1. Property Ownership, Estate Planning Process and Goals

Question 1

Estate 1. Property Ownership, Estate Planning Process and Goals

1. All of the following could stand alone as descriptions of the process of “estate planning” except

(LO 1-5)

a. creating a will.

b. planning for the conservation and distribution of the
client’s estate during life and at death.

c. considering both tax and non-tax implications of estate transfer transactions.

Answer 1

a. creating a will.

“Creating a will” does not adequately describe the process of estate planning.

Estate planning generally focuses on the conservation and distribution of the client’s estate during life and at death.

Estate transfers require consideration of both tax and non-tax implications of estate planning transactions.

Question 2

Estate 1. Property Ownership, Estate Planning Process and Goals

2. Which one of the following individuals is the holder of a “legal” interest?

(LO 1-5)

a. the income beneficiary of a trust
b. the trustee of a trust
c. the remainder beneficiary of a trust

Answer 2

b. the trustee of a trust

The trustee of a trust holds a legal interest and has no right to enjoy or consume the trust property unless he or she is also a beneficiary of the trust.

The income beneficiary of a trust holds a beneficial or equitable interest, not a legal interest.

The remainder beneficiary of a trust holds a beneficial or equitable interest, not a legal interest.

Question 3

Estate 1. Property Ownership, Estate Planning Process and Goals

3. All of the following are ways that a person can voluntarily transfer estate assets to another person or entity at death except

(LO 1-5)

a. by probate
b. by will substitute
c. by gift

Answer 3

c. 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.

Probate is one of the two ways that a person can voluntarily transfer estate assets to another person or entity at death.

Will substitute is one of the two ways that a person can voluntarily transfer estate assets to another person or entity at death.

Question 4

Estate 1. Property Ownership, Estate Planning Process and Goals

4. Which one of the following is a method by which assets can be transferred both during life and at death?

(LO 1-5)

a. by right of survivorship
b. by irrevocable trust
c. by testamentary trust

Answer 4

b. by irrevocable trust

An irrevocable trust can be used to transfer assets both while the grantor is alive and when the grantor is dead.

To transfer property by right of survivorship, someone must survive the death of the owner of the property.

Because a testamentary trust is established in the grantor’s will and funded from the grantor’s probate estate, it can transfer property only after the death of the grantor.

Question 5

Estate 1. Property Ownership, Estate Planning Process and Goals

5. Which one of the following statements regarding powers of appointment is correct?

(LO 1-5)

a. A general power of appointment gives the holder authority to manage all of the donor’s property.
b. A power of appointment exercisable in favor of the holder for his health, education, and comfort is a special power of appointment.
c. A power of appointment, whether general or special, can be exercised, released, or allowed to lapse by the holder.

Answer 5

c. A power of appointment, whether general or special, can be exercised, released, or allowed to lapse by the holder.

These are the three actions that the holder of any power of appointment can take.

A general power of appointment gives its holder authority to transfer title to only a specified portion of the donor’s property.

Because “comfort” is not an ascertainable standard, such a power of appointment would be general. The ascertainable standard is health, education, maintenance, and support.

Question 6

Estate 1. Property Ownership, Estate Planning Process and Goals

6. Mary Ellsworth has established and funded an irrevocable trust for the benefit of her family. She gave her husband, Tim, who is one of the income beneficiaries, “the right to demand that the trustee distribute no more than the greater of $5,000 or 5% of the value of the trust assets to any trust beneficiary during the last three months of any calendar year.” Which one of the following statements is correct?

(LO 1-7)

a. Mary has given Tim a special power of appointment.
b. Mary has given Tim a general power of appointment.
c. If Tim has not demanded that the trustee distribute any of the trust assets by December 31 of any year, he will be deemed to have released his power of appointment.

Answer 6

b. Mary has given Tim a general power of appointment.

This is a general power of appointment because Tim can appoint himself as an appointee of trust property without restriction.

This power of appointment is general, not special, because Tim can appoint himself as an appointee of trust property without any restrictions.

In this situation, rather than releasing his power of appointment, Tim would have allowed his power of appointment to lapse.

Question 7

1. Property Ownership, Estate Planning Process and Goals
2. Which one of the following statements regarding Henry White, who recently married for the first time, is correct?

(LO 1-8)

a. In a community property state, Henry’s spouse is deemed to have a vested 50% interest in all of the property Henry owned at the time of the marriage.
b. In a community property state, Henry’s earnings from his job subsequent to the date of his marriage will be considered community property.
c. In a community property state, any property Henry owns at death will go to his spouse by right of survivorship.

Answer 7

b. In a community property state, Henry’s earnings from his job subsequent to the date of his marriage will be considered community property.

Income earned after marriage is considered community property.

Only property acquired after marriage is considered community property unless separate property acquired before marriage is later commingled with community property.

Community property does not have a right of survivorship feature. Also, spouses can own property in their sole names in a community property state.

Question 8

Estate 1. Property Ownership, Estate Planning Process and Goals

8. Which one of the following statements regarding different forms of property co-ownership is correct?

(LO 1-5)

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. JTWROS, TBE, and CP are all forms of co-ownership that do not require a probate proceeding when one tenant dies.
c. JTWROS, 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.

Answer 8

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.

CP requires a probate proceeding.

JTWROS and tenancy in common do not require the consent of other co-owners before an owner can sell his or her interest in the asset, but TBE does.

Question 9

Estate 1. Property Ownership, Estate Planning Process and Goals

9. 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 prior to his death without his consent. Which one of the following statements concerning the most appropriate form of titling and the corresponding rationale is correct?

(LO 1-6)

a. Tenancy by the entirety will prevent lifetime disposition without Bill’s consent.
b. Tenancy in common with Edna will eliminate the need for ancillary probate.
c. Sole ownership enables Bill to leave the home to Edna outside of probate.

Answer 9

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.

Property owned in tenancy in common passes by probate.

Property owned in sole ownership passes by probate.

Question 10

Estate 1. Property Ownership, Estate Planning Process and Goals

10. Dawn Fairchild’s will leaves one-half of her real estate assets to her husband, Marc, and the remaining half in equal shares to her children, James and Maria. The will has no residuary clause and their combined estates do not exceed the applicable exclusion amount. The relationship between Dawn and James has become so strained that she now wants to leave his share of the estate to Maria. Marc has recently died, and Dawn is in the process of amending her will. Which one of the following estate planning pitfalls can be avoided by amending Dawn’s will?

(LO 1-3)

a. having part of the estate pass under the laws of intestacy
b. allowing the estate to be distributed through probate
c. not having sufficient liquidity to pay the estate tax liability

Answer 10

a. having part of the estate pass under the laws of intestacy

Without a residuary clause, the portion going to Marc
under Dawn’s present will must pass by intestacy. Also, Dawn’s personal property would pass by intestacy.

A new or amended will would also be subject to probate.

Making a new or amended will could affect the estate’s liquidity position only if more of the estate is given to a spouse or charity so that fewer taxes would be incurred. Since Dawn’s estate is less than the current applicable exclusion amount, there will be no estate tax due.

Question 11

Estate 1. Property Ownership, Estate Planning Process and Goals

11. Several of the steps involved in the estate planning process are: (1) analyze and evaluate the client’s financial status, (2) implement the appropriate estate planning technique, (3) gather data from the client, and (4) select the appropriate estate planning technique. Which one of the following lists the sequence of these steps correctly?

(LO 1-1)

a. (1), (3), (4), (2)
b. (1), (4), (2), (3)
c. (3), (1), (4), (2)

Answer 11

c. (3), (1), (4), (2)

Data regarding the client must be obtained to assess the client’s financial status, and a technique must be chosen before it can be implemented.

Question 12

Estate 1. Property Ownership, Estate Planning Process and Goals

12. Which one of the following is an incorrect statement regarding the purpose of having an estate planning team?

(LO 1-4)

a. The team approach is necessary to ensure professionalism and competence during each stage of the estate planning process.
b. The team approach may be necessary to accomplish all aspects of the estate plan in the shortest possible time.
c. The team approach is required by the CFP Board’s Rules of Conduct.

Answer 12

b. The team approach may be necessary to accomplish all aspects of the estate plan in the shortest possible time.

The team approach is required to achieve speed.

The team approach is required to achieve both competence and professionalism.

The team approach is not mandated by the Rules of Conduct.

Question 13

Estate 1. Property Ownership, Estate Planning Process and Goals

13. Which one of the following actions would probably not constitute the unauthorized practice of law by a non-attorney financial planner?

(LO 1-4)

a. drafting a power of attorney for a client
b. advising a client to conduct business as a partnership rather than a corporation
c. 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

Answer 13

c. 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.

Since a power of attorney can be used to affect the client’s property, only a licensed attorney should draft it.

The form of business entity can greatly affect a client’s legal rights and obligations; therefore, an attorney should make this recommendation.

Question 14

Estate 1. Property Ownership, Estate Planning Process and Goals

14. Ricky and Lucy, a married couple with two young children and minimal assets, are considering creating an estate plan. Which one of the following statements is correct?

(LO 1-2)

a. Ricky and Lucy should create an estate plan even though their assets do not exceed the applicable exclusion amount.
b. Ricky and Lucy do not need an estate plan since they own minimal assets that do not exceed the applicable exclusion amount.
c. Ricky and Lucy do not need an estate plan since they do not have any financial concerns.

Answer 14

a. Ricky and Lucy should create an estate plan even though their assets do not exceed the applicable exclusion amount.

There are many non-tax reasons for developing an estate plan, such as planning to meet the needs of their dependent children.

There are many non-tax reasons for developing an estate plan.

There are many nonfinancial reasons for developing an estate plan, such as meeting the needs of their dependents, proper distribution of assets, and efficient transfer of assets at death.

Question 15

Estate 1. Property Ownership, Estate Planning Process and Goals

15. Owning property in joint tenancy with right of survivorship (JTWROS) is a will substitute because

(LO 1-5)

a. the property may be owned by more than two owners.
b. the property is subject to probate.
c. the property passes outside of probate.

Answer 15

c. the property passes outside of probate.

It is precisely because JTWROS does pass property outside of probate that it is a will substitute.

While a true statement, the fact that JTWROS property may be owned by more than two owners does not make it a will substitute.

A will substitute is not subject to probate.

Question 16

Estate 1. Property Ownership, Estate Planning Process and Goals

16. Each of the following are characteristics of the tenancy by the entirety form of property ownership except

(LO 1-5)

a. property that transfers by the right of survivorship.
b. property that is owned by more than two individuals.
c. property that is owned in equal proportion, regardless of contribution.

Answer 16

b. property that is owned by more than two individuals.

Property owned as tenancy by the entirety may only be owned by husband and wife.

The surviving spouse gets the deceased spouse’s interest in the property by right of survivorship.

Since tenancy by the entirety property is owned by a husband and a wife, they are each deemed to own an equal percentage of the property, regardless of their individual contributions to the purchase.

Question 17

Estate 1. Property Ownership, Estate Planning Process and Goals

17. Methods used to achieve the client’s goal of distributing property at death to the desired persons may include each of the following, except

(LO 1-5)

a. a will.
b. a will substitute.
c. intestacy.

Answer 17

c. intestacy.

Intestacy occurs when the decedent has not designated a recipient, and thus state statutes determine who is entitled to such property.

In a will, the owner designates the recipient at death.

In a will substitute, the owner designates the recipient at death.

Question 18

Estate 1. Property Ownership, Estate Planning Process and Goals

18. Which of the following is an effective way for a client to remove the value of an asset from his or her estate?

(LO 1-2)

a. Gifting the asset to another individual.
b. Placing the asset in his revocable trust.
c. Placing the asset in his irrevocable trust, in which he retains an income interest.

Answer 18

a. 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.

The value of the asset continues to be included in his or her estate since the trust is revocable.

The value of the retained income interest will be included in his or her estate unless it is spent prior to death.

Question 19

Estate 1. Property Ownership, Estate Planning Process and Goals

19. Which of the following statements regarding the goals of estate planning is correct?

(LO 1-2)

a. A client may have to choose between two or more estate planning techniques that will achieve his or her objectives.
b. A client and an estate planner must mutually agree on the client’s most important estate planning objective, in the event that all such objectives cannot be satisfied.
c. An estate planner must choose between two or more estate planning techniques that will achieve his or her client’s objectives.

Answer 19

a. A client may have to choose between two or more estate planning techniques that will achieve his or her objectives.

Although there may be two or more techniques that will achieve the client’s stated objectives, the client’s choice will be based on a preference for one technique’s characteristics or tax consequences over those of the other technique(s).

A client makes the final decision as to which estate planning objective is the most important. The estate planner’s role is to present and discuss the advantages and disadvantages of each option, and make a recommendation only.

The estate planner presents planning options and techniques that are available to meet the client’s objectives. The client must choose which estate planning technique to implement.

Question 20

Estate 1. Property Ownership, Estate Planning Process and Goals

20. Which of the following is an example of unauthorized practice of law?

(LO 1-4)

a. A financial planner explaining to his clients the dangers of using legal forms obtained from the Internet.
b. A financial planner explaining how federal estate, gift, and income tax liability affect an estate plan, and which estate planning documents could be used to achieve desired objectives.
c. A financial planner advising a client to place solely owned property into joint tenancy with right of survivorship.

Answer 20

c. A financial planner advising a client to place solely owned property into joint tenancy with right of survivorship.

The financial planner is advising the client to give up his or her legal rights in the property, and, therefore, is practicing law.

The financial planner is not advising the client to give up his or her legal rights in property, and, therefore, is not practicing law.

The financial planner is not advising the client to give up his or her legal rights in property, and, therefore, is not practicing law.

Question 21

Estate 1. Property Ownership, Estate Planning Process and Goals

21. Fred and Ethel live in a community property state. They acquired property during their marriage and classified it as separate property pursuant to a spousal agreement. What is the effect of the spousal agreement?

(LO 1-8)

a. The property is community property. Property classification cannot be changed pursuant to a spousal agreement.
b. The property is separate property so long as the spousal agreement is valid (i.e. recognized by local law and entered into with the requisite intent).
c. The property is separate property so long as the spousal agreement is valid (i.e. recognized by local and federal law and entered into with the requisite intent).

Answer 21

b. The property is separate property so long as the spousal agreement is valid (i.e. recognized by local law and entered into with the requisite intent).

A spousal agreement will prevail if it is valid (i.e. recognized by local law and entered into with the requisite intent).

Property classification can be changed pursuant to a valid spousal agreement.

A spousal agreement does not have to be recognized by federal law.

Question 22

Estate 1. Property Ownership, Estate Planning Process and Goals

22. Which of the following is an advantage of all will substitutes?

(LO 1-5)

a. They avoid the probate process.
b. They permit you to pass any property by making a P.O.D. (payable on death) designation.
c. They are private and are not governed by state law.

Answer 22

a. They avoid the probate process.

Will substitutes, by definition, avoid probate.

P.O.D. designations are often limited to bank accounts or other cash equivalents.

Will substitutes are governed by state law.

Question 23

Estate 1. Property Ownership, Estate Planning Process and Goals

23. Before his death, Dave created a trust and named Joe as the trustee and his children, Abby and Ben, as the beneficiaries. Which of the following is a correct statement?

(LO 1-5)

a. Joe holds a legal interest in the trust property as trustee.
b. Joe holds a beneficial interest in the trust property as trustee.
c. Joe holds no interest in the trust property as trustee.

Answer 23

a. Joe holds a legal interest in the trust property as trustee.

The trustee is the legal title holder of trust property for the benefit of trust beneficiaries.

The trustee does not have a right to use, consume, or enjoy the property (beneficial interest).

The trustee has a right to manage, encumber, and transfer property (legal interest).

Question 24

Estate 1. Property Ownership, Estate Planning Process and Goals

24. Danny and Julie, a married couple, decided to sell their community property home in a community property state, and reinvest their sale proceeds in a new home in a common law state with only Julie’s name on the title. Which statement below is correct?

(LO 1-8)

a. The new home will be considered community property.
b. The new home will be considered the separate property of Julie.
c. The new home will be considered community property, but only if Julie places Danny’s name on the title as tenancy by the entirety.

Answer 24

a. The new home will be considered community property.

Property rights are not lost simply because the owner moves from one type of state to another.

Since Danny and Julie reinvested their proceeds in a house, it retains its community property status regardless of how it is titled. Property rights are not lost simply because the owner moves from one type of state to another.

Question 25

Estate 1. Property Ownership, Estate Planning Process and Goals

25. Which of the following statements about intestacy is correct?

(LO 1-5)

a. Intestacy allows a client to achieve the goals of controlling and disposing of assets according to his or her desires.
b. Intestacy allows a client to achieve the goal of controlling assets during life, but not disposing of assets, according to his or her desires at death.
c. Intestacy does not allow a client to achieve the goal of controlling assets, but does allow disposing of assets according to his or her desires at death.

Answer 25

b. Intestacy allows a client to achieve the goal of controlling assets during life, but not disposing of assets, according to his or her desires at death.

Intestacy allows the client to control his or her assets during life, but at death, the state intestacy statutes govern to whom the asset will be disposed.

Question 26

Estate 1. Property Ownership, Estate Planning Process and Goals

26. Which of the following terms define a clause which gives discretionary authority to another person to transfer title to a specified portion of a donor’s property to a recipient?

(LO 1-5)

a. power of attorney
b. power of appointment
c. power of attribution

Answer 26

b. power of appointment

A power of appointment authorizes the holder, at his or her own discretion, to dispose of a certain portion of the donor’s property.

A power of attorney directs the attorney-in-fact to perform a broad range of activities on behalf of the principal.

Attribution is a taxation concept, not a power that an individual holds.

Question 27

Estate 1. Property Ownership, Estate Planning Process and Goals

27. A characteristic of the sole ownership form of property ownership is that the property

(LO 1-6)

a. can benefit multiple parties.
b. does not avoid probate.
d. owner does not control disposition at death.

Answer 27

b. does not avoid probate.

Property owned in sole ownership must be probated at death.

Property owned in sole ownership cannot benefit multiple parties.

The final disposition of solely owned property is controlled by the owner.

Question 28

Estate 1. Property Ownership, Estate Planning Process and Goals

28. Which of the following statements is correct concerning income earned by spouses in a community property state?

(LO 1-8)

a. Income earned by each spouse after marriage is considered community property only if it is commingled.
b. Income earned by each spouse prior to and after marriage is considered community property.
c. Income earned by each spouse after marriage is considered community property.

Answer 28

c. Income earned by each spouse after marriage is considered community property.

Even though earned by only one spouse, such earnings are considered community property.

Income earned after marriage is community property, whether or not it is commingled, unless received by gift, inheritance, or appreciation of separate property.

Income earned prior to marriage retains its character as separate property unless commingled so as to make a finding of separate property impossible.

Question 29

Estate 1. Property Ownership, Estate Planning Process and Goals

29. If the separate property of one spouse is commingled with community property in a community property state,

(LO 1-8)

a. the separate property may later be held to have become community property in which both spouses have an interest.
b. the separate property may not be held to have become community property in which both spouses have an interest.
c. the separate property must later be held to have become community property in which both spouses have an interest.

Answer 29

a. the separate property may later be held to have become community property in which both spouses have an interest.

If the separate property cannot be traced after it has been commingled, it becomes community property.

If the separate property can be traced as separate property after it is commingled, it may retain its character as separate property.

Question 30

Estate 1. Property Ownership, Estate Planning Process and Goals

30. Which of the following is not a tax goal related to income tax?

(LO 1-2)

a. obtaining a stepped-up basis
b. deferring the recognition of income and gain
c. freezing or reducing the value of assets subject to tax

Answer 30

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.

Obtaining a stepped-up basis is a goal related to income tax, which occurs when a transferee receives an asset that was subject to federal estate tax as a result of the transferor’s death.

Deferring the recognition of income and gain is a goal related to income tax, which typically involves delaying payment of income tax with the time value of money.