Estate Planning Test 2
Ch 7: On January 1st of this year, a father gave his daughter a $100,000 ordinary life insurance policy on his life and filed a timely gift tax return. Premiums are paid annually. The pertinent facts concerning the policy are the following: - Date of issue: July 1, 15 years ago. - Premium paid on July 1 of this year = $1600. - Terminal reserve on July 1 of this year = $12,000. What is the value of the policy for federal gift tax purposes?
-$11,800 Interpolated terminal reserve plus unearned premium at the time of valuation. SInce the time of the gift, Jan 1 of this year, falls at the midpoint of the time interval presented, the interpolated terminal reserve is $11,000 (the sum of 10,000 and 12,000 divided by 2). SInce 1/2 of the annual premium (800) is unearned as of Jan 1 of this year, the value of the policy on Jan 1 of this year, for gift tax purposes is 11,800.
Ch 7: A widower made the following cash gifts in a year when the annual exclusion was $14,000: -$15,000 to his daughter -$20,000 to a qualified charity -$5000 to his sister -$10,000 to his brother -$25,000 to his mother. The total amount of the taxable gifts made was?
12,000 Total gifts = 75,000 -less annual exclusions daughter-14,000 charity- 14,000 sister- 5,000 brother- 10,000 mother- 14,000 = 57,000 75,000 - 57,000 - 6000 (charitable deduction) = 12,000 total taxable gifts
Ch 7: John Jenkins, a widower, made the following gifts in 2013: -50,000 in cash to his son -15,000 in cash to the American Cancer society -Stock worth 20,000 to his grandson (originally purchased for 10,000) -bonds worth 90,000 to the university of Penn development fund (orig. purchased for 100,000) What is the total amount of taxable gifts made by John?
42,000 For tax purposes, gifts are valued at their current market value. In addition, each gift will qualify for the 14,000 annual exclusion (2013), and the remainder of the gifts to the American Cancer society and University of Penn will qualify for the charitable deduction. Therefore, only 36,000 of the gift to his son and 6,000 of the gift to his grandson will be taxable gifts
Ch 8: Which of the following statements concerning executors is correct? A) An executor can be given broad and discretionary powers with respect to the management of estate assets. B) An executor is chosen by the beneficiary of a will shortly after the decedents death. C) An executor must be an individual rather an entity or institution D) An executor is answerable only to the beneficiary and not the court having jurisdiction over the probate of the asset.
A B is incorrect because the executor is named in the last will of the testator and is not named by the beneficiary C is incorrect because an executor may be an individual but is often a corporate trust institution D is incorrect because the probate court has control over the probate proceedings and the executor is answerable to it, not the beneficiary
Ch 7: Which of the following statements concerning federal gift and estate taxes is (are) correct? 1) The federal state death tax deduction is allowed only if a federal estate tax Form 706 return must be filed 2) State estate and inheritance taxes are generally imposed at the same rate regardless of the relationship of the deceased to the beneficiary 1 2 1 & 2 neither
A) -2 is incorrect because the general rule is that completed gifts are not brought back into a decedents gross estate. There are exceptions, however; transfers of property with retained rights and gifts of life insurance policies within 3 years of death are brought back into a decedent (insured's) gross estate.
Ch 11: All of the following are advantages of a buy-sell agreement EXCEPT: A) It binds the IRS to accept the value of the decedents business interest B) It can provide liquidity to a decedent-shareholders estate C) It provides for the continuation of the business D) It makes the business more attractive to creditors
Answer is A. -Although a properly drafted buy-sell agreement can be used to peg the estate tax value of a decedent's business interest, the IRS is not necessarily or absolutely bound to except the value of a decedent's business interest established in such an agreement.
Ch 11: All of the following are advantages of a buy-sell agreement EXCEPT: A) It guarantees the estate tax value of the decedents interest B) It assumes a market for the business interest C) It provides for business continuation D) It makes the business more attractive to creditors
Answer is A. -While executing a buy-sell agreement is important, the mere existence of an agreement does not necessarily guarantee that the IRS will accept the estate tax value of the decedent's business interest
Ch 11: Henry, Harry, and Hobie form a closely held corp, XYZ Corp. Each one receives 100 shares of stock. The three shareholders enter into a stock redemption (Entity purchase) buy-sell agreement so that when one dies, the remaining shareholders can continue the business in coequal ownership. If Henry dies prematurely, which of the following statements concerning this arrangement is correct? A) Harry and Hobie now own 150 shares of XYZ B) Harry and Hobie are obligated to purchase Henry's shares from his estate. C) Harry and Hobie continue to own the same number of shares are they did prior to Henry's death. D) There are 300 shares of stock outstanding in XYZ Corp.
Answer is C. -A is incorrect because with a stock redemption Harry and Hobie will each own 100 shares after Harry's death. -B is incorrect because it is XYZ corp. that is obligated to purchase Henry's shares from the estate. -D is incorrect because XYZ will retire Henry's shares, which leaves Harry and Hobie with 100 shares each.
Ch 8: All the following testamentary transfers are considered transfers by operation of contract EXCEPT A) A surviving spouse is the beneficiary of a survivor annuity from his or her deceased spouse's pension plan. B) An irrevocable inter vivos trust is the named beneficiary of a life insurance policy on the decedents life. C) A joint securities account becomes the sole property of a surviving account holder at the death of the other joint owner D) A surviving spouse receives his or her share of the deceased spouses estate as determined by a valid antenuptial agreement
Answer is C. Jointly held property with rights of survivorship passes to the survivor by operation of law
Ch 7: All the following statements concerning gift taxes to minors are correct except: A) the gift generally involves some complexity since state laws often restrict the titling of property in the minor's estate B) The annual gift tax exclusion is unavailable unless the minor receives the property outright C) Gifts to a Uniform Transfers to Minors (UTMA) custodial account provide for the outright distribution to the minor at the time the minor reaches the age of majority D) Gifts to a Sec. 2503(c ) minors trust permit the trustee to accumulate and reinvest income
B) Several types of transfer mechanisms are available to make gifts to minors that both qualify of the annual gift tax exclusion and restrict the minor's current assets to the funds.
Ch 10: An executor may value assets as of the date of death or the alternate valuation date 6 months after death. Assuming the executor elects the alternate valuation date, which of the following statements is (are) correct? 1) Property sold by the executor before the alternate valuation date is valued at its arm's length sale price 2) Property that has increased in value since the date of death is valued the alternate valuation date A) 1 B) 2 C) Both D) Neither
Both are correct (Regarding statement 2: Remember that SOME property in a decedents estate may increase in value during the 6-month period even though the overall value of the estate is less at the alternate valuation date than at the date-of-death value)
Ch 7: Which of the following is a gift for federal tax purposes? A) without compensation a carpenter builds a chicken shed for a neighbor B) a valuable oil painting owned by a father is delivered to his son to be displayed at the son's residence with a provision that the painting is to be returned to the father on demand C) a father tells his son that he need not pay interest on a 50,000 interest-bearing note evidencing a loan that the father made to his son D) a mother promises to give her son her new car as soon as the odometer reads 50,000 miles
C -Forgiveness of money owed is considered a gift unless it is in a business context. -A, B, D are incorrect because they do not constitute gifts for federal gift tax purposes
Ch 8: A person dying without a valid will generally loses which of the following capabilities? 1) the right to name guardians of minor children 2) the right to name a personal representative a) 1 b) 2 c) both d) neither
C) Both are correct
CH 8: Which of the following statement concerning wills is (are) correct? 1. A will may be revoked by the testator prior to his or her death. 2. An adult child may be disinherited entirely by a parent in most states A) 1 B) 2 C) both D) neither
C) both are correct
Ch 10: A father and son have been farming land owned by the father for the past 12 years. Just prior to his death the father was offered 3 million for his because of its possible use as a shopping center. The son would like to continue to farm the land if it can be included in his fathers estate at its current-use value. Additional facts are as follows: -Average annual gross rentals from nearby farms of similar acreage are 160,000 -Average annual state and local real estate taxes on the farm are 32,000. -The interest rate for loans from the Federal Land Bank is 8 percent. For federal estate tax purposes, the farm-method valuation formula would result in a current-use value for the farm of?
The answer is 1,600,000 Current use-valuation is calculated as follows: Net comparable income (160,000 - 32,000) = 128,000 Capitalized net income (128,000 / .08) = 1,600,000
Ch 10: Which of the following statements concerning valuation of assets for federal tax purposes is (are) correct? 1) The date of valuation of an estate is the date of the decedents death or, if applicable, the alternate valuation date, which is 6 months later. 2) All estate assets are valued at fair market value, which is the value placed on the estate assets by the executor with advice of the attorney for the estate. A) 1 B) 2 C) Both D) Neither
The answer is A. -2 is incorrect because, depending on the type of estate assets and the particular circumstances, fair market value may be inappropriate for federal estate tax valuation purposes. Special-use value, adjusted-book value, and capitalization of adjusted earnings are other possible valuations.
Ch 8: All the following statements concerning a will are correct EXCEPT A) its irrevocable once executed B) it is a legal instrument C) it provides for the disposition of property at death D) it takes effect after death
The answer is A. A will may be revoked or amended anytime prior to death
Ch 8: A man has established a revocable inter vivos trust and has named the trustee the beneficiary of all his life insurance policies. His will provides that al of his residuary estate will "pour over" to the trust. All the following statements concerning this arrangement are correct EXCEPT: A) Probate costs will be eliminated in the administration of the man's estate B) Flexibility and discretion in the administration of trust assets can be attained. C) The trust must be in existence prior to the date the man's will is executed. D) The trust can provide liquidity in the man's estate
The answer is A. Probate costs will be imposed on the estate-administered assets that will pour over to the trust at death
Ch 10: Which of the following statements concerning grantor-retained annuity trusts (GRATs) is (are) correct? 1) These trusts provide the grantor with a fixed annual annuity for a term of years of life. 2) A goal in establishing a GRAT is to transfer property at a reduced transfer tax cost. A) 1 B) 2 C) both D) neither
The answer is B. - 1 is incorrect because only a life insurance policy gifted immediately after purchase has a value for gift tax purposes equal to the gross premium paid. A paid-up life policy has a value equal to the premiums payable for the same type of single-premium policy based on the insured's age on the date of the gift. A premium-paying policy has a value equal to the interpolated terminal reserve plus any unearned premiums.
Ch 10: All of the following are typical of the stock of a closely-held corporation EXCEPT A) A limited number of stockholders B) the absence of an exchange listing or regular quotation in the over-the-counter market C) the lack of restrictions on a shareholders ability to transfer the stock D) irregular and limited history of sales or exchanges
The answer is C. In the usual closely held corporate entity, restrictions are placed on the transfer of ownership of stock to ensure the existing owners maximum control of the corporation and to maintain continuity of ownership in the hands of the present owners or their families.
Ch 9: All of the following are advantages to the probate process EXCEPT: A) court supervision of executors activities B) inventory of estate assets C) privacy of a decedents will D) validation of decedents will
The answer is C. One of the disadvantages of probate is that the decedent's will becomes a matter of public record.
Ch 8: Which of the following statements concerning a valid written will is (are) correct? 1) a testators signature must be notarized when the will is executed. 2) a testator must have testamentary capacity at the time of death a) 1 b) 2 c) both d) neither
The answer is D 1 is incorrect because a notarization causes a will to be self-proved to a probate court but is not required since a will can be formally proved to a probate court by establishing the validity of the testators signature 2 is incorrect because the validity of a will requires that the testator have capacity when the will is executed
