FIN 538 Exam 1

Six Basics Steps of Estate Planning Process

1. Establish client/planner relationship 2. Gather client information and establish objectives 3. Determine the client's financial status 4. Develop a comprehensive plan 5. Implement the plan 6. Review and update plan when necessary

Will

A legal document providing the testator the opportunity to control the distribution of his property at death; a will avoids the state's intestacy law distribution scheme May be revoked or amended at any time by testator as long as testator has legal capacity Effective only upon death of testator

What are the five parts of the estate planning team?

Attorney (JD), Certified Public Accountant (CPA), Chartered Life Underwriter (CLU), Chartered Financial Consultant (ChFC), Certified Financial Planner (CFP - Team Captain)

Common Goals and Objectives of Estate Planning

Fulfill client's transfer wishes (effective transfer) Minimize the transfer taxes (efficient) including: Income Tax Issues (income and capital gains) Gift Tax GST Tax Estate Tax State Inheritance Tax Minimize transfer costs (efficient) - Pre and Post Death: Lawyers' Fees Accountants' Fees Costs of Documents Court Fees Transfer Taxes Maximize net assets to heirs Plan for incapacity and healthcare

What estate planning objectives are usually the most important to the client: legal, tax or personal?

Personal objectives

Which estate planning objective is usually the most difficult to understand for the planner?

Personal objectives

Estate Planning

The process of accumulation, management, conservation, and transfer of wealth considering legal, tax, and personal objectives.

Unauthorized Practice of Law

When nonlawyers do things that only lawyers are allowed to do (such as drafting legal documents). In most states this is a crime.

Cate owns the following property: • A personal residence titled as tenants by entirety with her husband valued at $400,000. • A $500,000 life insurance policy on her own life. The named beneficiary is Cate's brother James, who died 6 months ago leaving two children, Michael and Carol. • A car valued at $20,000 titled JTWROS with Cate's mother. • An IRA valued at $200,000 with no named beneficiary. What is the current value of Cate's probate estate? a) $700,000. b) $900,000. c) $920,000. d) $1,320,000.

a) $700,000

Dennis died recently leaving all his assets in a trust for his wife, Sandy. Dennis was concerned that Sandy would not be able to manage her money adequately to maintain her standard of living. Therefore, Dennis placed the assets into a spendthrift trust and gave Sandy the right to receive a certain amount of income each year. Dennis appointed his good friend Richard to be the trustee of the trust. How is Richard's ownership classified? a) Richard holds a life estate over the property. b) Richard holds the legal title to the property. c) Richard holds the equitable title to the property. d) Richard does not hold an interest in the property.

b) Richard holds the legal title to the property.

Which of the following is TRUE? a) At the end of the trust term, the ownership of a residence held by a QPRT transfers back to the Grantor. b) The look back period for Medicaid qualification is 60 months. c) By selling an asset in exchange for a private annuity, the annuitant/seller receives a constant stream of income for a specified term, and removes the asset transferred and any of its subsequent appreciation from her gross estate for estate tax purposes. d) One of the disadvantages of an FLP for the general partner is that restrictions can be placed on the transferability of the limited partnership interests owned by junior family members.

b) The look back period for Medicaid qualification is 60 months.

Jan sells her yacht to her son for $750,000. The fair market value of the yacht at the time of the sale is $1.2 million. The amount of this bargain sale transaction that may be subject to gift tax is: a) $1,200,000 b) $300,000 c) $450,000 d) $750,000

c) $450,000

Hope Solo died. She is survived by two children and three grandchildren. Her son, Fred, is living and has no children. Her daughter, Debbie, is living and has one child. Her son, George, is dead and has two living children. If Hope's estate is distributed to her descendants, per stirpes, it is distributed as follows: a) All of the living children and grandchildren each receive 1/5. b) 1/4 Fred, 1/4 Debbie, 1/4 Debbie's child, 1/3 each to George's children. c) 1/3 Fred, 1/3 Debbie, 1/6 each to George's children. d) 1/4 Fred, 1/4Debbie, 1/4 each to George's children.

c) 1/3 Fred, 1/3 Debbie, 1/6 each to George's children.

Which of the following statements regarding SCINs is correct? a) If the seller outlives the SCIN term, the buyer continues to pay the SCIN payment until the seller's death. 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.

c) A SCIN can give the seller a collateral interest in the property sold.

Harold, a non attorney, prepares his own will. Harold handwrites all of the provisions of the will and signs and dates it but fails to have it witnessed by anyone. What type of will does Harold have, and is it enforceable in Missouri? a) A holographic will that is enforceable in Missouri. b) A nuncupative will that is enforceable in Missouri. c) A holographic will that is not enforceable in Missouri. d) A nuncupative will that is not enforceable in Missouri.

c) A holographic will that is not enforceable in Missouri.

Teresa and her brother Michael decide to purchase a condo together. They both want to use the condo for family vacations. The price of the condo is $620,000. Michael expects to use the condo 60% of the time and Teresa 40% of the time. Michael contributed $372,000 and Teresa contributed the balance. Their ownership percentage equals their contribution percentage. Which type of property titling must the condo be to reflect their ownership interest? a)Community Property. b) JTWROS. c) Tenancy in Common. d) Tenancy by the Entirety.

c) Tenancy in Common.

Kevin transferred $4,000,000 to a GRAT naming his four children as the remainder beneficiaries. Kevin retained an annuity from the GRAT valued at $1,500,000. If this is his only transfer during the year, what is Kevin's total taxable gifts for the year? a) $1,444,000. b) $1,500,000. c) $2,440,000. d) $2,500,000

d) $2,500,000

Cody and Chelsi, who are married to each other, own their home together titled as community property. They purchased the home three years ago for $200,000. After improvements and a surge in the market, the home is now worth $400,000. If Cody died today and left his share of the home to his daughter Alyssa, what is Alyssa's federal income tax basis in the home? a) $50,000. b) $100,000. c) $150,000. d) $200,000.

d) $200,000.

Sarah owns a business worth $5 million. Her adjusted basis is $450,000. She is 60 years old and wants to sell the business to her son, Todd, but also wants to reduce her gross estate. She sells him the business in exchange for a private annuity. Sarah's life expectancy is 27 years and the §7520 rate is 2.6%. Sarah dies after Todd makes his 5th payment. Todd sells the business for $7.5 million. What is Todd's gain on the sale of the business? a) $1,685,190 b) $2,500,000 c) $4,550,000 d) $6,199,845

d) $6,199,845

Making arrangements to deal with the possibility of physical or mental incapacity is an important area of estate planning. Which of the following arrangements may be used to deal with such unexpected incapacity? 1. A springing durable power of attorney. 2. A revocable living trust. 3. A health care directive. 4. A living will. a) 1 only. b) 2 and 4. c) 1, 2, and 4. d) 1, 2, 3, and 4.

d) 1, 2, 3, and 4.

Which of the following activities would be considered the unauthorized practice of law for a financial planner who is not a licensed attorney? a) Helping a client to identify his financial planning goals. b) Explaining a law to a client. c) Preparing financial statements for a prospective client. d) Preparing a will for a client.

d) Preparing a will for a client.

A power of attorney that gives the agent the authority to do anything the principal can do, remains in effect if the principal becomes incapacitated and only becomes effective if the principal is not in the country is described as: a) special, durable, springing. b) general, not durable, springing. c) special, durable, not springing. d) general, durable, springing.

d) general, durable, springing.

Joe appointed his son, Mike, age 30, as his power of attorney for all property. Joe recently passed away leaving a sizable estate which includes a number of investment accounts, real estate and retirement plans. His will names his wife, Lisa, age 65, as his executrix and Mike as the successor executor. The will calls for an outright distribution to Lisa. Lisa is unsure if she wants the responsibility of administering the estate. Which of the following options are available to Lisa? a) Have Mike manage Joe's property under the power of attorney. b) Establish a testamentary spousal trust to hold the assets for her. c) Hire professional advisors to help her to administer the estate. d) Decline to serve as executrix and ask the probate court to appoint Mike as the executor. e) Both C and D.

e) Both C and D.