Retirement and Estate Planning Exam 3 practice questions
Darren Allen died leaving a will that was written in his own handwriting. The will was not witnessed nor attested to by witnesses. This is an example of what type of will?
A holographic will is a will that is in the testator's own handwriting and is not witnessed.
Which one of the following describes a person who dies testate?
A person who dies intestate does not have a valid will.
Which one of following describes a person who dies intestate?
A person who dies intestate is a person who dies without a valid will.
Nancy is a widow with four children and nine grandchildren. In preparing her will, she wants to leave her entire estate to her children equally. If any of her children are not living when she dies, she wants that child's share of her estate to be split equally among that child's living children. Which one of the following will provisions best meets Nancy's needs?
A provision calling for a per stirpes distribution best meets Nancy's needs because with a per stirpes distribution, members of a designated class inherit property as members of the class. In other words, the children of a deceased child would split their deceased parent's share equally. With a per capita distribution, the children of a deceased child would each receive a share equal to the shares received by the surviving children. A simultaneous death provision is used in the wills of spouses to create a presumption as to the order of death if both spouses die simultaneously. A survivorship clause provides that a beneficiary must survive for a specified period beyond the testator's death to receive a bequest.
All of the following statements regarding powers of appointment are correct except
A special power of appointment held by the holder at death is not included in the holder's gross estate. The right to designate the disposition means the ability to name the new owner of the property.
Which of the following statements regarding the federal gift tax return IRS Form 709 are CORRECT? For a calendar-year taxpayer, an extension of time for filing IRS Form 1040 also extends the time for filing IRS Form 709. George gives $5,000 of separate property to his son. If Mary, George's spouse, elects to split the gift with George, they must file a gift tax return. George and Mary give $20,000 of community property to their son. No gift tax return need be filed. An extension of time for filing the gift tax return does not extend the time for payment of the gift tax.
All
Which of the following are alternatives to probate when disposing of property? Property held as tenants by the entirety Property held within a revocable living trust Property held within an irrevocable trust Proceeds of a life insurance policy with a named beneficiary other than the estate
All of the answer choices are substitutes for the probate process. Revocable living trusts become irrevocable at the death of the grantor. Also, a trust—not the donor—is the legal owner of all trust assets. Therefore, the property held by all trusts, except for a testamentary trust, escape probate.
Which of the following statements regarding probate is CORRECT? Probate may be costly and create delays in the distribution of assets. Probate is open to public scrutiny. Probate protects creditors. Probate provides heirs and/or legatees with clear title to property.
All of the statements are correct. The main point of the probate estate is transferring ownership. The main point of the gross estate is to start the estate taxation process.
Which of the following statements regarding installment sales is CORRECT? Installment sales allow the seller to remove an appreciating asset from the seller's gross estate. Installment sales have both an estate tax advantage and an estate tax disadvantage. The estate tax disadvantage associated with installment sales can be avoided by using a self- canceling installment note (SCIN) or private annuity.
All of these statements are correct. One disadvantage of a regular installment sale is that the balance of the loan principal and the interest since the last payment are included in the deceased's gross estate. A SCIN or a single life private annuity overcomes this disadvantage. However, SCINs and private annuities have other rules that must be obeyed.
Which of the following transfers are gifts for purposes of the gift tax statutes? Kurt creates an irrevocable trust providing that his son is to receive income for life and his grandson the remainder at his son's death. Kurt purchases real property and has the title conveyed to himself and to his brother as joint tenants. Kurt creates an irrevocable trust giving income for life to his spouse and providing that upon her death the corpus is to be distributed to his daughter. Kurt purchases a U.S. savings bond made payable to himself and his spouse. The spouse later surrenders the bond for cash to be used for her benefit.
All of these transfers are gifts for purposes of the gift tax statutes. Statement IV falls under the gift tax statutes, but the unlimited marital deduction may be utilized to offset any possible gift tax due.
Which of the following statements regarding gift splitting are CORRECT? Gift splitting is permitted only between spouses. If gift splitting is elected, gift splitting applies to all gifts in a given year. Gift splitting doubles the annual exclusion for gifts of a present interest. Gift splitting requires the filing of a gift tax return.
All the statements are correct.
All of the following transfers are subject to the federal gift tax except
An incomplete transfer is not subject to the federal gift tax. A gift from a U.S. citizen to a revocable trust is an incomplete transfer because the donor retains the right to reclaim the property.
Ronald James wants to establish a trust for his financially challenged adult daughter. He wants to contribute money yearly to the trust, but his daughter would get only the income. The residue or remainder would go to his grandchildren (her children) at her death. Ronald wants the daughter to receive all the earnings from the trust with no limitations. He realizes that she will probably just give the money away, but wants to otherwise protect her from her creditors. Which one of the following trusts should you recommend that Ronald establish for the benefit of his daughter?
An irrevocable trust is the best option here, even though a gift tax would be incurred (and the annual exclusion would not be available without Crummey powers). Spendthrift provisions would ensure that the assets, while part of the trust, would be protected from the daughter's creditors. A Section 2503(c) trust is used for minors, and the Section 2503(b) trust provides for the gift tax annual exclusion in annual contributions only to the extent of the income interest/life estate (not the remainder interest) but is also primarily used for gifts to minors. A support trust is used to discharge a support obligation, which Ronald does not have for an adult child.
Arthur's nephew, Tom, has always been Arthur's favorite. Arthur has always thought of him as a son. Tom has worked closely with Arthur at Bell's Animal Care Center and is considered by Arthur to be a top-notch veterinarian. Assume Arthur is considering retirement and has decided to transfer Bell's Animal Care Center to Tom using a self-canceling installment note (SCIN). All of the following statements regarding SCINs are correct except
Any remaining gain on the SCIN at the death of the seller must be included in Arthur's (the seller's) estate income tax return (IRS Form 1041). A SCIN is not in the seller's gross estate for estate tax purposes, but the remaining gain at death is income taxable on the seller's estate income tax return.
Joshua, the grantor of JKL Trust, may revoke certain provisions of the trust. Which of the following statements is CORRECT? The JKL Trust is an irrevocable trust. Joshua will not be taxed on the trust income.
Because Joshua may revoke certain provisions of the trust, the trust is a revocable trust and Joshua is income taxed on the trust income under the grantor trust rules.
Which of the following statements regarding qualified personal residence trusts (QPRTs) is CORRECT? If the grantor dies before the end of the trust term, the value of the residence will be included in her gross estate for estate tax purposes. At the end of the trust term, the grantor can remain in the residence if she pays rent at the current prevailing rate.
Both
Which of the following statements regarding sale-leasebacks is CORRECT? In a sale-leaseback, a senior family sells fully depreciated business property to a junior family member and then leases it back. The senior family member can deduct the lease payments made to the junior family member if there is a valid business purpose for the sale and an arm's-length rental payment.
Both
Brenda wants to create a trust and fund it immediately with $2 million in stocks and bonds. She wants the trust to be able to distribute income and principal to her niece and to make annual distributions to the Salvation Army. She also wants the ability to rescind the trust in the future. Which type of trust will meet Brenda's needs?
Brenda needs a revocable inter vivos complex trust. The trust must be revocable for Brenda to be able to rescind it. It must be inter vivos if it is created and made effective during Brenda's life. It must be a complex trust to distribute principal and make charitable distributions.
Jack Skelton recently died. His will leaves everything in equal shares to his wife, Elsie, and their three children. Elsie, who was named executrix, has discovered to her horror that Jack was indebted to virtually every person and business in town. So many claims have been filed against his estate that if they were all paid, Elsie and her children would get absolutely nothing from his estate. Which of the following laws would not help Elsie and her children retain some portion of Jack's estate?
Even though an elective or spousal share statute may grant her a larger percentage of Jack's estate than did his will, the percentage is applied only after payment of all valid claims.
Which one of the following intrafamily transfers involve a gift of the underlying property?
FLPs involve a gift of the underlying property. All of the other transfers involve a sale.
What is the maximum gift that Bob and Stan, a married couple, can give to one donee in 2021 without paying any gift tax, assuming they have not made any previous taxable gifts?
For 2021, the answer is $23,430,000: ($11,700,000 applicable exclusion amount × 2 donors) + ($15,000 annual exclusion × 2 donors).
Which of the following statements regarding gift leasebacks is CORRECT? A senior family member gives his fully depreciated business assets to a junior family member and leases the assets back for use in his business. The lease payments are not taxable income to the junior family member.
Fully depreciated business property is generally most suitable for use in a gift-leaseback transaction. This is because the income tax deduction generated by the lease obligation will replace or make up for the lost depreciation deduction. The lease payments are taxable income to the junior family member.
Phillipe established a revocable living trust naming himself, his spouse, and his two children as income beneficiaries, and his grandchildren as remainder beneficiaries. He funded the trust with $300,000. What is the value of this trust for gift tax purposes?
Funding a revocable living trust has no effect on gift taxes as no gifts are made to oneself.
In her will, Jessica left some farmland to George, her husband, for life. Her will provided that George could appoint the property only to their two daughters at his death. Which of the following statements is CORRECT?
George has a special (limited) power of appointment because George cannot name/appointment himself, his creditors, his estate, or his estate's creditors as the new owner of the farmland, he has a special (limited) power of appointment. The value of the farmland will not be included in his gross estate.
Which one of the following actions to create a will substitute is irrevocable?
Giving someone an interest in real property as a joint tenant with right of survivorship is an irrevocable act. The interest cannot be unilaterally reclaimed by the original owner. All other options are revocable.
Which of the following factors should a business owner consider when creating a succession plan? Whether the owner wants to transfer the business during life or at death If the owner wants to gift the business, whether the owner has sufficient income from other sources to make up for the loss of business income If the owner wants to transfer the business during life, whether the owner wants to retain control of the business until death
I, II, and III A business owner should consider all of these factors when creating a succession plan.
Lionel Trane has made the following lifetime transfers: Gave his spouse a remainder interest worth $56,000 in a parcel of real estate after his death Funded a Section 2503(c) trust for the benefit of his daughter with $60,000 of common stock; his spouse did not split this gift. Paid his mother's medical bill to the community hospital in the amount of $15,000 Established a revocable trust for his only grandchild with $8,000 in cash Which of the following statements describe the tax impact of Lionel's lifetime transfers on subsequent lifetime transfers that Lionel may wish to make? The gift to his spouse will reduce the amount of future lifetime taxable transfers that he can make without having to pay the gift tax out of pocket. Establishing and funding the trust for his daughter will reduce the amount of future lifetime taxable transfers that he can make by the value of the gift, minus one annual exclusion, without having to pay the transfer tax out of pocket. Paying his mother's hospital bill will have no effect on subsequent lifetime transfers. Establishing the revocable trust will have no effect on subsequent lifetime transfers.
II, III, and IV The gift to his spouse will have no effect because no part of it will be taxable. The entire amount will be covered by the unlimited marital deduction because the gift of a vested remainder is not a terminable interest. Also, since it is a future interest gift, the remainder interest is not entitled to an annual exclusion. The gift to the daughter's trust is entitled to an annual exclusion by the terms of Section 2503(c) even though it technically is not a present interest gift. Direct payment of medical expenses to the provider is exempt from gift tax. A revocable trust is revocable and therefore is not a completed gift.
Which of the following statements regarding gifts is NOT correct?
If a gift is made within four years prior to the donor's death, the amount of any gift tax paid on the transfer is included in the donor's gross estate. Gift taxes paid on gifts made within three years prior to death are included in the donor's gross estate.
Charles Sorensen purchased a vacation home. Charles wants the bulk of his estate to pass to his spouse. However, he plans to pass the vacation home to his adult children. Charles does not have a will and does not intend to make one. Which one of the following statements concerning the most appropriate form of titling for the commercial real estate owned by Charles is CORRECT?
If held as JTWROS, the property will pass to the children by right of survivorship. Since Charles does not have a will or intend to make one, the property would pass by intestacy, and his spouse would get at least part of the vacation home. The property would go to his spouse, not his children, if held in tenancy by the entirety. Any portion of the property still owned by Charles at death would pass by intestacy, and his spouse would receive at least part of the property if tenancy in common is used.
Which of the following statements regarding a Section 2503(b) trust is CORRECT?
In a Section 2503(b) trust, the trust income must be distributed to the beneficiary at least annually, and the trust income is taxable to the beneficiary. A distribution of trust principal does not have to be made by age 21. The minor's right to income is a present interest that qualifies for the annual exclusion.
Which of the following statements regarding entity purchase buy-sell agreements is CORRECT? When used by a corporation, these agreements are also known as stock redemption plans. The business entity itself purchases the interest of an owner who dies. The business entity is entitled to an income tax deduction for the premiums it pays on any life insurance policies used to fund the agreement.
In an entity purchase plan, the business entity itself purchases the interest of an owner who dies. These plans are also known as stock redemption plans when used by a corporation. However, they should not be confused with Section 303 stock redemption plans. The premiums on life insurance used to fund the agreement are not tax deductible.
Which of the following wills is totally handwritten by the testator?
Most states allow a will that is 100% handwritten by the testator to be accepted for probate. Of course, a formal will, drawn up by an attorney is preferable. The testator likely will not have all wishes fulfilled because he probably is not sufficiently knowledgeable to write such an important and often complex document.
Which of the following statements regarding probate is CORRECT? Real estate owned by a decedent at death is probated according to the laws of the decedent's domicile. Personal assets owned by a decedent at death are probated according to the law of the state in which they are located, which is known as their situs.
Neither I nor II are correct. Real estate is probated according to the law of its situs (where the property is located), and personal assets are probated according to the law of the decedent's domicile.
Which of the following statements regarding grantor retained annuity trusts (GRATs) is CORRECT? A GRAT is usually used when the grantor has a less-than-average probability of outliving the term of the trust. A GRAT is usually used when the asset transferred to the trust is not expected to appreciate in value.
Neither statement is correct. A GRAT is usually used to transfer property that is likely to appreciate and the grantor has a better-than-average probability of outliving the term of the trust. This is because if the donor dies during the life of the GRAT or GRUT, then the value of the property in the trust is included in his gross estate and the trust has little or no estate tax savings. With a GRAT or a GRUT, the donor intends to outlive the trust and thus remove the property and hopefully also a measure of the appreciation of the property from the gross estate.
Which of the following statements regarding qualified personal residence trusts (QPRTs) is CORRECT? A QPRT may have an interest in more than one residence. There are no restrictions on who may occupy a residence that is owned by a QPRT.
Neither statement is correct. Statement I is incorrect because a QPRT may have an interest in only one residence. Statement II is incorrect because a residence owned by a QPRT cannot be occupied by anyone other than the grantor and members of the grantor's family.
All of the following statements regarding probate are correct except
One of the disadvantages of probate is that it is public in nature.
Which one of the following properly describes partial intestacy?
Partial intestacy in this case would occur if John dies after executing a will, but the will does not effectively dispose of all of his probate assets.
Which of the following statements correctly characterizes property interests held by the decedent that, at death, pass by operation of law? If the property passes according to the operation of law, the property avoids probate. If the property passes according to the operation of law, it will not be included in the decedent's gross estate. Property that passes by operation of law cannot qualify for the marital deduction. The titling on the instrument determines who shall receive the property.
Property passing by operation of law avoids probate, may qualify for the marital deduction, and is transferred to the survivor(s) listed in the title.
Cora Trout, age 79, has an estate that includes her personal residence valued at $120,000, and $18,000 in a bank account that is solely in her name. She would like to arrange her estate so that she maintains exclusive control of the assets during her lifetime, but at her death the assets will pass to her friend, Mabel Berger, outside of probate. Based on Cora's goals and situation, which of the following statements is CORRECT about will substitutes that she could use? She should put her bank account in tenancy in common with Mabel. She should title her personal residence in joint tenancy with her friend, Mabel. She should place the bank funds in a payable on death (P.O.D.) account with Mabel as beneficiary. She should change the title on her personal residence to indicate a life estate reserved for her lifetime and a remainder to her friend, Mabel.
Statement I is false because tenancy in common will require probate for her share. Statement II is false because she would not have exclusive control over the account in joint tenancy.
Which of the following statements regarding QTIP trusts is CORRECT? The surviving spouse is usually given a general power of appointment over the trust property. The surviving spouse may be given a limited power of invasion over the trust property for health, education, support, and maintenance.
Statement II is correct. Statement I is incorrect; the surviving spouse is usually not given a general power of appointment, so the decedent controls the ultimate disposition of the property.
The Chapter 14 zero valuation rules focus on proper valuation of assets at the time of transfer for purposes of determining gift tax. Which of the following statements regarding the Chapter 14 valuation rules are CORRECT? An estate freeze involving the intrafamily transfer of corporate stock or partnership interests generally results in an immediate gift tax based on the entire value of the business held by the senior family member. In the case of buy-sell agreements, the Chapter 14 rules do not apply to transfers between non-family members.
Statement II is incorrect because in the case of buy-sell agreements, the Chapter 14 valuation rules apply to transfers between nonfamily members as well as transfers between family members.
Which of the following statements regarding qualified transfers in payment of educational or medical expenses is CORRECT? A gift is excluded from taxable gifts if made directly to an educational institution for the tuition of the individual or to a provider of medical services for medical care received by the individual. The exclusion is limited to $30,000 annually.
Statement II is incorrect because there is no $30,000 annual limit on the exclusion for payments of medical services or for educational expenses for another person. The exclusion for qualified transfers is not limited in amount or who can be the donee.
Which of the following statements regarding the gift tax annual exclusion is CORRECT? The gift tax annual exclusion amount for 2021 is $15,000. The annual exclusion applies to as many donees each year as the donor chooses. The annual exclusion applies only to gifts of future interests.
Statements I and II are correct. Statement III is incorrect because the annual exclusion applies only to gifts of present interests.
Which of the following statements regarding qualified transfers for tuition or medical expenses for gift tax purposes are CORRECT? The transfer is limited to the amount of the annual exclusion. The transfer reduces the annual exclusion dollar-for-dollar. The transfer must be paid directly to the medical provider or educational institution. The transfer can be made on behalf of anyone, without regard to the relationship of the donor, to the person benefitting from the gift.
Statements I and II are incorrect. A qualified transfer for tuition or medical expenses is unlimited in amount and is independent of the annual exclusion or the person's relationship to the donor. Statements III and IV are correct.
If Arthur and Tasha Bell begin making gifts to their three children in 2021, which of the following gifts would require the filing of a gift tax return for tax year 2021? Arthur gives each child $10,000, for a total of $30,000 in gifts. Arthur gives each child $10,000, for a total of $30,000 in gifts, and he and Tasha elect gift splitting. Tasha gives a future interest gift worth $5,000 to their daughter Danielle.
Statements II and III are correct. A gift tax return must be filed whenever a married couple elects gift splitting and whenever a gift of a future interest is made. Statement I is incorrect; a gift tax return is not required in this case because no gift to any donee exceeds the annual exclusion amount.
Which of the following is an example of tangible personal property?
Tangible personal property is an asset that can be touched and has a physical form, but does not include land or anything on or attached to the land. Stocks and bonds (or any other types of securities) are intangible personal property.
When do the Chapter 14 rules of estate valuation generally apply?
The Chapter 14 rules of estate valuation generally apply in certain estate freeze transactions, such as corporate recapitalizations, between family members. These rules also apply in the valuation of interests in certain trusts, such as grantor retained income trusts (GRITs).
What is the standard amount of personal liability coverage provided by a personal liability umbrella policy?
The answer is $1,000,000. The standard amount provided is $1,000,000; however, the insured may obtain additional amounts relatively inexpensively.
Stewart owns a home with a replacement cost of $300,000. He purchased $200,000 of property insurance on the house with a $1,000 deductible for all losses. The house caught on fire and sustained $100,000 worth of damage. The actual cash value (ACV) of the damaged portion of the property was $80,000. How much will Stewart receive as reimbursement for the loss?
The answer is $82,333. The insurance company will pay the greater of $80,000 ACV or the coinsurance amount of $82,333, calculated as follows: $200,000 (current coverage amount) divided by $240,000 (required insurance amount) equals 0.8333; 0.8333 multiplied by the $100,000 loss equals $83,333; $83,333 minus the $1,000 deductible equals $82,333. Because the coinsurance amount of $82,333 is greater than the $80,000 ACV, Stewart will receive $82,333 as a partial payment for his $100,000 loss. If Stewart had insured his home for at least $240,000 (80% of $300,000), he would have been fully reimbursed for the loss minus the $1,000 deductible.
How much homeowners insurance coverage should financial planners encourage their clients to maintain?
The answer is 100% of the replacement value of the home. Unless a financial planner is a licensed property and casualty agent, the planner cannot discuss a client's coverages. However, the planner can and should encourage clients to maintain at least 100% of the replacement value of the home. Many insurance companies offer additional riders to increase that amount, and the client can discuss that with an insurance agent.
All of the following are considered qualified transfers for gift tax purposes EXCEPT
The answer is Charles owns a residence with his sister as JTWROS. He transfers his ownership share of the residence to his sister, making her the sole property owner. Charles's transfer of his ownership share of the residence to his sister was a gift, not a qualified transfer. The other transfers are all qualified transfers and not gifts.
Which of the following perils is ordinarily covered in an open-perils HO-3 policy? Ice damage Lightning Flood Earthquake
The answer is I and II. HO-3 is an open-perils policy, but the general exclusions in all HO policies include earthquake and flood.
What types of coverage are considered professional liability insurance? Malpractice insurance Errors and omissions insurance Inland marine insurance Business overhead expense insurance
The answer is I and II. The two types of professional liability insurance are malpractice insurance and errors and omissions insurance. The type of policy underwritten depends on the profession that is considered for coverage.
Which of the following statements regarding a qualified personal residence trust (QPRT) is CORRECT? A QPRT can include a vacation home. There is a 10-year limit on the term of the trust. The trust may have an interest in only one residence. The trust may be revocable.
The answer is I and III. Vacation homes are often included in QPRTs. The trust may have an interest in only one residence. A QPRT must be irrevocable, and there is no legally set limit on the term of the trust. However, for a QPRT to remove the home from the donor's gross estate, the donor must outlive the term of the trust. This is the same as any donor-retained trust.
Kevin and Nancy have brought their homeowners insurance policy in for your review. The residence is insured for $430,000 under an HO-3 policy. Since taking ownership, they have made many improvements to the property. The market value of the residence is $776,000, and their 40-acre lot is valued at $150,000. Costs to rebuild the house now would be approximately $600,000. Last year, they added a barn, which cost $60,000, to supplement the loafing sheds, tack shed, and pole barn, with a total estimated replacement cost of $50,000. This is where they store the hay for their four horses, miniature donkey, and the other horses boarding there. They have created a collection of western memorabilia, which they lend to a local museum every couple of years. When it is lent, the museum takes out a special insurance policy for $150,000 to protect against damage or theft. Which of the following statements regarding their risk and coverage is true? Coverage A is underinsured by $170,000. In case of a partial loss, the residence is under the 80% coverage requirement, so the coinsurance provision would apply. Coverage C is adequate because 50% of the $430,000 will cover their memorabilia. The horses and miniature donkey should be disclosed to the company. They have added liability due to the friends keeping horses and riding on their property that should be addressed. Kevin and Nancy need an agent familiar with horse property and high-value collectibles.
The answer is I, III, and IV. Option II is incorrect because Coverage C may not fully cover the memorabilia. They should have inland marine coverage and/or a personal property endorsement. Additionally, not knowing the value of their other personal property, we cannot say Coverage C is adequate.
Steven has a dog that has been known to wander through the neighborhood. His home is covered by an HO-3 policy. If Steven's dog bites a mailman three blocks away from his home, which of the followings statements regarding Steven's homeowners insurance coverage is CORRECT? Steven will not have any coverage because the bite did not take place at his personal residence. Coverage E of Steven's policy may apply or provide coverage if he is found to be legally liable (dog bite lawsuit). Coverage F of Steven's policy may be applied to any medical bills, typically up to $1,000.
The answer is II and III. Steven will be covered if his dog bites the mailman on or off his property. Coverage E will apply only if he is found to be legally liable, and Coverage F will apply to any medical bills typically up to $1,000. Coverage F does not require Steven to be at fault to provide coverage.
Which of the following statements regarding a businessowners policy (BOP) are true? A BOP includes property coverage only. There are four parts to a BOP. BOPs are a specific, standard package of coverage. BOPs can be customized to a specific business.
The answer is II and IV. A BOP includes both property and liability coverage and consists of four parts: common policy conditions, property coverage, causes of loss and exclusions, and liability coverage. BOPs are customizable so that the coverage a business needs can be added to the basic framework of the policy.
Which of the following about a businessowners policy (BOP) is true? A BOP includes liability coverage only. There are six parts to a BOP. BOPs are a specific, standard package of coverage. BOPs can be customized to a specific business.
The answer is IV only. A BOP includes both property and liability coverage and consists of four parts: common policy conditions, property coverage, causes of loss and exclusions, and liability coverage. BOPs are quite customizable so that the coverage a business needs can be added to the basic framework of the policy.
Which of the following examples demonstrates vicarious liability?
The answer is XYZ Paper Company must pay damages caused by the negligence of a delivery driver. Vicarious liability occurs when a person is liable for a tort committed by someone else, such as when an employer is responsible for damages caused by an employee.
Which of the following professionals would likely need malpractice insurance?
The answer is chiropractor. Of the two professional liability forms available, malpractice insurance is for those professions where personal, physical harm can occur (e.g., doctors, nurses, and chiropractors). Errors and omissions insurance is for those professions where financial harm can occur (e.g., insurance agents, financial advisors, accountants, and attorneys).
Which of the following statements regarding the basis for policy premiums on a personal automobile policy (PAP) is NOT correct?
The answer is farm-use vehicles generally have higher premiums. Farm-use vehicles generally have reduced premiums.
Which of the following professionals would likely need errors and omissions insurance?
The answer is financial planner. Of the two professional liability forms available, malpractice insurance is for those professions where personal, physical harm can occur (e.g., doctors, nurses, and chiropractors). Errors and omissions insurance is for those professions where financial harm can occur (e.g., insurance agents, financial advisors, accountants, and attorneys).
Which of the following items are covered without a dollar limit under the personal property provision of a homeowners policy?
The answer is none of these. None of these items are covered without a dollar limit under the standard homeowners policy. To increase this limit to an agreed-upon value, items need to be scheduled or endorsed.
Which of the following statements regarding malpractice insurance is CORRECT?
The answer is only a limited number of companies issue professional liability insurance policies. Relatively few companies sell this product due to its highly specialized nature. The act for which a physician or dentist might be sued might well be the exact act the provider intended. The result may not be what the patient wanted, leading to a lawsuit. Thus, intentional acts are not excluded from malpractice insurance. There are generally different forms used for each type of professional under all forms of professional liability insurance. An umbrella policy may extend the limits of an underlying professional liability policy, but professional liability insurance does not replace an umbrella policy.
A homeowners insurance policy can be endorsed with an HO-15 to
The answer is provide open-peril coverage for personal property owned, used, or worn by the insured. The HO-15 provides open-peril coverage for personal property owned, used, or worn by the insured.
Which of the following professionals would likely need malpractice insurance?
The answer is registered nurse. Of the two professional liability forms available, malpractice insurance is for those professions where personal, physical harm can occur (e.g., doctors, nurses, and chiropractors). Errors and omissions insurance is for those professions where financial harm can occur (e.g., insurance agents, financial advisors, accountants, and attorneys).
Denise plans to establish a trust for the benefit of her four grandchildren. She wants to give the trustee discretion to distribute trust income in different amounts among the four beneficiaries. Which of the following trust provisions will accomplish Denise's objective?
The answer is sprinkling (spray) provision. A sprinkling (spray) provision gives the trustee the right to make distributions in different amounts among the permissible beneficiaries.
Augusto and Celena have an HO-3 homeowners policy on their home. The dwelling is insured for $150,000. As the result of a kitchen fire, their home suffers extensive structural and smoke damage and is made uninhabitable for nine months. They rent a hotel room while the damage is repaired, incurring expenses of $13,500. It also costs them $4,000 for meals during their hotel stay, for a total of $17,500. Which of the following statements regarding the couple's coverage under their HO-3 policy is CORRECT?
The answer is the HO-3 policy covers the entire $17,500 in expenses. Coverage D of a homeowners policy pays living expenses, including lodging costs and meals, incurred when the house is made uninhabitable by a covered peril. Under an HO-3 policy, Coverage D is limited to 20% of the Coverage A limit on the dwelling. In Augusto and Celena's case, coverage under Coverage D is $30,000 ($150,000 × 20%), so their lodging expenses and meals are fully covered.
Which of the following HO policy forms provides the highest level of building and personal property coverage?
The answer is the HO-5. The HO-5 policy form provides open-perils coverage on buildings and personal property. The HO-2 policy form only provides broad form coverage on buildings and personal property. The HO-3 policy form provides open form coverage on buildings and broad form coverage on personal property. The HO-15 is technically an endorsement and not a form, and provides open-peril coverage to personal property. A combination of the HO-3 form and the HO-15 personal property endorsement is the equivalent of the HO-5.
Which of the following is true about the various HO forms?
The answer is the open-perils forms cover all perils unless specifically excluded. The basic form covers the 10 basic perils. The broad form covers the 10 basic perils and adds coverage for seven additional perils. The HO-15 endorsement was withdrawn as part of the ISA HO-2000 program and is no longer available for purchase.
Which of the following statements regarding an unfunded irrevocable life insurance trust (ILIT) is CORRECT?
The grantor of an unfunded ILIT gifts cash to the ILIT each year to pay the policy premiums. The gifts are considered to be future interest gifts, so the grantor must include Crummey powers in the trust to take advantage of the annual exclusion. An unfunded ILIT is not a grantor trust because there are no assets in the trust generating taxable income.
Which of the following is property that passes by contract and avoids probate at death? Pensions with a named beneficiary other than the decedent's estate. Life insurance with a named beneficiary other than the decedent's estate. Profit-sharing plans with a named beneficiary other than the decedent's estate.
These are all examples of property that passes by contract and avoids probate at death.
Which of the following situations does not require the filing of a federal gift tax return?
This is the correct answer because there is no requirement to file a federal gift tax return if the gift by a donor is of a present interest valued at less than the annual exclusion amount. The donee's applicable credit amount situation is irrelevant to whether a return must be filed.
Bernard donates $1 million to a charity. The money will be commingled in a fund with property donated by other donors, and Bernard will receive a pro rata share of the annual income from the fund for life. Which of the following best describes this type of charitable donation?
This type of charitable donation involves a pooled income fund. Pooled income funds are often established by public charities to encourage contributions of cash or property and to spare donors the expense of having to draft a CRAT or CRUT.
Bob Dickson made taxable gifts of $200,000 in prior years. The gift tax due on these prior gifts was paid by his gift tax credit amount. In 2021, Bob established a Uniform Transfers to Minors Act (UTMA) account for each of his 10 children. He funded each account with $580,000. Bob did not make any other gifts to his children in 2021. Which of the following is the net federal gift tax due for the 2021 gifts?
Transfers to an UTMA are eligible for an annual exclusion. Therefore, $565,000 of each transfer is taxable, for a total of $5,650,000. Bob's prior taxable gifts must be added to this amount to determine total taxable gifts of $5,850,000 ($5,650,000 + $200,000). This figure is taken to the gift tax rate table to compute a tax due of $2,285,800 ($4,850,000 × 40% = $1,940,000 + $345,800 [tax on $1 million]). From this amount, the tax on $200,000 (the prior taxable gifts) is deducted. The tax on $200,000 is $54,800. Therefore, $2,285,800 - $54,800 = $2,231,000. Because Bob has used $54,800 of his $4,625,800 gift tax credit amount on prior gifts, he has $4,571,000 of this credit left to apply to current gifts. Therefore, Bob's net federal gift tax due for the current transfers is $0 because he can use a portion of his remaining applicable credit amount.
Which one of the following types of statutes may give a replacement bequest to a beneficiary who was given a specific asset in a decedent's will when that asset is not available at the testator's death?
When a will identifies specific property to go to an heir, but that property is no longer in the decedent's estate, ademption statutes allow for a replacement item or cash equivalent.
Your client and his spouse have combined gross estates of $17.5 million, owned in equal shares, that include the following: (1) real estate with their share valued at $4.0 million, owned by them and their son as joint tenants with right of survivorship (all three provided equal contributions); and (2) individual life insurance policies, owned by each spouse on their own life—each policy has a face value of $1.75 million and names their three children as equal beneficiaries. Which of the following are disadvantages of using the will substitutes described? The estate of the first spouse to die will be denied a marital deduction for the jointly titled real estate because it will avoid probate. Each estate might be faced with inadequate funds to pay taxes and administrative expenses due to the current beneficiary designations on the life insurance policies. Estate tax liability on the jointly titled real estate may be payable on one-third of the value at the first spouse's death and on two-thirds of the value at the second spouse's death. The estate of the first spouse to die will be denied a marital deduction for the insurance benefits due to the current beneficiary designations on the life insurance policies.
While there are unlikely to be large administrative expenses since neither spouse's estate has any probate property, there will be some (e.g., to complete and file the estate tax return) and there will certainly be estate taxes due at both spouses' deaths. Neither estate has the liquidity to pay these expenses and taxes. There will be no marital deduction for the life insurance death benefits, as the designated beneficiaries for each policy are the children. The first spouse to die will have to include one-third of the total real estate in their gross estate, but only one-half of this amount will go to the surviving spouse and thus qualify for the marital deduction. The remaining portion will go to the son. The estate of the first spouse to die will have estate tax liability on only one-sixth of the real estate due to the marital deduction for the other one-sixth that goes to the surviving spouse.
Dawn Fairchild's will leaves half of her real estate assets to her spouse, Marc, and the remaining half in equal shares to her children, James and Maria. The will has no residuary clause and their combined estates do not exceed the applicable exclusion amount. The relationship between Dawn and James has become so strained that she now wants to leave his share of the estate to Maria. Marc recently died, and Dawn is in the process of amending her will. Which one of the following estate planning pitfalls can be avoided by amending Dawn's will?
Without a residuary clause, the portion going to Marc under Dawn's present will pass by intestacy. Also, Dawn's personal property would pass by intestacy.
Which of the following statements regarding grantor retained income trusts (GRITs) is CORRECT? In a GRIT, the grantor transfers property into a trust for the eventual benefit of someone else, while retaining the right to the trust income during the term of the trust. If the grantor survives the income period of the GRIT, the value of the trust asset is removed from the grantor's gross estate. A GRIT is a defective grantor trust for income tax purposes as long as the grantor is receiving income. To avoid the zero valuation rules of Chapter 14, the retained income interest in a GRIT must be a qualifying annuity or unitrust payment.
all
Which of the following statement(s) regarding a Section 2503(c) trust is CORRECT? A Section 2503(c) trust requires that income and principal be distributed when the minor reaches age 21. A Section 2503(c) trust does not require that the trustee distribute income annually.
both
