CFP Estate Planning MIDTERM GTG W/ Solutions
Eric died on July 24, of this year. At the time of his death, he owned 1,000 shares of Jefferson Crab stock. Given the trade prices for Jefferson Crab surrounding Eric's date of death, at what value will the Jefferson Crab be included in Eric's gross estate: Avg. Price Thursday, July 15 $101 Monday, July 19 $104 Tuesday, July 27 $103 Wednesday, July 28 $108 A.$103,286 B.$103,440 C.$103,500 D.$104,000
A. $103,286. Explanation:Since the stock is not traded on the date of Eric's death, the value is determined utilizing the artificial valuation formula in the text, the average of the high and low for the 2 relevant dates, Monday and Tuesday. [($104 x 2) + ($103 x 5)]/7 = $103.29 x 1,000 shares = $103,285.71. Saturday and Sunday are not counted as trading days for purposes of the calculation.
Benzo has made great business decisions and made saving a priority during his working years. He has increased his net worth above the lifetime exemption, but has decided not to prepare an estate plan. He believes that his surviving family members will divide up his assets appropriately. Which of the following could Benzo avoid by setting up an estate plan? A. His estate being distributed per intestate laws. B. His beloved Corvette will be transferred to his daughter, Chrissy. C. Benzo's estate incurring substantial transfer taxes. D. Benzo's insurance proceeds go to the intended beneficiary.
A. His estate being distributed per intestate laws. Intestate laws follow a prescribed distribution of assets. Using estate planning documents such as a will or trusts, would ensure assets are distributed per the decedents wishes. Family would have no say in how assets are distributed under intestate law. Choice B is incorrect. Proper estate planning would address this. Choice C is incorrect. Transfer taxes can be reduced or minimized with proper estate planning. Choice D is incorrect. The proceeds of insurance policies with named beneficiaries pass outside of probate via contract law. Having an estate planning documents would not change the distribution of his insurance policy.
Alton would like to transfer the ownership of his Picasso painting to his son Edgar, but Alton would like to continue to have the painting hanging in his house. Which of the following would you recommend to Alton? A.TPPT B.CRAT C.QPRT D.FLP
A. TPPT Answer b is incorrect because Alton's son Edgar is not a charity. Answer c is incorrect because a QPRT, or Qualified Personal Residence Trust, is a special form of a GRAT to which the grantor contributes his personal residence. Answer d is incorrect because a FLP would be more appropriate for transferring ownership of a family business than ownership of a painting. Answer a is correct because TPPTs or Tangible Personal Property Trusts are funded with personal property and the grantor retains the right to use the property that has been transferred to the trust.
Zed recently executed a power of attorney giving Risan the power to perform certain tasks. Which of the following powers given to Risan would cause the power to be deemed a general power of appointment? A. Zed gave Risan the power to use Zed's money to pay Risan's creditors. B. Zed gave Risan the power to sell and buy property on Zed's behalf. C. Zed gave Risan the power to use Zed's money to pay Zed's creditors. D. Zed gave Risan the power to make gifts to Zed's heirs and charities.
A. Zed gave Risan the power to use Zed's money to pay Risan's creditors. Giving Risan the power to pay his own creditors creates a general power of appointment over the assets. Choices B,C and D do not benefit Risan and thus do not create a general power of appointment.
Melissa is a very generous single woman. Before this year (2024), she gave over $13,610,000 in taxable gifts over the years and has completely exhausted her applicable credit amount. In the current year, Melissa gave her daughter Riley $100,000 and promptly filed her gift tax return. Melissa did not make any other gifts this year. How much gift tax must Riley pay the IRS because of this transaction? A.$0 B.$32,800 C.$40,000 D.$45,000
A.$0 Riley will not pay the gift tax on this transaction because Melissa is responsible for the tax incurred. While this question may seem to be a trick question, a similar question has appeared on previous CFP® Certification Exams. Choices B, C and D are all incorrect since Riley is not responsible for gift tax. If the question had asked for the gift tax paid by Melissa, then $32,800 would have been the correct answer. The problem states that she has given over $13,610,000 in taxable gifts thus implying the gift will be taxed at the maximum rate of 40%. Therefore, the tax paid by Melissa would be [40% × ($100,000 - $18,000)] = $32,800. Notice that the $18,000 annual exclusion is deducted to determine the taxable gift.
Chad and Ross have been involved in an romantic relationship for the past 15 years. Chad's family is quite wealthy, and has provided Chad with every "extra" in life. Unfortunately, Chad's family does not approve of Chad's relationship with Ross since he has been in jail for insider trading. Chad was diagnosed with cancer last year and given only 12-15 months to live. Chad plans to leave the substantial wealth he has inherited over the years to Ross. After a few too many glasses of wine last Christmas, Chad's mother proclaimed, "Chad, I hope you have a great estate planning attorney, because I will spend every penny I have to keep Ross from inheriting a dime from you!" In a fit of rage, Chad has come to you, an estate planning attorney, and asks you to recommend ways he can ensure that Ross will receive his assets. Which of the following would you be least likely to recommend to Chad to meet his objectives?
A.A well-drafted will leaving everything to Ross with a no-contest clause. While all of these options may seem to accomplish Chad's goal, option A has the most inherent risk. The trust options and titling option are much less likely to be susceptible to fraud and undue influence claims. The use of a will in this situation is very susceptible to a contest. The no-contest clause is irrelevant because Chad did not leave anything to anyone else to encourage them not to contest.
Suzy was recently diagnosed with an inoperable brain tumor. While the tumor has not caused any noticeable mental problems yet, Suzy's brain function is expected to deteriorate substantially over the next three years, resulting in significant medical expenditures. Suzy's sister Sally was diagnosed with the same illness 2 years ago. Suzy's only other surviving relatives include three brothers, two nieces, and one nephew. Although Suzy's brother invited her to live with him, Suzy sold her home in Maine last month and moved to an assisted living facility in New Mexico that specializes in caring for patients with brain tumors. Suzy's gross estate is currently valued at $3,600,000, including $500,000 in personal property, $500,000 in a retirement account, and $2,600,000 in a closely held family business. The only estate planning document Suzy currently has is a valid will that was executed a year ago. Suzy reviewed the w
A.If Suzy were to decide to make changes to her will utilizing a codicil, she would still have to be considered competent to execute such a document for it to be considered valid. A codicil is an amendment or change to the will and to be valid the testator must be competent when the codicil is executed. Choice B is incorrect. Suzy should have her will reviewed because she moved from Maine to New Mexico to ensure it complies with the laws of the new state of residence. Choice C is incorrect. A gifting program is not appropriate because of the significant medical expenses she is expected to incur over the next three years. Her estate is currently not subject to estate taxes and therefore there is not a reason to try to reduce her estate. Choice D is incorrect. Sally would not be the best choice to be the appointed agent because they have the same medical condition that will cause brain deterioration.
Under what circumstances would property be subject to ancillary probate? A.If the decedent is a resident of one state and owns real property in another state. B.If the decedent is a tenant in common with an unrelated person. C.If the decedent was a resident of a community property state. D.If the decedent owns a life estate in real property located in a state other than his state of residence
A.If the decedent is a resident of one state and owns real property in another state. None of the other answers describe circumstances under which the decedent's property would be subject to ancillary probate.
Which of the following empowers an executor to act as the agent of a probate court? A.Letters Testamentary B.Letters of Administration C.Surety Bond D.Intestacy Laws
A.Letters Testamentary Letters of testamentary allow the executor to act as an agent of a probate court. Choice B is the document that empowers an administrator to act as the agent of a probate court. Choice C is the bond that an administrator must generally post. Choice D describes the state laws that govern the disposition of a decedent's estate if he has failed to prepare a valid will.
Which of the following transfers would not be considered a qualified transfer? A.Piper pays $50,000 to her friend Paige, who uses the money to pay for her medical expenses. B.Piper pays $35,000 to Harvard University for her niece's tuition. C.Piper pays $10,000 to Children's Hospital for her granddaughter's medical expenses. D.Piper pays $12,000 to Prestigious Preparatory School for her nephew's tuition.
A.Piper pays $50,000 to her friend Paige, who uses the money to pay for her medical expenses. Answers b, c, and d described qualified transfers. Answer a is not a qualified transfer because the payment was not made directly to the healthcare provider.
Under which of the following circumstances would a decedent be considered to have died intestate? A.The decedent wrote out a will by hand, but did not sign or date it. B.The decedent was of "sound mind" when he signed his statutory will. C.The decedent prepared a last will and testament, witnessed by a neighbor. D.The decedent prepared a reciprocal will with his attorney 6 years ago.
A.The decedent wrote out a will by hand, but did not sign or date it. Choice A describes an invalid holographic will, a signature is required as is a date. This is considered dying intestate (without a will). Choice B describes a situation in which the testator is "of sound mind" which is required for a valid will. Choice C describes a decedent dying with a valid will. This is not considered to have died intestate, but testate (with a will). Choice D describes a will completed giving the assets generally to a spouse and was executed by an attorney.
At the time of his death, Nate owned the following property: -A personal residence titled fee simple valued at $500,000. -A $500,000 life insurance policy on his own life. The only named beneficiary is Nate's brother Jaime, who died 6 months ago leaving two children, Michael and Kristi. -A car valued at $15,000 titled JTWROS with Nate's mother. -An IRA valued at $400,000 with Nate's mother as the named beneficiary. What is the value of Nate's probate estate? A.$500,000 B.$1,000,000 C.$1,400,000 D.$1,415,000
B. $1,000,000 The probate estate will include the personal residence and the life insurance policy. The life insurance policy is included because the named beneficiary was already dead at Nate's death. The car is not included because of the JTWROS ownership, thus it transfers by operation of law. The IRA is not included because there is a living named beneficiary and thus will transfer via contract law.
Mario's executor determined that the estate tax liability for Mario's estate is $600,000. However, Mario's executor forgot to file the estate tax return and filed and paid 65 days late. Calculate the penalties that Mario's estate will now have to pay. A.$81,000 B.$90,000 C.$99,000 D.$108,000
B. $90,000 The failure-to-file penalty of $90,000 (5% × $600,000 × 3 months) is reduced by the failure-to-pay penalty of $9,000 (.5% × $600,000 × 3 months), creating an adjusted failure-to-file penalty of $81,000. Adding the failure-to-pay penalty of $9,000 to the adjusted failure-to-file penalty creates a total penalty of $90,000.
Kathi and Darrin, who are married, own their home together as community property. They purchased the home 17 years ago for $100,000. After many improvements and a surge in the market, the home is now worth $200,000. If Darrin died today and left his share of the home to his daughter Elizabeth, what is Kathi's basis in the home? A.$50,000 B.$100,000 C.$150,000 D.$200,000
B.$100,000 Kathi's one-half interest in the home will have a basis of $100,000 due to a step-to fair market value of both halves at Darrin's death because the property is owned as community property.
Rachel died in 2024 and her executor is finalizing her estate tax return. The executor has determined that Rachel's adjusted gross estate is $15,110,000 and that her estate is entitled to a charitable deduction in the amount of $500,000. Calculate the estate tax liability for Rachel's estate in 2024. A.$345,800 B.$400,000 C.$5,789,800 D.$5,844,000
B.$400,000 Subtract the charitable deduction from the adjusted gross estate to get the taxable estate ($15,110,000 - $500,000 = $14,610,000). The tentative tax on the taxable estate is $5,789,800 ($345,800 + (($14,610,000 - $1,000,000) x 40%)). Subtract the applicable estate tax credit to determine the federal estate tax liability ($5,789,800 - $5,389,800 = $400,000) or ($14,610,000 - $13,610,000) × 40% = $400,000. Choice A is incorrect. This is the tax on $1,000,000. Choice C is incorrect. This is the tentative tax on the taxable estate. Choice D is incorrect. This is the tentative tax on the taxable estate if the charitable deduction is not excluded.
Which of the following assets would transfer through probate? A.Life insurance policy with a named beneficiary B.Antique four poster bed C.Pay-on-death (POD) bank accounts D.Assets held in an inter vivos trust
B.Antique four poster bed Household items do not have titling nor a beneficiary designation. The items will pass through probate. Choice A passes by state contract law. Choice C passes by state contract law. Choice D passes by trust law.
Baxter is a financial planner and is now qualified to call himself a CFP® professional. Baxter does not have any other certifications or licenses. Although Baxter's expertise is investment planning, he is anxious to expand his client base and is willing to assist clients with any area of financial planning. Over the last month Baxter engaged in the following activities with Troy, a new client. Which of these actions would be considered the unauthorized practice of law? B.Baxter downloaded a copy of a generic will from the internet, filled in Troy's information and gave the document to Troy to be executed. C.During the second meeting, Baxter recommended the use of a trust to fulfill some of Troy's estate planning goals. D.Troy called Baxter one afternoon and asked if Baxter could explain the probate process to him, which Baxter promptly did.
B.Baxter downloaded a copy of a generic will from the internet, filled in Troy's information and gave the document to Troy to be executed. Printing a will and including the client name to be filed and executed is considered the unauthorized practice of law. The drafting of legal documents is reserved for attorneys. Inquiring about estate planning documents should be completed by all practitioners. Recommending appropriate estate planning devises, such as trusts, can be done by financial planners. Explaining the probate process to a client would not be the unauthorized practice of law; the line would be crossed if Baxter gave legal advice regarding the probate process.
Which of the following states is not a community property state? A.Louisiana B.Florida C.Wisconsin D.Idaho
B.Florida The states following the community property regime are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Which of the following is/are considered a disadvantage(s) of probate? The process can result in delays. The process may be expensive. The process provides clear title to heirs and legatees. The process is not open to public scrutiny. A.I only. B.I and II only. C.I, II and IV only. D.I, II, III and IV.
B.I and II only. Statement I is a disadvantage. The process resulting in delays hinders the heirs / legatees from receiving the assets. Statement II is a disadvantage. The expenses of probate decreases the amount of assets the heirs / legatees receive. Statement III is an advantage. Providing a clear title alleviates any issues with ownership. Statement IV is an advantage. Probate is open to public scrutiny and therefore this is a false statement.
Laurie and Chance are considering purchasing a piece of land on which they plan to build a vacation home. Laurie and Chance are engaged to be married, so they are unsure of how they should title the property. Which of the following statements is correct regarding their ownership and titling of the land? A.Laurie and Chance cannot own the property as joint tenants because this title may only be established between spouses. B.If Laurie and Chance were married and owned the property as a joint tenancy between spouses, one-half of the value of the property will be included in the probate estate of the first spouse to die without regard to the contribution of each spouse. C.If the property is held as a joint tenancy once Laurie and Chance are married, they will each own the same fractional share in the property regardless of how much they contributed.
C. If the property is held as a joint tenancy then Laurie and Chance will each own the same fractional share in the property regardless of how much they contributed Joint tenancy requires equal ownership. Answer a is incorrect because joint tenancies may be established by spouses or nonspouses. Answer b is incorrect because if the two were married, each would be deemed to have contributed 50%, therefore only 50% would be included in the gross estate of the first spouse to die. Nothing will be included in the probate estate. Answer d is incorrect because if the property is held as a joint tenancy then the property will transfer automatically at the first tenant's death, regardless of what the will dictates.
Carolyn made the following transfers during her life: 1. The transfer of her home to an irrevocable trust for the benefit of her four children on January 1, 2020. Carolyn retained the right to live in the home for the remainder of her life. The fair market value of the home at the date of the transfer to the trust was $1,000,000. The fair market value of the home at Carolyn's date of death was $1,200,000. 2. A transfer of $44,000 to an irrevocable trust for the benefit of her four children on January 2, 2020. Carolyn retained the right to a 4% annuity payment from the trust for the years 2020 and 2021. At Carolyn's date of death, the trust had a value of $62,000. If Carolyn died on July 13, 2024, with regard to the above transfers, how much is included in Carolyn's gross estate? A.$0 B.$58,480 C.$1,200,000 D.$1,262,000
C.$1,200,000 Carolyn's gross estate would include the fair market value of the home at her date of death, but not the value of the trust listed in #2. The transfer listed as #1 would be included in Carolyn's gross estate because Carolyn retained an interest in the home that terminated at her death. Therefore, the full fair market value of the transferred property would be included in the transferor's gross estate at the time of the transferor's death. No amount related to the transfer listed as #2 would be included in Carolyn's gross estate because the annuity interest terminated before Carolyn's death
Lina made the following transfers during the current year: $20,000 to her grandson for his law school tuition. $1,000 to her neighbor to help him pay a hospital bill. A transfer of property valued at $100,000 to a GRAT. Lina retained an annuity valued at $40,000 and her daughter is the remainder beneficiary. What is the total amount of Lina's taxable gifts for the current year? A.$44,000 B.$60,000 C.$62,000 D.$64,000
C.$62,000 1. Lina's transfer to her grandson is not a qualified transfer because the payment was not made directly to the educational institution. The transfer is eligible for the annual exclusion, the taxable amount is $2,000 ($20,000 - 18,000). 2. Lina's transfer to her neighbor is not a qualified transfer because the payment was not made directly to the medical institution. The transfer is eligible for the annual exclusion. the taxable amount is $0 (it is less than $18,000). 3. The transfer of the remainder interest in the GRAT to Lina's daughter is valued at $60,000 ($100,000 - $40,000). Since it is a gift of a future interest, the transfer is not eligible for the annual exclusion. The total taxable gifts are $62,000 ($2,000 + $0 + $60,000). Choice A is incorrect. See above. Choice B is incorrect. See above. Choice D is incorrect. See above.
Ralphie, a real estate mogul, died owning a great deal of real property in his home state of New York. Which of the following would be included in Ralphie's probate estate? A.A building owned fee simple by Ralphie's wife that Ralphie helps co-manage. B.A vacant lot owned joint tenancy with rights of survivorship by Ralphie and his brother. C.A beach house owned tenancy in common by Ralphie and his mother. D.An office building owned tenancy by the entirety by Ralphie and his wife.
C.A beach house owned tenancy in common by Ralphie and his mother Answer A is incorrect because the property of Ralphie's wife would not be included in his probate estate in a common law state. Answer B is incorrect because property owned JTWROS passes outside of probate. Answer D is incorrect because property owned tenancy by the entirety passes outside of probate.
Cartez, age 42, recently came to you for estate planning advice. He has never executed any estate planning documents. During the client interview, you learned that Cartez has never been married and has a nine-year-old daughter, Kaystin, who lives with her mother full-time. Cartez has invested a majority of his $500,000 net worth in a closely held company to develop a revolutionary steel product that will not bend, crumble or catch fire. Cartez and his business partner, Bob, are sure that all race car companies will buy the steel product because their initial tests established that nine out of ten times a car made with the product that was in a wreck did not even get a dent. Which of the following statements is true?
C.If Cartez were to die today, his assets would transfer via state intestacy laws with Kaystin being the most likely heir. Since Cartez has not executed any estate planning documents, his estate will transfer via state intestacy laws. When an individual is not married, their children are generally the next in line to inherit under state intestacy laws. Choice A is incorrect. The ability to quickly sell a closely held business for fair market value is always questionable regardless of how good the products are. Choice B is incorrect. Cartez's net worth is irrelevant as to whether he needs estate planning. He has a child that needs to be cared for and assets that will need to be transferred, thus he needs estate planning. Choice D is incorrect. The amounts given for Kerstin's support are not deductible on the income or gift tax return.
Trevor is considering having his attorney prepare a springing power of attorney in which he gives his friend, Ella, the power to handle his finances. In which situation should Trevor include such a document in his overall estate plan? A.Ella is only 16 years old. B.Ella is legally incompetent. C.In the event that Trevor becomes disabled, Ella will be able to pay Trevor's bills. D.Trevor wants Ella to be able to handle all of his finances immediately.
C.In the event that Trevor becomes disabled, Ella will be able to pay Trevor's bills. A springing power of attorney allows an agent to act on behalf of the principal upon a triggering event such as disability or incapacity. Choice A is incorrect. A minor should not be named as a general power of attorney for finances as they would need to be the age of majority in most instances. Choice B is incorrect. A legally incompetent individual should not be named as a power of attorney. Choice D is incorrect. If Trevor wants Ella to be able to handle his finances immediately, he should not use a springing power of attorney, as it only becomes effective upon the principal's disability or incapacity.
Anna and Shiella have been in a long-term relationship, but not married. Anna wants to make sure that if she dies first, Shiella will be provided for. Which of the following would you be likely to recommend to fulfill Anna's goal of transferring assets to Shiella at Anna's death? A.Advise Anna against writing a will that specifically bequeaths assets to Shiella B.Transfer the ownership of Anna's real estate investments into Tenancy by the Entirety. C.Name Shiella as the beneficiary of Anna's retirement plan. D.Recommend that Anna and Shiella move to a community property state.
C.Name Shiella as the beneficiary of Anna's retirement plan. Choice A is incorrect; Anna should write a will that specifically bequeaths property to Shiella if she wants Shiella to have that property. It can be contested but if not, it would transfer assets to her. Choice B is incorrect; Anna and Shiella cannot own property in a tenancy by the entirety because they are not married. Choice D is incorrect; even if Anna and Shiella moved to a community property state, they would not be subject to the community property regime because they are not married.
Meg recently started her own financial planning practice. She is not a licensed attorney. Which of the following activities would be considered an unauthorized practice of law? A.Preparing financial statements for prospective clients. B.Helping clients to identify their financial planning goals. C.Preparing a last will and testament for her client. D.Referring clients to her brother, Ted, who is a licensed attorney.
C.Preparing a last will and testament for her client. Only a licensed attorney should prepare legal documents for clients, such as a last will and testaments.
Maxwell died August 8, 2024. Of the following transfers made during his life, which is included in his gross estate? A.The transfer of a whole life insurance policy on Maxwell's life to an ILIT on September 16, 2020. B.The sale of his term insurance policy to his brother, Donald, for fair market value on July 12, 2022. C.The transfer of a whole life insurance policy on Maxwell's life (face value $150,000) valued at $20,000 to his son on September 16, 2022. D.A gift of $17,000 to Maxwell's sister on August 7, 2024. No gift tax was due on the gift.
C.The transfer of a whole life insurance policy on Maxwell's life (face value $150,000) valued at $20,000 to his son on September 16, 2022. The transfer would be included in Maxwell's gross estate because transfers of life insurance on the decedent's life within three years of the decedent's date of death are included in the decedent's gross estate.Choice A is incorrect. The transfer is not included in Maxwell's gross estate because the transfer was completed more than three years prior to Maxwell's date of death.Choice B is incorrect. The sale of an insurance policy for fair market value removes the asset from the gross estate.Choice D is incorrect. Gifts, other than life insurance, within three years of the decedent's date of death are not included in the decedent's gross estate. Gift tax paid within three years of the decedent's date of death is included in the decedent's gross estate, but in this case gift tax was not paid.
Kevin transferred $4,000,000 to a GRAT naming his four children as remainder beneficiaries. Kevin retained an annuity from the GRAT valued at $1,500,000. If this is his only transfer during the year, what is Kevin's total taxable gifts for the year? A.$1,428,000 B.$1,500,000 C.$2,428,000 D.$2,500,000
D. 2,500,000 The transfer of the remainder interest is a gift to his children. Because it is a gift of a future interest, it is not eligible for the annual exclusion - thus, Kevin's taxable gifts for the year are $2,500,000 ($4,000,000 - $1,500,000).Choice A is incorrect. The choice assumes that the retained annuity is the gift and is reduced by the annual exclusion.Choice B is incorrect. The choice assumes that the retained annuity is the gift.Choice C is incorrect. This choice assumes that the annual exclusion reduces the gift.
Richard recently prepared a last will and testament in which he left all of his assets to his girlfriend Jess. Richard and Jess broke up last night and now Richard wants to leave all of his worldly possessions to his best friend, Joey. What can Richard do to prevent Jess from receiving any of his assets? A. Richard can give the will to Joey. B. Richard can send Jess an email telling her that he is cutting her out of his will. C. Richard can tell Joey that he plans to write a new will. D. Richard can shred the will under which Jess receives all of his assets.
D. Richard can shred the will under which Jess receives all of his assets. A will can be revoked by physically destroying the will. Choices A, B and C would not effectively revoke Richard's will.
In this scenario consider that you recently had lunch with an estate planning attorney during which she made several statements regarding the estate planning process. Of her statements listed below, which would you consider inappropriate from an estate planning perspective? B."A current balance sheet and income statement are helpful when beginning the estate planning process." C."While the probate process is expensive and time consuming for many people, a financial planner should weigh the cost of the necessary planning devices needed to avoid probate against the cost of actually going through probate before determining with the client if probate should be avoided." D."In all my years of experience I have learned to discount the client's transfer wishes when drafting the will. They are not paying me to make sure little Tina gets the pearls, they are paying me to save them money."
D."In all my years of experience I have learned to discount the client's transfer wishes when drafting the will. They are not paying me to make sure little Tina gets the pearls, they are paying me to save them money." The financial planner should strive to meet the transfer objectives of the client as well as save money. Choice A is incorrect. Long-term care and disability policies are appropriate to review because they allow the financial planner to determine the risks associated with gifting a policy. Choice B is incorrect. Documents such as a balance sheet and income statement that describe the client's current financial situation are appropriate to review as they reveal the asset base and income and expense sources. Choice C is incorrect. It is appropriate for the financial planner to weigh the cost of probate against the documents and work needed to avoid probate.
Maxine agrees to purchase Jacob's property utilizing a private annuity. Jacob's table life expectancy is ten years at the date of the agreement and the property has a fair market value of $400,000. The private annuity payment is $45,000 per year, and Maxine dies after making two payments. At Maxine's death, what amount is included in her gross estate with regards to the private annuity and the transferred property? A.$0 B.$90,000 C.$310,000 D.$400,000
D.$400,000 Maxine bought the property utilizing the private annuity. Maxine's gross estate will include the fair market value of the property purchased. The expected present value of the remaining private annuity payments will be a debt of the estate.
Which of the following accurately describes a life estate? A.An interest in property for a specified number of years. B.A complete interest in property with all the rights associated with outright ownership. C.An undivided interest in property held by two or more related or unrelated persons. D.An interest in property that ceases upon the death of the owner of the life estate.
D.An interest in property that ceases upon the death of the owner of the life estate. An interest in property that ceases upon the death of the owner of the life estate is the definition of a life estate. Choice A is the definition of an interest for a term. Choice B is the definition of fee simple. Choice C is the definition of tenancy in common.
Which of the following statements is true? B.Missy transfers rental property to a Family Limited Partnership (FLP) in return for a 99% limited partnership interest and a 1% general partnership interest. Missy immediately begins a gifting program by gifting a portion of the limited partnership interests to her children and grandchildren. Six years after the initial formation of the FLP, Missy continues to own the 1% general partnership interest and 45% of the limited partnership interests in the FLP. Because Missy does not own D.Earl has four children - Kenny, Tim, Aaron, and Cathy. Earl's will directs all of his property to be divided equally among his four children, and if any child predeceases Earl, that child's heirs will inherit Earl's property per capita. Cathy died two years before Earl. Cathy had three children. At Earl's death, Kenny receives 1/6 of Earl's estate.
D.Earl has four children - Kenny, Tim, Aaron, and Cathy. Earl's will directs all of his property to be divided equally among his four children, and if any child predeceases Earl, that child's heirs will inherit Earl's property per capita. Cathy died two years before Earl. Cathy had three children. At Earl's death, Kenny receives 1/6 of Earl's estate. Answer D is correct because Cathy's surviving heirs become equal heirs in Earl's estate because Cathy predeceased Earl. Accordingly, each heir receives 1/6 (Kenny, Tim, Aaron, Cathy's three kids) of Earl's estate. Answer A is incorrect because the value of the home transferred to the QPRT will be included in Angela's gross estate because Angela died during the term of the QPRT. Answer B is incorrect because ONLY the general partner can control the operations of a limited partnership and Missy is the general partner so she CAN control the operations of the FLP. Answer C is incorrect because a TPPT would not fulfill Rose's desires because the TPPT would only give Rose the right to use the art for the rest of her life, and would not provide any income.
Mena has her first meeting with her financial planner Rath in a few days. What information should Mena gather for her first meeting with Rath? A.Previously filed income tax and gift tax returns. B.A copy of her current will. C.A detailed list of Mena's assets and liabilities. D.Mena should bring all of the above information to her first meeting with Rath.
D.Mena should bring all of the above information to her first meeting with Rath Mena should bring all of this information with her as the new financial planner will be getting to know her and gathering information to continue with their engagement.
Which of the following is not a method for transferring property outside of the probate process? A.State contract law B.State trust law C.State property titling law with survivorship feature D.State intestacy law
D.State intestacy law Property transferred via the state intestacy law will pass through probate. Choices A, B and C pass to a beneficiary and therefore outside of probate
Which of the following is not a reason that the proceeds of a life insurance policy would be included in a decedent's gross estate? A.The proceeds of the policy are payable to the estate. B.The decedent transferred the ownership of the policy to his daughter six years before his death, but retained the right to change the beneficiary of the policy. C.The decedent transferred the ownership of the policy to his son six months before his death. D.The decedent transferred the ownership of the policy to his wife four years ago.
D.The decedent transferred the ownership of the policy to his wife four years ago. Answer a is incorrect because the proceeds of the policy would be included in the estate if the proceeds are payable to the estate. Answer b is incorrect because the decedent is considered to have an incident of ownership in the policy if he retains the right to change the beneficiary of the policy. Answer c is incorrect; under IRC section 2035, the proceeds of a policy transferred within three years of death are included in the gross estate of the transferor.
Bernard made a gift of $500,000 to his brother in 2020. Due to Bernard's prior taxable gifts, he paid $200,000 of gift tax. When Bernard died in 2024, the applicable gift tax credit had increased. At Bernard's death, what amount related to the $500,000 gift to his brother is included in his gross estate? A.$0 B.$200,000 C.$300,000 D.$500,000
a. $0 Gift tax paid on gifts made within three years of a decedent's date of death is included in the decedent's gross estate. In this case, Bernard made the gift more than three years before his death, so $0 is included in his gross estate related to this gift.Choice B is incorrect. Bernard will get credit for the gift tax paid of $200,000.Choice C is incorrect. The difference between the gift and the tax paid is not included in the gross estate.Choice D is incorrect. The value of the gift, $500,000 is added to the decedent's taxable estate, not gross estate, to determine the tentative tax base.
Several years ago he purchased what he thought was prime property in Louisiana for $100,000. Unfortunately, he didn't realize the property was pure swamp land and completely uninhabitable by anyone (except maybe some cajuns from New Orleans). Shortly after he purchased the property, Jeff realized the investment was a flop! To hide his embarrassing investment, he decided to give the property to his cousin Rustin as a graduation present when Rustin graduated from LSU (Geaux Tigers!). When Jeff gave the property to Rustin, the value of the property had fallen to $80,000. Rustin promptly built a house in the middle of the swamp and made it his home. After six months of owning the property, and sharing his bed with alligators, Rustin decided to move back to the city. Luckily, he sold the property a week later to an old cajun named Boudreaux for $75,000. What is Rustin's loss on the sale of the land?
a. $5,000 short term capital lossIn general, when a donor makes a gift of property other than cash to a donee, the donee will take the property at the donor's adjusted basis. One exception to this rule is when the fair market value of the property at the date of the gift is less than the donor's adjusted basis. In this case, the donee will have a basis for gains and a basis for losses, called the double-basis rule. The basis for losses is the fair market value as of the date of the gift (the lower value) and the basis for gains is the donor's adjusted basis. If the donee subsequently sells the property for an amount between the two bases, there is no gain or loss. The holding period will depend on which basis is used. If the donor's carryover adjusted basis is used, then the holding period includes the time the donor held the property as well as the time the donee held the property. If the fair market value at time of transfer is used, then the holding period begins at the date of transfer. Thus, in this example, Jeff gave property to Rustin that had depreciated in value and Rustin's basis is subject to the double basis rule. Since Rustin sold the property below the FMV at time of transfer, the lower number is used and the loss is $80,000 - $75,000 = $5,000. The holding period will be short term because the holding period will only include the time Rustin held the property which is less than 1 year (he held the property for 6 months).
Fred, the founder and CEO of WonderCo, recently passed away. At his death, Fred owned 80% of the stock of WonderCo which was his only asset. WonderCo is a closely held company. Which of the following discounts would be applicable to Fred's WonderCo stock? A.Key Person Discount B.Minority Discount C.Both a and b D.Neither a nor b
a. Key Person Discount Answer b is incorrect because Fred owns a controlling interest in WonderCo; therefore, a Minority Discount is not applicable. Therefore, answer c is also incorrect. Answer d is incorrect because answer a is correct; since Fred was both the founder and CEO of WonderCo, his stock is entitled to a Key Person Discount.
Natalie and her younger sister Kate purchased a beach-front condo together 15 years ago. They own the property as a joint tenancy with rights of survivorship. At the time of the purchase, Natalie, being the older sister, was in a better financial position. Therefore, Natalie contributed $300,000 and Kate contributed $100,000 to the purchase price. The property is now worth $800,000. Which of the following statements is correct? A.Natalie and Kate each own 50% of the condo. B.If Natalie were to die today, her share of the condo would transfer to her husband Brian. C.If Kate were to die today, Natalie's new basis in the property would be $400,000. D.If Natalie and Kate were to disagree on how the property was being managed, the only way they could partition their share of the property would be to find a willing buyer that would purchase both of their interests
a. Natalie and Kate each own 50% of the condo Because the property is owned JTWROS they automatically own 50% each. Answer b is incorrect because if Natalie were to die today, then her share of the condo would transfer to Kate. Answer c is incorrect because if Kate died today, then Natalie's new basis would be $500,000 (Natalie's original $300,000 contribution and Kate's step-to fair market value basis of $200,000 based on the contribution rule). Answer d is incorrect because if they disagree on how the property is being managed then either one can easily sell their share to any person. They do not need the consent of the other party.
Which of the following is true concerning the 5/5 Lapse Rule? A.The 5/5 Lapse Rule deems that a taxable gift has been made where a power to withdraw in excess of $5,000 or five percent of the trust assets is lapsed by the powerholder. B.The 5/5 Lapse Rule only comes into play with a single beneficiary trust. C.Amounts that lapse under the 5/5 Lapse Rule qualify for the annual exclusion. D.Gifts over the 5/5 Lapse Rule do not have to be disclosed on a gift tax return.
a. The 5/5 Lapse Rule deems that a taxable gift has been made where a power to withdraw in excess of $5,000 or five percent of the trust assets is lapsed by the powerholder. Answer a is the definition of the 5/5 Lapse Rule. Answer b is incorrect because the 5/5 Lapse Rule does not come into play with a single beneficiary trust because a person cannot make a taxable gift to himself. Answer c is incorrect because amounts that lapse under the 5/5 Lapse Rule do not qualify for the annual exclusion. Answer d is incorrect because gifts over the 5/5 Lapse Rule do have to be disclosed on a gift tax return.
Bobby owned a building with a fair market value of $2,000,000. Bobby's adjusted basis in the building was $1,000,000. Bobby agreed to sell the building to his son, Robby, for $1,300,000. What is the amount of Bobby's taxable gift? A.Bobby has made a taxable gift of $300,000. B.Bobby has made a taxable gift of $682,000. C.Bobby has made a taxable gift of $2,000,000. D.Bobby has not made a taxable gift.
b. Bobby has made a taxable gift of $682,000. When an individual sells an asset for an amount less than the asset's fair market value, the seller is deemed to have made a gift to the buyer equal to the difference between the fair market value of the property and the actual sales price.The discount of $700,000 ($2,000,000 - $1,300,000) is treated as a gift eligible for the annual exclusion, thus creating a taxable gift of $682,000 ($700,000 - $18,000).Choice A is incorrect. The difference between the adjusted basis and sale price is not considered a gift.Choice C is incorrect. The fair market value is not the gift as there is consideration of $1,300,000.Choice D is incorrect. Bobby has made a taxable gift, the sale price is lower than the FMV and it was sold to a family member.
Brody and Tanya recently sold some land they owned for $150,000. They received the land five years ago as a wedding gift from Brody's Aunt Jeanette. She had already given them cash equal to the annual exclusion during that year. Aunt Jeanette purchased the land many years ago when the property was worth $20,000. At the time of the gift, the property was worth $100,000 and Aunt Jeanette paid $47,000 in gift tax. What is the long term capital gain on the sale of the property? A.$42,400 B.$50,000 C.$92,400 D.$130,000
c. $92,400 In general, when a donor makes a gift of property other than cash to a donee, the donee will take the property at the donor's adjusted basis. The holding period of the donee will include the holding period of the donor for purposes of subsequent transfers and the determination of long or short-term capital gains. An exception to the general basis rule occurs when the donor gives property with a fair market value in excess of his adjusted basis and the donor pays gift tax. The gift tax associated with the appreciation is added to the donor's original adjusted basis to determine the donee's basis. Thus, the basis would be:$20,000 + [($80,000/$100,000) × $47,000] = $57,600The gain on the asset would be $150,000 - $57,600 = $92,400The annual exclusion, normally accounted for in the denominator, is ignored since it was used for the same donees earlier in the year.
Which of the following statements regarding SCINs is correct? A.If the seller outlives the SCIN term, the buyer continues to pay the SCIN payment until the seller's death. B.The payments received by the seller under a SCIN are treated as interest income. C.A SCIN can provide the seller with a collateral interest in the property sold. D.If the seller dies before the end of the SCIN term, the seller is deemed to have made a taxable gift to the buyer equal to the difference between the payments made and the total principal payments due on the SCIN.
c. A SCIN can provide the seller with a collateral interest in the property sold. Choice A is incorrect because the buyer of a SCIN only makes payments until the earlier of (1) the seller's death or (2) the term set forth in the SCIN.Choice B is incorrect because each payments received by the seller consists of (1) interest income, (2) capital gain, and (3) return of adjusted basis.Choice D is incorrect because there is no gift involved in a SCIN provided the present value of the note less the SCIN premium is equal to the fair market value of the asset transferred, and the SCIN premium is appropriate for the mortality risk of the transferor and the value transferred.
Donald has created a trust for the benefit of his three nephews, Huey, Dewey, and Louie, who are all minors. Donald plans on making annual contributions to the trust. Donald would like his annual contributions to the trust to qualify for the annual exclusion. What would be the best way to accomplish this goal? A.Donald should make sure that he does not contribute more than $18,000 for each nephew, or $54,000 in total, each year. B.Donald should give his nephews an unlimited ability to remove funds from the trust. C.Donald should give his nephews the right to remove some or all of the annual contribution from the trust for a limited period of time. D.Donald's annual contributions to the trust will not qualify for the annual exclusion under any circumstances.
c. Donald should give his nephews the right to remove some or all of the annual contribution from the trust for a limited period of time Choice C describes a Crummey provision, which converts what otherwise would have been a gift of a future interest, which would not be eligible for the annual exclusion, into a gift of a present interest, which is eligible for the annual exclusion.Choice A is incorrect because without a Crummey provision, the annual contribution does not qualify for the annual exclusion, regardless of the amount.Choice B is incorrect because even though this would qualify for the annual exclusion, giving minors the unfettered right to remove funds from the trust is not as good of a solution as a Crummey power.Choice D is incorrect. The contribution can qualify for the annual exclusion as long as there is a present interest created.
Tom loans $11,000 to his daughter Tina. Why would interest not be imputed on this loan? A.Interest would not be imputed because the loan is less than the amount of the annual exclusion. B.Interest would not be imputed because loans of $100,000 or less are exempt from both income tax and gift tax consequences. C.Interest would not be imputed because Tina has unearned income of $500. D.Interest would not be imputed because Tina's earned income is less than $1,000.
c. Interest would not be imputed because Tina has unearned income of $500. Answer a is incorrect because gift loans do not qualify for the annual exclusion. Answer b is incorrect; loans of less than $10,000 are exempt from both income tax and gift tax consequences. Answer d is incorrect because whether interest is imputed on this loan is based on Tina's level of unearned income, not earned income.
Rosie and her brother Michael decided recently to purchase an RV together. They both want to use the RV to take their families camping. The price of the RV was $10,000. Since Michael expects to use the RV 60% of the time and Rosie 40% of the time, Michael contributed $6,000 and Rosie contributed $4,000. Their ownership percentage equals their contribution percentage. Which type of property titling should they use to reflect their ownership interest? A.Fee Simple B.JTWROS C.Tenancy in Common D.Tenancy by the Entirety E.Community Property
c. Tenancy in Common Fee Simple ownership is for one owner. They cannot own the property JTWROS because they own unequal ownership percentages. Tenancy by the Entirety and Community Property must be owned between married people.
Which of the following transfers would result in taxable gift or a gift tax? A.Bob gifts $10,000 to his daughter Barbie. B.Elroy gifts $50,000 to his wife, Elizabeth, who is a U.S. citizen. C.Adam gives his favorite employee, Aaron, a new car at Aaron's retirement. D.Pete transfers $20,000 to his ex-wife, Patricia. Pete and Patricia were divorced five years ago.
d. Pete transfers $20,000 to his ex-wife, Patricia. Pete and Patricia were divorced five years ago. Answer a would not result in taxable gift because the gift does not exceed the annual exclusion. Answer b is incorrect because a person can gift an unlimited amount to his or her spouse without incurring gift tax. Answer c is incorrect because transfers in a business setting are presumed to be compensation. If Pete had transferred $20,000 to Patricia pursuant to a divorce decree, there would be no taxable gift, but transfers to an ex-spouse five years after the divorce was final are not considered "transfers pursuant to a divorce decree."
Jose recently died with a probate estate of $900,000. He was predeceased by his wife, Guadalupe, and his daughter, Lucy. He has two surviving children, Pete and Fred. Jose was also survived by several grandchildren: Child Pete Fred Lucy Grandchild NaomiHeatherDavid GrandchildDanielChrisRachel GrandchildNickSteve Jose's will states the following, "I leave everything to my three children equally. If any of my children predecease me, then I leave their share to their heirs, per stirpes." Which of the following statements is correct? A.Under Jose's will, David will receive $225,000. B.Under Jose's will, Chris will receive $150,000. C.Under Jose's will, Nick will receive $100,000. D.Under Jose's will, Rachel will receive $150,000.
d. Under Jose's will, Rachel will receive $150,000 Under the will, Pete and Fred will each receive 1/3 shares. Lucy's 1/3 share will flow to her children, with each of them receiving 1/2 of the 1/3 share or 1/6 each ($150,000).
