Exam 3

Seth, a U.S. citizen, owns a life insurance policy on his own life. His latest statement from the life insurance company revealed the following: Death Benefit $1,000,000Cash Value $200,000Beneficiary Designation Sonia (his wife) If Seth died today, and the insurance proceeds were paid to his wife, Sonia (not a US citizen), what amount will qualify for the estate tax marital deduction?

$0 Since the policy is owned by Seth, the $1,000,000 will be included in his gross estate. Since Sonia is not a U.S. citizen, she will NOT qualify for the unlimited marital deduction.

Nine months ago, Bonnie gave land to Ron. At the date of gift, the land had a fair market value of $400,000 and an adjusted taxable basis to Bonnie of $250,000. Ron died bequeathing all of his property to Bonnie. If the land had a fair market value of $450,000 on the date of Ron's death, what is Bonnie's adjusted taxable basis in the land?

$250,000 If a heir or legatee receives property from a decedent that the decedent acquired by gift from the heir/legatee within one year of the decedent's death, the heir/legatee takes the decedent's basis (which will be the donor's basis). There is no stepped-up basis. Since Ron died within one year of the gift, and bequeathed the property to the original donor (Bonnie), Bonnie's basis in the property will not be stepped up. Bonnie's basis will be $250,000.

Which of the following is/are correct regarding qualifying disclaimers? 1. They must be in writing.2. The property must be disclaimed within 9 months the date of death.3. The disclaiming party could not have previously benefited from the interest being disclaimed.4. The disclaiming party cannot direct the interest to any other specific person.

1,2,3, and 4

Kyrie dies and leaves his son, LeBron, the family farm. The value of the farm as used is $3,000,000. The fair market value of the farm at its highest and best use (supermarket and shopping mall) is $6,000,000. Which of thefollowing statement(s) is/are true regarding a proper 2032A election? 1. The value of the land in the gross estate will be less than $3,000,000.2. LeBron will have to use the farm for 10 years to avoid recapture of the 2032A benefit.

2 only Statement #1 is incorrect because the amount included in the gross estate will be $6,000,000 minus the 2032A election.

Zack died on November 15th. The assets in his estate were valued at the date of death and on the alternate valuation date, respectively, as follows: Asset: Home. Date of Death Value: $500,000. Alternate Valuation Date Value: $550,000. Asset: Investments. Date of Death Value: $1,000,000. Alternate Valuation Date Value: $800,000. Asset: IRAs. Date of Death Value: $600,000. Alternate Valuation Date Value: $650,000. Asset: Copyrights. Date of Death Value: $400,000. Alternate Valuation Date Value: $300,000. The executor sold the home on December 15th for $525,000. If Zack's executor properly elects the alternate valuation date method, what is the value of Zack's gross estate?

2,375,000 ($525,000 + 800,000 + 650,000 + 400,000) = $2,375,000. Generally, all assets are valued on the alternate valuation date. Any asset disposed of between the date of death and the alternate valuation date is valued as of the date of disposition. All wasting assets (leases, installment notes, annuities, patents, and copyrights), which decline in value due to time are valued as of the date of death.

How many insurance policies are required under a LLC entity buy-sell agreement if the LLC has five members?

5 The LLC would purchase one policy for each member's life.

If the executor of a decedent's estate elects the alternate valuation date, and none of the property included in the gross estate has been sold or distributed, the estate assets must be valued as of how many months after the decedent's death?

6

Prior to his death, Ashton owned a closely held business. The total business is valued at $5,000,000, the real estate used in the business is valued at $4,000,000, and Ashton's total adjusted gross estate was $13,000,000. Which of the following postmortem estate planning techniques can Ashton's executor elect?

6166 the closely held business will qualify for 6166. The corporation is 38.5% of Ashton's AGE. Section 2032A requires the value of the closely held corporation to be at least 50% of the AGE. Section 1031 and Section 1033 are tax free exchange provisions and do not apply.

Which of the following statements regarding the estate tax marital deduction is correct?

A QTIP trust will qualify for the marital deduction, if the executor makes the appropriate election. The marital deduction applies in both community property and separate property states. There is no need for the surviving spouse to be a U.S. citizen if using a QDOT. The marital deduction property must be included in the surviving spouse's gross estate.

Maria is a citizen and resident of Mexico. She was married to Jose, a U.S. citizen, and is his sole survivor. Which of the following techniques or arrangements would be useful if his gross estate is $15,000,000?

A Qualified Domestic Trust QDOT

Which of the following terms describes an insurance policy that covers the lives of two people and is payable only after both have died?

A second to die policy pays on the death of the second to die insured.

Upon the death of the grantor of a revocable inter vivos trust, the trust assets receive:

A step to FMV basis with inclusion in the gross estate. There is step to FMV basis but no capital gains tax and there is inclusion in gross estate.

Only property that passes from the deceased spouse to the surviving spouse is eligible for the marital deduction. Which of the following will not qualify for the estate tax marital deduction?

A terminal interest in property (with the exception of certain survival clauses).

On January 15th, Mitch transfers property to a trust over which he retains a right to revoke one-fourth of the trust. The trust is to pay Jennifer 5% of the trust assets valued annually for her life with the remainder to be paid to a qualified charity. On September 1st, Mitch dies and the trust becomes irrevocable. Which of the following trusts does this qualify as?

At the creation, the trust is revocable; therefore, it does not qualify as CRUT, CRAT, or pooled income fund

Failure to make an installment payment under Section 6166 could result in: 1. Acceleration of all unpaid tax.2. Loss of the special 2% interest rate.

Both 1 and 2

Which statement(s) regarding Section 6166 is correct?1. 6166 provides for a 2% loan.2. The first 4 years following the 6166 election requires interest only and no principal repayment.

Both 1 and 2

Which of the following charitable trusts allow investments in securities that are exempt from taxes?

CRATs, CRUTs NOT pooled incomes

Which of the following charitable trusts allow sprinkling provisions?

CRATs, CRUTs NOT pooled incomes

Which of the following charitable trusts allow for additional inter vivos contributions to be made after the inception of the trust? Check all that apply

CRUTs bc CRATs specifically preclude additions to trust property post-inception.

Which of the following charitable techniques allow the grantor/transferor to manage the transferred assets? Check all that apply.

CRUTs, CRATs NOT pooled income fund because the charity manages the assets in those

Which of the following charitable trusts allow both term certain less than or equal to 20 years and life annuities?

CRUTs, CRATs NOT pooled incomes

Which type(s) of charitable remainder arrangements permit additional contributions after inception? Check all that apply.

CRUTs, Pooled income funds

The alternate valuation date:

Can be elected only if it reduces the value of the gross estate and the estate tax liability.

Which of the following is not a major type of insurance?

Custodial Life Insurance

A QTIP trust must:

Give the surviving spouse the right to require only income producing assets be in the trust.

Which of the following statements is correct regarding buy-sell agreements?

If the corporation is designated as the owner and irrevocable beneficiary of any life insurance policy used to fund the buy-sell agreement, the death benefit from the policy is not includible in the decedent shareholder's gross estate. Option a is incorrect, since a buy-sell agreement need not be funded with life insurance or property. Option b is incorrect, because life insurance premiums are not deductible. Option d is incorrect, because in a cross-purchase agreement, the owners purchase life insurance on the lives of the other owners.

Which of the following is not an advantage of the marital deduction?

If the first spouse to die took full advantage of the marital deduction, all property in the surviving spouse's estate at his or her death is subject to the federal estate tax.

To qualify for the charitable income tax deduction, a gift cannot be made to a(n):

Individual. A charity can not be an individual

Which of the following is not a benefit of a charitable remainder trust?

It acts as a form of life insurance that benefits the grantor's children at death. Generally, when the grantor dies the money goes to charity.

Benefits of Charitable remainder trusts:

It reduces income tax It increases current income by providing life income for the grantor It reduces federal estate tax

Ron, a certifiable terminally ill patient, sold the ownership of his life insurance policy to a viatical settlement provider for $200,000. Which of the following statements is/are true with respect to the transfer? 1. Ron will be subject to income tax on this transaction if he lives beyond two years.2. Ron will be subject to income tax on the sale proceeds less his cost basis.

NEITHER Statements 1 and 2 are incorrect. Ron is terminally ill, and as a result, the proceeds from the viatical settlement are excluded from his gross income for income tax purposes.

Ordinary and necessary administration expenses paid by the fiduciary of an estate are deductible:

On the fiduciary tax return Form 1041 or the 706. The executor determines and elects where to deduct administrative expenses (on the 1041 or the 706 - one or the other).

Only property that passes from the deceased spouse to the surviving spouse is eligible for the marital deduction. Which of the following will qualify for the estate tax marital deduction?

Property passed under state intestacy laws life insurance proceeds property passed by will

Which one of the following provisions should NOT be included in a buy-sell agreement for an unincorporated business?

Provisions allowing for Section 6166 relief. Section 6166 is for an illiquid estate

Bob and Ted are married and live in California, a community property state. Their community property consists of real property with an adjusted basis of $300,000 and a fair market value of $750,000 and other property with an adjusted basis of $100,000 and a fair market value of $75,000. Bob dies and leaves his entire estate to Ted. What is Ted's adjusted basis in the real property and other property after Bob's death?

Real Property: $750,000. Other Property: $75,000. Both the decedent's and survivor's interest in the community property receive a basis adjustment to the fair market value on the date of Bob's death.

Insurance and annuities:

Term insurance does not have cash value Annuities are contracts that pay income to someone during their lifetime. The beneficiary of a life insurance policy is the person who receives the proceeds of the policy after the insured's death.

Which of the following statements about insurance and annuities is incorrect?

The cash surrender value of a life insurance policy is the amount payable by the insurance company to the beneficiary. term insurance has no cash value. The cash surrender value is paid to the owner not the beneficiary.

Gifts of life insurance policies valued at $15,000 may qualify for the annual gift tax exclusion. Which of the following statements correctly describes a requirement to qualify for the exclusion?

The donee must have the unrestricted right to use, posses, or enjoy the donated property after the gift is received.

Which statement about the gift tax marital deduction is incorrect?

The regular annual exclusion available to all donees is available for gifts to non-citizen spouses. There is a special annual exclusion available for marital gifts to non-citizen spouses which is approximately 10 times the normal exclusion and the amount of the exclusion is indexed annually for inflation.

On January 15th, Linus transfers property to a trust over which he retains a right to revoke one-fourth of the trust. The trust is to pay Patti 5% of the trust assets valued annually for her life with the remainder to be paid to a qualified charity. On September 1st, Linus dies and the trust becomes irrevocable. Which of the following statements is/are correct? Check all that apply.

The trust is created JAN 15th The trust is created when funded, but because of the right to revoke, it does not qualify for any charitable deduction.

Justin is the grantor of an ILIT. When he dies, his estate needs cash for funeral costs, final medical expenses, death taxes, etc. How can the proceeds of the life insurance policy in the ILIT be made available to the executor?

The trust terms may authorize the purchase of assets from the estate, or authorize loans to the estate. While the proceeds may not go directly into the estate, the trust terms have either of these two options for making cash available to the executor. However, the trust must not require the trustee to make the cash available, or else the trust assets will end up being included in the grantor's estate.

The marital deduction is:

Unlimited

If a deceased person has "incidents of ownership" in a life insurance policy at the time of his or her death, the death benefits are included in the decedent's gross estate. When would the decedent not have incidents of ownership?

When the decedent paid none of the policy premiums.

What are major types of insurance

Whole life insurance Indexed universal life insurance term life insurance

Advantages of the marital deduction:

With proper planning, it provides a way to minimize estate tax liability for both spouses The surviving spouse receives a stepped up basis on property qualifying for the marital deduction there is not estate tax at the first spouse's death