Quiz 1

All of the following statements about fee simple ownership are correct EXCEPT: A) Property owned at death is not eligible for a step-up in basis to fair market value. B) Property owned at death is 100% includible in the gross estate. C) Property owned at death is subject to probate administration. D) The owner in fee simple has complete control and dominion over the property. Property owned in fee simple is entitled to a step-up in basis to fair market value at death.

A)

Carrie is preparing her estate plan and wants to include instructions for her funeral. What method should she use? A) She should leave written instructions to one or more family members likely to survive her and be involved in funeral arrangements. B) She should include her instructions in her will because it will be the first thing that will be read after her death. C) She must include these instructions in a formal, notarized list of instructions drawn up by her attorney. D) She must include t

A) Carrie should leave a letter of personal instruction or side letter. It can be as simple as a handwritten note to her personal representative containing her instructions.

Which of the following is a tax sensitive goal unrelated to income tax? A) Freezing or reducing the value of assets subject to tax B) Deferring the recognition of income and gain C) Obtaining a stepped-up basis D) Shifting receipt of income

A) Freezing or reducing the value of assets subject to tax is a tax goal related to transfer taxes, not income taxes.

Which one of the following statements regarding different forms of property co-ownership is CORRECT? A) Joint tenancy with right of survivorship (JTWROS), tenancy by the entirety (TBE), and community property (CP) are all forms of co-ownership that can be used by a husband and wife. B) Joint tenancy with right of survivorship (JTWROS), tenancy by the entirety (TBE), and community property (CP) are all forms of co-ownership that do not require a probate proceeding when one tenant dies. C) Tenancy

A) JTWROS can be used by anyone, including spouses; only spouses can use TBE and CP.

Which of the following is a nontax-related financial goal? A) Maximizing flexibility B) Freezing or reducing the value of assets C) Leveraging the use of exclusions D) Shifting the receipt of income

A) The remaining choices are tax-related financial goals.

In light of the multiple possible estate goals which of the following would be plausible candidates for estate planning? A) A Pennsylvania domiciled client with a condo in Vail, Colorado. B) All of these C) A client whose wealth is concentrated in a real estate business. D) A recently married couple expecting their first child.

B) All are potential clients to deal with issues of liquidity, need for a guardian and avoidance of ancillary probate.

Which of the following questions would be appropriate in planning with life insurance? A) How would a soon-to-be-issued policy be owned? B) All of these C) How is the policy currently owned? D) Is the amount of insurance coverage adequate?

B) All of the these would be appropriate as among the most important questions to be initially raised.

Estate planners are often asked to assess whether a client's estate plan has adequate provisions to accomplish client objectives. Which of the following would be appropriate questions to ask and answer? A) Marital and family status of client. B) All of the above. C) How titles to property are held. D) Competency of intended beneficiaries.

B) All would be appropriate questions and there would also be many other appropriate questions to raise to analyze the client's current position and potential courses of action.

Arnie attended a recent seminar about the importance of liquidity and asset protection in a sound estate plan. Which of these might be reasonable recommendations to address these concerns? A) Placing assets in trust with a spendthrift clause B) All of the above C) Placing assets in an entity like a corporation or LLC D) Creating a buy-sell agreement funded with life insurance

B) All would be reasonable recommendations of a sound estate plan addressing asset protection and liquidity.

Which of the following statements concerning titling of assets captures its importance in estate planning? I. Titling determines how the income of an asset as well as the proceeds from its sale would be split. II. The distribution of income or sales proceeds not in fact divided as title dictates likely will create unintended gift and income tax consequences. A) I only B) Both I and II C) Neither I and II D) II only

B) Both statements are true.

As a financial planner, what would be the most appropriate function to perform as a member of the estate planning team of a client? A) Advising a client to conduct business as a partnership rather than a corporation B) Gathering data as part of the effort to identify and understand client objectives C) Advising a client to change from sole ownership of property to joint tenancy with right of survivorship (JTWROS) D) Drafting a power of attorney for a client

B) Gathering data to formulate a plan would be appropriate. The other activities are in the domain of a lawyer practicing law and would be inappropriate.

Which of the following is an advantage of spouses holding property jointly with right of survivorship? Total administration expenses and attorney fees may be reduced because the property avoids probate at the death of the first spouse. The surviving spouse now has a basis equal to the fair market value of the property at death of first spouse. A) Both I and II B) I only C) Neither I nor II D) II only

B) However the basis in the hands of the surviving spouse is the sum of her basis plus 1/2 the fair market value at date of the decedent's death.

Fred and Ethel live in a California, a community property state. They acquired property during their marriage and classified it as separate property pursuant to a formal legal agreement. What is the effect of the formal legal agreement? A) The property is separate property so long as the formal legal agreement is valid (i.e., recognized by California and federal law and entered into with the requisite intent). B) The property is community property since property classification cannot be changed

C) A formal legal agreement will prevail if it is valid (i.e., recognized by local law and entered into with the requisite intent). There is no federal law governing whether or not property is community or common law property. Each state has the right to determine whether and how to be a community property state.

Which of the following statements regarding the consequences of holding property jointly is CORRECT? A) Joint tenancy with right of survivorship can exist between spouses only. B) A tenancy in common is treated the same as a joint tenancy with the right of survivorship when one owner dies. C) When spouses are joint tenants with a right of survivorship, 50% of the value of the property will be included in the gross estate of the first spouse to die. D) The federal estate tax treatment of jointly

C) A tenancy in common is not treated the same way as a joint tenancy with right of survivorship because a tenancy in common does not provide a right of survivorship. Joint tenancy is not limited to spouses, and the treatment of joint tenancy for estate tax purposes is different for spouses and nonspouses. Spouses are always defined as having each contributed half towards the purchase of the property. For estate taxes, nonspouse decedents are initially assumed to have contributed 100%, and thus will be estate taxed on 100% of the property unless the other joint tenancy with right of survivorship (JTWROS) can be shown as having made an actual contribution to the purchase of the JTWROS property.

Which of the following statements best describe the potential for improper planning with life insurance? A) Insufficient coverage B) Lack of awareness of how the transfer for value rules work. C) All of these D) Tax-inefficient ownership of the policy

C) All of the statements are true. Life insurance works best if there is adequate coverage undiminished by estate and income taxes.

Thomas owns as joint tenant with right of survivorship an office building with his sister Sally? His will makes a specific bequest of the office building to his son, Winston. If Thomas predeceases Sally, who will own the property? A) Winston B) Estate of Thomas C) Sally D) Ownership will be equally split between Winston and Sally.

C) As sole surviving co-tenant, Sally now owns the office building. The specific bequest of the will is irrelevant.

You are a CFP® certificant. A client has come to you for assistance. You should inform the client of which of the following? I. You can provide the client with "fill-in-the-blank" durable power of attorney forms for both finances and health care, as well as living wills, and help the client complete and execute these documents. II. You can be involved in data gathering, identifying goals, and identifying possible weaknesses and problem areas in the client's current situation. III. Your primary

C) Both II and III are legitimate and accepted roles of an educated financial planner (such as a CFP® certificant) in the process. A financial planner is not legally or ethically prohibited from assisting a client with his or her estate plan but cannot advise a client regarding the content of the documents mentioned in Statement I. Interpreting the contents of a client's documents and informing him/her of the legal implications of those documents is not part of the financial planner's role because it usually involves some interpretation of state law, which is considered the unauthorized practice of law.

Which of the following statements regarding joint tenancy with right of survivorship is CORRECT? Property owned as a joint tenancy with right of survivorship avoids probate when the first owner dies. When a joint tenancy is created in real estate a joint tenant who contributes more than his or her share of the purchase price makes a gift to the other joint tenant. A) II only B) I only C) Both I and II D) Neither I nor II

C) Both statements are correct.

James leases an office building for use in his business. The lease gives James the right to use the building for 10 years in exchange for annual lease payments of $100,000. What type of ownership interest does James have in this building? A) Life estate B) Future interest C) Term of years D) Remainder

C) James's interest under the lease is a term of years because it gives him the right to possess and use the building for a given period. It is not a future interest because the right to enjoy the benefits of the property occurs immediately.

All of the following statements regarding joint tenancies with right of survivorship are CORRECT except A) joint tenancy with right of survivorship is similar to tenancies in common in that there may be two or more joint tenants who may or may not be related to each other. B) jointly held property passes to the surviving joint owners when one of the joint owner dies. C) jointly held property can be transferred by will. D) in joint tenancy the ownership percentages must be equal.

C) Jointly held property cannot be transferred by will. It passes to the surviving joint tenants by operation of law outside of the will. While there is no legal restriction that joint tenancy with right of survivorship (JTWROS) owners must be related, it would almost never be correct for people with no feelings of long-term connection to choose to be JTWROS because the property would pass to the other joint tenant upon death.

When Craig's Uncle Larry died, Craig inherited the right to live in Larry's home for as long as Craig lives. Larry's will also provides that when Craig dies, the home will pass to Craig's daughter, Monica. What type of interest does Monica have in the home at the uncle's death? A) Term of years B) A right of partition C) Remainder D) Life estate

C) Monica has a remainder interest in the home because she has the right to possess and enjoy the home after the intervening right of someone else (Craig). Her remainder interest runs for her lifetime, not a fixed number of years. When Monica ultimately receives the property, she will have a fee simple interest as she then will be the absolute owner of the property. Craig has the life estate.

Which of the following types of property will be treated as separate property assuming the couple always has lived in a community property state? A) A tax-exempt bond purchased by one spouse with the after-tax proceeds of her salary B) A coin collection purchased by one spouse during the marriage C) Real estate acquired by one spouse before the marriage D) A closely held business interest purchased by one spouse during the marriage

C) The real estate acquired before the marriage is separate property.

All of the following statements about the major forms of property ownership are correct EXCEPT: A) A tenancy by the entireties is only available to married spouses. B) A tenants in common interest is subject to probate. C) Property held as joint tenant with right of survivorship is partitionable without the consent of the other joint tenant. D) A community property interest is not subject to probate.

D) A community property interest is subject to probate administration.

Which of these describe the advantage(s) of owning property as joint tenants with right of survivorship (JTWROS)? When one tenant dies, the property passes directly to the surviving joint tenant. Each joint tenant with a right of survivorship has a right to sever or partition the property without the consent of the joint tenant. JTWROS is convenient for certain types of assets, such as bank accounts, because either tenant has access to the account. A) I only B) II and III C) I and II D) I, II, a

D) All of these are advantages of owning property as JTWROS.

Which of the following are essential in establishing and defining the client and planner relationship? A) Determine what the planner is to do or not do. B) Determine how the planner is compensated. C) Understanding the personal and financial circumstances of the client. D) All of the above.

D) All would be examples of activities useful in establishing the client and planner relationship.

Which of the following statements about the importance of properly arranging the ownership and beneficiary designation are CORRECT? I. The identity of the beneficiary can affect whether the proceeds are available for the intended purpose. II. Life insurance could be a source of income replacement for a surviving spouse. A) II only B) I only C) Neither I nor II D) Both I and II

D) Both statements are true.

Edward and Dennis are brothers who share the ownership of a farm they purchased together. Edward owns an undivided 40% interest in the property, and Dennis owns an undivided 60% interest. They both have the right to sell their interest in the farm or to leave their interest in the farm to anyone they choose under their will. Which this form of ownership do they have? A) Tenancy by the entirety B) Community property C) Joint tenancy with right of survivorship (JTWROS) D) Tenancy in common

D) Edward and Dennis own the farm as a tenancy in common because each party owns an undivided interest in the farm and their interests are unequal. The property is not held as JTWROS because each owner can dispose of their interest by will. Community property and tenancy by the entirety can only be owned by spouses.

Which of these statements concerning the transfer of a life insurance policy is correct? The matured death benefit is always excluded from gross income. The matured death benefit may be only partially excludible from gross income and partially includible in gross income. A) I only B) Both I and II C) Neither I nor II D) II only

D) If a life insurance policy has been transferred during the life of the insured, the death proceeds may be partially taxed under the transfer for value rules assuming there are no exceptions available. So Statement II is true and must make Statement I false.

Which of the following statements about analyzing the liquidity of an estate are correct: Payment of the decedent's debts must be considered. Payment of the estate's cost of administration such as appraisal fees must be considered. The ease of securing a death certificate must be determined to estimate how quickly survivorship benefits can be paid. A) I and III B) I and II C) II and III D) I, II, and III

D) Statements I, II and III are true.

Which of the statements about maintaining liquidity of an estate are correct? Premortem liquidity needs are not considered. Postmortem liquidity needs are met primarily with life insurance. A) Neither I nor II B) I only C) Both I and II D) II only

D) The need for premortem liquidity should be considered to meet the retirement needs of a client. Life insurance is the most likely source of liquidity at the death of a decedent.