Estate Planning FP516

Case Study Question If Grant decides to help fund Max's and Sam's college educations using Section 529 plans, what is the maximum amount Grant can contribute to the plans without making a taxable gift in 2023, assuming no gift splitting? A) $170,000 B) $340,000 C) $34,000 D) $85,000

A) $170,000 Under Section 529, a donor can contribute up to $85,000 for each beneficiary without making a taxable gift. The total contribution he can make to both grandchildren without making a taxable gift is $170,000. LO 9.1.2

Mike and Jane, a married couple, bought a condominium 15 years ago for $200,000 as joint tenants with right of survivorship (JTWROS). When Jane died, the condominium was valued at $500,000. Four years after Jane's death, Mike sells the condominium for $600,000. What is the amount of Mike's capital gain? A) $250,000 B) $0 C) $300,000 D) $100,000

A) $250,000 Mike received a stepped-up basis in one-half of the condominium at Jane's death. He retains his original basis of $100,000 in the other half. His total basis at the time of the sale is $350,000, so his gain is $250,000. LO 7.2.1

Your unmarried client has made these lifetime cash gifts: Total Gifts to DaughterTotal Gifts to Son 2018 $35,000 $75,000 2023 $92,000 $57,000 How much of your client's applicable credit is gone on December 31, 2023? A) $53,200 B) $14,400 C) $38,800 D) $0

A) $53,200 Remember the cumulative nature of the gift tax and the annual exclusion amount for present value gifts. The total gifts to the daughter and the son in 2018 are reduced by the $15,000 annual exclusion and $17,000 for the gifts in 2023 to arrive at a net taxable gift total of $80,000 ([$35,000 − $15,000] + [$75,000 − $15,000]). The same applies to the 2023 gifts resulting in a net gift totaling $115,000 ([$92,000 − $17,000] + [$57,000 − $17,000]). To calculate the tax, you need to first figure the tax on the total of the gifts from both 2018 and 2023 ($80,000 + $115,000 = $195,000). Tax on $195,000 would be $38,800 + 32% of $45,000 (the amount over $150,000), which is $14,400. The sum of $14,400 and $38,800 = $53,200. LO 2.2.2

Darwin, age 60, has an estate valued at $15 million. Included in the valuation of his estate are the following: A small U.S. Treasury note that is subject to changes in market value One-half ownership in Coeur d'Alene Estates, a private real estate development owned as a joint tenant with rights of survivorship with his sister, Anne 800,000 shares of Untell Inc., a public corporation traded on a major exchange; 50,000 shares of this stock are traded daily A joint and last survivor annuity that names his daughter, Ruthie, as the surviving annuitant When Darwin dies, which one of the following valuation techniques would most effectively reduce the value of his gross estate, and why? A) A blockage discount on the publicly traded stock, because the stock is difficult to sell on a public exchange at one time and in such a large quantity B) A co-ownership discount on the real estate development, because it would be difficult to find a buyer for the real estate six months after the date of Darwin's death C) The date-of-death fair market value for the U.S. Treasury note, because it would reflect the current market price if the value of the Treasury note decreases D) The alternate valuation d

A) A blockage discount on the publicly traded stock, because the stock is difficult to sell on a public exchange at one time and in such a large quantity With 800,000 shares of stock in a company that only trades 50,000 shares daily, this is the rare example of when a blockage discount would be available. LO 5.1.2

Jose and Maria have been married for 50 years. They have three children and seven grandchildren. Their estate is $30 million. They do not want to rely on the deceased spouse's unused exemption (DSUE) because they have seen a lot of tax law changes through the years. They would like to arrange their assets so there are no estate taxes when the first spouse dies. Maria wants to be sure their son, Fred, receives their vacation home when the second of them passes away. Jose wants to ensure their daughter Amelia eventually takes possession of their family home upon the second of the couple to die. Other than these assets, they are fine with allowing the survivor to control the remaining property. Which of the following will best allow them to accomplish all three goals? A) A combination of an A trust and a B trust B) A Type C qualified terminable interest property (QTIP) trust C) A Type A power of appointment trust D) A Type B bypass trust

A) A combination of an A trust and a B trust The combination of the two is the only way to achieve all of their goals as the remaining choices except for the QTIP will allow for some of the goals to be achieved, but not all of them. The QTIP trust doesn't align with their goals at all. LO 5.3.3

Rhonda owns the following assets: A solely owned closely held business that comprises one-half of the value of her estate A collection of antique figurines that forms a substantial part of her remaining estate A residence owned with her husband as tenants by the entirety Rhonda's will bequests $10,000 to her only niece and leaves the balance of her estate to her husband if he survives her. Rhonda is looking for methods to provide the liquidity needed for her estate. Which one of the following actions would have the potential to improve the liquidity of Rhonda's estate? A) Eliminating the bequest in her will to her niece B) Entering into a cross-purchase buy-sell agreement with her husband regarding the business C) Retitling the residence she owns with her husband as joint tenants with right of survivorship D) Amending her will to place the antique figurines in a testamentary estate trust

A) Eliminating the bequest in her will to her niece None of the other actions will have any effect, positive or negative, on liquidity. LO 6.2.2

Which of the following regarding state property law elections and allowances are CORRECT? Family settlement agreements may require court approval. An election against the will can be made by the deceased's surviving children. A homestead exemption prevents surviving family members of the decedent from losing certain property due to the claim of an unsecured creditor. A) I and III B) I, II, and III C) II and III D) I and II

A) I and III Statement II is incorrect. An election against the will protects a surviving spouse, not the surviving children, from potentially being disinherited. LO 6.3.1

The CFP Board Rules of Conduct prohibits a CFP® certificant from doing which of the following activities? Borrowing money from a client who is not in the business of lending money Loaning money to a client Establishing relationships that might compromise the planner's objectivity (i.e., create a conflict of interest) without adequate disclosure Omitting facts where that disclosure would mislead clients A) I, II, III, and IV B) I, II, and IV C) I and II D) I and IV

A) I, II, III, and IV A CFP® certificant may not loan money to clients or borrow money from clients (unless the client is in the lending business) and may not mislead a client. The CFP Board Code of Ethics does not prohibit establishing relationships that might compromise the planner's objectivity; however, it does require disclosure of these relationships. CFP® certificants obviously may not make misleading statements, but also may not fail to disclose information that would prevent misleading a client. LO 9.3.2

Which of the following are valid concerns when an applicant for long-term nursing home benefits under Medicaid transfers title to his or her personal residence to his or her community spouse? The possibility the parties may divorce Whom the community spouse may leave the residence to when he or she dies The community spouse's creditors The terms of an existing mortgage on the residence A) I, II, III, and IV B) II and III C) I, III, and IV D) I and IV

A) I, II, III, and IV All of these are valid concerns when considering Medicaid as an option to pay for long-term care. LO 8.2.1

Which of the following statements regarding cross-purchase buy-sell agreements funded with life insurance is CORRECT? The death benefits under the life insurance policies are generally received tax free. The increase in the basis of the surviving owner(s) in the purchased interest(s) will equal the purchase price paid. The number of policies required may become cumbersome if there are a large number of businessowners. A) I, II, and III B) III only C) I only D) I and III

A) I, II, and III All of these statements are correct. With a cross-purchase agreement, the surviving owners receive the life insurance death benefits income tax free. They then personally pay that amount to the former owner's family. This adds to the basis for the surviving owner(s). With an entity plan, the business itself receives the death benefits and then buys out the deceased owner's share of the business. The surviving owner(s)' basis is not changed. LO 4.4.1

In which of the following situations is a qualified domestic trust (QDOT) necessary for the donor to receive an unlimited gift tax marital deduction? The donor is a resident alien and the donee spouse is also a resident alien. The donor is a resident U.S. citizen and the donee spouse is a resident alien. The donor is a nonresident U.S. citizen and the donee spouse is also a nonresident U.S. citizen. The donor is a nonresident alien and the donee spouse is a resident U.S. citizen. A) II and III B) II and IV C) III and IV D) I and III

A) II and III Statements I and IV are false because the donor needs to be a U.S. citizen. LO 8.3.1

Which of the following are the tax implications of a 10-year term charitable lead trust with the donor's children as the remainder beneficiaries? I. The donor's charitable gift tax deduction is determined by the present value of the charity's right to receive trust assets at the end of the 10-year term. II. The donor is liable for gift tax based on the entire value of the gift to the children as discounted to the date of the gift. III. The entire value of the assets gifted to the trust will be removed from the donor's gross estate only if he or she outlives the 10-year term. IV. Each year, as the trust pays income to the charity, the donor receives a charitable income tax deduction for that amount. A) II only B) I, II, and III C) I and IV D) I and III

A) II only In a charitable lead trust, the charity receives the income with the remainder to a noncharitable beneficiary. The present value of this remainder interest is taxable. Therefore, the charitable gift tax deduction I is the present value of the income interest. III is incorrect as the entire value of the trust assets is removed from the grantor's gross estate no matter when the grantor dies. IV is incorrect as the amount of the charitable income tax deduction is based on the value of the gift to the charity in the year the gift is made, not on income earned. LO 2.1.2

Which of the following statements regarding property owned as joint tenants with right of survivorship (JTWROS) between spouses is CORRECT? I. The entire value of the property is included in the gross estate of the decedent spouse and the entire value of the property receives a stepped-up basis. II. One-half of the property is included in the gross estate of the decedent spouse and one-half of the property receives a stepped-up basis. A) II only B) Neither I nor II C) Both I and II D) I only

A) II only Statement I is incorrect because only one-half of the property is included in the gross estate of the decedent spouse and only one-half of the property receives a stepped-up basis. The stepped-up basis from the deceased spouse's half is added to the surviving spouse's original basis to determine the surviving spouse's new basis. This is different from community property in which both the deceased spouse and the surviving spouse receive a stepped-up basis. LO 3.1.3

George has a gross estate valued at $3.7 million. His estate consists almost entirely of publicly held stock owned solely by him. He owes no debts. George's only living relative is a nephew whom he hasn't seen or heard from for 30 years. George has not executed a valid will. If George were to die in the current year without change in any of the related facts, which one of the following is a disadvantage of the probate process for him? A) It will not allow distribution of his estate without incurring considerable cost in attempting to locate his nephew. B) It will not allow payment of a personal representative's fee to reduce his estate tax so that it can be covered by the applicable credit amount. C) It will not allow George's estate to be subject to court supervision regarding payment of claims and distribution. D) It will not allow George's estate to claim a marital deduction to reduce the taxable estate.

A) It will not allow distribution of his estate without incurring considerable cost in attempting to locate his nephew. The marital deduction has nothing to do with probate. Payment of a personal representative's fee would reduce his estate tax, but his estate is small enough that his applicable credit amount will certainly cover any taxable estate. Probate requires court supervision regarding payment of claims and distribution. LO 4.1.2

Sam wants to leave some real estate to his wife, Inez, outside of probate when he dies. He would also like her to receive some interest in the real estate while he is alive. Sam does not want Inez to be able to transfer or encumber her interest in the real estate without his consent. Which one of the following is the most appropriate form of will substitute for Sam to use? A) Place the property in tenancy by the entirety B) Place the property in joint tenancy with right of survivorship (JTWROS) C) Give Inez a remainder interest in the property while retaining a life estate D) Place the property in tenants in common

A) Place the property in tenancy by the entirety Tenants in common and JTWROS are partitionable without consent, which is not one of Sam's goals. Giving Inez a remainder interest does not give her the present interest he wants her to have while he is alive. LO 4.4.3

When Marsha dies, her will leaves her entire estate to her surviving spouse, Daniel. Marsha's will provides that if Daniel does not survive Marsha by 90 days the estate will pass to their adult children. Daniel has sufficient assets of his own and would prefer that Marsha's property pass directly to their children now, instead of to him, but he wants to avoid making a taxable gift to them. Which of the following postmortem estate planning techniques would enable Daniel to achieve his objective? A) Qualified disclaimer B) Partial qualified terminable interest property (QTIP) election C) Reverse QTIP election D) Election against the will

A) Qualified disclaimer A qualified disclaimer will achieve Daniel's objective because it constitutes a refusal by Daniel to accept the property and allows the property to pass directly to her children without any gift tax consequences. A partial QTIP election is used to qualify a terminable interest for the marital deduction, and a reverse QTIP election is used to permit the decedent's estate to use the generation-skipping transfer tax exemption for QTIP property. An election against the will allows a surviving spouse who has been disinherited under the deceased spouse's will to claim a share of the deceased spouse's estate. LO 6.3.3

In which one of the following situations would a state's intestate succession laws be applied? A) The decedent owned a residence that is community property in a community property state, and the decedent died without a will. B) The decedent owned property as a tenant in common, and the decedent's will contains a residuary clause naming his son as beneficiary. C) The decedent transferred all of his property to an inter vivos revocable trust, and died without a will. D) The decedent owned real estate in fee simple, and left a valid holographic will that leaves his property to his sister.

A) The decedent owned a residence that is community property in a community property state, and the decedent died without a will. Intestacy applies when a person dies without a will or with a will that fails to include all probate property. LO 4.3.1

Your client established a funded revocable life insurance trust and transferred a $500,000 face value whole life insurance policy on his life into it. Your client's father was named trustee. The client has made no other lifetime gifts. If the client dies 18 months after establishing the trust, one disadvantage of this life insurance planning technique is that A) The face amount of the transferred policy will be includible in the client's gross estate. B) The client will have a gift tax liability for the value of the policy. C) The premium payments will be considered taxable income to the beneficiary. D) The amount of gift tax paid will be includible in the client's gross estate under the gross-up rule.

A) The face amount of the transferred policy will be includible in the client's gross estate. For gift tax purposes, the value of a life insurance policy is the replacement cost, but for estate tax purposes, it is the face amount that is included and because death occurred within three years of the transfer, the face amount is brought back into the gross estate. LO 3.3.2

Which one of the following statements describes a basic feature of one of the special valuation rules under IRC Chapter 14? A) These rules cannot apply to a buy-sell agreement between two unrelated partners. B) For a transfer in trust to be subject to these rules, the transferor must be related to the transferee in a specified manner. C) These rules will apply if the transferor transfers all of his or her interest in a closely held corporation to a son or a daughter. D) These rules will apply if the transferor sells some of his or her interest in a closely held corporation to a son or a daughter at fair market value.

A) These rules cannot apply to a buy-sell agreement between two unrelated partners. Chapter 14 rules are best remembered as a set of "anti-shenanigans" laws requiring intrafamily transfers to meet certain restrictions. Unrelated partners would not fall under Chapter 14 rules. LO 2.1.3

Frank is a widower. He has a $17.2 million estate consisting primarily of undeveloped real estate and life insurance. His children are the beneficiaries of his life insurance. His will leaves $900,000 of probate assets to each of his three children, with the residue to his cousin, James. Frank learned that his estate may have liquidity problems when he dies. Which one of the following techniques is the most appropriate to increase liquidity in Frank's estate? A) Transfer existing life insurance policies to an irrevocable life insurance trust with his children as beneficiaries, which allows the trustee to purchase some of the hard-to-sell property from the estate and/or to loan funds to the estate B) Change the beneficiary on his life insurance to his estate C) Place the undeveloped real estate in a qualified terminable interest property (QTIP) trust and make the QTIP election D) Amend his will to place the undeveloped real estate in an estate trust

A) Transfer existing life insurance policies to an irrevocable life insurance trust with his children as beneficiaries, which allows the trustee to purchase some of the hard-to-sell property from the estate and/or to loan funds to the estate Neither a QTIP trust nor an estate trust will change the liquidity situation. Naming the estate as beneficiary would cause that asset to go through probate and doesn't change the dollar amount that the children will receive. LO 6.2.3

For purposes of the generation-skipping transfer tax, any payment of income or principal from a trust to a person two or more generations junior to the donor's generation is a A) taxable distribution. B) qualified transfer. C) taxable termination. D) direct skip.

A) taxable distribution. Payment of income or principal is a distribution, not a transfer or termination. A distribution might be to a direct skip, or it could be to an indirect skip. LO 7.1.2

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

A) the transferor's ex-spouse, who is 40 years younger than the transferor. A transferor's spouse or ex-spouse is not a skip person, regardless of age. Also, any children of a spouse or ex-spouse are only one generation below the spouse(s). For example, if a 70-year-old married a 30-year-old who already has a 3-year-old child from a different relationship, the 30-year-old spouse is legally considered to be of the same generation as the 70-year-old and the stepchild is only one generation below the 70-year-old. LO 7.1.1

Which one of the following is a CORRECT statement regarding the advantages and disadvantages of using a conservatorship to manage property left to a child? A) The actions of the conservator are not subject to court supervision. B) Establishing the conservatorship can be costly and time consuming. C) A conservator must be the same person who makes decisions regarding the minor's day-to-day personal care. D) A conservator typically has a broader range of powers than does a trustee.

B) Establishing the conservatorship can be costly and time consuming. A conservator has a narrower range of powers than a trustee and the actions most definitely are supervised by a court. A guardian manages the day-to-day personal care of a minor while a conservator manages the finances. LO 8.3.1

Assuming that a decedent left no valid last will and testament, which of the following assets will pass by the laws of intestate succession? A) An asset gifted by the decedent during his lifetime B) A life insurance policy owned by the decedent with his wife as the insured C) Assets placed in the decedent's revocable living trust D) Property held by the decedent and his spouse as joint tenants with right of survivorship

B) A life insurance policy owned by the decedent with his wife as the insured LO 4.3.1

Bob, Frank, Hector, and Fermin are equal partners in a closely held business. Although the four partners work well together, their spouses and children do not. No partner is ready to quit the business and retire, but they are each worried about how the business would operate if this were to happen. Each partner is financially overextended and thus not able to pay a gift tax or capital gains tax, as they started the business from scratch and it has become very profitable. Which one of the following is the most appropriate business transfer technique for the partners to use considering these circumstances? A) A cross-purchase buy-sell agreement among the partners B) An entity buy-sell agreement between the business and each partner C) A preferred stock recapitalization of the business D) A private annuity agreement among the partners

B) An entity buy-sell agreement between the business and each partner This is the best choice because only four policies are required with an entity purchase plan as compared to the 12 policies a cross-purchase plan would require. Neither a private annuity nor a preferred stock recapitalization make sense for this scenario as the partners are not family members. LO 3.2.3

Case Study Question Assume that Grant places assets valued at $1 million into a grantor retained annuity trust (GRAT) with a trust term of 10 years. The remainder beneficiary of the GRAT is Marie. Which of the following statements regarding this GRAT is(are) CORRECT? Grant will receive a fixed annuity payment from the trust each year during the 10-year trust term. If Grant survives the 10-year trust term, the FMV of the trust assets will not be included in his gross estate. A) I only B) Both I and II C) II only D) Neither I nor II

B) Both I and II Both of these statements are correct. LO 9.2.1

Your client, age 65, has a gross estate valued at $18.7 million. He and his second wife have two teenage children. In addition, your client has two children from his first marriage who are in their mid-30s. His objectives are to: leave an income stream and a portion of his estate to his current wife; leave a portion of his estate in trust for the teenage children from his current marriage; ensure that the children from his first marriage receive a portion of his estate; and reduce his federal estate tax liability. Which one of the following transfers is most appropriate for achieving the client's objectives? A) Family bypass trust equal to the applicable exclusion amount for the teenage children, with the remainder in a marital trust for his current wife B) Combination A-B-C (power of appointment, family bypass, and QTIP) trust arrangement C) Outright gift of two-thirds of the estate to his current wife, with the remainder passing to the teenage children in a nonmarital trust D) Outright transfer of the entire estate into a power of appointment trust

B) Combination A-B-C (power of appointment, family bypass, and QTIP) trust arrangement This is the only option that achieves all of the client's goals. The family bypass trust and the outright gift options leave out his children from his first marriage. There is no guarantee that whomever has the power of appointment in a power of appointment trust will leave anything to the other parties. LO 5.3.2

Tasha and her mother, Marleen, meet with a financial advisor to get a better understanding of Marleen's estate and financial planning. Marleen has recently updated her will but Tasha fears there may be gaps in her mother's planning. If Marleen is in poor health, which of the following estate planning devices should Marleen include in her overall estate planning? Springing durable power of attorney for health care Advance medical directive Special needs trust Qualified domestic trust (QDOT) A) I only B) I and II C) I, III, and IV D) II, III, and IV

B) I and II Because Marleen is in poor health, there may soon be a need for someone else to step in and manage both her health care and her assets, making springing powers of attorney for health care and property desirable. She should also execute an advance medical directive (living will) so her physicians are informed of her wishes regarding end-of-life care. A qualified domestic trust (QDOT) is not appropriate as Marleen does not have a nonresident alien spouse. LO 8.1.1

Which of the following are characteristics of the probate process? I. It provides for the orderly distribution of property that passes by will or intestate succession to the ultimate beneficiary. II. It usually provides a longer time period for the filing of claims than if assets were to pass outside of probate. III. It provides for systematic administration of the decedent's estate. IV. It provides for administration of all of the decedent's gross estate. A) I and II B) I and III C) III and IV D) II and IV

B) I and III Statement II is false because there is a shorter, not longer, time period for the filing of claims than if assets were to pass outside of probate. Statement IV is false because gross estate is used only for estate tax purposes and the probate process has nothing to do with that calculation. LO 4.1.1

Jacob and Wendy have been married for nine years and live in a common law state. They have two children, ages 4 and 2. In the same year they were married, Wendy insisted that they should each have wills. Since they had no children at the time, the wills they executed gave everything to the survivor, or if there was no survivor, to that person's brothers and sisters. Recently, the state in which Jacob and Wendy live has passed a statute allowing wills to be self-proved if they include language specified in the statute. Which of the following correctly state why Jacob and Wendy's current wills do or do not need to be amended? I. Their wills need to be amended to provide for their minor children's personal care if there is no survivor. II. Their wills do not need to be amended to provide for the children because of intestacy statutes. III. Their wills do not need to be amended to be self-proving, as they will be grandfathered since they were already validly executed. IV. Their wills need to be amended to provide for the financial care of their children if there is no survivor. A) I and III B) I and IV C) II, III, and IV D) I, III, and IV

B) I and IV Statements II and III are false because the wills should be amended to account for the new language required for self-proving wills. LO 4.2.2

Which of the following are factors that should be considered in selecting a trustee for a trust that will last for an extended period of time? Appointing of co-trustees Appointing a contingent trustee Providing a method for the appointment of a successor trustee The age of the potential trustee A) I and III B) I, II, III, and IV C) II and IV D) I, II, and IV

B) I, II, III, and IV All of these are factors that should be considered in selecting a trustee for a trust that will last for an extended period of time. LO 8.5.1

Joe made a gift of property to his niece in the amount of $50,000 on the condition that his niece pay any gift tax due. Joe has previously made prior taxable gifts in the amount of the applicable exclusion amount. His niece, however, has never made a taxable gift. Which of the following are CORRECT statements about the tax implications of making this gift? I. The net amount of the gift (value of the gift minus gift taxes paid) minus the maximum annual exclusion amount will be included in Joe's estate tax calculation as an adjusted taxable gift. II. Joe will have taxable income to the extent that the gift tax paid by his niece exceeds Joe's adjusted basis in the property. III. Joe's niece will have a basis in the property equal to Joe's basis in the property as adjusted for gift taxes paid by her. IV. If Joe's niece accepts this gift, she will have to pay a gift tax out of pocket. A) I and III B) I, II, III, and IV C) II and III D) I and IV

B) I, II, III, and IV All of these statements are correct statements regarding the tax implications of making this gift. LO 3.1.2

Which of the following are reasons business succession planning is complex and challenging? Determining the value of the business may be difficult. It may be difficult to find a buyer who has the resources necessary to purchase the business. Family issues may be involved if the business is closely-held or family owned. A new owner may have difficulty adapting to the idiosyncrasies of the owner's business. A) III and IV B) I, II, III, and IV C) I and II D) II and IV

B) I, II, III, and IV Business succession planning is complex and challenging for all of these reasons. LO 3.2.1

Which of the following features apply to both the federal gift tax model and the federal estate tax model? Unlimited marital deduction for qualifying transfers Unlimited charitable deduction for qualifying transfers Use of an applicable credit amount Allowance of an annual exclusion A) I and II B) I, II, and III C) I, II, III, and IV D) III only

B) I, II, and III Statement IV is incorrect because only the gift tax model allows for an annual exclusion. LO 5.1.1

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

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

Which of the following are CORRECT statements concerning a buy-sell (business continuation) agreement funded with life insurance? I. The business is a party to the contract if a stock (entity) redemption plan is used. II. With a cross-purchase plan, the surviving shareholder's new cost basis is equivalent to his or her old cost basis plus the life insurance proceeds used to purchase the deceased shareholder's interest at the price established by the agreement. III. A cross-purchase plan is preferable to a stock (entity) redemption plan when all shareholders are in a higher income tax bracket than the corporation. With a stock (entity) redemption plan, premiums paid by the corporation on life insurance to fund the purchase are taxable income to the shareholders because they will eventually benefit. IV. Under a stock (entity) redemption plan, the value of the deceased's business interest is included in his or her gross estate, while the life insurance proceeds used to purchase his or her business interest are excluded. A) II and IV B) I, II, and V C) II, III, and IV D) I and III

B) I, II, and V When shareholders are in a higher income tax bracket than the corporation, a stock (entity) redemption, not a cross-purchase plan, is preferable because payment of premiums by the corporation provides a greater economic benefit to the shareholders than payment of salaries and/or dividends to them which will be taxed at a higher rate before they are used to pay premiums. Under a stock redemption plan, the premiums are paid by the corporation with after-tax dollars (i.e., premiums are not deductible to the corporation) and therefore are not taxable income to the shareholders. LO 3.3.3

Which of the following statements regarding cross-purchase buy-sell agreements funded with life insurance is CORRECT? I. The death benefits under the life insurance policies are generally subject to income tax. II. The increase of the basis of the surviving owner(s) in the purchased interest(s) will equal the purchase price paid under the cross-purchase buy-sell agreement. III. The number of policies required may become cumbersome as the number of businessowners increases. A) I, II, and III B) II and III C) III only D) I only

B) II and III Statement I is incorrect because the death benefits received under the life insurance policies are generally not subject to income tax. LO 3.3.1

Which of the following are characteristics of the probate process? It facilitates the administration of an estate without publicity. It provides for distribution of property through a judicially supervised process. It results in reduced administrative costs and expenses to the estate. It establishes a method for an orderly filing and paying of creditor claims against the estate. A) I and IV B) II and IV C) I and III D) II and III

B) II and IV Statement I is false because probate is a public, not private, process. Statement III is false because probate almost always results in increased administrative costs and expenses to the estate. LO 4.1.1

Of the following actions taken last year by Joan, which transfers must be included in calculating her total gifts for last year? I. Purchase of a certificate of deposit (CD) that is payable to her daughter on Joan's death II. Writing a check to her mother for $3,600 to assist her in paying for recent surgery III. Placement of her brother's name jointly with her own on the deed to a commercial office building that she purchased IV. Cancellation of an $25,000 debt owed to her by her best friend A) I only B) II, III, and IV C) I and IV D) II and III

B) II, III, and IV Statement I is false because the gift has not been completed. The daughter only has a future interest in the CD. LO 2.2.1

Which of the following characteristics are required for a power of appointment trust ("A" trust) to qualify for the marital deduction? Authorization to the trustee to split trust income between the surviving spouse and other family members Mandatory distribution of all income earned by the trust to the surviving spouse at least annually Control by the surviving spouse over the ultimate disposition of the trust assets Inclusion of the trust corpus in the surviving spouse's gross estate A) I, II, and III B) II, III, and IV C) I and IV D) II and IV

B) II, III, and IV Statement I is false because the spouse must be the sole income recipient in a marital trust, which is what a power of appointment trust ("A" trust) is. LO 5.3.1

Your client is the sole depositor of $30,000 in a bank account. He is considering naming his girlfriend as the other joint tenant on the account. You should inform him that one consequence of creating the joint tenancy with right of survivorship bank account would be that A) The other joint tenant, his girlfriend, may not withdraw the funds from the account without his consent. B) The client's contributions to the account will be excluded from his probate estate. C) The client's contributions to the account will be excluded from his gross estate. D) All funds can be withdrawn by either the client or his girlfriend without gift tax consequences.

B) The client's contributions to the account will be excluded from his probate estate. A joint tenancy with right of survivorship (JTWROS) designation is a will substitute that will allow this asset to pass outside of probate. The girlfriend, once added, can make withdrawals without his consent. The account value will be included in his gross estate and, since the girlfriend did not contribute to the account, any withdrawals she makes are gifts. LO 4.4.2

Jill, Sherry, and Peggy are each one-third owners of a closely held business and they have executed a buy-sell agreement. The agreement requires that Jill, Sherry, and Peggy each purchase and pay the premiums on an insurance policy that insures each co-owner and names the policyowner as the beneficiary. Which of the following correctly states an advantage or disadvantage of this buy-sell agreement? A) The premiums are considered a gift from the owner to the insured. B) The premiums paid are not deductible by the policyowner. C) The replacement cost of the policy must be included in the owner's gross estate. D) The premiums paid are income to the insured under the policy.

B) The premiums paid are not deductible by the policyowner. Premiums paid are not income or gifts and the death benefit is what is included in the owner's gross estate. LO 3.2.2

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

B) The stock proceeds are community property, and Cheryl and Paul are each entitled to one-half of the total emergency fund. Because Cheryl commingled separate property with community property, the stock proceeds lost their separate property status and because community property. LO 1.3.2

Jack created an irrevocable trust in 2014 for the benefit of his son, Bill, and his granddaughter, Karen. This year, the trustee distributes $40,000 in trust income to Karen. For purposes of the generation-skipping transfer tax (GSTT) the $40,000 distribution to Karen is a A) taxable termination. B) taxable distribution. C) qualified transfer. D) direct skip.

B) taxable distribution. This is a taxable distribution because it is a distribution made from a trust to a related beneficiary two or more generations below the transferor. LO 7.1.1

Cisero gifted 2,000 shares of his stock in a closely held corporation to his daughter. These shares constitute half of the total number of shares he owned in the corporation prior to the transfer. The value of Cisero's stock in this corporation prior to the transfer was $400,000. Which one of the following statements is CORRECT regarding the value of the stock transferred to his daughter? A) Cisero would have to compute his gift tax on $400,000 because of the Chapter 14 rules. B) Cisero would be able to choose special use valuation when computing his gift tax for this transfer. C) Cisero would be able to claim a lack of marketability discount when computing his gift tax for this transfer. D) Cisero would be able to claim a blockage discount when computing his gift tax for this transfer.

C) Cisero would be able to claim a lack of marketability discount when computing his gift tax for this transfer. This transfer would not qualify for a blockage discount as it is not publicly traded stock. It would not qualify for special use valuation either, but a reasonable lack of marketability discount is available and would not violate Chapter 14 rules. LO 2.1.2

Two sisters, Donna and Mary, own a home as joint tenants with right of survivorship (JTWROS). They purchased the home 10 years ago for $100,000. Donna contributed $40,000 and Mary contributed $60,000. Today, the home is valued at $180,000. If Donna died today, what amount would be included in her gross estate? A) $80,000 B) $40,000 C) $72,000 D) $90,000

C) $72,000 Because the property is owned as tenants in common, the amount included in the gross estate is based on Jon's share of the fair market value on the date of death. Therefore, the value included in Jon's gross estate is $72,000 (40% of $180,000). LO 5.2.1

When she died, Roberta and her spouse, Patrick, owned a condo as joint tenants with right of survivorship (JTWROS). Their basis in the condo was $500,000, and the fair market value on the date of Roberta's death was $1,200,000. What is Patrick's basis in the home following Roberta's death? A) $250,000 B) $1,200,000 C) $850,000 D) $600,000

C) $850,000 Because Roberta and Patrick were spouses, Patrick receives a stepped-up basis of $600,000 in the 50% of the condo that is included in Roberta's gross estate. He retains his original basis of $250,000 in the 50% that is not included in Roberta's gross estate. Patrick's new basis is $850,000 ($250,000 + $600,000). LO 3.1.2

Jud and Harry are equal partners in a small but thriving business. They recently signed a cross-purchase buy-sell agreement. They wish to use life insurance to fund their respective obligations in this agreement but want to do so with the least possible cost. Which one of the following types of insurance products is the most appropriate for Jud and Harry's situation? A) A joint and last survivor policy B) Split dollar policies C) A "first-to-die" joint lives policy D) Key person policies

C) A "first-to-die" joint lives policy A first-to-die policy will be less expensive than two individual policies and pays out upon the first death essentially ending the policy when it is no longer needed. LO 3.3.3

Janis owns the Pretty Little Celluloid Shop as a sole proprietor. Janis is now 63 years old and is ready to retire. She has a gross estate estimated at $3.9 million, and the value of the business constitutes $2.45 million of that amount. Janis would like to transfer the business to her daughter and remove all future appreciation of it from her estate. In addition, she would like to receive an income stream from the business for the rest of her life. Which one of the following is the most appropriate form of business transfer for Janis to use to best achieve her objectives? A) An installment sale of the business to her daughter B) A family partnership of the business with her daughter as co-partner C) A pure life private annuity sale of the business to her daughter D) A recapitalization of the business with her daughter as co-shareholder

C) A pure life private annuity sale of the business to her daughter An installment sale will only provide income for a period of time. The remaining two options don't generate income, but simply bring her daughter in as co-owner. LO 3.2.3

Andy, age 68, has a gross estate currently valued at $2,500,000 that consists primarily of highly appreciated growth securities. Within the last six months, Andy transferred $500,000 worth of these securities to his wife, Harriet. His cost in these securities was $200,000. Harriet recently died. The fair market value of the transferred securities at the time of her death was $500,000. The securities passed to Andy under the terms of Harriet's will. Which one of the following is an income tax implication of the transfer of stock? A) Andy's basis in the stock is $500,000. B) Andy must recognize $300,000 in capital gain on the stock as of Harriet's death. C) Andy's basis in the stock is $200,000. D) If Andy sells the stock he received from Harriet immediately after her death, his gain, if any, will be deemed to be short-term capital gain.

C) Andy's basis in the stock is $200,000. The basis Harriet received from the lifetime gift from Andy would be the same as Andy's. Because she did not live for more than one year, the property does not qualify as a reverse gift and get a stepped-up basis. The basis will remain $200,000. LO 7.2.1

The preliminary computation of assets in the Hugh Campbell Estate indicates the following: Farm land $6,000,000 Farm machinery 3,000,000 Residue of Campbell estate $11,000,000 Total gross estate $20,000,000 Administrative expenses (300,000) Debts of decedent (mortgage on farm land only)> (900,000) Other Deductions (1,200,000) Adjusted gross estate $18,800,000 Taxable estate $18,800,000 Hugh, a U.S. citizen, purchased the farm land six years before his death and personally farmed the land throughout this same period. Hugh's will leaves the land and farm machinery to his son, Hobart, who hopes to continue farming the land. Why is the Campbell estate NOT entitled to use special use valuation in the calculation of estate tax due? A) Because the farm property has not been in a qualified use for the required number of years B) Because the decedent's son is not a qualified heir for purposes of special use valuation C) Because the combined value of the farm land and farm machinery, less secured debts, does not exceed 50% of the gross estate as adjusted for secured debts D) Because the land was not used by any of Hugh's family members prior to his death

C) Because the combined value of the farm land and farm machinery, less secured debts, does not exceed 50% of the gross estate as adjusted for secured debts In order to qualify for the special use valuation, the value of the farm land and farm machinery, less secured debts, must exceed 50% of the gross estate as adjusted for secured debts. LO 6.3.2

Jane has a gross estate estimated at $18 million. Approximately 75% of her estate is attributable to the value of personal property and collectible items. Jane is married but has no children. Her husband does not have a large estate because he spends money freely and foolishly. Because she is much older than her husband, Jane would like for him to benefit from her wealth after her death without giving him control over the principal either while he is alive or at his death. Jane wants as little of her estate assets as possible to go toward payment of estate taxes on either of their estates. She currently has no will but has come to you for advice regarding provisions she should put in a will. Which provision, if placed in her will, would be best to increase the liquidity of her estate and accomplish her other goals? A) Establish an testamentary trust naming her husband as the sole beneficiary and trustee B) Establish a power of appointment trust naming her husband as the income beneficiary and a qualified charity as the remainder beneficiary C) Establish a charitable remainder trust naming her husband as the income beneficiary and a qualified charity as the remainder beneficiary D) Es

C) Establish a charitable remainder trust naming her husband as the income beneficiary and a qualified charity as the remainder beneficiary A QTIP wouldn't change the liquidity situation. A power of appointment trust gives the husband access to trust principal she does not want him to have while she is alive and the testamentary trust allows the same access upon her death. LO 6.2.3

Which of the following are CORRECT statements regarding the characteristics and purpose of a "no contest" clause? I. This type of clause is used when a close family member is disinherited in a will. II. This type of clause imposes a penalty for contesting the validity of provisions in a will. III. This type of clause prohibits contesting the validity of provisions in a will. IV. This type of clause prevents a person from contesting a will if he or she has feloniously caused the death of the testator. A) I, III, and IV B) II and IV C) I and II D) III and IV

C) I and II Statement III is false because a no contest clause is designed to discourage a will contest, but cannot prevent it. A person who has feloniously caused the death of the testator is prohibited from collecting from the will by statute, which has nothing to do with a no contest clause. LO 4.2.1

If included as part of your married client's gross estate, which of the following property interests qualify for the marital deduction? A life estate interest in, and a general power of appointment over, the family residence (titled in his name only) to his wife A trust with income distributable at least annually to his wife and his children, with the remainder to the children at his wife's death A life income interest in a testamentary charitable remainder trust to his wife as the only noncharitable beneficiary A stock portfolio owned in joint tenancy with right of survivorship by the client and his brother A) I, III, and IV B) I, II, and IV C) I and III D) II and III

C) I and III Statement II is false because income is also paid to the children and to qualify for the marital deduction, income must only be payable to the spouse. Statement IV is false because JTWROS property owned with his brother will not qualify for the marital deduction. The spouse is completely left out of that property, so no deduction is available. LO 5.3.2

Which of the following is a skip beneficiary for purposes of the generation-skipping transfer tax (GSTT)? A related person who is at least two generations below that of the transferor. A trust in which the beneficiaries are skip persons and from which no non-skip person will benefit. An unrelated person who is younger than the transferor by 37½ years or more. A) I and III B) III only C) I, II, and III D) I and II

C) I, II, and III These are all skip persons for purposes of the GSTT. LO 7.1.2

Case Study Question Michael and Marie are currently saving for Max's and Sam's high school educations by investing in CDs that are in the children's names. They are concerned that Max and Sam might cash in the CDs and use the funds for noneducational purposes once they reach the age of majority, which is age 18 in the state where the Andersons live. Which of the following planning alternatives might alleviate the Andersons' concerns? Establishing custodial accounts (i.e., UGMA or UTMA) for the children's benefit Establishing trusts for the children's benefit A) Both I and II B) Neither I nor II C) II only D) I only

C) II only Statement I is incorrect because with a custodial account, the account legally belongs to the child once the account is established. The children could still access the accounts when they turn 18. Statement II is correct. Establishing trusts would allow the Andersons to specify a date when the income and principal will be distributed to the children. LO 9.3.1

Jorge is in the highest current marginal income tax bracket. He owns several thousand shares of rapidly appreciating growth stock that he wants to transfer to his three minor children. Income will not be used for legal support obligations. He wants to have some control over the distribution of income from this stock while affording himself the gift tax annual exclusion for the total value of this and subsequent transfers to the maximum amount allowed. He also wants this stock to be available to his children when they reach age 21. Jorge does not want income from the stock to be taxed to him. Which one of the following is the most appropriate lifetime transfer technique for Jorge to use to best achieve his objectives? A) Net gifts to each child B) Outright gifts of equal amounts to the children C) Irrevocable trusts structured under the provisions of Internal Revenue Code Section 2503(c) D) Irrevocable trusts structured under the provisions of Internal Revenue Code Section 2503(b)

C) Irrevocable trusts structured under the provisions of Internal Revenue Code Section 2503(c) A 2503(c) trust accomplishes all of Jorge's goals: maintaining control until the children reach 21, getting the annual gift tax exclusion, and giving the corpus to the children at age 21. Outright gifts cannot do all of that. A 2503(b) trust does not require the corpus to be distributed at age 21 and net gifts leave gift tax payable by the children which is definitely not one of Jorge's goals. LO 3.1.4

Joaquim is contemplating the sale of his solely owned business to his son in the form of a private annuity transaction. Which one of the following statements is CORRECT regarding the disadvantages of this type of transaction? A) The son's obligation to make the annuity payments will cease when Joaquim reaches his actuarial life expectancy. B) This transaction would be subject to the IRC Chapter 14 rules. C) The transaction will not allow Joaquim to realize the full value of the business if he dies prior to his actuarial life expectancy. D) The son must pay a premium for the right to cease making payments whenever his father dies.

C) The transaction will not allow Joaquim to realize the full value of the business if he dies prior to his actuarial life expectancy. Annuities, even private ones, are based on life expectancy and if he does not reach that age, the full value will not be paid out. Additionally, if Joaquim lives beyond life expectancy, he will continue to be paid. Private annuities are based on FMV so they would not be subject to Chapter 14 rules. The payment of a premium for the right to cease making payments whenever his father dies applies to self-cancelling installment notes (SCINs), not private annuities. LO 3.2.2

Ruth established a Section 2503(c) minor's trust for her 5-year-old granddaughter, Frances, and funded it with $20,000 of income-producing real estate. Ruth named herself as trustee. Which one of the following statements is CORRECT regarding this transfer? A) This type of trust cannot be funded with real estate. B) This trust will allow Ruth to determine when Frances will be entitled to receive the corpus. C) This trust will allow Ruth to determine when Frances will be entitled to receive income from the trust. D) This transfer will assure Ruth that the trust property will not be included in her gross estate.

C) This trust will allow Ruth to determine when Frances will be entitled to receive income from the trust. This trust will allow Ruth to determine when Frances will be entitled to receive income from the trust. The corpus of 2503(c) trusts must be distributed by age 21. As long as Ruth has control of trust distributions, it remains in her estate. A 2503(c) trust can be funded with real estate. Income-producing real estate would be a good way to generate the income desired by such a trust. LO 3.1.3

Which of the following are CORRECT statements about the nontax characteristics of a pooled income fund? I. It involves a trust created by the grantor solely for the benefit of that grantor and the charity. II. It must pay a fixed dollar amount to the noncharitable beneficiary annually. III. The principal is distributed to the charitable beneficiary at the end of the noncharitable beneficiary's life. IV. The income that can be paid to the noncharitable beneficiary is limited to 10% of the original principal unless the beneficiary is older than a specified age. A) I and III B) I and II C) III and IV D) III only

D) III only Statement I is false because a pooled income fund is not a grantor trust. Statement II is false because income payments are based on returns of the fund in proportion to the donor's contribution relative to the total value of the fund. Statement IV is false because there is no limitation on the income percentage. A pooled income fund is like owning a mutual fund as joints tenants with right of survivorship (JTWROS) with a charity along with many other co-owners who all get a share of the income. LO 5.3.1

Case Study Question Assume that in 2023, Grant pays $30,000 directly to State University in payment of Alex's tuition. What is the amount of the taxable gift, assuming Grant makes no other gifts to Alex for the remainder of the year? A) $15,000 B) $30,000 C) $13,000 D) $0

D) $0 The payment of tuition directly to a qualified educational institution is a qualified transfer, and is not considered a gift for gift tax purposes. LO 9.1.2

In 2018, Roland established an inter vivos irrevocable trust naming his wife as the sole income beneficiary of the trust. All income must be distributed annually. At his wife's death, the balance of the trust will be in her gross estate. The trust was funded with $3 million in cash and assets. Which one of the following most closely approximates Roland's taxable gift for this transfer? A) $3,000,000 B) $1,985,000 C) $2,985,000 D) $0

D) $0 The unlimited marital deduction eliminates any gift tax liability on such a transfer. LO 2.2.2

Which one of the following statements regarding Henry, who recently married for the first time, is CORRECT? A) In a community property state, Henry's spouse is deemed to have a vested 50% interest in all of the property Henry owned at the time of the marriage. B) In a community property state, any property Henry owns at death will go to his spouse by right of survivorship. C) In a community property state, Henry's earnings from his job both before and after the date of his marriage will be considered community property. D) In a community property state, Henry's earnings from his job subsequent to the date of his marriage will be considered community property.

D) In a community property state, Henry's earnings from his job subsequent to the date of his marriage will be considered community property. Income earned after marriage is considered community property. LO 1.3.3

Greg died in 2022 and was survived by his wife and five children. At the time of his death, he owned these property interests: Solely owned property valued at $16,000,000 Property owned in joint tenancy with right of survivorship (JTWROS) with his spouse, with his share valued at $1,000,000 Greg's will made no charitable bequests and provided that his entire estate go equally to his surviving children due to his wife having a large estate of her own. Other pertinent facts are: Greg made $1,000,000 in post-1976 taxable gifts. Greg's estate had $350,000 in allowable debts. Greg's estate had funeral and administrative expenses of $150,000. Greg's estate paid $60,000 in state death taxes. Which one of these amounts most closely approximates Greg's net federal estate tax due? Use the Unified Federal Estate and Gift Tax Rates table. A) $6,521,800 B) $5,113,800 C) $1,008,000 D) $1,408,000

D) $1,408,000 Gross estate is $17,000,000. Subtract $560,000 in debts, expenses, and taxes to get $16,440,000. The marital deduction can be used for the JTWROS property, so subtract $1,000,000. Then add $1,000,000 for adjusted taxable gifts, leaving the tax base at $16,440,000. Tax on this number is $6,521,800 [($16,440,000 less $1,000,000 = $15,440,000 × 40%) + $345,800]. Subtracting the applicable credit amount of $5,113,800 from $6,521,800 equals $1,408,000. LO 5.2.2

Your client, a widow, has made these lifetime gifts to her son in an effort to reduce the size of her gross estate: YearGiftTaxable Gift 2012 $323,000 $310,000 2016 $254,000 $240,000 2023 $467,000 $450,000 If she used her applicable credit to offset gift tax liability on the gifts, what amount of applicable credit remains available to your client for gifts in 2023? A) $345,800 B) $5,113,800 C) $0 D) $4,768,000

D) $4,768,000 The total taxable gifts come to $1,000,000 and tax on the first $1,000,000 is $345,800. Subtract that from the 2023 applicable credit of $5,113,800 and the result is $4,768,000. LO 2.3.1

Jon and Bob own a house as tenants in common. Jon owns 30% and Bob owns 70%. They purchased the house 10 years ago for $125,000 and today the house is valued at $200,000. If Jon dies today, what amount is included in Jon's gross estate? A) $100,000 B) $37,500 C) $140,000 D) $60,000

D) $60,000 Because the property is owned as tenants in common, the amount included in the gross estate is based on Jon's share of the fair market value on the date of death. Therefore, the value included in Jon's gross estate is $60,000 (30% of $200,000). LO 5.2.1

Which of the following statements regarding a springing power of attorney is CORRECT? With a springing power of attorney, the attorney-in-fact's authority to act is delayed until the principal actually becomes incapacitated or incompetent. A springing power of attorney can be used in planning for the principal's possible incapacity. A) II only B) Neither I nor II C) I only D) Both I and II

D) Both I and II Both of these statements correctly define a springing power of attorney. LO 8.1.1

Which of the following are characteristics of a gift-leaseback? The property involved in the transaction usually is a business-related asset. The property involved in the transaction usually is gifted to a donee in a lower marginal income tax bracket. The donor retains security in the gifted property. The lease payments made by the donor to the donee are considered additional gifts. A) II and III B) I and IV C) III and IV D) I and II

D) I and II Statement II is false because in a gift-leaseback the donor relinquishes security and control of the gifted property. Statement IV is false because lease payments are income to the donee, not additional gifts. LO 2.3.1

Which of the following correctly identify a premortem technique that can be used to reduce the cash needs of an estate? Retitling property as joint tenants with right of survivorship (JTWROS). Executing a will that includes a self-proving clause and meets all legal formalities required by state law. Investing in real estate, such as rental properties, and retaining closely held business interests. Purchasing real property in multiple states for investment purposes. A) I, II, III, and IV B) II and IV C) I, III, and IV D) I and II

D) I and II Statement III is false because real estate and closely held businesses can only help increase cash available, but won't reduce cash needs. These will increase cash needs if liquid assets are used to acquire these assets. Statement IV is false because this will require ancillary probate which will increase cash needs, not decrease cash needs. LO 6.2.1

Which of the following statements regarding the group term life insurance provided by an employer are CORRECT? The employer can deduct the premiums paid as a necessary and reasonable business expense. No part of the premiums that the employer pays will be considered income to any of the employees. The death benefit of the policy will be included in the employee's gross estate. The beneficiary of the death benefit will have taxable income to the extent that the death benefit exceeds the value of premiums paid by the employer. A) I and IV B) II and III C) III and IV D) I and III

D) I and III Statement II is false because group life premiums for amounts over $50,000 are considered income to the employee. Statement IV is false because death benefits would be received income-tax-free. LO 3.3.2

Case Study Question If Marie dies today, which of the following statements is(are) CORRECT? Marie has died intestate. The ABC stock will pass through probate. State intestacy law will determine who receives the ABC stock after Marie's death. A) I only B) I and II C) II and III D) I, II and III

D) I, II and III All of these statements are correct. Marie has died intestate because she does not have a valid will. The ABC stock is titled in Marie's name alone, so it will pass through probate when she dies. State intestacy law determines who receives the ABC stock because Marie has died without a valid will. LO 9.1.2

Which of the following estate planning techniques can be used by unmarried cohabitants to reduce estate tax due at the death of the first cohabitant to die? I. The gift tax annual exclusion II. The estate tax charitable deduction III. A qualified domestic trust (QDOT) IV. A qualified personal residence trust (QPRT) A) I and III B) II, III, and IV C) II and IV D) I, II, and IV

D) I, II, and IV Statement III is false because a QDOT is used only when a U.S. citizen spouse wishes to leave assets to a nonresident alien spouse. LO 8.4.1

Assuming that the special valuation rules under IRC Chapter 14 apply to each of the following situations, which one of the following statements is CORRECT? A) In a transfer in trust, the grantor of the trust must pay gift tax on the entire value of the trust assets if she retains a qualified interest. B) In a transfer in trust, the retention of an annuity or unitrust interest by the grantor is deemed to be a nonqualified interest. C) The Chapter 14 special valuation rules negate the impact of IRC Code sections 2035-2038, otherwise known as the "three-year rule" and the "transfer sections." D) In a transfer of corporate or partnership interests, the retention of an interest that will pay a fixed cumulative dividend by the donor will constitute a qualified interest.

D) In a transfer of corporate or partnership interests, the retention of an interest that will pay a fixed cumulative dividend by the donor will constitute a qualified interest. Chapter 14 rules do not negate other regulations. A retained interest will reduce the value of the gift because the donee is not receiving the entire gift. The retention of an annuity or unitrust interest by the grantor is deemed to be a qualified interest. LO 2.1.3

All of the following items of property would be considered community property in a community property state except A) A business in which both spouses participate and which is formed during the marriage. B) Salary earned by one spouse during marriage. C) Stock purchased during marriage by one spouse using her self-employment earnings. D) Real estate received by one spouse during marriage as an inheritance from her mother.

D) Real estate received by one spouse during marriage as an inheritance from her mother. In a community property state, property acquired by one of the spouses by gift or inheritance during their marriage is considered to be separate property. Items owned prior to the marriage can also be separate property. LO 1.3.3

Robert is the sole income beneficiary of a charitable remainder unitrust (CRUT) established by his recently deceased wife in her will. A qualified public charity will receive the trust remainder at Robert's death. Which one of the following is a CORRECT statement regarding the effect of this trust on the potential liquidity of Robert's estate at his death? A) The trust does not represent a potential cash requirement, but does represent a potential source of liquidity because of the charitable deduction. B) The trust represents a potential cash requirement since the estate of Robert's spouse did not pay estate tax at the time of funding. C) The trust represents both a potential cash requirement and a potential source of liquidity for Robert's estate. D) The trust represents neither a potential cash requirement nor a potential source of liquidity for Robert's estate.

D) The trust represents neither a potential cash requirement nor a potential source of liquidity for Robert's estate. This is because upon his death the asset belongs to the charity creating neither a liability for the estate nor a potential source of income. It has simply been removed from the estate. LO 6.1.1

Your client died recently with a gross estate valued at $425,000. Her estate tax bracket is 34%. Her husband has a gross estate of $155,000. Her will (1) placed $350,000 in a trust that gave her husband and her mother life income interests payable annually, with the trust remainder going to her son from a previous marriage when both have died; and (2) left the residue to her daughter. Her husband was named executor. Most of her estate is in certificates of deposit and securities that recently have shown only minimal growth. During the last six months of her life, she had uninsured medical expenses of $30,000. She and her husband were in the 24% marginal income tax bracket at the time of her death. If her husband, as executor, came to you for advice, you should inform him that the most appropriate postmortem election for his wife's estate is A) the making of a qualified terminable interest property (QTIP) election by her executor. B) the waiver of executor fees charged to her estate. C) the use of the alternate valuation date (AVD) for her estate assets. D) the claiming of medical expenses on her final income tax return.

D) the claiming of medical expenses on her final income tax return. The estate is way too small to need a QTIP election. Waiving executor fees will help, but not as much as claiming the medical expenses on her final income tax return. With clearly no chance of owing estate taxes, the AVD is not an option. LO 6.3.3

Which of the following are CORRECT statements about the filing requirements and/or the responsibility for payment as they relate to federal transfer taxes? I. A donee can be held responsible for paying the gift tax on a transfer that she has received if the IRS cannot collect from the donor. II. A federal estate tax return need not be filed unless an estate owes estate taxes in excess of the unified credit. III. The beneficiary is responsible for paying the generation-skipping transfer tax on a distribution from a trust and must file a tax form. IV. A federal gift tax return need not be filed for a gift that is split with the donor's spouse.

I. A donee can be held responsible for paying the gift tax on a transfer that she has received if the IRS cannot collect from the donor. III. The beneficiary is responsible for paying the generation-skipping transfer tax on a distribution from a trust and must file a tax form. Statement II is false as an estate tax return is always required. Statement IV is false because the exact opposite is true: A gift tax return, while not always required, is required when gift splitting is used. LO 2.1.1

Which of the following are factors that a financial planner should monitor for every client? I. Changes in the client's objectives II. Changes in the client's marital status III. Changes in property laws IV. Changes in the amount of lifetime gifts made by the client

I. Changes in the client's objectives II. Changes in the client's marital status III. Changes in property laws IV. Changes in the amount of lifetime gifts made by the client All of these are factors that a financial planner should monitor for every client. LO 1.1.1

Your client has an estate valued at $3 million. Two months ago, his wife died. He and his deceased wife did not have any children together, but she had two children from a prior marriage. His will, drafted in 2007, leaves everything to his wife. Nocontingent beneficiary is named in the will, and it does not contain a residuary clause. Included in the client's estate are real estate holdings in three other states. He wants to retain lifetime ownership of these properties because of the income they provide him. He would like the real estate holdings to pass to his wife's children in equal shares upon his death. He would like the remainder of his estate to go to his brother. Which of the following are serious estate planning pitfalls that can be avoided if your client amends his will to carry out his objectives? I. Having the estate pass under the laws of intestacy II. Having the estate assets distributed through probate III. Having the estate pay any estate tax IV. Having part of the estate pass to unintended beneficiaries

I. Having the estate pass under the laws of intestacy IV. Having part of the estate pass to unintended beneficiaries Statement II is false because amending a will has no effect on whether probate can be avoided. Wills are probated. Statement III is false because amending a will has no effect on the estate tax calculation. LO 1.2.2

Lauren and Roger are spouses. Lauren has assets with a market value of $50 million titled in her name alone. Roger has assets valued at less than $1 million. Lauren drafts a will making an outright bequest of all of her assets to Roger. Which of the following are potential disadvantages of Lauren's approach? I. Lauren will not use her estate tax applicable exclusion amount when she dies. II. Roger may become legally incapacitated and not be able to manage the property. III. When Roger dies, the property must be included in Roger's gross estate to the extent Roger has not spent it or consumed it during his lifetime. IV. The DSUE amount may not be available in some circumstances.

I. Lauren will not use her estate tax applicable exclusion amount when she dies. II. Roger may become legally incapacitated and not be able to manage the property. III. When Roger dies, the property must be included in Roger's gross estate to the extent Roger has not spent it or consumed it during his lifetime. IV. The DSUE amount may not be available in some circumstances. All of these are potential disadvantages of leaving all property outright to the surviving spouse. LO 1.3.2

Rolando owned a parcel of real estate as an equal tenant in common (TIC) with his wife, Liz, and his brother, Sam. Rolando and Liz each contributed $50,000 to the original purchase price, and Sam contributed $20,000. Rolando recently died and is survived by Liz and Sam. Which of the following statements are CORRECT concerning a tax implication of this form of property ownership? I. Rolando's estate must include one-third of the property's fair market value (FMV) as of the date of death. II. When they took title as TIC, both Rolando and Liz made a gift to Sam. III. Rolando's estate must include 41.66% of the property's FMV at the date of death, unless his personal representative can prove contribution by Sam. IV. After Rolando's death, Liz will be entitled to receive 83.33% of the income from the property because she will receive Rolando's interest by right of survivorship.

I. Rolando's estate must include one-third of the property's fair market value (FMV) as of the date of death. II. When they took title as TIC, both Rolando and Liz made a gift to Sam. Rolando's estate must include one third of the date of death FMV of the property because that is his percentage share of ownership. Contribution by the parties would be relevant only if the property were owned in joint tenancy. Sam obtained a one-third ownership interest, but paid less than one-third of the purchase price; thus, Rolando and Liz each have made a gift to Sam. Liz will not automatically receive Rolando's interest, as tenancy in common has no right of survivorship feature. LO 1.3.2

Which of these statements best describes a CFP® certificant's role in defining a client's financial goals, needs, and priorities? I. The role of the planner is to facilitate the goal-setting process. II. The role of the planner is to assist clients in recognizing the implications of unrealistic goals and objectives. III. The role of the planner is to make sure a client's goals and objectives are consistent with the client's values and attitudes. IV. The role of the planner in this process will involve exploring a client's expectations and time horizons.

I. The role of the planner is to facilitate the goal-setting process. II. The role of the planner is to assist clients in recognizing the implications of unrealistic goals and objectives. III. The role of the planner is to make sure a client's goals and objectives are consistent with the client's values and attitudes. IV. The role of the planner in this process will involve exploring a client's expectations and time horizons. All of these statements are correct. LO 1.2.1

Rollie plans on purchasing some U.S. savings bonds with his son, Steven. He has been told that he can title the bonds either as "Rollie or Steven" or "Rollie payable on death to Steven." Which of the following statements are CORRECT regarding advantages and disadvantages of these two methods of titling? I. "Rollie or Steven" would not avoid probate of the bonds. II. "Rollie payable on death to Steven" would give Rollie sole control of the bonds during his life. III. "Rollie payable on death to Steven" would allow Rollie to remove Steven as beneficiary. IV. "Rollie or Steven" would allow the survivor to become the sole owner of the bonds without the bonds going through probate.

II. "Rollie payable on death to Steven" would give Rollie sole control of the bonds during his life. III. "Rollie payable on death to Steven" would allow Rollie to remove Steven as beneficiary. IV. "Rollie or Steven" would allow the survivor to become the sole owner of the bonds without the bonds going through probate. Rollie would avoid probate using a joint tenancy with right of survivorship (JTWROS) or payable on death (P.O.D.) designation because these are will substitutes. LO 1.3.1

Which of the following statements correctly identify estate planning activities that can be performed by a financial planner who is not also a licensed attorney? I. Advise a client as to who would receive property under the state intestacy statutes II. Estimate a client's potential federal gift tax liability III. Advise a client that he or she needs a new will IV. Draft a living will for a client to execute

II. Estimate a client's potential federal gift tax liability III. Advise a client that he or she needs a new will Statements I and IV are actions only a licensed attorney can perform. Planners can certainly estimate gift tax liability and determine if a current will meets client estate planning goals. LO 1.3.1

Which of the following are important characteristics of the gift tax marital deduction? I. It enables the donor to avoid gift tax liability by transferring the entire liability for gift taxes to the donee spouse. II. It allows the donor to avoid gift tax liability on up to one-half of the value of the gifted property that is received by the donee spouse. III. It allows the donor to avoid gift tax liability on the amount of the gift in excess of the annual exclusion amount. IV. It allows the donor to avoid gift tax liability on a gift to a donee spouse.

III. It allows the donor to avoid gift tax liability on the amount of the gift in excess of the annual exclusion amount. IV. It allows the donor to avoid gift tax liability on a gift to a donee spouse. Statement I is false because there would be no gift tax liability for the spouse. The marital deduction would transfer estate tax liability, but not gift tax liability. Statement II is false because it allows the donor to avoid gift tax on 100% of the value. LO 2.1.1