Estate Planning
Martha and her daughter Lacy recently visited Sharron a CFP® professional to review her estate planning documents. Martha informed Sharron that her friend Betty holds a non-durable Power of Attorney over Martha's assets. A few weeks later, Martha was involved in an auto accident and was left mentally incapacitated. Sharron needs authorization to make a few transactions in Martha's portfolio. Who should Sharron contact to get the necessary approval? A) She should get approval from Martha's daughter Lacy. B) She should get approval from Betty who holds a non-durable Power of Attorney over Martha's assets. C) A & B. D) None of the choices.
Rationale Answer: D Neither Martha, Lacy nor Betty are capable of providing proper authorization on behalf of Martha. Sharron needs approval from someone who has a durable power of attorney to make decisions in case of mental incapacity. Choice A is incorrect because Lacy does not have legal authority to make decisions for Martha. Choice B is incorrect because although Betty does have a power of attorney it becomes ineffective once Martha becomes incapacitated. Choice C is incorrect because neither A or B are correct.
What is the appropriate estate planning strategy for married couples to minimize taxes over the death of both spouses? A) Bequeath the entire estate to a trust, giving the surviving spouse a general power of appointment over the assets at her death. B) Bequeath the applicable exemption equivalent amount to a qualified terminable interest property trust (QTIP) and the balance outright to the surviving spouse. C) Bequeath the applicable exemption equivalent amount to a bypass trust and the balance to the surviving spouse in a qualifying way. D) Bequeath the applicable exemption equivalent amount to the surviving spouse and the balance to the children.
Rationale The best correct answer is "C." Answer "A" - This creates a situation where the entire value of the estate will be includible in the estate of the second to die although with portability this could possibly result in the same outcome as "C" but is not as good a choice. Answer "B" - This still leaves the entire amount in the estate of the second to die. Answer "D" - This statement is opposite of the correct order strategy.
Which of the following functional roles may be commonly simultaneously filled by the same person(s) in respect to a grantor trust. I. Grantor. II. Trustee. III. Successor Trustee. IV. Beneficiary. A) I, II and IV only. B) I and IV only. C) I, II, III, and IV. D) I and II only.
Rationale The correct answer is "A." A grantor trust provides inclusion of trust assets in grantor's estate; therefore, a trust grantor (Statement "I") can also be the beneficiary (Statement "IV") of the trust, as well as the trustee. If the grantor is the trustee, he or she cannot be the successor trustee, a successor trustee only operates after original trustee can no longer serve.
Carlos Fiorelli, a well-known sculptor, donated a large marble piece of his work to a public charity as part of a plan to reduce his gross estate and receive a charitable income tax deduction. He showed you this list, as his planner, and asked what the allowable charitable deductions would be from the following: - $3,200 for marble and materials - $ 600 contribution of his time - $1,500 modeling costs paid - $ 750 studio time paid What is the amount that will be allowed as deductible contribution? A) $4,700 B) $5,300 C) $5,450 D) $6,050
Rationale The correct answer is "A." Answer "A" is the amount that can be deducted as charitable contributions. Only materials and actual costs can be used. Rental of space or time contributions are not deductible.
Which of the following is a deduction from the gross estate used to calculate the adjusted gross estate? A) Last medical costs. B) The gift tax paid on gifts made within three years of death. C) The unlimited marital deduction. D) The unlimited charitable deduction.
Rationale The correct answer is "A." Answers "C" and "D" are all subtracted from the adjusted gross estate to arrive at the taxable estate. Answer "B" actually increases the gross estate.
Harry died this year. Which of the following property items are included in his gross estate? I. His rings and watches, valued at more than $45,000. II. Cash of $250,000 that he gave to a friend in 2008. No gift tax was paid on this transfer. III. Stock that Harry purchased and held with his brother in a joint tenancy with right of survivorship. A) I and III only. B) II and III only. C) I only. D)
Rationale The correct answer is "A." Both statements "I" and "III" are includible in the gross estate. Statement "II" is not included in the gross estate because it was a completed gift, but to the extent it was a taxable gift it would be included in the adjusted taxable estate.
Your client, Zoe, has established a revocable grantor trust, naming a bank as the trustee. Pursuant to the terms of the trust document, your client receives all the income annually generated by the trust assets during her life. The assets placed into the trust consist of Zoe's mutual fund portfolio, her personal residence, a rental property located in another state, and two installment notes held by Zoe. Upon your client's death, all of the assets remaining in the trust are to be distributed to Zoe's two children. Upon Zoe's death, the assets remaining in the trust will: I. Be included in Zoe's gross estate. II. Be subject to the probate process. III. Receive a new income tax basis equal to the fair market value at death or her alternate valuation date if properly elected. IV. Be distributed as directed by Zoe's will. A) I only. B) I and III only. C) I, II and III only. D) I, II, III and IV.
Rationale The correct answer is "A." Grantor trusts do not remove assets from the grantor's gross estate, but do allow assets to pass outside of probate. Installment notes are IRD property and therefore do not get a step to fair market value. The trust document will determine how the assets are distributed, not the will.
An estate freeze would accomplish which of the following? A) Any property transferred would be appreciating in value and the future gain would occur in the transferee's estate. B) A property with a decreased value could be transferred and the loss would freeze the basis at the lower amount. C) A property with an increased value would be transferred and the gain would be frozen in the estate of the transferee. D) A property transferred would be appreciating in value but any loss would occur in the transferee's estate.
Rationale The correct answer is "A." In the case of an estate freeze, the property transferred would be appreciating in value and any future gain would occur in the transferee's estate.
All of the following are features of tenancy by entirety except: A) There can be two or more tenants. B) Each tenant has equal shares. C) Each tenant has a right of survivorship. D) No tenant can sell his or her share without the consent of all of the other joint tenants.
Rationale The correct answer is "A." Tenancy by the entirety is always between spouses and can only exist between two people. One spouse cannot partition the property without the consent of the other spouse.
Which of the following is an argument that favors the use of a revocable intervivos trust? A) Probate costs are avoided by the use of a revocable trust. B) There can be a substantial savings in income tax by the use of a revocable trust. C) There can be a substantial savings in estate tax by the use of a revocable trust. D) All of the above are valid reasons for the use of a revocable trust.
Rationale The correct answer is "A." There are no estate or income tax savings by using a revocable trust. There will be a savings of probate costs, because the use of a revocable trust avoids probate.
Eric and Tawny gift $120,000 to an Irrevocable Life Insurance Trust with Crummey provisions. The trust has, as beneficiaries, their three children. A few weeks later, Eric dies in an auto accident. Tawny, with the assistance of her attorney and Financial Planner, is calculating Eric's gross estate. How much of the gift will be brought back into Eric's gross estate? The annual exclusion is $15,000. Split gifts are available. The 5/5 lapse rule is in effect. A) $0 B) $21,000 C) $42,000 D) $102,000
Rationale The correct answer is "A." This was a cash gift, not a gift of life insurance. Therefore, none of the gift will be included in Eric's gross estate as the trust is irrevocable.
Your clients, Jane and Tang R. Zahn, are considering a corporate trustee to administer their trusts, rather than his Uncle, Chi Ta Zahn. Which of the following are reasons to favor the corporate trustee? I. Generally stronger financial security and technical skills. II. Lower costs to the estate and trusts. III. Closer relationship with beneficiaries. IV. The corporate trustee will have specialized and sophisticated knowledge of decedent's business interests. A) I only. B) I and IV only. C) II, III and IV only. D) I, II, III and IV.
Rationale The correct answer is "A." Though there are many good reasons to favor corporate trustees, the only one listed here is statement "I". The other statements favor personal acquaintances or relatives.
A decedent has made substantial lifetime gifts exceeding the lifetime exemption and such that her estate is in the 40% marginal tax bracket. In her will, she made a bequest of $100,000 to her adult son with NO special arrangements, or allocations, for the payment of the estate taxes. The balance of her estate is left to her husband in a qualifying way. How much of the bequest to the son will the son actually receive, assuming NO other bequests to him from her estate? A) $60,000. B) $51,000 C) $85,000. D) $100,000.
Rationale The correct answer is "A." Unless special arrangements are made for the residual estate to satisfy the estate tax payment, then the 40% tax will be charged against the bequest based on the information provided. The $15,000 annual exclusion is not available for bequests. Answer "B" is wrong (100,000 - 15,000) x 60% = $51,000 Answer "C" is wrong (100,000 - 15,000) = $85,000 Answer "D" is wrong because the son will have to pay the estate tax.
Your client, Mike Goldstein, has made a number of gifts to friends and family as described below. He wants to know which one of the following was not a completed gift: A) Stock certificates were signed and delivered directly to his nephew, James' investment account. B) Mike made an irrevocable transfer of legal title of solely owned property to his niece, Bonnie, and retained a minority interest in that property after the gift. C) Mike gave his 16 year old grandson Colin a 1969 Convertible Mustang car. D) Mike funded his granddaughter's education with a 529 plan. He made himself the owner of the plan so that he could personally use the funds for his own needs if the situation arose.
Rationale The correct answer is "B". The retained interest in answer "B" prevents it from being a completed gift. The 529 ownership is deemed a completed gift once made but can be undone by withdrawing. The right to withdraw does not prevent the gift from being complete. The 529 is the only deemed gift which has this bind of capability.
Rick and Amber (husband and wife), residents of a non-community property state, owned unimproved land that they have titled in joint tenancy with rights of survivorship. Rick purchased the land with his own funds for $100,000 five years ago, and he died in the current year when the land was worth $400,000. What is the amount associated with the land that will be included in Rick's gross estate? A) $100,000. B) $200,000. C) $300,000. D) $400,000.
Rationale The correct answer is "B." 50% of the fair market value must be included in Rick's estate because of the deemed contribution rule because his joint tenant Amber is his spouse. If he titled JTWROS with anyone but a spouse we would use the "actual contribution rule" in which case he would have $400,000 included in his gross estate. Note that is he had titled the property tenants in common, he would have had $400,000 inclusion.
Which of the following best describes a completed present interest in a gift that would not return to be includable in one's gross estate upon death? A) The transfer of an owned life insurance policy assigned to a spouse 18 months earlier. B) A small stock portfolio worth $15,000 given to a nephew 18 months earlier. C) A house which one has deeded full ownership to one's child with the stipulation of being allowed to reside there in that house until one's death when the transferor never availed himself of the house post the transfer. D) A grantor trust with the right of revocation of benefits to the beneficiary.
Rationale The correct answer is "B." Answers A, C and D are all examples of either retained interest or reversionary interest. Only answer B is a completed gift.
In a QPRT the following is true: A) A QPRT can hold up to two residences. B) Any income is taxed to the donor. C) The donor surrenders the tax advantages of ownership. D) Any income generated in the trust must be distributed by the trust.
Rationale The correct answer is "B." QPRTs can hold only one residence. You may own 2 QPRTs. The donor retains all tax advantages.
Which of the various types of trusts permits income sharing? A) QTIP Trusts B) By-pass Trusts C) General Power of Appointment Trusts D) Estate Trusts
Rationale The correct answer is "B." The A Trust, the Q-Tip Trust and the Estate Trust do not allow for splitting or sharing of income streams. Only the By-pass Trust allows for this income splitting or sharing. The bypass trust is the only non-marital trust of the list given.
Ethel L. Black, a widow, died. She had made no previous lifetime taxable gifts and she died with a gross estate of $11,200,000, consisting solely of a diversified portfolio of publicly traded, income-producing stocks. Her debts were $75,000 and estate administrative expenses amounted to $50,000. Which of the following post-mortem techniques should Ethel's executor consider electing? A) The alternate valuation date. B) Deduct estate administrative expenses on the estate's fiduciary income tax return. C) Pay estate taxes under IRC Section 6166. D) Use a Section 303 stock redemption.
Rationale The correct answer is "B." The alternative valuation is not beneficial because there is no estate liability. No estate tax is due therefore no installment payment is needed and 6166 does not apply. The estate is not a closely held business (C corporation) so Section 303 redemption does not apply.
Horatio dies during the current year while holding a note receivable from Bill for $250,000. All of the following items surrounding the note could directly impact the valuation of his estate with the exception of which one? A) The maturity date of the note. B) The note is forgiven in Horatio's will. C) The interest rate of the note. D) Bill's financial health.
Rationale The correct answer is "B." The note must be included in the gross estate at the fair value of the note. A long time to maturity, accrued interest, and a rate below market affect note valuation for estate purposes, thus estate valuation. Also, if Bill is in poor financial health the note may be discounted, directly impacting the value of Horatio's estate. Forgiveness of the note itself, however, does not impact the value of the note to the estate. The note will be included for estate tax purposes even if it is forgiven at death.
Which of the following circumstances would cause the value of gifted property to be included in the donor's gross estate? I. Donor retains a life estate in the gift property. II. Donor retains the power to revoke or amend the gift. III. Donor gives more than $15,000 to one donee in one year. IV. Donor dies within three years of the date of the gift. A) I, II and III only. B) I and II only. C) I, II and IV only. D) III and IV only.
Rationale The correct answer is "B." The power to revoke, amend, or alter the gift, or retention of any rights will cause gifted property to be included in a donor's gross estate. ILIT that have insurance policies transferred into them will be added to the gross estate, if the ILIT was created and insurance purchased, it will be excluded from the gross estate. Completed gift are not pulled back into the estate.
Which of the following are characteristics of a private annuity? I. Title to the property is conveyed to the individual responsible for making annuity payments at the time of the transaction. II. It involves a promise on the part of the individual receiving the property to make an annuity payment to the transferor, usually secured by the transferred property. III. The individual responsible for making annuity payments can deduct the interest portion of those payments. IV. Each payment received by the annuitant is divided into gain, interest income, and a non-taxable recovery of basis. A) I and II only. B) I and IV only. C) II, III and IV only. D) I, III and IV only.
Rationale The correct answer is "B." The private annuity cannot be secured by the transferred property and the interest portions of payments to the annuitant cannot be deducted by the transferee.
Bob gave his daughter Kerri 100 shares of XYZ stock on February 14. Bob had acquired the shares from his deceased uncle on November 26 of the previous year at which time the fair market value was $71.49 per share. His uncle held the shares for years. On February 14, the XYZ stock shares on the market traded as follows: Open Low High Close Volume $69.20 $68 $71 $70 1,250,000 What was the value of the gift made on February 14? A) $7,149 B) $6,950 C) $6,960 D) $7,000
Rationale The correct answer is "B." The value of a gift of securities is the average of the high and the low on the date of the gift assuming the date of the gift is a trade date. (68 + 71) / 2 = 69.50 x 100 = $6950
Devon Wright asked if you could help him structure an irrevocable trust. His ultimate goal is to remove the trust corpus from his gross estate while still reporting the income taxes on any income generated by the trust during his life. His best choice of trust to accomplish this is? A) A Chapter 14 Trust. B) A Defective Grantor Trust. C) A Crummey Trust. D) A Bypass Trust. E) A GRAT.
Rationale The correct answer is "B." There is no such thing as a Chapter 14 Trust. Crummey is a provision or power to withdraw from a trust. A Bypass trust is used in marital estate planning. A grantor trust is subject to income tax to the grantor. A defective grantor trust is treated as a grantor trust for income tax purposes but as a completed gift for gift and estate tax purposes.
Which of the following would meet the requirements for the annual exclusion under the gift tax rules? A) A gift to a trust, to be distributed to a beneficiary contingent upon the beneficiary's survivorship. B) A gift to a trust that has an ascertainable value at the time of the gift. C) A gift to a secular (not a 2503c trust) trust that does not require annual income distribution to the beneficiary. D) A gift to a trust where the grantor can benefit from current income.
Rationale The correct answer is "B." This answer represents a present interest. All of the other choices are a "future interest." Keep in mind that the 2503c trust for minors would qualify for the annual exclusion because any gift to such a trust is deemed to be a gift of a present interest. However, a regular secular trust that does not require any annual income distribution to the beneficiary will not qualify as a gift of a present interest.
Wolfgang and Anastasia, who are married to each other, have combined assets as follows: -Wolfgang's separate property: $15,600,000 -Anastasia's separate property: $1,800,000 -Community property: $1,400,000 Wolfgang wishes to structure a standard AB Trust for himself, which of the following would be correct for the year 2018? A) A Trust: $15,600,000 and B Trust: $700,000 B) A Trust: $5,120,000 and B Trust: $11,180,000 C) A Trust: $11,180,000 and B Trust: $5,120,000 D) A Trust: $16,300,000 and B Trust: $0
Rationale The correct answer is "B." Wolfgang could put $11,180,000 in the B trust (applicable exemption for 2018) and $5,120,000 in the A Trust. He has a total of $16,300,000 including his half of community property. If $11,180,000 goes to the B Trust, the remainder of $5,120,000 would go to the A trust. He would not include Anastasia's separate property in his estate.
Joyce's gross estate was $1,000,000. Her funeral costs were $16,000. She left $20,000 to charity and $14,000 to a community hospital. Total amount of home mortgage (owned in JTWROS with her spouse) was $100,000. The home was valued at $200,000. She had personal consumer debt of $15,000. Her spouse was her personal representative and waived his fees. She left $260,000 in cash outright to her spouse. What is her taxable estate? A) $525,000 B) $539,000 C) $575,000 D) $589,000
Rationale The correct answer is "C." AGE: $1,000,000 - $16,000 (admin cost) - $50,000 (1/2 debt from the mortgage) - $15,000 (credit card debt) = $919,000 Taxable Estate: $919,000 - $310,000 (marital deduction) - $34,000 (charitable deduction) = $575,000 The maritable deduction is calculated as follows: The total amount of the home is $200,000 therefore her portion would be $100,000. If the debt is $100,000 then her portion is $50,000. So she would be leaving $100,000 - $50,000 = $50,000 to the spouse for the home. So total marital deduction is $260,000 + $50,000 = $310,000.
Assuming NEITHER person has used any of his/her applicable credit, what is the maximum amount a married couple can give to a single, third-party donee in the current year without paying any federal gift tax? A) $30,000 B) $11,210,000 C) $22,390,000 ($11,180,000 X 2) + ($15,000 X 2) = $22,390,000 D) $22,420,000
Rationale The correct answer is "C." A $15,000 gift may be made by each spouse each under the annual gift exclusion amount and a $11.2M gift from each spouse may be made to utilize the applicable lifetime exclusion amount of $11.180M each.
There are a number of ways to transfer property upon death. The probate system is one of these methods. There are, however, a number of reasons and methods that can be used to avoid probate. Which of the following is/are non-probate transfer devices? I. Use of a Totten Trust. II. A charitable annuity trust. III. Community Property Titling. IV. An intervivos trust. A) II and III only. B) II, III and IV only. C) I, II and IV only. D) I, II, III and IV.
Rationale The correct answer is "C." All of these methods work as means of avoiding probate except community property titling. The decedents' one-half of community property goes into probate.
Which of the following statements regarding SCINs is correct? A) If the seller outlives the SCIN term, the buyer has paid no more than the FMV. B) The payments received by the seller under a SCIN are treated as interest income. C) A SCIN can give the seller a collateral interest in the property sold. D) If the seller dies before the end of the SCIN term, the seller is deemed to have made a taxable gift to the buyer equal to the difference between the payments made and the total principal payments due on the SCIN.
Rationale The correct answer is "C." Answer "A" is incorrect because the buyer of a SCIN pays the FMV plus the SCIN premium. Answer "B" is incorrect because each payments received by the seller consists of (1) interest income, (2) capital gain, and (3) return of adjusted basis. Answer "D" is incorrect because the transferee bought the right to cancel thus no gift.
Of the following statements, which is false? A) The unlimited marital deduction merely postpones the potential estate tax due. B) Property that is not included in the decedent's gross estate cannot qualify for the unlimited marital deduction. C) The death benefit of a life insurance policy included in a decedent's gross estate is not eligible for the unlimited marital deduction. D) An individual can use the unlimited marital deduction during life to fund the surviving spouse's applicable estate tax credit. The best property to transfer is the property that is expected to appreciate in value.
Rationale The correct answer is "C." Answer "C" is a false statement. If the death benefit of a life insurance policy is included in a decedent's gross estate, the value of the death benefit will be eligible for the unlimited marital deduction. All of the other answers are true statements.
What is an appropriate standard estate planning strategy for married couples to minimize estate taxes over two deaths if a revocable trust is in place during life? A) Bequeath the entire estate to a trust, giving the surviving spouse a general power of appointment. B) Bequeath the applicable exclusion amount to a qualified terminable interest property trust (QTIP) and the balance outright to the surviving spouse. C) Bequeath the applicable exclusion amount to a bypass trust to take advantage of the unified credit at the death of the first spouse. D) Bequeath the applicable exclusion amount outright to the surviving spouse and the balance to the children.
Rationale The correct answer is "C." Answers "A", "B" and "D" do nothing to reduce estate tax at the second death since these three strategies would cause the decedants unified credit amount to be added into the surviving spouse's gross estate.
A client asks you to explain the statement, "Life insurance proceeds are tax-free." You answer that the general rule(s), subject to some exceptions, is/are that death benefits received from a life insurance policy due to the death of the insured are income tax free to the beneficiary, but which of the following are also true: I. The proceeds are subject to estate taxes in the estate of the insured if the insured is the owner. II. The proceeds may be subject to income taxes if the policy was sold to a third party. III. The proceeds are not subject to income tax, even if sold to a third party if the contract is a modified endowment contract. A) I only. B) II and III only. C) I and II only. D) I, II and III.
Rationale The correct answer is "C." Death benefits from a modified endowment contract (MEC) are still income tax free unless sold. Statement "II" subjects the policy proceeds to income tax if the policy was transferred to a transferee who took under a transfer for value rule.
In the current year (2018), George made taxable gifts to his two sons. One was for $500,000 to his son Chris and another was to his son Alex for $500,000. George's wife, Lois died several years ago. George used his applicable credit amount to offset any gift tax liability, and would like to know how much applicable gift tax credit does he have left at this time? A) $345,800 B) $1,000,000 C) $4,072,000 D) $10,180,000
Rationale The correct answer is "C." George gave $1,000,000 in the current year in taxable gifts so he has $10.180M of remaining exemption left which translates to a $4,072,000 credit ($4,417,800 - $345,800). There is no indication from the stem that he has any portability from his deceased wife. Choice "A" is the credit equivalency, not the credit. Taxable gifts is a term of art meaning net of any annual exclusion. Note: the $345,800 is from the estate tax table. It is the calculated tax due on 1 million dollars of gift or estate amounts.
Dr. Ben Allen has two primary assets in addition to his home and personal property. He is an osteopathic physician. He owns an S corporation that is producing substantial income. He has an X-ray machine and support equipment which is fully depreciated. His son, 18, has decided to go to chiropractic school after graduating from college. He would like to pay for the college and chiropractic school with pre-tax dollars. Based on this information, which of the following intra-family planning techniques would be appropriate? A) Gift stock in the S corporation to his son and use the education deduction. B) Sell X-ray equipment on an installment sale basis. C) Gift and leaseback the equipment and X-ray machine. D) Transfer the S corporation into a Family Limited Partnership.
Rationale The correct answer is "C." Gift and leaseback addresses the means to accomplish the desired objective of using pre-tax dollars to pay his son's tuition because the lease payments are a deductible business expense to the physician.
Clarke and Lois Kent, spouses, own equal shares of an S corporation, which operates a growing garden center. They have considered forming a family limited partnership with their son, Jimmy. The S Corporation would be the general partner, and Clarke and Lois would gift limited partner interests to Jimmy over the next decade or so. They want to maintain control of the business until they retire. They also want a fixed income stream from the business. This would be considered an intra-family transfer. Which of the following accurately describes the tax implications of the transfers Clarke and Lois are considering? I. The family limited partnership interests will be eligible for valuation discounts in spite of the fact that IRC Chapter 14 may apply. II. Income paid to Clarke and Lois after the limited partnership is formed will be subject to double taxation, both at the partnership level and the individual level. III. The control maintained by Clarke and Lois will bring the limited partnership interests gifted to Jimmy back into their estates if made within three years of death. IV. Lois and Clarke's right to fixed income from the partnership will be a qualified payment right when valuing the limited partnership interest gifted to Jimmy. A) II only. B) I and III only. C) I and IV only. D) II, III and IV only.
Rationale The correct answer is "C." Limited partnerships are conduit entities and do not pay taxes. IRC Chapter 14 affects valuation only by assigning a value of zero to any non-qualified interests retained by the donor. The right to the income retained in this question is considered qualified because it is income that is fixed in time and dollar amount and thus can be valued.
Grantor is single and has established a trust, naming a bank as trustee. Pursuant to the terms of the trust document, Grantor is to receive all of the income generated by the trust assets during his life. Grantor may withdraw assets from the trust or place additional assets into it. The assets placed into the trust consist of Grantor's mutual fund portfolio, personal residence, a rental property located in another state, and two installment notes held by Grantor. Upon Grantor's death, all of the assets remaining in the trust are to be distributed to Grantor's two children. Which of the following statements is/are correct? I. Upon the transfer of the installment notes to the trust, any deferred gain will be recognized as taxable income. II. After the transfer to the trust, the income from the mutual funds will continue to be reported on the Grantor's tax return. III. Upon the transfer of the rental property to the trust, all the excess prior year's depreciation will be recaptured as ordinary income. IV. After the transfer, the $250,000 exclusion from capital gains remains available for the principal residence. A) II, III and IV only. B) I, II and III only. C) II and IV only. D) I, II, III and IV.
Rationale The correct answer is "C." Statement "I" is incorrect because deferred gain is not recognized as taxable income until such time as it is received. Statement "III" would ordinarily be true except that this is a grantor trust with control remaining with the grantor and all rental income taxable to the grantor, thus no true transfer which would cause depreciation recapture. This is a grantor trust.
Because of his age and his inability to conduct business, Walter gave his son Henry a general power of appointment. Which of the following is/are true regarding such a power? I. Henry can appoint his father's money to pay for his father's needs. II. Henry can appoint money to Walter's creditors. III. Henry must only appoint money using the standards of health, education, maintenance and support. IV. If Henry dies before Walter, Henry's gross estate includes Walter's assets under the power even though those had not previously been appointed by Henry. A) I and II only. B) I, III and IV only. C) I, II and IV only. D) II, III and IV only.
Rationale The correct answer is "C." Statement "III" is incorrect because Henry can appoint to anyone he wishes including himself, his heirs, or his creditors under a general power of appointment. The other statements are correct.
Which of the following is not necessary to carry out a Section 303 stock redemption? A) The value of the stock must be greater than 35% of the decedent's adjusted gross estate, including gifts made in the last 3 years. B) The 303 redemption can only be used if the corporation has the cash to redeem the shares. C) The 303 redemption can be made even without a positive earnings and profits account. D) The Section 303 redemption is limited to an amount that cannot exceed the death taxes of the estate, plus funeral and administrative expenses for which the decedent is liable.
Rationale The correct answer is "C." The closely-held stock must make up 35% of the decedent's adjusted gross estate value and must be the stock of a closely-held firm. The E and P account must be positive or there is no need for a 303 redemption.
Which one of the following statements is NOT true for a Grantor Retained Unitrust (GRUT)? A) The grantor creates an irrevocable trust with a retained income interest. B) Income must be paid out at least annually. C) Once established, the GRUT corpus will not be part of the grantor's estate. D) The amount of income to be paid to the income beneficiary is recalculated annually based on the GRUT valuation.
Rationale The correct answer is "C." The corpus value may be included in the grantor's gross estate if grantor dies before the end of the term of the GRUT. GRUTs are irrevocable and income needs to be paid out annually with the amount recalculated annually. Due to grantor status, the GRUT will be part of the gross estate if the grantor dies before the end of the trust term.
Sam, age 95, transferred common stock with a fair market value of $600,000 to an irrevocable trust. The trust provides that the income from the trust is payable to Sam for life, and upon his death, the trust corpus passes to his sister. The trust prohibits Sam from changing the trust beneficiaries. If Sam dies one year from now when the value of the trust assets is $700,000, how much of the trust will be included in Sam's gross estate? A) $0 - because the trust is irrevocable and Sam cannot change the beneficiaries. B) The present value of the income over Sams remaining life expetancy. C) $700,000 - because Sam has the right to the trust's income for life. D) $600,000 - the value of the initial deposit because Sam created an irrevocable trust.
Rationale The correct answer is "C." The explanation is contained with the problem itself in that this is a grantor trust. Just because the beneficiary is irrevocable doesn't change the fact that the donor has a life interest in income in the trust making it includable in his gross estate.
Which of the following is the least important factor in choosing an appropriate/competent Personal Representative? A) Being willing and able to accept fiduciary responsibility. B) A trusted family memeber. C) Having knowledge and competency in dealing with investments. D) Possessing sufficient common sense to know when to retain competent legal assistance. E) Being honest.
Rationale The correct answer is "C." The other qualities are much more important than investment expertise which can be hired.
Richard is a 72-year old widower. He recently transferred $2,000,000 of preferred stock to an irrevocable trust. Richard provides that the income from the trust is payable to himself for life, and upon his death, the trust corpus will pass to his son. The trust restricts Richard from changing trust beneficiaries. If Richard dies in the current year when the value of the trust assets are $2,350,000, how much of the trust will be included in Richard's gross estate? A) $0 - Because Richard CANNOT change the beneficiaries and has made an irrevocable transfer. B) The present value of the income to be paid to Richard at the inception based on his life expectancy and the federal interest rate. C) $2,350,000 - Because Richard has the right to the trust's income for life. D) $2,000,000 - Because Richard created an irrevocable trust and he was one of the beneficiaries.
Rationale The correct answer is "C." The total value of the trust at his death because of his retained interest.
Which of the following does NOT relate to a will? A) A Codicil. B) A Devisee. C) A Legatee. D) None of the choices.
Rationale The correct answer is "D." A Codicil is a document used to alter a will. A Devisee is a gift of real property through a will. A Legatee is a person who inherits property under the will.
The best life insurance policy for the payment of federal estate taxes for a 50-year-old married couple with illiquid assets is: A) An individual whole-life policy on each spouse on a cross-ownership basis. B) A joint first-to-die life insurance policy owned jointly. C) A joint last-to-die life insurance policy owned by the spouse with the larger estate. D) A joint and last-to-die life insurance policy owned by an irrevocable life insurance trust.
Rationale The correct answer is "D." A second-to-die life policy provides insurance for a lower cost than insuring each spouse individually. Due to the unlimited marital deduction, there is no need for liquidity until the death of the second spouse. The ILIT keeps the insurance proceeds from being included in the gross estate of either spouse as long as neither has any incidence of ownership in the trust or policy.
Which of the following statements is incorrect? A) When a decedent's taxable estate is less than the applicable estate tax credit equivalency because of the overuse of the marital deduction, the estate is said to be overqualified. B) When too few assets pass to a decedent's surviving spouse, and as such the decedent's taxable estate is greater than the applicable estate tax credit equivalency, the decedent's estate is said to be underqualified. C) An ABC Trust arrangement utilizes a General Power of Appointment Trust, a QTIP Trust. and a Bypass Trust to maximize the use of a decedent's applicable estate tax credit. D) The ultimate beneficiary of a QTIP Trust is selected by the surviving spouse.
Rationale The correct answer is "D." Answer "D" is incorrect because the ultimate beneficiary of a QTIP Trust is chosen by the grantor of the QTIP Trust. All of the other statements are correct.
Of the following statements, which one best describes the non-tax characteristics of a reverse gift? A) In the case of a reverse gift, the donee's projected estate tax liability is not a consideration. B) Properties with a high income tax basis make an excellent choice for this type of gift. C) The reverse gift may be given at any time prior to the donee's death, as there is no waiting period in this case. D) The gift is given with the intention that the donor receive it back with a step up in basis.
Rationale The correct answer is "D." Answer "D" is the only true statement. Answer "A" is incorrect because the property is included in the donor's gross estate, thus possibly causing estate tax to the donee that might have been avoided. Answer "B" is untrue as gain is not an issue with high basis property. Answer "C" is incorrect as the gift must be completed one year prior to the donor's death.
With regard to the required income distribution of the various types of marital trust, which of the following trusts permit accumulation of income? A) A QTIP Trust. B) A TPP Trust. C) A Power of Appointment Trust (GPOA). D) An Estate Trust.
Rationale The correct answer is "D." Both the GPOA Trust and Q-Tip Trust require distribution of income at least annually to the spouse. A TPP Trust holds tangible personalty. Only the Estate Trust permits income accumulation.
Your client, George Carlisle, is 58-years old. He is interested in establishing a trust with a value of $6,000,000 for his family. He is aware of the Generation Skipping Transfer Tax, and he has asked you for your advice as to which person would be considered a skip person. Which of the following is a skip person? A) George's son Fred, who is age 17. B) George's grandson Bill, age 14, whose mother (George's daughter) died in an auto accident this year. C) George's mother Thelma. D) A trust that George had established 3 years ago for George's favorite employee, Sam, who has just turned 20.
Rationale The correct answer is "D." Due to the age difference of more than 37 1/2 years and the non-related party status, the trust for Sam is a skip person. The reason Fred is not a skip person is because he is a first generation descendent. Billy is not a skip person because his mother's death moves him up a generation (predeceased parent rule).
Sharon McRay, your client, has a large house valued at $3 million and a large estate of $12 million. She is 65-years old, a widow, and already has used $300,000 of her applicable gift exclusion credit. Which of the following transfer techniques could she use to realize the greatest reduction of her estate tax? The house is appreciating at about 9% per year. A) A residential GRIT. B) A residential RIT. C) A residential SPLIT. D) A residential QPRT.
Rationale The correct answer is "D." From among the choices, the Qualified Personal Residence Trust would afford her the reduction in gross estate tax presuming she lives through the trust term. There is no such thing as a residential GRIT, RIT or SPLIT.
All of the following are included in the gross estate except: A) Proceeds from a life insurance policy owned by the decedent insured that was assigned to an ILIT two years before death of the insured. B) A CRAT where the income beneficiary was the decedent. C) Property where the decedent had a reversionary interest of less than 10% of the value. D) Gift taxes paid two years prior to the decedent's date of death for gifts made four years earlier.
Rationale The correct answer is "D." Incidence of ownership of life insurance policies assigned within three years of death are includible in the decedent's estate, as are CRATs and CRUTs. Any amount subject to the gross up rule is includible in the taxable estate but must be for gifts made within three years of death.
Dan Ryan wishes to estimate his probate estate. The following are assets listed on his data form. What is included in the probate estate? -$5,000 Limited Partnership Interest held as JTWROS with his brother who made no contribution. -$150,000 home held in tenants by the entirety (TE). -$20,000 municipal bonds held in a separate account. -$20,000 child UTMA accounts. -$25,000 Mutual Fund held in community property with his spouse. A) $40,000 B) $20,000 C) $45,000 D) $32,500
Rationale The correct answer is "D." Joint tenants with rights of survivorship and tenants by the entirety pass outside probate. The municipal bond and one half of the community property are inlcuded in probate, equaling $32,500.
Elaine Shurtz created an irrevocable trust for her granddaughter, Ashley. Elaine named her spouse, James, as trustee and gave him complete autonomy in investment authority. The trust provides that the current net income will be distributed at the trustee's discretion. Ashley turned 21 years of age in the current year and had the right to demand the distribution of all trust assets at that time. Instead, she chose to allow the trust to continue until she is 25 years of age. Which of the following correctly identifies the taxpayer who must pay tax on the trust income for the current year? A) Elaine, because the trust relieves her of family support obligations and therefore its a grantor trust. B) The trust itself unless it distributes the income. C) The trust because it is irrevocable with no benefits to the grantor. D) Ashley because she chose to allow the trust to continue after her twenty-first birthday.
Rationale The correct answer is "D." Once Ashley had access to the corpus of the trust, but decided to let it remain in the trust, it became a grantor trust for which Ashley is responsible for paying taxes on trust income.
Prairie Dog Corporation (PDC), an oil drilling company, has a "key-person" variable universal life policy on Digger Phelps, its vice-president of drilling operations. The owner and beneficiary of the policy are the corporation. Which of the following is correct? A) Premiums paid by PDC are taxable income to Digger. B) Premiums paid by PDC are considered gifts to Digger. C) Premiums paid by PDC are tax deductible as a business expenses. D) Any death benefit paid will be nontaxable to PDC.
Rationale The correct answer is "D." PDC is the owner and beneficiary of the policy. For the same reason, premiums are NOT considered a gift or taxable to Digger, nor will they appear in his gross estate. "Key person" life premiums are not deductible as a business expense. Any death benefit pad will be nontaxable to PDC.
Which of the following are disadvantages or "costs" of the 2503(c) trust? I. The 2503(c) trust is irrevocable and the grantor must relinquish control. II. The 2503(c) trust can have only one beneficiary, meaning that funds cannot be taken away from a child who is not observing the wishes of the grantor. III. The 2503(c) trust requires mandatory distribution of income on an annual basis. IV. The 2503(c) trust has expenses involved in filing tax returns and estimated quarterly tax payments. A) I and II only. B) I, III and IV only. C) II, III and IV only. D) I, II and IV only.
Rationale The correct answer is "D." The 2503(c) trust does not require annual distribution of income. It is the 2503(b) trust that has this requirement.
Which one of the following statements is NOT correct about trusts? A) A sprinkling provision allows the trustee to make payments of income or corpus to beneficiaries based upon specific needs. B) A discretionary provision allows trustees to distribute corpus or income, or not, as they determine is most prudent. C) A spendthrift provision prohibits a trust beneficiary from assigning interests in the trust corpus. D) The CRUT is subject to a test for remainder interest of 10% and the probability test.
Rationale The correct answer is "D." The CRAT but not the CRUT is subject to the probability test.
Mary's husband died two years ago. His will included the following three testamentary trusts: A trust for the benefit of Mary's children, but giving Mary a general power of appointment over the trust assets for the remainder of her life (GPOA Trust), a bypass trust for the benefit of Mary's children, but giving Mary a power to invade the trust assets for an ascertainable standard for the remainder of her life (Bypass Trust), and a charitable remainder annuity trust for the benefit of Mary's as the income beneficiary for life with the remainder to her alma mater (Charitable Trust). At Mary's death, which of the trusts assets will be included in her gross estate? I. GPOA Trust. II. Bypass Trust. III. Charitable Trust. A) I only. B) I and II only. C) II and III only. D) I and III only.
Rationale The correct answer is "D." The GPOA Trust would be included in Mary's gross estate. Because the withdrawal right of the Bypass trust was limited to an ascertainable standard, its assets are not included in Mary's gross estate. Mary has an interest in the assets of the Charitable trust so those assets are also included in her gross estate then she gets an unlimited charitable deduction equal to the assets included in the gross estate.
Which of the following is considered a complex trust? I. A 2503(c) trust. II. A trust which allows the trustee discretion to distribute or accumulate current income. III. A trust which allows a beneficiary a limited noncumulative right to demand. IV. A Section 2503(b) mandatory income trust that has only individual beneficiaries. A) I and IV only. B) I, III and IV only. C) II and IV only. D) I, II and III only.
Rationale The correct answer is "D." The Section 2503(b) is a simple trust. A complex trust is a non-grantor trust which in a given year accumulates fiduciary income or distributes trust corpus, whereas a simple trust distributes no corpus. A 2503(c) trust allows for accumulation.
Maria Olmsted Chavez, age 58, is the owner of a closely-held partnership business which makes up 65% of her adjusted gross estate. More than half the assets of the partnership are real estate holdings. Maria wants to undertake a transfer of some sort to her son, Ernesto, to reduce her potential income tax obligations and possible future estate tax liability. Such a transfer would accomplish both of these goals and reduce Maria's interest in the business by 35%, meaning the business would make up only 30% of her adjusted gross estate. Maria will also be bequething $50,000 to her favorite public charity and the balance to her husband upon her death. In light of these activities and transfers, which of the following elections does Maria lose? A) Maria can no longer use the special use election. B) Maria can no longer use the reverse QTIP election. C) Maria can no longer use the Section 303 election. D) Maria gives up the right to use the 6166 election.
Rationale The correct answer is "D." The amount required to use the Section 6166 is that the ownership asset must make up at a minimum of 35% of the estate. Section 303 is not appropriate because this is a partnership and there is not stock in a partnership. Special use is for valuation of real property used in a trade or business. The reverse QTIP is a generation transfer tax election.
To qualify for the marital deduction, qualified terminable interest property (QTIP) must meet which of the following conditions? I. The surviving spouse must have a general power to appoint the property. II. All of the income must be paid out either to the surviving spouse or to the children of the decedent and the surviving spouse at least annually. III. The executor must make the QTIP election. IV. The surviving spouse must be entitled to make lifetime gifts to family members directly from the QTIP. A) I, II and III only. B) I and III only. C) II and IV only. D) III only.
Rationale The correct answer is "D." The surviving spouse generally has no dispositive powers in a QTIP trust. The surviving spouse must be the SOLE income beneficiary who must receive ALL income from the trust at least once each year for the rest of his/her life.
