Estate Planning

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

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

Example of Section 2701

Assume that Dan is the sole owner of a closely held business, but he wants to begin involving his adult children in the business so that they can run it when he is ready to retire. Upon the advice of his financial planner (who is working with Dan's attorney), Dan incorporates the business as a regular C corporation with two classes of stock: preferred and common. Dan retains all the preferred shares (senior equity interests), which have voting rights and a cumulative preferred dividend right to 2% of the stock's value annually. Dan gives all the common shares (junior equity interests) equally to his two children over time. These common shares do not have voting rights or a preference in the payment of income. Dan has transferred a corporate interest to a family member, and he has retained a controlling interest in the corporation. Therefore, the value of Dan's retained distribution right can be subtracted from the value of the entire corporation so that he will pay gift tax only on the remainder, which is the value of what he gave his children

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

B) She should leave written instructions to one or more family members likely to survive her and be involved in funeral arrangements. 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 statements regarding types of gifts is CORRECT? A) A gift of a future interest is not subject to gift tax. B) The gift tax applies to incomplete gifts. C) A gift of a future interest is not eligible for the gift tax annual exclusion. D) Indirect gifts, such as the payment of another's expenses, are not subject to the gift tax.

C) A gift of a future interest is not eligible for the gift tax annual exclusion. Indirect gifts, such as the payment of another's expenses, may be subject to the gift tax. The gift tax does not apply to incomplete gifts. The gift tax applies to gifts of future interests as well as to gifts of present interests.

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

C) All of the above.

Which of the following is not a tax goal related to income tax? A) Obtaining a stepped-up basis B) Shifting receipt of income C) Freezing or reducing the value of assets subject to tax D) Deferring the recognition of income and gain

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

Which of the following statements regarding community property is CORRECT? A. If a couple lives in a common-law state, they can elect to treat their property as community property to obtain a full step-up in basis at the death of the first spouse. B. Upon the death of the first spouse, community property will generally pass automatically to the surviving spouse by right of survivorship. C. Community property states do not allow married people to own property separately. D. If a couple moves from a community property state to a common-law state, separate property will generally remain separate property.

D. If a couple moves from a community property state to a common-law state, separate property will generally remain separate property. Couples living in common-law states cannot elect to treat their property as community property. Community property generally does not include a right of survivorship, and community property states do allow married people to own property separately in some circumstances, such as when a spouse receives property through an inheritance or gift. Also, property brought into the marriage can be separate property. Finally, the couple could affirmatively choose to retitle assets as separate property. This is sometimes done for asset protection purposes when one spouse is more liable to lawsuits. For example, if a surgeon is married to a teacher, for legal liability purposes, it can be advantageous for the teacher to own the family's property instead of the surgeon.

Spousal Joint Tenants

If spouses take title to property as joint tenants, there are no gift tax implications on the acquisition date of the property, regardless of the amount each spouse contributed to the acquisition of the property. Furthermore, for estate tax purposes, when the first spouse dies, the decedent spouse's gross estate includes only half (50%) of the value of property. EX: At his death, Dan and his spouse, Heather, owned their home in a common-law state as JTWROS. Their basis is $500,000. The home has a date-of-death fair market value of $700,000. Because Dan and Heather were spouses, only half of the property is included in Dan's gross estate, and Heather's new tax basis in the home is $600,000 ($350,000 step-up in basis on the half interest included in Dan's gross estate plus a $250,000 basis in the other half already owned by Heather).

Nonspousal Joint Tenants (Consideration Furnished Rule)

If the owners contributed an unequal amount to the acquisition price, the owner contributing more of the purchase price makes a gift to the other owner(s) equal to the amount contributed in excess of an equal contribution. For estate tax purposes, the consideration furnished rule applies if the joint owners were not spouses at the time of the first joint tenant's death. Because of this rule, the property at death is included in the decedent's gross estate to the extent that the surviving joint tenant cannot prove that he actually contributed to the purchase price. Thus, a rebuttable presumption is created: unless the surviving joint tenant can prove that he actually contributed to the acquisition of the property titled as JTWROS, the deceased joint tenant's gross estate must include 100% of the property's value.

Which of the following statements regarding the concept of gift splitting in federal gift tax law is CORRECT? A) Spouses can elect to split some gifts but not split other gifts made within the same calendar year. B) Gifts of community property require a gift splitting election. C) The gift splitting election may be made by any related party who joins in the making of the gift. D) In non-community property states, the donor spouse must file a gift tax return even if the split gift value is less than the annual exclusion.

In non-community property states, the donor spouse must file a gift tax return even if the split gift value is less than the annual exclusion. If a married couple elects to split gifts, a gift tax return must be filed by the donor spouse even if the split brings the total gift to less than the annual exclusion amount. One exception to this is where the married couple lives in a community property state. In that instance, each spouse is considered to already own a one-half interest in the property gifted (meaning that the filing of a return to indicate spousal consent is not required). The purpose of filing the gift tax return, even though the gift is less than the annual exclusion for either spouse, is to document the gift splitting to the IRS.

Transfer of Property- Joint tenants with right of survivorship

In states where joint tenancy with right of survivorship tenants are deemed to own property equally, the donor tenant's share is the total FMV of the property divided by the total number of owners. Thus, if there are three joint tenants and the entire property is gifted, each is deemed to own one-third of the property and is responsible for one-third of the gift tax. In states where joint tenants can own property in unequal shares, the value of the transfer would be the same as for tenants in common.

Joint Tenancy With Right of Survivorship

Involves the co-ownership of property by two or more people, each of whom owns an undivided, equal interest in the entire property. The fundamental characteristic of property owned as JTWROS (whether these owners are spouses or nonspouses) is that the property passes to the surviving owner(s) by right of survivorship or "by operation of law." There is no need for either owner to write a will to pass the property to the other.

Step 7: Monitoring Progress and Updating the Implemented Recommendations

The client and the planner must mutually define what, how, when, and by whom monitoring will be done. The monitoring process involves periodic review with the client so that the estate planner is aware of changes in the client's objectives and situation. When changes do occur, the entire estate planning process is repeated, beginning with the first step, in an effort to modify the plan so that it is once again appropriate for the client's objectives and circumstances.

Which of the following statements regarding grantor retained annuity trusts (GRATs) is CORRECT? 1. A GRAT is most effective when a single, appreciating asset is transferred to the trust and the term of the trust is relatively short. 2. A GRAT is generally used when the grantor has a less-than-average probability of outliving the term of the trust.

I only. Statement I is correct. Statement II is incorrect because a GRAT is generally used when the grantor has a better-than-average probability of outliving the term of the trust. A GRAT or granter retained unitrust (GRUT) only removes the trust assets from the donor's gross estate if the GRAT or GRUT expires while the donor is still alive. In this situation, the trust assets are removed from the donor's gross estate and transferred to the remainderman. If the donor dies during the life estate of the GRAT or GRUT, then some or all of the trust assets are included in the donor's gross estate.

Monty owns property with a basis of $500,000 and a fair market value of $1 million. He sells the property to his son for $700,000. Which of the following statements regarding this transaction is CORRECT? 1. This transaction is a bargain sale. 2. There are no gift tax consequences arising from this sale.

I only. Statement I is correct. Statement II is incorrect. Because this transaction is a bargain sale, the difference between the fair market value of the property and the consideration received is a gift. In this situation, a $300,000 gift was made.

Which of the following statements regarding charitable contributions is CORRECT? Charitable contributions may qualify for a charitable deduction if made during the donor's lifetime or at death. A decedent's estate qualifies for an estate tax charitable deduction if the decedent's beneficiaries make a contribution to a qualified charity.

I only. Statement II is incorrect because a charitable contribution is deductible for estate tax purposes if it is made by the decedent via the will or by contract but not if made by the beneficiaries.

Which of the following statements regarding gift splitting is CORRECT? 1. The annual exclusion can be doubled to $30,000 (for 2021) even if one spouse makes the entire gift. 2. Gifts made from community property or JTWROS property held by spouses require a gift-splitting election.

I only. Statement II is incorrect because gifts made from community property or from JTWROS property owned by spouses do not require a gift-splitting election.

Which of the following statements regarding the estate tax lifetime exemption amount is CORRECT? 1. The estate tax lifetime exemption amount is $11,700,000 for 2021. 2. The estate tax lifetime exemption amount is not portable between spouses.

I only. Statement II is incorrect because the estate tax lifetime exemption amount is portable between spouses.

Which of the following statements regarding probate is CORRECT? 1. Probate is necessary when a decedent dies testate. 2. Assets held as tenancy by the entirety pass through probate.

I only. When a decedent dies testate (with a valid will), probate is necessary to prove the validity of the will and transfer the decedent's assets according to its provisions. Property held as tenancy by the entirety passes by operation of law (there are survivorship rights) and is not subject to probate.

Which of the following statements regarding durable powers of attorney is CORRECT? 1. The principal must be at least age 18 and legally competent. 2. The power may be general or limited in scope. 3. The power may be immediately effective or springing. 4. The power does not survive the principal's death.

I, II, III, and IV. All of the statements are correct.

hich of the following are valid considerations when attempting an intrafamily estate freeze transaction? 1. The application of the Chapter 14 rules 2. How the business owner can maintain control of the business after the transaction 3. How to shift appreciation in the value of the business to younger family members 4. The identities of the persons to be given interests in the entity

I, II, III, and IV. All of these are valid considerations when attempting an intrafamily estate freeze transaction.

Which of the following transfers are gifts for purposes of the gift tax statutes? 1. 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. 2. Kurt purchases real property and has the title conveyed to himself and to his brother as joint tenants. 3. 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. 4. 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.

I, II, III, and IV. 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.

Chapter 14 of the Internal Revenue Code governs federal gift taxation of lifetime intrafamily transfers. To which of the following transfers does Chapter 14 not apply? 1. Incomplete gifts, such as a revocable trust 2. Qualified personal residence trusts (QPRTs) 3. Charitable remainder annuity or unitrusts (CRATs and CRUTs) 4. Pooled income funds (PIFs)

I, II, III, and IV. Chapter 14 does not apply to incomplete transfers, QPRTs, CRATs, CRUTs, and PIFs.

Which of the following typically represent liquidity needs of a decedent's estate? 1. The decedent's funeral and burial expenses 2. The decedent's outstanding debts 3. Taxes 4. Payment of cash bequests

I, II, III, and IV. These are all typical liquidity needs of a decedent's estate.

Which of the following factors should a business owner consider when creating a succession plan? 1. Whether the owner wants to transfer the business during life or at death 2. 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 3. 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.

Which of the following statements concerning gifts of appreciated property are CORRECT? 1. The donor's holding period carries over to the donee. 2. Generally, the donor's basis carries over to the donee. 3. If the donor paid gift tax on the gift, the donee's basis is increased by a portion of the gift tax paid.

I, II, and III. All of these statements are correct.

Which of the following statements regarding QTIP trusts are CORRECT? 1. QTIP trusts allow a terminable interest to be left to the surviving spouse and still qualify for the estate tax marital deduction. 2. Assets in a QTIP trust are usually included in the gross estate of the second spouse to die. 3. QTIP trusts are useful when the first spouse to die has children from a prior marriage.

I, II, and III. All of these statements are correct. The QTIP is included in the estate of the second spouse to die at the same percentage as the first spouse took as a marital deduction. If 100% of the QTIP was taken as a marital deduction when the first spouse dies, then 100% of the QTIP is included in the second spouse to die's gross estate. If the first spouse's estate only took a martial deduction for 70% of the QTIP, then only 70% of the QTIP's value when the second spouse to die passes away is included in the estate of the second spouse to die.

Elaine has consulted a CFP® professional for help in preparing her estate plan. She has a relatively small estate, and her main objective is to avoid probate. Which of the following actions will help Elaine achieve her objective? 1. Designate her daughter as beneficiary of her IRA 2. Open a payable on death (POD) bank account with her son 3. Transfer assets to a revocable living trust 4. Retitle her house as tenants in common with her sister

I, II, and III. Statement IV is incorrect; property held as a tenancy in common does not avoid probate because there is no survivorship feature as there is with JTWROS. All of the other statements are correct.

Vince died during the current year. His estate consisted of the following assets: 1. Traditional IRA invested in a global stock fund and a balanced mutual fund—Vince's cousin, who died two years ago, was the designated beneficiary. This beneficiary designation was never changed by Vince. 2. Life insurance policy with a cash value of $55,000 and death benefit of $500,000—the policy is on the life of Vince's sister. Vince's daughter is the named beneficiary. 3. An installment note receivable, with a 9% interest rate and a remaining term of seven years. 4. Land held as tenancy by the entirety with Vince's spouse. Which assets will be included in Vince's probate estate?

I, II, and III. The IRA will be included in his probate estate because the named beneficiary predeceased Vince. The life insurance policy will be subject to probate because the insured (Vince's sister) is still alive. Therefore, the death benefit will not be paid out, and the insurance policy can be left to Vince's heirs in his will. The installment note receivable will be subject to probate. The land will not be subject to probate because it is held as a tenancy by the entirety. Tenancy by the entirety passes by operation of law and avoids probate.

Gary and Georgeann Sutter have the following objectives: For Gary to provide Georgeann exclusively with a mandatory stream of income from the assets included in his gross estate if he predeceases her To ensure that Gary's children from his prior marriage will ultimately receive the income-producing assets upon Georgeann's death To prevent assets used to provide income to Georgeann from being included in her gross estate Which of the following estate planning techniques would accomplish the Sutters' first objective of providing a mandatory stream of income? 1. a power of appointment trust 2. a QTIP trust, with an election 3. a QTIP trust, without an election

I, II, and III. The key portion of the Sutters' first objective is that Gary wants Georgeann to have a mandatory income stream. All of these trusts must grant the surviving spouse a mandatory income stream to qualify for the marital deduction. In a QTIP trust, there is a mandatory income stream to the surviving spouse whether or not the election is made. The election affects only tax goals, not distribution goals.

Mario has accumulated significant wealth over his lifetime, and is currently implementing gifting techniques. He would like to take advantage of the annual exclusion. Transfers to which of the following trusts/accounts would permit Mario to utilize the gift tax annual exclusion? 1. Uniform Gift to Minors Account (UGMA) 2. Grantor retained annuity trust (GRAT) 3. Qualified tuition plan 4. Section 2503(c) trus

I, II, and IV. A transfer to a GRAT is a gift of a future interest that is not eligible for the annual exclusion. Transfers to an UGMA, a qualified tuition plan, a Section 529 plan, and a Section 2503(c) trust are all eligible for the gift tax annual exclusion.

Which of the following statements regarding gift splitting are CORRECT? 1. The annual gift tax exclusion allows spouses who consent to split their gifts to transfer up to $30,000 (for 2021) to any one person during any calendar year without gift tax liability, if the gifts are of a present interest. 2. To qualify for gift splitting, a couple must be married at the time the gift is made. 3. For gift tax purposes, spouses must file a joint income tax return to qualify for the gift splitting benefits. 4. Both spouses must consent to the use of gift splitting and at least one gift tax return must be filed.

I, II, and IV. Spouses do not have to file a joint income tax return to elect gift splitting. The other statements are correct.

Which of the following are exceptions to the terminable interest rules qualifying for the marital deduction? 1. A bequest to the surviving spouse conditioned upon surviving for up to six months after the decedent's death (as long as the spouse survives the specified period) 2. An interest for life if the surviving spouse also receives a general power of appointment 3. Life insurance proceeds payable in installments to the surviving spouse but only until she remarries 4. Property for which the QTIP election is made

I, II, and IV. Statement III is incorrect. The life insurance proceeds payable in installments to a spouse until remarriage are an example of a terminable interest that does not qualify for the marital deduction.

Which of the following correctly describe a mistake, pitfall, or weakness and actions that can be taken to avoid such problems? 1. If a client has recently remarried, updating the will and powers of attorney is necessary. If a person is the sole owner of real estate in a state other than the state of his or her domicile, the person can avoid ancillary probate by executing a new will that leaves such property to a trust. 3. If the testator of a will wants to restrict his adult children's access to their inheritance after his death, the testator should place their share of the estate into a trust established under the will which includes the limitations on distributions desired. 4. To minimize the costs of estate administration, will substitutes such as completion of beneficiary designation forms should be considered.

I, III, and IV. Option II would not avoid ancillary probate as the new will would have to be probated the same as the old will. Updating a will whenever a significant life change occurs is necessary to keep this document up-to-date and aligned with the client's goals. Option III places the estate assets in a testamentary trust with the trustee directed to make distributions subject to the limitations desired by the grantor. Assets distributed through a will substitute such as a beneficiary designation form will avoid the delay and expense of probate administration.

Which of the following statements about survivorship life insurance is CORRECT? 1. Neither the death benefits nor any of the replacement cost is includible in the gross estate of the first insured to die. 2. It may be used to provide funds to pay estate taxes at the death of the surviving spouse when all property transferred at the first spouse's death qualified for the marital deduction. 3. It pays a partial benefit equal to administrative expenses and estate taxes at the death of the first insured, with the remainder paid in full at the death of the second insured. 4. Generally, the premium is less than those for comparable policies on each of the individuals.

II and IV. Like any life insurance, the value of a survivorship life policy is includible in the deceased owner's gross estate, unless the deceased has given up all incidents of ownership in the policy more than three years before death. With survivorship life insurance, the death benefit would not be included in the deceased's gross estate, but the deceased's share of the replacement cost would a part of the deceased's gross estate. Therefore, option I is wrong. Option III is incorrect because a survivorship life policy pays the entire death benefit at the death of the survivor; nothing is paid at the first death.

Which of the following property interests of a decedent will pass through probate? 1. Pension plan assets with a named beneficiary other than the decedent's estate 2. The decedent's half interest in community property 3. Life insurance proceeds with the decedent's spouse as beneficiary 4. Property owned with the brother of the decedent as tenants in common

II and IV. Property owned as tenants in common may be transferred by will or pass via state intestacy laws. In either case, the property will pass through probate. A decedent's half interest in community property will also pass through probate. The other interests pass by contract (beneficiary designation) and are not subject to probate.

Which of the following is the only exception(s) to an estate transfer being subject to the generation-skipping transfer tax (GSTT) when a gratuitous completed inter vivos transfer is a generation-skipping transfer? 1. The transferor makes payments directly to the recipient for medical expenses. 2. The transferor makes direct payments of medical expenses on behalf of the recipient. 3. The transferor makes payments directly to the recipient for educational expenses. 4. The transferor makes direct payments for tuition expenses on behalf of the recipient.

II and IV. The transferor can qualify within the limited exception if direct payment is made for medical expenses in addition to making direct payments for tuition expenses.

Phil recently died owning a farm on the outskirts of town. The nearby land has been valued at over $100,000 per acre as developed commercial real estate. Farmland is valued far below that price. Which of the following conditions must be met for Phil's farmland to be valued under Section 2032A special use valuation? 1. The property must have been owned by Phil (or a member of his family) and used as a farm for three of the past five years. 2. The net value of the qualified real and personal property must equal at least 50% of the adjusted value of Phil's gross estate. 3. The value of the real estate must be at least 25% of the adjusted value of the adjusted value of Phil's gross estate. 4. The family cannot sell the farm to a nonqualified individual for 10 years without causing recapture problems.

II, III, and IV. Statement I is incorrect because the property must have been owned by the decedent or a member of the decedent's family, and used as a farm or closely held business, for five of the last eight years. Note that Statement II refers to the farming operation as a business, and not the underlying real estate.

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? 1. 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. 2. 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. 3. Paying his mother's hospital bill will have no effect on subsequent lifetime transfers. 4. 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.

If in 2021 Arthur and Tasha make gifts to all three of their children and elect gift splitting, what is the total amount of gifts that will be covered by their annual exclusions?

If a married couple elects to split gifts up to $30,000 (in 2021) in gifts to each donee will be covered by their annual exclusions. Arthur and Tasha can make a total of $90,000 ($30,000 × 3) to their three children and have the gifts covered by their annual exclusions.

QPRT

If the grantor funds the trust with a personal residence rather than income-producing assets, the right retained by the grantor is the right to possess or live in the personal residence for the term of the trust. The present value of the retained right to use the residence is computed by multiplying an income factor found in Table B in IRS Publication 1457 times the FMV of the residence at the time of funding. The value of the remainder interest subject to gift tax is the remaining amount after deducting the value of the retained right of use from the value of the trust assets at the time of funding.

Tenancy by the Entirety

Is a limited form of joint tenancy with right of survivorship that can exist only between spouses. This form of ownership is recognized only in some common-law states and, unlike JTWROS between spouses, neither spouse may sever the survivorship right of the other without mutual consent. As in JTWROS between spouses, only half of the value of property held as TE is included in the gross estate of each spouse, and the basis of the property is calculated in the same manner as with JTWROS property held by spouses. Finally, TE features creditor protection from the claims of each spouse's separate creditors (but not joint creditors). This feature is not available when spouses title property as JTWROS.

Tenancy in Common

Is the ownership of property by two or more people, each of whom owns an undivided but possibly unequal (fractional) interest in the entire property. For example, if there are two owners, one tenant in common might own a 40% undivided interest and the other a 60% undivided interest in the property. The undivided interest of each owner is treated as being owned outright and can be sold, donated, willed, or passed through intestate succession.

Which of the following statements concerning the transfer of a life insurance policy is correct? 1. The matured death benefit is always excluded from gross income. 2. The matured death benefit may be only partially excludible from gross income and partially includible in gross income.

Neither I nor II. 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.

Which of the following charitable remainder trusts can be revoked by the grantor after they are established? 1. Charitable remainder annuity trusts (CRATs) 2. Charitable remainder unitrusts (CRUTs)

Neither I nor II. Neither is correct. For a trust to qualify as a CRAT or a CRUT, the trust must be irrevocable upon inception.

Which of the following statements regarding qualified personal residence trusts (QPRTs) is CORRECT? 1. A QPRT may have an interest in more than one residence. 2. 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.

A woman purchases a life insurance policy on her husband's life with her own funds. She is both the owner and beneficiary of the policy. Do the proceeds of the policy qualify for the marital deduction in the husband's estate, if he predeceases his wife?

No, because the proceeds of the policy are not included in the husband's gross estate. Property qualifies for the marital deduction only if it is included in the decedent's gross estate.

Non-Financial Goals

Nonfinancial goals are often more important to clients than financial goals because they have to do with the people they love. 1. Meeting the Needs of Dependents 2. Proper Distribution of Assets 3. Efficient Transfer of Assets at Death 4. Asset Protection 5. Control of Asset

Step 2: Identifying and Selecting Goals

One of the most important steps is to mutually define the client's personal and financial goals, needs, and priorities. This must be done before any recommendations are made or enacted. Developing an effective estate plan requires gathering complete and accurate quantitative and qualitative information about the client.

Annual exclusion

Only the gift tax allows a deduction annually for a limited amount of gifts of a present interest by any donor to each donee in a calendar year. The annual exclusion amount is indexed annually for inflation to the next lowest multiple of $1,000. The maximum annual exclusion amount for 2021 is $15,000.

Transfers Exempt From Gift Tax

Political Organization Exemption, Educational Exemption( The payment must be made directly and exclusively to the qualifying educational organization, and it must be for tuition. No educational exemption is allowed for amounts paid for books, supplies, dormitory fees, board, or other similar expenses that do not constitute direct tuition costs), Medical Exemption ( The gift tax does not apply to an amount paid on behalf of an individual to a person or institution that provided medical care for the individual. The payment must be made directly and exclusively to the care provider),

Applicable Exclusion Amount

Refers to the dollar value of taxable gifts or a taxable estate that will generate gift or estate tax liability equal to the applicable credit amount. Any person can avoid paying a gift tax out of pocket if the cumulative amount of the person's taxable gifts is less than the maximum gift tax applicable exclusion amount for that year. For example, in 2021, an individual could have cumulative taxable gifts valued at $11.7 million and avoid payment of any gift tax out of pocket because the gift tax applicable credit amount ($4,625,800) is equal to the tax on $11.7 million. Only if their cumulative taxable gifts exceed $11.7 million would there be any out-of-pocket gift tax liability

Chapter 14 Rules: Code Section 2701

Section 2701 sets the rules for lifetime transfers of corporate or partnership interests where there is no established market for such interests. Must meet 4 prerequisites: 1. There must be a transfer of an equity interest in a closely held corporation or partnership. 2. The transfer must be made to a member of the transferor's family. 3. The transferor or an applicable member of the transferor's family must keep an applicable retained interest in the corporation or partnership. In other words, the transferor is not giving her entire interest. An applicable retained interest is - a distribution right, but only if immediately before the transfer, the transferor and applicable family members hold control of the entity; or - a liquidation, put, call, or conversion right. 4. There are senior and junior equity interests in the entity. (A difference of voting rights, without more, is insufficient.)

Chapter 14 Rules: Code Section 2702

Section 2702 deals with transfers in which a trust or a term of years is involved. It applies only to lifetime transfers, and therefore, has an effect only on valuation for gift tax purposes. There are only three types of qualified retained interests for a transaction subject to Section 2702.

Which one of the following objectives cannot be achieved with an unfunded irrevocable life insurance trust that does not have a Crummey power? A) Avoiding transfer tax on the death benefit, as long as the grantor is not the trustee B) Avoiding probate of death benefits C) Sheltering premium payments gifted to the trust from gift tax with the annual exclusion D) Naming the trust as beneficiary of the policy with annual income payments to the grantor's spouse and children

Sheltering premium payments gifted to the trust from gift tax with the annual exclusion. Sheltering of premium payments gifted to the trust from gift tax by using the annual exclusion cannot be accomplished unless the beneficiaries of the unfunded irrevocable life insurance trust (ILIT) have Crummey powers, which gives them a present interest in the premium payments.

Transfer of Property- Tenants by the entirety and community property ownership

Since tenants by the entirety and community property ownership are forms of property ownership reserved solely for married couples, each person is deemed to own half of the asset regardless of contribution. Therefore, for gift tax purposes, each person's share is equal to 50% of the FMV of the asset. (Note: For probate estate purposes, community property assets go through probate, while tenancy by the entirety assets do not.)

Which of the following statements regarding community property is CORRECT? 1. Community property can exist only between spouses. 2. Community property includes a right of survivorship at the death of the first spouse.

Statement 1 is correct. Statement II is incorrect because community property does not include a right of survivorship. Community property is in the probate estate and the deceased spouse has the right to will the property to anyone.

Which of the following gifts qualify for a gift tax annual exclusion? 1. A gift in which the donee receives the immediate and unrestricted right to use, possess, or enjoy the gift 2. A gift in which the donee's possession or enjoyment commences at some time after the gift is made

Statement I is correct because it defines present-interest gifts, which qualify for the gift tax annual exclusion. Statement II is incorrect because it defines a gift of a future interest, which is not entitled to an annual exclusion.

Which of the following statements regarding the rule against perpetuities is CORRECT? 1. The rule against perpetuities limits how long a trust may last. 2. The rule against perpetuities does not apply to charitable trusts. 3. The rule against perpetuities applies in all states.

Statements I and II are correct. Statement III is incorrect because the rule against perpetuities does not apply in all states.

Which of the following statements about analyzing the liquidity of an estate are correct: 1. Payment of the decedent's debts must be considered. 2. Payment of the estate's cost of administration such as appraisal fees must be considered. 3. The ease of securing a death certificate must be determined to estimate how quickly survivorship benefits can be paid.

Statements I, II and III are true.

Estate Planning Process

Step 1.: Understanding Personal and Financial Circumstances Step 2: Identifying and Selecting Goal Step 3: Analyzing the Client's Current and Potential Alternative Courses of Action Step 4: Developing the Recommendation(s) Step 5: Presenting the Recommendation(s) Step 6: Implementing the Recommendation(s) Step 7: Monitoring Progress and Updating the Implemented Recommendations

spendthrift clause:

Such a clause prohibits the beneficiary from assigning the beneficiary's interest to a creditor and denies creditors the right to demand that the trustee pay for the beneficiary's debts. The spendthrift provision may be used even if the beneficiary is not a proven spender or spendthrift.

Trusts created under a will are examples of which type of trust?

Testamentary trust. A trust that is created under a will and that does not take effect until the testator's death is a testamentary trust.

A grandfather is considering making gifts to his grandchildren in 2021. Assuming the grandfather has made no previous generation-skipping transfers, the generation-skipping transfer tax (GSTT) lifetime exemption amount available to the grandfather in 2021 is

The GSTT lifetime exemption amount for 2021 is $11,700,000.

Transfer of U.S. Government Savings Bonds

The U.S. government has issued five types of savings bonds: Series E and H bonds, Series I bonds, and Series EE and HH bonds. When a lifetime transfer is made of any of these bonds, the value of the transfer is measured by the redemption value of the bond as of the transfer or valuation date, as determined from tables published periodically by the Bureau of the Fiscal Service and the Treasury Department.

Who owns equitable title to trust assets?

The beneficiary. The trust beneficiary holds equitable title to the trust assets. The trustee of the trust holds legal title to the trust assets, or corpus. The trustee also has a fiduciary duty to act at all times on behalf of beneficiary. The grantor, or settlor, establishes the trust.

Step 3: Analyzing the Client's Current and Potential Alternative Courses of Action

The financial planner must analyze the collected data to identify factors that will affect the estate plan, such as -the value of the gross estate -the amount of any previous taxable gifts, including generation-skipping transfers and any gift or generation-skipping transfer taxes paid -the types of property interests held; -how titles to properties are held -health, insurability, and life expectancy status -financial needs for education, retirement, etc. -competency of beneficiaries -current and anticipated marginal income tax brackets -applicable state law -marital and family status of the client -wealth that the client may obtain in the future by gift or inheritance; -existing and anticipated obligations and liabilities of the client

Step 1: Understanding Personal and Financial Circumstances

The first step in the estate planning process is to understand the client's personal and financial circumstances. This accomplished by obtaining qualitative and quantitative information, determining if it is sufficient to properly assess the client's situation and addressing any incomplete information.

What is the gift tax lifetime exemption amount for 2021?

The gift tax lifetime exemption amount for 2021 is $11,700,000.

Why was the gift tax established?

The gift tax was established to deter people from transferring their assets away during their life, thus avoiding the estate tax that Congress imposed on the transfer of wealth at death. Without the gift tax, people could avoid the estate tax simply by giving all of their property away prior to death. Congress passed legislation in 1932 imposing a gift tax on the gratuitous transfer of wealth during an individual's lifetime.

Grit

The grantor retains the right to receive a stated percentage or all of the income produced by trust assets at least annually. Accordingly, if no income is earned, no amount is distributed to the grantor. If the GRIT had a remainder interest that would go to a non-family member, for gift tax purposes, the present value of the income interest is computed by multiplying an income factor found in Table B in IRS Publication 1457 by the FMV of all of the trust assets (apportioned if less than all income is retained).

GRUT

The grantor retains the right to receive a unitrust amount from the trust at least annually. This unitrust amount is expressed as a fixed percentage of the net FMV of trust assets as valued at least annually; however, the trust may provide that the grantor is entitled to any excess trust income in addition to this unitrust amount. The amount will vary each year with the value of trust assets. For gift tax purposes, the present value of the remainder interest is determined by multiplying a factor found in a different government table (Table D found in IRS Publication 1458) times the FMV of all of the trust assets.

GRAT

The grantor retains the right to receive an annuity amount from the trust at least annually. This annuity amount is usually expressed as either a stated dollar amount or a fixed percentage of the initial value of trust assets; however, the trust may provide that the grantor is entitled to any excess trust income in addition to this annuity amount. The present value of the remainder interest that is subject to gift tax is determined by first computing the value of the retained annuity interest. This computation involves multiplying an annuity factor from a government table (Table B, IRS Publication 1457) times the annual annuity payment, and then deducting the present value of the annuity interest from the FMV of all of the trust assets.

Which one of the following is a CORRECT statement regarding a key person life insurance policy when used for liquidity planning purposes? A) The amount of the policy is equal to the anticipated administrative expenses and taxes for the estate of the insured. B)The insured is the owner of such a policy. C)The insured is not the owner, nor is the estate of the insured the beneficiary of the policy. D)The estate of the insured is usually designated as the beneficiary of such a policy.

The insured is not the owner, nor is the estate of the insured the beneficiary of the policy. With a key person life insurance policy, the insured is not the owner, nor is the estate of the insured the beneficiary of the policy. The employer is usually the owner and beneficiary so that there is cash available upon the death of the key employee for the business to use in the transition process from the death of the key person until a replacement can be found, hired, trained, and become productive.

The maximum federal estate tax rate in 2021 is

The maximum federal estate tax rate is 40%.

Which one of the following statements is CORRECT about the nontax characteristics of a reverse gift? A) Property with an income tax basis close to its fair market value is often the subject of the gift. B) The donee does not have the right to sell the gifted property. C) The purpose of the gift is that the donor will get the gift back with a stepped-up basis. D) A gift given anytime within three years of the donee's death will achieve the objective of the donor.

The purpose of the gift is that the donor will get the gift back with a stepped-up basis. The gift is given to a donee who will most likely predecease the donor, with the expectation that the donee will bequeath it to the donor and that the property will have received a stepped-up basis at the donee's death, thereby wiping out any gain. Property with an income tax basis close to its fair market value is incorrect because property that has a large amount of gain is selected for this technique. More than one year must pass between the time of the gift and the death of the donee to achieve a step-up in basis. To get the desired step-up in basis, the donee must have sufficient dominion and control so that the donee could sell the property if she chose, rather than bequeath it back to the donor.

Transfer of Property- Tenants in Common

The value of a gift of property owned as tenants in common is the FMV of the donor's percentage share at the date of transfer. For example, if the donor owned and transferred 40% of the subject property, the value of the transfer would be 40% of the total FMV of the property on the date of completion of the transfer.

Applicable credit amount

This amount is used to offset any tax liability owed by an estate or donor. The applicable credit amount is equal to the tax on an amount of taxable transfers that Congress has declared taxpayers should not have to pay out of pocket.

Qualified annuity interest

This interest includes a right to receive a fixed amount that must be payable to (or for the benefit of) the holder of the annuity interest at least annually. A fixed amount means: - a stated dollar amount, but only to the extent the amount does not exceed 120% of the stated dollar amount payable in the preceding year; or - a fixed fraction or percentage of the initial FMV of the property transferred to the trust, as finally determined for federal tax purposes, but only to the extent that the fraction or percentage does not exceed 120% of the fixed fraction or percentage payable in the preceding year.

Qualified unitrust interest

This interest includes a right to receive a periodic payment, at least annually, of a fixed percentage of the net FMV of the trust assets determined annually, but only to the extent the fraction or percentage does not exceed 120% of the fixed amount payable in the preceding year

Step 4: Developing the Recommendation(s)

Using information from the prior steps, you can begin examining estate planning techniques that may be appropriate for the client's goals and situation. First, it is important to consider several alternatives, including staying on the client's current path. Second, the planner should develop recommendations concerning the client's progress toward her goals, needs, and priorities.

Step 5: Presenting the Recommendation(s)

When presenting each recommendation, you should make a reasonable effort to assist your clients in understanding their current situations regarding their estates, the estate planning recommendations and their impact on the ability to meet the clients' goals, needs, and priorities. In doing so, you should avoid presenting your opinions as fact.

Which one of the following options correctly states the deadline by which a qualified disclaimer must be received by a decedent's estate?

Within 9 months after the later of when the interest was made or the day on which the person disclaiming the interest reaches age 21. A qualified disclaimer must be received by the decedent's estate within 9 months after the later of when the interest was made, or the day on which the person disclaiming the interest reaches age 21.

A will that is entered into probate in the testator's own handwriting and is not witnessed is

a holographic will. A holographic will is a will that is in the testator's own handwriting and is not witnessed.

A trust that must pay out all of its income to the beneficiaries each year and cannot distribute any trust principal is:

a simple trust. A simple trust is one that must pay out all of its income to the beneficiaries at least annually and cannot distribute any trust principal.

Chapter 14 Rules: Code Section 2703

ection 2703 does not apply to any option, agreement, right, or restriction that meets stated conditions. These conditions include the following: 1. The arrangement must be a bona fide business arrangement. 2. The arrangement cannot be merely an attempt to transfer property to family members for less than full and adequate consideration in money or money's worth. 3. The terms of the arrangement must be comparable to those of similar arrangements entered into by persons in an arm's-length transaction.

All of the following methods for implementing intrafamily transfers involve making a gift to a family member except: A)gift-leaseback. B)private annuity. C)family limited partnership (FLP). D)corporate recapitalization.

private annuity. A private annuity involves a sale to a family member in exchange for the buyer's unsecured promise to pay a lifetime annuity to the seller.

Your client, Cora Kortz, a 77-year-old widow, has heard about living revocable trusts. She has asked you to summarize some of their advantages and disadvantages. You would tell her all of the following except: A) the trust will provide management of her property during periods of incompetency. B) the trust is cumbersome and expensive because each year she will have to file two separate income tax returns—her personal return and a return for the trust. C) a trust provides greater confidentiality than a will regarding what assets she owns and who will receive them when she dies. D) the entire value of assets in the trust at her death will be includible in her gross estate for federal estate tax purposes.

the trust is cumbersome and expensive because each year she will have to file two separate income tax returns—her personal return and a return for the trust. The answer is the trust is cumbersome and expensive because each year she will have to file two separate income tax returns—her personal return and a return for the trust because it is the only false statement. Income earned by assets in a living revocable trust is passed through and reported on the grantor's own personal return because of the grantor trust rules.

A pre-marital agreement should not be considered by individuals contemplating marriage in which one of the following situations? (CFP® Certification Examination, released 12/96) A) when one or both parties have ongoing obligations, rights and/or children from a previous marriage. B) when there is a significant difference in the wealth of each party. C) when each party has significant wealth and wishes to protect his/her financial independence. D) when one or both parties are unwilling to make a full disclosure of all their income and assets to the other party.

when one or both parties are unwilling to make a full disclosure of all their income and assets to the other party. Premarital agreements require full disclosure by both parties as to their financial matters before marriage.

The estate tax applicable credit amount of $4,625,800 in 2021 effectively shelters what amount of taxable property transfers from the estate tax ?

$11,700,000. The applicable credit amount of $4,625,800 in 2021 shelters $11,700,000 in taxable transfers at death.

In 2021, Shannon gifts 10,000 shares of XYZ stock valued at $11,715,000 to her adult son, Alan. No Previous lifetime gifts

$11,715,000 -$15,000 $11,700,000

Paulo and Francisca own a piece of property as tenants in common. Paulo owns an undivided 45% interest in the property, and Francisca owns an undivided 55% interest. The property has a fair market value of $1 million. If Francisca dies, what amount will be included in her gross estate for federal estate tax purposes?

$550,000. When property is owned as a tenancy in common, the amount included in the gross estate is based on the decedent's percentage of ownership. Francisca owns a 55% interest in the property, so her gross estate will include $550,000 ($1,000,000 × 55% = $550,000).

Qualified remainder interest.

- It is a qualified remainder interest in every respect. - It meets the definition of and functions exclusively as a qualified interest from the creation of the interest. - It is noncontingent because it is payable to the beneficiary or the beneficiary's estate in all events. - All other interests in the trust, other than the noncontingent remainder interest, are qualified annuity interests or qualified unitrust interests.

Tax Goals Related to Income Tax

1. Shifting the receipt of income (For high tax bracket taxpayers, particularly those with large gross estates, retaining income-producing assets may be inconsistent with their goals. However, there can be great benefit in shifting such income to a taxpayer with a smaller gross estate, since he likely won't incur an estate tax liability, especially if he is in a lower income tax bracket). 2. Shifting the taxation of income (If income is taxable to a family member who is in a lower marginal tax bracket, family wealth as a whole is increased. An outright transfer of title to an income-producing asset will ensure that all future income from the asset will be taxed to the new owner). 3. Obtaining a stepped-up basis (The higher a person's basis in a capital asset, the less capital gains tax that will have to be paid when the asset is sold. Generally, to obtain a step-up in basis, a transferee must have received an asset as a result of the transferor's death (known as "stepped-up basis"). 4. Deferring the recognition of income and gain (Although there are some exceptions, it is usually best to delay payment of income tax because of the time value of money, especially if the taxpayer anticipates being in a lower tax bracket in future years. This is one goal, of course, of qualified retirement plans).

Factors that would be relevant in determining the value of gifted assets: 1. FMV on last day (high + low) /2 (60+56/2=58) 2. FMV on next day (high +low) /2 (62+58/2=60) 3. Count days between last trade and gift date (last day trade 7-8, gift date 7-12) 3 days! 4. Count days between gift date and 1st trade after gift 1 day 5. Multiply #1 x #4 58 6. Multiply #2 x #3 180 7. Add results of 5+6 and divide by results 3+4

236/4

Martina is age 70 and lives alone. She wants to draft a document that will inform her personal representative of her funeral wishes and the location of important personal papers in case she dies unexpectedly. Which one of the following document best fits her needs?

A letter of personal instruction, or side letter, will best meet Martina's needs because it does not have to satisfy any formal requirements and can be acted upon more quickly than the provisions in a will.

Which of the following is considered to be a gift for federal gift tax purposes that qualifies for the gift tax annual exclusion? A) A transfer of property to fund a revocable trust B) A gift to a political organization for its use C) Property settlement transfers pursuant to a written divorce agreement D) A payment of cash to a favorite nephew to assist with his college tuition

A payment of cash to a favorite nephew to assist with his college tuition. Because it's not made directly to an educational institution (which would be excludible as a qualified transfer), the payment of cash to a favorite nephew to assist with tuition is both a gift and one that qualifies as a present interest for purposes of the gift tax annual exclusion. The gift to a political organization is a gift, but there is no gift tax liability. The transfer of property to fund a revocable trust is an incomplete transfer; gift taxes do not apply. A property settlement transfer that is a part of a written divorce agreement or decree between divorcing spouses is not considered a gift.

sprinkling (or spray) provision:

A sprinkling provision allows the trustee to spread out distributions over time to a single beneficiary. A spray provision allows the trustee to distribute assets to multiple beneficiaries.

Owning property in joint tenancy with right of survivorship (JTWROS) is a will substitute because A) the property passes outside of probate. B)the property may be owned by more than two owners. C)this form of ownership eliminates the need for a will. D)the property is subject to probate.

A) the property passes outside of probate. It is precisely because JTWROS passes property outside of probate that it is a will substitute.

If a citizen or resident of the United States dies during 2021, an estate tax return must be filed if the tentative tax base (taxable estate plus adjusted taxable gifts) at the date of death was valued at more than

A) $11,700,000. An estate tax return must be filed if the tentative tax base (taxable estate plus adjusted taxable gifts) exceeds the lifetime exemption amount. For 2021, the lifetime exemption amount is $11,700,000. In other words, an estate tax return must be filed if it is theoretically possible that an estate tax might be paid. However, this does not mean that estates with assets and adjusted taxable gifts below the exemption equivalent should not file a Form 706 when the first spouse dies. The first spouse to die needs to file an estate tax return electing portability for the surviving spouse.

Mike and Jane, a married couple, bought a condominium 15 years ago for $200,000 (as joint tenants with right of survivorship). When Jane died, the condominium was valued at $500,000. Four years after Jane's death, Mike sold the condominium for $600,000. What is the amount of Mike's capital gain?

A) $250,000. Mike receives a stepped-up basis in half of the condominium. He retains his original basis of $100,000 in the other half. His total basis at the time of the sale is $350,000, so his gain is $250,000.

Stewart's gross estate is $17.4 million. His federal estate taxes payable are $2 million, his state estate taxes are $625,000 and his estate administration expenses are $1 million. Assuming his estate owns closely held stock and qualifies for a Section 303 stock redemption, what is the maximum dollar amount of stock that may be redeemed under Section 303?

A) $3,625,000. Under Section 303, only an amount of stock equal to the total of the decedent's federal and state estate taxes plus administration expenses is eligible for the favorable tax treatment. In Stewart's case, the maximum amount of stock that may be redeemed under Section 303 is $3,625,000 ($2,000,000 + $625,000 + $1 million).

Roger has made the following gratuitous lifetime transfers: $30,000 in 2000 to his mother and father; $30,000 to each of his three children in 2001 (these amounts were placed in three separate Section 2503(c) minor's trusts); and $90,000 in 2011 to a revocable trust that gives the corporate trustee the discretion to make disbursements of income or principal for the health, education, maintenance, and support of Roger's brother. Through the end of 2011, the trustee made disbursements of $14,000 from the trust to Roger's brother. Roger's spouse passed away in 1999. What amount of gift tax applicable credit does Roger have available in 2021 for subsequent lifetime transfers after reporting these transfers for gift tax purposes? A) $4,609,940 B) $984,140 C) $4,283,800 D) $330,440

A) $4,609,940. The taxable gifts were as follows: 2000: $30,000 - [2 × $10,000 for annual exclusions (AE)] = $10,000 2001: $30,000 × 3 - [3 × $10,000 (AE)] = $60,000 2011: $14,000 - $13,000 (AE) = $1,000 (only the amount actually disbursed is a completed gift) Therefore, Roger has made total cumulative taxable gifts of $71,000, which has incurred cumulative gift taxes in the amount of $15,860, and therefore he has used $15,860 of his gift tax applicable credit amount, leaving $4,609,940 ($4,625,800 - $15,860) of gift tax applicable credit amount available for lifetime gifts in 2021.

Mohammed and his spouse, Fatema, own $13 million worth of property as equal joint tenants with right of survivorship. Neither has made any lifetime taxable gifts. Assuming death in 2021, Mohammed's estate tax liability would be zero, but Fatema's would be $640,000, assuming Mohammed's DSUE amount is not available. Mohammed and Fatema may revise their estate plan in the following ways: Transferring $6.5 million into Mohammed's name as sole owner and $6.5 million into Fatema's name as sole owner Amending their wills to provide that their solely owned property shall be placed in a trust that gives the trustee the right to pay as much income to the surviving spouse as the institutional trustee, in its sole discretion, determines appropriate, with the the remainder going to their children. The surviving spouse has a right of invasion of trust corpus based on receiving the children's consent. If the plan is implemented, and both spouses died in 2021, which of the following amounts best describes the family's estate tax savings?

A) $640,000, regardless who dies first. The trust described does not qualify for the marital deduction—it gives the surviving spouse a terminable interest without an exclusive lifetime mandatory right to income. The taxable amount in both estates would be $6.5 million, which can easily be covered by the estate tax credit amount of $4,625,800—the tax on $11.7 million. Thus, neither Mohammed's nor Fatema's estate would owe estate taxes, regardless which one dies first. Savings would be $640,000 ($640,000 tax under the old plan minus zero tax under the new plan).

Mary and her sister Della purchased several acres of land in Montana several years ago. They titled the property as joint tenants with right of survivorship (JTWROS). At the time of purchase, Mary paid $120,000 and Della paid $60,000 toward the $180,000 purchase price. Della died when the fair market value of the land was $240,000. Assuming Mary can substantiate her contribution toward the purchase price, what amount is included in Della's gross estate?

A) $80,000. When property is owned as JTWROS between nonspouses, the gross estate inclusion is based on relative contributions (or the consideration furnished rule). Because Della paid one-third of the purchase price, she will include one-third of the date-of-death value in her gross estate. Gross estate inclusion = ($60,000 ÷ $180,000) × $240,000 = $80,000. If Mary had provided no substantiation of her contribution, the entire value of the property ($240,000) would be included in Della's gross estate because she died first.

A qualified disclaimer must be received by the decedent's estate within how many months after the later of the date on which the date creating the interest was made or the day on which the person disclaiming the interest reaches age 21?

A) 9. A qualified disclaimer must be received by the decedent's estate within nine months after the later of the date on which the date creating the interest was made or the day on which the person disclaiming the interest reaches age 21.

Bill Martian would like to benefit the University of Florida at Orlando (the University), his alma mater. Due to a temporary cash flow problem, the only property Bill can use is a vacant lot (which he purchased six years ago for $5,000) located next to a site on which the University plans to build a new central library. The University would like to acquire this land for a parking lot at a reduced price. The present fair market value (FMV) of the lot is $25,000. Due to his cash flow problem, Bill would not only like to get any income tax benefits from a charitable contribution but also would like to receive some cash as soon as possible. Given Bill's objectives and the situation stated above, which one of the following is the most appropriate charitable giving technique for Bill to use? A)A charitable bargain sale B)A charitable remainder annuity trust (CRAT) C)A charitable remainder unitrust (CRUT) D)A charitable lead trust

A) A charitable bargain sale. A charitable bargain sale will allow Bill to (1) benefit the University, (2) get a charitable income tax deduction, and (3) obtain immediate cash to help his cash flow by selling the lot to the University at below current FMV, which would make the transaction part sale and part charitable gift. None of the other alternatives would get cash to Bill as quickly, and the lead trust would get him no cash at all.

Which one of the following statements regarding conservators is correct? A)A conservator is subject to the jurisdiction of the court and must make annual or more frequent reports and accountings to the court. B)A conservator and a guardian perform essentially the same role managing the ward's finances. C)A conservatorship is a court-ordered arrangement to provide for an incompetent person's personal care. D)In states that have adopted the Uniform Probate Code, a conservator does not have legal title to the ward's property.

A) A conservator is subject to the jurisdiction of the court and must make annual or more frequent reports and accountings to the court. A conservator is subject to the jurisdiction of the court and must make annual or more frequent reports and accountings to the court. In UPC states, the conservator does hold legal title to the ward's assets. A conservatorship is a court-ordered arrangement to manage an incompetent person's financial affairs. A guardianship court-ordered arrangement to manage an incompetent person's physical needs.

Bill is the sole owner of an Iowa farm valued at $1.63 million (farmland he owns is $1.04 million of that value). He has successfully farmed the land for the past seven years. There is no debt against any of the farm property. His will leaves the farm to his cousin, Charles, with his remaining property passing outright to his spouse, Mary; his godchild, Josh, is the contingent beneficiary of the residuary estate. Charles lives out of state and most likely will not continue the farming operation. Mary is named as Bill's personal representative. His gross estate is estimated at $4.1 million, with unsecured debts and administrative expenses projected to be no more than $100,000. Bill has made $1 million in adjusted taxable gifts. Mary recently received an inheritance of $400,000 from her mother's estate, most of which is rapidly appreciating commercial property. Before receiving the inheritance, Mary had a gross estate of $9.6 million and had made no adjusted taxable gifts. If Bill dies first, which of the following is the most appropriate postmortem planning technique for Bill and Mary to use to minimize estate taxes due in both estates? A) A qualified disclaimer of part of Bill's property by Mary B)Election of installment payments for Bill's estate taxes C)Election of a Section 303 stock redemption by Bill's estate D)Election of special use valuation by Bill's estate

A) A qualified disclaimer of part of Bill's property by Mary. This is the correct answer because a qualified disclaimer by Mary of part of her bequest from Bill will prevent the disclaimed property from being subject to estate tax in Mary's estate because it would go to the contingent beneficiary, Josh. A partial disclaimer would more closely achieve equalization of the two estates, thus lowering overall estate taxes. The part disclaimed should allow Bill's estate to more fully use his estate tax credit amount.

In which of the following does a taxable distribution occur? A) A taxable distribution occurs when a nonskip party still has an interest in the remaining trust property but an actual distribution of trust property is made to a skip party B)A taxable distribution occurs when a distribution is made to a skip party as the result of the death of a nonskip party. C)A taxable distribution occurs when a distribution is made to a skip party at the termination of the trust. D)A taxable distribution occurs whenever an interest in trust property terminates (by death, lapse of time, release of power, or otherwise).

A) A taxable distribution occurs when a nonskip party still has an interest in the remaining trust property but an actual distribution of trust property is made to a skip party. Code Section 2612 defines a taxable distribution as any distribution from a trust to a skip person other than a taxable termination or direct skip.

Your client currently has a large gross estate that includes the following assets: -A payable on death (P.O.D.) bank account in favor of client's son at death -A residence owned as joint tenants with right of survivorship with his spouse -Stocks held in a revocable trust that continues after his death for the benefit of his surviving spouse and family Which one of the following is a CORRECT statement regarding the advantages or disadvantages for this client of using these will substitutes? A) An advantage of the way the bank account is titled is that it is more easily and inexpensively created than a revocable trust. B) An advantage of owning the residence in joint tenancy with right of survivorship is that the client can control disposition of this asset at death. C) A disadvantage of the revocable trust is that its assets will not avoid probate because it is revocable. D) A disadvantage of the way the bank account is titled is that the client no longer has exclusive control of the bank account.

A) An advantage of the way the bank account is titled is that it is more easily and inexpensively created than a revocable trust. P.O.D. accounts are created simply by titling the account with a named payee at the owner's death, whereas an attorney usually drafts a revocable trust agreement. The trustor (client) maintains total control of a P.O.D. account trust until death. The disposition of property held in joint tenancy cannot be controlled at death because of the right of survivorship feature. The assets in a revocable trust cannot avoid being included in the grantor's gross estate, but they will avoid inclusion in her probate estate.

Assuming that a decedent left no valid last will and testament, which one of the following assets will pass by the laws of intestate succession? A)Assets held by the decedent and his spouse as community property in a community property state that were designated community property by a nuptial agreement B)A money market account at his bank that was held in the decedent's name that was payable on death (P.O.D.) in favor of his spouse C)A life insurance policy on the decedent/grantor's life placed into an irrevocable life insurance trust (ILIT) for the benefit of the decedent's children two years before the decedent's death D)Assets placed in an inter vivos irrevocable trust in which the decedent/grantor was the sole income beneficiary and the decedent's children were the remainder beneficiaries

A) Assets held by the decedent and his spouse as community property in a community property state that were designated community property by a nuptial agreement. Community property does not have a right of survivorship feature, and thus it must be transferred at death by either will or the laws of intestate succession. Assets included in the trust in each case acts as a will substitute as does a bank account held in P.O.D. form.

Holly Miller is in poor health and would like to make a gift to her nephew, Todd. Holly's main goal is to reduce administrative expenses and taxes on her estate. She also would like to keep both her and Todd's income tax liability as low as possible. Her will leaves everything to Todd when she dies. Todd does quite well financially, but Holly would like to give him something while she is alive. Based on her objectives, which one of the following transfers to Todd would be the most appropriate? A) Assigning to Todd all incidents of ownership in a life insurance policy that Holly currently owns on a friend's life; the policy names Todd as the primary beneficiary of a $100,000 death benefit; replacement cost of the policy is $44,000 B) Transferring a stock portfolio worth $45,000 to Todd; her basis in the portfolio is $5,000 C) Making Todd a joint tenant with right of survivorship in a one-acre tract of land she owns in a neighboring state; the land is valued at $35,000 D) Giving up her retained income interest in an irrevocable trust and accelerating Todd's remainder interest; the trust corpus is valued at $39,000

A) Assigning to Todd all incidents of ownership in a life insurance policy that Holly currently owns on a friend's life; the policy names Todd as the primary beneficiary of a $100,000 death benefit; replacement cost of the policy is $44,000. While making Todd a joint tenant with right of survivorship in a one-acre tract of land she owns in a neighboring state will reduce Holly's transfer and administrative costs by eliminating the need for ancillary probate, her gross estate will not be reduced because of the contribution rule for property owned in joint tenancy by nonspouses. Contrast this with the life insurance policy which if gifted will result in a minimum $44,000 reduction in her gross estate. The three-year rule would not apply to the transfer of this policy because it is not on Holly's life. The stock portfolio is a highly appreciated asset, which usually should be transferred at death to take advantage of the step-up in income tax basis. If she gifted the portfolio to Todd and he sold it, he would have to pay income tax on a $40,000 gain. However, if it was transferred to Todd at her death and he sold it, because of a step-up in basis there would be no gain, and therefore, Todd would not owe income tax on the sale. Finally, Holly's release of her retained income interest would be subject to the three-year inclusionary rule. Holly has been in poor health. If she dies within three years of the transfer, the full date-of-death fair market value will come back into her estate. Therefore, such a transfer would not likely reduce the size of her gross estate.

Which of the following statements regarding charitable gifts is CORRECT? 1. Gifts to qualified charities by U.S. citizens or residents are deductible for gift tax purposes. 2. The gift tax charitable deduction is not limited to a percentage of the donor's adjusted gross income (AGI).

A) Both I and II. Both Statesments are correct.

Which of the following statements regarding the portability of the estate tax lifetime exemption amount between spouses are CORRECT? 1. If a surviving spouse remarries, only the unused exemption amount of the last predeceased spouse is available to the surviving spouse. 2. Portability means that a married couple with total assets of $23,400,000 in 2021 might elect to use no lifetime exemption amount in the estate of the first spouse to die and use the entire $23,400,000 in the second spouse's estate.

A) Both I and II. Both of these statements are correct. However, to benefit from portability, the estate of the first spouse must file a timely Form 706 Estate Tax Return and elect to allow portability for the surviving spouse's estate. If the first spouse to die does not have a Form 706 filed with the election made in a timely manner, then the second spouse to die will not benefit from portability.

Which of the following are features of the QTIP trust? 1. The surviving spouse receives the income from the trust for life. 2. Property in the QTIP trust must be included in the surviving spouse's gross estate to the extent it is not consumed during the surviving spouse's lifetime.

A) Both I and II. Both statements are correct.

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

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

Corrine wants to donate money to an arrangement that will make income payments to a charity for a specified period of years, with the remainder passing to her grandchildren when that period has expired. Which of the following charitable transfers will meet Corrine's needs? A) Charitable lead trust (CLT) B) Charitable remainder unitrust (CRUT) C) Pooled income fund D) Charitable remainder annuity trust (CRAT)

A) Charitable lead trust (CLT). With a charitable lead trust (CLT), income payments go to a charity and the remainder interest either reverts to the donor or passes to noncharitable beneficiaries. Because the present value of the charity's interest is a large portion of the gift to the trust; and because appreciation above the distribution rate accrues for the remainder beneficiaries, a family that has the ability to go without the asset(s) for the term of the trust can pass the trust assets to family members at the end of the trust term with extremely low transfer taxation (gift or estate taxes). With CRATs, CRUTs, and pooled income funds, the remainder interest passes to a charity.

Bruce, age 80, wants to ensure that he has a continued fixed income to take care of him for the rest of his life. Because Bruce is in a high income tax bracket he also wants to receive a lifetime charitable income tax deduction. He is considering making a charitable gift to the American Cancer Society as long as his stated objectives are met. As his financial planner, which of the following charitable gifting techniques do you recommend? A) Charitable remainder annuity trust (CRAT) B) Charitable lead trust C) Outright charitable gift D) Charitable remainder unitrust (CRUT)

A) Charitable remainder annuity trust (CRAT). A charitable remainder annuity trust (CRAT) is the only option that would provide Bruce with a fixed income amount. The unitrust form would provide lifetime income to Bruce, but the income stream would be variable.

This year, Rhonda makes present interest gifts to five different donees and makes future interest gifts to three other donees. Rhonda is entitled to how many gift tax annual exclusions this year?

A) Five. A separate annual exclusion applies to each donee who receives a gift of a present interest, so Rhonda is entitled to five annual exclusions. Each annual exclusion amount covers up to $15,000 of present interest gifts per recipient in 2019.

Which of the following are advantages of using an individual fiduciary rather than an institutional fiduciary? 1. An individual fiduciary is less likely to charge a fee for his or her services. 2. An individual fiduciary usually will have more knowledge of, and sensitivity to, the beneficiaries. 3. An individual fiduciary is likely to be more impartial and have fewer conflicts of interest with the beneficiaries. 4. An individual fiduciary is more likely to be able to serve for an extended period of time.

A) I and II only. An institutional fiduciary would be more likely to charge a fee since acting as a fiduciary is part of its business. An institutional fiduciary is also less likely to be familiar with the needs of the beneficiaries than would an individual family member. An individual fiduciary may know one beneficiary better than another and may be less impartial as a result. If the individual fiduciary is also a beneficiary (which is not uncommon), he or she is more likely to have a conflict of interest. An individual fiduciary may be unable or unwilling to serve because of changed circumstances in his or her life. This is less likely to be a problem with an institutional fiduciary.

Which of the following statements regarding private foundations are CORRECT? 1. The private foundation must distribute at least 5% of its assets annually for charitable purposes. 2. Private foundations may be administratively expensive to operate because they are subject to strict IRS reporting requirements. 3. Nonoperating private foundations engage in charitable activity directly.

A) I and II. Nonoperating private foundations do not engage in any charitable activity directly but generally distribute funds for charitable purposes.

Which of the following statements regarding the annual exclusion for purposes of generation-skipping transfer tax (GSTT) is CORRECT? 1. The annual exclusion amount is $15,000 for 2021. 2. The annual exclusion is allowed for lifetime direct skips. 3. The annual exclusion is allowed for testamentary direct skips.

A) I and II. Statements I and II are correct. Statement III is incorrect because the annual exclusion is not allowed for testamentary direct skips.

Lucinda took all of the following actions within three years of her death: -She made a gift to her children by releasing a life interest in a condominium that she had previously placed in an irrevocable trust for her children. -She gave $15,000 in cash to her nephew. -She assigned all incidents of ownership in a life insurance policy on her life to an irrevocable life insurance trust (ILIT) for the benefit of her children. -She released the right to exercise a general power of appointment over assets in a trust established by her father in which she had no other interest. Which of the following assets are included in Lucinda's gross estate? 1. The condominium placed in trust 2. The cash given to her nephew 3. The life insurance policy given to the ILIT 4. The trust assets over which Lucinda held the general power of appointment

A) I and III. The three-year rule requires that something be included in a decedent's gross estate in three instances: (1) gift taxes paid out of pocket on gifts made within three years of death, (2) assignment of ownership rights in a life insurance policy on the assignor's life (option III), and (3) release of a retained interest covered by the transfer sections of the Code (sections 2036, 2037, and 2038). The right to use the condominium (option I) is a retained right mentioned in Code Section 2036. Options II and IV will not be included in Lucinda's gross estate, but the taxable portions of those transfers will be included in her estate tax calculation as adjusted taxable gifts. Option II is not included in her estate, as it is a completed gift under the annual exclusion amount.

Which of the following planning techniques allow the donor to make deductible charitable contributions without drafting a private trust agreement? 1. Charitable gift annuity 2. Charitable remainder trust 3. Charitable lead trust 4. Pooled income fund

A) I and IV. Statements I and IV are correct; charitable gift annuities and pooled income funds do not involve the use of private trust agreements. Statements II and III are incorrect because charitable remainder trusts and charitable lead trusts involve the use of private trust agreements.

Which of the following would qualify as common estate planning goals associated with the taxation of capital gains? 1. Delaying or avoiding the realization of a capital gain 2. Timing an event that will cause the realization of gain to be short term 3. Selecting an asset that will have the highest fair market value 4. Designing the transaction so that the gain will be realized by the original owner

A) I only. Common estate planning goals associated with the taxation of capital gains are delaying or avoiding the realization of a capital gain; timing an event that will cause the realization of gain to be long term; selecting an asset that will generate the smallest gain, either because of the asset having a high basis or no significant increase in value; and shaping the transaction so that the gain will be realized by a taxpayer who is in a lower marginal income tax bracket than the original owner.

Which of the following transactions are subject to the Chapter 14 valuation rules? 1. Corporate recapitalizations 2. Partnership capital freezes 3. Grantor retained trusts, such as GRITs 4. Buy-sell agreements between non-family members

A) I, II, III, and IV. All of these estate freeze transactions are subject to the Chapter 14 valuation rules.

Which of the following statements regarding marital property agreements (prenuptial agreements) is(are) CORRECT? 1. They are often implemented between prospective spouses who have children from previous marriages. 2. They require full disclosure of the spouses' current assets (and future assets to the extent known). 3. They may involve the relinquishment of marital property rights in the event of divorce or death.

A) I, II, and III

Which of the following statements regarding the role of guardians in estate planning is(are) CORRECT? 1. A guardian manages the personal care and well-being of a ward. 2. A guardian must account annually to the court until released from his fiduciary duties by the judge. 3. Empathy and caretaking ability are the most important considerations when selecting a guardian.

A) I, II, and III. All Statements correct

Which of the following is an advantage of owning property as joint tenants with right of survivorship (JTWROS)? 1. When one tenant dies, the property passes directly to the surviving joint tenant. 2. Each joint tenant with a right of survivorship has a right to sever or partition the property without the consent of the joint tenant. 3. JTWROS is convenient for certain types of assets, such as bank accounts, because either tenant has access to the account.

A) I, II, and III. All of these are advantages of owning property as JTWROS.

Which of the following statements regarding QTIP trusts are CORRECT? 1. QTIP trusts allow a terminable interest to be left to the surviving spouse and still qualify for the estate tax marital deduction. 2. Assets in a QTIP trust are usually included in the gross estate of the second spouse to die. 3. QTIP trusts are useful when the first spouse to die has children from a prior marriage.

A) I, II, and III. All of these statements are correct. The QTIP is included in the estate of the second spouse to die at the same percentage as the first spouse took as a marital deduction. If 100% of the QTIP was taken as a marital deduction when the first spouse dies, then 100% of the QTIP is included in the second spouse to die's gross estate. If the first spouse's estate only took a martial deduction for 70% of the QTIP, then only 70% of the QTIP's value when the second spouse to die passes away is included in the estate of the second spouse to die.

Property can be transferred at death by: 1. the terms of a valid will. 2. contract. 3. operation of law.

A) I, II, and III. Property can be transferred at death by any of these methods.

Manuel is evaluating the assets in his estate to determine his liquidity. Manuel owns assets such as collectibles, rental property, and closely held business interests. Which premortem liquidity planning technique(s) would benefit Manuel? 1. Manuel could reduce or eliminate the collectibles from his estate to enhance liquidity. 2. Manuel could reduce or eliminate the rental property from his estate to enhance liquidity. 3. Manuel could reduce or eliminate the closely held business interests from his estate to enhance liquidity.

A) I, II, and III. Reducing or eliminating assets such as rental property, collectibles, and closely held business interests before death can enhance an estate's liquidity position because these assets are inherently more difficult to value and require more time and effort to administer. These assets are likely to generate higher administration expenses than other property, increase the liquidity requirements of an estate, and lead to estate shrinkage.

Which of the following are advantages of establishing an irrevocable life insurance trust (ILIT)? 1. Avoidance of probate for trust assets 2. Flexibility in distribution of trust assets to beneficiaries 3. Removal of life insurance death proceeds from decedent-insured's gross estate

A) I, II, and III. These are all advantages of establishing an ILIT.

Which of the following are estate planning issues that face persons in nontraditional family relationships such as cohabitation? 1. the reduction or elimination of transfer taxes without benefit of certain tax deductions that are available in traditional families 2. ensuring that nonrelatives who are significant to them are included in medical decisions in the event of incapacity 3. ensuring that nonrelatives who are significant to them are able to receive a family allowance 4. clarifying the responsibility for debts and the ownership of specific assets for all involved parties and their heirs

A) I, II, and IV. Nonrelatives are not entitled to a family allowance from an estate (option III). Option I is true because of the unavailability of gift splitting and the marital deduction in such situations. Option II is true because relatives are given priority by law to make such decisions unless the incapacitated person has specifically appointed someone else. Option IV is true because most laws dealing with such matters apply only to legally married couples, which in most states do not include cohabiting couples.

Which of the following statements regarding property owned as joint tenancy with right of survivorship (JTWROS) is CORRECT? 1. Each tenant owns an equal fractional share in the property. 2. Joint tenants have the right to sever their interests in the property during life without the consent of the other joint tenant(s). 3. Upon the death of one joint tenant, the property passes as directed by the decedent's will. 4. JTWROS property avoids probate.

A) I, II, and IV. Statement III is incorrect because JTWROS property passes to the surviving tenants by operation of law, regardless of the decedent's will provisions. All of the other statements are correct.

Which of the following are requirements that must generally be met for property to qualify for the estate tax marital deduction? 1. The property must be included in the decedent's gross estate. 2. The property must pass to the decedent's surviving spouse. 3. The value of the property must not exceed $1 million. 4. The property must not be a terminable interest or must qualify under one of the exceptions to the terminable interest rule.

A) I, II, and IV. Statement III is incorrect because the estate tax marital deduction is unlimited in amount; if the other requirements are met, there is no limit on the amount of the marital deduction.

Luis consults a CFP® professional for help in formulating an estate plan. Luis's primary objective is to avoid probate when he dies. Among his assets are a traditional IRA and the house he lives in. In helping Luis meet the specific goal of avoiding probate, the CFP® professional would consider which of the following items of information? 1. Luis's statement of financial position 2. Beneficiary designation forms for the IRA 3. Whether Luis has any children 4. The deed to Luis's house

A) I, II, and IV. Statements I, II, and IV are correct. The statement of financial position will help determine what assets Luis owns and whether they are titled in a way that avoids probate (e.g., as joint tenants with right of survivorship). The same applies to the deed to Luis's house. The IRA beneficiary designation forms will determine whether the IRA will avoid probate because it is payable to a named beneficiary by contract. Statement III is incorrect. Whether Luis has children has no bearing on whether his estate will avoid probate.

Which of the following statements should be considered to minimize the probability of a successful will contest? 1. Leaving every heir a bequest, even if it is small 2. Executing a codicil that appoints a new executor of the estate 3. Establishing a trust during lifetime to provide for testamentary disposition to the heirs 4. Including an in terrorem clause in the will if these clauses are generally enforced in the testator's state

A) I, III, and IV. Appointing a new executor by codicil is a good idea if the originally appointed executor has died or no longer is able to serve in this capacity. This, however, will generally not minimize the probability of a successful will contest.

Which of the following statements regarding the use of a cross-purchase buy-sell agreement as a premortem liquidity planning device is CORRECT? 1. The purpose is to ensure that the owner of a closely held business interest will be able to sell her interest in specified circumstances. The business entity contracts to pay each owner an agreed-upon amount for his interest in the business under certain circumstances. If a business interest is sold under such an agreement at an owner's death, estate liquidity is enhanced because the estate will be liable for little or no capital gain. If insurance is used to fund such an agreement, the owner of the policy used to accomplish the purchase will be the purchasing owner.

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

Which of the following statements regarding property owned as joint tenancy with right of survivorship (JTWROS) are CORRECT? 1. Ownership is transferred to the surviving joint tenant by operation of law when one owner dies. 2. JTWROS property can be owned by spouses only. 3. The property passes outside of probate when one owner dies. 4. A portion of the property may be included in a deceased owner's gross estate.

A) I, III, and IV. Property owned in joint tenancy with right of survivorship (JTWROS) will transfer to the surviving co-owner automatically by operation of law, rather than by the probate process. A portion of the asset's value may be included in the decedent's gross estate. Both spouses and nonspouses can hold property as JTWROS.

Arthur and Tasha are a married couple, and they have three children. If they begin making gifts to their children in 2021, which of the following gifts would require the filing of a gift tax return for tax year 2021, knowing the gift tax annual exclusion remains at $15,000 for 2021? 1. Arthur gives each child $10,000, for a total of $30,000 in gifts. 2. Arthur gives each child $10,000, for a total of $30,000 in gifts, and he and Tasha elect gift splitting. 3. Tasha gives a future interest gift worth $5,000 to one child.

A) II and III. 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.

Bob Daniels and his brother, Jack, own a parcel of rental real estate as tenants in common. They inherited the property from their grandmother, who specified in her will that Bob was to have a 60% ownership interest and Jack the remaining 40%. The property generated an income of $10,000 last year. Since Jack was unemployed, Bob let Jack keep the entire $10,000. The property was worth $100,000 when Bob and Jack inherited it and is now worth $120,000. Their grandmother's basis in the property was $30,000. Bob recently died. Which of the following are CORRECT statements concerning the income tax implications of this form of property ownership and these transactions? 1. Jack's basis in the property after Bob's death is $100,000. 2. Bob's fiduciary must report $6,000 of income from this property for last year. 3. Jack must report $10,000 of income from this property for last year. 4. Jack's basis in the property after Bob's death is $40,000.

A) II and IV. Option I is incorrect because option IV is correct. Jack does not automatically get Bob's interest in the property since tenancy in common does not have a right of survivorship feature. Option III is incorrect because income for tenants in common is divided according to each tenant's proportional interest. Therefore, Bob was entitled to $6,000 of the income last year. Bob's income tax return for last year must show the income to which he was entitled. Since he allowed Jack to take that income, he will be deemed to have made a gift to Jack of $6,000. However, this gift will not be taxable because of the annual exclusion. Option II is correct for the same reasons option III was incorrect. Option IV is correct because Jack's basis is 40% of the estate tax value in his grandmother's estate (the fair market value of the property at the date of her death). Whoever inherits Bob's 60% of the property will have a basis of $72,000 ($120,000 x .60). If the question would have said that Jack inherited the property from Bob, Jack's new basis would have been $112,000 (his original $40,000 + $72,000 of stepped-up basis from that was in Bob's gross estate).

Which of the following charitable remainder trusts permit additional contributions of property after inception? 1. Charitable remainder annuity trusts (CRATs) 2. Charitable remainder unitrusts (CRUTs)

A) II only. Only CRUTs permit additional contributions of property subsequent to inception.

Which of the following people is(are) legally incapacitated? 1. George is 82 years old. He is confined to a wheelchair but is mentally alert. 2. Edna is 78 years old. She suffers from advanced dementia and is no longer able to make reasoned decisions.

A) II only. Only statement II is correct. Edna's dementia renders her legally incapable of acting, so she is legally incapacitated. Statement I is incorrect. George is disabled because he is no longer able to walk, but he is not a minor and there is no indication he is otherwise legally incapacitated.

Your client has determined that she needs to do something before she dies to ensure that her estate will have sufficient liquidity at her death. Which of the following actions, if taken by your client, could potentially give her estate increased liquidity? 1. Elect the alternate valuation date 2. Establish and fund an irrevocable life insurance trust (ILIT) with all life insurance policies on her life in which she has any incidents of ownership 3. Purchase another life insurance policy on her own life naming her estate as beneficiary 4. Enter into a cross-purchase buy-sell agreement with her business partners

A) II, III, and IV. Establishment of an ILIT will increase liquidity by removing the death benefit from the gross estate if your client lives at least three years after the transfer. Even if she does not live for three years, if the trust is properly drawn, the trustee will be able to make loans to her estate and/or purchase illiquid assets from the estate. The outright purchase of a new life insurance policy, while not the best alternative, will increase liquidity even though it would be included in her gross estate because the top estate tax rate is less than 100%. The buy-sell agreement would provide liquidity by ensuring that her estate would have the ability to turn her closely held business interest into cash. Election of the alternate valuation date will help estate liquidity, but it can only be done after death by the PR of the estate.

Which of the following statements about the federal gift tax are CORRECT? 1. The federal gift tax applies to all gratuitous transfers. 2. Gift splitting means that spouses may elect to file a joint gift tax return. 3. The unlimited gift tax marital deduction has the effect of abolishing the terminable interest rule. 4. Taxable gifts for prior years must be added to taxable gifts for the current year to determine the tax bracket(s) applicable to the current year's taxable gifts

A) IV only. Certain gratuitous transfers, such as political contributions and direct payment of medical and tuition expenses, are exempt from the gift tax. Statement II is incorrect, as there is no such thing as a joint gift tax return. A marital deduction can be taken only when the gift to the surviving spouse is not a gift of a terminable interest. Thus, one does not abolish the other.

Which of the following statements regarding the use of the alternate valuation date (AVD) is NOT correct? A) If estate assets are distributed prior to the AVD, and the AVD is selected, those assets are valued at their fair market value (FMV) on the AVD. B)If estate assets are distributed prior to the AVD, those assets are valued as of the date of distribution, sale, exchange, or other disposition for AVD purposes. C)The AVD election cannot be made unless it also results in a reduction of the amount of federal estate tax owed by the decedent's estate. D) If estate assets are distributed prior to the AVD, the measurement value on such distribution date is the asset's FMV.

A) If estate assets are distributed prior to the AVD, and the AVD is selected, those assets are valued at their fair market value (FMV) on the AVD. If the AVD is elected, estate assets that do not decrease automatically are subject to the AVD unless they have been disposed of within six months of death. If so, they are valued at the FMV on the date of distribution when calculating the gross estate on the AVD. Also, even if the AVD is selected, assets that decrease naturally with the passage of time (like annuitized survivor benefits and patents) are still valued as of the date of death.

Peter and Ann are married, and each of them has children from a prior marriage. Most of their assets are solely owned. Peter's solely owned assets are worth $11.7 million, and Ann's are worth $9.7 million. Peter and Ann also hold their residence, automobiles, and other personal property (valued at $1 million) as joint tenants. Peter, 68, is in good health and has made no lifetime taxable gifts. Ann, 63, is in poor health and has made taxable gifts of $1 million (all of which were more than three years ago). Peter willed his solely owned assets to his children from his prior marriage, and Ann did the same to her children. Some friends have suggested that they modify their estate plan by placing their solely owned assets in QTIP trusts and having their personal representative elect the marital deduction for all assets placed in the trust. Their respective children will still receive the assets eventually under the QTIP arrangements. Which of the following statements correctly describes the federal estate tax implications of establishing the QTIP trusts and making the election, assuming both deaths occur in 2021 and the estate of the first to die allows the surviving spouse to use his or her deceased spousal unused exclusion (DSUE) amount under the existing or proposed plan?

A) Implementing the QTIP trusts as proposed would cost Peter and Ann the same amount in federal estate tax on their combined estates as it would under their existing plan. The first step is to determine their current estate tax situation. If Peter died first, his gross estate would be $12.2 million (his solely owned assets of $11.7 million plus $500,000 of the JTWROS property with Ann). However, his taxable estate would be the $11.7 million that went to his children. The remaining $500,000 would receive the marital deduction. Thus, his estate would not owe any estate tax after his entire applicable credit was used at his death. Next, Ann's gross estate would grow from $10.2 million (her $9.7 million of solely owned assets, plus $500,000 of JTWROS property) to $10.7 million with the addition of the remaining $500,000 of formerly JTWROS property. With her $1 million of adjusted taxable gifts, her tentative tax base would be $11.7 million. This is fully covered by her applicable credit, so she would not owe any estate taxes, either. Thus, if Peter dies first, neither of them would owe estate taxes. If Ann died first, her gross estate would be $10.2 million ($9.7 million + $500,000 of JTWROS). However, the $500,000 would be a marital deduction, reducing her taxable estate to $9.7 million. Then her $1 million of adjusted taxable gifts would make her tentative tax base $10.7 million. Thus, her estate would not owe estate taxes, and Peter would receive a $1 million deceased spousal unused exclusion (DSUE). His estate would increase by the $500,000 of JTWROS property he would receive from Ann at death. Thus, his tentative tax base would be $12.7 million (his current $11.7 million of solely owned assets + $1 million that was formerly JTWROS). His exclusion amount would be $12.7 million (his own $11.7 million for 2021 + $1 million DSUE). Thus, his estate will not owe estate taxes, and therefore,their current plan has no estate taxes. The proposed plan would also not owe any estate taxes. If Peter's $11.7 million of solely owned assets received a marital deduction from the proposed QTIP, then 100% of his estate would be eligible for the marital deduction, and thus, his entire $11.7 million exemption would be available for Ann's estate. That would give her a $23.4 million exemption. After Peter's death, her gross estate is $22.4 million (her original $9.7 million of solely owned assets + her original $500,000 of JTWROS assets + his original $11.7 million of solely owned assets + his $500,000 of formerly JTWROS assets). When her $1 million of adjusted taxable gifts are added, her tentative tax base becomes $23.4 million. This is covered by her augmented exclusion, so no estate tax would be owed if Peter died first. If Ann died first under the new arrangement, her gross estate of $10.2 million ($9.7 million + $500,000) would be eligible for the marital deduction. Thus, her taxable estate would be zero. However, she would have a tentative tax base of $1 million because of her adjusted taxable gifts. Her estate tax bill would be reduced to zero by using $1 million of her exemption amount. That would leave Peter $10.7 million of DSUE. When added to his $11.7 million applicable exclusion, he would not owe any net estate taxes until his tentative tax base went over $22.4 million. His tentative tax base is $22.4 million ($11.7 million of his originally solely owned property + $1 million of formerly JTWROS property + $9.7 million of her solely owned property), so he would not owe estate taxes. In all, there are no estate taxes under either the current arrangement or the proposed plan. Does that make the plans equal? Not if you were her children and expected to inherit from her soon due to her failing health. Here is another way to work the question. Peter and Ann own $22.4 million in property, plus Ann has made $1 million in adjusted taxable gifts. Therefore, they have a total of $23.4 million that is subject to estate tax. However, they also have two 2021 applicable exclusion amounts of $11.7 million, for a total of $23.4 million. Portability of the DSUE amount guarantees that this amount, and its resulting credit, will be totally used in one estate or the other. Since they will incur tax on $11.7 million in both estates and have a credit amount that will pay the tax on $11.7 million, there is no net estate tax to be paid in either estate under either the current plan or the proposed plan. Regardless of who dies first and what plan is employed, neither estate will owe any estate tax.

Which of the following is a common mistake people make regarding estate planning? A) Improper disposition of assets B) Recommending necessary changes to a will C) Adequate estate liquidity D) Proper titling of assets

A) Improper disposition of assets. The remaining choices are the exact opposite of mistakes people make.

Which of the following assets must be listed at their date-of-death value on the federal estate tax return even if the estate elects the alternate valuation date (AVD)? A)Installment notes B)Publicly traded securities C)Mutual funds D) Real estate

A) Installment notes. Wasting assets, such as installment notes, patents, and joint and survivor annuities, must be listed at their date-of-death value even if the estate elects the alternate valuation date.

Which one of the following statements is CORRECT about the characteristics of a standby (contingent) trust? A) It is often used to manage the grantor's financial affairs when the grantor becomes incompetent. B) It is a type of testamentary trust. C) The grantor acts as trustee once the trust is funded. D) It is fully funded at the time it is created.

A) It is often used to manage the grantor's financial affairs when the grantor becomes incompetent. The answer is it is often used to manage the grantor's financial affairs when the grantor becomes incompetent. The trust must be established inter vivos to handle the grantor's financial affairs when he becomes incompetent. The trust is only minimally funded upon creation. Full funding will occur only when the grantor becomes incompetent. If the grantor is incompetent, he cannot act as trustee.

Which of the following assets must be listed at their date of death value on the federal estate tax return, even if the estate elects the alternate valuation date (AVD)? A) Joint and survivor annuities B) Publicly traded securities C) Real estate D) Mutual funds

A) Joint and survivor annuities. The answer is joint and survivor annuities. Wasting assets, such as installment notes and joint and survivor annuities, must be listed at their date of death value, even if the estate elects the AVD.

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 by the entirety (TBE) and tenancy in common are the only two forms of co-ownership specifically for spouses. D) Joint tenancy with right of survivorship (JTWROS), tenancy by the entirety (TBE), and tenancy in common are all forms of co-ownership that require the consent of other co-owners before an owner can sell his or her interest in the asset.

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

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)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. C)Property owned at death is subject to probate administration. D)Property owned at death is 100% includible in the gross estate.

A) Property owned at death is not eligible for a step-up in basis to fair market value.

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

A) Qualified disclaimer. A qualified disclaimer will achieve Grace's objective because it constitutes a refusal by Grace to accept the property and allows the property to pass directly to her children. A partial QTIP election is used to qualify a portion of a qualified terminable interest for the marital deduction, and a reverse QTIP election is used to permit the decedent's estate to use the generation-skipping transfer tax exemption for QTIP property. An election against the will allows a surviving spouse who has been disinherited under the deceased spouse's will to claim a share of the deceased spouse's estate.

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

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

Which of the following is a premortem technique to increase estate liquidity? A) Reduce the cash needs of an estate B)Use of the alternate valuation date C)Electing against the will D)Making a QTIP election

A) Reduce the cash needs of an estate. The remaining options are postmortem techniques.

Which of the following would not be a source of estate liquidity? A) Restructuring a closely held business from a sole proprietorship to an LLC B) Reducing hard-to-sell assets C) Selling illiquid assets D) Increasing cash and cash equivalents

A) Restructuring a closely held business from a sole proprietorship to an LLC. This is a business succession strategy that will neither increase not decrease estate liquidity.

Which one of the following actions would probably not constitute the unauthorized practice of law by a nonattorney financial planner? A)Telling a client that property that is titled in joint tenancy with right of survivorship will pass outside of probate at his or her death B)Drafting a power of attorney for a client C)Advising a client to conduct business as a partnership rather than a corporation D)Advising a client to change from sole ownership of property to joint tenancy with right of survivorship (JTWROS).

A) Telling a client that property that is titled in joint tenancy with right of survivorship will pass outside of probate at his or her death. This statement merely recognizes a well-established fact and does not constitute the unauthorized practice of law.

Bill Jenkins owns a vacation home in another state. Bill wants to include his new wife, Edna, on the title to the vacation home. His primary concern is to avoid probate without making it possible for Edna to dispose of the property before his death without his consent. Which one of the following statements concerning the most appropriate form of titling and the corresponding rationale is CORRECT? A) Tenancy by the entirety will prevent lifetime disposition without Bill's consent. B) Sole ownership enables Bill to leave the home to Edna outside of probate. C) Tenancy in common with Edna will eliminate the need for ancillary probate. D) JTWROS will prevent lifetime disposition without Bill's consent.

A) Tenancy by the entirety will prevent lifetime disposition without Bill's consent. Tenancy by the entirety requires the consent of both spouses to dispose of property. JTWROS does not. Sole ownership will require probate. Tenancy in common will not eliminate the need for ancillary probate as Bill's share of the property will require probate unless other plans are made.

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 in common B)Community property C)Joint tenancy with right of survivorship (JTWROS) D)Tenancy by the entirety

A) Tenancy in common. 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.

When is the generation-skipping transfer tax (GSTT) reported and due for an inter vivos direct skip? A) The GSTT is reported and due at the same time as the gift tax return. B)The GSTT is reported and due at the same time as the estate tax return. C)The GSTT is reported and due on April 15th of the year after termination. D)The GSTT is reported and due on April 15th of the year after distribution.

A) The GSTT is reported and due at the same time as the gift tax return. GSTT for a taxable distribution is reported and due on April 15 of the year after distribution. GSTT for an inter vivos direct skip is reported and due at the same time as the gift tax return.

Which of the following statements regarding a Section 2503(b) trust is CORRECT? A)The beneficiary's right to trust income is a present interest that qualifies for the annual exclusion. B)Trust principal must be distributed to the beneficiary at age 21. C)The trustee has discretion over how often income is distributed. D)The trust income is not taxable to the beneficiary.

A) The beneficiary's right to trust income is a present interest that qualifies for the annual exclusion. 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.

Brielle, a widow, had been in poor health for several years prior to her death. In the two years preceding her death, Brielle took the following actions: -Made several lifetime cash gifts to her children -Exercised a special power of appointment over property included in a trust -Changed the designated beneficiary on a life insurance policy she owned on her life from her deceased spouse to her estate -Gave up a life estate in a vacation cabin inherited from her mother Which of the following is included in Brielle's gross estate? A) The life insurance proceeds payable to her estate B) The full fair market value of the vacation cabin C) The trust property over which she held a special power of appointment D) The cash gifts made to her children within three years of her death

A) The life insurance proceeds payable to her estate. If something is given away during life, it will be included in the donor's gross estate only if it is subject to the three-year rule (IRC 2035) or the transfer sections (IRC 2036-2038). None of the actions described would require application of the transfer sections, as Brielle did not retain an interest in or control over something that she irrevocably gifted to another person. While all described actions were taken within three years of death, none of the actions fit the description of the three actions that will cause the three-year rule to apply. Giving up the life estate in the vacation cabin did not constitute the release of a retained right since the life estate was not retained—it was the only interest in the property that Brielle ever had. Brielle owned and retained the right to change the beneficiary of the life insurance policy, which shows that she really did not gift this asset prior to her death, and therefore, it must be included in her gross estate, as she had incidents of ownership in the policy at death.

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

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

Robert gifted a duplex to his brother Harold, who is terminally ill. Harold is not married and has no children. Robert purchased the duplex 20 years ago for $175,000. Today, the property is worth $450,000. Harold's will leaves his entire estate to Robert upon his death. This means that the duplex may ultimately be passed back to Robert. This type of transfer is called

A) a reverse gift. This type of transfer is called a reverse gift. A net gift is a situation in which the donee pays the gift taxes rather than the donor. A bargain sale involves selling appreciated property to a donor at below the market value. A split gift is one that is split between donor spouses, effectively doubling the annual exclusion for lifetime gifts. For a reverse gift to be effective, the donee must have the property for more than a year. If the donee passes away within a year of the gift, the property reverts back to the donor, but it does not get a stepped-up basis.

The purpose of including Crummey powers in a trust is to A) ensure that gifts to the trust qualify for the gift tax annual exclusion. B) allow the grantor to revoke the trust upon 30 days' notice. C) protect trust assets against claims by the grantor's creditors. D) prevent the trust from having to pay tax on the trust income.

A) ensure that gifts to the trust qualify for the gift tax annual exclusion. The purpose of including Crummey powers in a trust is to ensure that gifts to the trust are considered gifts of a present interest that qualify for the gift tax annual exclusion.

If a decedent's property does not pass to someone by will substitute or by will, and there are no legal heirs under the applicable state intestate succession statute, the property will...? A) escheat to the state. B) be held by the court until a distant relative can be located and petitions the court for distribution. C) be claimed by the IRS as a death tax. D) be donated to a charitable organization.

A) escheat to the state. The property will be held by the state in trust for a stated number of years, and if no legal heirs under the intestacy statutes come forward, the property escheats to the state.

All of the following statements regarding the basis of inherited assets are correct except: A)inherited assets that are considered to be income in respect of a decedent (IRD) receive a stepped-up basis at the decedent's death. B)for property owned in the decedent's name alone, 100% of the property receives a stepped-up basis when the decedent dies. C)inherited property generally receives a basis equal to its fair market value (FMV) on the decedent's date of death or its FMV as of six months after the decedent's death if the estate elects the alternate valuation date (AVD). D)when spouses own property as joint tenants with right of survivorship (JTWROS), 50% of the property receives a stepped-up basis when the first spouse dies.

A) inherited assets that are considered to be income in respect of a decedent (IRD) receive a stepped-up basis at the decedent's death. Assets that are considered IRD do not receive a stepped-up basis at the decedent's death.

All of the following statements regarding joint tenancies with right of survivorship are CORRECT except A)jointly held property can be transferred by will. B) in joint tenancy the ownership percentages must be equal. C) 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. D) jointly held property passes to the surviving joint owners when one of the joint owner dies.

A) jointly held property can be transferred by will. 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.

All of the following are techniques that can be used to prevent a child from a prior marriage from being disinherited except A)making the child a contingent beneficiary on a life insurance policy. B)naming the child as the remainderman of a QTIP trust. C)placing property in joint tenancy with the child. D)making lifetime gifts to the child.

A) making the child a contingent beneficiary on a life insurance policy. If the child is a contingent beneficiary on a life insurance policy, there is no certainty that he or she will ever receive anything; therefore, this technique would not prevent the child from being disinherited. With this technique, the child is given a vested interest in the property and a right to receive more of the property if he or she survives other joint tenants. Since the QTIP trust is irrevocable and the remainder interest is vested, it can be used to protect the child's inheritance. Although the gifts may have to be managed by a conservator, they cannot be used to benefit anyone except the child.

All of the following are methods to avoid probate except: A) owning real estate in states where the decedent is not domiciled. B) transferring property by deed during life. C) titling property as joint tenancy with right of survivorship or tenancy by the entirety. D) passing property by contract (e.g., designating beneficiaries for life insurance, IRAs, or retirement plan benefits).

A) owning real estate in states where the decedent is not domiciled. Owning real estate in other states is not a method to avoid probate. Typically a probate proceeding must be conducted in each state in which the decedent owned real property. Probating real estate in another state from a client's state of domicile is known as ancillary probate. Ancillary probate can be prevented by transferring the real estate to a revocable trust. It can also be prevented by gifting the property or selling the real estate if the situation warrants.

All of the following are correct pairings of an intrafamily planning technique with one of its characteristics except A) private annuity: payments from the transferee to the annuitants are paid for a stated term certain. B) sale-leaseback: the transferor continues to have the right to use business-related property that she previously owned. C) installment sale: reporting gain on an installment basis is automatic if a payment is made in any year other than the year of the sale, unless the seller elects not to have it apply. D) gift-leaseback: the donor leases the property back from the donee at a reasonable rental value.

A) private annuity: payments from the transferee to the annuitants are paid for a stated term certain. The answer is private annuity: payments from the transferee to the annuitants are paid for a stated term certain. It is the only wrong pairing of an intrafamily planning technique to a characteristic. Annuity payments from a private annuity are made for the lifetime of the annuitant regardless of the number of years involved. The transferor is immediately taxed on the difference between the present value of the promised payments and her basis in the transferred property.

A springing power of attorney A)springs into existence upon the principal's incapacity. B)authorizes only one of two named agents to act, depending on the power to be exercised. C)springs back to the principal upon revocation. D)springs from a first agent to a second agent after the first agent resigns.

A) springs into existence upon the principal's incapacity. A springing power is any power that becomes valid at a certain occurrence, such as the principal's incapacity.

All of the following statements regarding the election to use the alternate valuation date (AVD) on the federal estate tax return are correct except A) the executor is allowed to select which assets will be valued at the AVD and which will valued as of the decedent's date of death. B) the AVD can be used only if it reduces the amount of federal estate tax owed by the estate. C) the AVD can be used only if it reduces the total value of the gross estate. D) the AVD cannot be used for wasting assets.

A) the executor is allowed to select which assets will be valued at the AVD and which will valued as of the decedent's date of death. If the executor elects to use the alternate valuation date, the election must be applied to all eligible assets in the gross estate; the executor is not allowed to choose among the assets.

If a trust is a grantor trust, the income from the trust is taxed to A) the grantor. B) the trust beneficiaries. C) the trustee. D) the trust.

A) the grantor. If a trust is a grantor trust, the income from the trust is taxable to the grantor. Retaining control over an asset in the trust will cause the donor to have to include the trust earnings in gross earnings as they are taxable. The right to pay life insurance premiums, however, is not an incident of ownership and does not subject the donor to income taxes on the trust earnings.

Arnie attended a recent seminar about the importance of asset protection. He wants to know which of the following would not provide that protection. A)Placing assets in a revocable trust. B)Placing assets in an entity like a corporation or LLC. C)Placing assets in trust with a spendthrift clause. D)Gifting assets away before incurring any legal judgments.

A)Placing assets in a revocable trust. Assets in a revocable trust would be subject to Arnie's ability to demand them. Accordingly, there is no asset protection.

Which of the following statements regarding the consequences of holding property jointly is CORRECT? A)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. B)A tenancy in common is treated the same as a joint tenancy with the right of survivorship when one owner dies. C)The federal estate tax treatment of jointly held property is the same for spouses and nonspouses. D)Joint tenancy with right of survivorship can exist between spouses only.

A)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. 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 types of property will be treated as separate property in a community property state? (Assume the couple has always lived in a community property state.) A. Bonds acquired by one spouse before the marriage B. Stocks purchased by one spouse during the course of the marriage C. An IRA in one spouse's name but fully funded during the course of the marriage D. A coin collection purchased by one spouse out of his own salary during the marriage

A. Bonds acquired by one spouse before the marriage. Of the properties listed, only the bonds are separate property.

Which of the following is a nonfinancial goal of estate planning? A. Efficient transfer of assets at death B. Preserving business value C. Delaying payment of tax due D. Maximizing benefits for a surviving spouse

A. Efficient transfer of assets at death. This is a nonfinancial goal of estate planning because it is more about the process than the assets themselves. Preserving business value and maximizing benefits for a surviving spouse are both nontax financial goals of estates planning. Delaying payment of tax due is a tax-related financial goal of estate planning.

All of the following are common mistakes people make or weaknesses of estate plans except A. maintaining adequate liquidity. B. improper titling of assets. C. failure to give advice on funeral arrangements. D. improperly arranged life insurance.

A. Maintaining adequate liquidity. Adequate liquidity is a positive thing, not a mistake. The common mistakes made or weaknesses in existing estate plans listed are the following: Failure to recommend necessary changes to a will Improper disposition of assets Improper titling of assets Improperly arranged life insurance Lack of estate liquidity Failure to avoid ancillary probate, provide business planning, minimize taxes and costs Failure to give advice on funeral arrangement

Which of the following statements regarding a Section 2503(b) trust is CORRECT? A) The beneficiary's right to trust income is a present interest that qualifies for the annual exclusion. B) Trust principal must be distributed to the beneficiary at age 21. C) The trustee has discretion over how often income is distributed. D) The trust income is not taxable to the beneficiary

A. The beneficiary's right to trust income is a present interest that qualifies for the annual exclusion. 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.

Reverse Gift

Advantages: Same as for an outright gift to a noncharitable donee, Step-up in basis if there is more than one year between gift and death, gain is not recognized if a step-up in basis is achieved. Disadvantages: Loss of control over asset(s), the donee may not give the property to the donor by will, there is no step-up in basis if there is a one year or less between gift and death

Gift- Leaseback

Advantages: Same as for an outright gift to noncharitable donee, The donor retains use of the property by lease, Business deduction for lease payments, if the donor gives the property to his children, the lease payments can be accumulated for education or other expenses. Disadvantages: Same as for an outright gift to a noncharitable donee, The donor must make lease payments to keep use of the property

Step 6: Implementing the Recommendation(s)

Again, actions and responsibilities for both the client and the planner must be mutually determined and agreed upon. However, in the end the client is the person determining how to pursue the goals, needs, and priorities and deciding who is responsible for implementation. This may entail other financial professionals. If so, the planner should indicate why another professional should be involved and why this person is qualified to serve the client. This is the step during which appropriate products and services are engaged.

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

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

Net Gift Tax Due Example

Assume Howard, a single donor who has not made any prior taxable gifts, makes a gift of $12,000,000 in 2021, conditioned on Quentin paying the gift tax due on the transfer. If Howard paid the gift tax, he would pay gift tax on $12,000,000, minus one annual exclusion of $15,000, which leaves a gift of $11,985,000. The tax on $11,985,000 is $4,739,800 less the 2021 gift tax credit amount of $4,625,800, which results in a gift tax of $114,000. Quentin will pay a gift tax of $81,429 ($114,000 / [1 + 40%]).

support provision

Authorizes the trustee to distribute only as much income or principal from the trust as the trustee deems necessary for the support or education of the beneficiary. If there is an actual support obligation of the grantor/ parent on behalf of a minor child/beneficiary, the income from the trust is likely taxable to the grantor under the grantor trust rules

Which of the following statements regarding discharge of indebtedness is NOT correct? A) Income from the discharge of indebtedness is included in the definition of gross income under Code Section 61. B) A discharge of indebtedness occurs when a legal indebtedness owned by an individual is discharged or satisfied, and the individual's gross earnings have been decreased the same as if the individual had earned income in the same amount. C)Gain may be incurred when the discharge of indebtedness involves a net gift. D)Discharge of indebtedness may be referred to as phantom income.

B) A discharge of indebtedness occurs when a legal indebtedness owned by an individual is discharged or satisfied, and the individual's gross earnings have been decreased the same as if the individual had earned income in the same amount. A discharge of indebtedness occurs when a legal indebtedness owned by an individual is discharged or satisfied, and the individual's net worth has been increased the same as if the individual had earned income in the same amount.

Which of the following statements regarding the generation-skipping transfer tax (GSTT) for 2021 is CORRECT? 1. The annual exclusion is allowed. 2. Gift splitting is permitted. 3. Qualified transfers are excluded from GSTT. 4. Each transferor is allowed a lifetime exemption of $11,700,000.

B) I, II, III, and IV All the statements are correct.

Erwin makes a gift of his vacation home to his friend, Winnie. Erwin paid $200,000 for the home 20 years ago, and the home has a fair market value of $1.5 million on the date of the gift. What is the value of the gift for gift tax purposes? A) $1.7 million B) $1.5 million C) $1.3 million D) $200,000

B) $1.5 million. The value of a gift for gift tax purposes is the fair market value of the property on the date of the gift less any consideration paid by the donee. The value of the gift is not affected by the donor's basis in the gifted property.

James was gifted a house during the current year. At the date of the gift, the house had a fair market value (FMV) of $175,000, and the donor's adjusted basis was $105,000. The donor paid a gift tax of $12,000 on the gift. The donor did not have the annual exclusion available for this gift. What is James's basis in the house? A) $187,000 B) $109,800 C) $117,000 D) $175,000

B) $109,800. Because the property was appreciated property as of the date of the gift, a portion of the gift tax paid is allocated to the donee's basis in the property. Therefore, James's basis is calculated as follows: donor's adjusted basis + [(unrealized appreciation ÷ FMV at date of gift) × gift tax paid]. Or, here, $105,000 + [($70,000 ÷ 175,000) × $12,000] = $109,800. $105,000 + $4,800 = $109,800.

Bill gifts his daughter bonds with a fair market value (FMV) of $1,000. Bill's basis in the bonds is $1,800. Bill's daughter subsequently sells the bonds for $2,000. What is her recognized gain or loss? A) $2,000 gain B) $200 gain C) No gain or loss D) $1,000 gain

B) $200 gain. On the date of the gift, the FMV of the property was less than the donor's basis. Therefore, the double-basis rule applies. The daughter's gain basis is $1,800. She has a recognized gain of $200, which is calculated as follows: Amount realized $2,000 Basis for gains (1,800) Realized gain $200 Recognized gain $200

Dorothy gifts her vacation condo to her grandson but reserves the right to use the condo whenever she chooses for the rest of her life. The market value of the condo at the time of the gift is $300,000. When Dorothy dies, the condo has a market value of $350,000. What amount is included in Dorothy's gross estate for estate tax purposes?

B) $350,000. Because Dorothy retained the right to use the condo for the rest of her life, the entire fair market value of the condo on Dorothy's date of death is included in her gross estate.

Ginger sells some antique jewelry with a fair market value of $50,000 to her daughter for $10,000. Ginger's basis in the jewelry is $5,000. What is the value of Ginger's gift for gift tax purposes? A)$0; this is a sale, not a gift B)$40,000 C)$45,000 D) $25,000

B) $40,000. This is a gift for gift tax purposes because it is a transfer of property in exchange for less than full and adequate consideration. The value of the gift is the fair market value of the property on the date of the gift ($50,000) reduced by any consideration paid by the donee ($10,000). The adjusted taxable gift in this situation was $25,000 in 2021 ($40,000 - $15,000), but the question asked about the value for gift tax purposes, not the adjusted taxable gift.

Matt gives Jim securities in the current year. Matt's adjusted basis for the securities is $48,000, and the fair market value (FMV) is $40,000. Matt pays gift tax of $16,000. What is Jim's basis in the stock for gain and for loss? A) $50,000 for gain and $42,000 for loss B) $48,000 for gain and $40,000 for loss C) $0 for gain and $0 for loss D) $40,000 for gain and $40,000 for loss

B) $48,000 for gain and $40,000 for loss. On the date of the gift, the FMV of the property was less than the donor's basis. Therefore, the double basis rule applies. The donee's gain basis for the property received is the same as the donor's basis. The donee's loss basis is the lesser of the donor's adjusted basis or the FMV on the date of the gift. If the FMV of the property is less than the adjusted basis at date of gift, no basis adjustment is made for gift tax paid.

Jerry creates a charitable remainder annuity trust (CRAT) and funds it with property having a fair market value (FMV) of $5 million. For Jerry to be eligible for an income tax charitable deduction, the present value of the charity's remainder interest at the trust's inception must be at least

B) $500,000. In a charitable remainder annuity trust or unitrust, the present value of the charity's remainder interest at the inception of the trust must be at least 10% of the initial FMV of the transferred property. In Jerry's case, the present value of the charity's remainder interest must be at least $500,000 ($5 million × 10%).

Which of the following constitutes a direct skip for purposes of the generation-skipping transfer tax (GSTT)? A) A transfer in trust granting a life estate to daughter, remainder to grandson B) A lifetime gift from grandmother to granddaughter C)A transfer in trust benefiting the remainder person (granddaughter) after the death of the life tenant (son) D)A testamentary bequest from father to son

B) A lifetime gift from grandmother to granddaughter. A direct skip for purposes of the GSTT is any transfer in which only skip parties (defined as individuals at least two generations below the transferor) have an interest. The transfers in trust may also be taxable for GSTT purposes but are not classified as a direct skip.

Grace Grubbs, your 76-year-old client, has the following objectives: -Shifting some of the future appreciation in her portfolio of marketable securities to other members of her family -Spreading income from the portfolio among her family without any preferential rights to income -Maintaining control over the entire portfolio for her lifetime -Reducing the size of her gross estate Grace is considering several techniques. Which one of the following would be most appropriate for accomplishing Grace's objectives? A) An installment sale B) A subchapter S corporation in which she retains most of the shares and distributes the remaining shares to family members C) A 20-year GRUT (grantor retained unitrust) D) A regular (C) corporation in which she retains all of the voting shares, and distributes nonvoting shares to family members

B) A subchapter S corporation in which she retains most of the shares and distributes the remaining shares to family members. This is the correct answer because it is the technique that will accomplish all of Grace's goals at the least tax cost. By retaining most of the shares, she would retain control of the corporation and thus control of the securities. She can reduce her gross estate by gifting the remaining shares to her family. These shares will be entitled to income on the same basis as Grace's shares, and she can spread the income among the family members who are now owners of the corporation. A gift of these shares will not be subject to the Chapter 14 rules because they are of the same type as those retained by Grace. Some of the future appreciation of the subchapter S corporation will accrue to the holders of these shares. Other options would require Grace to surrender lifetime control of the securities. In addition, an installment sale would require Grace to recognize all gain in the securities, as installment reporting of gain is not available for a sale of marketable securities. If Grace were to die during the 20-year term of the GRUT (which is likely), the fair market value of the shares at death would be included in her gross estate, and thus, her gross estate would not be reduced. The regular (C) corporation could achieve all of Grace's goals, but at a greater tax cost. A transfer of shares in such a corporation would be subject to the Chapter 14 rules because Grace's shares would be of a different type than those gifted to family members. Grace would not have retained a qualified right in the corporation for Chapter 14 purposes, and thus she would have to pay a larger gift tax. A C corporation is also potentially subject to the personal holding company tax, whereas a subchapter S corporation is not.

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

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

Robert Williams is thinking of retitling a brokerage account that is currently solely in his name to add a provision that the account be transferred on his death to his daughter. Which of the following statements is CORRECT regarding an advantage or a disadvantage of retitling the account in this manner? A)An advantage is that Robert has reduced his gross estate. B)An advantage is that Robert has reduced his probate estate. C)A disadvantage is that Robert will no longer be able to retitle the account without his daughter's consent. D)A disadvantage is that Robert will no longer be able to control the account.

B) An advantage is that Robert has reduced his probate estate. A brokerage account with a T.O.D. (transfer on death) designation will pass by will substitute, and thus the probate estate has been reduced. The assets, however, will still remain in Robert's gross estate. Because such a retitling is revocable, Robert will still be able to control the account and change the title.

Alan created and funded an irrevocable trust with $150,000 for the benefit of his two minor children with income to be accumulated for five years, at which time the trust will terminate and all the income and corpus are to be distributed equally between the two children. Which of the following is a CORRECT statement about the impact of this lifetime transfer on any subsequent lifetime transfers Alan might make? A) Any annual exclusions that Alan applies to the transfer creating the trust will decrease the annual exclusions available for transfers to the same children in the future. B) Any subsequent taxable lifetime transfers will be taxed at a higher rate. C) This transfer will have no impact on any subsequent transfers. D) Alan could not take any annual exclusions in the year he created the trust, but he will be able to do so at the time the trust is distributed to the children.

B) Any subsequent taxable lifetime transfers will be taxed at a higher rate. The taxable amount of this transfer is $150,000 because no annual exclusions can be taken (there are no present interest gifts because the income will be accumulated for five years); $150,000 is at the top of a bracket on the unified rate chart. Therefore, the next taxable transfer will be taxed at a higher rate. There is no gift at the time of distribution to which to apply an annual exclusion. No annual exclusions can be taken at the creation of the trust. Annual exclusions are available each year.

Ted and Betty are spouses. In 2021, Betty makes a gift of $25,000 to her mother, and Ted agrees to treat the gift as a split gift. Who must file a gift tax return for 2021 if this is their only gift? A) Neither Betty nor Ted B) Betty C) Both Betty and Ted D) Ted

B) Betty. Only Betty must file a gift tax return. If spouses agree to split gifts for the year and make no gifts in excess of $30,000 (2021), only the donor spouse is required to file a gift tax return. The consenting spouse must sign the donor's gift tax return to consent to the gift splitting. Filing a gift tax return in this situation documents the splitting of the gifts. It also documents the value of the gift.

Which of the following statements concerning the calculation of the generation-skipping transfer tax (GSTT) is CORRECT? 1. The GSTT is determined by multiplying the taxable amount by the applicable GSTT rate. 2. The applicable GSTT rate is the highest federal estate and gift tax rate multiplied by an inclusion ratio.

B) Both I and II. Both of these statements are correct.

Which of these is CORRECT regarding the generation-skipping transfer tax (GSTT)? 1. An annual exclusion amount is allowed for lifetime direct skips. 2. Gift splitting is allowed if both spouses elect it.

B) Both I and II. Both statements are correct.

Regina establishes a funded irrevocable life insurance trust (ILIT) as part of her estate plan. Which of the following statements regarding this trust is CORRECT? 1. The trust holds title to a life insurance policy on Regina's life and also income-producing assets that may be used to pay the policy premiums. 2. Income from the ILIT assets is taxed to Regina as grantor of the trust.

B) Both I and II. Both statements are correct. A funded ILIT is a grantor trust because it uses trust income to pay the premiums on life insurance covering the grantor's life. Because the trust is a grantor trust, trust income is taxed to Regina.

Glen bought some property from his grandfather five years ago using an installment sale. Under the terms of the sale, he is required to make payments to his grandfather for 10 years. Which of the following statements regarding this arrangement is CORRECT? 1. If the grandfather dies during the installment period, the remaining unpaid principal, plus any interest that has accrued from the date of the last payment until the date of his death, is included in his gross estate. 2. If the grandfather dies during the installment period, the value of the property is excluded from his gross estate.

B) Both I and II. If the seller under an installment sale dies during the installment period, the remaining unpaid principal, plus any interest that has accrued from the date of the last payment until the date of the seller's death, is included in his gross estate. The estate tax advantage of an installment sale is that the seller may remove an appreciating asset from his estate. For example, the property that was sold might have doubled in value since the date of the sale, but the seller's gross estate only contains the remaining balance on the installment sale, plus unpaid interest since the last payment. Notice that the property in question is not in the seller's gross estate—only the loan value at the date of death is in the gross estate.

In which type of charitable transfer does the remainder interest pass to a noncharitable beneficiary? A)Pooled income fund B)Charitable lead trust (CLT) C)Charitable remainder annuity trust (CRAT) D)Charitable remainder unitrust (CRUT)

B) Charitable lead trust (CLT) With a charitable lead trust, income payments go to a charity and the remainder interest either reverts to the donor or passes to noncharitable beneficiaries. With CRATs, CRUTs, and pooled income funds, the remainder interest passes to a charity.

Which of the following statements regarding charitable gift annuities (CGAs) is CORRECT? A) A CGA is a contract between a donor and a qualified charity in which the donor pays an annuity to the charity in exchange for cash. B) Either cash or appreciated property may be donated to charity in a CGA. C) A CGA is usually secured and presents no risk to the donor-annuitant. D) The donor of a CGA is eligible for an income tax charitable deduction equal to the fair market value (FMV) of the donated property.

B) Either cash or appreciated property may be donated to charity in a CGA. A charitable gift annuity (CGA) is a contract between a donor and a qualified charity in which the donor transfers cash or appreciated property to the charity in exchange for an annuity. The donor is eligible for an income tax charitable deduction equal to the FMV of the donated property minus the present value of the annuity to be received. A CGA is unsecured and presents some risk to the donor.

Which of the following is a common mistake people make regarding estate planning? A)Recommending necessary changes to a will B)Failure to give proper advice regarding funeral arrangements C)Proper titling of assets D)Adequate estate liquidity

B) Failure to give proper advice regarding funeral arrangements. The remaining choices are the exact opposite of mistakes people make.

Which of the following statements regarding IRS Form 1041 is NOT correct? A)Form 1041 must be filed if an estate has gross income of $600 or more for the tax year. B)Form 1041 for an estate must be filed within nine months following the decedent's date of death. C)Form 1041 must be filed if any beneficiary of an estate is a nonresident alien. D)Form 1041 is used to report the income of an estate or irrevocable trust.

B) Form 1041 for an estate must be filed within nine months following the decedent's date of death. Form 1041 for an estate must be filed on or before the 15th day of the fourth month following the end of the taxable year.

Which of the following is an effective way for a client to remove the value of an asset from her estate? A) Placing the asset in her irrevocable trust in which she retains an income interest B) Gifting the asset to another individual C) Placing the asset in a grantor trust D) Placing the asset in her revocable trust

B) Gifting the asset to another individual. The asset is no longer in the possession, and therefore, no longer in the gross estate, of the donor.

Which of the following is a characteristic of gifts to a noncitizen spouse? A) Can only be made when the noncitizen spouse becomes a US citizen before the death of the US citizen spouse B) Gifts exceeding super annual exclusion amount will reduce the donor spouse's lifetime applicable credit amount (unified credit) or result in a gift tax if this credit has already been used C) Qualify for the unlimited marital deduction D) Must always be made in the form of a qualified domestic trust

B) Gifts exceeding super annual exclusion amount will reduce the donor spouse's lifetime applicable credit amount (unified credit) or result in a gift tax if this credit has already been used. Gifts exceeding super annual exclusion amount will reduce the donor spouse's lifetime applicable credit amount (unified credit), or result in a gift tax if this credit has already been used.

Which of the following are characteristics of a qualified disclaimer of assets from a decedent's estate? 1. It must be irrevocable and stated in writing. 2. It must direct the bequest to another person selected by the disclaimant. 3. It must be received by the estate's personal representative. 4. The disclaimant may refuse the bequest after accepting its benefits.

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

Which of the following are property interests that must go through the probate process? 1. A car that passes to the decedent's spouse by the state's intestate succession statute. 2. A government savings bond that is titled in the name of the decedent payable on death to the decedent's daughter. 3. Life insurance proceeds payable to the decedent's estate. 4. Assets in a revocable trust that pass to the decedent's children at the decedent's death.

B) I and III. Assets that pass by the laws of intestacy (option I) are subject to probate. Although life insurance proceeds that are payable to a named beneficiary pass by will substitute, when they are payable to the decedent's estate (option III) they become subject to the probate process. The government savings bond (option II) passes by will substitute because of the beneficiary designation. Assets in a revocable trust (option IV) also pass by will substitute, because the trust names remainder beneficiaries.

Derik Levine recently established a revocable living trust and funded it with several parcels of income-producing real estate. The trust provides that the trustee has discretion to distribute all trust income at least annually in equal shares to Derik's three adult children, who are also to receive the remainder of the trust at Derik's death. Derik named his brother as trustee. Which of the following statements about the tax implications of this trust are CORRECT? 1. Derik will not owe a gift tax on the value of the assets placed in the trust. 2. Derik will be able to take three annual exclusions in computing the gift tax due from funding the trust. 3. Derik will have to report all trust income on his personal income tax return. 4. The taxable value of the assets placed in trust will be included in Derik's estate tax calculation as an adjusted taxable gift.

B) I and III. The answer is I and III only. Establishment and funding of a revocable trust are not deemed to constitute a completed gift, as the donor does not give up dominion and control over the assets. Because no gift is made, no gift tax calculation is necessary, and no gift tax is due. Therefore, the trust assets remain part of the grantor's gross estate. A right to revoke a trust triggers one of the grantor trust rules and thus makes all trust income taxable to the grantor whether or not he ever receives any of the income.

Which of the following postmortem planning techniques require the decedent to have executed, prior to death, a document that is enforceable after death? 1. An election that property in a QTIP trust qualify for the marital deduction 2. A Section 303 stock redemption election 3. A disclaimer trust that will allow a surviving spouse to disclaim property and give her an interest in the property as a beneficiary of the trust 4. An election to waive personal representative (executor) fees

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

Gary and Georgeann have the following objectives: -If Gary predeceases Georgeann, to provide her exclusively with a mandatory stream of income from the assets included in his gross estate -To ensure that Gary's children from his prior marriage will ultimately receive the income-producing assets upon Georgeann's death -To prevent assets used to provide income to Georgeann from being included in her gross estate Which of the following estate planning techniques would accomplish the couple's second and third objectives simultaneously? 1. A family bypass (B) trust 2. A power of appointment (A) trust 3. A QTIP (C) trust, with an election 4. A QTIP (C) trust, without an election

B) I and IV. To accomplish the couple's second and third objectives, the property must be placed in a trust that will not qualify for the marital deduction. A family bypass trust and a QTIP trust without an election do not qualify for the marital deduction. If the estate of the first spouse to die takes a marital deduction, the estate of the surviving spouse will always have to include the trust assets in his gross estate.

Which of the following should be included in a will? 1. Provision for guardians of minors 2. Funeral instructions 3. Beneficiaries for retirement accounts

B) I only. Statement I is correct. Statement II is incorrect. Because the will is often read after the funeral, funeral instructions should be included in a side instruction letter. Statement III is incorrect. Retirement plan assets will automatically pass to the beneficiaries designated on each plan account, regardless of the will.

Which of the following are fiduciary relationships created by law to enable one person to manage the property of another? 1. Conservatorships 2. Guardianships

B) I only. Statement II is incorrect because a guardianship is a fiduciary relationship that enables one person to manage the personal care and well-being (but not the property) of another. Think of prison guards. You guard a person. You conserve money or property.

Which of the following charitable trusts may NOT invest in tax-exempt securities? 1. Pooled income fund (PIF) 2. Charitable remainder annuity trust (CRAT) 3. Charitable remainder unitrust (CRUT)

B) I only. The pooled income fund is the only option that cannot invest in tax-exempt securities. CRATs and CRUTs are allowed to invest in tax-exempt securities.

After Chester dies, his estate incurs administrative expenses of $5,000 and casualty losses of $2,000. On which tax return(s) may Chester's executor elect to deduct these expenses and losses? 1. Form 706 (estate tax return) 2. Chester's final Form 1040 3. Form 1041 (fiduciary income tax return)

B) I or III. The executor may elect to deduct the expense and losses on either the federal estate tax return (Form 706) or the fiduciary income tax return (Form 1041). The decision will depend on the relative marginal tax rates applicable to each return.

Which of the following statements would avoid probate at the owner's death? 1. Payable on death (P.O.D.) account 2. Tenancy by entirety 3. Funded inter vivos trust 4. Joint tenancy with right of survivorship (JTWROS)

B) I, II, III, and IV. All of these are will substitutes that can be used to avoid probate.

Which of the following tax returns may be necessary after a decedent's death? IRS Form 1040 IRS Form 1041 IRS Form 706

B) I, II, and III. All choices are correct. The deceased taxpayer's tax year ends with the date of death, so a final Form 1040 may be necessary. Form 1041 is the estate's income tax return, known as the fiduciary income tax return. Form 706 is the federal estate tax return.

Which of the following property transfers between family members are subject to the special zero valuation rules under Chapter 14? 1. Corporate recapitalizations 2. Partnership capital freezes 3. Buy-sell agreements

B) I, II, and III. All of these property transfers between family members are subject to the special zero valuation rules under Chapter 14. In other words, these types of transfers must comply with the rules under Chapter 14 of the Tax Code or the transfer will have negative gift tax consequences.

Which of the following statements regarding Medicaid planning and eligibility is(are) CORRECT? 1. There are 2 types of assets for determining Medicaid eligibility—countable assets and exempt assets. 2. Exempt assets are not counted in determining a person's eligibility for Medicaid. 3. A married couple's primary residence is considered to be an exempt asset.

B) I, II, and III. All of these statements are correct.

Which of the following statements regarding estate liquidity is CORRECT? 1. An estate typically needs substantial amounts of cash or other liquid assets to meet its obligations following the decedent's death. 2. An estate can manage its cash flows by developing a cash flow plan indicating when its cash inflows and outflows are expected to occur. 3. An estate that lacks sufficient liquidity to pay its obligations when due may be forced to sell illiquid assets or borrow money at unfavorable terms.

B) I, II, and III. All of these statements are correct.

Which of the following assets generally receive a stepped-up basis at the transferor's death? 1. The decedent's interest in property held jointly with right of survivorship 2. Real estate 3. Artwork 4. Variable annuities

B) I, II, and III. Variable annuities are not eligible for a stepped-up basis because they are income in respect of a decedent (IRD).

Prior to his death on January 1, 2021, Garth took the following actions in the years indicated: -2019: He gave a cash gift of $50,000 to his brother, on which he paid $14,400 in gift tax out of pocket -2015: He released a general power of appointment over assets in a trust established by his mother; Garth is not the trustee or a beneficiary of this trust. -2012: He relinquished to his three children a life estate in a condominium that he had retained when he transferred title to them in 2004; the life estate had a value of $56,000 at the time of the gift in -2004 and a value of $52,000 at the time of transfer in 2012. -2010: He established an irrevocable trust for the benefit of his grandchildren, naming himself as trustee and providing that the trustee could distribute income and principal from the trust at his sole discretion; the assets used to fund the trust had a date of gift value of $100,000 and a date of death value of $105,000. Which of the following statements regarding the impact of these lifetime transfers on Garth's estate tax liability are CORRECT? 1. Garth's estate will have to include the $14,400 paid in gift tax in the gross estate and $36,000 in adjusted taxable gifts as a result of the 2019 gift. 2. Release of the power of appointment in 2015 will not be in his gross estate at death. 3. Garth's estate tax liability will not be affected by the transfer in 2012 since it occurred more than three years prior to death. 4. Garth's estate will have to include the date of death value of the assets of the trust established in 2010 in his gross estate, but it will not have to include the amount taxable for gift tax purposes in his adjusted taxable gifts amount.

B) I, II, and IV. For 2019, $14,400 (option I) must be included in the gross estate under the gross-up rule, as gift tax was paid out of pocket on a gift made within three years of Garth's death. The taxable portion of this gift—$36,000 ($50,000 less one maximum annual exclusion of $14,000)—will be an adjusted taxable gift in Garth's estate tax calculation, as the 2019 gift is not brought back into his gross estate. For 2015, release of a general power of appointment (option II) by a holder is deemed to be a gift since the assets that the holder could have taken for himself will now go to someone else. Therefore, the value of these assets will be frozen for estate tax purposes at their date of gift value (as an adjusted taxable gift) rather than their date of death value in the gross estate had the release not been made. In summary, Garth's gross estate will not include the general power of appointment, but the taxable value will be in his tentative base. Garth's estate tax liability (option III) will be affected by the 2012 transfer because he has made a gift of his life estate to his children, and his adjusted taxable gifts will be increased by the taxable portion of this gift. Also, the property in which he held the retained life estate will not have to be included in his gross estate like it would have had he not relinquished the life estate or if he had died within three years of releasing the life estate. The date of death value of the assets included in the trust established in 2010 (option IV) will have to be included in Garth's gross estate under Code Section 2038 of Chapter 14, as Garth retained the right to determine beneficial enjoyment of the trust property.

If Marleen Harris died and her daughter Tasha Harris decided to disclaim part or all of her inheritance, which of the following steps should Tasha take to make sure that any such disclaimer is a qualified disclaimer? 1. The disclaimer must be irrevocable. 2. The disclaimer must be in writing. 3. The disclaimer must be filed within six months of Marleen's death. 4. Tasha cannot have benefited from any disclaimed assets before execution of the disclaimer.

B) I, II, and IV. Tasha should make sure the disclaimer is writing and is irrevocable. Additionally, she should make sure that it is filed with the executor within nine months, not six months. Finally, Tasha cannot have benefited from disclaimed assets and cannot try to direct Marleen's disclaimed assets to particular heirs.

Mario has accumulated significant wealth over his lifetime, and he is currently implementing gifting techniques. He would like to take advantage of the annual exclusion. Transfers to which of the following trusts/accounts permit Mario to utilize the gift tax annual exclusion? 1. Uniform Gift to Minors Account (UGMA) 2. Grantor retained annuity trust (GRAT) 3. Qualified tuition plan 4. Section 2503(c) trust

B) I, III, and IV. A transfer to a GRAT is a gift of a future interest that is not eligible for the annual exclusion. Transfers to an UGMA, a qualified tuition plan, a Section 529 plan, and a Section 2503(c) trust are all eligible for the gift tax annual exclusion.

Gideon owns the following solely owned assets: -A savings account at a bank -Commercial real estate that is located in a state other than his state of domicile and that has a sizeable mortgage Gideon's will gives all of his property to his daughter. His will makes no mention of his son. Which of the following actions would have the potential to improve the liquidity of Gideon's estate? 1. Executing a codicil to his will stating the reasons why he is leaving no property to his son by will 2. Executing a codicil to his will placing the commercial property into a testamentary trust for the sole benefit of his daughter 3. Executing a codicil to his will denying his daughter a right of exoneration for the mortgage on the commercial property 4. Establishing a transfer on death designation for the savings account naming his daughter as the beneficiary

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

Which of the following statements regarding durable powers of attorney is(are) CORRECT? 1. The power survives the incapacity of the principal. 2. The power survives the death of the principal. 3. The power may be springing. 4. A principal must be 18 and competent at the time the durable power of attorney is created.

B) I, III, and IV. Statement II is incorrect; a durable power of attorney does not survive the death of the principal. Statements I, III, and IV are correct.

Which of the following statements is CORRECT regarding the purpose and characteristics of a nuncupative will? 1. A nuncupative will is one whose material provisions are written entirely in the testator's handwriting. 2. A nuncupative will requires at least one witness. 3. State law may limit the types and amounts of property that may be distributed by this form of will. 4. This form of will is recognized in most states.

B) II and III. A nuncupative will is an oral will. This form of will is recognized only in a few states, which often place limits on the types and amounts of property that can be transferred using this method. At least one witness is necessary to hear the oral statements.

Jason wants to contribute $10 million to a charitable trust. He expects to receive a large inheritance in a few years, so he wants to receive an income interest from the trust for only 15 years and not for life. Which of the following charitable trusts will meet his needs? 1. Pooled income fund 2. Charitable remainder annuity trust (CRAT) 3. Charitable remainder unitrust (CRUT)

B) II and III. Statement I is incorrect because in a pooled income fund, the donor (or one or more named beneficiaries) must retain a life income interest. Retained term interests are not allowed. Statements II and III are correct.

Emmet's personal representative is computing his estate tax liability. Among other provisions, Emmet's will provides the following relating to his spouse, Nellie, who is still alive more than seven months after Emmet's death. 1. It grants Nellie a life estate in his residence with the remainder at her death to go to Emmet's only son, John; the executor does not plan to make a qualified terminable interest property (QTIP) election for this property. 2. It establishes Trust 1, on the condition that Nellie survive him by at least three months. This trust grants all income to Nellie for life (to be paid at least annually) and grants her a general power of appointment over the corpus. 3. It establishes Trust 2, naming John and Nellie as income beneficiaries, to receive distributions of income at the trustee's discretion, with the remainder at Nellie's death to go to John. 4. Since Emmet's will did not contain a residuary clause, his remaining assets passed to Nellie pursuant to state intestacy laws. Which of these interests left to Nellie qualify for the marital deduction?

B) II and IV. Option II is a power of appointment, or "A" trust, which gives Nellie the equivalent of outright ownership—she gets all income and can use the general power of appointment to appoint all corpus to herself. The property in option IV, which passes to Nellie by the intestacy laws, qualifies for the marital deduction. Option I is QTIP, which can qualify for the marital deduction only if the proper election is made. Option III is a bypass or family trust, which grants Nellie only a terminable interest (i.e., an income interest that terminates at her death). It does not qualify for the QTIP election because she is not given a qualifying income interest for life.

Sarah and Jenny, a married couple, own real estate as JTWROS, and Sarah is contemplating a transfer of her interest to Jenny. Assuming the transfer occurs, which of the following statements are CORRECT? 1. A taxable gift occurs. 2. The transfer is eligible for the marital deduction.

B) II only. Only Statement II is correct. A taxable gift has not occurred because of the marital deduction.

Which of the following statements regarding the installment payment of estate taxes is CORRECT? 1. The installment payment of estate taxes is not available unless the closely held business interest is a corporation. 2. If an estate qualifies for the installment payment of estate taxes, interest must be paid during the five-year deferral period.

B) II only. Statement II is correct. Statement I is incorrect because installment payments are available to any closely held business (unincorporated or incorporated) as long as the qualifying conditions are met.

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)II only C)I only D)Both I and II

B) II only. 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.

Which of the following statements is CORRECT regarding a payable on death (P.O.D.) account used as a will substitute? 1. Use of a P.O.D. designation is a completed gift, but is entitled to an annual exclusion for each named beneficiary. 2. The named beneficiary can transfer up to half of the assets in the account. 3. The account assets will be included in the account owner's gross estate. 4. The account assets will be transferred outside of probate.

B) III and IV. A P.O.D. designation is revocable. Therefore, no completed gift is made, and the named beneficiary has no use of the account assets until the account owner dies. The account assets are included in the owner's gross estate, but not the owner's probate estate.

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? 1. She should put her bank account in tenancy in common with Mabel. 2. She should title her personal residence in joint tenancy with her friend, Mabel. 3. She should place the bank funds in a payable on death (P.O.D.) account with Mabel as beneficiary. 4. 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

B) III and IV. 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.

Sylvia, 67, is a widow with an estimated gross estate of $4.8 million. Some of her assets are listed as follows: A one-third partnership interest in the Mountain Home Ranch (which she, her brother, and sister have operated for the past 30 years). The partnership assets are valued at $8 million, with 40% allocated to the real estate and the remainder to livestock, machinery, et cetera. The ranch has mortgages and secured debts of $3.3 million, divided equally between the ranch real estate and the ranch personal property. She has willed her interest to her son, Simpson. 1,000 shares of closely held stock in the Cowpoke Cafe and Emporium valued at $1.25 million. Real estate owned by the corporation is valued at $400,000. Her will names her son as the beneficiary of the stock. Her financial planner has estimated her unsecured debts at $280,000, her administrative expenses at $220,000, and combined state and federal death taxes at $1 million. Sylvia has made $9 million of adjusted taxable gifts, all of which occurred more than three years ago. Which of the following postmortem techniques can Sylvia's estate use to decrease its need for liquid resources and/or increase its liquidity? 1. Special use valuation for Sylvia's interest in the Mountain Home Ranch 2. Section 303 stock redemption for Sylvia's interest in the Mountain Home Ranch 3. Section 6166 installment payment of estate taxes for Sylvia's interest in the Mountain Home Ranch 4. Section 303 stock redemption for Sylvia's interest in the Cowpoke Cafe and Emporium

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

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

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

Which one of the following statements is CORRECT concerning income earned by spouses in a community property state? A) Income earned by each spouse is considered separate property. B) Income earned by each spouse after marriage is considered community property. C) Income earned by each spouse before and after marriage is considered community property. D) Income earned by each spouse after marriage is considered community property only if it is commingled.

B) Income earned by each spouse after marriage is considered community property. The answer is income earned by each spouse after marriage is considered community property. Even though earned by only one spouse, such earnings are considered community property.

Within three years prior to her death, Himari established an irrevocable trust with her children as trust beneficiaries. She transferred ownership of a vacation cabin into it, and in the deed conveying the property to the trust, Himari reserved the right to use the vacation cabin when it is not occupied. Which of the following statements regarding whether the trust property would be included in Himari's gross estate is CORRECT? A)It is excluded because she retained no administrative control over the trust. B)It is included because she retained the right to use the property. C)It is included because the transfer was made within three years prior to death. D)It is excluded because her use is dependent upon the implied consent of the children.

B) It is included because she retained the right to use the property. Retention of the right to use property makes the asset includible in Himari's gross estate no matter how long ago she established the arrangement. The limitation "when it is not occupied" is irrelevant. The three-year rule has no application to this situation.

David wants to draft a document advising his physician that he does not want to receive life-sustaining medical care if he ever becomes terminally ill and is unable to make decisions for himself. Which of the following documents best meets David's needs? A) Nondurable power of attorney B) Living will C) Letter of personal instruction (side letter) D) Nuncupative will

B) Living will. A living will will best meet David's needs. A nuncupative will (another name for an oral will) would not take effect until David's death. A nondurable power of attorney would become ineffective if David ever became incapacitated. A letter of personal instruction (side letter) is an informal document advising the writer's survivors of his wishes concerning post-mortem matters such as funeral arrangements or the disposition of personal effects.

Which of the following statements regarding probate is CORRECT? 1. Real estate owned by a decedent at death is probated according to the laws of the decedent's domicile. 2. 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.

B) Neither I nor II. 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.

On January 1, 2021, Paul gifts a piece of land (basis of $100,000, FMV of $300,000) to his father. Which of the following statements is CORRECT? A)If Paul dies, the property will be included in his gross estate at the date-of-death value. B)Paul's father's basis in the property will be $100,000. C)If Paul's father dies on December 1, 2021, and leaves the land to Paul, Paul will receive a stepped-up basis in the property. D)If Paul had sold the land to his father for $50,000 instead of gifting it, he would have had a deductible loss of $50,000.

B) Paul's father's basis in the property will be $100,000. The gift basis to a donee is the carryover basis of the donor ($100,000). The boomerang rule of Section 1014(e) precludes Paul from receiving a stepped-up basis at his father's death if his father dies within one year of receiving the property from Paul.

Which of the following is a written document in which one person (the principal) authorizes another person to act on the principal's behalf? A)Codicil B)Power of attorney C)Trust document D)Prenuptial agreement

B) Power of attorney. A power of attorney is an instrument in writing by which one person, as principal, appoints another as agent and confers upon them the authority to perform certain specified acts or kinds of acts on behalf of the principal.

Ronald and Karen are spouses. Karen is a U.S. citizen, and Ronald is a citizen of Scotland. Karen has a sizable estate, and when she dies she wants to leave it all to Ronald in a way that qualifies for the estate tax marital deduction. Which of the following marital trusts can Karen use to accomplish her goal? A) Bypass (B) trust B) Qualified domestic trust (QDOT) C) Disclaimer trust D) Qualified terminable interest property (QTIP) trust

B) Qualified domestic trust (QDOT). A qualified domestic trust (QDOT) is used to qualify a bequest for the marital deduction when the surviving spouse is not a U.S. citizen.

Jasmine dies owning 1,000 acres of farmland, which is used as a family farm. The value of the acreage as farmland is $3,000 per acre. Many adjoining farms have been sold to commercial developers for as much as $20,000 an acre. Jasmine's will leaves the acreage to her son, who intends to use it as farmland for the foreseeable future. Which of the following postmortem estate planning techniques will be most useful to Jasmine's estate? A) Election against the will B)Special use valuation (Section 2032A) C)Alternate valuation date (AVD) D) QTIP election

B) Special use valuation (Section 2032A). Special use valuation under Section 2032A will be most useful to Jasmine's estate because it permits the acreage to be valued at its current use as farmland ($3,000 per acre) rather than at its highest and best use as commercial development ($20,000 per acre). In 2021, the maximum reduction in value under Section 2032A is $1.19 million. In this case, the farmland is worth $3 million as a farm, but $20 million as a commercial development. The Section 2032A special use valuation would reduce the amount in the gross estate to $18,810,000 ($20 million - $1.19 million). The estate tax savings would be $476,000 ($1.19 million × 40%).

As part of their retirement plan, Stefon and his spouse, Addy, jointly purchased a commercial deferred annuity. This annuity paid income to Stefon and Addy on a joint and survivor basis. Stefon has now died. Which of the following statements regarding this commercial annuity is CORRECT? A) Since this annuity had a spousal survivorship feature, none of the benefits qualify for the marital deduction. B) The amount of the annuity includible in Stefon's estate is half of the replacement cost of a single life annuity on Addy at the time of Stefon's death. C) The amount of the annuity includible in Stefon's estate is the amount of the original investment that had not been fully recovered at his death. D) Stefon's estate must include half of the present value of the survivorship benefits.

B) The amount of the annuity includible in Stefon's estate is half of the replacement cost of a single life annuity on Addy at the time of Stefon's death. The remaining options are incorrect because the amount includible in Stefon's estate is the replacement cost of a single life annuity on Addy at the time of Stefon's death, which is proportionate to the purchase price contributed by the decedent. The present value of survivorship payments is used only for a private annuity. Further, half of the value of the survivorship benefits will qualify for the marital deduction.

Which one of the following statements about the use of a springing durable power of attorney is correct? A) The attorney in fact's authority will survive the principal's death. B) The attorney in fact generally must obtain a letter from the principal's physician prior to acting. C) The attorney in fact has immediate authority to act for the principal. D) The attorney in fact receives title to the principal's property.

B) The attorney in fact generally must obtain a letter from the principal's physician prior to acting. The answer is the authority of the attorney in fact under a durable power of attorney will survive the principal's incompetency, but not his or her death. The authority of the attorney in fact is not immediate in a springing durable power of attorney, as it does not "spring into action" until the occurrence of a stated event—usually the principal's incompetency. The attorney in fact does not take title to the principal's property but merely has authority as the principal's agent to deal with the principal's property according to the terms of the instrument. A springing power of attorney becomes effective upon incapacity, which generally must be confirmed by two physicians.

Which of the following statements about the gift tax charitable deduction is NOT correct? A) A charitable gift tax deduction is given only for the portion of the contribution in excess of any value the donor receives from the charity. B) The charitable gift tax deduction is limited by the type of property gifted, the type of charitable donee, and the donor's adjusted gross income (AGI). C) A gift of a partial interest will qualify for a charitable deduction only if it meets the requirements of the Internal Revenue Code and IRS regulations. D) To qualify for a charitable deduction, a gift must be of cash or property.

B) The charitable gift tax deduction is limited by the type of property gifted, the type of charitable donee, and the donor's adjusted gross income (AGI). The charitable gift tax deduction is unlimited for qualifying transfers. For income tax purposes, the charitable deduction has limits based on the type of charitable donee, the type of property gifted, and the donor's AGI (adjusted gross income).

Which one of the following statements regarding a conservatorship is not true? A) The conservator will likely have to file reports with a court. B) The conservator has authority to decide where the ward will live. C) The conservator is subject to the jurisdiction of a court. D) The conservator may have to post a bond.

B) The conservator has authority to decide where the ward will live. A conservator is almost always a fiduciary who is in charge of the ward's finances, but does not have authority over the body of the ward (e.g., deciding where the ward will live). This authority is given to a guardian. A conservator is appointed by the court which retains jurisdiction over both the conservator and guardian, requiring periodic reports from each, and may require a performance bond.

Your data gathering meeting with Colin Greywhale indicated the following about his property interests: -He has the right to decide, without limitation, who will receive the entire corpus of his uncle's trust. Colin's will does not exercise this right. -His wife owns a paid-up life insurance policy that insures Colin's life; his wife, Lois, is the primary beneficiary. -Five years ago, he created the revocable CG Trust for his children and funded it with $80,000 worth of securities; two years ago, when the trust fund was worth $130,000, he made it irrevocable. -Two years ago, he had cumulative taxable transfers that exceeded the applicable exclusion amount and paid $32,000 in gift tax to the federal government. If Colin died in the current year, which one of the following would be excluded from his gross estate?

B) The death benefit of the life insurance policy. Colin's right in his uncle's trust is a general power of appointment, which would cause the maximum value that could be appointed at death to be in the holder's (Colin's) gross estate. He has no incidents of ownership in the life insurance policy on his own life, which would cause inclusion of the death benefit in his gross estate, nor is his estate the beneficiary. There is no indication that Colin assigned ownership of this policy to his wife. If a right to a retained right to alter, amend, or revoke is given up within three years of death, as it was when the CG Trust was made irrevocable, the value of the assets over which the right was retained must be included in the grantor's gross estate. Finally, any gift taxes paid "out-of-pocket" (tax liability beyond the gift tax applicable credit amount) on gifts made within three years of death must be included in the gross estate under the gross-up rule.

Which one of the following statements about the use of a split-dollar life insurance plan in a business setting is false? A) The benefits from the policy are split between the employer and the employee/insured or the employee's beneficiary. B) The entire value of the policy and its benefits are subject to claims of the employer's general creditors. C) The insurance can act as a fringe benefit to a valued employee. D) The insurance premiums are typically split between the employer and the employee/insured.

B) The entire value of the policy and its benefits are subject to claims of the employer's general creditors. Only the benefits payable to the employer under the split-dollar agreement are subject to claims by the employer's creditors. All other statements are true.

Which of the following statements regarding the election to use the alternate valuation date (AVD) on the federal estate tax return is NOT correct? A) The AVD cannot be used for wasting assets. B)The executor is allowed to select which assets will be valued at the AVD and which will be valued as of the decedent's date of death. C) The AVD can be used only if it reduces the amount of federal estate tax owed by the estate. D)The AVD can be used only if it reduces the total value of the gross estate.

B) The executor is allowed to select which assets will be valued at the AVD and which will be valued as of the decedent's date of death. If the executor elects to use the AVD, the election must essentially be applied to all assets in the gross estate. The executor is not allowed to pick and choose among the assets. On the other hand, certain assets, like wasting assets, are not eligible to use the AVD. Also, assets sold between the date of death and the AVD must be valued at the actual sales price, not the AVD price, if the AVD is chosen.

Which one of the following is an advantage of the probate process? A)The probate process is private. B)The probate process is court supervised. C) The probate process is public. D) The probate process is lengthy.

B) The probate process is court supervised. The duration of a probate estate depends on the size and complexity of the estate and can continue for several years in certain situations. Typically, the personal representative will not make distributions to beneficiaries until the probate estate is finalized.

Matteo, an unmarried man, owns the following assets: (1) investment accounts worth $6 million; (2) a life insurance policy worth $5 million; (3) a house worth $2.5 million; (4) retirement accounts worth $2 million; and (5) tangible personal property worth $1 million. Matteo created a revocable living trust that names his three children as the beneficiaries, and he funded the trust with all of his assets except the retirement accounts. Which of the following statements regarding the effect of this trust on the potential liquidity of Matteo's estate at his death is CORRECT? A) The trust represents neither a potential cash requirement nor a potential source of liquidity. B) The trust assets will be included in Matteo's gross estate and will be available to meet estate liquidity needs. C) The trust will shield Matteo's estate from an estate tax liability, and therefore, it is sufficient to meet estate liquidity needs. D) The trust does not represent a potential cash requirement, but it does represent a potential source of liquidity.

B) The trust assets will be included in Matteo's gross estate and will be available to meet estate liquidity needs. A funded revocable living trust will allow the assets to transfer outside of probate and provide ready cash for estate needs. Revocable living trusts do not shield assets from estate taxes, as the assets are included in the gross estate.

Which of the following most likely describes the reason for including Crummey powers in a trust? A) To relieve the trust of fiduciary obligations regarding the trust assets B) To ensure that gifts to the trust qualify for the gift tax annual exclusion C) To ensure that the trust complies with the rule against perpetuities D) To protect the trust assets against claims by the beneficiaries' creditors

B) To ensure that gifts to the trust qualify for the gift tax annual exclusion. The purpose of including Crummey powers in a trust is to ensure that gifts to the trust qualify for the gift tax annual exclusion.

Which of the following is typically a reason for establishing a supplemental needs trust? A) To make medical decisions on behalf of a beneficiary who is terminally ill B) To pay for the needs of a beneficiary who is receiving public assistance while protecting assets from government attachment C) To receive assets that are transferred under the grantor's will D) To plan for the grantor's potential legal incapacity and avoid probate if the grantor dies

B) To pay for the needs of a beneficiary who is receiving public assistance while protecting assets from government attachment. The answer is to pay for the needs of a beneficiary who is receiving pubic assistance while protecting assets from government attachment. A supplement (special) needs trust is established by clients who have a dependent who is developmentally disabled and receiving public assistance. The purpose of the trust is to pay for the beneficiary's supplemental needs that are not covered by assistance while at the same time protecting assets from governmental attachment.

Wanda Skaggs would like to avoid the time, expense, and inconvenience of probate. She also would like to reduce the size of her gross estate. Which one of the following strategies would be most likely to meet all of Wanda's goals? A) Converting her bank accounts to payable on death (P.O.D.) accounts B) Transferring property to her son, Chauncy, in return for his promise to pay her a fixed annuity for the rest of her life based on the value of the property C) Changing the deed to her personal residence so that she has a retained life estate, with the remainder going to her children D) Retitling all of her solely owned property with her children and herself as tenants in common

B) Transferring property to her son, Chauncy, in return for his promise to pay her a fixed annuity for the rest of her life based on the value of the property. A single life private annuity will remove the asset involved from the seller's gross estate. Both the sold asset and the annuity will avoid probate because the asset is no longer owned by the seller, and there is no interest in the annuity to transfer after Wanda's death. Retitling property as tenancy in common would reduce her gross estate, but her remaining fractional interest would still have to go through probate. The remaining options would allow her estate to avoid probate, but they would not reduce the size of Wanda's gross estate, as she will have retained a right over the property that invokes the transfer sections.

Which of the following statements regarding the taxation of trust income is CORRECT? A)Trust income is always taxed to the trustee. B)Trust income is taxed to the grantor if the grantor trust rules apply. C)Trust income is always taxed to the beneficiary. D)Trust income is taxed to the trust if the trustee distributes the entire trust income annually.

B) Trust income is taxed to the grantor if the grantor trust rules apply. If a trust is a grantor trust, all trust income is taxed to the grantor.

Juan Valentino's will leaves his half of his probate estate to a testamentary trust in which his spouse and children are income beneficiaries, and his children the remainder beneficiaries. The will gives the remainder of his probate estate outright to his children. Juan wanted to be assured that both his spouse and children will receive some part of his estate while incurring minimal estate administration fees. Juan has a gross estate of $2 million. Since the will was drafted, Juan has had second thoughts about the way he decided to distribute the assets of his estate. Does Juan need to consider amending his will? A) No, because the spousal elective share given to his spouse by state statute will permit her to take all of Juan's estate in any event. B) Yes, because the existing will does not include a residuary clause and thus could be subject to the intestacy statutes. C) No, because there will be no estate tax to be paid out-of-pocket by his estate. D) Yes, because if his spouse predeceases him, her portion of the estate will pass through intestacy at Juan's death and be distributed to unintended beneficiaries.

B) Yes, because the existing will does not include a residuary clause and thus could be subject to the intestacy statutes. Juan needs to consider amending his will because the existing will does not include a residuary clause and thus could be subject to the intestacy statutes. The spouse's portion of the estate would be distributed to Juan's child as a remainder beneficiary of the testamentary trust. The spousal elective share never entitles a surviving spouse to all of a deceased spouse's estate. If his spouse and child do not survive him, there are no named beneficiaries and the estate will be subject to the intestacy statutes.

All of the following statements regarding charitable gift annuities (CGAs) are correct except A)with a CGA, the donor transfers cash or appreciated property to a charity in return for the charity's promise to pay an annuity to the donor or other designated annuitant. B)a CGA presents no risk to the donor-annuitant because the agreement is secured. C)the donor of a CGA is eligible for an immediate income tax deduction for the full amount transferred. D)the annuity payable under a CGA may be for one or two lives using a joint and survivor payment.

B) a CGA presents no risk to the donor-annuitant because the agreement is secured. A charitable gift annuity presents some risk to the donor-annuitant because it is unsecured. The donor of a gift tax annuity receives an income tax charitable deduction for the difference between the FMV of the assets transferred and the present value of the annuity.

All of the following statements regarding direct skips for purpose of the generation-skipping transfer tax (GSTT) are correct except A) a direct skip is an outright transfer to a skip person or a transfer of property to a trust exclusively for the benefit of one or more skip persons. B) gift-splitting by spouses is not permitted for direct skips. C) the transferor or the transferor's estate is liable for any GSTT that is due on a direct skip. D) an annual exclusion of $15,000 is available in 2021 for lifetime direct skips.

B) gift-splitting by spouses is not permitted for direct skips. Gift-splitting is allowed for direct skips if both spouses elect it. All of the other statements are correct.

All of the following statements regarding the effect of divorce or remarriage on estate planning are correct except A)a person who wants to disinherit a second spouse may want to use transfer methods other than a will to do so. B)transfers between spouses under property settlements incident to a divorce are subject to income tax and gift tax. C)people who remarry after a divorce may find it desirable to enter into a marital property agreement. D)a QTIP trust may be helpful for a spouse who has children from a previous marriage.

B) transfers between spouses under property settlements incident to a divorce are subject to income tax and gift tax. Transfers between spouses under property settlements incident to a divorce are income tax and gift tax free.

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)Term of years C)Remainder D)Future interest

B)Term of years. 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.

Which of the following statements regarding legal and equitable ownership of property is CORRECT? 1. A trust is a common example of property ownership in which legal and equitable ownership is split between different parties. 2. Trust beneficiaries have equitable ownership of the trust assets.

Both I and II

Peter Jenkins recently remarried after divorcing his first spouse last year. He has asked you for advice on updating his estate plan to reflect his new marital status. His existing will leaves all of his property to his first spouse. He does not want to leave any of his property to his new spouse and he wants all of his property to pass to his children from his first marriage when he dies. Which of the following recommendations would you make to Peter? 1. Peter should redo his will to reflect his new marital status. 2. If Peter's new will disinherits his second spouse, she may still be able to claim a share of his estate when he dies by electing against the will.

Both I and II. Both of these statements are correct. New wills are called for after a divorce. State laws concerning electing against the will allow spouses to claim a certain, state-set percentage of a deceased spouse's estate. Because Peter is remarried, his new spouse could make a claim against his probate estate by electing against the will. This is different than contesting the will. Electing against the will does not contest the validity of the will. It simply says, "As a spouse, I claim my state-set percentage of the probate estate." This contingency can be addressed by decreasing the probate estate or by leaving the spouse the state-set percentage of the probate estate. In some cases, the rich spouse can fund an irrevocable life insurance trust (ILIT) with a policy for the benefit of the new spouse. While this would not guarantee Peter's surviving spouse won't attempt to elect against the will, money from the ILIT would lessen the need for her to do so.

Chad Wilson recently died a resident of Ohio. When Chad died, he owned several bank accounts in his own name and a vacation house in West Virginia, also in his own name alone. His will leaves all of his assets to his son. The son's financial planner has recommended that the executor open probate proceedings in Ohio and West Virginia. Which of the following statements regarding the implementation of these probate proceedings is CORRECT? 1. Chad's real estate can only be probated in the state in which it is located. 2. Chad's bank accounts can all be probated in a single state.

Both I and II. Both of these statements are correct. Real assets must be probated in their own state. Intangible assets can be probated in any state.

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 I and II. Both statements are correct.

Which of the following intrafamily property transfers are subject to the special zero valuation rules under Chapter 14? 1. Corporate recapitalizations 2. Partnership capital freezes

Both I and II. Both statements are correct; corporate recapitalizations and partnership capital freezes are both subject to the special zero valuation rules under Chapter 14.

Which of the following statements concerning titling of assets captures its importance in estate planning? 1. Titling determines how the income of an asset as well as the proceeds from its sale would be split. 2. The distribution of income or sales proceeds not in fact divided as title dictates likely will create unintended gift and income tax consequences.

Both I and II. Both statements are true.

Which of the following statements regarding a living trust is CORRECT? 1. A living trust is a probate-avoidance method in which property is transferred to a trust during an individual's lifetime and is distributed according to the terms of the trust. 2. Because the trust rather than the grantor owns and manages the trust assets at the time of the grantor's death, the trust assets do not pass through probate.

Both I and II. The main point of probate is to transfer ownership of property when someone passes away. Assets in a trust do not go through probate because the trust owned the asset before the date of death and also after the date of death so there is no need to change ownership of the trust property to someone else.

Assume that in 2021 Marleen incurs substantial medical bills at the local hospital and Tasha pays $100,000 directly to the hospital in payment of Marleen's medical expenses. What is the amount of Tasha's taxable gift as a result of this transaction? A) $30,000 B) $85,000 C) $0 D) $100,000

C) $0. The payment of another person's medical expenses directly to the medical provider is a qualified transfer and is not considered a gift for gift tax purposes.

Humphrey recently gave his nephew several shares of ABC stock, a listed security. On the date of the gift, this stock closed at $12 per share and traded between a high of $14 per share and a low of $8 per share. In valuing ABC stock for gift tax purposes, what is its appropriate per share value?

C) $11. The fair market value of listed securities for gift tax purposes is the mean between the highest and lowest quoted selling price on the date of the gift. This is calculated as $11 per share: ($14 + $8) ÷ 2.

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? A)$11,700,000 B)$30,000 C)$23,430,000 D)$23,400,000

C) $23,430,000. For 2021, the answer is $23,430,000: ($11,700,000 applicable exclusion amount × 2 donors) + ($15,000 annual exclusion × 2 donors).

Kent, a widower, has made lifetime gifts to his two children in an effort to reduce the size of his gross estate. In 2014, Kent made a $300,000 taxable gift, and in 2016, he made another taxable gift of $100,000. He used his gift tax applicable credit amount to offset any gift tax liability for all gifts. What amount of the gift tax applicable credit, if any, remains available to Kent for gifts he may desire to make in 2021? A) $4,625,800 B) $4,025,800 C) $4,125,800 D) $4,504,000

C) $4,504,000 To calculate how much of the applicable credit amount remains in 2021, the amount used in prior years must be computed. Because the gifts for 2014 and 2016 are stated to be taxable gifts, nothing further needs to be deducted before computing the tax. Therefore, the tax on $400,000 ($300,000 + $100,000) is $121,800 ($70,800 + 34% of $150,000). Because the maximum gift tax applicable credit amount available in 2021 is $4,625,800 and prior gifts have used $121,800 of this amount, $4,504,000 remains.

The following is a complete list of the lifetime gifts made by Julie: $50,000 to her mother in 1972 before Julie was married $600,000 to her brother in 2001. Her husband, Hank, agreed to split this gift; Hank did not make any taxable gifts in this year. $350,000 to an irrevocable trust in 2012. Julie and Hank were income beneficiaries at a corporate trustee's discretion, and their children were equal remainder beneficiaries at the death of the last parent. Hank did not split this gift. $5,000,000 outright to her cousin late in December 2018 after Hank had died the year before. Julie paid $264,000 in gift tax when she filed her gift tax return in 2019. Julie died in early February 2021. What is the correct amount of adjusted taxable gifts that Julie's personal representative should add to her taxable estate when computing her federal estate tax?

C) $5,275,000. Because the only two gifts that created adjusted taxable gifts for estate tax purposes are the 2001 and 2016 gifts, $5,275,000 is the correct answer. Because of gift splitting, Julie is responsible for only $300,000 of the 2001 gift and is entitled to one 2001 annual exclusion amount of $10,000. Therefore, Julie's taxable gift for this transfer was $290,000. Julie is responsible for $5,000,000 of the 2018 gift since gifts made after a spouse's death are not entitled to gift splitting, and is entitled to one 2018 annual exclusion amount of $15,000. Therefore, Julie's taxable gift for this transfer was $4,985,000. Adjusted taxable gifts only include taxable gifts after 1976, and therefore, the 1972 gift is not included. The 2012 gift is not included because the trust assets must be included in Julie's gross estate at full date of death value because of her retained income interest. Gifted assets included in the gross estate do not require that the taxable portion of the gift be included as an adjusted taxable gift. The gift taxes paid out of pocket on the 2018 gift will have to be included in Julie's gross estate under the gross-up rule and will entitle her estate to a gift taxes payable deduction from the tentative tax, but does not figure in any way the computation of her adjusted taxable gifts.

The following is a list of all of the gratuitous transfers that Jean made during her lifetime: 2000: Placed the common stock previously listed in an irrevocable trust in which she retained the right to a 5% distribution of the trust account revalued annually for 25 years, with the remainder to her children at her death. The date of gift fair market value of the stock was $190,000, and the value of Jean's retained interest on the date the gift became complete was $90,000. 2001: Gave a cash gift to her niece of $30,000, which Loren agreed to split 2005: Paid the University of Iowa $11,000 for her youngest child's tuition 2021: Gave her brother $70,000 in cash, which Loren agreed to split Jean's will, executed in 2000, gave the residence and personal property to Loren and the Hummel figurines to a qualified charity. Jean's three children were designated as equal beneficiaries of her IRAs. Each beneficiary of Jean's estate was to pay any transfer tax due on the portions of the estate received. Her will also stipulated that any real property was to be received subject to the mortgage. Further, her will stipulated that funeral and administrative expenses were to be paid equally by her spouse and three children. These funeral and administrative expenses amounted to $60,000 for Jean's estate. Jean's estate paid state death taxes in the amount of $4,184 and will pay off the car loan. Which of the following amounts most closely approximates the marital deduction available to Jean's estate?

C) $620,000. The answer is $620,000. The marital deduction is granted only for the net amount of assets transferred to the decedent's surviving spouse in a qualifying manner. The facts state that the only assets that are given to Loren are the residence ($750,000) and personal property ($60,000). However, this total must be reduced by the $15,000 in funeral and administrative expenses that Loren must pay, as well as the $175,000 mortgage on the residence that he must pay as required by the will. Therefore, the net amount of assets that will pass to Loren is $620,000.

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

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

Opal dies leaving an adjusted gross estate of $20 million, which includes several thousand shares of closely held stock. For Opal's estate to qualify for a Section 303 stock redemption, the value of the closely held stock must exceed at least what amount?

C) $7.0 million. To qualify for a stock redemption under Section 303, the value of the closely held stock must exceed 35% of the decedent's adjusted gross estate.

Jack and Diane, a married couple, recently purchased a vacation home in their state of residence, which is a community property state. Assuming Jack dies, what percentage of the total ownership interest in the vacation home can Jack transfer under his will? A)100% B)25% C)50% D)0%

C) 50%. Only the portion owned by the decedent can be transferred by will. In a community property state, spouses own an equal undivided interest in all community property accumulated during their marriage.

Which of the following statements regarding types of gifts is CORRECT? A)Indirect gifts, such as the payment of another's expenses, are not subject to the gift tax. B)A gift of a future interest is not subject to gift tax. C)A gift of a future interest is not eligible for the gift tax annual exclusion. D)The gift tax applies to incomplete gifts.

C) A gift of a future interest is not eligible for the gift tax annual exclusion. Indirect gifts, such as the payment of another's expenses, may be subject to the gift tax. The gift tax does not apply to incomplete gifts. The gift tax applies to gifts of future interests as well as to gifts of present interests.

Linda Plantier wants to establish a trust for her three grandchildren that will accomplish all of the following objectives: Exclude all assets transferred to the trust from her gross estate Protect the trust assets before distribution from the creditors of any beneficiary Keep the trust assets from disqualifying a beneficiary for public assistance benefits such as Medicaid Which of the following trust provisions would NOT help to achieve one or more of these objectives? A) A provision making the trust irrevocable B) A provision making all distributions from the trust—of both principal and income—subject to the absolute discretion of a corporate trustee C) A provision granting each beneficiary a Crummey power D) A provision that once the trust is established, Linda cannot change any of the provisions

C) A provision granting each beneficiary a Crummey power. A Crummey power, which makes any gift to the trust a gift of a present interest and thus eligible for the annual gift tax exclusion, would not accomplish any of the stated objectives. A creditor would be able to exercise the Crummey power to take possession of the property affected by the Crummey power. The remaining options would help at least Linda achieve at least one of her objectives.

Which of the following is NOT a benefit of using a will substitute for liquidity planning? A)A will substitute can avoid ancillary probate on assets owned outside of a decedent's state of domicile. B)A will substitute allows for flexibility if it is revocable. C)A revocable will substitute will remove the asset from the gross estate. D) A will substitute will reduce estate administration expenses.

C) A revocable will substitute will remove the asset from the gross estate. A revocable will substitute does not remove the asset from the gross estate; however, it does remove the asset from the probate estate.

Abby is a businessowner, and she wants to provide her key employee with an additional benefit in light of her stellar work performance. Abby is interested in securing a life insurance policy for her key employee. Which type of policy should Abby give to her employee? A) A second-to-die life insurance policy B) A first-to-die life insurance policy C) A split-dollar life insurance policy D) A key-person life insurance policy

C) A split-dollar life insurance policy. A split-dollar life insurance policy can be used to retain the services of key employees by providing them with more insurance protection than the employee could otherwise afford.

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

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

Which one of the following techniques should not be used if a person desires to leave property to his or her unmarried cohabitant, but wants to maintain control over the property until death? A)A will B)A revocable living trust C)An irrevocable trust D)Property titled as T.O.D.

C) An irrevocable trust. To fund an irrevocable trust, the grantor must give up control of the property, which does not satisfy the grantor's goals in this situation. Since a will is revocable until death, this is a good technique to use in this situation. Since a revocable living trusts and T.O.D. designations are revocable until death, this is a good technique to use in this situation.

Which if the following is a nonfinancial goal? A)Preserving business value B)Maximizing flexibility C)Asset protection D)Minimizing nontax transfer costs

C) Asset protection. The remaining choices are financial goals.

Which of the following statements regarding a QTIP election is CORRECT? 1. If the decedent's executor makes a QTIP election, the percentage of the trust property that is the subject of the election is included in the surviving spouse's gross estate when the surviving spouse dies. 2. In determining whether to make a QTIP election, the executor should determine the best overall estate tax result for both the decedent's and the surviving spouse's gross estate.

C) Both I and II Both statements are correct.

Which of the following statements regarding the gift tax lifetime exemption amount (applicable exclusion amount) and applicable credit amount are CORRECT? 1. The gift tax lifetime exemption amount in 2021 is $11,700,000. 2. The gift tax applicable credit amount in 2021 is $4,625,800.

C) Both I and II.

Which of the following describe(s) a reverse QTIP election? 1. A special election made by an executor to treat qualified terminable interest property as if the QTIP election had not been made for generation-skipping transfer tax purposes. 2. An election that allows better utilization of a decedent's GSTT exemption.

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

Rick Stein dies as a resident of New Jersey. He owns a beach home in South Carolina. Which of the following statements regarding the probate of Rick's estate is CORRECT? 1. Rick's personal assets will be probated according to the laws of New Jersey. 2. Rick's beach home will be probated according to the laws of South Carolina.

C) Both I and II. Both statements are correct. A decedent's real estate is probated according to the laws of the state in which it is located. A decedent's personal assets are probated according to the laws of the decedent's state of residence or domicile.

Which of the following is an advantage of spouses holding property jointly with right of survivorship? 1. Total administration expenses and attorney fees may be reduced because the property avoids probate at the death of the first spouse. 2. The surviving spouse now has a basis equal to the fair market value of the property at death of first spouse.

C) Both I and II. 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.

Heinrich and Sharon are married. Sharon is a U.S. citizen, but Heinrich is a citizen of Germany. Sharon's will leaves her entire estate, valued at $15 million, to Heinrich. Sharon dies unexpectedly in an automobile accident this year. In which of the following situations can Sharon's estate claim the estate tax marital deduction for the property passing to Heinrich under Sharon's will, assuming Heinrich is a U.S. resident on the day Sharon dies? 1. Heinrich remains a U.S resident and becomes a U.S citizen before the federal estate tax return is filed. 2. The property passes to Heinrich under a qualified domestic trust (QDOT).

C) Both I and II. The property will qualify for the marital deduction in both of these situations.

Eduardo has been a client of yours for many years. You met him shortly after he was married and continued to do so after his divorce. Recently he shared with you that he is getting remarried. You share that the two of you should review his documents to ensure they align with his goals now. This is an example of avoiding which of the following mistakes, pitfalls, or weaknesses? A) Improper titling of assets B)Lack of estate liquidity C)Failure to recommend necessary changes to a will D)Improperly arranged life insurance

C) Failure to recommend necessary changes to a will. It is the only answer choice which addresses documents. The remaining answer choices would also be good to avoid, but they do not involve the will, powers of attorney, or other specific documents.

Which of the following is an effective way for a client to remove the value of an asset from his estate? A) Placing the asset in his revocable trust B) Placing the asset in a grantor trust C) Gifting the asset to another individual D) Placing the asset in his irrevocable trust in which he retains an income interest

C) Gifting the asset to another individual. The asset is no longer in the possession, and therefore no longer in the gross estate, of the donor.

An older couple, who both have children from prior marriages, is contemplating marriage. They disagree about how to handle their finances after their marriage, and their children are concerned about receiving their inheritances. Which of the following strategies would you recommend to address these issues? A) Have the couple title all of their assets as JTWROS after they get married B) Have the families enter into a family settlement agreement C) Have the couple execute a marital (prenuptial) property agreement D) Have each spouse draft a will disinheriting the other

C) Have the couple execute a marital (prenuptial) property agreement. Drafting a marital property (prenuptial) agreement is the best solution here because it will allow the couple to agree on how their property will be divided while they are living and also agree on the relinquishment of marital property rights when one of them dies. Titling their property as JTWROS will not assure that their children receive their inheritances because the surviving spouse will gain full ownership of all assets. Drafting wills which disinherit each other is ineffective because the surviving spouse might file a will contest or, in many states, make an election against the will. Finally, a family property agreement may be ineffective because it is not entered into until after death, and the heirs may not be able to reach an agreement.

Herbert Lawson, who lives in a common law state, has a will that gives his entire probate estate in equal shares to his three children. All of Herbert's $16.8 million gross estate is owned in his sole name except for his residence, which is owned as joint tenants with right of survivorship with his spouse. Herbert's interest in this residence is valued at $500,000. Despite having been married for 30 years, Herbert's spouse has no substantial estate of her own. Herbert has made $400,000 in adjusted taxable gifts since 1976. Herbert's spouse is named personal representative (PR) of his estate. Assuming Herbert is survived by his spouse and children, which one of the following is a disadvantage of the probate process for Herbert? A) The probate process will not allow Herbert's children to disclaim any part of his estate so that Herbert's spouse can receive more of his estate. B) Herbert's estate will have to pay estate tax because the marital deduction will be too small to eliminate all tax. C) Herbert's spouse will have the right to elect against the will even though she is named as the PR of the estate. D) Herbert's spouse will not be allowed to elect against the will unless she disclaims her right to receive Herbert's interest in the house.

C) Herbert's spouse will have the right to elect against the will even though she is named as the PR of the estate. With no substantial estate of her own, Herbert's spouse will be tempted to elect against the will to get part of the probate estate. While the amount she can get by this election is controlled by state law, and this amount may be reduced by the value of his interest in the residence, most states will allow a surviving spouse (especially in a marriage of this duration) to receive a substantial portion of the probate estate. The probate process does not restrict the right to disclaim. A spouse can elect against the will and retain what is given to him or her by will substitute. The amount given by will substitute is simply deducted from the amount given by making the election. And the spouse receives the difference from the probate estate.

Which of the following statements regarding revocable living trusts in dealing with potential legal incapacity issues is(are) CORRECT? 1. Revocable living trusts can be used to plan for the grantor's possible legal incapacity. 2. A revocable living trust designed to address incapacity issues typically is not funded until the grantor becomes incapacitated. 3. Assets in a revocable living trust do not avoid probate if the trust is funded during the grantor's lifetime.

C) I and II. Statements I and II are correct. Statement III is incorrect because assets in a revocable living trust will avoid probate if the trust is funded during the grantor's lifetime.

Which of the following statements are correct about gratuitous transfers between spouses where one or both of the spouses is a non-U.S. citizen? 1. If a spouse who is a resident alien makes a gratuitous transfer of property to his or her spouse who is a U.S. citizen, the rules for deciding whether the transfer is entitled to a marital deduction are the same as if both spouses were U.S. citizens. 2. If a spouse who is a nonresident alien makes a gratuitous transfer of property located in the United States to his or her spouse who is a U.S. citizen, the rules for deciding whether the transfer is entitled to a marital deduction are the same as if both spouses were U.S. citizens. 3. If a spouse who is a U.S. citizen makes a gratuitous transfer of property to his or her spouse who is a nonresident alien, the rules for deciding whether the transfer is entitled to a marital deduction are the same as if both spouses were U.S. citizens. 4. If a spouse who is a U.S. citizen makes a gratuitous transfer of property to his or her spouse who is a resident alien, the rules for deciding whether the transfer is entitled to a marital deduction are the same as if both spouses were U.S. citizens.

C) I and II. When discussing the marital deduction, the citizenship and residency status of the decedent/donor is irrelevant. Even when the donor/decedent is a nonresident alien, the unlimited gift and estate tax marital deduction is available for qualifying transfers to a citizen spouse. When the donee/transferee spouse is an alien, it does not matter whether the donee/transferee is a resident or not, since special rules regarding the marital deduction apply in either case. There is no gift tax marital deduction for gifts to an alien spouse, but there is a super annual exclusion if the transfer is of a present interest and is not of a terminable interest. If the transfer is made at death to an alien spouse, the marital deduction is available only if a qualified domestic trust (QDOT) is used.

Harold established and funded a generation-skipping trust for the benefit of his lineal descendants by a provision in his will. The trust had no termination date as the trust was settled in a state with no rule against perpetuities. He funded the trust with assets in the amount of the estate tax exclusion amount in the year of his death, and assigned all of his generation-skipping transfer tax (GSTT) exemption to this trust as he had not used any part of this exemption previously. Distributions to beneficiaries are at the discretion of the trustee. Harold was survived by his spouse, five children, and 12 grandchildren. All other estate assets were given to Harold's spouse. Which of the following statements regarding this trust are CORRECT? 1. This is an example of an indirect generation-skipping transfer. 2. Harold's spouse can become the transferor of this transfer if a reverse QTIP election is made. 3. No GSTT will ever be due on this transfer if it is reported on Harold's estate tax return, and the deemed allocation rules are allowed to allocate his GSTT exemption. 4. The trust is considered to be a skip party for GSTT purposes.

C) I and III. Because Harold's children are beneficiaries of the trust, this trust is an example of an indirect (option I) skip. The transferred property may go to both skip parties (Harold's grandchildren, etc.) and nonskip parties (Harold's children). Option III is correct because the maximum GSTT exemption is the same amount as the estate tax exclusion amount for the year of transfer; when this exemption is assigned to a taxable amount of transferred property of the same amount on the first gift or estate tax return on which the transfer is first reported, no amount of future distributions will be taxable regardless of the growth in the corpus. The deemed allocation rules would assign the full amount of Harold's GSTT exemption in these circumstances. Harold's spouse cannot become the transferor of this property. A reverse QTIP election (option II) can be made only when the regular QTIP election has been made. This trust is not a QTIP trust as Harold's spouse is not a beneficiary of the trust. This trust is not considered a skip party (option IV) because future distributions can be made to nonskip parties.

Sam Cahill died this year. His revocable living trust provided that after his death, the trustee was given discretion to distribute trust income among his spouse, children, and grandchildren for their health, education, maintenance, and support. The corpus and any undistributed income are to be distributed in equal shares to his grandchildren when Sam's youngest child reaches age 45. Sam was survived by his spouse, three children, and eight grandchildren. Which of the following are CORRECT statements regarding the application of the generation-skipping transfer tax (GSTT) to this trust? 1. Sam's trust is an example of an indirect skip. 2. If the trustee distributes any income to Sam's spouse, for GSTT purposes a taxable distribution will have occurred. 3. No generation-skipping transfer from this trust can take place until the youngest of Sam's children reaches age 45. 4. When Sam's grandchildren receive the corpus and undistributed income, a taxable termination will occur.

C) I and IV. This trust is an indirect skip because there are nonskip parties (Sam's spouse and children) who have a current interest in the trust assets. Sam's spouse is considered to be in the same generation as Sam, and therefore, a distribution to her will not even be considered to be a generation-skipping transfer, let alone a taxable distribution. A taxable distribution will occur if the trustee distributes income to any of the grandchildren. A taxable termination will occur when the grandchildren receive the corpus because there will no longer be any nonskip party who has an interest in the assets.

Which of the following statements regarding the portability of the gift tax lifetime exemption amount is CORRECT? 1. Portability means that a surviving spouse can use any portion of a predeceased spouse's lifetime exemption amount that remained unused when the predeceased spouse died. 2. A surviving spouse may apply the predeceased spouse's unused lifetime exemption amount to gift taxes due on lifetime gifts but not to the estate tax due on transfers at death.

C) I only. Statement I is correct. Statement II is incorrect because a surviving spouse may apply the predeceased spouse's unused lifetime exemption amount both to gift taxes due on lifetime gifts and to any estate tax due on transfers at death.

Which of the following statements regarding a QTIP election is CORRECT? 1. The QTIP election by a decedent's executor is voluntary. 2. If the executor makes a QTIP election, the estate tax is increased in the decedent's estate.

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

Rupert's gross estate is valued at $13.6 million using fair market valuations. His largest asset is a chicken breeding business, with real estate valued at $10.81 million and equipment valued at $1.4 million. Which of the following facts would Rupert's executor need to know to determine whether the real estate used in the chicken breeding business will qualify for special use valuation under Code Section 2032(a)? 1. To whom the real estate will go according to Rupert's will 2. How long Rupert or a member of his family has owned the real estate and how it has been used in the business 3. The amount and types of gifts Rupert made within three years of his death 4. The amount of all secured debts on the business property

C) I, II, III, and IV. All cited factors have the potential to impact the property's qualification for special use valuation. Option I is relevant to the requirement that the real estate must pass to a qualified heir. Option II is necessary to determine material participation and how long the real estate has been operated in a qualified use. Options III and IV are necessary to determine if the percentage tests can be met.

o qualify for the marital deduction, property must pass to the surviving spouse. How can property pass and still qualify for the deduction? 1. By will 2. By survivorship 3. By intestacy 4. By power of appointment

C) I, II, III, and IV. All of these methods allow for property to pass and still qualify for the marital deduction.

Which of the following are CORRECT statements about the nontax characteristics of a gift to a custodial account under the Uniform Transfers to Minors Act (UTMA)? 1. UTMA places no restrictions on the type of property that may be gifted. 2. UTMA allows both lifetime and testamentary gifts. 3. Both income and principal in an UTMA account may be used for the benefit of the minor during his period of minority. 4. A UTMA account is established by irrevocably registering the gifted property in the custodian's name for the benefit of the named minor.

C) I, II, III, and IV. All statements are true. An important restriction for Uniform Gift to Minors Account (UGMA) accounts, on the other hand, is that they are not allowed to invest in real estate.

Which of the following results from Arthur creating a charitable remainder annuity trust (CRAT) or charitable remainder unitrust (CRUT) and donating his ownership of Bell's Animal Care Center to such a trust, as opposed to a direct sale of the business? 1. He avoids capital gains tax upon the transfer of the business to the trust. 2. He gets an immediate charitable income tax deduction. 3. He may select a joint life annuity. 4. He can receive annuity income.

C) I, II, III, and IV. He avoids capital gains tax upon the transfer of the business to the trust. He gets an immediate charitable income tax deduction for transferring assets to the CRAT or CRUT (subject to the rules on the type of charity and AGI limits). He is able to get a retirement annuity from the CRAT or CRUT. He can choose a joint life expectancy for either the CRAT or CRUT.

Which of the following objectives can be accomplished through the use of a buy-sell agreement? 1. Fix the value of the business for estate tax purposes 2. Provide liquidity for the decedent businessowner's estate 3. Guarantee there will be a market or buyer for the business at the decedent's death 4. Provide for business continuation and goodwill among existing customers

C) I, II, III, and IV. The use of a buy-sell agreement can accomplish all of these objectives.

Debra is the majority stockholder in the Jernigan Family Corporation. Her interest in this corporation is the sole asset in her estate other than her personal-use assets. She understands that if she were to die today, an unacceptably large amount of her assets, including the closely held business interest, would have to be sold to pay her estate administrative expenses and death taxes. She would like to do something with her interest in the Jernigan Family Corporation to prevent the need for such a sale because she would like her children to receive her shares. Which of the following actions have the potential to increase the liquidity of Debra's estate? 1. Have the corporation purchase a key person life insurance policy on Debra 2. Gift shares in the Jernigan Family Corporation to her children 3. Amend her will to place her shares into a testamentary trust for her children 4. Establish an irrevocable life insurance trust (ILIT), and fund it with a policy on her life

C) I, II, and IV. Statement III is false because leaving her assets to heirs in a testamentary trust will not increase liquidity or decrease cash needs. The remaining answer choices will all help her achieve her goals.

When a married couple divorces, one estate planning issue that may arise is allowing one spouse access to retirement benefits earned by the other spouse. This goal can be achieved by use of a qualified domestic relations order (QDRO). Which of the following statements correctly identifies an advantage or a disadvantage of a QDRO? 1. An advantage of using a QDRO is that it can be used to satisfy the plan participant's obligation to pay child support, alimony, or marital property rights. 2. An advantage of using a QDRO is that it can force the plan administrator to accelerate the distribution of benefits to the alternate payee. 3. A disadvantage of using a QDRO is that distributions to an alternate payee who is the participant's spouse are taxable to him or her to the same extent they would have been to the participant. 4. An advantage of using a QDRO is that if the participant's spouse is the alternate payee, his or her interest may be distributed to an IRA owned by the spouse.

C) I, III, and IV only. A QDRO cannot be used to accelerate distribution of plan benefits (option II). All other statements are true.

Which of the following statements regarding a payable-on-death (POD) account is(are) CORRECT? 1. A payable on death account is a bank or savings account controlled by the depositor so long as living, but with a provision that the account is payable to another if still open when the depositor dies. 2. Payable-on-death accounts are included in the depositor's probate estate. 3. Payable-on-death accounts are considered a will substitute. 4. Payable-on-death accounts could create guardian problems if paid to a minor beneficiary.

C) I, III, and IV. Payable-on-death (POD) accounts are not included in the depositor's probate estate because they pass to the beneficiary by contract. They are considered a will substitute and can create guardian problems if paid to a minor beneficiary.

Which of the following statements regarding guardianships and conservatorships is(are) CORRECT? 1. A guardianship is the same as a conservatorship. 2. Guardianships and conservatorships are both fiduciary relationships. 3. The same person may be both the guardian and conservator of a ward.

C) II and III. Statement I is incorrect because a conservatorship enables a person to manage the ward's property, while a guardianship enables a person to manage the ward's health and personal care.

Which of the following statements regarding the income tax consequences of lifetime gifts to individuals is CORRECT? 1. The amount of a gift is included in the donee's gross income. 2. The donee may realize a gain or loss if she subsequently disposes of the gifted property. 3. The double basis rule applies if the fair market value of the gifted property is less than the donor's adjusted basis.

C) II and III. Statement I is incorrect because a gift is not included in the donee's gross income. Statements II and III are correct.

In which of the following situations must the donor file a federal gift tax return? 1. The donor makes a gift of a present interest valued at $10,000 to one donee. 2. The donor makes a gift of a future interest valued at $1,000 to one donee. 3. The donor makes a gift of $10,000 to one donee and the donor's spouse agrees to gift splitting.

C) II and III. Statement I is incorrect; a gift tax return is not required because the gift does not exceed the annual exclusion and is not a gift of a future interest. Statements II and III are correct. A gift tax return is required when a gift of a future interest in any amount has been made or when gift splitting has been elected by spouses.

Duran had a gross estate of $11.5 million when he died. He and his wife, Florence, died from injuries sustained in an auto accident. She died two weeks before he did. Part of his gross estate was $6.5 million in stock in the closely held Ortiz Family Corporation, which purchases cargo containers for lease to large shippers. Due to a great increase in demand for the containers, the stock recently has experienced rapid appreciation. His estate had unsecured debts of $300,000 and administrative expenses of $50,000. Duran made $1 million in adjusted taxable gifts. His will leaves his property to his children in equal shares. Which of the following postmortem techniques are available to provide liquidity to Duran's estate? 1. Special use valuation 2. Section 303 stock redemption 3. Alternate valuation date 4. Installment payment of federal estate taxes

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

Which of the following statements about the nontax characteristics of a charitable remainder unitrust (CRUT) are CORRECT? 1. A fixed percentage (but not less than 5%) of the trust assets, revalued annually, is paid to the charity. 2. Assets can be added to a CRUT in subsequent years. 3. If CRUT assets do not earn enough income to pay the specified income stream, the difference must be paid from the trust corpus. 4. At the end of the trust term, the remaining trust assets are paid to the charity.

C) II and IV. Option I is incorrect because the charity receives the remainder interest rather than the income interest in a CRUT. Option III is incorrect because while the trust agreement may provide for invasion of corpus in these circumstances, it is not mandatory that it do so.

Which of the following are CORRECT statements about the responsibility for payment of the federal generation-skipping transfer tax? 1. When a taxable termination occurs, the beneficiaries receiving distributions from the trust are responsible for paying any generation-skipping transfer tax that may be due. 2. The estate of a decedent is responsible for paying any generation-skipping transfer tax due on a direct skip transfer made by the decedent's will. 3. When a taxable distribution occurs, the trustee of the trust making the distribution is responsible for paying any generation-skipping transfer tax that may be due. 4. The donor is responsible for paying any generation-skipping transfer tax due on a direct skip made during life.

C) II and IV. Option I is incorrect because upon a taxable termination, the trustee is responsible for paying any GST tax due; also, there may not be any distributions with a taxable termination. Option III is incorrect because upon a taxable distribution, the beneficiary receiving the distribution is responsible for paying any GST tax due.

Estates that contain closely held businesses may elect certain postmortem tax treatments. Which of the following statements about these treatments is CORRECT? 1. The Section 6166 installment payment of estate tax requires that the decedent's closely held business interests constitute at least 50% of the decedent's adjusted gross estate. 2. If property that has received special use valuation tax treatment loses its status as qualified property within 10 years of the decedent's death, a recapture tax is applied. 3. A Section 303 stock redemption allows a partnership to make a distribution to redeem a portion of the stock of a decedent while avoiding dividend treatment on the amount paid for the stock. 4. The estate of a deceased owner of a closely held business that leases all of its property cannot qualify for special use valuation.

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

Which of the following statements regarding general powers of appointment is CORRECT? 1. If a person owns a general power of appointment when she dies, the property that is subject to that power is not included in the holder's gross estate for federal estate tax purposes. 2. The exercise, release, or lapse of a general power of appointment during the holder's lifetime is a gift to the person who receives the property.

C) II only. Statement I is incorrect, as a general power of appointment held by the decedent-holder at death is included in the holder's gross estate for federal estate tax purposes.

Hilger Jantzen established and funded a charitable lead trust with a 10-year term; he designated his children as the remainder beneficiaries. What are the tax implications of this inter vivos intrafamily planning technique? 1. Hilger's charitable gift tax deduction is determined by the present value of the charity's right to receive trust assets at the end of the 10-year term. 2. Hilger is liable for gift tax based on the value of the gift to the children as discounted to the date of the gift. 3. The entire value of the assets gifted to the trust will be removed from Hilger's gross estate only if he outlives the 10-year term. 4. Each year, as the trust pays income to the charity, Hilger receives a charitable income tax deduction for that amount.

C) II only. The answer is II only as it is the only correct statement. Option I describes how to value the charitable gift tax deduction for a remainder interest—in a charitable lead trust, the charity receives the income with the remainder to a noncharitable beneficiary. Therefore, the charitable gift tax deduction is the present value of the income interest. Option III is wrong because Hilger has not retained any interest in or control over the trust that would cause the transfer sections of the code to apply. Finally, option IV is incorrect because it indicates successive annual income tax deductions. The amount of the charitable income tax deduction is based on the present value of the income interest given to the charity in the year the gift is made. However, if all of the deduction cannot be taken in the year of the gift because of Hilger's AGI limitation, the deduction can be carried forward for five more years.

Which of the following trusts avoid probate? 1. Testamentary 2. Funded revocable 3. Funded irrevocable 4. Funded inter vivos

C) II, III, and IV. All assets in trusts that are in existence at the time of the grantor's death avoid probate because the legal titleholder of the trust assets is the trustee, not the deceased grantor. A testamentary trust is created by the grantor's will, so the assets pass through probate before going into the trust.

Max McFly owns one-third of the shares of Future Past, Inc., a closely held corporation. Max, together with all remaining shareholders of the corporation, has executed a stock redemption agreement obligating the corporation to purchase all the shares of a deceased shareholder, or of a shareholder who withdraws—voluntarily or involuntarily—from the corporation for any reason. The agreement is funded by a cash value life insurance policy on each shareholder with all premiums paid by the corporation, which is the named beneficiary of each policy. The agreement states that the purchase price—under all circumstances—is to be the fair market value of the shares as established by competent appraisal. Which of the following statements is CORRECT concerning the tax implications of this business transfer technique? 1. A deceased shareholder's estate would not receive a stepped-up basis on the decedent's shares because a value has already been agreed upon in the redemption agreement. 2. The life insurance proceeds would be included in a deceased shareholder's gross estate. 3. Premium payments made by the corporation are not taxable income to any shareholder. 4. Policy proceeds would be received income tax free by the corporation.

C) III and IV. Option I is incorrect because a step-up in basis to the value used for estate tax purposes is available for every asset in a decedent's gross estate (that is not IRD) and is not affected by any outside agreement. Option II is incorrect because the assets includible in a decedent's gross estate are fixed as of the date of death, and the insurance proceeds are received after the date of death as the result of a transaction between the deceased shareholder's estate and the corporation. Also, the deceased shareholder has no incidents of ownership in the policy.

Which of the following meet the basic requirements for a charitable gift to be deductible for income, gift or estate tax purposes? 1. When Grandpa died, his estate tax was enormous. To lower his estate tax, his heirs decided to contribute $1 million in his name to the Red Cross. 2. A qualified appraisal must generally accompany a tax return reflecting donations of property valued in excess of $3,500. 3. Contributions are only deductible if they are made to a charity as defined by the Internal Revenue Code. 4. Contributions of a split interest must be made in the form of a specified trust or remainder interest.

C) III and IV. Statement I is incorrect. Contributions from an estate directed by the heirs are not deductible for estate tax purposes. Only charitable contributions directed by the decedent are deductible for estate tax purposes. Statement II is incorrect. Qualified appraisals are required when a donated property is in excess of $5,000. Statement III is correct. Only contributions to an organization defined by the Internal Revenue Code are deductible. Statement IV is correct. There are rules about split interest gifts which must be followed.

Which of the following statements regarding a family limited partnership (FLP) is CORRECT? 1. The general partnership interests are transferred to the junior family members and will qualify for minority interest discounts. 2. The transfer of the limited partnership interests to the junior family members is considered a future interest gift and is therefore not eligible for the gift tax annual exclusion. 3. The transfer of the limited partnership interests to the junior family members may qualify for both a minority interest discount and a lack of marketability discount for federal gift tax purposes.

C) III only. Limited partnership interests (not general partnership interests) are transferred to the junior family members and may qualify for valuation discounts. The transfer of such interests is a present interest and is eligible for the gift tax annual exclusion. Another advantage of the FLP technique is that the senior family member retains the ability to control the business and receive income via retention of the general partnership interest.

Which one of the following is an incorrect statement concerning tax implications of lifetime gifts? A) In an outright gift, gifting assets reduces estate tax liability by eliminating all tax on future appreciation that otherwise would be part of the donor's gross estate at death. B) The basis for income tax purposes is not stepped up on assets received as gifts. C) If a gift is gift taxable, it is ignored in calculating the donor's estate tax liability. D) Gifting loss property eliminates the possibility of using capital losses to offset capital gains.

C) If a gift is gift taxable, it is ignored in calculating the donor's estate tax liability. The answer is if a gift is gift taxable, it is ignored in calculating the donor's estate tax liability. This is because the question asks for the identification of the incorrect statement about the tax implications of lifetime gifts. It erroneously states that taxable gifts are ignored in calculating the donor's estate tax liability. Remember, the transfer tax system is cumulative. Therefore, the taxable portions of gifts are added to the taxable estate to establish the estate's tax base against which the tax rate is applied, unless the gift is included in the gross estate.

Which one of the following properly describes partial intestacy? A) John Cooper dies without a will, but all of his property will be distributed by will substitutes. B) John Cooper dies without a will to dispose of his probate assets. C) John Cooper dies after executing a will, but the will does not effectively dispose of all of his probate assets. D) John Cooper dies with a will that leaves all of his property to Jane and none to his two children.

C) John Cooper dies after executing a will, but the will does not effectively dispose of all of his probate assets. 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.

Maria, the executor, is also the sole residuary beneficiary of Johnny's estate. Under which of the following circumstances should Maria waive the executor's fee? A)Maria expects a will contest to be filed. B)There is more than one beneficiary. C)Maria's income tax liability on the fee is larger than the estate tax savings from deducting the fee on the estate tax return. D) Johnny's heir is still a minor.

C) Maria's income tax liability on the fee is larger than the estate tax savings from deducting the fee on the estate tax return. The fee paid to an executor is taxable income, while a bequest is not. It is desirable for Maria to waive the fees when her income tax on the fee is greater than the estate tax savings from deducting the fee on the estate tax return.

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

C) Maximizing flexibility. The remaining choices are tax-related financial goals.

Which of the following statements regarding bypass planning is CORRECT? 1. One purpose of bypass planning is to take full advantage of the applicable credit amount when the first spouse dies. 2. Assets in a bypass (B) trust are not included in the surviving spouse's gross estate.

C) Neither I nor II. B trusts are subject to estate taxes when the first spouse dies. Therefore, B trusts will not be included in the estate of the surviving spouse. This makes B trusts especially effective with appreciating assets.

Assuming that a decedent left no valid last will and testament, which of the following assets will pass by the laws of intestate succession? A)Property in which decedent had a life estate in a vacation home with the remainder to decedent's sister. B)Property held by the decedent and his spouse as tenants by the entirety C)Property held by the decedent and his spouse as traditional community property D)Property held by decedent and his brother as joint tenants with right of survivorship.

C) Property held by the decedent and his spouse as traditional community property. The remaining options are will substitutes and do not expose property to probate.

Which of the following is a type of trust in which the grantor has not completed a transfer for gift tax purposes, and has retained the power to rescind the trust? A) Complex B) Simple C) Revocable D) Irrevocable

C) Revocable. A revocable trust is a trust in which the grantor retains access to the income and property of the trust.

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

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

Which of the following is a premortem technique to increase estate liquidity? A) Taking advantage of eligible deductions on the estate tax form 706 B)Use of the homestead exemption C) Sell illiquid assets D) Making a DSUE election

C) Sell illiquid assets. The remaining options are postmortem techniques.

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

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

Which one of the following is NOT a correct pairing of a trust provision with its characteristics? A) Sprinkle (spray) provision: a trust clause that allows the trustee to distribute unequal amounts to the beneficiaries or to make no distribution at all. B) Discretionary provision: a trust clause that allows the trustee to use his or her sole judgment in determining how much of the trust income and principal will be paid to or on behalf of a beneficiary. C) Spendthrift provision: a clause in a trust that prevents a beneficiary from withdrawing more than the greater of $5,000 or 5% of the corpus. D) Crummey provision: a trust clause that provides the beneficiary with a limited duration right to demand payment of contributions to a trust each year up to the annual gift tax exclusion from the trustee.

C) Spendthrift provision: a clause in a trust that prevents a beneficiary from withdrawing more than the greater of $5,000 or 5% of the corpus. A spendthrift provision is a trust clause limiting both a beneficiary's right to dispose of, and a creditor's right to have legal access to, the beneficiary's interest in the trust before actual distribution. The remaining options are correct.

Which one of the following statements regarding the purpose and basic features of the generation-skipping transfer tax (GSTT) is CORRECT? A)The purpose of the GSTT is to take the place of the gift tax or estate tax with a tax at the highest estate tax rate at the time of transfer on the value of any wealth that is not transferred to the generation immediately below that of the transferor. B)A child of the transferor is known as a skip party in a direct skip transaction, since the child is in the generation that was skipped over in the transfer of wealth. C)The GSTT exemption allows each person to make generation-skipping transfers in the applicable amount, during life or at death, without having to pay a GSTT. D)If a transferor funds a trust that has more than one beneficiary, and at least one of the beneficiaries is a skip party, the transferor will be deemed to have made an indirect skip.

C) The GSTT exemption allows each person to make generation-skipping transfers in the applicable amount, during life or at death, without having to pay a GSTT. The GSTT exemption allows a transferor to escape paying GSTT on taxable transfers up to the exemption amount. The GSTT exemption equals the estate tax applicable exclusion amount in the year of the transfer. The GSTT is in addition to (not a replacement of) the gift or estate tax that is also due on the same transfer. Any person who is in a generation that is less than two generations younger than the transferor is known as a nonskip party. The transaction will be deemed to be an indirect skip only if at least one current beneficiary of the trust is a nonskip party (not a skip party).

Which of the following is an estate planning strategy that is available to unmarried cohabitants? A) The marital deduction B)Tenancy by the entirety titling of assets C)The charitable deduction D)Gift splitting

C) The charitable deduction. The charitable deduction is available to an unmarried cohabitant on the same basis as it is to all other taxpayers. Gift splitting is available only between legally married spouses. The marital deduction is available only for qualifying transfers between legally married spouses.

Which of the following correctly states a requirement that must be met for a disclaimer to be qualified for federal tax purposes? A)The person making the disclaimer must be a qualified heir, defined as the decedent's surviving spouse or lineal descendants. B)The disclaimer must be made before the end of the calendar year in which the transfer creating the interest occurred (or in which a disclaimant becomes 21 years of age). C)The disclaimant may not name the person who is to receive the property as a result of the disclaimer. D)The disclaimant can accept and enjoy the property for a time but can decide to return, as long as they do so within six months.

C) The disclaimant may not name the person who is to receive the property as a result of the disclaimer. This is a correct answer because the requirements forbid the disclaimant from specifying who shall receive the disclaimed interest—that is, the property must pass without direction by the disclaimant. Additional requirements are (1) the disclaimant must not accept the disclaimed interest prior to disclaiming; (2) the disclaimer must be irrevocable and stated in writing; (3) the disclaimer must be made within nine months of the transfer creating the interest (or within nine months of when a disclaimant becomes 21 years of age);(4) the disclaimed interest must be the disclaimant's entire interest or partial interests specifically addressed by U.S. Treasury regulations; and (5) the disclaimed interest must pass to a person other than the disclaimant. However, disclaimers by surviving spouses are excepted.

If Arthur Greene dies today, which one of the following assets will be included in his probate estate? A)His profit-sharing plan B)His personal residence owned jointly with his spouse. C)The family limited partnership (FLP) he has set up. D)His IRA

C) The family limited partnership (FLP) he has set up. Arthur's FLP interest will be included in the probate estate. The other assets will pass via will substitute.

Estate planning data for Harriet indicates the following: -She transferred income-producing real estate to a QTIP trust for the benefit of her spouse, George, four years ago, and she elected the marital deduction for all trust assets. -She made a series of present-interest gifts of securities for the maximum annual exclusion to each of her three children over the past five years. -Six years ago, she made gifts of twice the amount of the maximum annual exclusion to UTMA accounts for each of her four nieces and nephews, naming her brother, Fred, as custodian; George agreed to treat the gifts as split gifts. -When she became ill last year, she gave her interest in the family farm to Fred; she withdrew money from a bank account to pay the gift tax due that was in excess of the applicable credit amount. Which of the following statements about the impact of the gifts on her estate tax liability is NOT correct? A)Harriet's gifts to her nieces and nephews reduced her estate tax liability by reducing her tax base. B)The gift to her husband, George, will reduce her estate tax liability by deferring taxation until George dies and the value of the trust becomes part of his gross estate. C)The gift tax paid by Harriet last year from her bank account will reduce the size of her gross estate, and thus, her estate tax liability, but only if she dies in the next two years. D)By making the series of gifts to her children, Harriet has transferred assets without making them subject to any transfer tax.

C) The gift tax paid by Harriet last year from her bank account will reduce the size of her gross estate, and thus, her estate tax liability, but only if she dies in the next two years. This is the correct answer because the statement regarding the effect of gifting and the gross-up rule is incorrect. Under the gross-up rule, gift taxes paid out of pocket on gifts made within three years of a donor's death must be added back to her gross estate. Harriet's withdrawal from her bank account does not reduce the size of her gross estate, and therefore, her tax liability until at least three years have passed. When gifts are not taxable, they were not subject to gift tax, nor will any part of these gifts be included in her estate tax calculation as adjusted taxable gifts. Also, they were not subject to generation-skipping transfer tax since the donees were not skip parties in relation to Harriet. The property placed in the QTIP trust for George will be removed from Harriet's gross estate as a completed gift, and it will not be included as an adjusted taxable gift because the marital deduction keeps the transfer from being taxable. The transfers to the UTMA accounts reduce her gross estate by the total amount transferred, and no part of this amount is added back as adjusted taxable gifts because of gift splitting and the annual exclusion. (Transfers to UTMA accounts are eligible for the annual exclusion.)

Which one of the following is a CORRECT statement regarding the characteristics of a salary increase or selective pension plan using life insurance under IRC Section 162? A) The insured employee has no incidents of ownership in the policy. B) Part of the death benefit will be paid to the employer. C) The premium payments are taxable income to the employee. D) The employee pays part of the policy premium.

C) The premium payments are taxable income to the employee. The premium payments are taxable because this insurance is considered to be additional compensation. The employee holds all incidents of ownership in the policy, but the employer pays the entire premium. All of the death benefit will go to the policy beneficiary designated by the employee.

Heirs with whom an individual shares a common ancestor but who are in a different line than the individual are known as A)lineal descendants. B)skip persons. C)collateral heirs. D)lineal heirs.

C) collateral heirs. A person's collateral heirs are those persons with whom she shares a common ancestor but who are in a different line than she is.

The alternate payee's interest in retirement plan benefits subject to a qualified domestic relations order (QDRO) may be distributed in all of the following ways except A)in periodic payments to the alternate payee after the plan participant reaches retirement age. B)to a qualified plan in which the alternate payee is a participant. C)directly to the alternate payee before the plan participant is eligible for withdrawals from the plan. D)to an IRA owned by the alternate payee.

C) directly to the alternate payee before the plan participant is eligible for withdrawals from the plan. The plan benefits may be paid directly to the alternate payee, but not before the plan participant is eligible for withdrawals from the plan. The plan benefits may be paid to an IRA owned by the alternate payee. The plan benefits may be paid in periodic payments to the alternate payee after he or she reaches retirement age. The plan benefits may be paid to a qualified plan in which the alternate payee is a participant if the plan allows.

All of the following statements regarding a preferred stock recapitalization freeze transaction are correct except A) if shares are gifted to other family members, the donor may be able to claim a discount for minority interest. lack of marketability. B) if shares are gifted to other family members, the Chapter 14 rules may apply. C)if shares are gifted to other family members, they are valued as of the date of completion of the recapitalization. D)if shares are gifted to other family members, the donor may be able to claim a discount for a lack of marketability.

C) if shares are gifted to other family members, they are valued as of the date of completion of the recapitalization. A minority interest discount may be warranted if the transferred shares do not give their owner a controlling interest in business decisions. A lack of marketability discount may be warranted if there are restrictions on the sale of the stock imposed either by the corporation or by market conditions. The Chapter 14 rules would likely apply to such a transaction. Thus, the preferred shares should have a cumulative right to the dividends.

Tess Thomas lives in a common law state. She "wrote out" a will in her own handwriting and signed it. In the will, she left everything to her sister, Kate, because she and her spouse separated last month. Since executing the will, Tess has become concerned about its adequacy. You should refer her to an attorney after informing her that A) the fact that she drafted her own will creates a presumption that she was not of sound mind when it was drafted, which causes the will to be invalid. B) her will is valid and will result in all her solely owned property going to her sister. C) if she has not met the state's will requirements, her will is unenforceable, and probate property interests will pass according to the intestate succession statute. D) this is a nuncupative will, which is invalid and allows all her property to avoid probate.

C) if she has not met the state's will requirements, her will is unenforceable, and probate property interests will pass according to the intestate succession statute. If Tess has not met the state's will requirements, her will is unenforceable, and probate property interests will pass according to the intestate succession statute. A handwritten and signed will described is a holographic will (a nuncupative will is an oral will). If the will is invalid, property not held in will substitute form at death would still be subject to probate under state intestacy laws. Even if the will were valid, the property would still be subject to probate; only property governed by a will substitute (such as joint tenancy with right of survivorship, beneficiary designation, etc.) is not subject to probate. Several states recognize holographic wills. Generally, in a common law state, one spouse cannot legally disinherit the other spouse, because the surviving spouse has a right to elect against the will to receive his spousal share.

For direct skips, the generation-skipping transfer tax is paid by A)both the transferor and transferee, jointly B)the transferee. C)the transferor or the transferor's estate. D)the trustee.

C) the transferor or the transferor's estate. For direct skips, the tax is imposed on the transferor or the transferor's estate. Therefore, the direct-skip beneficiary receives the full amount of the transfer, while the remainder of the transferor's estate is diminished by the transfer.

Providing for continued asset management during a period of incapacity can be achieved by the use of A)prenuptial agreement. B)trust arrangements and a living will. C)trust arrangements and durable powers of attorney. D)a durable power of attorney for health care.

C) trust arrangements and durable powers of attorney. Trust arrangements can provide for professional management of the settlor's assets. A durable power of attorney can provide an attorney-in-fact the authority to make other decisions for the benefit of the principal. The combination of a trust and durable power of attorney allows the creator, indirectly, to maintain control of personal and financial matters when physical or mental limitations prevent one from managing matters directly.

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

C)A community property interest is not subject to probate. A community property interest is subject to probate administration.

Which one of the following is a document that designates a trust as the recipient of all property that has not been otherwise disposed of upon the death of the decedent? A)Power of appointment B)Codicil C)Pourover will D)Testamentary trust

C)Pourover will. The answer is pourover will.

Which of the following is a financial goal? A) Control of assets B) Meeting the needs of dependents C) Maximizing benefits for a surviving spouse D) The efficient transfer of assets at death

C. Maximizing benefits for a surviving spouse. The other answer choices are nonfinancial goals.

All of the following statements regarding tenancy by the entirety are CORRECT except A. tenancy by the entirety includes a right of survivorship. B. tenancy by the entirety can exist only between spouses. C. tenancy by the entirety is recognized in all states. D. half of the value of property held as tenancy by the entirety is included in the gross estate of the first spouse to die.

C. Tenancy by the entirety is recognized in all states. Tenancy by the entirety is recognized in some common-law states only.

Which of the following rules does NOT apply to the estates of decedents who die in 2021? A) $11,700,000 exemption amount B) Portability of unused exemption amount between spouses C) Carryover basis for inherited assets other than income in respect of a decedent (IRD) D) 40% top estate tax rate

Carryover basis for inherited assets other than income in respect of a decedent (IRD). Assets (other than IRD) inherited from a decedent who dies in 2021 receive a stepped-up basis.

Kaitlin creates an irrevocable trust and funds it with $10 million in assets, including cash and stocks. The trust is authorized to accumulate income and to make distributions to the American Red Cross. What type of trust is this?

Complex trust. This is a complex trust because it is an irrevocable trust that can accumulate income and make charitable distributions.

Cheryl has made the following lifetime gifts: 2000: $25,000 in cash to her brother 2001: a life estate valued at $80,000 in a vacation cabin to her spouse (assume no QTIP election was made) 2017: $22,000 to the Muscular Dystrophy Association 2021: $34,000 to each of her three children Cheryl's spouse has consented to split the gifts for 2021 and filed a timely gift splitting election for the 2000 gift. Cheryl's spouse made a gift of $30,000 to his brother in 2000. Which of the following amounts most closely approximates Cheryl's gift tax liability for 2021 prior to application of any applicable credit amount? A) $3,000 B) $3,100 C) $3,310 D) $1,630

D) $1,630. The taxable amounts for each year (computed below) are as follows: 2000—$7,500; 2001—$70,000; 2017—$0; 2021—$6,000. As the following calculation shows, the taxable gifts for all years must be cumulated. The taxable amount for 2021 cannot be taken to the tax table alone. In 2000, when both Cheryl and her spouse made gifts to third parties, if one gift is split, all gifts must be split. The marital deduction was not taken for the 2001 gift because the QTIP election was not made. The life estate is a terminable interest that is not entitled to an automatic marital deduction. However, the life estate is a present interest and thus is eligible for the annual gift tax exclusion. Finally, remember that the maximum gift tax annual exclusion increased from $10,000 to $11,000 for years 2002-2005; to $12,000 beginning in 2006; to $13,000 for 2009-2012; to $14,000 for 2013-2017; and to $15,000 for 2017 and 2021. (This information will be available on the final.)

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

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

Katie, who is unmarried, made the following gifts in 2021: Cash to her sister, Kellie, in the amount of $16,000 Stocks valued at $26,000 to her cousin, Lawrence An automobile (valued at $17,000) to her uncle, Burt $24,000 to the Compassion Center, a charitable organization Certificates of deposit worth $10,000 to her childhood friend, Marjorie What is the amount of Katie's taxable gifts in 2021? A) $93,000 B) $45,000 C) $69,000 D) $14,000

D) $14,000. The total of Katie's taxable gifts is $14,000 ($1,000 to Kellie, $11,000 to Lawrence, and $2,000 to Burt). Note that with the exception of the gift to the Compassion Center, the $15,000 annual exclusion is deducted from each gift to arrive at the taxable gift. The $24,000 given to the Compassion Center is a charitable gift and is fully deductible under gift tax law, so there is no gift tax liability.

In 2021, Ron gives $20,000 in cash to each of his four children. What amount of taxable gifts, if any, must Ron report for 2021? A) $80,000 B) $65,000 C) $0 D) $20,000

D) $20,000. Because all of the gifts are present interests and they are made to four different donees, each gift is eligible for the annual exclusion of $15,000 (in 2021). Therefore, total taxable gifts are $20,000: 4 × ($20,000 − $15,000).

A married couple resides in a community property state. Their community property consists of real property with an adjusted basis of $90,000 and a fair market value of $300,000, as well as other property with an adjusted basis of $50,000 and a fair market value of $20,000. Spouse 1 died this year and left his entire estate to Spouse 2. What is Spouse 2's adjusted basis in the real property and other property after Spouse 1's death?

D) $300,000 $20,000. Both the decedent's and surviving spouse's shares of the community property receive a new basis equal to the fair market value on the date of the decedent's death. The real property's basis is stepped up. Notice that the other property's basis is less than its original adjusted basis, so getting the date of death basis actually results in a stepped-down basis for the other property.

Odell is the income beneficiary of a trust currently valued at $1 million. He also has a noncumulative general power of appointment with respect to the trust principal of $50,000 (5% of the total value) per year. If Odell dies in the current year without exercising his power over the trust principal and before the power lapses, what amount will be included in his gross estate?

D) $50,000. Because Odell's power over the trust principal is limited to 5% of the total value of the trust, the power qualifies as a 5 or 5 power (i.e., it does not exceed the greater of $5,000 or 5% of the trust principal). When Odell dies, the value of the power that was available but not yet exercised in the current year is included in his gross estate. In this case, $50,000 was the value of the power that was available in the current year but not yet exercised.

Juniper and her spouse purchased a home for $1M when they were first married. Juniper contributed 75% of the purchase price. They titled the property as joint title with right of survivorship (JTWROS). If Juniper died today, how much of the residence would be included in the gross estate?

D) $500,000. Although the residence is valued at $1,000,000 at Juniper's death, and she contributed 75% of the purchase price, 50% of the value of the residence is included in Juniper's gross estate because the residence is owned jointly by spouses.

Adam, age 72, is in the final stages of a terminal illness and wants to ensure that he has a continued fixed income to take care of his medical needs. He also wants to receive a lifetime charitable income tax deduction. Adam is considering making a charitable gift to the American Kidney Fund, so long as his stated objectives are met. As his financial planner, which of the following charitable gifting techniques should you recommend? A) A charitable lead trust B) A charitable remainder unitrust (CRUT) C) An outright charitable gift D) A charitable remainder annuity trust (CRAT)

D) A charitable remainder annuity trust (CRAT). A charitable remainder annuity trust (CRAT) is the only option that would provide Adam with a fixed income amount. The unitrust form would provide lifetime income to Adam, but it will be a variable income stream. An outright gift to a charity when the client needs income from the asset will never be the correct answer.

Which of the following situations does not require the filing of a federal gift tax return? A) A donor transfers to one donee a future interest valued at less than the annual exclusion amount. B) A donor makes a transfer to one donee of a present value for more than the annual exclusion, but has not used any applicable credit amount. C) A donor and spouse agree to split a present interest gift to one donee valued at more than the annual exclusion, but less than twice the annual exclusion amount. D) A donor makes a transfer to one donee of a present interest valued at less than the annual exclusion, but has used all of his applicable credit amount to offset the tax on prior gifts.

D) A donor makes a transfer to one donee of a present interest valued at less than the annual exclusion, but has used all of his applicable credit amount to offset the tax on prior gifts. 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.

A married couple owns a small business and would like to purchase a life insurance policy to ensure they have liquidity to pay any estate administration expenses and continue to operate the business when one of them dies. They would like to spend the least amount of money on premium payments while meeting their goals for the policy. Which of the following life insurance policies would meet their goals? A)A second-to-die policy B)An individual policy on each spouse C)A survivorship life policy D)A first-to-die policy

D) A first-to-die policy. A first-to-die policy will meet their goals because a single first-to-die policy will be less expensive than two individual policies, and it will provide cash upon the first death. A second-to-die policy and a survivorship policy are essentially the same thing and do not pay until the second death.

Which one of the following statements regarding a charitable remainder trust (CRT) is CORRECT? A) A grantor who establishes a CRT is free to revoke the trust at any time. B) The remainder interest in a CRT passes to a noncharitable beneficiary. C) The annuity payment received from a charitable remainder annuity trust (CRAT) fluctuates each year with the value of the trust assets, providing a potential hedge against inflation. D) A grantor who establishes a charitable remainder unitrust (CRUT) is eligible for an income tax deduction in the year the trust is established.

D) A grantor who establishes a charitable remainder unitrust (CRUT) is eligible for an income tax deduction in the year the trust is established. The grantor of a CRUT is eligible for an immediate income tax deduction based on the present value of the remainder interest that will pass to charity. A CRT must be irrevocable. The annuity payment from a CRAT is fixed.

C.J. Yee's taxable income fluctuates from year to year. Her adjusted gross income this year is $60,000, but it will probably be less in the future. Her major objective is to reduce income taxes for the current year. She plans to contribute $35,000 to the American Red Cross. Which one of the following is the most appropriate property for C.J. to gift to the American Red Cross to maximize her current-year charitable income tax deduction? A) A stamp collection she inherited, held long term, valued at $35,000 with a basis of $12,000 B) A stock, held short term, valued at $35,000 with a basis of $19,000 C) A tract of farmland, held long term, valued at $35,000 with a basis of $22,000 D) A life insurance policy with a face value of $35,000; net premiums, paid by C.J., of $24,000; and a replacement cost of $30,000

D) A life insurance policy with a face value of $35,000; net premiums, paid by C.J., of $24,000; and a replacement cost of $30,000. A gift of the life insurance policy would allow C.J. to take a current-year income tax deduction of $24,000, which is more than any other listed asset. It is rarely wise to gift short-term capital gain property because only the basis can be deducted as it in this case would allow a current deduction of $19,000. Use-unrelated tangible personal property is not a good choice because what would the Red Cross do with a stamp collection? They would sell it and use the proceeds for their charitable work. Donations that are sold by the charity within two years of the gift are consider use-unrelated. That limits the charitable deduction to the basis, which in this case would only allow a current deduction of $12,000. Farmland is ordinary income property. It you own farmland, you are a farmer by definition. The deduction for ordinary income property is always limited to the basis. In this case, donating the farmland to charity would only allow a maximum current-year deduction of $22,000.

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)Competency of intended beneficiaries. B)Marital and family status of client. C)How titles to property are held. D)All of the above.

D) All of the above. 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.

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

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

Which of the following is a characteristic of a living will? A)Appoints an agent to manage an individual's affairs in the event of incapacity. B)Allows an individual to make property bequests before death. C)Has the same function as a living trust. D)Allows an individual to specify, in advance, his wishes about medical treatment and artificial life support under specific circumstances.

D) Allows an individual to specify, in advance, his wishes about medical treatment and artificial life support under specific circumstances. A living will is a legal document in which an individual specifies what types of medical treatment and artificial life support measures he wishes in the event of an emergency. A durable power of attorney allows the principal to appoint an agent to manage his affairs in the event of incapacity.

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

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

John Cie, before he was sworn in as governor of his state, established a trust to manage his property through a corporate trustee, without his direction or input, for an irrevocable period of six years—the length of his term of office. As he intends to live solely from his salary as governor, none of the trust income is to be distributed to him. At the end of the six-year term, the principal of the trust will revert to John, but all accrued income is to be distributed equally to John's spouse and to his children, who are currently five and nine years of age. Which one of the following is a correct statement regarding this trust? A) The income of this trust will be taxable to John, as his spouse has retained a reversionary interest that exceeds 5% of the value of the trust at its creation. B) The income of this trust will be taxable to John because he has retained the power to revoke the trust. C) The income will be taxed to the trust until distributed, and to the recipients upon distribution. D) At least one-third of the income of this trust will be taxable to John even though he will never receive it.

D) At least one-third of the income of this trust will be taxable to John even though he will never receive it. This trust is subject to one of the grantor trust rules since the trust income is accumulated and one-third of the income will be distributed to the grantor's spouse (and possibly all of the income will be taxed to John because of his reversionary interest). The grantor trust rules apply to at least part of the income. John's spouse has retained nothing, and John has not retained such powers.

Which of the following statements regarding the effect of divorce or remarriage on estate planning are CORRECT? 1. People who remarry after a divorce may find it desirable to enter into a marital property agreement. 2. A QTIP trust may be helpful for a spouse who has children from a previous marriage.

D) Both I and II

Which of the following statements regarding qualified personal residence trusts (QPRTs) is CORRECT? 1. A QPRT may have an interest in only one residence. 2. The residence in a QPRT may not be occupied by anyone other than the grantor and members of the grantor's family.

D) Both I and II. Both of these statements are correct.

Which of the following statements regarding income in respect of a decedent (IRD) is CORRECT? 1. IRD is considered an asset for estate tax purposes and is reported on IRS Form 706. 2. IRD is income for income tax purposes and is reported on either Form 1040 or Form 1041.

D) Both I and II. Both of these statements are correct. IRD is reported on Form 1041 if it is payable to the decedent's estate and on Form 1040 if it is payable to the decedent or the decedent's beneficiary. It is also part of the gross estate. There is nothing unique in an asset being subject to income tax and also being subject to estate tax. For example, dividends from a stock received in the year of death, but prior to death are subject to personal income taxes. If the dividends are not spent before death, they are also part of the gross estate.

Which of the following is a characteristic of an installment sale? 1. It requires the receipt of at least one payment in a taxable year following the year of sale. 2. Reporting gain on an installment basis is automatic for qualifying sales unless the taxpayer elects not to have it apply.

D) Both I and II. Both of these statements represent characteristics of an installment sale.

Which of the following statements regarding expenses deductible in determining the federal estate tax is CORRECT? 1. Estate administration expenses such as court costs, executor's commissions, attorney fees, and accounting fees are deductible. 2. Unpaid mortgages and other claims against the estate are deductible.

D) Both I and II. Both statements are correct.

Which of the following statements regarding reversions is CORRECT? 1. A reversion is an example of a future interest. 2. A reversion gives the owner (transferor) the right to have all or part of the transferred property returned after an intervening interest.

D) Both I and II. Both statements are correct.

Which of the following statements regarding supplemental needs trusts is(are) CORRECT? 1. A special needs trust is typically used to help with the needs of a dependent who is developmentally disabled and who is receiving some form of government assistance. 2. Special needs trusts are not permitted in all states.

D) Both I and II. Both statements are correct.

Carmen is considering estate-planning options and wants to gift assets to her loved ones. All of the following are advantages to Carmen when gifting her assets except A)the future appreciation on Carmen's transferred assets will be removed from her gross estate. B)the gifted assets will be removed from Carmen's gross estate. C)gift tax paid is excluded from Carmen's gross estate, except for those taxes paid on gifts made within three years before her death. D)Carmen can take advantage of the annual exclusion for gifts of future interests.

D) Carmen can take advantage of the annual exclusion for gifts of future interests. The gift tax annual exclusion only applies to gifts of a present (and not future) interest.

Alice Greenlee, a widow, would like to reduce the value of her probate estate. She is retired and needs to retain all the income from her assets. She wants all of her estate to go to her daughter, Bonnie, and son, Charles, in equal shares, while minimizing the legal and administrative costs. She currently has the following property: a personal residence, valued at $130,000 rental real estate, valued at $105,000 a stock portfolio, valued at $70,000 pension benefits, valued at $270,000 Given Alice's situation and objectives, which one of the following will substitutes would not be appropriate? A)A retained life estate in the personal residence, with the remainder to Bonnie and Charles B)Naming Bonnie and Charles equal beneficiaries of her pension benefits at her death C)Placing the stock portfolio in a living revocable trust with Bonnie and Charles as remainder beneficiaries D)Changing the title of the rental real estate so that Alice, Bonnie, and Charles are joint tenants

D) Changing the title of the rental real estate so that Alice, Bonnie, and Charles are joint tenants. All answers place the corresponding asset in a will substitute that will avoid probate of the asset. Alice needs to retain the income from the rental real estate. Placing the real estate in joint tenancy would avoid probate because Bonnie and Charles would receive the property by right of survivorship, but Alice would be legally entitled to only one-third of the income. A better solution would be either to transfer the real estate to a living revocable trust or to retain a life estate in it, with the remainder to the children. In either case, the value would be in Alice's gross estate (but not in her probate estate).

The Bells have decided to establish a charitable trust. Their goal is to receive an annual income from the trust during their lives, with the trust assets passing to charity when they die. Because they both expect to live a long time, they want the income from the trust to provide them with a potential hedge against inflation. Which of the following charitable trusts will best meet the Bells' objectives? A) Charitable remainder annuity trust (CRAT) B) Charitable lead unitrust (CLUT) C) Charitable lead annuity trust (CLAT) D) Charitable remainder unitrust (CRUT)

D) Charitable remainder unitrust (CRUT). A charitable remainder unitrust (CRUT) will best meet the Bells' needs because it provides an annual income payment based on the market value of the trust assets as revalued each year and will provide a potential hedge against inflation. A CRAT provides a fixed annual income payment. A CLAT or CLUT will not meet the Bells' needs because charitable lead trusts provide an income interest to a charity and a remainder interest to noncharitable beneficiaries. This is the opposite of what the Bells want.

All of the following are considered qualified transfers for gift tax purposes EXCEPT A) Janet wrote a check for $30,000 to Boston University to pay Ronnie's college tuition for the current school year. B) Lucy transferred ownership of all of her shares in a mutual fund to her ex-spouse, Annie, because the written divorce decree in their divorce directed her to do so. C) Lester paid $75,000 to Dr. Bonner for surgery he performed on his friend, David, last year. David is not Lester's dependent. D) 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.

D) 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. 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 is a tax-related financial goal? A)Maximizing benefits for a surviving spouse B)Minimizing nontax transfer costs C)Maintaining a satisfactory standard of living D)Deferring the recognition of gain

D) Deferring the recognition of gain. The remaining answer choices are nontax-related financial goals.

Desiree just met with her financial adviser and discovered that her estate substantially exceeds the estate tax exclusion amount. She would like to reduce her potential taxable estate without giving up any control of her property during her life. Which of the following premortem planning techniques would achieve Desiree's goals? A) Desiree should make lifetime gifts up to the annual exclusion amount. B) Desiree should gift assets to an irrevocable trust. C) Desiree should reduce or eliminate property that is difficult to appraise or administer by sale. D) Desiree should make a testamentary transfer of property that will qualify for the charitable deduction.

D) Desiree should make a testamentary transfer of property that will qualify for the charitable deduction. A testamentary transfer of property that will qualify for the charitable deduction is a method to reduce the potential taxable estate. Making lifetime gifts up to the annual exclusion amount is a method to reduce the taxable estate without incurring gift tax. However, Desiree does not want to give up control of any of her property prior to death. Reducing or eliminating property that is difficult to appraise or administer by sale will reduce the administrative fees of an estate, but it will not necessarily reduce the potential taxable estate. Also, she does not want to give up control of any of her assets, which would also occur if she established and funded an irrevocable trust.

Since undergoing a quadruple bypass operation, Robert has become concerned that future heart problems may leave him incapacitated. He wants to grant his brother the right to make crucial medical decisions for him in the event he ever becomes unable to make decisions for himself. Which of the following documents best meets Robert's needs? A) Springing power of attorney for property B) Nondurable power of attorney C) Living will D) Durable power of attorney for health care (DPOAHC)

D) Durable power of attorney for health care (DPOAHC). A durable power of attorney for health care (DPOAHC) will become effective if Robert becomes incapacitated and will grant the attorney-in-fact (his brother) the power to make health decisions for him. A living will does not create a power of attorney but only states the drafter's wishes should he ever become terminally ill. A nondurable power of attorney would cease to be effective if Robert ever became incapacitated.

Which of the following is NOT an attainable estate liquidity planning strategy? A)Purchasing life insurance to be owned by an ILIT B)Entering into a buy-sell agreement with other business owners of a closely held business interest C)Reducing attorney fees D)Eliminating all estate administrative expenses

D) Eliminating all estate administrative expenses. This is not an estate liquidity planning strategy because all estates, whether large or small, have administrative expenses. These expenses can be diminished by proper premortem planning but can never be completely eliminated.

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

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

Alex and Megan need to have their wills updated; however, they would like to avoid the expense of writing entirely new wills. Which one of the following techniques would best meet their needs? A)File qualified disclaimers B)Elect against their wills C)File will contests D)Execute codicils

D) Execute codicils. A codicil is an instrument used to modify or amend an existing will. Executing a codicil is less expensive and cumbersome than writing an entire new will.

Chip and Pam, a married couple, are both 65 years old and live in a common-law property state. They have a total combined estate of $10 million, of which each owns half as their sole and separate property. They have three grown children, and Chip has one adult child from a prior marriage. Chip and Pam have the following objectives: -To allow each estate to use some or all of its estate tax applicable credit amount -To allow part of the estate of the first spouse to die to qualify for the marital deduction -That, according to Chip's wishes, his children from his current marriage and his prior marriage share equally in his wealth after Pam's death, if he dies first -That, according to Pam's wishes, only her children from her current marriage will share equally in her wealth after Chip's death, if she dies first -To be assured that the surviving spouse will have a right to an annual income stream from at least part of the decedent spouse's assets Based on Chip and Pam's objectives, which of the following is the most appropriate testamentary transfer technique or combination of techniques for them to use? Assume 2021 estate tax law in making your decision.

D) Family bypass (B) trust and QTIP (C) trust. The A trust is a marital trust, and as such, it would not allow the first decedent to use any of his estate tax applicable credit amount, or it could not be assured that his wealth would go only to the beneficiaries desired. The A trust would not allow the first decedent to be assured that his wealth would go only to the beneficiaries desired. The C trust would meet the income and distribution objectives and, in addition, would meet the use of the applicable credit amount objective if the QTIP election is not made, the marital deduction objective if it is made, or both if a partial election is made. However, since the C trust is not listed alone in any option, it must be paired only with an A trust to meet both spouses' distribution objectives of controlling where the assets go at the second death. Assets that are to receive the marital deduction could be placed in the C trust, with all other assets being placed in the B trust.

Which of the following statements regarding IRS Form 1041 is NOT correct? A)Form 1041 is used to report the income of an estate or irrevocable trust. B)Form 1041 must be filed if any beneficiary of an estate is a nonresident alien. C)Form 1041 must be filed if an estate has gross income of $600 or more for the tax year. D)Form 1041 for an estate must be filed within nine months following the decedent's date of death

D) Form 1041 for an estate must be filed within nine months following the decedent's date of death. Form 1041 for an estate must be filed on or before the 15th day of the fourth month following the end of the taxable year.

Which one of the following is a true statement about the generation-skipping transfer tax (GSTT)? A) Only that part of a gift that will go to non-skip parties is subject to the GSTT. B) The donor reports the GSTT due on an indirect skip and the federal gift or estate tax due on the transfer at the same time. C)GSTT due on an indirect skip is reported when the transfer is made on Form 706 or Form 709. D)GSTT on indirect skips cannot be immediately determined upon completion of the transfer.

D) GSTT on indirect skips cannot be immediately determined upon completion of the transfer. GSTT on indirect skips cannot be immediately determined upon completion of the transfer because it is not immediately known how much of the transfer will go to the skip party.

Which of the following statements regarding gift splitting is NOT correct? A) Gift splitting is available only to spouses. B) If a donor elects to split gifts, the election must be applied to all gifts made during that calendar year. C) The gift tax annual exclusion may be doubled if gift splitting is elected. D) Gifts of community property require a gift splitting election.

D) Gifts of community property require a gift splitting election. Gifts of community property or JTWROS property do not require a gift splitting election. All of the other statements are correct.

Which of the following is a court-supervised arrangement in which a person is appointed to manage the personal care and well-being of another? A) Trust B) Conservatorship C) Power of attorney D) Guardianship

D) Guardianship. A guardianship is a fiduciary relationship created by law for the purpose of enabling a person (known as the guardian) to manage the personal care and well-being of another (known as the ward). A conservatorship is a fiduciary relationship concerned with managing the ward's property. In other words, you guard people and you conserve money/assets. Trusts and powers of attorney are private documents that do not involve court supervision.

Which of the following statements regarding Medicaid planning for long-term care is CORRECT? 1. Medicaid planning is best done with the advice of an experienced 2. Medicaid planning advisor or a qualified elder care attorney. 3. Each state has its own asset and income levels for qualifying for benefits. Assets transferred to others are subject to a 12-month look-back period. If a client is married, the couple's residence is a countable asset.

D) I and II. Statements I and II are correct. Statement III is incorrect. The look-back period is 60 months. Statement IV is incorrect. If a client is married, the couple's residence is not a countable asset. Real estate other than the couple's primary estate is countable.

Which of the following statements regarding a taxable termination is CORRECT? 1. A taxable termination cannot occur as long as at least one nonskip beneficiary has an interest in the trust property. 2. If a taxable termination occurs, the skip person is responsible for paying any generation-skipping transfer tax (GSTT) that may be due. 3. A taxable termination occurs when an interest in a trust is terminated because of death or lapse of time, resulting in a skip beneficiary holding interests in the trust.

D) I and III. Statement II is incorrect; if a taxable termination occurs, the trustee is responsible for paying any GSTT that may be due.

Which of the following forms of ownership pass through probate when an owner dies? 1. Fee simple 2. Tenancy by the entirety 3. Community property 4. Joint tenancy with right of survivorship (JTWROS)

D) I and III. Statements I and III are correct. Statements II and IV are incorrect. JTRWOS and tenancy by the entirety do not pass through probate because they both include a right of survivorship and pass to the surviving joint owner(s) by operation of law.

Trusts are one method often used to leave property to care for a minor child from a prior marriage. Which of the following are correct statements about the advantages and disadvantages of such a technique? 1. Such trusts can be either inter vivos or testamentary trusts. 2. A conservator must be appointed for the minor child. 3. The trust will be subject to the continuing supervision of a local court. 4. Such trusts can continue for the minor child's benefit after he or she reaches the age of majority.

D) I and IV. It is not necessary for a conservator to be appointed, as the trustee is under a fiduciary duty to comply with the trust terms and to manage and spend the trust funds in the best interests of the minor child. One of the biggest advantages of using such a trust is that the hassle and expense of court proceedings can be avoided.

Which of the following statements correctly identify advantages or disadvantages of a living will? 1. The provisions of a living will may apply only when the maker is in certain medical conditions. 2. A living will must be re-executed periodically so that the medical care provider knows that it represents the maker's most current desires. 3. A living will cannot be used in conjunction with a medical durable power of attorney for health care (DPOAHC) or a do not resuscitate (DNR) order. 4. A living will becomes invalid when the maker becomes incompetent unless it has certain language.

D) I only. Many states restrict the effectiveness of living wills to when the maker is in a terminal or incurable condition. Although periodic execution of a new living will (option II) might have some benefit, it is generally not required. A living will can and often is used in conjunction with DPOAHC and DNR orders (option III). The main purpose of a living will is to let it speak for a patient when the patient is incompetent (option IV).

Svetlana has a large estate. She and her spouse, Igor, are childless. Svetlana has promised her favorite brother, Max, a portion of her wealth. Svetlana recently updated her will. Which of the following provisions of Svetlana's will qualify assets placed in the cited trusts for the marital deduction? 1. A trust that must pay all income to Igor at least annually during his lifetime. He has a lifetime, or testamentary, right to designate anyone, including himself, as an appointee of trust property. 2. A trust in which all income is distributed annually to Igor for his life. The corpus passes to a qualified charity at his death. 3. A trust that gives the trustee the discretion to pay income to Igor and Max until one of them dies. Then, the trust assets are to be distributed to the survivor.

D) I only. Option I is a power of appointment trust, which qualifies for the marital deduction automatically. The trust described in option II is not a qualified charitable remainder trust since it pays James neither an annuity nor a unitrust amount. Thus, this testamentary trust is not a CRAT or a CRUT. Also, a testamentary trust cannot be a pooled income fund (PIF) because PIFs are established by public charities (50% organizations), not by individuals in any circumstance. Therefore, this trust does not qualify for the marital deduction automatically. The trust described in option III does not qualify for three reasons. First, the income interest is not paid exclusively to Igor. Second, Igor's right to the remainder is contingent on his survival of Max. Finally, to receive a marital deduction, the arrangement cannot make a spouse survive for more than six months after the death of the first spouse. In this case, not only could her brother outlive her spouse, but even if her spouse outlived her brother, her brother could easily survive for more than six months. Thus, her spouse could be forced to wait longer than six months from her death to have exclusive benefits.

Which of the following statements regarding the role of guardians in estate planning is(are) CORRECT? 1. A guardian manages the personal care and well-being of the ward. 2. A guardian manages the property of the ward.

D) I only. Statement II is incorrect because a guardian does not manage the ward's property; this function is performed by a conservator. One way to remember this is that you guard people, but you conserve assets. For example, you conserve water. You guard prisoners.

Which of the following are effective method(s) of limiting or avoiding federal estate taxes? 1. Use the annual gift tax exclusion 2. Create an irrevocable life insurance trust 3. Use qualified transfers to pay tuition and medical expenses directly to the provider 4. Use the unlimited marital deduction

D) I, II, III, and IV. All of these items will reduce the gross estate or the taxable estate.

Which of the following actions should an executor take when developing a cash flow plan for an estate? 1. Determine which assets are the best candidates for sale if it appears necessary to sell estate property 2. Begin planning a strategy to make up any projected cash deficit 3. Account for the possibility of unexpected expenses 4. Explore ways of reducing the estate's cash needs by making special elections under the estate tax laws

D) I, II, III, and IV. An executor should take all of these actions when developing a cash flow plan for an estate.

Lewis is evaluating the assets in his estate to determine his liquidity. He owns assets such as collectibles, rental property, and closely held business interests. Which premortem liquidity planning technique(s) would benefit Lewis? 1. Lewis could reduce or eliminate the collectibles from his estate to enhance liquidity. 2. Lewis could reduce or eliminate the rental property from his estate to enhance liquidity. 3. Lewis could reduce or eliminate the closely held business interests from his estate to enhance liquidity.

D) I, II, and III. Reducing or eliminating assets, such as rental property, collectibles, and closely held business interests, prior to death can enhance an estate's liquidity position because these assets are inherently more difficult to value and require more time and effort to administer. Thus, these assets are likely to generate higher administration expenses than other property, increase the liquidity requirements of an estate, and lead to estate shrinkage.

Which of the following would cause the proceeds of life insurance on the decedent's life to be included in the decedent's gross estate? 1. The decedent possessed any incidents of ownership in the policy at the time of death. 2. The proceeds are payable to the decedent's estate. 3. The proceeds are payable to an ILIT and must be used to pay the estate tax on the decedent's estate. 4. The decedent gifted the policy more than three years before the decedent's death.

D) I, II, and III. Statement IV is incorrect as far as the question goes. The proceeds will not be included in the decedent's gross estate if the decedent gifted the policy more than three years before the date of death. If more information had been given, the answer could change. Even if the policy was transferred more than three years before the date of death other factors could still end up placing the death proceeds into the descendant's gross estate. For example, the original beneficiary was the deceased's estate and this was not changed after the transfer. Another example would be that the primary beneficiary for the policy died before the decedent in question and the decedent's estate is the secondary beneficiary. It is always important to follow life insurance death benefits to their final end before deciding anything about them.

Which of the following estate planning objectives can be accomplished through a will? 1. Creating a presumption of survivorship 2. Establishing a priority for eliminating or reducing bequests if the estate has insufficient assets 3. Avoiding probate of estate assets 4. Naming a residuary beneficiary to take all assets that remain after specific bequests are allocated

D) I, II, and IV. Only option III cannot be accomplished through a will because the will itself must be probated, as well as any estate assets that are distributed by the will.

Marie and Elsa are nonspouse domestic partners. They currently own all of their property in their individual names. They both have qualified retirement plans and IRAs but have not named beneficiaries for them. Each wants to ensure that the other receives her assets when she dies. Which of the following estate planning techniques would be useful to Marie and Elsa? 1. Convert their individually owned property into JTWROS. 2. Establish a revocable living trust naming the other partner as beneficiary at death. 3. Rely on intestate succession laws to pass property to the other partner at death. 4. Name the other partner as beneficiary of their qualified retirement plans and IRAs.

D) I, II, and IV. Statement III is incorrect because intestate succession laws generally do not recognize the rights of unmarried domestic partners to inherit property from one another.

Leon Brown has consulted a CFP® professional for estate planning advice. One of the CFP® professional's recommendations is that Leon take steps to avoid probate when he dies. In communicating this recommendation to Leon, which of the following statements made by the CFP® professional would be CORRECT? 1. Probate will not be necessary if Leon dies testate. 2. Avoiding probate will help keep Leon's affairs private after he dies. 3. Probate might delay the distribution of Leon's assets to his heirs.

D) II and III. Statement I is incorrect because probate is necessary when a decedent dies testate (with a valid will). Probate is also necessary for those who die intestate. Statements II and III are correct.

What is an adjusted taxable gift? 1. Life insurance death benefits from a policy in which the deceased was the original owner and is also the insured. The policy was gifted to a relative within three years of the death of the insured. 2. A taxable gift made by the decedent after December 31, 1976 3. An addition to the taxable estate to determine the total estate tax base 4. A pre-1976 gift

D) II and III. Statement I is incorrect. The death benefits of this life insurance policy would be added into the deceased's gross estate—not added later in the calculation as an adjusted taxable gift. If the gift of the policy was made more than three years before death, the life insurance death benefits would not be included in the gross estate of the giver. However, if the life insurance gift that is more than three years old resulted in an adjusted taxable gift at the time (the gift value was more than the annual exclusion for that year), then there would have been an adjusted taxable gift when the policy was gifted years ago. Statements II and III are correct. Adjusted taxable gifts are taxable gifts made by the decedent after 1976. They are added to the taxable estate to arrive at the tentative tax base for estate tax purposes.

Alice is interested in making deductible charitable contributions, but she does not want to incur the expense of drafting a private trust agreement. Which of the following planning techniques will meet her needs? 1. Charitable remainder trust 2. Charitable gift annuity 3. Charitable lead trust 4. Pooled income fund

D) II and IV. Charitable gift annuities and pooled income funds do not involve the use of private trust agreements. Statements I and III are incorrect because charitable remainder trusts and charitable lead trusts involve the use of private trust agreements.

Which of the following forms of ownership do NOT pass through probate when an owner dies? 1. Fee simple 2. Tenancy by the entirety 3. Community property 4. Joint tenancy with right of survivorship (JTWROS)

D) II and IV. Joint tenancy with right of survivorship (JTRWOS) and tenancy by the entirety do not pass through probate because they both include a right of survivorship and pass to the surviving joint owner(s) by operation of law.

Which of the following statements about survivorship life insurance is CORRECT? 1. Neither the death benefits nor any of the replacement cost is includible in the gross estate of the first insured to die. 2. It may be used to provide funds to pay estate taxes at the death of the surviving spouse when all property transferred at the first spouse's death qualified for the marital deduction. 3. It pays a partial benefit equal to administrative expenses and estate taxes at the death of the first insured, with the remainder paid in full at the death of the second insured. 4. Generally, the premium is less than those for comparable policies on each of the individuals.

D) II and IV. Like any life insurance, the value of a survivorship life policy is includible in the deceased owner's gross estate, unless the deceased has given up all incidents of ownership in the policy more than three years before death. With survivorship life insurance, the death benefit would not be included in the deceased's gross estate, but the deceased's share of the replacement cost would a part of the deceased's gross estate. Therefore, option I is wrong. Option III is incorrect because a survivorship life policy pays the entire death benefit at the death of the survivor; nothing is paid at the first death.

You are meeting with your client, Beatrice, to review her property and value it to estimate her potential gross estate. Included in her list of property owned are the following assets: -Fifty shares of AT&T stock -A whole life policy with her spouse as the insured and Beatrice as the primary beneficiary, which is still in premium pay status -A term life policy provided by her employer, with Beatrice as the insured and her spouse as the primary beneficiary -Five hundred shares of Rob Roy, Inc., a closely held corporation Of the following statements to make to Beatrice about the valuation of property includible in her gross estate, which would be CORRECT? 1. The AT&T stock will be entitled to a minority discount. 2. The whole life insurance policy will be valued at its replacement cost, as measured by its interpolated terminal reserve plus any unearned premiums. 3. The term life policy will be valued at the cost of a policy from the issuing company based on her age at the time of her death. 4. The closely held stock may qualify for a lack of marketability discount.

D) II and IV. Option I is false because only closely held, not publicly traded, stock can qualify for a minority discount. Option III states the gift tax valuation rule for a paid-up single premium policy; a term life policy on the decedent's life will be valued at the death benefit since the insured is deemed to have died.

Which of the following statements correctly identify an advantage or a disadvantage of a durable power of attorney for health care (DPOAHC)? 1. A disadvantage is that the agent's authority can be exercised only when the principal is in a terminal or chronic condition. 2. An advantage is that the authority of the agent can be revoked as long as the principal is competent. 3. A disadvantage is that the agent's authority can be exercised even when the principal is competent and makes a contrary decision. 4. An advantage is that the agent can be given authority to do more than simply make decisions regarding medical treatment.

D) II and IV. The agent under a DPOAHC can be authorized to do such things as file lawsuits or interpret the principal's living will. Option I is incorrect, as the advantage of a DPOAHC over a living will is that the agent's authority can be used in any situation in which the principal is incompetent to make medical decisions. Option III is incorrect because the principal's contrary decision in this situation would act as an implied revocation of the agent's authority.

Which of the following are interests that must go through probate? 1. A residence that the decedent held in tenancy by the entirety with his spouse 2. An automobile that passes according to state intestacy laws 3. Securities held by the decedent with a T.O.D. designation 4. Real property, located in the state of the decedent's domicile, that is held solely in the decedent's name but that is considered to be community property

D) II and IV. The interest in option I will not go through probate because tenancy by the entirety has a right of survivorship feature. Option III will not go through probate because the T.O.D. (transfer on death) designation is a type of will substitute. The decedent's share of the real property in option IV will be subject to probate in the state in which it is located, as community property must pass through probate.

Janelle wants to draft a power of attorney that will allow her daughter to manage Janelle's property if Janelle ever becomes incapacitated. Which of the following powers of attorney will meet Janelle's needs? 1. Nondurable power of attorney 2. Durable power of attorney

D) II only. Only statement I is incorrect. Statement II is correct. Only a durable power of attorney survives the principal's incapacity. A nondurable power of attorney becomes invalid if the principal becomes incapacitated. Both powers of attorney become null and void when the principal passes away.

Lonnie wants to execute a power of attorney naming his son, Brad, as attorney-in-fact. Lonnie wants Brad's authority to terminate if Lonnie ever becomes legally incapacitated. Which of the following types of power of attorney will meet Lonnie's wishes? 1. Durable power of attorney 2. Nondurable power of attorney

D) II only. Only statement II is correct. A durable power of attorney survives the principal's legal incapacity (but not the principal's death). A nondurable power of attorney becomes legally invalid at the onset of the principal's incapacity. That means a nondurable power of attorney becomes ineffective when the principal needs it the most. However, this is what the holder is asking for in this situation.

Which of the following statements regarding a QTIP election is CORRECT? 1. If the decedent's executor makes a QTIP election, the property that is the subject of the election is excluded from the surviving spouse's gross estate when the surviving spouse dies. 2. In determining whether to make a QTIP election, the executor should determine the best overall estate tax result for both the decedent's and the surviving spouse's gross estate.

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

Zeke is 85 years old. He feels he will need nursing home care within the next 2 to 3 years. In an attempt to become eligible for Medicaid, Zeke gives his home and most of his assets to his grandchildren. Which of the following statements regarding these transfers is(are) CORRECT? The transfers are subject to a look-back period of 36 months. Because of the transfers, Zeke may be subject to a waiting period before he becomes eligible for Medicaid.

D) II only. Statement I is incorrect because transfers of assets for less than adequate consideration to gain eligibility for Medicaid are subject to a 60 month look-back period.

Which of the following statements regarding powers of appointment is CORRECT? 1. A general power of appointment is not included in the holder's gross estate if the holder does not exercise the power during the holder's lifetime. 2. A special power of appointment is usually not included in the holder's gross estate. 3. A power of appointment cannot lapse.

D) II only. Statements I and III are incorrect. The property does not avoid inclusion in the gross estate just because the holder of the general power fails to exercise the power during the holder's lifetime. A power of appointment can lapse if it is not exercised. However, if a general power of appointment lapses, the holder of the power is treated as having made a gift to whoever gets the property subject to the general power of appointment.

A decedent is a U.S. citizen who owned a farm immediately prior to the date of his death. Which of the following conditions must be met before special use valuation is allowed for estate tax purposes? 1. The value of the farm must constitute at least 75% of the decedent's gross estate. 2. The farm must pass to a qualified heir. 3. The decedent or a member of his family must have materially participated in the operation of the farm for at least five out of the eight years prior to his death. 4. The farm must continue to be used as a qualified use for at least 10 years after the decedent's death.

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

Last year, Julie Poppins sold to her daughter, Mary, a daycare business for $180,000, which was its fair market value. Julie's basis in the business was $90,000. Mary gave Julie an unsecured promissory note in which she promised to pay the purchase price in 15 annual installments composed of only interest at the prevailing rate for the first five years, with each of the remaining 10 annual payments to be composed of $18,000 principal, plus interest at the same rate. At Mary's request, the note also contained a provision that if Julie died while any part of the note was not yet due, the payments not yet due would be canceled. Which of the following statements correctly describe the tax implications of the intrafamily sale that Julie has made to Mary? 1. If Julie dies while any part of the note remains outstanding, her gross estate must include the fair market value of the daycare business. 2. If any annual installments under the terms of the note are canceled, the present value of the canceled installments will be included in Julie's gross estate. 3. Cancelation of any annual installments by Julie's estate under the terms of the note will cause her estate to realize a taxable gain on the forgiven installments. 4. If Mary closes the daycare business before Julie dies, and Julie cancels the entire note, Julie will be subject to both income taxes and gift taxes.

D) II, III, and IV. The answer is II, III, and IV only. One key to this question is that this is only an installment sale and not a self-canceling installment sale (SCIN). We know this because a SCIN must pay a premium over the normal installment sale. The premium, which would be calculated by a CPA is either a higher interest rate or a larger initial principal amount (the fair market value (FMV) + the SCIN premium amount). In this case, the principal was the FMV and the interest rate is the prevailing interest rate, not a higher than prevailing interest rate as the premium for a SCIN. Only option I is an incorrect statement because Julie's estate would include the present value of the forgiven payments, but would not include the value of the daycare business as of the date of her death. Option II is correct because in such circumstances, Mary did not pay the required premium for the cancelation provision. If this premium is not paid, the transaction is an installment sale rather than a valid SCIN. When payments pursuant to an installment sale are canceled or forgiven, the seller must recognize any gain in the forgiven payments, and pay transfer tax on them. Option III is correct because in such circumstances, Julie will have to recognize for income tax purposes the proportionate gain (FMV less basis) that she would have otherwise recognized had the payment not been canceled. Option IV is correct for the same reasons as stated for options II and III.

Which of the following statements is CORRECT about the income, gift, or estate tax implications of making a gift to a charity of a remainder interest in a farm or personal residence? 1. A charitable gift tax deduction is not available because it is a gift of a partial interest. 2. The farm or residence is included in the grantor's gross estate only if the grantor dies before his actuarially determined life expectancy as of the date of gift. 3. The grantor gets a current income tax deduction for the present value of the remainder interest. 4. The grantor's estate will have to pay an estate tax on the value of the farm or personal residence according to the value used for estate tax purposes.

D) III only. Option I is incorrect because a remainder interest in a farm or residence is an exception to the partial interest rule. Option II is incorrect because the asset is included in the grantor's gross estate under all circumstances because of the reserved right of use and enjoyment. The property will be deducted as a charitable deduction, but it starts out in the gross estate. Option IV is incorrect because of the unlimited charitable estate tax deduction.

Because of her financial stability and sizable net worth, Marleen intends to leave the funds in her IRA untouched. When she dies, she believes this asset will get a step-up in basis for her heirs. Which of the following statements regarding Marleen's IRA is CORRECT? 1. She must receive minimum distributions after attaining age of 72, but any remaining amounts in the IRA at her death will receive a step-up in basis. 2. She is correct in her belief, and this is a great strategy. 3. The heirs will not receive a step-up in basis, and she will be penalized if she does not receive distributions when required by the Internal Revenue Code.

D) III only. There are a couple of problems with Marleen's plan. She is required to take distributions from the IRA once she reaches her required beginning date. Retirement accounts are considered income in respect of a decedent assets and do not receive a step-up in basis at the owner's death.

Roxanne, a widow, has a gross estate valued at $999,000. One-fourth of her estate is in raw land held for speculation, and another large portion is in a closely held partnership, valued at $380,000. Roxanne's will leaves all property to her son, with all debts, expenses, and taxes to be paid from the residue. She has employer benefits of about $200,000, payable to her son. Five years ago, she created an irrevocable life insurance trust, which is the owner and beneficiary of a $150,000 life insurance policy on her life; her son is the only beneficiary of the trust. She has made prior taxable gifts of $600,000. Which of the following postmortem techniques are available and advisable to increase liquidity in Roxanne's estate if she were to die today? 1. A Section 6166 extension and installment payment of taxes 2. An election of special use valuation for the raw land 3. A request to the trustee of the irrevocable insurance trust to purchase some of the hard-to-sell property from her estate 4. A Section 303 stock redemption

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

Brenda is a certified public accountant. During the current year, she performs the following charitable activities. Which of them qualify for a charitable deduction? 1. Brenda donates her services to help audit a local charity's books. 2. Brenda spends 40 hours working at the local homeless shelter. 3. Brenda donates her used car to the local Goodwill center. 4. Brenda allows a local charity to use her home for a fundraising event.

D) III only. To qualify for a charitable deduction, the subject of the gift must be the taxpayer's property. Gifts of the taxpayer's time, services, or the use of the taxpayer's property do not qualify.

Which of the following statements concerning income earned by spouses in a community property state is CORRECT? A)Income earned by each spouse is separate property. B)Income earned by each spouse after marriage is considered community property only if it is commingled. C)Income earned by each spouse prior to and after marriage is considered community property. D)Income earned by each spouse after marriage is considered community property.

D) Income earned by each spouse after marriage is considered community property. The answer is income earned by each spouse after marriage is considered community property. Even though earned by only one spouse, such earnings are considered community property.

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

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

Which one of the following statements correctly explains an estate-planning issue faced by a same-sex cohabitating couple? A)It is more difficult for such couples to transfer property at death to one another using will substitutes such as trusts and beneficiary designations. B)The rights of each party to the increase in value of assets brought to the relationship are the same as those for a married heterosexual couple. C)The right of one party to receive financial support from the other party in the event of termination of the relationship is the same as that for a married heterosexual couple. D)Most state and federal laws do not grant one member of the couple authority to make medical decisions for the other member absent a durable power of attorney for health care.

D) Most state and federal laws do not grant one member of the couple authority to make medical decisions for the other member absent a durable power of attorney for health care. The rights of each party to the increase in value of assets brought to the relationship or to receive financial support are not the same as those for a married heterosexual couple. However, will substitutes work equally well for such couples.

Frank is 83 years old. His second wife, Fannie, is 25. Frank has one grandchild, Bert, who is 30. Bert is the son of Frank's daughter, Ruth, who is deceased. From Frank's perspective, which of the following is a skip person? 1. Fannie 2. Bert

D) Neither I nor II. Neither Fannie nor Bert is a skip person. Although Fannie is more than 37½ years younger than Frank, she is not a skip person because she is Frank's spouse. Although Bert is a related person who is two or more generations below Frank, he moves up one generation under the predeceased parent skip exception because he is the son of Frank's deceased child.

Donna received a gift of rental real estate with an adjusted basis of $75,000 to the donor and a fair market value (FMV) of $50,000 on the date of gift. The donor paid gift tax of $3,000. Donna subsequently sold the property for $60,000. What is her recognized gain or loss? A) $12,000 loss is recognized. B) $15,000 loss is recognized. C) $10,000 gain is recognized. D) No gain or loss is recognized.

D) No gain or loss is recognized. The double basis rule applies to this gift. Donna's basis for gain is $75,000, and her basis for loss is $50,000. Because the sales price is between $50,000 and $75,000, no gain or loss is recognized. The gift tax paid is irrelevant because there was no unrealized appreciation as of the date of the gift. If FMV is less than the adjusted basis at date of gift, no basis adjustment is made for gift tax paid.

Which one of the following is a characteristic of probate? A) Not applicable if there is no will B) Ensures estate privacy C) Expedites estate administration D) Often a costly and complex process

D) Often a costly and complex process. Probate is often a costly and complex process. Information regarding the estate becomes a matter of public record and generally there are delays in estate administration. Probate applies whether a person has a will or dies intestate. This is because one of the major points of probate is transferring ownership. The ownership of the deceased's property that is not transferred by operation of law (joint tenancy with right of survivorship) or by contract (beneficiary designations) must be transferred by probate. Now the question becomes, "Will the probate court seek to follow the instructions of the deceased as expressed by a valid will or does the probate court transfer ownership according to the state-set order of distribution because the deceased did not have a valid will?"

Which of the following are considered to be community property when owned by spouses while living in a community property state? A) Property acquired by one spouse before marriage B) Property acquired by one spouse by inheritance C) Property acquired by one of the spouses by gift D) Property acquired through the efforts of either spouse during their marriage

D) Property acquired through the efforts of either spouse during their marriage. Community property rules assume that both people in the marriage are contributing equally to the wealth of the family. Notice that the exceptions (acquisition before marriage and by receipt as a gift or inheritance) are clearly not a combined effort of the married couple. The marriage has no bearing on the acquisition of these assets. Property acquired by one spouse by gift or inheritance, and property owned by one spouse before marriage is not subject to community property law. Property purchased with the income from separate property is generally considered separate property.

Which of the following is not a mistake, pitfall, or weakness? A)Failure to minimize taxes B)Improper arrangement of life insurance C)Lack of estate liquidity D)Providing business planning

D) Providing business planning. The answer is providing business planning because it is the only answer choice which would be a strength in an estate plan. The remaining choices are, in fact, mistakes, pitfalls, and weaknesses.

Which one of the following is not a good technique to use to secure the payment of child support by a noncustodial parent? A)Irrevocable living trust B)Aannuity for the benefit of the child C)Insurance policy for the benefit of the child D) Revocable living trust

D) Revocable living trust. Since the trust is revocable, the noncustodial parent could revoke the trust and remove the assets that are the surety for the child support payments. This could not be done if the trust were irrevocable. An irrevocable living trust is a good technique to use to secure the payment of child support by a noncustodial parent. An insurance policy for the benefit of the child is a good technique to use to secure the payment of child support by a deceased noncustodial parent.

Carol owns 80% of IGU Corporation (one-half of the value of the stock is attributable to real estate owned by IGU). Currently, the value of Carol's stock in IGU is 64% of her projected adjusted gross estate. Carol is examining the implications of transferring three-quarters of her IGU shares to her children from her current marriage through her will. Her will leaves specified property valued at 10% of her estate to her spouse and the remainder of her estate to her children from her former marriage. Which of the following postmortem elections would not be adversely affected due to the proposed transfer of the IGU shares from Carol to her children from her current marriage? A)Section 6166 installment payment of estate tax B)Special use valuation C)A partial stock redemption under IRC Section 303 D)The alternate valuation date

D) The alternate valuation date. This is the correct answer, since the transfer of the business interest would not directly affect the ability to qualify for the alternate valuation date, which applies only to post-death situations where the value of a decedent's estate declines after death. It is doubtful that gifting assets today would have any direct effect on the growth or decline in the value of the assets in an estate immediately after Carol's death. This postmortem election allows the decedent's estate to value all assets as of six months after the decedent's death, if such valuation both reduces the value of the gross estate and the total estate taxes due.

Which one of the following statements regarding a general power of attorney is incorrect? A)The authority of the attorney-in-fact can vest immediately, upon execution of the power of attorney. B)Actions taken by the attorney-in-fact pursuant to the terms of the instrument creating the power are legally binding on the principal. C)The authority of the attorney-in-fact can vest certain circumstances occur. D)The authority of the attorney-in-fact will always survive the principal's incompetency.

D) The authority of the attorney-in-fact will always survive the principal's incompetency. The authority of the attorney-in-fact will survive the principal's incompetency only when the power of attorney is durable.

If Arthur died today, which of the following estate tax features would NOT apply to his estate? A) The 40% top estate tax rate B) The $11,700,000 exemption amount C) The portability of unused exemption lifetime amount between spouses (subject to some restrictions) D) The carryover basis for most inherited assets

D) The carryover basis for most inherited assets. For decedents dying in 2021, the estate tax lifetime exemption amount is $11,700,000, the top estate tax rate is 40%, and portability of the unused exemption amount is available between spouses. Inherited assets—other than income in respect of a decedent—generally receive a stepped-up basis.

Your data-gathering meeting with Colin indicated the following about his property interests: -He has the right to decide, without limitation, who will receive the entire corpus of his uncle's trust. Colin's will does not exercise this right. -His spouse owns a paid-up life insurance policy that insures Colin's life, and his spouse, Lois, is the primary beneficiary. -Five years ago, he created the revocable CG Trust for his children and funded it with $80,000 worth of securities; two years ago, when the trust fund was worth $130,000, he made it irrevocable. -Two years ago, he had cumulative taxable transfers that exceeded the applicable exclusion amount and paid $32,000 in gift tax to the federal government. If Colin died in the current year, which of the following would be excluded from his gross estate?

D) The death benefit of the life insurance policy. Colin's right in his uncle's trust is a general power of appointment, which would cause the maximum value that could be appointed at death to be in the holder's (Colin's) gross estate. He has no incidents of ownership in the life insurance policy on his own life, which would cause inclusion of the death benefit in his gross estate, nor is his estate the beneficiary. There is no indication that Colin assigned ownership of this policy to his spouse. If a right to alter, amend, or revoke is given up within three years of death, as it was when the CG Trust was made irrevocable, the value of the assets over which the right was retained must be included in the grantor's gross estate. Finally, any gift taxes paid out of pocket (tax liability beyond the gift tax applicable credit amount) on gifts made within three years of death must be included in the gross estate under the gross-up rule.

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

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

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

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

Which one of the following statements correctly describes the characteristics of an entity purchase buy-sell agreement? A) The replacement cost of life insurance on the lives of the other owners used to fund the agreement will be included in the gross estate of the first owner to die. B) Each business interest owner (and/or her estate) has an obligation to sell or offer to sell her interest to the other business interest owners when specified events occur. C) Each business interest owner purchases a life insurance policy on the life of every other business interest owner to be able to meet her obligation to purchase her share of the interest of the other owner or owners. D) The purchase price established for an owner's interest in the agreement will be accepted for transfer tax purposes by the IRS if more than 50% of the value of the property subject to the agreement is owned directly or indirectly by individuals who are not members of the transferor's family.

D) The purchase price established for an owner's interest in the agreement will be accepted for transfer tax purposes by the IRS if more than 50% of the value of the property subject to the agreement is owned directly or indirectly by individuals who are not members of the transferor's family. The purchase price established for an owner's interest in the agreement will be accepted for transfer tax purposes by the IRS if more than 50% of the value of the property subject to the agreement is owned directly or indirectly by individuals who are not members of the transferor's family. The Chapter 14 rules will not apply as the statutory exception to this section will be met. In an entity redemption agreement, the business entity contracts with each business owner to buy or redeem each owner's interest when specified events occur. The remaining answer choices would be true statements for a cross-purchase buy-sell agreement.

Catherine Rich established trusts under Internal Revenue Code Section 2503(c) for each of her eight grandchildren this year and funded each trust with $926,000. Earlier this year, Catherine also paid $25,000 to the local community hospital for medical bills incurred by her niece. Assuming that all of Catherine's children are living at the time of these transfers, which one of the following statements are CORRECT regarding application of the generation-skipping transfer tax (GSTT) to these transfers?

D) The transfers to the trusts are direct skips. The transfers to the trusts for the grandchildren are direct skips because each grandchild is a lineal descendant of a grandparent of Catherine and is two generations further removed from this grandparent than is Catherine. The trusts are skip parties because each trust has only one beneficiary who is a skip party in relation to Catherine. The payment of the medical bills is exempt from GSTT because the provider is paid directly.

Which one of the following statements regarding the estate tax marital deduction is NOT correct? A)The deduction is unlimited in amount. B)If the spouse is given a terminable interest in property as well as a general power of appointment over the same property, the decedent's estate will be allowed to take a marital deduction. C)Only the amount that passes to the spouse from the decedent will qualify for the deduction. D)Use of the deduction is elective for all property that qualifies for the deduction.

D) Use of the deduction is elective for all property that qualifies for the deduction. If property qualifies for the marital deduction, it must be taken. Under certain circumstances, terminable interest property can be made to qualify for the marital deduction by making an election, such as one made for a QTIP trust.

A person who wishes to provide for a loved one while removing an asset from his gross estate and avoiding probate would most likely utilize A) a joint tenancy with right of survivorship (JTWROS). B) a will. C) a revocable trust. D) an irrevocable trust.

D) an irrevocable trust. If a person wishes to remove an asset from his gross estate and avoid probate, neither a will nor a revocable trust would be appropriate. JTWROS ownership avoids probate but does not remove the asset from the gross estate. To achieve all of the listed goals, the person would have to establish an irrevocable trust.

The provisions of all of the following types of state statutes can be altered by express provisions in a will except A)simultaneous death statutes. B)abatement statutes. C)after-born child statutes. D)elective share statutes.

D) elective share statutes. The right to or amount of a surviving spouse's elective share cannot be altered because it is based on the public policy of preventing the total disinheritance of the spouse. The statutes listed in the remaining options all set forth provisions that take effect only in the absence of explicit will provisions.

Which one of the following will substitutes is not unilaterally revocable by the original owner of the affected asset if the owner is still competent? A) securities in an account with a T.O.D. designation B) a beneficiary designation on a life insurance policy C) funds placed in a bank account with a payable on death (P.O.D.) designation D) property titled in tenancy by the entirety

D) property titled in tenancy by the entirety. The original owner cannot unilaterally revoke either the half interest given to the other spouse at the time of titling or the half interest that the other spouse can get by surviving the original owner.

All of the following statements regarding the election to use the alternate valuation date (AVD) on the federal estate tax return are correct except A)the AVD cannot be used for wasting assets. B)the AVD can be used only if it reduces the total value of the gross estate. C)the AVD can be used only if it reduces the amount of federal estate tax owed by the estate. D)the executor is allowed to select which assets will be valued at the AVD and which will valued as of the decedent's date of death.

D) the executor is allowed to select which assets will be valued at the AVD and which will valued as of the decedent's date of death. If the executor elects to use the alternate valuation date, the election must be applied to all eligible assets in the gross estate; the executor is not allowed to choose among the assets.

All of the following statements regarding self-canceling installment notes (SCINs) are correct except A) if the purchaser has paid a premium to obtain the cancelation provision in the SCIN, the seller may not have to include any payments canceled at death in his gross estate. B) if the self-canceling provisions of a SCIN never become operative, the tax consequences of a SCIN are identical to those of a regular installment sale. C) the purchaser's basis in the asset purchased is equal to the purchase price if a SCIN premium has been paid. D) the purchaser's basis in the asset purchased is limited to the payments that are actually made to the seller before death.

D) the purchaser's basis in the asset purchased is limited to the payments that are actually made to the seller before death. The purchaser's basis in the asset purchased is limited to the payments that are actually made to the seller before death. The purchaser's basis is the agreed upon purchase price even if some of the anticipated payments are never made because of the cancelation provision.

For taxable distributions from a trust, the generation-skipping transfer tax is paid by

D) the transferee. For taxable distributions, the liability for the tax falls on the transferee. The tax reduces the amount of the transfer available to the transferee.

Which of the following correctly explains why a beneficiary who received nonprobate assets by will substitute may agree to the use of all or part of the assets to meet estate liquidity needs? A)To avoid the liquidation of probate assets to meet cash needs B)To avoid a lawsuit by the personal representative for a prorated portion of the taxes C)To avoid an IRS lien against the nonprobate property that the beneficiary received from the decedent D)All of these

D)All of these. All three answers correctly explain why a beneficiary who received nonprobate assets by will substitute may agree to the use of all or part of the assets to meet estate liquidity needs. First, without the aid of such nonprobate beneficiaries, the personal representative (PR) may be forced to liquidate probate assets to meet cash needs. If the nonprobate beneficiary also is to receive a bequest, it may be considerably reduced or eliminated because in a forced liquidation of estate assets, the estate is likely to have to sell assets far below their fair market value, and administrative expenses will be greatly increased. Second, if taxes are equitably apportioned, the PR usually has authority to withhold the probate share of a beneficiary who has received a nonprobate asset that generates estate tax or to sue such beneficiary for her share of the taxes. Finally, if property received by a nonprobate beneficiary was included in the decedent's gross estate, and estate taxes are not paid, the IRS has the right to pursue nonprobate beneficiaries to collect such tax. In some cases, this might involve the filing of a lien against the property that the beneficiary received from the decedent.

When Craig's uncle died, Craig inherited the right to live in his uncle's home for as long as Craig lives. The 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)Life estate for a term of years B)Life estate C)Fee simple D)Remainder

D)Remainder. 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 and not a fixed number of years. A fee simple interest represents absolute ownership of property. Monica does not have absolute ownership of the home at the uncle's death. Craig has the life estate.

Jason purchased a tract of land for $100,000. Two years later, the land was valued at $160,000, and Jason added his daughter's name to the title as joint tenant with a right of survivorship. Jason dies when the land has a fair market value of $200,000. What amount is included in Jason's gross estate? A. $80,000 B. $100,000 C. $160,000 D. $200,000

D. $200,000. The value of the land included in Jason's gross estate is based on the consideration furnished rule. Because Jason contributed the entire purchase price of the land ($100,000), the entire FMV of the land ($200,000) at Jason's date of death is included in his gross estate.

Which of the following statements regarding the attributes of property owned solely by one person is(are) CORRECT? I. The maximum ownership interest a person may have in property is known as fee simple or absolute ownership. II. The owner of a life estate has the right to possess and use property for the remainder of that person's life or for the remainder of someone else's life. III. A lease is an example of a term of years.

D. All of these statements are correct.

Which of the following documents would a planner need to properly analyze a client's estate planning situation? A. The statement of financial position B. The cash flow statement C. An existing will D. All of these

D. All of these. Each of these documents—along with any advance directives, life insurance policies, and any other legal or contractual documents a client may have—will be needed to properly analyze the client's situation. No two clients are alike, so what a planner will need will vary.

All of the following intrafamily transfers involve the use of a trust except: A) GRATs. B) FLPs. C) GRUTs. D) QPRTs.

FLPs Transfers using FLPs (family limited partnerships) involve the use of gifts, not trusts.

Estate Planning Mistakes, Pitfalls, and Weaknesses

Failure to Recommend Necessary Changes to a Will, Improper Disposition of Assets, Improper Titling of Assets, Improperly Arranged Life Insurance, Lack of Estate Liquidity, Failure to Avoid Ancillary Probate, Failure to Provide Business Planning, Failure to Minimize Taxes and Costs, Failure to Give Proper Advice Regarding Funeral Arrangement

Which one of the following intrafamily transfers involve a gift of the underlying property?

Family limited partnerships (FLPs). FLPs involve a gift of the underlying property. All of the other transfers involve a sale.

Financial Goals in Estate Planning

Financial goals, of course, deal with the topic of money and may be further divided into nontax and tax issues. 1. Preserving Business Value 2. Maximizing Flexibility 3. Maximizing Benefits for a Surviving Spouse 4. Minimizing Nontax Transfer Cost 5. Maintaining a Satisfactory Standard of Living 6. Maintaining Adequate Premortem and Postmortem Liquidity

Tax Goals Related to Transfer Taxes

Freezing or reducing the value of assets subject to the tax. Because transfer taxes generally are assessed on the value of the property transferred as of the date of transfer, the benefits of this goal are obvious. This goal is always achieved by an outright (nontrust) gift, because all future appreciation in value of the asset will be the responsibility of the new owner. Leveraging the use of exclusions, exemptions, reductions, and credits. Leveraging means taking actions that will increase the benefit of these tax-saving items, such as making lifetime gifts to take advantage of the gift tax annual exclusion and the tax-exclusive nature of the gift tax. Delaying payment of a tax due. The benefits of this goal are the same as those of the income-tax-related goal of deferring the recognition of income and gain discussed previously. In addition to the benefits brought about because of the time value of money, delaying payment of a transfer tax may be necessary to meet liquidity needs.

Life Estate

Gives a person the right to possess and use the property for the remainder of the individual's life or for the remainder of someone else's life.

Which of the following statements regarding entity purchase buy-sell agreements is CORRECT? 1. When used by a corporation, these agreements are also known as stock redemption plans. 2. The business entity itself purchases the interest of an owner who dies. 3. 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.

I and II. 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.

Wilma Reader wants to help her niece, Anne, by giving her a gift of land valued at $50,000. However, Wilma has been so generous to other friends and relatives that she has completely used up her gift tax applicable credit amount. Therefore, Wilma would like to make the gift to Anne a "net gift" by having Anne agree to pay the gift tax. Which of the following statements is CORRECT about the general income, gift, or estate tax implications of a net gift? 1. If the gift tax paid exceeds Wilma's adjusted basis in the land, Wilma will have reportable gain. 2. Any gift tax paid by Anne can be taken as a credit against Wilma's eventual estate tax. 3. In computing the gift tax, Anne can use her applicable credit amount. 4. In figuring Wilma's estate tax, her executor will have to include $50,000 minus the maximum annual exclusion as an adjusted taxable gift because of this transaction.

I and II. Option III is incorrect, as the donee uses the donor's applicable credit amount in a net gift situation. Because Wilma used up her gift tax applicable credit amount, there will be no offsetting credit against the tax. Option IV is incorrect because only the net amount of the taxable gift (fair market value of gift minus gift tax paid and annual exclusion) will be added to Wilma's estate as an adjusted taxable gift.

Which of the following laws were designed to provide for the needs of a surviving spouse or dependent children? 1. Homestead exemption 2. Family allowance statute 3. Family benefits statute

I and II. Statement III is false because there is no such thing as a family benefits statute.

Which of the following statements regarding a gift-leaseback is CORRECT? 1. To implement the technique, a senior family member gifts a fully depreciated business asset to a junior family member and then leases it back. 2. A gift-leaseback creates lease payments for the senior family member and taxable income to the junior family member. 3. The senior family member is prohibited from deducting the lease payments that result from the gift-leaseback transaction.

I and II. Statements I and II are correct. Statement III is incorrect because the senior family member can deduct the lease payments if there is a valid reason for the gift-leaseback transaction and the lease payments are based on an arm's-length rental payment.

Which of the following statements regarding education planning trusts is CORRECT? 1. The principal of a Section 2503(c) trust must be distributed or offer to be distributed to the minor when the minor attains age 21. 2. The trustee of a Section 2503(b) trust may, at his discretion, distribute trust income each year. 3. The corpus of a Section 2503(b) trust need not be distributed when the beneficiary attains age 21.

I and III. A Section 2503(c) trust, also known as a minor's trust, provides for the discretionary distribution of annual trust income on the minor's behalf with the principal being made available to the minor when the minor attains age 21. A Section 2503(b) trust, also known as a mandatory income trust, is an alternative to the Section 2503(c) trust. It must distribute income each year to the trust beneficiary and does not require distribution of the principal (corpus) when the beneficiary attains age 21.