Estate Planning QUESTIONS

Terrence contributed $15,000 to a foreign charitable organization. At the time of the contribution, the organization told him that his contribution was tax deductible for income tax purposes. Ignoring any income limitations, how much of the $15,000 contribution is deductible? a. $0. b. $7,500. c. $10,000. d. $15,000.

The correct answer is a. Foreign charitable organizations are not qualified charitable organizations and therefore con- tributions to such organizations do not qualify for a charitable deduction. It is always the responsibility of the donee to determine the deductible status of his contribution.

The Organization to Prevent Cruelty to Animals receives contributions from the general public to fund programs to prevent cruelty to animals. Of its total support during the year, 75% of the funds are from contributions from supporting individuals. What type of charity is The Organization to Prevent Cruelty to Animals? a. Public Charity. b. Private Foundation. c. Private Operating Foundation. d. Public Nonoperating Charity.

The correct answer is a. To be classified as a public charity, more than 33% of the organization's support must be from a combination of gifts, grants, contributions, membership fees, and gross receipts from sales in an activity which is not an unrelated trade or business. Also, to be a public charity, not more than 33% of an organization's support can come from the sum of gross investment income plus unrelated business taxable income. Because the information provided tells us that 75% of the organization's support is from individual contributions, The Organization to Prevent Cru- elty to Animals passes the first requirement to be classified as a public charity, and the organi- zation must pass the second requirement because we know less than 33% of the contributions are derived from investment income and unrelated business taxable income.

6. Josh was a majority owner in a closely held business. He had an adjusted basis in his interest of $400,000, and at his death this year, the fair market value reported on his estate tax return was $6,000,000. Like most majority owner's in closely held businesses, Josh did not have much liquidity in his estate and his executor was forced to redeem some of his interest in the business. If Josh's executor redeemed 30% of Josh's interest for $2,500,000 to pay the estate tax and administration fees, how much is subject to capital gains tax? a. $0. b. $700,000. c. $2,100,000. d. $2,500,000.

The correct answer is b. Josh's estate would have an adjusted basis in the 30% interest equal to 30% of the fair market value at Josh's date of death, or $1,800,000. If the executor of Josh's estate sold the interest for $2,500,000, the gain of $700,000 ($2,500,000-$1,800,000) would be subject to capital gains tax under Section 303 (only available at the death of the owner). Ordinarily, unless a redemp- tion is a complete redemption, the redemption is treated as a dividend

17. In July 2016, the year of Ralph's death, Ralph's executor properly elects 6166 and has a taxable estate equal to $7,000,000. If the long-term annual AFR is 3%, how much is the first annual interest payment? (Assume no previous taxable gifts.) a. $0. b. $12,680. c. $15,680. d. $18,600.

The correct answer is b. Tax Estate Estate Tax Applicable Credit Estate Tax $7,000,000 $2,745,800 ($345,800 + 0.4 x $6,000,000) $2,125,800 $620,000 $592,000 $28,000 @2% @3% $11,840 (First $592,000 is taxed at 2%) $840 $12,680

If an estate pays the funeral expenses of the decedent, on which tax return are these expenses deducted?' a. The decedent's final return (Form 1040). b. The decedent's estate tax return (Form 706). c. The income tax return of the decedent's estate (Form 1041). d. The surviving spouse's income tax return (Form 1040).

The correct answer is b. If the funeral expenses are paid by the decedent's estate, the expenses are deducted on the fed- eral estate tax return. If the expenses are paid by anyone else (or any other entity), the expenses are not deductible.

Which of the following allows an individual to refuse property from the estate of a decedent? a. Bypass trust. b. Exclusionary clause. c. Disclaimer. d. Rejection.

The correct answer is c. A qualified disclaimer allows an individual to refuse property from the estate of a decedent. A bypass trust maximizes the use of the available applicable estate tax credit at the death of the first-to-die spouse. The exclusion clause and rejection do not exist.

Mary Jane's husband died in October of 2016. Which filing status will Mary Jane probably use on her 2016 income tax return? a. Single. b. Head of household. c. Married filing jointly. d. Qualifying widow.

The correct answer is c. In the year of death, the surviving spouse can file either married filing separate or married fil- ing jointly.

If a decedent dies in 2016 with a taxable estate of $6,000,000 and has never used any of his applicable estate tax credit, what amount of the decedent's estate tax will be absorbed by the applicable estate tax credit amount in 2016? a. $780,800. b. $1,455,800 c. $2,125,800. d. $5,450,000.

The correct answer is c. The applicable estate tax credit for 2016 is $2,125,800.

Which of the following assets is most likely found in a wealth replacement trust? a. A personal residence. b. Investment securities. c. Personal use assets. d. Permanent life insurance.

The correct answer is d. A wealth replacement trust is commonly used to replace assets donated to charities such as to a CRAT or CRUT. Such donations disenfranchises the normal heirs. If the donor wants to essentially make it up to the heir, he creates an ILIT to purchase permanent life insurance to replace the asset lost to the heirs by the charitable donation. Often, the donor uses the cash value of the charitable income tax deduction to purchase the life insurance. ILITs are also gen- erally set up to avoid estate tax.

Robin contributed $100 to the United Way and $300 to the Church of Good People. Which of the following statements concerning her contribution to the charitable organizations is correct? a. Robin must file IRS Form 8283. b. Both the United Way and the Church of Good People are required to send a confirmation of the contribution to Robin. c. Only the United Way is required to send a confirmation of the contribution to Robin. d. Only the Church of Good People is required to send a confirmation of the contribution to Robin.

The correct answer is d. Only when a contribution totals more than $250 is the organization required to provide the donor with a written statement of acknowledgement. So, only the Church of Good People would be required to provide this statement. Form 8283 is only filed when the total of non- cash contributions exceeds $500.

Joseph died this year. His will specifically bequeaths $1,000,000 to his son, Kevin and bequeaths the residual of his estate to his wife, Martha. At the time Joseph had written his will, his net worth was in excess of $4,000,000, but at his death his net worth had plummeted to $1,050,000. Because Kevin's mother would only receive $50,000 ($1,050,000-$1,000,000) of his father's assets, Kevin fully disclaimed his bequest three months after his father's death. How much will Kevin have to report as a taxable gift because of this disclaimer? a. $0. b. $38,000. c. $50,000. d. $1,000,000.

The correct answer is a. A qualified disclaimer is a disclaimer that is made in writing, filed within nine months of the decedent's date of death, does not allow the disclaiming party to specify to whom the property will pass, and does not allow the disclaiming party to benefit from the property before dis- claiming his interest. If a disclaimer is qualified the property will pass to the residual heirs of the estate, or as directed by a disclaimer clause, with no effect to the disclaiming party. In this case, Kevin has no taxable gift related to this disclaimer.

Which of the following contributions would require the taxpayer to obtain a statement of value from the IRS? a. The taxpayer is never required to obtain a statement of value. b. Taxpayer donates art work valued at $150,000 to a private nonoperating foundation. c. Taxpayer donates art work valued at $10,000 to a public charity. d. Taxpayer donates art work valued at $15,000 to a public charity.

The correct answer is a. A taxpayer is never required to obtain a statement of value from the IRS. The taxpayer may obtain a statement of value from the IRS if the art work is valued at $50,000 or more.

When a U.S. citizen married to a resident alien dies, what is the maximum value of a specific, outright bequest of property that can qualify for the unlimited marital deduction without a QDOT? a. $0. b. $1,360,800. c. $5,450,000. d. The marital deduction is unlimited.

The correct answer is a. An outright specific bequest of property from a U.S. citizen to his resident alien spouse does not qualify for the marital deduction. As such, the unlimited marital deduction is not avail- able.

In 2014, Amy created and funded an irrevocable Life Insurance Trust (ILIT) naming her children as the beneficiaries. Amy contributed cash each year to the trust to pay the life insurance benefit of this ILIT policy premiums. In 2016, Amy died in a car accident, and the policy death $1,000,000 was paid to the ILIT. Which of the following statements regarding and Amy's estate is false? A. The ILIT will be included in Amy's gross estate because Amy made a contribution to the trust within three years of her death. B. If Amy's executor can demand a distribution from the ILIT to pay Amy's estate taxes, the value of the ILIT will be included in Amy's gross estate. C. Amy's executor can sell the assets from Amy's estate to the ILIT without causing the value of the ILIT to be included in Amy's gross estate. D. If Amy had released any rights she had to revoke the ILIT in 2015, the value of the ILIT would be included in Amy's gross estate.

The correct answer is a. Answer a is false statement. Since Amy was only making cash contributions to the trust, the value of the ILIT will not be included in Amy's gross estate. If Amy had to pay any gift tax on the contributions to the ILIT, the gift tax paid on the contributions would be included in her gross estate. All of the other options are true statements. Answer d is a true statement, because to the extent the grantor of an ILIT releases a right to revoke the trust within three years of death, the value of the ILIT is included in their gross estate.

Before his death in 2016, Melvin, age 66, incurred $65,000 in medical bills. Melvin's taxable estate at his death was $675,000 and his adjusted gross income for 2016 was $100,000. How much of Melvin's medical expenses will be deducted on his estate tax return? a. $0. b. $57,500. c. $65,000. d. $100,000.

The correct answer is a. In this situation, Melvin's executor would not elect to deduct any of the final expenses on Mel- vin's estate tax return because the medical expenses will not change the estate tax due on Mel- vin's estate tax return - Melvin's taxable estate is less than the applicable estate tax credit equivalency. Melvin's executor will deduct the expenses, to the extent they exceed 7.5% of Melvin's AGI, on Melvin's final income tax return because he is over 65.

Which of the following statements is not correct? a. An organization that spends less than 85% of its adjusted net income on activities engaged in for the active conduct of its exempt purpose is a public charity. b. Public charities receive broad support from the general public. c. An organization that is not a public charity and spends 90% of its adjusted net income on activities engaged in for the active conduct of its exempt purpose is a private operating foundation. d. A public charity can receive up to 33% of its support from its gross investment income and its unrelated business taxable income.

The correct answer is a. Option a describes a private nonoperating foundation not a public charity. All of the other statements are true.

11. The executor of an estate makes many elections before he files an estate tax return. Which of the following is not an available election for the executor? a. Utilizing the annual exclusion against the testamentary transfers. b. Selection of the tax year-end. c. Electing QTIP on certain property passing to the surviving spouse. d. Deducting the expenses of administering the decedent's estate on the estate's income tax return.

The correct answer is a. The annual exclusion cannot be used against testamentary transfers. All of the other options are available elections for the executor.

Which of the following statements concerning an illiquid estate is true? a. If the executor of an illiquid estate takes a loan to pay estate taxes, and pledges the estate's assets as security for the loan, the interest on the loan is deductible. b. When an executor sells an estate's assets eight months after the decedent's date of death, any gain or loss is included in the fair market value of the asset in the decedent's gross estate. c. An heir who agrees to take an in-kind distribution, instead of a cash distribution, from the estate, will take the property with an adjusted basis equal to the decedent's adjusted basis immediately before his death. d. Real property valued under the Special Use Valuation rules can be sold after four years for an unrelated use without suffering recapture.

The correct answer is a. The interest on a loan used to pay estate taxes is deductible by the estate. Answer b is a false statement as the property is reported on the estate tax return at the fair market value at the decedent's date of death, or the alternate valuation date. Answer c is incorrect as the heir would receive the property with an adjusted basis equal to the fair market value at the dece- dent's date of death. Answer d is incorrect as the recapture occurs if property valued under the special use valuation rules is sold within ten years of the decedent's date of death.

3. The executor of an estate liquidated assets to generate the cash necessary to pay the estate taxes. Of the following assets, which is the least likely to generate income tax consequences upon its sale? a. Real estate sold within three months of the decedent's date of death. b. Publicly traded securities sold two weeks after the decedent's date of death. c. The redemption of the stock of a closely held business. The redemption qualified for Section 303 treatment. d. Publicly traded securities sold eight months after the decedent's date of death.

The correct answer is a. The real estate sold within three months of the decedent's date of death would not generally create any income tax consequences because the fair market value on the estate tax return of that piece of real estate would be that sales price. So, when the estate sold the real estate it would not have any gain or loss on the transaction because its adjusted basis (the fair market value on the estate tax return) would be equal to the proceeds of the sale. Answers b and d would create income tax consequences as the adjusted basis of the securities to the estate would be the fair market value of the securities at the decedent's date of death. Since these are publicly traded securities, their value changes daily, and the estate would most likely have some gain or loss on the sales. The stock redemption in answer c would create tax conse- quences. Section 303 redemption takes an otherwise dividend distribution subject to ordinary income tax and subjects any gain to capital gains tax.

Gillian transfers property to a revocable trust naming herself as the income beneficiary and the United Way as the remainder beneficiary. What type of trust has Gillian created? a. Revocable living trust. b. CRAT. c. CRUT. d. Pooled income fund.

The correct answer is a. To be a CRAT, CRUT or pooled income fund, the trust would have to be irrevocable. Since it is a revocable trust, it must be a revocable living trust.

Celeste made the following transfers during 2016: 1. Her friend, Paul, needed $24,000 to begin law school. Celeste gave Paul the cash. 2. An alimony payment of $14,000 to her ex-husband. 3. She paid $15,000 to Diamond Shores Hospital for her friend Jackie's medical bills. What is the amount of Celeste's taxable gifts? a. $10,000. b. $12,000. c. $27,000. d. $50,000.

The correct answer is a. 1. The payment to Paul is for his tuition, but to be a qualified transfer $10,000 the payment must be made directly to the educational institution. The payment is therefore a gift of $24,000 which will be reduced by the available $14,000 annual exclusion (2016). 2. Alimony payments are deductible for income tax purposes by the $0 payor, and included in the recipient's taxable income. Alimony payments are not taxable gifts. 3. A payment directly to a medical institution for the medical treatment $0 of anyone is a qualified transfer not subject to gift taxes. Taxable Gifts $10,000

Grandmother Jones contributed $2,500,000 to a revocable trust. She has a life expectancy of 24 years and she will receive an 8% per year annuity from the trust. At her death, the corpus will be paid to her granddaughter, Lisa. What is Grandmother Jones's taxable gift? a. $0. b. $2,094,752. c. $2,489,000. d. $2,500,000.

The correct answer is a. Because Grandmother Jones reserves the right to revoke the trust, she has not made a com- pleted transfer to Lisa and thus she does not have a taxable gift.

In the current year, Jerry loaned his daughter, Charisse, $15,000 to purchase a new car. The loan was payable on demand, but there was no stated interest rate. The applicable federal rate for the current year was 10%, and Charisse had $900 of net investment income for the year. For gift tax purposes with regards to this loan, how much has Jerry gifted Charisse during the current year? a. $0. b. $900. c. $1,500. d. $15,000.

The correct answer is a. Because the loan is for less than $100,000 and Charisse has less than $1,000 in net investment income, Jerry does not have to impute any interest on the loan and, as such, has not made a gift of interest to Charisse during the current year.

Jason and his wife, Maria, live in Texas with their two minor children. All of their property is owned as community property. During the year, Jason gave his brother a $13,000 car, his friend a $4,000 watch, and his dad a $45,000 fishing boat. What is the total amount of split gifts? a. $0. b. $16,000. c. $31,000. d. $62,000.

The correct answer is a. Because the question asked the amount of gifts attributable to Maria due to gift splitting, the answer is $0. Community property assets are not eligible for gift splitting because they are viewed as being owned one-half by each spouse. $31,000 (1/2 of the total of the all gifts dur- ing the year) would be attributable to Maria as gifts made by her during the year. If the ques- tion asked for the total amount of taxable gifts, the answer would change to $45,000 - $28,000 = $17,000.

Deborah provides the following list to her CPA who is preparing her gift tax return. Which of the following will Deborah's CPA include as a taxable gift on Deborah's gift tax return? a. Payment to grandmother of $20,000 to help her with her medical bills. b. Payment to Doctor's Hospital for $35,000 to cover the medical bills of a friend. c. Payment to Northshore Medical School for $17,000 to cover nephew's tuition. d. Payment for a child of $6,000 that represents legal support.

The correct answer is a. Deborah's CPA will include the payment made to Deborah's grandmother as a taxable gift. A payment must be paid directly to the health care provider or educational institution to be a qualified transfer. Options b and c represent qualified transfers and are not taxable gifts. Option d is a payment of legal support and is not considered a gift for gift tax purposes.

During 2016, Janice made the following transfers. What is the amount of her total taxable gifts for 2016? 1. Janice gave $10,000 to her boyfriend so he could buy a new car. 2. Janice's neighbor Judy needed $15,000 to pay for her knee surgery. Janice paid Doctors-R-Us Hospital directly. 3. Her nephew began attending Georgetown Law School this year. Janice made the initial yearly tuition payment of $25,000 directly to Georgetown Law School during 2016. a. $0. b. $14,000. c. $15,000. d. $50,000.

The correct answer is a. Statement 1 is the only gift subject to gift tax, but to arrive at the total taxable gifts for the year the value of the gross gift is reduced by the available annual exclusion. In this case, Janice's gift to her boyfriend would be eliminated after the application of the $14,000 for 2016 annual exclusion. Statements 2 and 3 are transfers not subject to gift tax because they are qualified transfers paid directly to a medical or educational institution.

Jack had been working with an estate planner for several years prior to his death. Accordingly, Jack made many transfers during his life in an attempt to reduce his potential estate tax burden, and Jack's executor, Tom, is thoroughly confused. Tom comes to you for clarification of which assets to include in Jack's gross estate. Which of the following transactions will not be included in Jack's gross estate? a. Jack gave $40,000 to each of his three grandchildren two years ago. No gift tax was due on the gifts. b. Jack purchased a life insurance policy on his life with a face value of $300,000. Jack transferred the policy to his son two years ago. c. Jack and his wife owned their personal residence valued at $250,000 as tenants by the entirety. d. After inheriting a mountain vacation home from his mother, Jack gifted the vacation home to his daughter to remove it from his gross estate. Jack continued to use the property as a weekend getaway and continued all maintenance on the property.

The correct answer is a. The $40,000 gifts to his grandchildren are excluded from his gross estate because only gifts of life insurance within three years and any gift tax paid on a gift within three years are included in a transferor's gross estate. The life insurance policy included in answer b is included in the Jack' gross estate because transfers of life insurance within three years of death are included in the decedent's gross estate. Any property owned at the decedent's date of death, as in answer c, is included in the decedent's gross estate. (Do not confuse gross estate inclusion with probate inclusion.) Even though Jack gave the mountain home in answer d to his daughter, and the value of the property generally would not be included in Jack's gross estate, the fact that Jack continued to utilize the property each weekend and maintained the property would cause inclusion in his gross estate.

During the year, Sean made the following gifts to his daughter: 1. An interest-free loan of $6,000 to purchase an SUV. The applicable federal rate was 6%. The loan has been outstanding for two years. 2. A corporate bond with an adjusted basis of $14,000 and a fair market value of $16,000. 3. A portfolio of stock with an adjusted basis of $10,000 and a fair market value of $25,000. Sean's wife agrees to elect gift-splitting for the year, but she did not make any gifts of her own. What is the amount of total taxable gifts made by Sean during the year? a. $6,500. b. $7,500. c. $7,680. d. $20,680.

The correct answer is a. The interest-free loan is not subject to gift tax because the loan is below $10,000 and meets the exclusion from imputed interest rules. To calculate Sean's taxable gifts, first add the fair market value of the transfers subject to gift tax and reduce by the annual exclusions and the gift-splitting. The calculation is as follows: Sum of the fair market values of the taxable transfers: $25,000 + $16,000 = $41,000. Allocation for gift splitting: $41,000/2 = $20,500. Reduction for annual exclusion: $20,500 - $14,000 = $6,500.

What is the meaning of the phrase "taxable gifts?" a. A gift exclusive of any annual exclusion. b. The gross amount of gift given to any donee. c. The amount of any gift exceeding the lifetime exemption which is then subject to gift tax. d. The amount of any gift that exceeds both the annual exclusion and the lifetime exemption, which is then subject to gift tax.

The correct answer is a. The term or phrase "taxable gifts" means net of any annual exclusion but before the applica- tion of the lifetime exemption.

21. Stephanie received 100 shares of ZYX Corporation from her aunt with an adjusted basis of $60,000 and a fair market value of $30,000 as of the date of the gift. Her Aunt paid $1,500 of gift tax. Stephanie sold the stock for $45,000. What is Stephanie's recognized gain or loss? a. No gain or loss. b. $15,000 gain. c. $15,000 loss. d. $13,500 loss.

The correct answer is a. When the fair market value of gifted property is less than the donor's adjusted basis, gift tax on the appreciation is not added to the basis, and the double-basis rule applies. In such a case, the gain basis for the property is the donor's adjusted basis, and the loss basis is the fair market value at the date of the gift. When the sale is between these amounts, there is not a gain or loss. In this case, Stephanie sold the stock for an amount between the gain and loss basis and therefore has no gain or loss.

Denis sold a parcel of land to a qualified charitable organization for $10,000. The parcel of land had a fair market value of $100,000 and an adjusted basis of $50,000. What taxable gain must Denis recognize at the time of the contribution? a. $0. b. $5,000. c. $50,000. d. $90,000.

The correct answer is b. Because Denis sold the property at 10% ($10,000/$100,000) of its fair market value, 10% of its adjusted basis offsets the sales proceeds. The capital gain is $5,000, $10,000 - $5,000 = $5,000.

Doug graduated from the University of Pittsburgh. Each year, season tickets are sold only to those who make a contribution to the university of $1,000 or more. If Doug contributes $1,000, so that he meets the requirements to purchase season tickets, how much is his deductible contribution for the year? a. $0. b. $800. c. $900. d. $1000.

The correct answer is b. For a contribution to a university where the donor receives the right to purchase tickets to ath- letic events, only 80% of the contribution will be allowed as a charitable contribution. $1,000 x 80% = $800.

Given only the following information, which would qualify for the estate tax unlimited marital deduction? a. Property transferring to a surviving spouse as beneficiary of an irrevocable trust created six years ago. At the time of the trust's creation, the gift was complete, but the decedent did not pay any gift tax as the only beneficiary of the trust was the decedent's spouse. b. A bequest of 2,000 shares of Holiday Incorporated stock to a surviving spouse. The surviving spouse is a U.S. citizen. c. The bequest of the life estate interest in a home to the surviving spouse. The decedent bequeathed the remainder interest to his children. d. A bequest of property with a fair market value of $10,000 to a surviving spouse. The surviving spouse disclaims the interest and the property transfers to the decedent's residual heirs, his children.

The correct answer is b. For a transfer to qualify for the estate tax unlimited marital deduction, the property interest must meet three requirements. First, the property must be included in the decedent's gross estate. Second, the property must be transferred to the surviving spouse. Third, the interest must not be a terminable interest. Utilizing only the information in each of the above options, only option b describes property that would qualify for the unlimited marital deduction. The property is included in the decedent's gross estate, transfers to the surviving spouse, the surviv- ing spouse is a U.S. citizen, and the property interest transferred is outright ownership, not a terminable interest. Option a is incorrect as a completed transfer of property to an irrevocable trust is not included the decedent's gross estate, and therefore will not qualify for the unlim- ited estate tax marital deduction. Option c is incorrect as the interest transferred is a termina- ble interest. Option d is incorrect because the surviving spouse disclaims the interest and the property transfers to the decedent's children. To qualify for the unlimited marital deduction, the surviving spouse must inherit the property.

Within how many months must an heir file a qualified disclaimer for it to be valid? a. 6 months. b. 9 months. c. 12 months. d. 15 months.

The correct answer is b. In order for a disclaimer to be valid, the disclaimer must be in writing, must be filed within 9 months of the decedent's date of death, and the disclaimant must not have benefited from the disclaimed inheritance.

Mary Jane's husband died in October of 2016. Mary Jane has a one year old dependent child and has not remarried. Which filing status will Mary Jane use on her 2019 income tax return? a. Single. b. Head of household. c. Married filing jointly. d. Qualifying widow.

The correct answer is b. Mary Jane will file as head of household in 2019. Since Mary Jane's husband died in 2016, she will file married filing jointly for the year of her husband's death. In the two years after her husband's death (2017 and 2018), Mary Jane will file as qualifying widow. For the 2019 tax year, Mary Jane will file head of household, and this will continue until she remarries or no longer provides a home for her child.

Four years ago, Walter created a charitable remainder trust with himself as the income beneficiary and a charity as the remainder beneficiary. In the current year, Walter would like to make an additional contribution to the trust. Which of the following charitable trusts would allow Walter to make an additional contribution during the year? a. CRAT. b. CRUT. c. CRET. d. CRIT.

The correct answer is b. Only a CRUT allows additional contributions. A CRAT does not allow additional contribu- tions. A CRET and CRIT do not exist.

Which of the following property interests qualifies for the unlimited marital deduction? a. John dies and leaves his vacation home to his wife as trustee of a testamentary trust created for the sole benefit of his two children. b. The executor of John's estate made the QTIP election for the bequest of a life estate interest in his personal residence to Deborah, John's wife. c. John bequeaths his interest in community property to his wife subject to his wife surviving him by more than 8 months. d. At John's death, his will created a trust for the benefit of his wife. The trust document gives his wife the authority to appoint assets to herself, her creditors, and her heirs with the approval of John's brother, Colin.

The correct answer is b. Only the property interest detailed in option b would qualify for the marital deduction. Even though a life estate is a terminable interest, which is normally not eligible for the marital deduction, the QTIP election on the property qualifies the transfer for the marital deduction. Option a does not qualify for the unlimited marital deduction because the property does not transfer to the surviving spouse. She only holds an interest as trustee for John's children. Option c does not qualify for the unlimited marital deduction because the survivorship clause cannot require the spouse to survive the decedent by more than 6 months. Option d does not qualify for the unlimited marital deduction because the surviving spouse cannot act alone to exercise the general power of appointment. To qualify the surviving spouse must be able to exercise the general power of appointment alone.

Which of the following statements regarding life insurance is true? a. When an individual designates a charitable organization as the beneficiary of his life insurance policy, the individual can deduct the face value of the policy as a charitable contribution on his income tax return. b. If an individual designates a charitable organization as the beneficiary of his life insurance policy, but retains the right to change the beneficiary designation, the death proceeds of the life insurance policy will be included in his gross estate. c. If an individual designates a charitable organization as the beneficiary of his life insurance policy, and then dies without changing the beneficiary designation, the death proceeds of the life insurance policy will be included in his taxable estate. d. Transferring ownership of a life insurance policy to a charitable organization does not qualify for an income tax charitable deduction.

The correct answer is b. Option b is a correct statement. Option a is incorrect as only a transfer of the ownership of a life insurance policy qualifies as a charitable deduction. A simple beneficiary designation will not create a charitable deduction. Option c is incorrect as the life insurance death benefit will be included in the gross estate, but if the decedent dies and the charitable organization is the listed beneficiary, the estate will receive a deduction from the gross estate to arrive at the tax- able estate. Option d is incorrect because a transfer of the ownership of a life insurance policy to a charitable organization will qualify for an income tax charitable deduction.

An executor may elect the unlimited marital deduction for which of the following transfers? 1. Decedent's will directs the creation of a CRAT and the decedent's nonresident alien spouse is the income beneficiary. The trustee of the CRAT is a citizen of the United Kingdom. 2. Bequest to U.S. citizen spouse of the right to use property for the remainder of her life. Executor has elected QTIP on the property. 3. A payment of $650,000 to fulfill a specific bequest to decedent's U.S. citizen spouse. Decedent's spouse became a U.S. citizen two months before the filing of the decedent's estate tax return. 4. A payment of $250,000 to fulfill a specific bequest to decedent's resident alien spouse. a. 2 only. b. 2and3. c. 3and4. d. 1,2,and3.

The correct answer is b. Statement 2 is eligible for the marital deduction because the executor made a QTIP election on the property. Statement 3 is eligible for the marital deduction because at the time of the distribution, the spouse was a U.S. citizen. Statements 1 and 4 are not eligible for the marital deduction because if the spouse is a nonresident or noncitizen, a QDOT must be used for a transfer to qualify for the marital deduction. The CRAT in statement 1 does not qualify as a QDOT because the trustee is not a U.S. citizen.

19. Kim is the income beneficiary of a QTIP trust, which includes a provision stating that any estate tax due on the QTIP's assets at Kim's death are to be paid by Kim's estate and not from the QTIP assets. When Kim dies, which of the following will occur? a. The estate of Kim will pay any estate tax due for the QTIP assets. b. Kim's estate is entitled to be reimbursed for any estate tax paid by the estate on assets held in the QTIP trust. c. Having the estate assets pay the taxes rather than the QTIP will reduce the estate tax. d. Having the estate assets pay the taxes rather than the QTIP will increase the estate tax.

The correct answer is b. The QTIP is liable for its proportional share of any estate tax and will have to reimburse the estate. The taxes will be the same regardless of whether paid from estate assets or QTIP assets.

Maggie contributed $10,000 to a private nonoperating foundation that has never made any distributions. Maggie also contributed $15,000 to a private operating foundation. Maggie's AGI for the tax year was $100,000. What is Maggie's charitable contribution deduction for the year? a. $10,500. b. $25,000. c. $50,000. d. $100,000.

The correct answer is b. The contribution of the $10,000 to the nonoperating foundation is subject to a 30% AGI limitation, and the contribution to the private operating foundation is subject to a 50% AGI limitation. Neither of the limitation amounts is an issue as the total of the contributions does not exceed either limit. In this case, the total charitable contribution is $25,000, the sum of both contributions.

Chris donated one of his original creation paintings to his alma mater, Backwoods University. His adjusted basis in the artwork was $400 and the fair market value was $150. Chris also contributed 100 shares of XYZ corporation that had an adjusted basis of $50 and a fair market value equal to $1,000 (held long-term). Ignoring the AGI limitations, what is the maximum amount Chris can deduct in relation to these donations? a. $200. b. $1,150. c. $1,300. d. $1,400.

The correct answer is b. The painting has a fair market value less than its adjusted basis, and is considered ordinary income property. When the fair market value is less than the adjusted basis, a contribution of ordinary income property is limited to the fair market value ($150). Because Chris created the painting, we do not have to worry about the related use test. The contribution of stock is a contribution of capital gain property and the deductible amount is equal to the fair market value of the stock ($1,000). The total of both items, and the deduction for the year, equals $1,150.

To avoid inclusion in a power holder's gross estate, a power should limit the appointment of property to the power holder for the sole purpose of: a. Pleasure. b. Support. c. Wealth. d. Happiness.

The correct answer is b. A power of appointment which limits the holder's benefit to support is not included in the power holder's gross estate. As a general rule, a power which limits the power holder's benefit to health, education, maintenance, or support (or any combination of those listed) is not included in the power holder's gross estate.

After an extensive hospital stay, Daryl died of heart failure in August of the current year. In computing Daryl's taxable estate, which of the following is not deductible? a. Payment to Good Insurance representing the past due balance of Daryl's car insurance for the month July. b. Per the will, a payment to Daryl's friend John. c. Payment to Brian's Engraving for Daryl's tombstone. d. Payment to Howe & Dewey, LLP, the estate's attorneys.

The correct answer is b. A specific bequest, as detailed in answer b, is not deductible. All of the other answers are deductible expenses or transfers.

Donna and Daniel have lived in Louisiana their entire marriage. Currently, their combined net worth is $4,000,000 and all of their assets are community property. After meeting with their financial advisor, Donna and Daniel begin a plan of lifetime gifting to reduce their gross estates. During 2016, they made the following cash gifts: Son $80,000 Daughter $160,000 Republican National Committee $75,000 Granddaughter $15,000 What is the amount of the taxable gifts to be reported by Donna? a. $35,500. b. $92,000. c. $127,500. d. $255,000.

The correct answer is b. Because the assets are community property, the gifts are deemed to be made 50% by each spouse. Gift-splitting is not an issue. The cash payment to the Republican National Commit- tee is not a gift for gift tax purposes. Donna's taxable gifts are calculated as follows: Donna's Total Gifts (1/2) Son--$40,000 Daughter-- $80,000 Granddaughter--$7,500 =$127,500 Donna's Annual Exclusion Son--$14,000 Daughter--$14,000 Granddaughter-- $7,500 =$35,500 Donna's Taxable Gifts Son--$26,000 Daughter--$66,000 Granddaughter- 0 - =$92,000

John transfers $8 million of stock to a GRAT naming his kids as the remainder beneficiaries. The GRAT was established for a ten year term. Which of the following statements concerning this transfer is correct? a. If John dies before the end of the trust term, $8 million will be included in his gross estate, even though the value of the GRAT assets are $10 million. b. If John lives beyond the ten years, none of the value of the GRAT assets will be included in his gross estate. c. Assuming the initial funding of the GRAT resulted in a taxable gift of $3 million, this amount will be added back to his gross estate. d. If John dies before the end of the trust, the GRAT's current value of $10 million will be included in his gross estate, in addition to any taxable gift resulting from the establishment of the GRAT.

The correct answer is b. Choice a is incorrect since the value included in the gross estate would be the lump sum nec- essary to support an annuity payment for the remaining term of the GRAT (this is a special exception to the §2036 rule that applies to GRATs). Choice c is incorrect as the taxable gift will not be added to his gross estate, but will go into the calculation of the total estate tax. Choice d is incorrect as the gift does not get added to his gross estate.

Jude has begun some estate planning. What is the maximum amount of estate tax Jude can avoid by using the applicable estate tax credit during 2016? a. $780,800. b. $2,125,800. c. $3,500,000. d. $5,450,000.

The correct answer is b. Jude can shelter estate tax of $2,125,800 using the applicable estate tax credit of $2,125,800. The applicable estate tax credit equivalency or exclusion amount is $5,450,000 for 2016.

5. Pedro has begun a program of lifetime gifting. All of the following statements regarding lifetime gifts are true, except? a. Appreciation on property after the date of the gift will not be subject to gift tax and will not be included in the donor's gross estate. b. Payments directly to his grandchildren for their education over the annual exclusion amount will not be taxable. c. Annual exclusion gifts will not be subject to the gift tax and will not be included in the donor's gross estate. d. The donee of income producing property will have to recognize the post-gift income from the property on the donee's income tax return.

The correct answer is b. Only option b is false. Payments to Pedro's grandchildren for education will be taxable because they were not made directly to the institution and thus are not qualified transfers. All of the other statements are true.

The gross estate of a decedent who died in the current year would not include which of the following items? a. A luxury sedan, valued at $60,000, driven every day by the decedent. b. Cash of $1,000,000 given to decedent's daughter two years ago. No gift tax was paid on the transfer. c. A bond given to decedent's cousin last year. Gift tax of $4,000 was paid on the transfer. d. A home which the decedent owned as tenants by the entirety with his wife.

The correct answer is b. The $1,000,000 transfer is not included in the decedent's gross estate because the three year look back rule only applies to life insurance. Only the gift tax paid on the transfer in answer c would be included in the decedent's gross estate. The property listed in answer a and answer d would be included in the decedent's gross estate.

Brent and his wife live in a common law (separate property) state. Each year, Brent makes gifts equal to the annual exclusion to his three children. During the year, he comes to you looking for a way to transfer more than $75,000 each year to his kids without using his applicable gift tax credit or paying any gift tax. All of the following statements regarding gift-splitting, are true, except: a. If Brent's wife would agree to elect gift splitting, Brent could transfer $84,000 per year to his kids without utilizing his applicable gift tax credit or paying any gift tax. b. Even if Brent's wife elected to split gifts, only Brent's gifts would be split. c. Even though all of the gifts are less than the annual exclusion, and not taxable, Brent will have to file a gift tax return if his wife agrees to gift split. d. If a couple elects to split gifts, all gifts made during the year (while the couple is married) by either spouse must be split.

The correct answer is b. The question asks which statement is not true regarding gift-splitting. Option b is incorrect because a couple that elects to split gifts must split all gifts made during the year. All of the other options are correct statements.

Timothy made the following transfers to his only daughter during the year: 1. A bond portfolio with an adjusted basis of $130,000 and a fair market value of $140,000. 2. 2,000 shares of RCM Corporation stock with an adjusted basis of $126,000 and a fair market value of $343,000. 3. An automobile with an adjusted basis of $15,000 and a fair market value of $9,000. 4. An interest-free loan of $2,000 for a personal computer on January 1st. The applicable federal rate for the tax year was 8%. What is the value of Timothy's gross gifts for this year? a. $271,000. b. $492,000. c. $494,000. d. $498,000.

The correct answer is b. The total of gross gifts is the fair market value of all gifted property before any deductions for gift-splitting, the marital deduction, or the annual exclusion. Because the loan in statement 4 is less than $10,000, it meets one of the exceptions of the imputed interest rules. The fact that the basis in Statement 3 is higher than the FMV is ignored for purposes of calculating the total gross gifts. The double-basis rule will apply to the donee in a subsequent sale. $140,000 + 343,000 + 9,000 = $492,000.

Which of the following statements is true? a. An estate is described as overqualified when, due to a failure to make proper use of the marital deduction, too much of the property is subject to estate tax at the death of the first spouse. b. An estate is described as underqualified when, due to a failure to make proper use of the marital deduction, not enough property is subject to estate tax at the death of the first spouse. c. A bypass trust aids in guaranteeing the full use of an individual's applicable estate tax credit. d. An estate that does not take advantage of its available applicable estate tax credit is transferring assets at the lowest possible cost.

The correct answer is c. A bypass trust is generally created in a will to receive, at the decedent's date of death, the amount of property necessary to utilize the decedent's available applicable estate tax credit. By creating this trust in his will, the decedent is ensuring that the applicable estate tax credit will be utilized. Options a and b are the definitions of an "underqualified" and "overqualified" estate. The definitions are reversed in each answer. Option d is an incorrect statement. An estate that does not take advantage of its available applicable estate tax credit is transferring assets at a higher overall estate tax cost than necessary. In other words, the assets that are shel- tered under the marital deduction could have transferred estate tax free to other heirs.

Which of the following statements is not true? a. A charitable gift during life can reduce estate taxes. b. A charitable gift during life can reduce income taxes. c. Only a full, outright donation of property will qualify as a deductible charitable contribution. d. The donor of a charitable gift may be required to file a gift tax return including the charitable contribution.

The correct answer is c. A donor can transfer an interest in property, other than the full, outright ownership, and receive a charitable deduction. All of the other statements are true statements. Option d is a true statement because the donor of a charitable contribution will have to file a gift tax return and include the charitable transfer if the contribution is a split interest gift, or if the donor made other taxable gifts during the year.

Which of the following is not a requirement of using the special use valuation of property? a. The property must be used in a farming operation or a trade or business that was actively managed by the decedent or the decedent's family for 5 out of the 8 years immediately preceding the decedent's death. b. The value of the real and personal property used in a qualifying manner must equal or exceed 50 percent of the decedent's gross estate as adjusted. c. The value of the real property used in a qualifying manner must equal or exceed 75 percent of the value of the decedent's gross estate as adjusted. d. The qualifying property must pass to qualifying heirs who must actively participate in the farming activity or trade or business.

The correct answer is c. Answer c simply reads the percentage incorrectly. The value of the real property used in a qualifying manner must equal or exceed 25 percent of the value of the gross estate as adjusted.

Which of the following statements regarding selling an estate's assets to generate cash is not correct? a. The estate may have income tax consequences. b. The assets may not be sold at full, realizable fair market value. c. Any losses on the sale of the assets are deductible as losses on the estate tax return. d. Any selling expenses are deductible on the estate tax return.

The correct answer is c. Any losses on the sale of the assets are income tax losses and are deductible on the estate's income tax return, not on the estate tax return. All of the other answers are true statements.

Todd irrevocably transfers property to a trust over which he retains an annuity payment each year equal to 6% of the initial fair market value of the property transferred to the trust. Todd designates the United Way as the remainder beneficiary. Which of the following statements concerning this transfer is true? a. Todd can make an additional contribution to the trust in subsequent years. b. Todd must inform the United Way of their right to the remainder of the trust's assets. c. Todd will receive an income tax charitable deduction on his income tax return for the year in which the trust is formed. d. The United Way can force Todd to transfer the present value of their interest to them immediately.

The correct answer is c. At the creation of a CRAT, Todd will receive an income tax charitable deduction on his income tax return for the year in which the trust is formed. Option a is incorrect because a CRAT does not allow subsequent contributions after creation. Options b and d are incorrect as the United Way does not have to be informed of their right to receive the remainder interest and they have do not have a right to force the payment of their interest.

Which of the following is not a typical reason an estate will have liquidity concerns? a. To meet specific bequests. b. To pay taxes. c. To pay life insurance premiums on the decedent's life. d. To pay funeral and administrative expenses and the executor's

The correct answer is c. Generally, an estate does not need cash to pay the premiums on a life insurance policy for the decedent since the decedent is dead. All of the other options are reasons an estate will have liquidity concerns.

16. The Dalton Family Winery has operated a winery with estate grown grapes for generations. Mike owns 100% of the winery valued at $4.5 million. His estate is valued at $10 million. His son and daughter-in-law have long since toiled in the vineyards to pick the grapes. Mike plans to leave the entire operation to them. Which post mortem election(s) could Mike's executor make use of presuming he is not married at the time of his death? a. 303 and 6166. b. 2032A and 303. c. 2032A and 6166. d. 303, 2032A and 6166.

The correct answer is c. Mike's executor can elect 2032A and 6166 but not 303 as there is no indication this is a C corporation with residual earning and profits.

Connie cooks and delivers meals for the homeless and the elderly at Thanksgiving. Connie spends $200 on food, she drives 300 miles, and she spends 15 hours of her time (valued at $10/hour) completing the charitable service each year. Of these expenses, how much will Connie deduct on her income tax return for the year? a. $0. b. $200. c. $242. d. $392.

The correct answer is c. Only the actual money spent on the food and the mileage are deductible expenses. The mile- age is deductible at $0.14/mile. The value of Connie's services are not deductible. So, the total deduction for Connie's income tax return is $242 ($200 + 300(0.14)).

Which of the following is not a requirement for a GPOA Trust to be eligible for the unlimited marital deduction? a. No person, other than the surviving spouse, may appoint any part of the trust property to anyone other than the surviving spouse. b. The general power of appointment granted to the surviving spouse must be exercisable by the surviving spouse alone. c. The surviving spouse's right to the trust property must be limited to an ascertainable standard, such as health, education, maintenance, and support. d. The surviving spouse must be entitled to receive all of the income from the trust, at least annually.

The correct answer is c. Options a, b, and d are the requirements for a general power of appointment trust to be eligi- ble for the unlimited marital deduction. Option c does not describe a requirement of a general power of appointment trust eligible for the marital deduction. 10

Which of the following is not a benefit of the unlimited marital deduction? a. The estate tax on property can be deferred until the death of the second-to- die spouse. b. The unlimited marital deduction can fund the applicable estate tax credit of the surviving spouse. c. The use of the unlimited marital deduction can shelter the future appreciation of an asset from estate taxes at the death of the second-to-die spouse. d. The unlimited marital deduction can ensure the surviving spouse has sufficient assets to support her lifestyle.

The correct answer is c. Property that transfers to the second-to-die spouse is eligible for the marital deduction and, to the extent it is not consumed, will be included in the second-to-die spouse's gross estate at the fair market value at his date of death, including any appreciation that may have occurred since the first-to-die spouse's estate. If the first-to-die spouse had transferred the property to other beneficiaries, such as children, at the death of the second-to-die spouse, the assets would have only been subjected to estate tax in the first-to-die spouse's estate. All of the other statements are benefits of the unlimited marital deduction.

Cathy and Mark paid $400 for two tickets to the United Church's annual gala ball. The church determined that the fair market value of each ticket was $100. How much can Cathy and Mark deduct on their income tax return? a. $0. b. $100. c. $200. d. $400.

The correct answer is c. The value of any tangible benefit received in return for a contribution is not deductible. In this case, Cathy and Mark paid $400 for two tickets and received $200 ($100/ticket) in bene- fit. The difference, $200 ($400-$200), is deductible on their income tax return.

Michael transfers $100,000 of stock to a charitable organization in return for a life annuity on his life valued at $43,000. With regards to this transfer, how much is Michael's charitable deduction? a. $0. b. $43,000. c. $57,000. d. $100,000.

The correct answer is c. When an individual transfers property in exchange for a charitable annuity, the value of the property less the value of the retained annuity interest is the value of the charitable deduction. In this case, $100,000 - $43,000 = $57,000.

Christie's father has been diagnosed with cancer and has been given one year to live. In an attempt to avoid capital gains tax, Christie transfers her stock with an adjusted basis of $1,000 and a fair market value of $11,000 to her father. Christie's father dies seven months after the transfer when the fair market value of the stock was $12,000 and Christie's father's will leaves her everything, including the stock. Christie subsequently sells the stock for $19,000. What is Christie's capital gain on the transaction? a. $7,000. b. $10,000. c. $18,000. d. $19,000.

The correct answer is c. A special rule applies when the donee of property dies within one year of the transfer and the donee bequeaths the property back to the original donor. In this case, the heir (original donor) will not receive a step up to fair market value in the property. Here, Christie will receive her stock from her father's estate with her father's basis - which was her basis before the original gift - or $1,000. So, when Christie sells the stock for $19,000, she has an $18,000 capital gain.

Jack gave his nephew, Stephen, 1,000 shares of ABC Corporation. Jack had an adjusted basis of $10,000 for all 1,000 shares and the fair market value at the date of the gift was $45,000. Jack paid gift tax of $9,000 on the gift to Stephen. If Stephen sells the stock three days after receiving the gift for $46,000, what is his capital gain/loss? (Assume Jack had already made transfers to Stephen during the year to utilize the annual exclusion.) a. No gain or loss. b. $1,000 gain. c. $29,000 gain. d. $36,000 gain.

The correct answer is c. First calculate Stephen's adjusted basis at the time of the sale. When the fair market value of gifted property is greater than the donor's adjusted basis, the donee's adjusted basis in the gifted property is equal to the donor's adjusted basis, $10,000, plus an allocation of gift tax paid on the appreciation of the property, [($35,000/$45,000) x $9,000] = $7,000. Accord- ingly, Stephen's adjusted basis is equal to $17,000 ($10,000 + $7,000). To calculate Stephen's gain or loss on the sale of the gifted property subtract his adjusted basis from the proceeds of the sale. $46,000 - $17,000 = $29,000.

Before her death, Alice loaned Jerry $400,000 in return for a note. The terms of the note directed Jerry to make monthly payments including interest at the applicable federal rate. If Alice dies before the note is repaid, which of the following affects the valuation for Alice's gross estate? 1. Jerry's inability to make payments timely. 2. The market rate of interest. 3. The remaining term of the note. 4. Alice forgives the note as a specific bequest in her will. a. 1 only. b. 1and2. c. 1,2,and3. d. 2,3,and4.

The correct answer is c. If Alice dies before Jerry repays the note, the note is included in Alice's gross estate at the fair market value of the note plus any accrued interest due at Alice's date of death. This fair market value is affected by the interest rate, maturity date, and Jerry's ability to make the note pay- ments, but not by Alice's forgiveness of the note in her will. The forgiveness of the note is deemed a specific bequest and the fair market value of the note is still included in Alice's gross estate.

In August of the current year, Jim died of lung cancer. Jim's son, Doug, has decided to prepare his father's estate tax return, but has come to you for clarification on whether the following list of items are included in Jim's gross estate. After reviewing the list, which item(s) will you tell Doug to exclude from Jim's gross estate? a. A life insurance policy on the life of Jim's wife owned by Jim. b. A check from Doctor's Hospital for the refund of medical expenses that Jim initially paid, but were subsequently paid for by Jim's health insurance company. The reimbursements were due to Jim before his death. c. A check from ABC Corporation for dividends in the amount of $15,000 declared September 23rd (the month after Jim's death). d. A payment of $500,000 from Mutual Life Insurance of America representing the proceeds of a life insurance policy owned by Jim.

The correct answer is c. Jim died in August. The dividends from ABC Corporation in the amount of $15,000 are not included in Jim's gross estate because they were not declared until September. The life insur- ance policy in answer a is included in Jim's gross estate as all property owned by the decedent at his date of death is included in the decedent's gross estate. The check from the hospital detailed in answer b is included in Jim's gross estate because the payments were due to him before his death. The life insurance policy in answer d is included in Jim's gross estate because life insurance owned or transferred within three years of a decedent's date of death are included in the decedent's gross estate.

Crystal loans Holly $650,000, so that Holly can buy a home. Holly signs a note, with a term of 5 years, promising to repay the loan. The home is the collateral, but because Crystal and Holly have been friends since childhood, Crystal does not charge Holly interest. Which of the following statements is true? 1. The imputed interest is considered a taxable gift from Crystal to Holly. 2. The imputed interest is taxable income on Crystal's income tax return. 3. The imputed interest is an interest expense deduction for Crystal. 4. Holly can deduct the imputed interest on her income tax return. a. 2 only. b. 2and4. c. 1,2,and4. d. 1,2,3,and4.

The correct answer is c. The loan is greater than $100,000 and does not meet any of the exceptions to imputing inter- est. Crystal will have imputed interest income based on the applicable federal rate and the imputed interest will also be considered a taxable gift to Holly. Because the loan is secured by Holly's personal residence, Holly will also have an itemized deduction equal to the imputed interest. Crystal does not have an interest expense.

Gus dies owning several shares of an infrequently traded stock. If Gus dies on Wednesday, November 7th, and the stock has the following trading information: Monday, 11/5 $31 Thursday, 11/8 $36 Monday, 11/12 $28 What is the per share value (rounded to the nearest dollar) of the stock on the federal estate tax return? a. $31. b. $33. c. $34. d. $36.

The correct answer is c. To value an infrequently traded stock, or to find the value on a date which falls in between trading dates, we must follow a special formula. First, multiply the first trading price after the valuation date by the number of days between the valuation date and the last trade before the valuation date. Add to this product, the product of the last trading price before the valuation date by the number of days between the valuation date and the first trade after the valuation date. Now, divide the total of the two by the total number of days between the trade before the valuation date and the trade after the valuation date. [(2x$36) + (1x$31) / 3] = ($103/3) = $34

Celeste and Raymond have been married for 29 years. Last year, Raymond sold his extremely successful automotive repair shop and his net worth now exceeds $10 million dollars. Celeste and Raymond have twin daughters, Kelly and Shelly, who will be 35 next month. Celeste and Raymond, neither of whom have given any gifts in the past, would like to give their daughters the maximum amount of cash possible without paying any gift tax. How much can Celeste and Raymond give to Kelly and Shelly during 2016? a. $28,000. b. $2,125,800. c. $5,450,000. d. $10,956,000.

The correct answer is d. $28,000 (for 2016) per child (annual exclusion for both parents) = $56,000 $5,450,000 (for 2016) per parent (applicable gift tax credit equivalency) = $10,900,000 Total that can be gifted without paying gift tax=$10,956,000

Which of the following property arrangements can be classified as marital property? 1. Tenants by the entirety. 2. AQDOT. 3. A QTIP Trust. 4. A POA trust. 5. Joint tenancy with rights of survivorship. a. 1,3and5. b. 1,2,4and5. c. 1,3,4and5. d. All of the above.

The correct answer is d. All of the property arrangements can qualify for the unlimited marital deduction.

When a U.S. citizen dies and bequeaths property to his U.S. citizen spouse, the marital deductions is limited to the following amount: a. $0. b. $1,360,800. c. $5,450,000. d. The marital deduction is unlimited.

The correct answer is d. An individual is generally permitted to leave an unlimited amount of property to his U.S. cit- izen spouse at death without incurring any federal estate tax. For a transfer to qualify for the marital deduction, the property interest must meet three requirements. First, the property must be included in the decedent's gross estate. Second, the property must be transferred to the surviving spouse. Third, the interest must not be a terminable interest.

In which of the following cases will Robert, the executor of his father's estate, not waive his executor's fee? a. Robert is a 39.6% taxpayer and his father's estate is a 40% taxpayer. b. Robert is the only heir of his father's estate. c. Robert and his mother are the only heirs to his father's estate. Neither Robert's father or his mother are very wealthy and his mother has very expensive prescription costs. Robert is in the 39.6% marginal tax bracket. d. Robert is also one of three beneficiaries of his father's estate. The beneficiaries will share the residual of the estate equally.

The correct answer is d. Based on the scenario, Robert will not waive his executor's fee in answer d. If he waived the fee he would have to share the residual with two other beneficiaries, and he would be left with less than if he would have taken the executor's fee. Robert would waive his fee in the scenarios under answers a and b as the overall tax burden would be lower. Robert would also waive his fee in answer c because he would want to help his mother.

Jeremy and Rosa were married forty years ago after meeting on the beaches of Cozumel. Rosa moved to the U.S. with Jeremy, but she never applied for U.S. citizenship. If Jeremy is concerned about using the marital deduction for the fair market value of the property he bequeaths to Rosa, which of the following techniques could he use? a. Qualified Terminable Interest Trust (QTIP). b. Section 2503(b) Trust. c. Section 2503(c) Trust. d. Qualified Domestic Trust (QDOT).

The correct answer is d. In order to use the unlimited marital deduction for any transfers to Rosa, Jeremy would have to create a Qualified Domestic Trust (QDOT). A QDOT will allow the U.S. government to subject any assets remaining at Rosa's death to estate taxation. In order to qualify the QDOT for the unlimited marital deduction, the following requirements must be met: 1. AtleastoneoftheQDOTtrusteesmustbeaU.S.citizenorU.S.domesticcorporation. 2. The QDOT must prohibit a distribution of principal unless the U.S. citizen trustee has the right to withhold estate tax on the distribution. 3. ThetrusteemustkeepasufficientamountofthetrustassetsintheU.S.toensurethepay- ment of federal estate taxes, or the trustee must have a minimum net worth sufficient to assure the payment of estate taxes upon Rosa's death. 4. Jeremy'sexecutormustelecttohavethemaritaldeductionapplytothetrust.

Which of the following statements regarding bypass trusts is false? a. A bypass trust can give the surviving spouse the right to distributions of principal for an ascertainable standard without causing inclusion of the trust's assets in the surviving spouse's gross estate. b. A surviving spouse can demand the greater of $5,000 or 5% of the trust's principal each year without causing inclusion of the trust's assets in her gross estate. c. Distributions of trust income to the surviving spouse will not create an ownership interest in the trust's assets. d. The right to appoint the assets of the trust to herself, her creditors, or anyone she desires will not create an interest which will cause inclusion of the trust's assets in the surviving spouse's gross estate.

The correct answer is d. Option d describes a general power of appointment over the trust's assets. Anyone dying with a general power of appointment over the assets of a trust will include the fair market value of the trust's assets in his gross estate. Options a, b, and c are correct statements.

Which of the following statements concerning a pooled income fund is correct? a. A pooled income fund is created for each individual. b. The pooled income fund is managed by its contributors. c. Pooled income funds invest strictly in tax-exempt securities. d. The income of a pooled income fund is paid to the contributors.

The correct answer is d. Option d is a correct statement. Option a is incorrect as a pooled income fund is created by the contributions of many individuals whose funds are commingled. Option b is incorrect because the pooled income fund is managed by the charity for whom it will benefit. Option c is incorrect because pooled income funds are not allowed to invest in tax-exempt securities.

If a decedent bequeaths the outright ownership of his house to his children subject to his wife's right to live in that house for the remainder of her life, which of the following statements is correct? a. If the wife disclaims her interest in the house, the house is not included in the decedent's taxable estate. b. If the children disclaim their interest in the house, the house will automatically transfer to the decedent's spouse as the life estate beneficiary. c. If the decedent's wife is a resident alien of the U.S., a QTIP election over the property will allow a marital deduction equal to the fair market value of the property. d. If the executor makes a QTIP election on the house, the house is not included in the decedent's taxable estate.

The correct answer is d. Option d is a true statement. Option a is a false statement. If the decedent's wife disclaims her interest in the property, the property will transfer to the children without being subject to the wife's life estate. In this case, the transfer would not be eligible for any deductions and would be fully included in the decedent's taxable estate. Option b is a false statement. If the children disclaim their outright ownership in the house, the outright ownership of the property will transfer according to the disclaimer clause in the will. If the will does not include a disclaimer clause, the outright ownership of the house will transfer according to the residuary heirs of the estate. Option c is a false statement. A QTIP election will not qualify a bequest to a non-U.S. citizen spouse for the unlimited marital deduction. Only a transfer to a qualifying QDOT will qualify a bequest to a non-U.S. citizen spouse for the unlimited marital deduction.

Which of the following is not an issue when considering whether to deduct the adjusted basis or the fair market value of contributed property? a. The current market rate of interest. b. The donor's current and projected adjusted gross income for the 5 years after the contribution. c. The fair market value of the donated property. d. The capital gains rate in effect at the time of the transfer.

The correct answer is d. Option d is not an issue when deciding whether to deduct the adjusted basis or the fair market value since the transfer generally does not create a capital gain. All of the other options are issues to consider.

Which of the following does not qualify as a charitable organization? a. The state of Kentucky. b. The city of Los Angeles. c. A cemetery company organized to maintain cemetery plots in a county. d. Republican National Committee.

The correct answer is d. Political organizations are not qualifying charitable organizations. The other options are con- sidered qualified charitable organizations. Section 170(c) defines which organizations will qualify for charitable status. They include: • a State, a possession of the United States, or any political subdivision; • a corporation, trust or community chest, fund or foundation that is organized in the U.S. and is operated exclusively for religious, charitable scientific, literary or educational pur- poses, fostering national or international amateur sports competition, or prevention of cruelty to animals; • a post or organization of war veterans organized in the U.S.; • a domestic fraternal society, order or association, operating under the lodge system, but only if the contribution is to be used for the purposes listed above; • a cemetery company.

Of Pablo's $10,000,000 federal gross estate, his will includes one specific bequest of $7,500,000 to his wife, Ariana, and directs the debts and other expenses of $1,000,000 to be payable from the residuary of the estate. The residuary heirs are Pablo's children. What is the amount of the marital deduction included on Pablo's federal estate tax return? a. $0. b. $6,500,000. c. $8,500,000. d. $7,500,000.

The correct answer is d. Since the debts and expenses are payable from the residuary of the estate, the marital deduc- tion is equal to the specific bequest to the wife. An allocation of the debts, expenses and taxes only offsets the marital deduction when the wife is the residuary beneficiary or the will directs the bequest to the wife to bear the debts, expenses, and taxes attributable to her share.

Juan's will creates a General Power of Appointment Trust (GPOA Trust) that distributes income to his wife annually for life and gives his wife a general power of appointment over the assets in the trust. Which of the following statements concerning a GPOA Trust is correct? a. The GPOA Trust only qualifies for the unlimited marital deduction if the trustee agrees to make distributions of principal to Juan's wife. b. The unlimited marital deduction cannot be elected over the property transferred to the trust because Juan's wife cannot appoint assets to herself, her creditors, or to anyone on her behalf. c. The unlimited marital deduction is not available because Juan's wife does not have the current right to the assets in the trust. d. The GPOA Trust automatically qualifies for the unlimited marital deduction because Juan's wife has a general power of appointment over the trust's assets.

The correct answer is d. The GPOA Trust gives Juan's wife a general power of appointment over the trust's assets and the ability to appoint the assets to herself, her creditors, or to anyone on her behalf. A GPOA trust that gives the surviving spouse these rights will qualify for the unlimited marital deduc- tion. Option a is incorrect because the trustee of the GPOA Trust does not have any influence on Juan's wife's general power of appointment over the trust's assets. Option b is incorrect because Juan's wife can appoint the assets of a GPOA Trust to herself, her creditors, or anyone on her behalf. Option c is incorrect because Juan's wife has a current right to the GPOA Trust's assets through her general power of appointment

Which of the following estates will most likely have the greatest liquidity problem? a. An estate with $4,000,000 of marketable securities. b. An estate comprised of rental real estate and marketable securities totalling $2,000,000. c. An estate consisting of a closely held business interest valued at $3,000,000, several pieces of art work valued at $400,000, and $500,000 of cash. d. An estate comprised of a closely held business interest valued at $4,000,000, and cash of $100,000.

The correct answer is d. The estate in answer d will most likely have the greatest liquidity problem because of the lack of cash that will be necessary to pay the estate tax, and the fact that the closely held business interest will generally not be very liquid. Answer a is completely comprised of marketable securities, which can easily be converted to cash. Answer b owes the least amount of tax, and there are liquid assets to use to pay the tax.The estate in answer c will have a liquidity problem but not as bad of a liquidity problem as answer D.

Which of the following is not a benefit of taking a loan to pay estate taxes and administration fees? a. The interest on the loan is deductible for income tax purposes. b. The executor of the estate will have more time to sell the estate's assets. c. The estate's assets will not be sold in a fire-sale fashion. d. The principal of the loan is a debt on the estate tax return.

The correct answer is d. The principal of the loan is not a debt on the estate tax return. The estate tax return would only include those debts that existed at the date of his death. This debt would have been acquired by the executor after the decedent's date of death. All of the other answers are true benefits.

Do the assets in a revocable trust that requires the trustee to create a QTIP trust for the benefit of the spouse at the death of the grantor automatically qualify for QTIP treatment? a. Yes, because the beneficiary of the revocable trust is the surviving spouse. b. No, the QTIP is funded by probate assets only. c. Yes, that is the purpose of a QTIP. d. No, the executor must elect QTIP assets on the 706.

The correct answer is d. There must be an election of QTIP assets by the executor.

Which of the following statements is correct about Form 706, Estate Tax Return? a. The return is due within six months of the date of death, but can be extended. b. The return can be extended for up to seven months. c. The surviving spouse can apply the DSUE amount received from the estate of any of his or her deceased spouses against any tax liability arising from subsequent lifetime gifts and transfers at death. d. To elect portability of the DSUE amount to a surviving spouse, the executor must file the Form 706 and elect this treatment.

The correct answer is d. Choice a is incorrect as the return is due within 9 months. Choice b is incorrect as the exten- sion is for 6 months. Choice c is incorrect as it is the last spouse, not any spouse, and the DSUE cannot be applied against the GSTT.

9. When a U.S. citizen dies and bequeaths property to his U.S. citizen spouse, the marital deduction is limited to the following amount: a. $780,800. b. $2,125,800. c. $5,450,000. d. The marital deduction is unlimited.

The correct answer is d. For transfers to a U.S. citizen spouse, the marital deduction is unlimited.

Which of the following is eligible for the annual exclusion? a. Frank designates his daughter, Holly, beneficiary of his 401(k) plan. b. Frank designates his wife, Betty, as beneficiary of his life insurance policy. c. Frank funds an irrevocable trust with $1,100,000 for the benefit of his son. The terms of the trust allow a payout at the discretion of the trustee. d. Frank funds an irrevocable life insurance trust with the amount necessary to pay the premiums of the policy. The beneficiaries can take a distribution equal to the contribution each year.

The correct answer is d. If the beneficiaries of a trust are given the right to take a withdrawal during the year, the con- tribution is eligible for the annual exclusion. Options a and b are not completed gifts and therefore do not qualify for the annual exclusion. The transfer to the trust in option c is a gift of a future interest and is not eligible for the annual exclusion.

Mary and Emile would like to give the maximum possible gift that they can to their son without having to pay gift tax. Mary and Emile have never filed a gift tax return and live in a community-property state. How much can they transfer in 2016 to their son free of gift tax? a. $28,000. b. $2,125,800. c. $5,450,000. d. $10,928,000.

The correct answer is d. Mary and Emile can each transfer $5,450,000 tax free during their lifetimes. Mary and Emile can also make a gift of $14,000 each during the year to qualify under the annual exclusion. In total to their son, Mary and Emile can transfer $10,928,000 (($5,450,000 x 2)+($14,000 x 2)=$10,928,000.

Carl would like to make a gift to his son, but does not want the value of the gift and the associated gift tax to total an amount greater than $100,000. Carl's cousin has told him about the net gift, but Carl has come to you for clarification. Which of the following statements from Carl's cousin is correct? a. A net gift does not qualify for the annual exclusion because it is a gift of a future interest. b. Carl must prepay the gift tax due when he makes a net gift. c. A net gift requires Carl's son to disclaim the interest in the gift. d. Carl will have taxable income to the extent the gift tax paid is greater than his adjusted basis in the gifted property.

The correct answer is d. Option d is a correct statement. As long as the gifted property is a gift of a present interest, a net gift qualifies for the annual exclusion. Also, Carl does not have any obligation to prepay the gift taxes. The gift taxes are due April 15th of the year after the gift. A net gift does not require the donee to disclaim the gift.

Of the following expenditures from an estate, which is not a deduction from the gross estate or adjusted gross estate to arrive at the taxable estate? a. Payment to United Charitable Organization (a charity qualifying under IRC Section 501(c)(3)) to satisfy a specific bequest. b. Distribution of assets to spouse to satisfy specific bequests listed in will. c. Payment to Second USA Bank for a credit card balance. d. A payment to decedent's friend for $10,000 to satisfy a specific bequest.

The correct answer is d. Payments made to satisfy specific bequests to individuals other than a surviving spouse or a charity are not deductions from the gross estate to arrive at the taxable estate. All of the others are deductible expenses or transfers.

Randy transferred property with a fair market value of $56,000 to his brother, Robbie. Randy's adjusted basis in the property was $23,000. Of the following statements related to this transfer, which is correct? a. Robbie has an adjusted basis in the property of $0. b. Randy must recognize a capital gain on this transfer of $33,000. c. If Robbie subsequently sells the property for $60,000, he will have a capital gain of $4,000. d. Randy has a taxable gift to Robbie of $42,000.

The correct answer is d. Randy made a taxable gift to Robbie of $42,000. The taxable gift is calculated on the fair mar- ket value as of the date of the transfer, $56,000, less the annual exclusion available, $14,000 for 2016 ($56,000-$14,000=$42,000). Option a is incorrect because the donee has a carry- over of the donor's adjusted basis when the fair market value is greater than the donor's adjusted basis. If the donor had paid gift tax on the transfer, an allocation of the gift tax attrib- utable to the appreciation of the property would have been added to the donee's adjusted basis. Option b is incorrect because a donor does not recognize gain on a gift of appreciated property. Option c is incorrect as Robbie's adjusted basis will carryover, as described above, and his capital gain would be $37,000 ($60,000 - $23,000). (Provided Randy did not pay any gift tax on the transfer.)

Johnny died eight months ago and his executor is finalizing his estate tax return. The executor has determined that Johnny's gross estate includes $400,000 of real estate, $750,000 of cash and cash equivalents, and $300,000 of qualified retirement plans. The total gross estate is $1,450,000. As the executor reviews the deductions, which of the following will he deduct from the total gross estate to arrive at the adjusted gross estate on his Form 706? a. Income in Respect of Decedent (IRD). b. Unlimited charitable deduction. c. Unlimited marital deduction. d. Executor's fee.

The correct answer is d. The executor's fees listed in answer d are deductions from the gross estate to arrive at the adjusted gross estate. The marital deduction and charitable deduction, as listed in answers b and c, are deductions from the adjusted gross estate to arrive at the taxable estate. Income in respect of a decedent, answer a, is a deduction on the estate's Form 1041 or a beneficiary's Form 1040, and is not a deduction on the decedent's Form 706.

Which of the following statements about James and Carly who are married, regarding the rules of the federal gift tax return is incorrect? a. James made a gift to his brother of $20,000 from his separate property. Carly, James' wife, agreed to elect gift-splitting. Only James will be required to file a gift tax return. b. Carly made a gift to her sister of $18,000 from community property. Because it is community property, Carly and James are each deemed to have made a gift of $9,000. c. A gift tax return is due 31⁄2 months after the end of the donor's tax year-end but is extended by extending the personal return. d. Carly and James filed an extension to file their federal income tax return. To extend any gift tax returns due for the year, Carly and James must file a gift tax return extension.

The correct answer is d. The gift tax return is extended with the federal individual income tax return - no separate extension is required. All of the other options are true statements.

While completing Joelle's tax returns, Joelle's CPA asked her if she made any gifts during the year. Joelle faxed her the following information. Of the following, which would not require the filing of a gift tax return? a. Joelle created a revocable trust under the terms of which her son is the income beneficiary for his life and her grandson is the remainder beneficiary. Joelle created the trust with a $6,000,000 contribution and the trust made an income distribution in the current year. b. Joelle opened a joint checking account in the name of herself and her sister with $75,000. The day after Joelle opened the account, her sister withdrew $35,000 to purchase a car. c. Joelle created an irrevocable trust giving a life estate to her husband and a remainder interest to her daughter. Joelle created the trust with a $1,000,000 contribution. d. Joelle gave her husband one-half of an inheritance she received from her uncle. The inheritance was $3,000,000.

The correct answer is d. The transfer in option d would qualify for the unlimited marital deduction, so it is not a tax- able gift and Joelle would not have to file a gift tax return. All of the other transfers would cre- ate taxable transfers and would require a gift tax return to be filed. The transfer in option a to a revocable trust would still be subject to gift tax reporting because the trust has current bene- ficiaries, as Joelle's son received an income distribution in the current year.

An estate tax return must be filed for a U.S. resident or a U.S. citizen dying during 2016 if the total value of his gross estate plus post-1976 adjusted taxable gifts on his date of death is greater than: a. $1,000,000. b. $2,125,800. c. $3,500,000. d. $5,450,000.

The correct answer is d. This question is asking for the applicable estate tax credit equivalency for 2016, or the fair market value of property that can transfer with an estate tax less than or equal to the applica- ble estate tax credit. For 2016, the applicable estate tax credit equivalency is $5,450,000.

After reading an estate planning article in a popular magazine, Vaughn has decided to take action to reduce his gross estate by making annual gifts to his 4 kids, 8 grandchildren, and 4 great-grandchildren. Vaughn has discussed the gifting strategy with his wife, Rebecca, and provided it does not result in use of any of her applicable gift tax credit, she has agreed to split each gift. Vaughn does not want to use his applicable gift tax credit either. If Vaughn carries the plan out for 5 years, how much can he gift in total while meeting Rebecca's requirement? Assume the 2016 exclusion amounts. a. $208,000. b. $1,120,000. c. $2,080,000. d. $2,240,000.

The correct answer is d. Vaughn has 4 kids, 8 grandchildren, and 4 great-grandchildren for a total of 16 people that he can make annual exclusion gifts. 16 x $14,000 (annual exclusion) = $224,000 Gift Splitting with his wife would allow $448,000 ($224,000 x 2) If Vaughn and his wife made these transfers each year for the next 5 years, he could transfer $2,240,000 ($448,000 x 5 years = $2,240,000) without incurring any gift tax liability.