FINA 4325 Estate Module 6

Hong's gross estate is $15.5 million. His estate taxes are $1.4 million, and his estate administration expenses are $500,000. Assuming his estate owns closely held stock and qualifies for a Section 303 stock redemption, what is the maximum dollar amount of stock that may be redeemed under Section 303? A) $1,900,000 B) $500,000 C) $1,400,000 D) $1,000,000

A) $1,900,000 Under Section 303, only an amount of stock equal to the total of the decedent's estate taxes plus administration expenses is eligible for the favorable tax treatment. In Hong's case, the maximum amount of stock that may be redeemed under Section 303 is $1,900,000 ($1,400,000 + $500,000).

Kris dies, leaving an adjusted gross estate of $20 million, which includes several hundred shares of closely held stock. For Kris's estate to qualify for a Section 303 stock redemption, the value of the closely held stock must exceed what amount? A) $7 million B) $10 million C) $5 million D) $2 million

A) $7 million To qualify for a stock redemption under Section 303, the value of the closely held stock must exceed 35% of the decedent's adjusted gross estate.

Which of the following is an estate liquidity need that cannot be completely eliminated by proper premortem planning? A) Administrative expenses B) Death taxes C) Miscellaneous cash needs, such as cash to pay the family allowance or to keep a business operating during the period of estate administration D) Cash bequests

A) Administrative expenses Administrative expenses is the correct answer because all estates, whether large or small, have certain administrative expenses that are virtually impossible to eliminate completely. Examples of such costs include court costs and professional fees—the estate's attorney, accountant, appraiser, and so forth rarely, if ever, waive their fees. Thus, administrative expenses can be diminished by proper premortem planning but can never be completely eliminated.

Which of the following is a requirement of a qualified disclaimer? A) It is an irrevocable and unqualified written refusal to accept the interest B) It can be made after the disclaimant has already accepted any interest in the benefits from the property C) It is made either in writing or orally D) It directs that the interest pass to someone else

A) It is an irrevocable and unqualified written refusal to accept the interest For a disclaimer to be qualified for tax purposes, it must be irrevocable and also in writing. If the disclaimer is qualified, the bequest or disposition will be treated as though a gift was never made. The disclaimant must not have previously accepted any interest in the benefits from the property.

Which of the following postmortem estate planning techniques permits certain types of terminable interests left to a surviving spouse to qualify for the estate tax marital deduction? A) Qualified terminable interest property (QTIP) election B) Family settlement agreement C) Election against the will D) Qualified disclaimer

A) Qualified terminable interest property (QTIP) election An executor can use a QTIP election to qualify certain types of terminable interests for the estate tax marital deduction.

Jocelyn dies owning a large block of stock in a closely held corporation. Her estate is short of liquid assets, and the executor needs to sell the stock to pay estate expenses. The only potential buyer for the stock is the corporation itself, but Jocelyn's executor is afraid that if she sells the stock back to the corporation, the money received will be taxable as a dividend. Which of the following postmortem estate planning techniques would be most useful to Jocelyn's estate? A) Section 303 stock redemption B) Reverse QTIP election C) Special use valuation (Section 2032A) D) QTIP election

A) Section 303 stock redemption A Section 303 stock redemption would be useful to Jocelyn's estate because it would permit the estate to sell stock back to the corporation and have the transaction treated as a sale rather than a redemption. If the transaction is treated as a sale, any gain would be treated as a capital gain (relative to the stepped-up basis from the date of death value). The proceeds from a non-Section 303 redemption would be treated as an ordinary dividend.

Lela was a widow at her death in 2021. She died with a gross estate of $11,825,000, consisting entirely of publicly traded income-producing stock. Her debts were $75,000, and her estate administrative expenses were $50,000. Lela made no lifetime taxable gifts. She left her entire estate to her daughter. Which one of the following postmortem planning techniques will help meet the liquidity needs of Lela's estate? A) Use of the election to take the estate administrative expenses as a deduction on the estate's fiduciary income tax return B) Application to pay estate taxes under Section 6166 C) Use of the alternate valuation date D) Special use valuation

A) Use of the election to take the estate administrative expenses as a deduction on the estate's fiduciary income tax return The value of income-producing stock is unlikely to have declined over time, so the alternate valuation date would be of no benefit. In addition, the alternate valuation date is not available when no estate tax will be due after use of the applicable credit amount. The estate does not qualify for special use valuation even if tax were due since it has no real estate used in a closely held trade or business or farming operation. After deducting the estate administrative expenses of $50,000 and debts of $75,000, there would be no estate taxes to be paid (gross estate of $11,825,000, minus debts of $75,000 and debts of $50,000, leaves a taxable estate and tax base—no adjusted taxable gifts—of $11,700,000, which is covered by Lela's estate tax applicable credit amount), so there would be no need to apply to pay estate taxes in installments under Section 6166. In addition, Lela's estate does not qualify under this section since her estate does not contain a closely held business interest exceeding 35% of her adjusted gross estate.

Eduardo dies on March 15 of the current year. His gross estate consists mostly of publicly traded stocks having a market value of $15 million on his date of death. A severe bear market begins within a few weeks after he dies, and the value of his stocks declines to $13 million by September 1. Which of the following postmortem estate planning techniques might be useful to Eduardo's estate? A) Qualified disclaimer B) Alternate valuation date (AVD) election C) Special use valuation D) QTIP election

B) Alternate valuation date (AVD) election An election to use the AVD would be useful because it allows the estate to value estate assets for estate tax purposes at their value six months after the date of death rather than on the date of death. Special use valuation allows the estate to value qualifying real property on the basis of its actual use rather than its highest and best use. A QTIP election allows the estate to take the marital deduction for bequests of certain terminable interests, and a qualified disclaimer allows a beneficiary to refuse a bequest or inheritance.

Which of the following statements regarding a QTIP election is CORRECT? I. If the decedent's executor makes a QTIP election, the percentage of the trust property that is the subject of the election is included in the surviving spouse's gross estate when the surviving spouse dies. II. In determining whether to make a QTIP election, the executor should determine the best overall estate tax result for both the decedent's and the surviving spouse's gross estate. A) Neither I nor II B) Both I and II C) I only D) II only

B) Both I and II

Which of the following is NOT a way that a person can voluntarily transfer estate assets to another person or entity at death? A) By will substitute B) By gift C) By probate D) By testamentary trust

B) By gift Gifting is one of the two ways that a person can voluntarily transfer estate assets to another person or entity during life, not at death.

Which of the following statements regarding a QTIP election is CORRECT? I. The QTIP election by a decedent's executor is voluntary. II. If the executor makes a QTIP election, the estate tax is increased in the decedent's estate. A) Both I and II B) I only C) II only D) Neither I nor II

B) I only Statement II is incorrect. If the executor makes the QTIP election, the estate tax is decreased in the decedent's estate because more property qualifies for the marital deduction.

Duran had a gross estate of $11.5 million when he died. He and his wife, Florence, died from injuries sustained in an auto accident. She died two weeks before he did. Part of his gross estate was $6.5 million in stock in the closely held Ortiz Family Corporation, which purchases cargo containers for lease to large shippers. Due to a great increase in demand for the containers, the stock recently has experienced rapid appreciation. His estate had unsecured debts of $300,000 and administrative expenses of $50,000. Duran made $1 million in adjusted taxable gifts. His will leaves his property to his children in equal shares. Which of the following postmortem techniques are available to provide liquidity to Duran's estate? I. Special use valuation II. Section 303 stock redemption III. Alternate valuation date IV. Installment payment of federal estate taxes A) I only B) II and IV C) II and III D) I, III, and IV

B) II and IV Duran's estate meets the 35% adjusted gross estate requirement for a Section 303 stock redemption and installment payment of taxes (Section 6166). The estate will owe estate tax because of the adjusted taxable gifts. The estate cannot qualify for special use valuation because there is no evidence of real estate ownership. Finally, since Duran was a widower at death, the estate cannot qualify for a QTIP election.

A decedent is a U.S. citizen who owned a farm immediately prior to the date of his death. Which of the following conditions must be met before special use valuation is allowed for estate tax purposes? I. The value of the farm must constitute at least 75% of the decedent's gross estate. II. The farm must pass to a qualified heir. III. The decedent or a member of his family must have materially participated in the operation of the farm for at least five out of the eight years prior to his death. IV. The farm must continue to be used as a qualified use for at least 10 years after the decedent's death. A) I and II B) II, III, and IV C) III and IV D) I and III

B) II, III, and IV Statement I is incorrect. The value of the farm must constitute at least 50% of the decedent's gross estate after certain adjustments for mortgages and liens.

Sylvia, 67, is a widow with an estimated gross estate of $4.8 million. Some of her assets are listed as follows: A one-third partnership interest in the Mountain Home Ranch (which she, her brother, and sister have operated for the past 30 years). The partnership assets are valued at $8 million, with 40% allocated to the real estate and the remainder to livestock, machinery, et cetera. The ranch has mortgages and secured debts of $3.3 million, divided equally between the ranch real estate and the ranch personal property. She has willed her interest to her son, Simpson. 1,000 shares of closely held stock in the Cowpoke Cafe and Emporium valued at $1.25 million. Real estate owned by the corporation is valued at $400,000. Her will names her son as the beneficiary of the stock. Her financial planner has estimated her unsecured debts at $280,000, her administrative expenses at $220,000, and combined state and federal death taxes at $1 million. Sylvia has made $9 million of adjusted taxable gifts, all of which occurred more than three years ago. Which of the following postmortem techniques can Sylvia's estate use to decrease its need for liquid resources and/or increase its liquidity? I Special use valuation for Sylvia's interest in the Mountain Home Ranch II. Section 303 stock redemption for Sylvia's interest in the Mountain Home Ranch III. Section 6166 installment payment of estate taxes for Sylvia's interest in the Mountain Home Ranch IV. Section 303 stock redemption for Sylvia's interest in the Cowpoke Cafe and Emporium A) II and III B) III and IV C) II and IV D) I and IV

B) III and IV This recognizes that the techniques in options I and II would not be available to Sylvia's estate. The Section 303 stock redemption (option II) is not available for Sylvia's interest in the Mountain Home Ranch because the ranch is owned as a partnership, not as a corporation. The special use valuation for Sylvia's interest in the ranch (option I) also is not available. Sylvia's partnership interest in the ranch is worth $1,566,667 ($8,000,000 - partnership debts of $3,300,000 = $4,700,000 ÷ 3 = $1,566,667), and her interest in partnership real estate is $516,667. The value of Sylvia's share of ranch real estate equals $8,000,000 × 40% ÷ 3 = $1,066,667 minus one-third of $3,300,000 ÷ 2 (secured mortgage against real estate). As can be seen by using the following computations, Sylvia's total partnership interest ($1,566,667) does not meet the 50% test ($1,850,000), nor is there enough real estate ($516,667) to meet the 25% test ($925,000). Installment payment of estate taxes (option III) is available for her interest in the ranch since her interest ($1,556,667) exceeds the 35% AGE threshold ($1,120,000). Finally, her estate can qualify the interest in the Cowpoke Cafe and Emporium (option IV) for a Section 303 stock redemption because her interest ($1,250,000) exceeds the 35% AGE threshold ($1,120,000).

Roxanne, a widow, has a gross estate valued at $999,000. One-fourth of her estate is in raw land held for speculation, and another large portion is in a closely held partnership, valued at $380,000. Roxanne's will leaves all property to her son, with all debts, expenses, and taxes to be paid from the residue. She has employer benefits of about $200,000, payable to her son. Five years ago, she created an irrevocable life insurance trust, which is the owner and beneficiary of a $150,000 life insurance policy on her life; her son is the only beneficiary of the trust. She has made prior taxable gifts of $600,000. Which of the following postmortem techniques are available and advisable to increase liquidity in Roxanne's estate if she were to die today? I. A Section 6166 extension and installment payment of taxes II. An election of special use valuation for the raw land III. A request to the trustee of the irrevocable insurance trust to purchase some of the hard-to-sell property from her estate IV. A Section 303 stock redemption A) II and III B) III only C) I, III, and IV D) I, II, and IV

B) III only This estate will not qualify for a Section 6166 extension and installment payment of taxes because the raw land is less than 35% of her adjusted gross estate. A special use valuation is not allowed because the land is not a farm. Section 303 does not apply because the business is not incorporated.

When Alex dies, his will leaves his entire estate to his widow, Grace. The will provides that if Grace does not survive him by 60 days, the estate will pass to their children. Grace has substantial assets of her own and would prefer that Alex's property pass directly to their children now instead of to her. Which of the following postmortem estate planning techniques would enable Grace to achieve her wishes? A) Reverse QTIP election B) Qualified disclaimer C) Partial QTIP election D) Election against the will

B) Qualified disclaimer A qualified disclaimer will achieve Grace's objective because it constitutes a refusal by Grace to accept the property and allows the property to pass directly to her children. A partial QTIP election is used to qualify a portion of a qualified 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.

Which of the following describe(s) a reverse QTIP election? I. A special election made by an executor to treat qualified terminable interest property as if the QTIP election had not been made for generation-skipping transfer tax purposes. II. An election that allows better utilization of a decedent's GSTT exemption. A) Neither I nor II B) I only C) Both I and II D) II only

C) Both I and II Both of these statements describe reverse QTIP elections.

Which of the following are characteristics of a qualified disclaimer of assets from a decedent's estate? I. It must be irrevocable and stated in writing. II. It must direct the bequest to another person selected by the disclaimant. III. It must be received by the estate's personal representative. IV. The disclaimant may refuse the bequest after accepting its benefits. A) III and IV B) I only C) I and III D) I, II, and III

C) I and III A disclaimant can have no say in where the disclaimed property goes, nor can the disclaimant have derived any benefit from the disclaimed property.

Which of the following statements regarding the use of a cross-purchase buy-sell agreement as a premortem liquidity planning device is CORRECT? I. The purpose is to ensure that the owner of a closely held business interest will be able to sell her interest in specified circumstances. II. The business entity contracts to pay each owner an agreed-upon amount for his interest in the business under certain circumstances. III. If a business interest is sold under such an agreement at an owner's death, estate liquidity is enhanced because the estate will be liable for little or no capital gain. IV. If insurance is used to fund such an agreement, the owner of the policy used to accomplish the purchase will be the purchasing owner. A) I and III B) II and IV C) I, III, and IV D) I, II, and IV

C) I, III, and IV Only option II is an incorrect statement. In a cross-purchase buy-sell agreement, the parties obligated to purchase an offered interest are the other individual business owners—the business entity is not a contracting party. If insurance is used, each owner takes out a life insurance policy on every other owner who is a party to the agreement and uses the proceeds of such a policy to fulfill her obligation to purchase that owner's interest under specified conditions. If an estate sells the owner's interest at death, the estate's basis in the business interest will equal its estate tax value (stepped-up), and therefore, the sale will produce little or no capital gain, which allows the estate to keep more of the sale proceeds for liquidity purposes.

Sandra dies owning a family farm. The value of the acreage as farmland is $2,500 per acre. Many adjoining farms have been converted to tract housing and have sold for as much as $10,000 an acre. Sandra's will leaves the farm to her daughter, who intends to use it as farmland for the rest of her life and then pass it to her children. Which of the following postmortem estate planning techniques will be most useful to Sandra's estate? A) Alternate valuation date (AVD) B) Election against the will C) Special use valuation (Section 2032A) D) QTIP election

C) Special use valuation (Section 2032A) Special use valuation under Section 2032A will be most useful to Sandra's estate because it permits the farm to be valued at its current use as farmland ($2,500 per acre) rather than at its highest and best use as tract housing ($10,000 per acre). The maximum reduction under Section 2032A is a little over $1 million (indexed). In 2021, the maximum reduction is $1.19 million.

Which of the following statements regarding the use of the alternate valuation date (AVD) for estate tax purposes is NOT correct? A) The AVD election cannot be made unless it results in a reduction of the amount of federal estate tax owed by the decedent's estate. B) The AVD election allows the executor to value estate assets at their fair market value six months after the decedent's date of death. C) The executor is allowed to pick and choose which assets will be valued as of the decedent's date of death value and which will be valued at the AVD. D) Wasting assets must be valued at their date of death fair market value, even if the AVD election is made.

C) The executor is allowed to pick and choose which assets will be valued as of the decedent's date of death value and which will be valued at the AVD. The AVD election is an all-or-nothing choice, and the executor is not allowed to pick and choose which assets will be valued as of the decedent's date of death and which will be valued at the AVD.

Roland was the sole owner of a toy manufacturing company with a fiscal year ending on January 31. Approximately 50% of the company's income is received in the month of January, with expenses incurred evenly over the year. Roland died on January 1, leaving his entire estate, including his interest in the company, to his daughter, Penney. Penney is in the lowest marginal income tax bracket. Roland named his brother, Buck, a contingent beneficiary of the estate. Buck is in the highest marginal income tax bracket. Which of the following postmortem elections would best minimize the income tax liability for Roland's estate and its beneficiaries? A) Penney should make a qualified disclaimer of the interest left to her in the toy company. B) The executor should elect a fiscal year ending January 31 for the estate. C) The executor should use the calendar year as the tax year for the estate. D) The executor should elect a fiscal year for the estate that ends 13 months after Roland's death.

C) The executor should use the calendar year as the tax year for the estate. The election of the shorter first fiscal year is incorrect because that will result in fewer deductions available to offset the large amount of income received in January. Also, any income Penney receives from the estate is not reportable by Penney until the estate's taxable year ends, thus allowing her to delay the payment of any tax on such income for an extended period of time after its receipt. The option to elect a fiscal year for the estate that ends 13 months after Roland's death is incorrect, as the estate's taxable year must end on the last day of a month that does not exceed the date of the decedent's death. The action to make a qualified disclaimer would mean that the toy company would pass to Buck and that future income would be taxed at a higher rate than if Penney had retained the interest.

Which of the following concepts associated with liquidity planning, matched with its description, is NOT correct? A) Estate administrative expenses—the money that the decedent's personal representative must spend to collect the decedent's assets; pay claims of the estate; and distribute the remaining assets to the decedent's devisees, legatees, or heirs. B) Estate debts—the money that the decedent's personal representative must spend to pay the decedent's lifetime obligations that had not been paid at the time of the decedent's death. C) Forced liquidation—estate shrinkage that occurs when the decedent's personal representative must sell estate assets, usually at less than market value, to make up for a cash deficiency. D) Estate liquidity—the decrease in the value of a decedent's estate from the time of the decedent's death until the time of the ultimate distribution to the decedent's devisees, legatees, and heirs

D) Estate liquidity—the decrease in the value of a decedent's estate from the time of the decedent's death until the time of the ultimate distribution to the decedent's devisees, legatees, and heirs Estate liquidity is a term used to describe the current or future potential of an estate to meet its cash requirements. The decrease in the value of a decedent's estate from the time of the decedent's death until the time of the ultimate distribution to the decedent's devisees, legatees, and heirs describes the concept of estate shrinkage.

Which of the following statements regarding the development of a cash flow plan to maintain an estate's liquidity is NOT correct? A) The executor should anticipate that there may be a delay in receiving life insurance proceeds on the decedent's life. B) The timing of some of the estate's cash outflows will be fairly predictable. C) The cash flow plan should be flexible enough to account for the possibility of unexpected expenses. D) In developing a cash flow plan for an estate, it is generally not possible to reduce the estate's cash needs.

D) In developing a cash flow plan for an estate, it is generally not possible to reduce the estate's cash needs. It may be possible to reduce the estate's cash needs by using special elections available under the estate tax laws—for example, Section 2032A, special use valuation for farm property; Section 303, stock redemption from a closely held corporation; or Section 6166, installment payment of estate taxes. In fact, gifting assets while alive can reduce the gross estate, and thus, estate taxes. Further, the strategic use of gifting can also help an estate qualify for the special elections just noted. For example, gifting nonbusiness assets increases the percentage of the estate held as a farm or business. It also may be possible to address the estate's cash needs by using life insurance trusts and reducing debts over time while the client is alive.

Henry dies on June 30 of the current year. His gross estate consists mostly of rental real estate with a market value of $20 million on his date of death. Within a few weeks after he dies, the real estate market takes a severe downturn, and the value of his property declines to $17 million by December 31. Which of the following postmortem estate planning techniques might be useful to Henry's estate? A) Qualified disclaimer B) Special use valuation C) QTIP election D) Alternate valuation date (AVD) election

D) Alternate valuation date (AVD) election An election to use the AVD would be useful because it allows the estate to value estate assets for estate tax purposes at their value six months after the date of death rather than on the date of death. Special use valuation allows the estate to value qualifying real property on the basis of its actual use rather than its highest and best use. A QTIP election allows the estate to take the marital deduction for bequests of certain terminable interests, and a qualified disclaimer allows a beneficiary to refuse a bequest or inheritance.

Estates that contain closely held businesses may elect certain postmortem tax treatments. Which of the following statements about these treatments is CORRECT? I. The Section 6166 installment payment of estate tax requires that the decedent's closely held business interests constitute at least 50% of the decedent's adjusted gross estate. II. If property that has received special use valuation tax treatment loses its status as qualified property within 10 years of the decedent's death, a recapture tax is applied. III. A Section 303 stock redemption allows a partnership to make a distribution to redeem a portion of the stock of a decedent while avoiding dividend treatment on the amount paid for the stock. IV. The estate of a deceased owner of a closely held business that leases all of its property cannot qualify for special use valuation. A) I, II, and III B) III only C) I and IV D) II and IV

D) II and IV Section 6166, which provides for deferral and installment payment of the estate tax, can be elected if more than 35% of the decedent's adjusted gross estate is attributable to the value of a closely held business or businesses. A Section 303 stock redemption cannot be used for a partnership, as a partnership does not have any stock. A closely held business that leases all of its property would not be able to take the special use valuation.

Which of the following statements regarding a QTIP election is CORRECT? I. If the decedent's executor makes a QTIP election, the property that is the subject of the election is excluded from the surviving spouse's gross estate when the surviving spouse dies. II. In determining whether to make a QTIP election, the executor should determine the best overall estate tax result for both the decedent's and the surviving spouse's gross estate. A) Neither I nor II B) I only C) Both I and II D) II only

D) II only Statement I is incorrect because if the executor makes a QTIP election, the QTIP property must be included in the surviving spouse's gross estate, to the extent it has not been spent or otherwise consumed during the surviving spouse's lifetime.

Which of the following postmortem planning techniques require the decedent to have executed, prior to death, a document that is enforceable after death? I. An election that property in a QTIP trust qualify for the marital deduction II. A Section 303 stock redemption election III. A disclaimer trust that will allow a surviving spouse to disclaim property and give her an interest in the property as a beneficiary of the trust IV. An election to waive personal representative (executor) fees A) I, II, and III B) III and IV C) I and III D) I only

I and III This recognizes that for option I, a QTIP trust must have been established, and for option III, the decedent must have established a disclaimer trust. Although an agreement for the redemption of stock under Section 303 (option II) may be entered into prior to death, such an agreement is not required. Section 303 requires only that the stock meet certain percentage requirements and that the business be willing to redeem the stock. Option IV requires only a signed waiver that is executed after the date of death.

Which of the following statements regarding estate liquidity is CORRECT? I. An estate typically needs substantial amounts of cash or other liquid assets to meet its obligations following the decedent's death. II. An estate can manage its cash flows by developing a cash flow plan indicating when its cash inflows and outflows are expected to occur. III. An estate that lacks sufficient liquidity to pay its obligations when due may be forced to sell illiquid assets or borrow money at unfavorable terms. A) I, II, and III B) II only C) I and III D) I only

I, II, and III

Gideon owns the following solely owned assets: A savings account at a bank Commercial real estate that is located in a state other than his state of domicile and that has a sizeable mortgage Gideon's will gives all of his property to his daughter. His will makes no mention of his son. Which of the following actions would have the potential to improve the liquidity of Gideon's estate? I. Executing a codicil to his will stating the reasons why he is leaving no property to his son by will II. Executing a codicil to his will placing the commercial property into a testamentary trust for the sole benefit of his daughter III. Executing a codicil to his will denying his daughter a right of exoneration for the mortgage on the commercial property IV. Establishing a transfer on death designation for the savings account naming his daughter as the beneficiary

I, III, and IV Only option II would not have the potential to increase Gideon's estate liquidity because it is a testamentary trust. Testamentary trusts do not avoid probate. Option I could increase liquidity by decreasing the potential for the son contesting the will. Option III could increase liquidity by eliminating the possibility that the estate would have to pay off the mortgage. Option IV could increase liquidity by eliminating this asset from the probate estate, thus reducing administrative expenses.