. D. She cannot take advantage of income shifting because the trust income is taxable to her under the grantor trust rules.

D. She cannot take advantage of income shifting because the trust income is taxable to her under the grantor trust rules. Because Georgia retained the power to revoke, the grantor trust rules apply, and Georgia will be taxed on all trust income whether disbursed to her or not. The other choices are incorrect. The power to revoke obviously includes the power to determine the beneficiaries of trust assets. The three-year or inclusionary rule does not apply because Georgia never gave up any incidents of ownership in this policy. At all times, Georgia was the owner of this policy because of her right to revoke the trust. Payment of the premiums (with trust income) is not a gift because of her power to revoke the trust. LO 5.2.1

Your data gathering meeting with Colin indicated the following about his property interests: - He has the right to decide, without limitation, who will receive the entire corpus of his uncle's trust. Colin's will does not exercise this right. - His wife owns a paid-up life insurance policy she purchased that insures Colin's life; his wife, Lois, is the primary beneficiary. - Five years ago, he created a revocable trust for his children and funded it with $80,000 worth of securities; two years ago, when the trust fund was worth $130,000, he made it irrevocable. - Two years ago, he had cumulative taxable transfers that exceeded the applicable exclusion amount and paid $32,000 in gift tax to the federal government. Which one of the following estate assets would NOT be included in Colin's taxable estate if he died in the current year? A. The $32,000 in gift taxes paid B. The value of the corpus of his uncle's trust C. The date-of-death value of the irrevocable trust D. The replacement cost of the life insurance policy

D. The replacement cost of the life insurance policy Because Colin's wife is the owner and beneficiary of the life insurance policy, it would seem that the death benefit will qualify for a marital deduction. However, because the death benefit is not included in Colin's gross estate, it will not transfer from Colin to his wife, and therefore no part of the policy will be in his taxable estate. B -- Because Colin did not specify in his will that the assets in his uncle's trust were to go to his spouse (marital deduction) or to a qualified charity (charitable deduction), the assets in this trust will also be part of his taxable estate. C -- Because the assets in the irrevocable trust go to Colin's children, they also are not entitled to either a marital or charitable deduction and thus will be included in his taxable estate. A -- Colin cannot transfer the gift taxes because these taxes are, in effect, a phantom asset. Therefore, they cannot qualify for any estate tax deduction that would keep them from being in his taxable estate. LO 5.2.1

Ernesto, a married individual, died in 2020 with a gross estate with a fair market value of $30 million. His marginal estate tax bracket is 40%. The majority of his estate consists of personal use assets and publicly traded stock, which has rapidly declined in value since his death. Ernesto appointed his wife, Davila, as personal representative and beneficiary of one-half of his estate. He gave the remainder of his estate to his nephew. During the last year of his life, Ernesto incurred medical expenses of $50,000, all of which were reimbursed through health insurance. Two years before his death, he gifted $20,000 to his nephew and filed a gift tax return without Davila's consent to split gifts. Ernesto and Davila were in a 24% marginal income tax bracket immediately prior to his death. Which one of the following is a postmortem election that will minimize tax liability the most for Ernesto's estate or its beneficiaries? A. An election to defer and make installment payments of estate taxes B. A claim of medical expenses on his final income tax return C. The filing of a gift tax return with Davila's consent to split gifts D. The use of the alternate valuation date election for estate assets

D. The use of the alternate valuation date election for estate assets The stock has declined in value, and most personal use assets also tend to decline in value over time. Therefore, use of the alternate valuation date will probably meet its two qualifying criteria: (1) that the value of the gross estate be reduced and (2) that the estate tax due be reduced. The part of the estate not given to Davila will be taxable, but this tax could be reduced or even eliminated if the gross estate is reduced enough. The medical expenses were reimbursed by insurance. No election to split gifts may be made if a gift tax return has been filed for that year. An election to defer and make installment payments of estate taxes can be made only if more than 35% of a decedent's adjusted gross estate consists of a closely held business interest. There is no such business interest in Ernesto's estate. LO 6.3.3

Rita created an irrevocable trust and funded it with securities valued at $200,000. The trustee has discretion to distribute income to Rita's son, Wally, for his health, education, maintenance, or support until he reaches age 25, at which time the trustee is to distribute all assets in the trust to him. Rita named herself trustee. Which one of the following statements concerning the gift tax treatment of the trust is CORRECT? A. This is an incomplete transfer because the gift to Wally is a partial interest. B. This is an incomplete transfer because Wally's enjoyment of the trust assets is postponed until a future date. C. This is an incomplete transfer because of Rita's power to distribute income. D. This is a completed transfer to Wally of the present value of the remainder interest.

D. This is a completed transfer to Wally of the present value of the remainder interest. Because the trust is irrevocable, the remainder interest is irretrievably given to Wally. Even though Wally may never receive anything until age 25, the transfer is complete because neither Rita nor anyone else can change his interest. Finally, Rita's retention of a fiduciary power limited to an ascertainable standard will not cause a transfer that is otherwise complete to become an incomplete transfer. Rita's power is subject to an ascertainable standard because it is limited to a demonstrated need of funds for "health, education, maintenance, or support." Because Wally will get all income from the trust (either before or after he reaches age 25), the entire value of the trust assets is a completed gift. Thus, Rita must declare the present value of both the remainder and the income interest as a gift. LO 3.3.2

The XYZ Corporation has purchased a "key person" whole life insurance policy on its founder, major shareholder, and CEO, Albert, age 72. The beneficiary of the policy is the corporation. Which one of the following is a CORRECT statement concerning the income, gift, or estate tax implications of this type of life insurance business planning technique? A. The premiums paid by XYZ Corporation will be considered gifts to Albert. B. The premiums paid by XYZ Corporation will be taxable income to Albert. C. Upon Albert's death, the policy proceeds will be included in his gross estate. D. XYZ Corporation will own the cash value of this policy.

D. XYZ Corporation will own the cash value of this policy. The policy proceeds will benefit the corporation rather than Albert. Albert had no incidents of ownership in the policy and the death benefit is not available to his estate. LO 3.3.1

A characteristic of the sole ownership form of property ownership is that the property A. can benefit multiple parties. B. owner does not control disposition at death. C. avoids probate. D. does not avoid probate.

D. does not avoid probate. Property owned in sole ownership must be probated at death. LO 4.2.2