Estate planning Process, Goals, and Property Ownership

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

A. A community property interest is subject to probate administration. LO 1.3.1

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

A. A tenancy in common is not treated the same way as a joint tenancy with right of survivorship because a tenancy in common does not provide a right of survivorship. Joint tenancy is not limited to spouses, and the treatment of joint tenancy for estate tax purposes is different for spouses and nonspouses. Spouses are always defined as having each contributed half towards the purchase of the property. For estate taxes, nonspouse decedents are initially assumed to have contributed 100%, and thus will be estate taxed on 100% of the property unless the other joint tenancy with right of survivorship (JTWROS) can be shown as having made an actual contribution to the purchase of the JTWROS property. LO 1.3.1

Norman owns property as tenants in common with his brother James. Norman has a 30% interest and James has a 70% interest. Which of the following statements are correct? During Norman's lifetime he can sell or transfer his 30% interest to anyone of his choosing. At the death of James he may leave his 70% interest to anyone through his will. A) Both I and II B) Neither I nor II C) I only D) II only

A. Both statements are correct. LO 1.3.1

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

A. Carrie should leave a letter of personal instruction or side letter. It can be as simple as a handwritten note to her personal representative containing her instructions. LO 1.2.1

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

A. Edward and Dennis own the farm as a tenancy in common because each party owns an undivided interest in the farm and their interests are unequal. The property is not held as JTWROS because each owner can dispose of their interest by will. Community property and tenancy by the entirety can only be owned by spouses. LO 1.2.1

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

A. If a life insurance policy has been transferred during the life of the insured, the death proceeds may be partially taxed under the transfer for value rules assuming there are no exceptions available. So Statement II is true and must make Statement I false. LO 1.2.2

Stella transferred a residence that was in her sole name to her and her four children as joint tenants with right of survivorship to avoid probate of this asset. No child provided any consideration for this transfer. When Stella dies, what percentage of the fair market value of this asset must be included in her gross estate? A) 100% B) 20% C) 10% D) 50%

A. Only Stella contributed to the acquisition costs of the asset. Under the consideration furnished rule, there is a rebuttable presumption the deceased joint tenant's gross estate must include 100% of the property's value. Since Stella furnished all the consideration, there is 100% inclusion. LO 1.3.1

Which of the following is not a broad category personal of financial planning goals? A) Funding the collegiate education of a grandchild B) Nonfinancial goals C) Financial tax goals D) Financial nontax goals

A. Personal financial planning goals are typically thought of as tax versus non tax goals and financial and non financial goals. Funding collegiate education is not a broad category of a personal financial planning goal. It is, however, a type of financial non tax financial goal. LO 1.2.1

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

A. The answer is 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 1.3.2

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

A. The real estate acquired before the marriage is separate property. LO 1.3.3

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

A. The remaining choices are tax-related financial goals. LO 1.2.1

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

B. All would be appropriate questions and there would also be many other appropriate questions to raise to analyze the client's current position and potential courses of action. LO 1.2.2

Bill Donnelly'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? $8,175 in appraisal fees $5,000 personal representative fee $2,380 in medical bills $705,000 elective share A) I only B) I, III, and IV C) II and IV D) I and III

B. 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 since 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 1.1.1

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

B. Both II and III are legitimate and accepted roles of an educated financial planner (such as a CFP® certificant) in the process. A financial planner is not legally or ethically prohibited from assisting a client with his or her estate plan but cannot advise a client regarding the content of the documents mentioned in Statement I. Interpreting the contents of a client's documents and informing him/her of the legal implications of those documents is not part of the financial planner's role because it usually involves some interpretation of state law, which is considered the unauthorized practice of law. LO 1.1.1

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

B. Both statements are correct. LO 1.3.2

Antwan consults a CFP® professional for advice concerning a fishing cabin he plans to purchase with his brother. Antwan and his brother want to share ownership of the cabin, but they are unsure whether they should take title as tenants in common or as JTWROS. Which of the following information should the CFP® professional obtain before making a recommendation to Antwan? I. How much each brother plans to contribute toward the purchase price of the cabin II. Whether Antwan wants to pass his interest in the cabin under his will when he dies A) I only B) Both I and II C) II only D) Neither I nor II

B. Both statements are correct. Statement I is correct because if the brothers decide to take title as joint tenants with right of survivorship (JTWROS), a taxable gift may result if one brother contributes more toward the purchase price than the other. Statement II is also correct; if Antwan wants to pass his interest in the cabin under his will, taking title as JTWROS will not be an option because title will pass automatically to the surviving brother by right of survivorship. LO 1.3.2

Kevin and Carol are spouses who live in a community property state. Which of the following assets would NOT be considered community property? A) General Motors stock purchased during their marriage; Kevin purchased the stock out of his salary B) Municipal bonds inherited by Carol from her father during their marriage C) A stock portfolio Carol purchased during their marriage with her salary D) Their home, which they purchased during their marriage using the salaries from both of their jobs

B. Gifts and inheritances received by one spouse during marriage are not considered community property. The other choices are all examples of community property, because the assets were purchased with community property funds. LO 1.3.2

Which of the following is NOT a mistake, pitfall or weakness? A) Lack of estate liquidity B) Proper disposition of assets C) Improper titling of assets D) Failure to recommend necessary changes to a will

B. It is the only answer choice which would be a strength in an estate plan. The remaining choices are, in fact, mistakes, pitfalls, and weaknesses. LO 1.2.2

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

B. LO 1.3.1

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

B. The answer is pourover will. LO 1.2.2

Which of the following is a tax-related financial goal? A) Maintaining liquidity B) Obtaining a stepped-up basis C) Avoiding ancillary probate D) Maintaining a satisfactory standard of living

B. The remaining answer choices are nontax-related financial goals. LO 1.2.1

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

B. This statement merely recognizes a well-established fact and does not constitute the unauthorized practice of law. LO 1.1.1

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

B. JTWROS can be used by anyone, including spouses; only spouses can use TBE and CP. LO 1.2.1

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

C. All of these are advantages of owning property as JTWROS. LO 1.3.2

Two friends are planning to purchase a fishing lodge together. One friend will contribute 75% of the purchase price, and the other will contribute the rest. They prefer that the purchase of the lodge not generate any gift tax consequences for either of them. In addition, each friend has a will leaving all of his assets to his surviving spouse. They both want their interest in the property to pass under their will when they die. Which of the following forms of ownership would meet all of the friends' objectives? Joint tenancy with right of survivorship (JTWROS) Tenancy in common A) I only B) Both I and II C) II only D) Neither I nor II

C. JTWROS will not meet all of the friends' objectives. JTWROS is incorrect because a gift will result if one friend contributes more than 50% of the purchase price. In addition, JTWROS property will not pass under the friends' wills. Statement II (tenancy in common) is correct. Taking title as tenants in common will not result in a taxable gift and will allow the property to pass under the friends' wills. LO 1.3.2

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

C. James's interest under the lease is a term of years because it gives him the right to possess and use the building for a given period. It is not a future interest because the right to enjoy the benefits of the property occurs immediately. LO 1.3.1

Which of the following forms of ownership do NOT pass through probate when an owner dies? Fee simple Tenancy by the entirety Community property Joint tenancy with right of survivorship (JTWROS) A) IV only B) I, III, and IV C) II and IV D) I only

C. Joint tenancy with right of survivorship (JTRWOS) and tenancy by the entirety do not pass through probate because they both include a right of survivorship and pass to the surviving joint owner(s) by operation of law. LO 1.3.1

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

C. Jointly held property cannot be transferred by will. It passes to the surviving joint tenants by operation of law outside of the will. While there is no legal restriction that joint tenancy with right of survivorship (JTWROS) owners must be related, it would almost never be correct for people with no feelings of long-term connection to choose to be JTWROS because the property would pass to the other joint tenant upon death. LO 1.3.1

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

C. Monica has a remainder interest in the home because she has the right to possess and enjoy the home after the intervening right of someone else (Craig). Her remainder interest runs for her lifetime and not a fixed number of years. A fee simple interest represents absolute ownership of property. Monica does not have absolute ownership of the home at the uncle's death. Craig has the life estate. LO 1.3.1

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

C. Statements I, II and III are true. LO 1.3.3

Your client and his wife are residents of a community property state and recently have acquired a real estate tract there. They want to leave their respective interests in this tract to the surviving spouse when one of them dies. Also, they would like to minimize income taxes on this disposition when the tract is sold by the surviving spouse. If your client is the first spouse to die, which one of the following correctly states an advantage of holding the property as traditional community property? A) Your client's interest will pass to his wife by right of survivorship. B) Your client's share of the property will receive a step-up in basis. C) The entire property will receive a step-up in basis upon his death. D) Your client's interest will pass to his wife outside of probate.

C. The answer is the entire property will receive a step-up in basis upon his death. LO 1.3.3

Which of the following is a tax-related financial goal? A) Maintaining a satisfactory standard of living B) Maximizing benefits for a surviving spouse C) Deferring the recognition of gain D) Minimizing nontax transfer costs

C. The remaining answer choices are nontax-related financial goals. LO 1.2.1

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

D. A formal legal agreement will prevail if it is valid (i.e., recognized by local law and entered into with the requisite intent). LO 1.3.3

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

D. All are potential clients to deal with issues of liquidity, need for a guardian and avoidance of ancillary probate. LO 1.3.1

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

D. All of the statements are true. Life insurance works best if there is adequate coverage undiminished by estate and income taxes. LO 1.3.2

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

D. All of the these would be appropriate as among the most important questions to be initially raised. LO 1.2.2

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

D. Assets in a revocable trust would be subject to Arnie's ability to demand them. Accordingly, there is no asset protection. LO 1.3.1

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

D. Both statements are true. LO 1.2.2

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

D. Both statements are true. LO 1.3.3

Which of the following are considered to be community property when owned by spouses while living in a community property state? A) Property acquired by one spouse before marriage B) Property acquired by one spouse by inheritance C) Property acquired by one of the spouses by gift D) Property acquired through the efforts of either spouse during their marriage

D. Community property rules assume that both people in the marriage are contributing equally to the wealth of the family. Notice that the exceptions (acquisition before marriage and by receipt as a gift or inheritance) are clearly not a combined effort of the married couple. The marriage has no bearing on the acquisition of these assets. Property acquired by one spouse by gift or inheritance, and property owned by one spouse before marriage is not subject to community property law. Property purchased with the income from separate property is generally considered separate property. LO 1.3.3

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

D. Freezing or reducing the value of assets subject to tax is a tax goal related to transfer taxes, not income taxes. LO 1.2.1

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

D. However the basis in the hands of the surviving spouse is the sum of her basis plus 1/2 the fair market value at date of the decedent's death. LO 1.3.2

Luis consults a CFP® professional for help in formulating an estate plan. Luis's primary objective is to avoid probate when he dies. Among his assets are a traditional IRA and the house he lives in. In helping Luis meet the specific goal of avoiding probate, the CFP® professional would consider which of the following items of information? Luis's statement of financial position Beneficiary designation forms for the IRA Whether Luis has any children The deed to Luis's house A) I, II, III, and IV B) I and III C) II and IV D) I, II, and IV

D. Luis consults a CFP® professional for help in formulating an estate plan. Luis's primary objective is to avoid probate when he dies. Among his assets are a traditional IRA and the house he lives in. In helping Luis meet the specific goal of avoiding probate, the CFP® professional would consider which of the following items of information? Luis's statement of financial position Beneficiary designation forms for the IRA Whether Luis has any children The deed to Luis's house A) I, II, III, and IV B) I and III C) II and IV D) I, II, and IV

Two sisters plan to purchase an office building together. One sister will contribute 80% of the purchase price, and the other will contribute 20%. The sisters want title to the property to reflect their respective ownership shares of 80% and 20%, and they want the ability to leave their interests to whomever they choose under their wills. Which of the following forms of property ownership will meet the sisters' objectives? A) Community property B) Joint tenancy with right of survivorship (JTWROS) C) Tenancy by the entirety D) Tenancy in common

D. Tenancy in common is the only form of ownership that will meet the sisters' needs, because it will allow them to own different ownership percentages. In addition, there is no right of survivorship so the sisters can leave their interests to whomever they choose under their will. With JTWROS, the ownership interests must all be equal and there is a right of survivorship when one owner dies. Tenancy by the entirety and community property are available only to spouses. LO 1.3.2

Billy owned a piece of undeveloped land (valued at $100,000) in San Jose, California, with his three brothers as tenants in common. If Billy dies, what value will be included in Billy's gross estate? A) $0 B) $25,000 C) $100,000 D) It cannot be determined from the information given.

D. Tenants in common own an undivided interest in the property, but they may own unequal shares. These facts do not state what percentage of the property Billy owns. LO 1.3.2

Several of the steps involved in the estate planning process are implement the appropriate technique, develop the appropriate technique, identify and select goals, and understanding the client's personal and financial circumstances. Which one of the following lists the sequence of these steps correctly? A) III, I, IV, II B) IV, III, I, II C) I, IV, II, III D) IV, III, II, I

D. The answer is IV, III, II, I. Understanding the client's personal and financial circumstances must be completed prior to identifying and selecting goals. From there, you can analyze the client's current course of action and potential alternative courses of action. After analysis, you can develop recommendation(s) and present them to the client. With client agreement, you can help implement recommendation(s) and, of course monitor and update as needed. LO 1.1.1

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

D. The need for premortem liquidity should be considered to meet the retirement needs of a client. Life insurance is the most likely source of liquidity at the death of a decedent. LO 1.3.3

Which if the following is a nonfinancial goal? A) Minimizing nontax transfer costs B) Maximizing flexibility C) Preserving business value D) Asset protection

D. The remaining choices are financial goals. LO 1.1.1

Assuming that a decedent left no valid last will and testament, which of the following assets will pass by the laws of intestate succession? A) Property held by the decedent and his spouse as tenants by the entirety B) Property held by decedent and his brother as joint tenants with right of survivorship. C) Property in which decedent had a life estate in a vacation home with the remainder to decedent's sister. D) Property held by the decedent and his spouse as traditional community property

D. The remaining options are will substitutes and do not expose property to probate. LO 1.3.3

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

a. All would be examples of activities useful in establishing the client and planner relationship. LO 1.3.2