Module 4 - 4325
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 probate estate. B) An advantage is that Robert has reduced his gross 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.
A 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.
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) Execute codicils B) File will contests C) Elect against their wills D) File qualified disclaimers
A 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.
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? A) The death benefit of the life insurance policy B) The date-of-death value of the CG Trust C) The value of the corpus of his uncle's trust D) The $32,000 in gift taxes paid
A 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.
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 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 C) 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 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 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.
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) A disadvantage of the way the bank account is titled is that the client no longer has exclusive control of the bank account. C) 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. D) A disadvantage of the revocable trust is that its assets will not avoid probate because it is revocable.
A 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.
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? I. Probate will not be necessary if Leon dies testate. II. Avoiding probate will help keep Leon's affairs private after he dies. III. Probate might delay the distribution of Leon's assets to his heirs. A) II and III B) I, II, and III C) I and III D) II only
A 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.
Which of the following forms of ownership pass through probate when an owner dies? I. Fee simple II. Tenancy by the entirety III. Community property IV. Joint tenancy with right of survivorship (JTWROS) A) I and III B) IV only C) I, III, and IV D) I only
A 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.
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) Herbert's spouse will have the right to elect against the will even though she is named as the PR of the estate. B) 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) 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. D) Herbert's estate will have to pay estate tax because the marital deduction will be too small to eliminate all tax.
A 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 is CORRECT regarding the purpose and characteristics of a nuncupative will? I. A nuncupative will is one whose material provisions are written entirely in the testator's handwriting. II. A nuncupative will requires at least one witness. III. State law may limit the types and amounts of property that may be distributed by this form of will. IV. This form of will is recognized in most states. A) I, II, and IV B) II and III C) I and II D) III and IV
B 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.
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) Placing the stock portfolio in a living revocable trust with Bonnie and Charles as remainder beneficiaries B) Changing the title of the rental real estate so that Alice, Bonnie, and Charles are joint tenants C) A retained life estate in the personal residence, with the remainder to Bonnie and Charles D) Naming Bonnie and Charles equal beneficiaries of her pension benefits at her death
B 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).
Which of the following statements would avoid probate at the owner's death? I. Payable on death (P.O.D.) account II. Tenancy by entirety III. Funded inter vivos trust IV. Joint tenancy with right of survivorship (JTWROS) A) I and III B) I, II, III, and IV C) II, III, and IV D) I and II
B All of these are will substitutes that can be used to avoid probate.
Which of the following statements should be considered to minimize the probability of a successful will contest? I. Leaving every heir a bequest, even if it is small II. Executing a codicil that appoints a new executor of the estate III. Establishing a trust during lifetime to provide for testamentary disposition to the heirs IV. Including an in terrorem clause in the will if these clauses are generally enforced in the testator's state A) I and IV B) I, III, and IV C) II and III D) I, II, and III
B 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.
If Arthur Greene dies today, which one of the following assets will be included in his probate estate? A) His IRA B) The family limited partnership (FLP) he has set up. C) His profit-sharing plan D) His personal residence owned jointly with his spouse.
B Arthur's FLP interest will be included in the probate estate. The other assets will pass via will substitute.
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) this is a nuncupative will, which is invalid and allows all her property to avoid probate. B) 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. C) her will is valid and will result in all her solely owned property going to her sister. D) 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 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.
Which one of the following is an advantage of all will substitutes? A) They can never be revoked. B) They avoid the probate process. C) They permit you to pass any property by making a payable on death (P.O.D.) designation. D) They are private and are not governed by state law.
B Will substitutes, by definition, avoid probate.
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) Changing the deed to her personal residence so that she has a retained life estate, with the remainder going to her children B) Retitling all of her solely owned property with her children and herself as tenants in common C) 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 D) Converting her bank accounts to payable on death (P.O.D.) accounts
C 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.
Trusts created under a will are examples of which type of trust? A) Totten trust B) Inter vivos trust C) Testamentary trust D) Revocable living trust (RLT)
C A trust that is created under a will and that does not take effect until the testator's death is a testamentary trust.
Which of the following are property interests that must go through the probate process? I. A car that passes to the decedent's spouse by the state's intestate succession statute. II. A government savings bond that is titled in the name of the decedent payable on death to the decedent's daughter. III. Life insurance proceeds payable to the decedent's estate. IV. Assets in a revocable trust that pass to the decedent's children at the decedent's death. A) II and IV B) I, III, and IV C) I and III D) II, III, and IV
C 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.
Which one of the following statements regarding the estate tax marital deduction is NOT correct? A) Only the amount that passes to the spouse from the decedent will qualify for the deduction. 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) Use of the deduction is elective for all property that qualifies for the deduction. D) The deduction is unlimited in amount.
C 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.
Owning property in joint tenancy with right of survivorship (JTWROS) is a will substitute because A) this form of ownership eliminates the need for a will. B) the property may be owned by more than two owners. C) the property passes outside of probate. D) the property is subject to probate.
C It is precisely because JTWROS passes property outside of probate that it is a will substitute.
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) No, because there will be no estate tax to be paid out-of-pocket by his estate. C) Yes, because the existing will does not include a residuary clause and thus could be subject to the intestacy statutes. 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.
C 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.
Which of the following estate planning objectives can be accomplished through a will? I. Creating a presumption of survivorship II. Establishing a priority for eliminating or reducing bequests if the estate has insufficient assets III. Avoiding probate of estate assets IV. Naming a residuary beneficiary to take all assets that remain after specific bequests are allocated A) II and III B) II and IV C) I, II, and IV D) I and III
C 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.
Which of the following should be included in a will? I. Provision for guardians of minors II. Funeral instructions III. Beneficiaries for retirement accounts A) III only B) I and II C) I only D) II and III
C 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.
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? I. The disclaimer must be irrevocable. II. The disclaimer must be in writing. III. The disclaimer must be filed within six months of Marleen's death. IV. Tasha cannot have benefited from any disclaimed assets before execution of the disclaimer. A) II and IV B) I and II C) I, II, and IV D) II, III, and IV
C 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.
Which of the following are interests that must go through probate? I. A residence that the decedent held in tenancy by the entirety with his spouse II. An automobile that passes according to state intestacy laws III. Securities held by the decedent with a T.O.D. designation IV. 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 A) II, III, and IV B) I, III, and IV C) II and IV D) I and III
C 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.
Which of the following statements is CORRECT regarding a payable on death (P.O.D.) account used as a will substitute? I. Use of a P.O.D. designation is a completed gift, but is entitled to an annual exclusion for each named beneficiary. II. The named beneficiary can transfer up to half of the assets in the account. III. The account assets will be included in the account owner's gross estate. IV. The account assets will be transferred outside of probate. A) I and III B) I, III, and IV C) II only D) III and IV
D 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.
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 tract of farmland, held long term, valued at $35,000 with a basis of $22,000 B) A stock, held short term, valued at $35,000 with a basis of $19,000 C) A stamp collection she inherited, held long term, valued at $35,000 with a basis of $12,000 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 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.
Wiley Willmaker lives in a common law state that has adopted the Uniform Probate Code. Wiley has been married to Jane for 28 years. All family assets are in Wiley's name only. His will, executed in 2001, is structured as follows: *It leaves specified tangible personal property and all real property, which amounts to 28% of his estate, to Jane. *It leaves specified tangible and intangible personal property, which amounts to 45% of his estate, to "my children, Carrie and Maureen, in equal shares." *It leaves specified intangible personal property, which amounts to 25% of his estate, to a qualified charity. *It is attested to and witnessed by his daughter, Maureen. *No other provisions disposing of property exist. Wiley has two children from his current marriage, Maureen and Chad, and a daughter, Carrie, from his prior marriage. Relations with Chad have become strained, and Wiley feels that Chad has been so disrespectful he should not receive any property from Wiley. Which of the following statements is CORRECT about why Wiley's will needs to be amended? I. The will needs to be properly witnessed by a disinterested party. II. Chad may still be able to receive a share of Wiley's property unless the current will is changed. III. The estate will not be subject to the intestacy statutes. IV. The will needs a residuary clause. A) II, III, and IV B) I and III C) II and IV D) I, II, and IV
D Option III is an incorrect statement—here 2% of his estate does not have a named beneficiary. Although it may not be legally necessary to execute a new will without Maureen as a witness (option I), it is advisable to do so to prevent a possible will contest by Chad. While a witness who is a beneficiary of the will increases the chances of a will contest based on undue influence on the testator, it does not make the will invalid per se. However, most states require a will to have two witnesses, and this will has only one. This will may be invalid because of too few witnesses. Chad may still inherit (option II) by arguing that his name was mistakenly omitted from the specific listing of the children—he should be specifically disinherited by name or specifically given a small bequest. Finally, to avoid intestacy (option IV), Wiley's will needs a residuary clause ("rest and remainder to . . .") to indicate how assets not disposed of by other will provisions will be distributed—here 2% of Wiley's assets would pass by intestacy, which is another way in which Chad might inherit a portion of the estate.
Which of the following statements regarding a payable-on-death (POD) account is(are) CORRECT? I. 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. II. Payable-on-death accounts are included in the depositor's probate estate. III. Payable-on-death accounts are considered a will substitute. IV. Payable-on-death accounts could create guardian problems if paid to a minor beneficiary. A) I and III B) III only C) I, II, and IV D) I, III, and IV
D 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.
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) after-born child statutes. C) abatement statutes. D) elective share statutes.
D 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.