Book 6 -- Estate Planning

Nicholas gave his daughter, Amy, a house on August 1. The fair market value of the house on January 1, August 1, and December 1 of the same year was as follows: $130,000, $140,000, and $150,000. Nicholas had purchased the property in 1994 for $60,000 and had used it as rental property the entire time he held it. His basis at the time of the gift was $50,000. Nicholas had made previous gifts of $46,000 to Amy in the year of the gift. What is Amy's adjusted basis if Nicholas had paid $30,000 in gift tax on the gift of the house? A)$130,000. B)$71,094. C)$69,286. D)$50,000.

C // The property was appreciated property as of the date of the gift. Therefore, a portion of the gift tax paid is allocated to Amy's basis in the property. Amy's basis is: $50,000 + [(90,000 ÷ 140,000) × 30,000] = $69,286. $50,000 + $19,286 = $69,286.

Walter recently passed away. He lived in a noncommunity property state with his wife, Sara. His assets included $20,000 in a joint checking account with Sara; a $30,000 automobile registered in his name; a $20,000 money market account in his name that is POD to his sister, Joanna; a half interest in a $200,000 duplex he owns with his brother, John; a single life annuity in his name valued at $50,000 and a $180,000 home he owned with his wife as joint tenants with right of survivorship. What is the value of these assets in Walter's gross estate? A)$310,000. B)$300,000. C)$215,000. D)$250,000.

D // Walter's gross estate includes one-half of the $20,000 joint checking account, the $30,000 automobile, the $20,000 money market account, the half interest in the duplex, and half of the $180,000 home. The annuity is not included because it is a single life annuity and has no further value when Walter dies.

Julie, age 53 years, wants to provide for the financial security of her secretary, Carolyn, and other unrelated friends. She establishes a trust. Carolyn, age 66, will receive income from the trust for her life. Upon Carolyn's death, Abe, another friend who is currently 58, will receive income for his lifetime. Upon his death, the remainder interest will be divided equally between Peter (age 36) and Jimmy (age 40). How many of the trust beneficiaries are skip persons for purposes of the GSTT? A)0. B)1. C)3. D)2.

A // There are no skip persons in this example. An unrelated person must be 37-1/2 years younger than the transferor to be a skip person.

William and Jayne are married. It is a second marriage for both spouses, and William has a son from his previous marriage. William owns assets valued at $10 million, which are all titled in his separate name. In planning his estate, William wants to ensure that his entire estate qualifies for the marital deduction, but he also wants to ensure that his assets will pass to his son after Jayne dies. Which of the following recommendations will meet William's objectives? A)Leave his assets to a C (QTIP) trust B)Leave his assets to a B trust C)Leave his assets to an A trust D)Retitle his assets as JTWROS with Jayne

A // A C (QTIP) trust is the only recommendation that will meet William's objectives. The assets in a C (QTIP) trust will qualify for the marital deduction, and William can designate who receives the assets after Jayne dies because Jayne does not have to have a general power of appointment over the trust assets. In fact, the surviving spouse also never has a general power of appointment in a C (QTIP) trust. With an A trust, the assets will qualify for the marital deduction, but because Jayne must have a general power of appointment over the trust assets she can determine who receives them after she dies. With a B trust, William can designate who receives the assets when the trust terminates, but the assets do not qualify for the marital deduction. Assets titled as JTWROS would qualify for the marital deduction when William dies, but Jayne would own them outright after William's death and could leave them to whomever she chooses.

Bert owns investment real estate valued at $15 million. His son, Earl, wants to purchase the property but does not have sufficient cash to pay the purchase price in one installment. Bert is willing to explore alternative arrangements for selling the property to Earl as long as he can secure the transaction with collateral and as long as the transaction does not result in a gift that may result in gift taxes. Which of the following transactions is(are) suitable for achieving Bert and Earl's objectives? 1. Bargain sale 2. Private annuity 3. Self-canceling installment note (SCIN) A)3 only. B)1 and 3. C)2 and 3. D)1 and 2.

A // A SCIN is suitable for meeting Bert and Earl's objectives. A SCIN is a sale for full fair market value, so there is no gift, and a SCIN can be secured by collateral. A private annuity is also a sale but cannot be secured by collateral. A bargain sale is a sale made for less than full consideration, so it is considered to be part sale and part gift.

Jane died 6 months ago. At her death, she owned 90% of the stock in a closely-held C corporation. Jane's stock was valued at $3.5 million on her date of death and has a value of $3.6 million today. Other than her personal effects, Jane's only other assets are several copyrights and patents that have declined significantly in value since she died. Jane's adjusted gross estate is $9 million. Because of the estate's lack of liquid assets, Jane's executor wants to make any available postmortem elections that will reduce or defer the amount of estate tax payable by the estate. Which of the following provisions can Jane's executor elect? 1. Section 303 stock redemption 2. Special use valuation (Section 2032A) 3. Alternate valuation date (AVD) 4. Deferred payment of estate tax (Section 6166) A)1 and 4. B)2, 3, and 4. C)1 only. D)1, 2, and 3.

A // A Section 303 stock redemption (Statement 1) is available because the value of Jane's stock is more than 35% of the value of her adjusted gross estate. Section 2032A special use valuation (Statement 2) is not available because there is no indication that Jane owned real estate that was used as a farm or in connection with her closely-held business. The alternate valuation date (Statement 3) is not available because the only assets that have declined in value since Jane's death are the patents and copyrights, which are not eligible for the alternate valuation date election. Jane's executor can elect to pay the estate tax in installments (Statement 4) because the value of Jane's closely-held business interest exceeds 35% of the value of her adjusted gross estate.

Claudette wants to set up an arrangement that will ensure her favorite nephew, Eddie, will receive $100,000 in cash when she dies. Claudette has used all of her gift tax applicable credit amount as a result of making prior taxable gifts, and she does not want the arrangement involving the $100,000 in cash to result in any gift tax being due. Which of the following recommendations will meet Claudette's objectives? 1. Execute a will leaving $100,000 in cash to Eddie when she dies. 2. Place $100,000 in cash in a revocable living trust specifying that the cash will pass to Eddie at her death. 3. Open a $100,000 joint bank account with Eddie, with the understanding that Eddie will not withdraw any funds from the account until after she dies. A)1, 2, and 3. B)3 only. C)1 and 3. D)1 and 2.

A // All of these recommendations will meet Claudette's objective of ensuring that Eddie receives $100,000 in cash at her death without incurring any gift tax. A bequest in a will (Statement 1) is a transfer that takes effect at death and is not subject to gift tax. A transfer to a revocable trust (Statement 2) is not subject to gift tax because it is not a completed gift. Likewise, opening a joint bank account (Statement 3) does not result in a gift until the noncontributing party draws on the account for his own benefit.

Dominick owns stock in a corporation that provides IT consulting services to other businesses. He is interested in gifting his interest in the business to his 3 children and consults a CFP® professional for advice. Dominick is particularly interested in learning whether his interest in the business might qualify for valuation discounts. Which of the following information should the CFP® professional gather in addressing Dominick's concerns? 1. What role Dominick plays in the business 2. Whether the corporation is publicly traded 3. What percentage of the corporation's stock Dominick owns A)1, 2, and 3 B)1 only C)1 and 2 D)2 and 3

A // All of these statements are correct. Statement 1 is correct because Dominick's role in the business may help determine whether his interest is eligible for a key person discount. Statement 2 is correct because whether the corporation is publicly traded may determine whether Dominick's interest is eligible for a blockage discount. Statement 3 is correct because the percentage of stock Dominick owns may determine whether his interest is eligible for a minority discount. (Domain 2-Gathering Information Necessary to Fulfill the Engagement)

Mr. and Mrs. Donaldson are both in their mid-50s. They own assets valued at over $40 million, almost all of which are illiquid and titled as JTWROS. They are considering the purchase of life insurance to help cover any estate taxes that might be due at their deaths. Which of the following life insurance arrangements would best satisfy the Donaldson's objectives? A)A new second-to-die life insurance policy purchased by an irrevocable life insurance trust (ILIT) B)A first-to-die life insurance policy owned jointly by the two spouses C)A second-to-die life insurance policy owned by the spouse with the smaller estate D)Separate life insurance policies on the life of each spouse, each owned by the insured spouse

A // Because all of the couple's assets are titled as JTWROS, the marital deduction will prevent any estate tax from being due until the second spouse dies. Therefore, if the purpose of the life insurance is to pay estate tax, a second-to-die policy is appropriate. Using an ILIT to obtain a new policy will prevent the policy death benefits themselves from being subject to estate tax. If an existing life insurance policy (in which an owner is also an insured) is transferred to an ILIT, the death benefits will be in the owner's estate for three years from the transfer.

Paul divorced his first spouse last year and recently remarried. He has come to you for advice on updating his estate plan to reflect his new marital status. His existing will leaves all of his property to his first spouse. He says he does not want to leave any of his property to his new spouse and that he wants all of his property to pass to his children from his first marriage when he dies. Which of the following recommendations would you make to Paul? I. Paul should redo his will to reflect his new marital status. II. If Paul wants to disinherit his second spouse, he may want to use transfer methods other than a will to do so. A)Both I and II B)Neither I nor II C)I only D)II only

A // Both of these statements are correct. Statement II is correct because Paul's second spouse may be able to elect against his will if he dies with a will that disinherits her. It would be safer to pass is property to his children by JTWROS titling or by the use of a trust if he wants to disinherit his spouse.

Sam, age 70, owns several parcels of rental real estate. He has had high blood pressure for many years. Following some recent lab work, his doctor advised him that he faces a high risk of a heart attack or stroke. Sam is concerned that if he becomes incapacitated as a result of his heart ailments, his rental properties will suffer from his inability to manage them. He consults George, his CFP® professional, for advice on planning for this possibility. Sam mentions that he has heard that powers of attorney can be useful in this type of situation. Which of the following steps should George take next in fulfilling his engagement with Sam? A)Determine whether Sam knows a trustworthy person who is willing to assume responsibility for managing his property if the need arises B)Determine whether Sam wants any authority granted under a possible power of attorney to remain in effect at his death C)Recommend that Sam execute a nonspringing durable power of attorney D)Inform Sam that instead of executing a power of attorney now, it would be easier and cheaper simply to wait until he becomes incapacitated and have a court appoint a conservator for him

A // George should not make any specific recommendation, including a nonspringing durable power of attorney, until he gathers additional information from Sam. For example, George needs to find out whether Sam knows anyone who is trustworthy and who would be willing to manage his property if the need arose. It is not necessary to determine whether Sam wants the attorney-in-fact's authority to continue at his death because this is not possible with any type of power of attorney. Advising Sam to wait and have a court appoint a conservator is not appropriate because this would probably be more expensive than executing a power of attorney and would also deprive Sam of the opportunity to appoint someone of his own choosing to manage the property. (Domain 2-Gathering Information Necessary to Fulfill the Obligation)

In 2019, Della, a single mother, gifted stock with a basis of $6.8 million and a fair market value of $5,130,000 to her grandson. Which of the following statements is CORRECT? A)Assuming Della had made no prior gifts, there would be no gift tax due on the gift of stock to her grandson. B)If Della paid $40,000 of gift tax on the gift, her grandson could allocate a portion of the gift tax paid to his basis in the stock. C)If the grandson subsequently sold the stock for $6,500,000, he would have a capital loss of $300,000. D)The gift is not eligible for the annual exclusion because its fair market value is less than Della's basis.

A // If Della had made no prior gifts, she would be able to use some of her applicable credit for gift tax purposes. The credit will fully offset the gift tax on gifts of up to $11,400,000 in 2019. Della's taxable gift would be $5,115,000 ($5,130,000 gift − $15,000 annual exclusion). The applicable credit would offset the tax on this gift and still have room to offset future gift or estate taxes. The fact that the FMV of the gift is less than Della's basis does not affect the availability of the annual exclusion. Gift tax paid can only be allocated to basis if the gifted property is appreciated property. Della has gifted loss property. Because of the double-basis rule, loss property subsequently sold between its original basis and fair market value will recognize no gain or loss. While not covered by the question, Della has also made a generation-skipping transfer (unless the grandchild's parent by Della is deceased).

Your client owns a whole-life insurance policy with a death benefit of $200,000 on the life of his spouse. The policy has a cash value of $13,500 of which the dividends are used to purchase additional paid-up life insurance. Their son is the named beneficiary. If the spouse were to die today, which of the following is true? (CFP® Certification Examination, released 12/96) A)A taxable gift of the life insurance proceeds has been made from the client to the son. B)The client continues to own the policy for the benefit of the son. C)The client receives an amount equal to the cash value, and the son receives the remainder of the life insurance proceeds tax-free. D)The son must be at least 14 years old in order to collect the proceeds.

A // If the insured does not own the life insurance policy, then a gift of the policy's face value will be deemed made from the owner to the beneficiary upon the death of the insured. Note: In the online version of Kaplan Schweser's QBank, the letters preceding the answer choices that appear in the original CFP Board question have been eliminated. The answer choices may not be in the same order as in the original CFP Board released questions

On the recommendation of his CFP® professional, Claude executes a durable limited power of attorney naming his brother, Andrew, as attorney-in-fact. The power-of-attorney grants Andrew the limited power to sign legal documents in connection with the management of Claude's rental real estate, which is located in another state where Andrew lives. As part of his planning engagement with Claude, the CFP® professional has agreed to help Claude monitor the continuing effectiveness of the durable limited power of attorney he has granted to Andrew. Which of the following statements regarding these monitoring activities is(are) CORRECT? 1. If Claude becomes terminally ill, he should consider granting Andrew a durable unlimited power of attorney so Andrew can continue managing the real estate after Claude's death. 2. If Claude has a stroke and becomes incapacitated, the CFP® professional should immediately notify Andrew that his authority to manage the real estate under the durable limited power of attorney is no longer valid. 3. If Claude dies, the CFP® professional should advise Andrew that he can continue managing Claude's real estate but only until an executor is appointed for Claude's estate. A)None of these statements are correct. B)1 only C)2 and 3 D)1 and 2

A // None of these statements are correct. Statements 1 and 3 are incorrect because an attorney-in-fact's authority under any power of attorney terminates at the principal's death. Statement 2 is incorrect because an attorney-in-fact's authority to act under a durable power of attorney survives the principal's incapacity. (Domain 7-Monitoring the Recommendation(s))

Harry's will leaves his entire estate to a trust, which provides that his wife, Eloise, is to receive the income from the trust for life. The trust also gives Eloise the power to appoint trust principal, in any amount she chooses, to Harry's 3 daughters during her life. Harry dies in 2019, and his estate of $25 million passes to the trust. In 2020, Eloise appoints $100,000 in trust assets to one of the 3 daughters. Eloise dies in 2021, when the trust assets are valued at $28 million. Which of the following statements regarding this scenario is(are) CORRECT? 1. Harry's bequest of $25 million to the trust qualifies for the marital deduction. 2. Eloise's appointment of $100,000 to the daughter is a taxable gift. 3. When Eloise dies, the $28 million in trust assets is included in her gross estate. A)None of these statements is correct B)1 and 3 C)2 only D)2 and 3

A // None of these statements is correct. Statement 1 is incorrect because Eloise's right to appoint trust property to the 3 daughters is a limited (special) power of appointment. A life estate coupled with a limited power of appointment is a terminable interest that does not qualify for the marital deduction. Statement 2 is incorrect because the lifetime exercise of a limited power of appointment is not a taxable gift. Statement 3 is incorrect because a limited power of appointment is not included in the holder's gross estate.

Christine consults a CFP® professional for assistance in formulating a comprehensive estate plan. After extensive fact-finding and analysis, the CFP® professional makes a package of recommendations, including a recommendation that Christine open $100,000 bank account with her daughter as JTWROS to assist with her expenses in starting a new business. The CFP® professional agrees to help Christine monitor the continued effectiveness of the recommendation. Which of the following steps will be necessary in performing these monitoring activities? I. Filing a gift tax return when the account is opened II. Filing a gift tax return if the daughter withdraws $30,000 from the account A)II only B)I only C)Neither I nor II D)Both I and II

A // Only Statement II is correct. Christine's creation of a JTWROS bank account does not result in a gift until the daughter withdraws funds for her own benefit. (Domain 7-Monitoring the Recommendation(s))

Greg, a CFP© professional, is working with a client to develop an estate plan. Among his recommendations is a recommendation that the client implement steps to minimize his probate estate. In communicating this recommendation to the client and explaining the disadvantages of probate, Greg could correctly make all of the following statements EXCEPT; A)probate may prevent the client's heirs from receiving clean title to the client's assets B)the probate process will open the client's estate to public scrutiny C)probate may add to the expense of administering the client's estate D)probate may delay the distribution of assets to the client's heirs

A // Probate will not prevent the client's heirs from receiving clean title to the client's assets. One of the advantages of probate is that it provides the heirs with clean title to the decedent's property. Another term for "clean" title is "clear" title. Both are synonyms meaning the owner has unquestioned legal ownership of the asset.

Dwayne creates an irrevocable trust during his lifetime and funds it with $2 million in marketable securities. The trust agreement allows the trustee to make distributions of trust income and corpus to Dwayne's son, Gary, during Gary's life. At Gary's death, all trust assets are to pass to Dwayne's niece, Alice. In the current year, the only income generated by the trust is $100,000 of capital gain, and the trust distributes $150,000 to Gary. Which of the following statements regarding Dwayne's trust is(are) CORRECT? 1. Alice is the remainder beneficiary of the trust. 2. The trust receives an income tax exemption of $300. 3. The trust's DNI for the current year is $100,000. 4. The trust assets will be included in Dwayne's gross estate when he dies. A)1 only B)2, 3, and 4 C)1 and 3 D)1 and 4

A // Statement 1 is correct; Gary is the income beneficiary and Alice is the remainder beneficiary of the trust. Statement 2 is incorrect; the trust is a complex trust because it can distribute corpus. A complex trust receives an income tax exemption of $100. Statement 3 is incorrect because DNI excludes items relating to corpus, such as capital gains. The trust's DNI for the current year is $0. Statement 4 is incorrect because an irrevocable trust is not included in the grantor's gross estate.

Clive and Joanna are married. Clive is a resident of the U.S. but Joanna is a resident of Austria. The have a daughter, Carla. Clive owns assets valued at $20 million and wants to begin making lifetime gifts to Joanna, as long as they qualify for the marital deduction. He consults a CFP® professional for advice. Which of the following gifts will meet Clive's objectives? 1. A gift of a farm to Joanna for life, with the remainder to Carla. The present value of Joanna's life estate is $100,000. 2. A gift of a condo to Carla for life, with the remainder to Joanna. The present value of Joanna's remainder interest is $125,000. 3. A gift of $125,000 in cash to Joanna. A)3 only B)1, 2, and 3 C)1 only D)2 and 3

A // Statement 1 is incorrect because a life estate is a terminable interest and gifts of terminable interests do not qualify for the marital deduction. Statement 2 is incorrect because a remainder is a future interest and all gifts of a future interest to a nonresident spouse are subject to gift tax. Statement 3 is correct. Cash is a present interest and $125,000 is less than the annual exclusion for a non-US citizen spouse. (Domain 4-Developing the Recommendation(s))

Edith dies with an estate valued at over $25 million. Her will leaves her entire estate to a trust, which provides that the trust income will be paid to her husband, Edward, for his life and that at Edward's death the trust corpus will be paid to Edith's 2 children from a prior marriage. On Edith's federal estate tax return, her executor elects QTIP treatment for the trust. Which of the following statements regarding this trust is(are) CORRECT? 1. The assets in the trust do not qualify for the marital deduction in Edith's estate because Edward's interest is a terminable interest (life estate). 2. As a result of the QTIP election, the trust income is no longer required to be paid to Edward during his life. 3. The assets remaining in the trust when Edward dies must be included in Edward's gross estate. A)3 only B)1, 2 and 3 C)2 and 3 D)1 only

A // Statement 1 is incorrect; although Edward's life estate in the trust assets is a terminable interest, the QTIP (qualified terminable interest property) election allows the trust assets to qualify for the marital deduction in Edith's estate. Statement 2 is incorrect because the income from QTIP property must be paid to the surviving spouse at least annually for life. Statement 3 is correct; the QTIP election allows the trust property to qualify for the marital deduction in Edith's estate but also means the trust property must be included in Edward's gross estate when he dies.

Brian and Barry are twin brothers, age 68. They have no children or other close family members, and they each own assets valued at approximately $8 million. They want all of their assets to pass to the other if either of them dies. They often travel together to war-torn areas on business, however, and they are concerned that if their deaths occur close together in time, their estates may be subject to estate tax twice in rapid succession. Which of the following recommendations would be suitable for addressing their concerns? I. Execute wills containing survivorship clauses II. Rely on the portability provision to ensure that the second brother to die has an applicable exclusion amount of $22,800,000 (in 2019) A)I only B)Neither I nor II C)Both I and II D)II only

A // Statement I is correct because survivorship clauses are used to prevent property from being included in 2 estates in rapid succession. Statement II is incorrect because portability is available only to spouses. (Domain 4-Developing the Recommendation(s))

Grantor has established a trust, naming a bank as trustee. Pursuant to the terms of the trust document, Grantor is to receive all of the income generated by the trust assets during his life. Grantor may withdraw assets from the trust or place additional assets into it. The assets placed into the trust consist of Grantor's mutual fund portfolio, personal residence, a rental property located in another state, and two installment notes held by Grantor. Upon Grantor's death, all of the assets remaining in the trust are to be distributed to Grantor's two children. Upon Grantor's death, the assets remaining in the trust will: (CFP® Certification Examination, released 01/99) I. be included in Grantor's taxable estate. II. be subjected to the probate process. III. receive a new basis except for the installment notes. IV. be distributed as directed by Grantor's will. A)I and III. B)IV only. C)I, II and III. D)I, II, III and IV.

A // Statement I is correct. Because the grantor has control over the assets in the trust, the value of the assets in the trust will be included in the gross estate. Statement II is incorrect; assets in a revocable trust at the grantor's death do not pass through probate. Statement III is correct; inherited assets, other than assets such as installment notes that are income in respect of a decedent, receive a stepped-up basis. Statement IV is incorrect; assets in a revocable trust pass according to the trust terms at the grantor's death. Note: In the online version of Kaplan Schweser's QBank, the letters preceding the answer choices that appear in the original CFP Board question have been eliminated. The answer choices may not be in the same order as in the original CFP Board released questions

Nick has a daughter, Nicole, who is in precarious financial condition as a result of some poor personal decisions. Nick is willing to help her financially but, if possible, he wants to do so in a way that avoids generating any additional tax burden to himself. He consults a CFP® professional who suggests that Nick make an interest-free loan of $50,000 to Nicole. Nick accepts this recommendation and retains the CFP® professional to help him monitor the effectiveness of this recommendation in meeting his objectives. Which of the following factors should the CFP® professional monitor in ensuring that the recommendation continues to meet Nick's objectives? I. The amount of Nicole's net investment income II. The amount of Nicole's earned income A)I only B)Both I and II C)Neither I nor II D)II only

A // Statement I is correct; because the gift loan is less than $100,000, interest will be imputed to Nick if Nicole's net investment income exceeds $1,000. Statement II is incorrect because the amount of Nicole's earned income has no bearing on whether interest will be imputed to Nick. (Domain 7-Monitoring the Recommendation(s))

Christine recently remarried after 10 years. Her son, Michael, is now 21 years old. She would like to make arrangements to ensure that Michael will own certain of her assets when she dies. Which of the following options would accomplish her goal? 1. Gifting assets directly to Michael. 2. Setting up a trust for Michael's benefit. 3. Changing the title of certain assets to her name and Michael's as joint tenants with rights of survivorship. 4. Establishing a Uniform Gift to Minor's Account (UGMA). A)1, 2, and 3. B)1 and 4. C)1, 2, 3, and 4. D)2 and 3.

A // Statements 1, 2, and 3 are correct. Statement 4 is incorrect. Christine cannot utilize a Uniform Gift to Minor's Account for Michael because he is no longer a minor.

Walter, a widower who was founder and chairman of Springer Appliance Corporation, recently passed away. His gross estate was valued at $10 million. At the time of his death, Walter owned 55% of the corporation's stock which amounted to $3,125,000 with $2,188,000 representing his ownership share in the real property. Walter's will bequeaths $1 million to the American Cancer Society. The estate incurred personal debts and expenses of $600,000. David, the company's president, is currently operating the business and may be elected by the Board of Directors to succeed Walter as chairman. Based on the preceding information, which of the following statements is CORRECT? 1. The estate can use the marital deduction. 2. The estate does not qualify for special use valuation. 3. The estate is allowed a charitable deduction for the contribution to a qualified charity. 4. The estate is eligible to pay the estate taxes on an installment basis. A)2 and 3. B)3 and 4. C)1, 2, 3, and 4. D)1 and 2.

A // Statements 2 and 3 are correct. The estate does not qualify for the special use valuation because Walter's interest in the real property does not amount to 25% or more of his gross estate. His gross estate is $10 million, and $2,188,000 divided by $10 million is only 21.88%. Walter's estate is allowed a charitable deduction for his testamentary gift to a qualified charity. The estate is not allowed to use the marital deduction because Walter is a widower and has no spouse. The estate does not qualify to pay estate taxes on the installment basis for two reasons. First, his gross estate was under the exemption amount and there were no lifetime taxable gifts, so there will be no estate tax. Second, Walter's share of the business is less than 35% of his adjusted gross estate ($3,125,000 divided by $9,400,000 = 33.25%)

Kurt wants to establish a trust for the benefit of his niece, Marsha, who is age 15. He plans to contribute $10,000 in cash to the trust each year. He wants the distribution of trust income to Marsha to be discretionary with the trustee, and he wants the trust to continue until Marsha turns 25, when the trust will terminate and the trust corpus will be distributed to Marsha. He also wants to ensure that his cash contributions to the trust will qualify, either totally or partially, for the gift tax annual exclusion. Which of the following trusts will meet Kurt's objectives? 1. Section 2503(b) trust 2. Section 2503(c) trust 3. Crummey trust A)3 only B)None of these C)1, 2, and 3 D)1 and 2

A // The 2503(b) trust is eliminated because it does not give the trustee discretionary authority over the trust income. The Section 2503(c) trust is eliminated because it must end or at least offer the beneficiary ownership of the trust assets at age 21 according to federal law. All three trusts qualify for the annual gift tax exclusion. (Domain 4-Developing the Recommendation(s))

Which of the following regarding the executor's responsibilities in managing the assets of an estate are CORRECT? 1. Any cash belonging to the decedent should be deposited in an estate checking account as soon as assets are released to the estate. 2. All banks in which the decedent had accounts must be contacted to obtain the date-of-death values. 3. The executor is responsible for the interim management and investment of all assets of the estate. A)2 and 3. B)1, 2, and 3. C)1 and 2. D)1 and 3.

B

When the grantor of a revocable trust dies, the trust assets: A)receive a carryover basis and are included in the grantor's gross estate. B)receive a stepped-up basis and are included in the grantor's gross estate. C)receive a stepped-up basis and are not included in the grantor's gross estate. D)receive a carryover basis and are not included in the grantor's gross estate.

B // Assets in a revocable trust are included in the grantor's gross estate. When the grantor dies, the assets receive a stepped-up basis.

Several years ago, Tom and his sister, Laura, purchased a tract of real property as joint tenants with right of survivorship (JTWROS). Tom can prove that he contributed $50,000 toward the $200,000 purchase price and Laura contributed the remaining $150,000. Laura died in the current year, and her will provided that all of her assets would pass to her daughter, Kate. The real property was worth $1 million on the date of Laura's death. The value of Laura's interest in the property included in her gross estate is: A)$600,000. B)$750,000. C)$500,000. D)$1,000,000.

B // $750,000 will be included in Laura's gross estate. Property held JTWROS is included in the decedent's gross estate on the basis of the relative contribution toward the cost of the property (the consideration furnished rule). Because Laura originally contributed 75% of the purchase price of the tract of land, $750,000 ($1,000,000 × 75%) is included in her gross estate.

Jackie has 4 adult children. She owns a small apartment building with a current fair market value of $500,000. The apartments generate an annual income of $50,000. Jackie wants to transfer this asset to her children but retain the right to the apartment income for the rest of her life. She also wants the apartment building to be excluded from her gross estate when she dies. Her current life expectancy is 9 years. Which of the following recommendations is most likely to meet Jackie's objectives? A)Revocable living trust B)GRAT with a trust term of 7 years C)QPRT with a trust term of 7 years D)GRUT with a trust term of 10 years

B // A revocable trust will not meet Jackie's objective of removing the apartment building from her gross estate, and a QPRT cannot be used because a QPRT is appropriate only for a personal residence. A GRUT with a trust term of 10 years is not likely to meet Jackie's objectives because Jackie must survive the term of the trust for the asset to be removed from her gross estate and her life expectancy is 9 years. A GRAT with a trust term of 7 years is the recommendation most likely to meet her objectives. (Domain 4-Developing the Recommendation(s))

Richard is serving as executor of his grandfather's estate. He consults a CFP© professional, who is also a licensed attorney, for advice on handling the estate. After reviewing the estate's assets and liabilities, including a potentially large estate tax liability, the CFP© professional determines that the estate may have a liquidity shortage and recommends that Richard develop a cash flow plan for the estate. Which of the following actions would be appropriate in implementing the recommendation to develop a cash flow plan for the estate? 1. Determine which assets are the best candidates for sale if it becomes necessary to sell estate property 2. Begin planning a strategy to make up any projected cash deficit 3. Account for the possibility of unexpected expenses 4. Explore ways of reducing the estate's estate tax liability by making special elections under the estate tax laws A)1 and 3 B)1, 2, 3, and 4 C)3 and 4 D)2 only

B // An executor should take all of these actions when developing a cash flow plan for an estate.

Maxine is 67 years old. She has no will and doesn't feel she needs one. Her estate is valued at $500,000 and is comprised of her home valued at $180,000 and mutual funds. Maxine relies upon the income and growth from her mutual funds for support. She can't afford to gift any of her assets at this time. Upon her death, she wants her assets to pass directly to her daughter, Clarice, avoiding probate, if possible. What form of will substitute would you suggest she use? A)Outright gift. B)Joint tenancy with right of survivorship. C)Irrevocable living trust. D)Government savings bonds.

B // Because Maxine relies upon the income from her investments for support, neither gifting the assets to Clarice nor placing them in an irrevocable trust for Clarice's benefit are recommended. At 67, Maxine still has a significant life expectancy, so she wouldn't want to sell her mutual funds to invest in government savings bonds. Nor would this accomplish the transfer of assets at her death. She requires both the growth and income from her investments. Titling her assets as joint tenancy with rights of survivorship allows them to pass directly to Clarice upon Maxine's death, thereby avoiding probate.

Wilhelm, a CFP® professional who is also a licensed attorney, is meeting with a new client, Reginald. Wilhelm has already established and defined the client relationship with Reginald and has provided all the necessary disclosures. During the meeting, Reginald tells Wilhelm that he is 84 years old, but he seems unsure of his birth date. Reginald also states that he would like to execute a will leaving his entire estate to his children and grandchildren. He remembers the names of his 3 children but he is unsure how many grandchildren he has and can't remember any of their names. In fulfilling his engagement with Reginald, which of the following steps should Wilhelm take next? A)Ask Reginald whether he prefers a per capita or per stirpes distribution scheme in his will. B)Investigate whether Reginald has testamentary capacity. C)Investigate whether Reginald has been subject to undue influence. D)Ask Reginald whether he prefers a holographic or nuncupative will.

B // Before taking any other steps, Wilhelm should investigate whether Reginald has testamentary capacity to ensure that Reginald can execute a valid will at all. The fact that Reginald seems unsure of his birth date and can't remember the names of any of his grandchildren indicates he may not be of sound mind. Asking whether Reginald prefers a holographic (handwritten) or nuncupative (oral) will is irrelevant because if the CFP® professional drafts a will, it will be a statutory (formal) will. There is no indication at this point that Reginald has been subject to undue influence. (Domain 2-Gathering Information Necessary to Fulfill the Engagement)

Bob and Mary Jane have 3 young nephews. They want to contribute to an education fund for the nephews in 2019. They want to contribute the maximum amount possible as long as they do not incur any taxable gifts. Assuming they have made no gifts in the past, which of the following recommendations will allow them to contribute the largest sum of money without incurring a taxable gift? A)Contribute to a Section 2503(b) trust for each nephew. B)Contribute to a Section 529 plan for each nephew. C)Contribute to a Coverdell Education Savings Account (ESA) for each nephew. D)Use gift-splitting and make an outright gift of cash to each nephew.

B // Contributing to a Section 529 plan is the best option. The contributions will be considered gifts to the nephews, but the contributions can be treated as being made ratably over a 5-year period. Therefore, each spouse could contribute $75,000 ($15,000 annual exclusion × 5) for each nephew, without resulting in a taxable gift. The total that can be contributed is $450,000 ($15,000 annual exclusion × 5 years × 3 nephews × 2 spouses). Of course if they make this large a gift to the nephews they will not be able to make gifts for them for four more years without the gifts being an adjusted taxable gift in those years because the annual gift tax exclusions for those years were used in 2019. Outright gifts of cash and contributions to Section 2503(b) are eligible for the annual exclusion, but only one year's worth of annual exclusion can be used for each nephew. Therefore, even with gift-splitting, the maximum gift they can make without incurring a taxable gift is $90,000 ($15,000 annual exclusion × 3 nephews × 2 spouses). Annual contributions to Coverdell ESAs are limited to $2,000 for each nephew, so the maximum possible contribution is $6,000.

Krypton Co. has 4 equal partners and a value of $2,400,000. The partners want to implement a business continuation plan in which the surviving partners buy a deceased partner's business interest at his death. The partners would like to fund the buyout with life insurance policies. Which of the following statements regarding the business continuation plan for Krypton Co. is(are) CORRECT? 1. A cross-purchase plan would involve each partner purchasing 3 life insurance policies, one on each of the lives of the other partners. 2. Each policy purchased in a cross-purchase plan would have a death benefit of $600,000. 3. A stock redemption plan, which would be most appropriate for Krypton Co., would involve the purchase of 4 policies. 4. Premiums are tax deductible for the policyowners under both a cross-purchase and a stock redemption plan. A)3 and 4. B)1 only. C)1 and 2. D)1, 2, and 4.

B // Each partner would purchase 3 policies, 1 on each of the other 3 partners, resulting in a total of 12 policies purchased. The value of each partner's share in the business is $600,000 ($2,400,000 ÷ 4 partners = $600,000, ). The death benefit each partner would purchase on the other 3 partners is $200,000 ($600,000 ÷ 3 remaining partners = $200,000). A stock redemption plan is inappropriate for Krypton. because it is a partnership and has no stock. Premiums are not tax deductible in either case; however, the life insurance proceeds are received income tax free.

Mildred recently added her granddaughter's name to her $300,000 checking account as a JTWROS. Assuming neither party has any additional accounts at this financial institution, which of the following statements is CORRECT? A)If the granddaughter writes a $25,000 check from the account to pay her own credit card bills, there is no taxable gift. B)If Mildred dies tomorrow, the checking account will not be included in her probate estate. C)A taxable gift occurred when the granddaughter's name was added. D)Only $250,000 of the checking account balance will be FDIC insured.

B // If Mildred dies tomorrow, the checking account will not be included in her probate estate because JTWROS property passes to the surviving joint tenant(s) automatically by operation of law. There is no taxable gift when the granddaughter's name is added to the account, but a taxable gift occurs when the granddaughter withdraws money. The $25,000 gift exceeds the $15,000 annual exclusion amount (for 2019), and will therefore be a taxable gift. Because this is a joint account, each party will be insured under FDIC for $150,000 (one-half of the balance). Therefore, the entire account balance will be insured.

On December 1, Rosario gave her son, Alex, stock with a fair market value of $20,000. The annual exclusion was unavailable, and Rosario paid gift tax of $5,000. Rosario had purchased the stock 2 years ago, and her adjusted basis on the date of the gift was $12,000. On January 10 of the following year, Alex sold the stock for $24,000. What was Alex's basis when he sold the stock? A)$20,000. B)$14,000. C)$17,000. D)$12,000.

B // If gain property is gifted, a portion of any gift tax paid is allocated to the recipient's basis. Rosario's original basis was $12,000; the FMV at the date of the gift was $20,000. The gift tax paid on the gift was $5,000. Therefore: ($8,000 ÷ $20,000) × $5,000 = $2,000. Alex's basis includes Rosario's adjusted basis of $12,000, plus $2,000 of allocated gift tax paid, for a total basis of $14,000.

Jack and Jill Jones, age 65, have decided that, in order to best pay their $3,000,000 federal estate tax bill, they will purchase a second-to-die life insurance policy. In order to keep the proceeds out of their estate, they were advised to create an irrevocable life insurance trust. Jack and Jill applied for the insurance and the policy was issued to them. An irrevocable trust was drafted. The policy was transferred into the irrevocable trust, and 90 days later both Jack and Jill were killed in a plane crash. The Internal Revenue Service wants to include the insurance in the estate for tax purposes. Which statement(s) is (are) CORRECT? (CFP® Certification Examination, released 11/94) I. The insurance will be included in the estate because the trust was drafted after the insurance was approved. II. The insurance will be included in the estate because the premiums were a gift from the insured. III. The insurance will be included in the estate because the insureds transferred the policy within three years of death. IV. The Internal Revenue Service is wrong—the insurance will not be included in the estate. A)I only. B)III only. C)II and III. D)IV only.

B // Life insurance policies transferred within 3 years of death are included in the gross estate. Note: In the online version of Kaplan Schweser's QBank, the letters preceding the answer choices that appear in the original CFP Board question have been eliminated. The answer choices may not be in the same order as in the original CFP Board released questions.

In 2019, Amanda establishes an irrevocable trust for the benefit of her 2 sons as equal beneficiaries. Amanda contributes $20,000 to the trust in 2019, and she plans to contribute the same amount each year going forward. The trust provides that each son has the right, during a 30-day period each year, to withdraw the lesser of the gift tax annual exclusion amount or 25% of the annual trust contribution. Neither son exercises his right of withdrawal during 2019. Which of the following statements regarding the transfer tax consequences of this arrangement is(are) CORRECT? 1. Amanda's gift to the trust in 2019 is not eligible for the annual exclusion because neither son made a withdrawal from the trust. 2. Each son has made a taxable gift to the other in 2019. 3. Both sons must file gift tax returns for 2019. A)1 only B)None of these statements is correct. C)2 and 3 D)1, 2, and 3

B // None of these statements is correct. Statement 1 is incorrect because a grantor who grants Crummey powers to trust beneficiaries is entitled to the annual exclusion for gifts to the trust even if the beneficiaries never exercise their right of withdrawal. Statement 2 is incorrect; because neither son's withdrawal right exceeds the 5/5 limitation (the greater of $5,000 or 5% of the annual trust contribution), the sons' lapses of their withdrawal rights do not constitute gifts. 25% of the $20,000 contribution is $5,000. Since the withdrawal right is the lesser of the annual gift tax exclusion or 25% of the annual contribution to the trust, the withdrawal right is only $5,000 per beneficiary. Thus, the withdrawal rights do not exceed a 5/5 power. Statement 3 is incorrect; because neither son has made a taxable gift in 2019 neither son is required to file a gift tax return.

Bob wants to contribute $5 million to a charitable cause. His objectives are to set up an arrangement in which he retains the right to an income interest from the $5 million during his life and then for any remaining value to pass to a charity when he dies. He wants to retain the right to make additional contributions to the arrangement after inception and to revoke the transfer if his financial status deteriorates excessively before he dies. He also wants to obtain a charitable income tax deduction for his contribution. Which of the following techniques is(are) suitable for achieving Bob's objectives? 1. CRUT 2. CRAT 3. Pooled income fund 4. Charitable gift annuity A)1 and 3. B)None of these. C)3 and 4. D)1 only.

B // None of these techniques will achieve Bob's objectives because they all require that the charitable transfer be irrevocable. Bob's desire to be able revoke the transfer precludes the use of any these techniques.

Annette owned a farm as JTWROS with her sister for many years. The sisters originally purchased the farm several years ago, and Annette became the sole owner of the farm when her sister died last year. Last month, Annette sold the farm for $1 million. She consults a CFP® professional for advice on the income tax consequences of the sale. Which of the following information should the CFP® professional obtain to address Annette's concerns? 1. The amount each sister contributed to the original purchase price of the farm 2. The fair market value of the property on the date of the sister's death 3. Whether Annette held the farm long enough to satisfy the 1-year LTCG holding period following the sister's death 4. The amount of Annette's expected adjusted gross income (AGI) for this year A)1 and 2 B)1, 2, and 4 C)2, 3, and 4 D)1 and 3

B // Statement 1 is correct because the amount each sister contributed to the original purchase price will determine what percentage of the farm received a stepped-up basis when the sister died. Statement 2 is correct because the FMV on the date of death will determine the basis of the portion of the farm that received a stepped-up basis. Statement 3 is incorrect because the holding period of inherited property is always considered to be long-term. Statement 4 is correct because Annette's AGI will determine the tax rate that applies to any gain resulting from the sale. (Domain 2-Gathering Information Necessary to Fulfill the Engagement)

Conrad owns a sizeable portfolio of income producing investments. In preparing his estate plan, he plans to leave the portfolio to a testamentary trust. He wants to leave his wife, Edna, an interest in the trust but he wants to ensure that no portion of the trust assets will be included in her gross estate when she dies. Which of the following interests could he leave to Edna and still accomplish his goal? 1. The right to income from the trust for life. 2. The right to income from the trust for life, plus the power to invade the principal for her health, education, maintenance, and support (HEMS). 3. The right to income from the trust for life, plus a general power of appointment over the principal. A)2 and 3. B)1 and 2. C)Neither 1, 2, nor 3. D)1 only.

B // Statement 1 is correct. Conrad can give Edna the right to the trust income for life (a life estate) without the trust assets being included in her gross estate. Statement 2 is correct; if Edna's right to invade the principal is limited to an ascertainable standard such as HEMS (health, education, maintenance, and support) the assets will not be included in her gross estate. Statement 3 is incorrect; if Edna has a general power of appointment over the trust assets, the trust assets will be included in her gross estate when she dies.

Gerry is 68 years old. Because of a serious medical condition, his life expectancy is 5 years. He owns several valuable pieces of property, some of which he expects to appreciate rapidly during the next few years. After consulting with a CFP® professional, he decides to create a grantor retained annuity trust (GRAT) naming his daughter, Christine, as remainder beneficiary. His objective is to reduce the size of his gross estate for estate tax purposes. Which of the following statements regarding Gerry's GRAT is(are) CORRECT? 1. An appropriate term for the GRAT would be 7 years. 2. A rapidly appreciating asset would be an appropriate asset to transfer to the GRAT. 3. Gerry will receive annual income payments from the trust during the GRAT term. 4. For gift tax purposes, the present value of Gerry's retained interest in the trust property will be considered to be zero. A)1 and 4 B)2 and 3 C)3 and 4 D)1, 2, and 3

B // Statement 1 is incorrect because Gerry needs to survive the term of the GRAT for the trust asset to be removed from his gross estate. The trust term should be less than 5 years. Statement 2 is correct; GRATs achieve the best transfer tax results if they are funded with appreciating assets. Statement 3 is correct; a GRAT provides the grantor with annual income payments during the term of the trust. Statement 4 is incorrect; GRATs are not subject to the zero value rules of Chapter 14, so Gerry's retained interest will not be valued at zero for gift tax purposes.

Delores wants to create a trust for the benefit of her niece, Annie, who is 14 years old. After consulting with a CFP® professional, she decides to create a Section 2503(b) trust for Annie's benefit and fund it with annual trust contributions of $15,000 in cash. Which of the following statements regarding this trust is(are) CORRECT? 1. Delores's annual contributions to the trust do not qualify for the gift tax annual exclusion. 2. The trust principal must be distributed to Annie when she turns 21. 3. All income from the trust must be distributed annually. 4. The trust is a complex trust. 5. The trust income may be subject to the kiddie tax. A)1, 2, and 3 B)3 and 5 C)2, 3, and 4 D)4 and 5

B // Statement 1 is incorrect; Annie's right to the income from the trust is a present interest, so the portions of Delores's contributions that are attributed to Annie's right to income are eligible for the annual exclusion. Statement 2 is incorrect; a Section 2503(b) trust (unlike a Section 2503(c) trust) is not required to end when the minor turns 21. Statement 3 is correct. Statement 4 is incorrect; a Section 2503(b) trust is a simple trust because all income must be distributed annually. Statement 5 is correct.

Patrick wants to make a gift of stock today to his nephew, Richard. Richard plans to sell the gifted stock in 6 months. Patrick wants to ensure that Richard receives a carryover basis and a long-term holding period in the gifted stock. He consults a CFP® professional for advice on which stock to gift. The CFP® professional could help Patrick achieve his objectives by recommending that he give Richard which of the following stocks? I. Stock A, which Patrick acquired in 2016 for $8 a share. Its current value is $12 a share. Its value is expected to be $10 a share in 6 months. II. Stock B, which Patrick acquired in 2017 for $13 a share. Its current value is $10 a share. Its value is expected to be $9 per share in 6 months. A)Neither I nor II B)I only C)Both I and II D)II only

B // Statement I is correct; Stock A is appreciated property, so Richard will receive Patrick's carryover basis and holding period. Statement II is incorrect; because Stock B is loss property and Richard will sell it for less than the FMV at the time of the gift, Richard must determine his loss based on the FMV of the stock at the time of the gift and Patrick's holding period will not carry over. (Domain 4-Developing the Recommendation(s))

Jonathan is the sole owner of ABC Manufacturing, Inc., a closely held corporation. Jonathan lives in a noncommunity property state and recently married for the second time. He would like to give his new wife, Alice, an ownership interest in the business. What benefits would result from changing the ownership of his corporate stock to himself and Alice as joint tenants with rights of survivorship? 1. The stock would avoid probate upon the death of the first spouse. 2. Alice would own an undivided equal interest in the business. 3. Alice would receive a step-up in basis of 100% of the stock upon Jonathan's death. 4. Jonathan still controls the ultimate disposition of all shares of stock. A)1, 2, 3, and 4. B)1 and 2. C)2, 3, and 4. D)1 only.

B // Statements 1 and 2 are correct. This form of property ownership avoids probate because the stock would pass to the surviving spouse by right of survivorship. This saves time and money. This form of ownership would also accomplish Jonathan's goal of providing Alice with partial ownership of the business. Jonathan would not control the ultimate disposition of the stock, because if he dies first, Alice would own 100% of the stock and could leave it to anyone she chooses. Alice would receive a stepped-up basis in only 50% of the stock at Jonathan's death.

The XYZ Corporation is a C corporation with 4 shareholders. The total value of the corporation is $1 million. The shareholders want to ensure that if any of them dies, the corporation will redeem their shares. The corporation does not currently have enough cash to make the redemption, so the shareholders also want to provide a method of funding the agreement. Which of the following recommendations would best accomplish the shareholders' objectives? A)Implement a self-canceling installment note (SCIN) between the corporation and each shareholder. B)Enter into an entity-purchase buy-sell agreement funded with 4 life insurance policies of $250,000 each. C)Implement a corporate recapitalization. D)Enter into a cross-purchase buy-sell agreement funded with 4 life insurance policies of $250,000 each.

B // The best recommendation is to enter into an entity-purchase buy-sell agreement funded with 4 life insurance policies of $250,000 each. The corporation would own a $250,000 life insurance policy on each shareholder and would use the death proceeds to buy the shares of an owner who dies. With a cross-purchase buy-sell agreement, the surviving shareholders would purchase the shares of a deceased shareholder. A SCIN is typically used to sell an asset to a family member, with a provision that the note is automatically canceled upon the seller's death. A corporate recapitalization is an estate freeze technique used to gift a corporation to younger family members using valuation discounts.

Stan is the sole beneficiary of a trust whose assets consist of stocks and bonds. The trust generated $20,000 of distributable net income (DNI) for the current tax year. Of this amount, $5,000 is tax-exempt interest on municipal bonds and the remaining $15,000 consists of taxable dividends. During the year, the trustee made a $1,000 discretionary distribution of trust income to Stan. What is the taxable portion of this distribution in the current year? A)$250 B)$750 C)$1,000 D)$500

B // The taxable portion of the distribution is based on the taxable portion of the trust's distributable net income (DNI). Therefore, $750 of the distribution-or [$1,000 × ($15,000 ÷ $20,000)]-is taxable to Stan, the sole beneficiary.

Sheldon is a successful real estate investor. His net worth is approximately $20 million. He has one son, Marcus. Sheldon has made numerous taxable gifts to Marcus over the years and has fully utilized his applicable credit amount. Sheldon wants to transfer additional parcels of investment real estate to Marcus as long he does not incur any gift tax. Which of the following recommendations is most suitable for meeting Sheldon's objective of avoiding taxable gifts? A)Transfer investment property to a family limited partnership (FLP) and give limited partnership interests valued at $50,000 to Marcus each year B)Transfer investment property to Marcus under a self-canceling installment note (SCIN) charging a premium over FMV C)Transfer investment property to a qualified personal residence trust (QPRT) naming Marcus as the remainder beneficiary D)Retitle investment property as JTWROS naming Marcus as a joint tenant

B // The use of a SCIN is treated as a sale and not a gift as long as the seller charges an appropriate premium over FMV or an above-market interest rate. All of the other types of transfer are treated as gifts and will result in taxable gifts if they exceed the gift tax annual exclusion amount ($15,000 in 2019).

Ron made the following gifts in 2019: --$62,000 cash to his son, Ron Jr. --$120,000 in stock to his wife, Bonnie. --$40,000 cash to his church. --A $32,000 auto to his nephew. --$32,000 cash to his mother. Ron and Bonnie elect gift splitting. Bonnie's only gift during the year is a $32,000 cash gift to her mother. What amount of taxable gifts must Ron report for 2019? A)$141,000. B)$18,000. C)$19,000. D)$38,000.

C

Nelson is the beneficiary of a trust established last year (2018) by his Uncle Walter. The trust allows Nelson to withdraw 9% of the trust principal each year. Nelson made no withdrawals from the trust in 2018. Nelson died in 2019 before his right to withdraw for 2019 had lapsed. The balance of the trust in both years was $1 million. What amount must be included in Nelson's gross estate? A)$0 B)$1 million C)$130,000 D)$90,000

C // $130,000 must be included in Nelson's gross estate. This includes 9% ($90,000) of the trust principal because of the unexercised withdrawal right at Nelson's death in 2019, plus 4% ($40,000) for 2018 because the 9% withdrawal right exceeded the 5-and-5 power by 4%. Lapses of general powers of appointment above the 5-and-5 power in the three years prior to the holder's death are included in the holder's gross estate (in addition to the full amount of any unused general power of appointment for the year of death).

John consults a CFP® professional for estate planning advice. He is 46 years old and has a son, Randy, who is 7. John wants to establish an arrangement that will pay his favorite charity an annual income for 14 years until Randy turns 21, and then terminate and pay Randy a lump sum. He is willing to contribute $1 million to fund this arrangement. If possible, he would like to receive an income tax charitable deduction at the inception of the arrangement. Which of the following recommendations is most suitable for achieving John's objectives? A)Charitable remainder annuity trust (CRAT) B)Charitable gift annuity C)Charitable lead trust (CLT) D)Pooled income fund

C // A charitable lead trust (CLT) is the only answer choice that will meet John's needs. If the CLT is set up as a grantor trust, a charitable deduction is available at inception. The other answer choices are not suitable because they pay an income interest to a noncharitable beneficiary and the remainder interest to a charity. (Domain 4-Developing the Recommendation(s))

joe and Nathan are partners in a CPA firm that they established 22 years ago. Both are age 52. Joe has never been married and Nathan has 3 grown children who are not interested in the accounting practice. Which of the following techniques would you recommend to provide for the continuation of the business and the funds to purchase the deceased owner's share if one of them dies? A)A stock recapitalization. B)A family partnership. C)A cross-purchase buy-sell agreement. D)A second-to-die policy.

C // A cross-purchase buy-sell agreement funded with life insurance (each partner owns a policy on the life of the other partner) would provide the funds to buy out the deceased partner's interest from the heirs so that the surviving partner can continue the business.

Phoebe, age 73, has accumulated a sizable estate during her career as an entrepreneur. She owns a successful business, which is structured as a C corporation, and a life insurance policy with a face value of $1 million on her own life. She is single, but she has several nieces and nephews she is fond of. Some of them currently attend expensive private colleges. She is interested in transferring a portion of her wealth to her nieces and nephews, but she wants do so in ways that might reduce or eliminate estate taxes when she dies. Which of the following recommendations are likely to help her achieve her objectives? 1. Make annual gifts to her nieces and nephews equal to the gift tax annual exclusion amount. 2. Transfer the life insurance policy to an irrevocable life insurance trust (ILIT). 3. Pay her nieces' and nephews' college tuition directly to their colleges. 4. Implement a corporate recapitalization for her business and systematically gift the nonvoting common stock to her nieces and nephews. A)1 only. B)2 and 3. C)1, 2, 3, and 4. D)1, 2, and 3.

C // All of these recommendations are likely to help Phoebe achieve her objectives. The recommendations in Statements 1 and 3 will remove assets from Phoebe's gross estate and will not result in adjusted taxable gifts being added to her taxable estate because they are not taxable gifts. The recommendation in Statement 2 will remove the life insurance death benefit from Phoebe's gross estate if Phoebe lives for more than 3 years after making the transfer. The recommendation in Statement 4 is an estate freezing technique that will remove the future appreciation in the gifted common stock from Phoebe's gross estate.

William gave his son, James, a house on August 1. The fair market value of the house on January 1, August 1, and December 31 of the same year was as follows: $130,000, $140,000, and $150,000. William had purchased the property in 1994 for $60,000 and had used it as rental property the entire time he held it. His basis at the time of the gift was $50,000. No gift tax was paid at the time of the gift. What is James' adjusted basis in the house? A)$60,000. B)$150,000. C)$50,000. D)$130,000.

C // Because this was a gift of appreciated property, James receives a carryover basis. James' basis is $50,000.

Your client, a senior family member in ill health, wants to sell the family business to a junior family member and would like payments to cease on his death. Which of the following estate planning techniques might meet your client's needs? 1. Installment sale. 2. Private annuity. 3. Family limited partnership. 4. Self-canceling installment note. A)2, 3, and 4. B)1 only. C)2 and 4. D)1, 2, 3, and 4.

C // Both a private annuity and a self-canceling installment note (SCIN) will achieve the client's goals. Payments would not stop at death with an installment sale. A family limited partnership is an appropriate gifting technique, but does not involve a sale.

Jonathan is the sole owner of ABC Manufacturing, Inc., a closely held corporation. Jonathan lives in a noncommunity property state and recently married for the second time. He would like to give his new wife, Alice, an ownership interest in the business. However, Jonathan would like to pass the business on to his nephew, Bob, upon his death. What would be the ramifications of changing the ownership of his corporate stock to himself and Alice as joint tenants with rights of survivorship? A)Jonathan can still gift the stock to whomever he chooses. B)Upon Jonathan's death, Jonathan could leave the stock to Bob in his will. C)Upon Jonathan's death, Alice would own the stock by right of survivorship. D)Jonathan can still control the ultimate ownership of the stock.

C // If Jonathan changes the ownership of his business stock to himself and Alice as joint tenants with rights of survivorship, he gives up the ability to pass the entire business on to Bob. When property is owned as joint tenants with rights of survivorship and one of the tenants dies, ownership of the property passes directly to the remaining tenant(s), who controls the ultimate disposition of the property.

Terry and Pat, 50/50 unrelated co-owners, set up a stock redemption agreement for their business. The value of their business is $500,000, and they will fund their agreement with life insurance. They have asked a CFP® professional to advise them on the amount of insurance they should apply for on each life, who should be the owner, and who should pay for the life insurance contracts. Which of the following should the CFP® professional recommend? (CFP® Certification Examination, released 08/04) A)Terry and Pat should each own a $250,000 contract on the other and should individually pay the premium on the policy each owns. B)The company should own a $500,000 contract on both Terry and Pat. The company should pay premiums on the contract. C)The company should own and pay for two $250,000 contracts, one on Terry and one on Pat. D)Terry and Pat should each own a $250,000 contract on the other. The company should pay the premiums on the contracts.

C // In a stock redemption buy-sell agreement, the corporation purchases a separate life insurance policy on the life of each shareholder. The corporation is the purchaser, owner, and premium payer. The amount of insurance on each shareholder is equal to the respective shareholder's interest in the business. Therefore, the company should own and pay for two $250,000 policies, one on Terry and one on Pat. Note: In the online version of Kaplan Schweser's QBank, the letters preceding the answer choices that appear in the original CFP Board question have been eliminated. The answer choices may not be in the same order as in the original CFP Board released questions.

Kurt, age 68, is suffering from a serious illness. He believes he will die within the next 7 − 9 years. He owns an investment portfolio with a current value of $10 million. He wants the portfolio to pass to his niece, Karla, when he dies, but he wants to retain a fixed annual income from the portfolio. Karla is currently 16 years old. In achieving his objectives, Kurt would like to structure a transaction that will remove the portfolio from his gross estate if it is possible to do so. Which of the following recommendations is most likely to meet Kurt's objectives? A)Transfer the portfolio to a revocable living trust reserving a life income interest and name Karla as the remainder beneficiary B)Transfer the portfolio to a Section 2503(b) trust with Karla as the beneficiary C)Transfer the portfolio to a GRAT with a term of 5 years and name Karla as the remainder beneficiary D)Transfer the portfolio to a GRUT with a term of 10 years and name Karla as the remainder beneficiary

C // Kurt is most likely to achieve his objectives by transferring the portfolio to a grantor retained annuity trust (GRAT) with a term of 5 years and naming Karla as the remainder beneficiary. A GRAT will provide Kurt with a fixed annual income and, if he survives the trust term of 5 years, the trust corpus will be excluded from his gross estate. A grantor retained unitrust (GRUT) is not appropriate because the annual income from the trust may fluctuate and Kurt is not likely to survive the trust term of 10 years. A revocable living trust will not meet Kurt's objective of removing the trust corpus from his gross estate. A Section 2503(b) trust is not suitable because all income from a Section 2503(b) trust must distributed annually for the minor child's benefit.

Dallas and Bud, 2 brothers, are planning to purchase an expensive beachfront property together. Dallas plans to contribute 65% of the $10 million purchase price, and Bud will contribute the rest. They want to hold title to the property together, but they prefer that the purchase of the property not generate any tax consequences for either of them. In addition, each brother has a will leaving all of his assets to his surviving children. They both want their interest in the property to pass under their will when they die, and they want the property to avoid probate. Which of the following forms of ownership would you recommend to meet the brothers' objectives? I. Joint tenancy with right of survivorship (JTWROS) II. Tenancy in common A)II only B)I only C)Neither I nor II D)Both I and II

C // Neither form of ownership will meet the brothers' objectives. Statement I (JTWROS) is incorrect because a gift from Dallas to Bud will result if Dallas contributes more than an equal share of the purchase price. In addition, JTWROS property will not pass under the brothers' wills, although it will avoid probate. Statement II is also incorrect. Although taking title as tenants in common will not result in a taxable gift and allow the property to pass under the brothers' wills, tenancy in common property does not avoid probate. (Domain 4-Developing the Recommendation(s))

Jeanette, who is single, made the following gifts in 2019: 1. Paid $16,000 in medical bills for her sister Joyce; the payments were made directly to the hospital. 2. Gave $20,000 to her mother to pay for her rent, utilities, and food. 3. Gave $16,000 to her cousin Cheryl as start-up financing for a new business. 4. Jeanette also made a $30,000 interest-free demand loan to her cousin Cheryl, on January 1, 2019; the loan was still outstanding at the end of the year; the applicable federal interest rate for 2019 remained constant at 8%; Cheryl had no net investment income during 2019. What is the amount of Jeanette's taxable gifts for 2019? A)$10,400. B)$8,000. C)$6,000. D)$38,400.

C // Payment directly to the hospital is a qualified transfer, not a gift. $20,000 to mother is reduced by the $15,000 annual exclusion; therefore, taxable gift is $5,000. $16,000 to Cheryl is reduced by the $15,000 annual exclusion; therefore, taxable gift is $1,000. Loan is less than $100,000; therefore, the imputed interest cannot exceed Cheryl's net investment income, which was 0. Total taxable gifts = $6,000

Angela, age 76, consults a CFP® professional for advice on making a large charitable contribution. After analyzing Angela's objectives and current financial status, the CFP® professional determines that a charitable remainder annuity trust (CRAT) would meet Angela's needs. She recommends that Angela contribute $1 million to the CRAT and name herself as the income beneficiary. When the CFP® professional is meeting with Angela to communicate the recommendation, Angela states that she is concerned that the CRAT may not provide her with sufficient income during her remaining lifetime. In responding to Angela's concerns, the CFP® professional could make which of the following statements? 1. Angela is assured of receiving an annual income of at least $50,000 from the trust. 2. Angela is assured of receiving an annual income from the trust even if the trust assets generate no income. 3. Angela can revoke the trust if she ever feels the income payments from the trust are insufficient. A)1 only B)2 and 3 C)1 and 2 D)3 only

C // Statement 1 is correct because the annuity payout rate from a CRAT must be at least 5%. Statement 2 is correct because a CRAT must pay the specified annuity each year even if it must invade principal to do so. Statement 3 is incorrect because a CRAT must be irrevocable. (Domain 5-Communicating the Recommendation(s))

Harold, age 83, transfers $7 million to an irrevocable trust. The sole beneficiary of the trust is Harold's great-granddaughter, Amy, who is 8 years old. The trustee is Old National Bank. The trust provides that Old National Bank must annually distribute all trust income for Amy's benefit until she is age 25. When Amy turns 25, all remaining trust corpus is to be distributed to her in a lump sum. Which of the following statements regarding the GSTT consequences of this trust is(are) CORRECT? 1. Harold's transfer of $7 million to the trust is a direct skip. 2. Harold's transfer of $7 million to the trust is subject to both gift tax and the GSTT. 3. Old National Bank is responsible for paying any GSTT due on Harold's transfer of $7 million to the trust. 4. Harold's transfer of $7 million to the trust is eligible for the GSTT annual exclusion. A)2 only B)2 and 3 C)1, 2, and 4 D)1 and 4

C // Statement 1 is correct; Harold's trust is a skip person because the only beneficiary, Amy, is 2 or more generations below the donor (Harold). A direct gift to a skip person is a direct skip. Statement 2 is correct; the transfer is subject to gift taxes as well as GSTT because a transfer to an irrevocable trust is a completed gift subject to gift tax. Statement 3 is incorrect because the donor (Harold) is liable for any GSTT due on a direct skip. Statement 4 is correct; Amy's right to the income from the trust is a present interest which qualifies for the GSTT annual exclusion.

Carmen, age 70, is single. She owns assets valued at $18 million. She has no immediate family and wants to leave her entire estate to a niece, who lives in another state. Carmen is concerned, however, that the niece might not have the maturity to handle such a large sum of money if she receives it in a lump sum distribution from the estate. She consults a CFP® professional, who recommends that Carmen create a testamentary trust for the benefit of her niece. After discussing the recommendation with the CFP® professional, Carmen accepts it and asks the CFP® professional to assist her in implementing it. Which of the following steps will be necessary in the implementation of this recommendation? 1. Carmen will execute a will containing the terms of the trust. 2. Carmen will file a gift tax return reporting the gift to the trust as a taxable gift. 3. When Carmen dies, the assets that fund the trust will pass through probate. 4. Carmen will begin transferring assets to the trust during her lifetime. A)3 and 4 B)1 and 2 C)1 and 3 D)2 and 4

C // Statement 1 is correct; a testamentary trust is one that is created in the grantor's will and becomes effective at death. Statement 2 is incorrect; a testamentary trust is not subject to gift tax because the transfer occurs at death. Statement 3 is correct; the assets that fund a testamentary trust pass through the grantor's will, subjecting them to probate. Statement 4 is incorrect; the assets in a testamentary trust pass to the trust through the grantor's will. They are owned by the grantor until death. (Domain 6-Implementing the Recommendation(s))

In January 2019, Colleen gifted real estate valued at $10 million to her nephew, Greg. Her basis in the property was $4 million. The annual exclusion was not available, and she paid gift tax on the gift. In November 2019, Colleen dies unexpectedly in an automobile accident. On the date of her death, the real estate has a value of $11 million. Which of the following statements regarding the tax consequences of this gift is(are) CORRECT? 1. The gift tax paid on the gift of the real estate will be included in Colleen's gross estate. 2. The real estate will be included in Colleen's gross estate at a value of $11 million. 3. The real estate will be included in Colleen's taxable estate as an adjusted taxable gift of $10 million. 4. Greg will receive a stepped-up basis of $11 million in the real estate as a result of Colleen's death. A)1 only B)2 and 4 C)1 and 3 D)1, 3, and 4

C // Statement 1 is correct; because the gift was made within 3 years of Colleen's death, the gift tax paid will be included in her gross estate. Statement 2 is incorrect and Statement 3 is correct; the gifted real estate is not included in Colleen's gross estate but is included in her taxable estate as an adjusted taxable gift of $10 million. Statement 4 is incorrect; Greg received the real estate as a lifetime gift, so he receives a carryover basis-not a stepped-up basis-in the property.

In 2019, Donald establishes an irrevocable trust for the benefit of his 2 daughters as equal beneficiaries. Donald contributes $120,000 to the trust in 2019, and he plans to contribute the same amount each year going forward. The trust provides that each daughter has the right, during a 30-day period each year, to withdraw the lesser of the gift tax annual exclusion amount or 25% of the annual trust contribution. During 2019, neither daughter exercises her right of withdrawal. Which of the following statements regarding the gift tax consequences of this arrangement is(are) CORRECT? 1. Donald has made a taxable gift as a result of his contribution to the trust in 2019. 2. Donald's gift to the trust is eligible for annual exclusions totaling $30,000. 3. Each daughter has made a taxable gift to the other in 2019. 4. Neither daughter must file a gift tax return for 2019. A)1 and 2 B)3 and 4 C)1, 2, and 3 D)2 and 3

C // Statement 1 is correct; because the trust is irrevocable, Donald's contribution represents a completed, taxable gift. Statement 2 is correct; because Donald gave the daughters withdrawal rights (Crummey powers), his contribution to the trust is treated as a gift of a present interest and is eligible for the annual exclusion. There are 2 donees, so he is entitled to 2 annual exclusions. This is NOT due to a spousal split because there is no mention of him having a wife. The two exclusions come from the two donees. Statement 3 is correct; each daughter's right to withdraw is limited to $15,000 [the lesser of the annual exclusion amount ($15,000) or 25% of the annual trust contribution amount (25% × $120,000 = $30,000)]. $15,000 exceeds the 5/5 limitation of $6,000 [the greater of $5,000 or $6,000 (5% × $120,000 = $6,000)]. Each daughter makes a gift to the other to the extent that one-half of her lapsed amount exceeds the 5/5 limitation [($15,000 ÷ 2) − $6,000 = $1,500]. The reason $15,000 is divided by 2 is because there are two trust beneficiaries here. When the lapse occurs half of the value remaining in the trust stays with the daughter who let the power lapse. The remaining half is going to her sister. This amount going to her sister is the gift taxable event. The gifts are future interest gifts, so the daughters must both file gift tax returns. This documents the gifts and uses a portion of their applicable gift tax credit. Notice that each sister is giving a gift to the other sister, but there is no netting of these gifts.

Alice is a 70-year-old widow with 3 children. She places her personal residence, valued at $200,000, into a qualified personal residence trust (QPRT) with a 10 year term. Under the terms of the QPRT, Alice has the right to live in the residence for 10 years and then the property will pass to her children. Using the applicable Section 7520 interest rate, Alice calculates that the present value of her right to live in the house for 10 years is $176,000. Which of the following statements regarding this arrangement is(are) CORRECT? 1. Alice has made a gift of $24,000 to her children at the creation of the trust. 2. Alice's gift to her children is eligible for the gift tax annual exclusion. 3. If Alice dies before the end of the trust term, the value of the residence will be excluded from her gross estate. 4. The QPRT is subject to the zero valuation rules of Chapter 14. A)3 only B)1, 2, and 4 C)1 only D)1, 2, 3, and 4

C // Statement 1 is correct; the value of Alice's gift is the value of the residence ($200,000) minus the present value of her retained interest ($176,000). Statement 2 is incorrect; Alice's gift is a gift of a remainder interest, which is a future interest that does not qualify for the annual exclusion. Statement 3 is incorrect; if Alice dies before the end of the trust term, the residence will be included in her gross estate. She must survive the 10-year trust term for the residence to be excluded from her gross estate. Statement 4 is incorrect; QPRTs are not subject to the zero valuation rules of Chapter 14. Chapter 14 specifically excludes gifts of a "qualified interest" from the zero valuation rules. There are three qualified interests, mandatory annual payments based on a fixed amount of the initial principal (GRAT); mandatory annual payments based on a fixed percentage of the trust amount revalued annually (GRUT); and QPRTs. With a QPRT, the donor is clearly retaining some of the value of the home because they are allowed to remain living there.

Andrew, age 79, wants to make a sizeable gift of most of his property to a local charity, but he would also like to retain an income interest from the property for the remainder of his life. He consults a CFP® professional for advice. After considering Andrew's objectives and current financial status, the CFP® professional recommends that Andrew make a transfer to the charity's pooled income fund. Assuming Andrew accepts this recommendation, which of the following steps are likely to be involved in implementing the recommendation? 1. The charity will establish a separate fund to hold Andrew's donation. 2. Andrew will receive an annual income payment from the fund. 3. Andrew will claim an income tax charitable deduction. 4. The charity will invest Andrew's donation in tax-free municipal bonds. A) 2, 3, and 4 B)1, 2, and 3 C)2 and 3 D)1 and 4

C // Statement 1 is incorrect because in a pooled income fund, a donor's contribution is commingled with the property of other donors. Statements 2 and 3 are correct. Statement 4 is incorrect because a pooled income fund cannot invest in tax-free municipal bonds. (Domain 6-Implementing the Recommendation(s))

John died in 2019 owning property valued at $20 million. Upon his death, $11,400,000 of John's assets passed to a credit shelter trust, with his children as beneficiaries. John's remaining assets passed to a QTIP trust qualifying for the marital deduction. The remainder beneficiaries of the QTIP trust are John's grandchildren. Assuming the executor made a valid QTIP election, which of the following statements is(are) CORRECT? 1. The property transferred into the credit shelter trust qualifies for the marital deduction. 2. The property transferred into the QTIP trust qualifies for the marital deduction. 3. To utilize the GSTT exemption at John's death, a reverse QTIP election must be made. 4. If a reverse QTIP election is made, the assets in the QTIP trust will not be included in the surviving spouse's gross estate at her death. A)1 and 4. B)1, 3, and 4. C)2 and 3. D)2, 3, and 4.

C // Statement 1 is incorrect because property transferred into a credit shelter trust does not qualify for the marital deduction. Statement 2 is correct because assets transferred to a QTIP trust qualify for the marital deduction. Statement 3 is correct because a reverse QTIP election must be made to take advantage of John's GSTT exemption. The reverse QTIP election treats the QTIP property as if the QTIP election was not made for GSTT purposes. Statement 4 is incorrect because assets in a QTIP trust will be included in the surviving spouse's gross estate at death, whether or not a reverse QTIP election was made.

Simon owns a whole life insurance policy on his own life, with a death benefit of $3 million. In March 2019, Simon transfers the policy to an unfunded irrevocable life insurance trust (ILIT) with a Crummey provision. Simon's daughter, Roxanne, is the sole beneficiary of the trust. Each year, Simon gifts $12,000 to the ILIT to pay the policy premiums. Simon dies in June 2022. Which of the following statements regarding the tax consequences of this scenario is(are) CORRECT? 1. The $3 million death benefit will be included in Simon's gross estate. 2. The $3 million death benefit will be included in Simon's probate estate. 3. Simon made a gift to Roxanne when he transferred the policy to the ILIT. 4. Simon's gifts of $12,000 each year to pay the policy premiums are eligible for the gift tax annual exclusion. A)1 and 2 B)2, 3, and 4 C)3 and 4 D)4 only

C // Statement 1 is incorrect because the death benefit of a life insurance policy is not included in the insured's gross estate if the insured transferred ownership of the policy more than 3 years prior to death. Statement 2 is incorrect because the assets in an irrevocable trust avoid probate at the grantor's death. Statement 3 is correct because a policy owner who transfers a policy to an irrevocable trust makes a gift to the trust beneficiaries. Statement 4 is correct; the $12,000 annual gifts to pay the policy premiums are eligible for the annual exclusion because of the Crummey provision.

Kathleen consults a CFP® professional for advice on making a large gift to benefit her niece, who is 14 years old. After exploring Kathleen's objectives and evaluating her current financial status, the CFP® professional recommends that Kathleen establish a Section 2503(c) trust on behalf of the niece. Assuming that Kathleen accepts this recommendation, which of the following steps will be necessary in implementing the recommendation? 1. All trust income will be distributed to the niece each year 2. The trust principal will be distributed to the niece when she reaches age 21 3. If the niece dies before reaching age 21, the trust principal will be returned to Kathleen A)1, 2, and 3 B)3 only C)2 only D)1 and 2

C // Statement 2 is correct. Statement 1 is incorrect because the distribution of income to the niece is discretionary, not mandatory. Statement 3 is incorrect because if the niece dies before reaching age 21, the trust property must pass to the niece's estate or as directed by a general power of appointment held by the niece. (Domain 6-Implementing the Recommendation(s))

Eric, age 75, owns a life insurance policy with a face value of $1 million on his own life. His great-grandson, Michael, is the beneficiary. Eric is concerned about the possible transfer tax implications of this arrangement. He thinks it might be a good idea to transfer ownership of the policy to Michael. Which of the following statements concerning the transfer tax consequences of this policy is(are) CORRECT? 1. If Eric dies without transferring ownership of the policy, the death proceeds will be included in his gross estate. 2. If Eric dies without transferring ownership of the policy, the payment of the death proceeds to Michael will not be subject to the generation-skipping transfer tax (GSTT). 3. If Eric transfers ownership of the policy to Michael and dies within 3 years of the transfer, the death proceeds will be included in Eric's gross estate. 4. If Eric transfers ownership of the policy to Michael, the transfer will be subject to the generation-skipping transfer tax (GSTT). A)1 only. B)2 and 3. C)1, 3, and 4. D)2 and 4.

C // Statement 2 is incorrect; if Eric dies without transferring ownership of the policy, the payment of the death proceeds to Michael will be subject to the GSTT because Michael is a skip person. Statements 1, 3, and 4 are correct.

Pauline wants to set up a trust that will pay a fixed annuity to her favorite charity for 15 years. At the end of the 15-year trust term, the assets remaining in the trust will pass to her 3 grandchildren equally. The grandchildren are currently 9, 12, and 15 years old. Pauline plans to contribute securities having a total fair market value of $10 million to the trust. Which of the following trusts is(are) suitable for meeting Pauline's objectives? 1. CRAT 2. CLUT 3. CLAT 4. Section 2503(b) minor's trust A)2 and 3. B)1, 3, and 4. C)3 only. D)4 only.

C // Statement 3 is the only answer choice that is suitable for meeting Pauline's needs. A charitable lead annuity trust (CLAT) pays a fixed annuity to the charitable beneficiary for the term of the trust, with the remainder passing to noncharitable beneficiaries. Statement 1 is incorrect because a CRAT pays a fixed annuity to noncharitable beneficiaries and the remainder to charity. Statement 2 is incorrect because a CLUT pays a variable (not fixed) income interest to the charity, with the remainder to noncharitable beneficiaries. Statement 4 is incorrect because with a Section 2503(b) trust, all trust income must be distributed annually for the benefit of the minor beneficiary.

Doris Jenkins is a 71 year-old widow with a son and daughter ages 43 and 45 and six grandchildren. Doris has an estate currently worth $572,000 which includes her home worth $250,000 and a life insurance policy on her life with a face value of $160,000. Her children are named as primary beneficiaries. Doris recently suffered a severe stroke that left her paralyzed on her right side. She is home from the hospital but her health will continue to decline and she will need to go into a nursing home within one year. The only estate planning she has done to date is to write a will in 1989 which left all her assets to her children equally. Of the following estate planning considerations, which is (are) appropriate for Doris at this time? (CFP® Certification Examination, released 12/96) I. Transfer ownership of her home to her children so it will not be counted as a resource should she have to go into a nursing home and apply for Medicaid. II. Execute a durable general power of attorney and a durable power of attorney for health care. III. Place all of her assets in an irrevocable family trust with her children as beneficiaries. IV. Start a gifting program transferring assets up to the annual exclusion amount to each of her children and grandchildren. A)I and IV. B)I, II, III and IV. C)II only. D)II and III.

C // Statement I is inappropriate because of the Medicaid look-back rule. Statement II is appropriate due to her declining health. Statement III is inappropriate due to the irrevocability and her need to have access to the assets during incapacity. Statement IV is inappropriate, because it is unnecessary. She is well below the estate tax applicable exclusion amount. Note: In the online version of Kaplan Schweser's QBank, the letters preceding the answer choices that appear in the original CFP Board question have been eliminated. The answer choices may not be in the same order as in the original CFP Board released questions.

Earl drafts a will leaving his entire estate to a charitable remainder annuity trust (CRAT). The CRAT provides that Earl's surviving spouse, Helen, will receive an annuity from the trust for life and that when Helen dies, the remaining trust assets will pass to a local chapter of a national charity. Earl dies this year, and assets with a total fair market value of $10 million pass to the CRAT. Which the following statements regarding the CRAT is(are) CORRECT? I. The annuity passing to Helen is a terminable interest that does not qualify for the estate tax marital deduction. II. The present value of the remainder interest passing to the charity must be at least $1 million. A)I only B)Both I and II C)II only D)Neither I nor II

C // Statement I is incorrect because the marital deduction is allowed when a surviving spouse receives a bequest of an income interest from a CRAT or CRUT if the surviving spouse is the only income beneficiary. Statement II is correct because in a CRAT, the present value of the remainder interest passing to the charity must be at least 10% of the initial fair market value of the property transferred to the trust.

Margaret, age 74, owns 100% of the stock in a corporation that specializes in remodeling Victorian houses. Her daughter, Andrea, currently works for the business and is interested taking it over when Margaret dies. Margaret wants to gift the business to Andrea gradually over her lifetime, as long as she can retain control over the company until she dies. Which of the following recommendations will meet Margaret's objectives? 1. Transfer the company to Andrea using a family limited partnership 2. Transfer the company to Andrea using a corporate recapitalization 3. Transfer the company to Andrea using a private annuity A)1, 2, and 3 B)None of these recommendations will meet Margaret's objectives C)1 and 2 D)3 only

C // Statements 1 and 2 are correct because both a family limited partnership and a corporate recapitalization would allow Margaret to gift the business to Andrea gradually while retaining control. Statement 3 is incorrect because a private annuity involves a sale and not a gift. (Domain 4-Developing the Recommendation(s))

Stanley and Janet are married. Stanley has assets in his own name valued at $10 million, and Janet has assets in her own name valued at $12 million. They both have wills leaving all of their assets to the other. Neither has made any lifetime taxable gifts. Stanley dies in 2019. Which of the following statements regarding the transfer tax consequences of Stanley's death is(are) CORRECT? 1. Stanley's estate owes no estate tax. 2. Stanley has used none of his lifetime applicable exclusion (exemption) amount. 3. Janet potentially now has a lifetime applicable exclusion amount of $22,800,000, which she can apply to lifetime taxable gifts or to estate tax due at her death. 4. Stanley has underqualified his estate. A)1 and 2 B)1, 2, 3, and 4 C)1, 2, and 3 D)4 only

C // Statements 1 and 2 are correct; Stanley's estate owes no federal estate tax and he has used none of his lifetime applicable exclusion (exemption) amount because his entire estate qualifies for the marital deduction. Statement 3 is correct; because of the portability provision, Janet potentially has a lifetime applicable exclusion amount of $22,800,000 ($11,400,000 from Stanley's estate for 2019 and $11,400,000 for her own estate in 2019) which she can apply to gift taxes during life or estate tax at death. Statement 4 is incorrect; underqualification occurs when a decedent uses too little marital deduction. Stanley has overqualified his estate because he has used too much marital deduction and none of his applicable exclusion amount.

Frank owns a traditional IRA with a current value of $500,000. The IRA was funded entirely with tax-deductible contributions, so Frank's tax basis in the IRA is $0. The designated beneficiary of the IRA is Frank's son, Roberto. Frank owns other assets with a value of over $10 million and has a valid will that leaves his entire estate to his companion, Delores. If Frank dies, which of the following statements regarding his traditional IRA is(are) CORRECT? 1. The IRA will pass through Frank's probate estate. 2. Delores will inherit the IRA under Frank's will. 3. Any distributions received from the IRA following Frank's death will be treated as IRD to Roberto. 4. Roberto receives a stepped-up basis of $500,000 in the IRA because it is an inherited asset. 5. The IRA will be included in Frank's gross estate at a value of $500,000. A)3, 4, and 5 B)2 and 4 C)3 and 5 D)1 and 2

C // Statements 1 and 2 are incorrect because the IRA passes to Roberto by contract, outside of probate, and is not affected by the provisions of Frank's will. Statement 3 is correct; distributions received from a retirement plan made after the date of death are considered income in respect of a decedent (IRD). Statement 4 is incorrect because IRD assets do not receive a stepped-up basis; the decedent's basis carries over to the recipient. Statement 5 is correct; the value of the traditional IRA at Frank's death will be included in his gross estate.

Albert died a week ago leaving a gross estate valued at $25 million. His will leaves his entire estate to his wife, Eva, who has resided in the U.S. continuously for the last 2 years but is a citizen of Sweden. Eva is alarmed at the amount of estate tax that will be due on Albert's estate as a result of the unavailability of the marital deduction. Which of the following actions, considered independently, could reduce the amount of estate tax due on Albert's estate? 1. Eva could remain a resident of the U.S. and become a U.S. citizen before the due date for filing Albert's federal estate tax return. 2. Eva could make a qualified disclaimer. 3. Albert's executor could make an election to place the property passing to Eva into a QDOT. A)1, 2, and 3. B)2 only. C)1 and 3. D)1 and 2.

C // Statements 1 and 3 are correct. The property passing to Eva will qualify for the marital deduction if Eva remains a resident and becomes a U.S. citizen before the estate tax return filing deadline or if the executor makes an irrevocable election to place the property into a qualified domestic trust (QDOT). A qualified disclaimer (refusal to accept the property) would do nothing to qualify the property for the marital deduction.

Mark, age 67, is working on an estate plan with his financial planner and his attorney. Mark and his wife Elsa, age 64, have been married 20 years and have no children together. He has 2 adult children from his first marriage. Mark's estate is valued at $12.2 million. Elsa's estate totals $11.5 million. Elsa has never handled her own finances and has neither the experience nor the inclination to do so. Mark would like to distribute his estate as follows: (1) $500,000 to his church (a qualified charitable institution) in an outright bequest; (2) $5 million to provide an annual income to Elsa for life, allowing her total discretion in the disposition of the principal at her death; (3) $2 million to provide supplemental income to Elsa, only if necessary, with the principal passing to Mark's children (the principal may be invaded for her benefit in the event of a financial emergency); and (4) the remainder (qualifying for the marital deduction) set aside to provide Elsa an income for life with the remainder passing to Mark's children. Which of the following transfer methods might be used to meet Mark's goals? 1. A trust. 2. B trust. 3. C trust. 4. Charitable remainder trust. A)1 only. B)2 and 3. C)1, 2, and 3. D)1 and 4.

C // Statements 1, 2, and 3 are correct. Mark's charitable bequest is in the form of an outright gift. The A trust or marital trust would provide Elsa with a right to all income from the trust, payable annually, and give her the power to appointment or determine who receives the corpus or principal upon her death. The B trust or family bypass trust (also called the credit shelter trust) would provide income to Elsa, allowing Mark to determine the final disposition of the corpus. The C or QTIP trust would allow Elsa to receive the income but not control the final disposition of the corpus.

Joe and Mary live in a community property state and have been married for 25 years. Prior to their marriage, Mary inherited a country cottage from her grandmother. Joe established his own accounting firm after they were married. Mary is an architect. They purchased their most recent home in 1996. Joe's uncle gifted $10,000 worth of stock to him 10 years ago. Avid investors, the couple currently have a mutual fund portfolio valued at $78,000, which was purchased with earnings from Joe's firm. Which of the following assets are community property? 1. The country cottage. 2. The accounting firm. 3. The mutual fund portfolio. 4. The stock. A)1, 2, 3, and 4. B)1 and 4. C)2 and 3. D)1, 2, and 3

C // Statements 2 and 3 are correct. The accounting firm and the mutual fund portfolio are community property. The accounting practice was established after Joe and Mary were married. The mutual fund portfolio was purchased with community funds. The country cottage was inherited by Mary and is, therefore, separate property. The stock gifted to Joe is also separate property.

Geraldine, a wealthy entrepreneur age 68, has engaged the services of a CFP® professional to help her formulate an estate plan. One of Geraldine's primary objectives is to reduce her estate tax exposure by reducing the value of her gross estate. After analyzing Geraldine's financial status and goals and considering alternatives, the CFP® professional develops several recommendations, including a recommendation that Geraldine gift her personal residence valued at $6 million to her son. When she communicates this recommendation to Geraldine, Geraldine accepts it wholeheartedly. Geraldine adds that she has already discussed this possibility with her son and the son is delighted as well-he has even offered to let her remain living in the residence rent free after the gift is made. Which of the following possible responses to Geraldine's comments is most appropriate, considering Geraldine's goal of reducing her gross estate? A)The CFP® professional acknowledges Geraldine's comments as evidence that all parties are "on board" with the recommendation and begins implementing it. B)The CFP® professional advises Geraldine that if she plans to consider living in the residence after making the gift, she should still gift the residence to her son but formally retain a life estate. C)The CFP® professional advises Geraldine that if she plans to continue living in the residence after making the gift, a qualified personal residence trust (QPRT) might be a better approach. D)The CFP® professional informs Geraldine that they can begin implementing the recommendation, but that Geraldine should first ask her son to put his offer in writing.

C // The most appropriate response is for the CFP® professional to suggest an alternative recommendation, such as a QPRT, to satisfy Geraldine's goal of reducing her gross estate. The residence will be included in Geraldine's gross estate if she informally continues to live in it rent-free after gifting it or gifts it and retains a formal life estate because either approach will be treated as a retained life estate. A QPRT will allow her to continue living in the residence without the residence being included in her gross estate, as long as she survives the term of the QPRT and pays a fair market rent. (Domain 5-Communicating the Recommendation(s))

Dennis, age 68, owns a chain of muffler shops, which is organized as a C corporation. He consults a CFP® professional for advice on transferring the business to his 3 sons, who are all interested in taking over the business when Dennis dies. After analyzing Dennis's financial status and reviewing his goals, the CFP® professional determines that a transfer using a family limited partnership will best meet Dennis's objectives. He presents the recommendation to Dennis, who accepts it and tells the CFP® professional to begin implementing it. All of the following steps may take place in the implementation of this recommendation EXCEPT A)Dennis will transfer the shares of stock in the business to a partnership B)appraisals will be secured to support valuation discounts applied to the gifted partnership interests C)the sons will assume control of the business once they collectively own a 51% limited partnership interest D)Dennis will file gift tax returns claiming annual exclusions for the gifted partnership interests

C // The sons do not obtain any right to control the business by virtue of their ownership of the limited partnership interests they receive as gifts from Dennis. Dennis retains exclusive control over the business because he is the only partner who owns a general partnership interest. All of the other statements are correct. (Domain 6-Implementing the Recommendation(s))

Marjorie funded an irrevocable living trust with $200,000 in stocks and mutual funds for the benefit of her granddaughter Karen. Marjorie's basis in the portfolio is $50,000. The trust will pay all income to Karen until her 25th birthday, at which time the trust will terminate and the trust principal will be distributed to Karen. What is the value of the gift for gift tax purposes? A)$0. B)$50,000. C)$200,000. D)$150,000.

C // The value of the gift for gift tax purposes is $200,000. This is an irrevocable inter vivos trust in which the donor retains no right or interest in the gifted property. Therefore, the value of the gift is the FMV at the time the trust is funded.

Craig, who is single, wealthy, and age 48, wants to make gifts to his children Casey and Cody. He has made no previous taxable gifts. He wants to use his entire applicable exclusion amount (lifetime exemption) and make full use of the annual exclusion so that he pays no gift tax. He has the following property for possible gifts: $1,000,000 cash currently in a money market account; $400,000 of Warner Stock-Craig's basis is $20,000, and the stock is appreciating at 20% per year; $11,400,000 of Versa stock-Craig's basis is $400,000, and the stock is appreciating at 10% per year; and $11,400,000 personal residence-Craig's basis is $500,000, and the house is appreciating at 5% per year. For 2019, which is the most appropriate gifting combination for Craig to satisfy his objectives? A)$30,000 in cash. B)$11,400,000 personal residence and $15,000 in cash. C)$11,400,000 of Versa stock and $30,000 in cash. D)$1,000,000 in cash and $30,000 of Versa stock.

C // To fully utilize his annual exclusion and his applicable exclusion amount (lifetime exemption), Craig should make a taxable gift of $11,400,000. In 2019, he is allowed $30,000 ($15,000 per person) for his annual exclusion. Thus, he can make gifts worth up to $11,430,000 in 2019 before he would have to write a check for gift taxes. Therefore, $11,400,000 of Versa stock and $30,000 in cash is the best choice. First, it removes an asset that is growing at 10% instead of the home growing at 5%. Second, it takes into account two annual gift tax exclusions. Notice that in this question, the donor is young, age 48, and there are no indications that his death is imminent. If the donor is close to death, highly appreciated assets are a poor gift because they would receive a stepped-up basis upon the death.

Dave and Jessica are both successful professionals. They have been married for 30 years and have 3 grown children and 2 grandchildren. Their simple wills were executed in 2001. Since that time, they have acquired significant assets, including a beachfront cottage in another state which Dave inherited from his brother. In addition, Jessica has inherited a substantial amount of rare antiques from her mother. The couple would like to provide for their grandchildren, as well. They travel together quite often and are becoming concerned about the need to revise their wills. They also want to expedite the transfer of their estate assets. As their financial planner you recommend that they: 1. Make a lifetime transfer of the beachfront real estate. 2. Include a simultaneous death clause in their new wills. 3. Establish testamentary trusts for their grandchildren. A)1 only. B)2 and 3. C)1 and 2. D)1, 2, and 3.

D // All of these statements are correct. A lifetime transfer of property Dave owns in another state will avoid the expense and delays of ancillary probate. A simultaneous death clause may be useful if both spouses die in a common accident. Determining the order of death is important when settling their estates and allocating the marital deduction. Testamentary trusts allow the couple to accomplish their objective of providing for the grandchildren.

Dorothy, age 68, consults a CFP® professional for assistance in formulating an estate plan. Among Dorothy's assets is her personal residence, which is valued at $500,000. During her initial conversation with the CFP® professional, Dorothy states that she wants to remain living in the residence during her life and for the residence to pass to her daughter, Claire, when she dies. Which of the following information should the CFP® professional obtain from Dorothy before making a recommendation on how to achieve this objective? 1. The value of Dorothy's other assets. 2. Whether Dorothy has any medical issues that might affect her life expectancy. 3. Whether Dorothy has made any previous gifts. A)2 only B)1 and 3 C)2 and 3 D)1, 2, and 3

D // All of these statements are correct. Statement 1 is correct because the value of Dorothy's other assets will help determine whether her estate is potentially subject to estate taxes and, if so, whether a technique that may reduce her gross estate, such as a QPRT, is appropriate. Statement 2 is correct because if a QPRT is determined to be an appropriate recommendation, Dorothy's life expectancy will help determine the term of the trust. Statement 3 is correct because if a QPRT is recommended, it will potentially result in a taxable gift to Claire. If Dorothy has made any prior taxable gifts, they may have reduced her lifetime exemption amount, and if she has made taxable gifts to Claire during the current year, the annual exclusion may be unavailable for additional gifts to Claire this year. (Domain 2-Gathering Information Necessary to Fulfill the Engagement)

Several years ago, David purchased a universal life insurance policy on the life of his wife, Michelle. The couple's 12-year-old son, Jonathan, is the named beneficiary. The policy has a death benefit of $500,000 and has a current cash value of $20,000. If Michelle dies, which of the following statements regarding the policy is CORRECT? A)The death benefit of the policy will be included in Michelle's probate estate. B)The $500,000 death benefit will be automatically paid to an irrevocable life insurance trust, because Jonathan is a minor. C)The $500,000 death benefit received by Jonathan will be subject to kiddie tax, because Jonathan is younger than 19. D)The death benefit of $500,000 will be considered a gift from David to Jonathan when paid.

D // Because David owned the policy and named Jonathan the beneficiary, David has made a taxable gift to Jonathan. This situation is called the "unholy trinity." There should never be three different people in as the owner, insured, and beneficiary of a life insurance policy because when the insured dies, an asset of one person, the owner of the policy, will pay the death benefit to a third person (the beneficiary). This means the living owner transfers the death benefit to the beneficiary when the insured dies. Subtract the annual gift tax exclusion, and an adjusted taxable gift has been made. Life insurance death benefits are income tax free. Michelle did not own the policy. Jonathan is the beneficiary and will receive the entire death benefit. Therefore, the death benefit is not included in Michelle's probate estate.

Malcolm, a widower, owns a downtown frame shop valued at $320,000. He purchased the business 10 years ago for $250,000. Malcolm is age 65 and would like to retire; however, he needs income for his retirement. He would like to move to Colorado to be near his daughter and grandchildren. Malcolm's home is valued at $150,000. He has personal property worth $70,000 and a stock portfolio valued at $215,000. Malcolm receives a monthly pension of $950 and Social Security of $1,000. He needs an additional $1,000 or more to meet his living expenses. His neighbor, Bob, is interested in buying the business, but doesn't have the capital to do so and is averse to borrowing money. What type of transfer technique would you suggest for Malcolm's situation? A)Gift the business to a revocable trust with Bob as beneficiary. B)Sell the business to Bob for a cash lump sum. C)Gift the business to Bob. D)Sell the business to Bob on an installment basis.

D // Bob cannot afford to pay cash for Malcolm's business, nor does he want to borrow to do so. Malcolm's major concern is providing supplemental income for his retirement. If Malcolm sells the business to Bob on an installment basis, the sale can provide the additional monthly income he needs, as well as give Bob an opportunity to purchase the business on a pay-as-you-go basis without having to borrow the funds. The installment sale would allow Malcolm to provide seller financing to Bob, yet still sell the business for its fair market value. In addition, Malcolm does not have to recognize the gain all in one tax year, but can spread the gain out over the term of the agreement (tax deferral). There is no gift tax consequence, because it is a legitimate sale for full value.

Philip is serving as executor of his father's estate and is also the sole heir under his father's will. The largest asset of the estate is a farm that has been in Philip's family for generations. Philip consults a CFP® professional for assistance in filing the federal estate tax return for his father's estate. After gathering data from Philip and analyzing Philip's goals and objectives, the CFP® professional recommends that Philip elect special use valuation under Section 2032A for the family farm. Philip accepts this recommendation and retains the CFP® professional to help him monitor the continued effectiveness of the recommendation. Which of the following factors will be relevant to the CFP® professional's monitoring activities? I. Whether Philip disposes of the farm to a nonfamily member within 10 years after his father's death II. Whether Philip discontinues using the property as a farm within 10 years after his father's death A)I only B)Neither I nor II C)II only D)Both I and II

D // Both statements are correct. All of part of the estate tax savings resulting from the Section 2032A election may be recaptured if the property is transferred to a nonfamily member or its qualified use is discontinued within 10 years of the father's death.

Which of the following individuals would be skip persons for purposes of the GSTT? (Assume Bill is the transferor and is 82 years old at the time of all transfers.) --Bill's grandson, John. John's mother, Donna, is living but his father, Frank, is deceased (Frank is Bill's son). --Bill's great-grandchild, Mary. Mary's parents and grandparents are all living. --Hazel, the 21-year-old wife of Bill's second son, Mike, age 65. A)Mary and Hazel. B)John only. C)John and Mary. D)Mary only.

D // John is not a skip person because of the predeceased parent exception. Hazel is not a skip person because her marriage to Bill's son places her in the son's generation (only one generation below that of Bill, the transferor).

Mike wants to immediately transfer his only valuable business property to his son James. Mike has made no previous gifts. Mike has recently been diagnosed with a disease expected to substantially reduce his life expectancy. However, during the remainder of his life, he will need income on which to live. The transfer transaction to James cannot be secured by collateral. Which of the following devices will Mike most likely choose to achieve his objective? A)Installment sale. B)Self-canceling installment note (SCIN). C)Outright sale. D)Private annuity.

D // The private annuity does not allow collateral, is appropriate for someone who is in poor health, and will provide Mike with income on which to live.

During this year, Mr. and Mrs. Brown gifted the following items to their son: 1. A bond with an adjusted basis of $12,000 and a fair market value of $40,000. 2. Stock with an adjusted basis of $22,000 and a fair market value of $33,000. 3. An auto with an adjusted basis of $12,000 and a fair market value of $14,000. 4. An interest-free loan of $6,000 for a computer (for the son's personal use) on January 1 of this year, repaid by their son on December 31 of this year. Assume the applicable federal rate was 8% per annum. What are Mr. and Mrs. Brown's total gifts for this year? A)$62,000. B)$63,000. C)$57,000. D)$87,000.

D // Note that the question asks for the total gifts, not the taxable gifts. There is no imputed interest on the loan in statement 4 because the loan was less than $10,000. As a result, total gifts are $87,000 ($40,000 + 33,000 + 14,000 = $87,000).

Marlene, age 70, is married to Jack, age 55. They have 2 adult children. Marlene owns assets valued at approximately $18 million in her name alone, and she and Jack own assets valued at approximately $7 million as JTWROS. Jack owns an insignificant amount of assets in his own name. Marlene currently has no will. She and Jack consult a CFP® professional for advice on formulating an estate plan. In discussing the estate tax, the CFP® professional explains the portability provision to them, pointing out that it reduces the negative consequences of overqualification. Marlene and Jack note, however, that because of the disparity in their ages, it is likely that Marlene will die first and that Jack will remarry. They agree that they would rather not rely on the portability provision and state that they would like to reduce the potential overqualification in Marlene's estate to the extent possible. Which of the following recommendations is(are) appropriate for achieving this objective? 1. Marlene should title additional assets as JTWROS with Jack. 2. Marlene should execute a will leaving all of her assets to Jack. 3. Marlene should execute a will leaving all of her assets to an A trust 4. Marlene should execute a will leaving a portion of her assets to a B trust A)1, 2, and 4 B)1 and 2 C)3 and 4 D)4 only

D // Only Statement 4 is correct. Overqualification occurs when a decedent qualifies an excessive amount of property for the marital deduction and does not fully utilize the applicable credit amount. Statements 1, 2 and 3 are incorrect because they all have the effect of leaving additional assets to Jack and increasing the marital deduction in Marlene's estate. The recommendation in Statement 4 decreases the marital deduction in Marlene's estate because the assets left to the B trust do not qualify for the marital deduction. (Domain 4-Developing the Recommendation(s))

Carlotta, age 70, has amassed a large estate during her career as an entertainer. She is considering making several large gifts to family members and friends, but she is concerned about the possibility that the transfers may be subject to the generation-skipping transfer tax (GSTT). Which of the following transfers would be subject to the GSTT? 1. $25,000 tuition payment made directly to her grandson's college; the grandson is 20 years old and both of his parents are still living 2. $100,000 cash gift to one of her former husbands, Tony, who is 30 years old 3. $50,000 cash gift to her granddaughter, who is 25 years old; the granddaughter is the child of Carlotta's son, David, who is deceased 4. Gift of a condo valued at $300,000 to her friend, Alicia, who is 25 years old A)2 and 4. B)1, 2, and 3. C)2, 3, and 4. D)4 only.

D // Only Statement 4 is subject to the GSTT; Alicia is a skip person because she is an unrelated person who is at least 37½ years younger than Carlotta. Statement 1 is not subject to the GSTT because it is a qualified transfer. Statement 2 is not subject to the GSTT because the transferor's spouse or former spouse is not a skip person, regardless of age. Statement 3 is not subject to the GSTT; the granddaughter is not a skip person because of the predeceased parent rule

Kendra, age 62, has a net worth of $540,000. Kendra is paralyzed from a recent stroke. Her home has a fair market value of $250,000 and is free of a mortgage. Kendra has 2 adult children and 6 grandchildren. As her financial planner, which of the following actions would you recommend? 1. Put the house in an irrevocable trust so that Kendra can immediately qualify for Medicaid. 2. Put the house and its contents in a revocable living trust to avoid probate. 3. Give one of the adult children a durable power of attorney for health care. 4. Gift $10,000 to every child and grandchild each year to reduce her estate tax. A)4 only. B)1, 2, and 3. C)1, 2, 3, and 4. D)2 and 3.

D // Placing the house in an irrevocable trust will not help Kendra immediately qualify for Medicaid because of the look-back period. Because she may need her assets to pay her expenses, she should not gift during life. Using a revocable living trust for the house and contents avoids probate but also makes the assets available if necessary during life to pay her expenses. A durable power of attorney is important, and Kendra may want to couple that with a living will.

Kathryn is a 68-year-old widow with 1 adult daughter, Carole. Kathryn owns substantial assets, including a $10 million life insurance policy on her own life, securities with a fair market value of $10 million, and her home, which has a fair market value of $2 million. She is interested in pursuing any planning strategies that might reduce the value of her gross estate. Because of her deteriorating health, her doctors feel she is likely to die within the next 8 to 10 years. Which of the following recommendations is(are) suitable for meeting Kathryn's objective of reducing her gross estate? 1. Transfer ownership of her life insurance policy to Carole. 2. Transfer her home to a QPRT with a term of 6 years, with Carole as the remainder beneficiary. 3. Transfer her investments to a revocable living trust, with Carole as the remainder beneficiary. A)1 and 3. B)2 only. C)2 and 3. D)1 and 2.

D // Statement 1 is a suitable recommendation because if Kathryn lives for more than 3 years after transferring the policy, the death benefits will be excluded from her gross estate. Statement 2 is also a suitable recommendation because if Kathryn survives the QPRT term of 6 years, the home will be excluded from her gross estate. Statement 3 is not a suitable recommendation because assets in a revocable living trust will be included in the grantor's gross estate. The trust would have to be irrevocable to avoid inclusion in the grantor's gross estate.

Mike wants to immediately transfer his only valuable business property to his son James. Mike has made no previous gifts and is in great health. However, during the remainder of his life he will need income on which to live. He has asked his CFP® professional for advice on which device will achieve his objectives. Which of the following devices should the CFP® professional recommend as most likely to achieve Mike's objectives? A)Buy-sell agreement to take effect at death. B)Qualified person residence trust (QPRT). C)Outright gift. D)Grantor retained annuity trust (GRAT).

D // The GRAT is appropriate because it will provide Mike with income on which to live. An outright gift will not provide Mike with income, and the buy-sell agreement would not take effect until death. A QPRT is appropriate only for a personal residence.

Pat and Kim are spouses who have always lived in a community property state. During their marriage, Pat has been employed outside the home and Kim has maintained the household. They own several items of real and personal property, including condos, automobiles, art work, and stocks and bonds. They have consulted a CFP® professional for help in formulating an estate plan. During the fact-finding phase, the CFP® professional asks them to list their assets and indicate which items are community property. Pat and Kim admit that they are not sure which items are community property and which are not. Which of the following information should the CFP® professional request from them to help determine the ownership status of their property? 1. The date each item was acquired. 2. Whether any items were purchased exclusively with Pat's salary. 3. Whether any items were received by one of the spouses as a gift or inheritance. A)1, 2, and 3 B)2 only C)None of this information is relevant because all of their property is community property if they have always lived in a community property state. D)1 and 3

D // Statement 1 is correct because any property that was acquired before marriage and held separately is not community property. Statement 2 is incorrect because community property status does not depend on which spouse's earnings were used to purchase the property. Statement 3 is correct because property inherited or received as a gift by one spouse during marriage and held separately is not community property. (Domain 2-Gathering Information Necessary to Fulfill the Engagement)

Three brothers own 100% of the stock of a small C corporation in equal proportions. The current value of the corporation is $15 million. The brothers are concerned that if one of them dies, neither the corporation nor the surviving brothers will have sufficient cash to purchase the shares of the deceased brother. They consult a CFP® professional for advice on addressing their concerns. After extensive consultation with the brothers, the CFP® professional determines that a cross-purchase buy-sell agreement funded with life insurance will meet their needs. In communicating this recommendation to the brothers, the CFP® professional could correctly make which of the following statements? 1. Implementing the plan will require the purchase of 6 life insurance policies. 2. Implementing the plan will be less expensive for the younger brothers than for the older brothers. 3. If 1 brother dies, the surviving brothers' tax basis in the business will increase as a result of the agreement. A)2 and 3 B)1, 2, and 3 C)1 only D)1 and 3

D // Statement 1 is correct because the formula for determining how many policies will be required in a cross-purchase buy-sell agreement is n × (n − 1), where n = the number of owners. Statement 2 is incorrect; a cross-purchase agreement will be more expensive for the younger owners than for the older owners because the premiums on the policies insuring the older owners will be higher than the premiums on the policies insuring the younger owners. Statement 3 is correct because the surviving brothers will receive a tax basis in the shares they purchase under the agreement equal to the purchase price they pay. This will be added to their basis in the shares they already own. (Domain 5-Communicating the Recommendation(s))

In 2010, Darryl purchased a vacation home in South Carolina as joint tenants with rights of survivorship with his daughter, Janie. Of the $800,000 purchase price, Darryl paid $600,000 and Janie paid $200,000. Darryl died in 2019, while a resident of Ohio. His will leaves his entire estate to Janie and his other daughter, Grace, equally. The fair market value of the vacation home on the date of his death is $1.2 million. Which of the following statements regarding the vacation home is(are) CORRECT? 1. The vacation home is subject to probate in South Carolina. 2. The purchase of the vacation home in 2010 represents a gift of $200,000 from Darryl to Janie. 3. Grace inherits an interest in the vacation home under Darryl's will. 4. Janie's basis in the vacation home following Darryl's death is $1.2 million A)1 and 3 B)1, 2, and 4 C)2 and 4 D)2 only

D // Statement 1 is incorrect because JTWROS property is not subject to probate when one owner dies; it passes automatically to the surviving owner(s) by operation of law. Statement 2 is correct; the difference between the amount Janie would have paid had she contributed equally to the purchase price ($400,000) and the amount she actually paid ($200,000) represents a gift from Darryl to Janie. Statement 3 is incorrect because the vacation home passes automatically to Janie by right of survivorship when Darryl dies and is not affected by his will. Statement 4 is incorrect. Janie receives a stepped-up basis in the portion of the vacation home that is included in Darryl's gross estate but retains her own basis in the rest. Because Darryl contributed 75% of the original price of the vacation home, 75% of the date-of-death value ($900,000) will be included in his gross estate. Janie receives a stepped-up basis of $900,000 in this portion and retains her own basis of $200,000 in the rest, for a total basis of $1.1 million.

Robin and her long-time companion, Tina, have come to you for estate planning advice. Robin would like to put an estate plan into place that will ensure that Tina will be taken care of in the event of Robin's untimely death. Which of the following recommendations would you make to Robin, assuming the couple is not legally married? 1. Transfer the ownership of Robin's real estate into tenancy by the entirety with Tina. 2. Name Tina as the beneficiary of Robin's IRA. 3. Make sure Robin creates a will leaving all of her property to Tina. 4. Name Tina as the beneficiary of Robin's life insurance policy. A)1, 3, and 4. B)2 and 3. C)1, 2, and 4. D)2, 3, and 4.

D // Statement 1 is incorrect because tenancy by the entirety is available only to married couples. Statements 2, 3, and 4 are all good planning suggestions.

Debra was seriously ill, so she and her husband decided to hire a financial planner to perform some final planning before she died. They wanted to establish a will and a living will; however, before the documents were drafted and signed, Debra died. Fortunately, before her death, she gave her CFP® professional the power of attorney to sign the documents for her. What should the CFP® professional do now that he has power of attorney? A)The CFP® professional should disregard the previous agreement now that Debra is dead and not do anything. B)The CFP® professional should sign the will on Debra's behalf and carry out the plans that had been established. C)The CFP® professional should withdraw from the engagement because the client is no longer alive. D)The CFP® professional cannot sign on Debra's behalf but should continue to carry out the plan to the best of his ability.

D // The CFP® professional cannot sign on Debra's behalf because she is no longer alive, and the power of attorney does not survive her death. Both the husband and wife were clients. Because the husband is still living, the CFP® professional still has a client.

Claude, age 62, is a wealthy entrepreneur. He is married to Gina, who is a citizen of Italy. He has 4 adult children and several grandchildren, all of whom are currently in college. Among his assets is a home valued at $2 million, which he wants to live in until he dies. He has made no prior taxable gifts. Claude consults a CFP® professional for estate planning advice. His objective is to begin making lifetime gifts in 2019 to reduce the size of his gross estate at his death, but he does not want to incur any gift taxes or use any of his applicable credit amount (lifetime exemption) in doing so. Which of the following gifting strategies will achieve Claude's objectives? 1. Gift $1 million annually to Gina, taking advantage of the unlimited gift tax marital deduction 2. Gift $30,000 annually to each child and grandchild and elect gift-splitting with Gina 3. Pay the grandchildren's college tuition directly to the grandchildren's colleges 4. Gift his home to his children with the understanding that he will continue living in the home until he dies A)1, 2, and 3 B)1 and 4 C)2, 3, and 4 D)2 and 3

D // Statement 1 is incorrect; because Gina is not a U.S. citizen, only the first $155,000 (in 2019) of annual present interest gifts to her is exempt from gift tax. Statements 2 and 3 are correct. Statement 4 is incorrect. If Claude gifts the home to his children with the understanding that he will continue living there until he dies, the transfer will not be subject to gift tax because it is an incomplete transfer. The home will be included in his gross estate, however, because his retention of the right to live in the house will be treated as a retained life estate.

Roger creates a revocable living trust and contributes $1 million in securities to it. He names a local bank as trustee. The trust provides that during Roger's life the trustee has discretion to distribute trust income and corpus to Roger or to various charities as the trustee sees fit. Any corpus remaining in the trust at Roger's death is to be distributed to Roger's niece, Julie. Which of the following statements regarding this trust is(are) CORRECT? 1. When Roger dies, the trust assets will be included in his probate estate. 2. When Roger dies, the trust assets will be included in his gross estate. 3. The trust income will be taxed to Roger. 4. Julie has a remainder interest in the trust. 5. Roger's trust is a simple trust. A)5 only B)2, 3, and 5 C)1, 2, and 3 D)2, 3, and 4

D // Statement 1 is incorrect; the assets in a living trust pass according to the trust terms at the grantor's death and do not become part of the probate estate. Statement 2 is correct; assets in a revocable trust are included in the grantor's gross estate. Statement 3 is correct; because the trust is revocable, the trust is a grantor trust and the trust income will be taxed to Roger. Statement 4 is correct; Julie has a remainder interest in the trust because her enjoyment of the trust property does not begin until Roger dies. Statement 5 is incorrect; the trust is a complex trust because it can distribute corpus and make charitable distributions.

In 2019, Geraldine, a married woman, purchases a vacation home for $400,000 and takes title in her name and the names of her 4 children as JTWROS. Neither Geraldine nor her spouse has made any other gifts to the children in 2019. Which of the following statements regarding this transaction is(are) CORRECT? 1. Geraldine has made a taxable gift of $65,000 to each of her 4 children. 2. If Geraldine elects gift-splitting with her spouse, the taxable gift to each child will be $50,000. 3. No gift taxable transfer occurs until Geraldine dies. 4. If Geraldine dies, the vacation home will be included in her probate estate. A)3 and 4 B)1 only C)1, 2, and 4 D)1 and 2

D // Statements 1 and 2 are correct. A taxable gift of $80,000 to each child ($400,000 ÷ 5 owners = $80,000 per owner) occurs when Geraldine pays the entire purchase price and takes title as JTWROS with her children. If Geraldine does not elect gift-splitting, the taxable gift to each child is $65,000 ($80,000 − $15,000). If Geraldine elects gift-splitting with her spouse, the taxable gift to each child is $50,000 ($80,000 − $30,000). Statement 3 is incorrect because the taxable gift occurs when Geraldine takes title as JTWROS with her children. Statement 4 is incorrect; when Geraldine dies, the vacation home will avoid Geraldine's probate estate and pass to the surviving children by right of survivorship.

Peter and Chantal were recently married. Chantal owns assets valued at $25 million, and Peter owns assets valued at $350,000. In preparing her estate plan, Chantal wants to ensure that all of her assets pass to Peter when she dies as long as they qualify for the marital deduction in her estate. Which of the following recommendations would satisfy Chantal's objectives? 1. Execute a will leaving all of her assets to Peter, on the condition that he survive her for at least 6 months 2. Retitle all of her assets as JTWROS with Peter 3. Execute a will granting Peter a life estate in all of her assets and directing that the remainder will pass to her nieces and nephews 4. Execute a will granting Peter a life estate coupled with a general power of appointment over all of her assets A)1 and 2. B)2 and 3. C)1, 3, and 4. D)1, 2, and 4.

D // Statements 1, 2, and 4 are correct. Statement 3 is incorrect; a bequest of a life estate does not qualify for the marital deduction.

During his life, Tim gave his daughter his residence, retaining the right to live in the home for the rest of his life. He originally bought the home for $140,000. The home was worth $180,000 when he gifted it to her, and was worth $200,000 at his death. Which of the following statements is(are) CORRECT? 1. The residence is not included in Tim's gross estate. 2. The residence is included in Tim's gross estate at a value of $180,000. 3. The residence is included in Tim's gross estate at a value of $200,000. 4. The daughter recognizes no taxable gain if she sells the residence for $200,000 after Tim's death. A)4 only. B)1 only. C)2 and 4. D)3 and 4.

D // Statements 3 and 4 are correct. The residence is included in Tim's gross estate at its fair market value of $200,000 on his date of death because Tim retained a life estate. Tim's daughter receives a step-up in basis to $200,000 at Tim's death, and therefore will have no gain.

years and will leave the property to him in her will. Which of the following assets would be most suitable for Joe to gift, assuming Joe's objectives are to provide his mother with current income and avoid making a taxable gift? A)Stock C, which is a common stock, paying a 2% dividend; basis is $60,000 and FMV is $20,000. B)A zero-coupon corporate bond maturing in 20 years, sold at a discount to yield 9%. C)Stock A, which is a common stock paying no dividend and for which no significant capital appreciation is expected; basis is $20,000 and FMV is $30,000. D)Stock B, which is a highly rated preferred stock, paying an 8% dividend; basis is $20,000 and FMV is $28,000.

D // Stock B provides income to Mom, and if gift splitting is elected, no gift tax would result. Stock A is not appropriate because it does not provide Mom with income. Stock C is not appropriate because income is the main objective, and it pays only a small dividend. A zero-coupon bond is inappropriate because it provides no cash flow, but would trigger taxable income each year.

Mike wants to transfer his only valuable business property to his son James, who is age 30. Mike has made no previous gifts. Mike has recently been diagnosed with a disease expected to substantially reduce his life expectancy. However, during the remainder of his life he will need income on which to live. The transfer to James will require James to secure any obligation with the underlying property as collateral. Which of the following devices will Mike most likely choose to achieve his objective? A)Outright gift. B)Private annuity. C)Transfer under the UGMA. D)Self-canceling installment note (SCIN).

D // The SCIN allows the use of collateral, is appropriate for someone who is in poor health, and will provide Mike with income on which to live. A transfer under the Uniform Gift to Minors Act (UGMA) is not available because James is an adult.

Jennifer was divorced from her husband, Stanley, 10 years ago, and has retained custody of their only son, James, who was 14 years old at the time of the divorce. As part of the divorce decree, Jennifer received a property settlement from her ex-husband. At the time the property was transferred to Jennifer (10 years ago), it had a basis of $50,000 and a fair market value of $60,000. In the current year, Jennifer gifted the property to James, who is now age 24. The fair market value of the property on the date of the gift was $40,000. No gift tax was paid. James subsequently sells the property for $43,000. What is James's recognized gain (or loss)? A)$3,000 gain. B)$7,000 loss. C)$43,000 gain. D)No gain or loss.

D // The basis of the property received pursuant to a divorce is the carryover basis. Jennifer had a basis in the property of $50,000 when she gifted the property to James. On the date of the gift, the fair market value of the property was less than Jennifer's basis. Therefore, the double-basis rule applies. The son's gain basis is $50,000. His loss basis is $40,000. Because his selling price of $43,000 is between the gain and the loss basis, there is no recognized gain or loss.

Roger died in 2019. His gross estate was $16.8 million, composed mostly of publicly traded blue-chip stocks that had appreciated greatly over the last few years. He also had debts and other administrative expenses of $800,000, resulting in a taxable estate of $16 million. He had made no taxable gifts during his lifetime. Roger's federal estate tax due is: A)$2,345,800. B)$0. C)$6,345,800 D)$1,840,000.

D // The calculation $1,928,000 calculated as follows: First, $16 million minus the $11,400,000 exemption equivalent for 2019 is $4,600,000. Everything above the exemption equivalent is estate taxed at 40%. Thus, the federal estate tax due would be $4,600,000 x .40 = $1,840,000.

Martin recently died with an estate valued at $7 million. His will leaves his entire estate to his wife, Sue, provided she survives him by 6 months, otherwise to his 3 children. Sue has assets of her own valued at $10 million and feels she does not need Martin's assets to live comfortably. Sue and the 3 children agree that they would prefer Martin's assets to pass directly to the children. They consult a CFP® professional for advice. Which of the following recommendations is most suitable for achieving their objective? A)The children should file a will contest B)Sue should file an election against the will C)Martin's executor should file a QTIP election D)Sue should file a qualified disclaimer

D // The most suitable recommendation is for Sue to file a qualified disclaimer. A qualified disclaimer is often used when property is left to a surviving spouse who does not need it; the effect of the disclaimer is that the property will pass to the contingent beneficiaries (here, the 3 children). There is no reason for a will contest if Sue is willing to file a qualified disclaimer. An election against the will is used by a surviving spouse who has been disinherited in the will and is not suitable here. A QTIP election is used to qualify property for the marital deduction and will not achieve the family's objectives. (Domain 4-Developing the Recommendation(s))

Arnold is age 65, in good health, and single. He owns assets valued at over $20 million, including an insurance policy on his own life with a death benefit of $1 million and a current replacement cost of $350,000. He also owns a parcel of vacant land currently valued at $1 million, which he does not expect to appreciate in value over the next few years, and a savings account with a current balance of $1 million. He is thinking of making a gift to his niece, Betty, but he wants to do so in the way that will be most beneficial in reducing his federal estate tax when he dies. Which of the following recommendations is most suitable for meeting Arnold's objectives? A)Gift the $1 million bank account directly to Betty B)Gift the vacant land directly to Betty C)Gift the vacant land to a revocable living trust with Betty as the remainder beneficiary D)Gift the life insurance policy directly to Betty

D // The most suitable recommendation is to gift the life insurance policy directly to Betty. If Arnold survives for more than 3 years after making the gift, the $1 million death proceeds will be excluded from his gross estate. The current replacement cost of $350,000 (minus the gift tax annual exclusion amount, if available) will be added to the taxable estate as an adjusted taxable gift (ATG). Gifting the bank account or vacant land directly to Betty is less helpful because in either case, the current value of $1 million (less the gift tax annual exclusion amount, if available) will be added to the taxable estate as an ATG. If Arnold gifts the land to a revocable living trust, the FMV of the land on Arnold's date of death (or alternate valuation date, if elected) will be included in Arnold's gross estate.

Graham, age 68, owns a personal residence valued at $2 million which he purchased many years ago. Because of some serious health issues, Graham feels he has a life expectancy of only about 8 years. He wants his residence to pass to his daughter, Lynne, when he dies but he wants to continue living in it for as long as he lives. He would also like for the residence to be excluded from his gross estate when he dies. Which of the following recommendations are likely to satisfy Graham's objectives? 1. Gift the residence to Lynne now with the understanding that he can continue living in it rent-free until he dies. 2. Retitle the residence as JTWROS property with Lynne as the other joint owner. 3. Transfer the residence to a QPRT with a term of 5 years. 4. Retitle the residence, granting himself a life estate and naming Lynne as the remainderman. A)2 and 4. B)2, 3 and 4. C)1 and 3. D)3 only.

D // The only recommendation that can satisfy Graham's objective of removing the residence from his gross estate is to transfer the residence to a qualified personal residence trust (QPRT) with a term of 5 years. If he survives the 5-year trust term, the residence will be excluded from his gross estate. He can continue living in the residence without the residence being pulled back into his gross estate as long as he pays Lynne a fair market rent. Any method of transfer in which Graham retains a life estate (Statements 1 and 4) will cause the residence to be included in his gross estate when he dies. Retitling the property as JTWROS with Lynne (Statement 2) will also result in the residence being included in his gross estate because he contributed the original purchase price for the property.