Chapter 6: Estate Liquidity

Question 1

Alternate Valuation Date (AVD) Election

Answer 1

An election (form 706) to value the estate 6 months after the decedents date of death.

• must be applied to all assets included in the estate
• cannot be made unless it results in a reduction of total value of the gross estate
• cannot be made unless it results in a reduction of the amount of fed estate tax owed

Question 2

Curtesy/dower

Answer 2

The surviving spouses right to receive a life estate in certain real estate owned by the decedent spouse

Question 3

Disclaimer

Answer 3

An unqualified refusal by a beneficiary to accept benefits

Must:

• be irrevocable
• disclaiming must not have accepted or enjoyed interest in property
• must be in writing
• must be sent to the decedents estate within nine months

Question 4

What is an ILIT?

Answer 4

Type of life insurance held in a trust that removes the fund from the estate. It makes sure the death benefit is not included in the estate by transferring ownership to the ILIT.

To be effective the person can’t have incidence of ownership.

Question 5

Family allowance

Answer 5

A sum of money that is paid from the estate to the surviving spouse and dependent children - either lump sum or installments

Question 6

Family settlement agreements

Answer 6

Collective agreement of all of the decedents heirs consenting to distribute the decedents property in a certain manner amount them

Question 7

Income in respect of a decedent

Answer 7

Gross income that the decedent was entitled to on date of death but was not yet received – rent, distributions from qualified plans, etc

Question 8

Installment payment of estate taxes

Answer 8

To qualify:

• Closely held business owner is a US citizen or resident at time of death and actively carrying on the business at that time
• The value of the closely held business owners interest in the estate must exceed 35% of the value of her adjusted gross estate
• the decedent must own at least 20% of the total value of the business
• the amount of tax that may deferred is limited to the tax attributable to the value of the closely held business

Question 9

Section 303 stock redemption

Answer 9

A closely held corp can redeem some of the decedents shares and have the transaction treated as a sale. The gain realized is treated as capital gain.

to qualify:

• only closely held stock
• value of stock must exceed 35% of decedents AGE
• only an amount equal to the total of the decedents estate taxes plus admin expense is eligible for the favorable treatment

Basically a tax break for a dead business owners estate when they sell back some stock owned

Question 10

Special use valuation

Answer 10

When an asset (farmland) is valued based on how it is used (farming) versus how it could be used (commercial)

Section 2032A

Question 11

What are types of Will substitutes?

Answer 11

1. funded inter vivid trusts
2. JTWROS property
3. Tenancy by the entirety property
4. Transfer on death designations
5. Payable on death designations

Question 12

When and where are ordinary and necessary admin expenses deductible by the beneficiary?

Answer 12

on either the fiduciary income tax return (IRS Form 1041) or the federal estate tax return (IRS 706), but not on both.

Question 13

What is a nonexoneration clause?

Answer 13

If the estate elects to use the alternate valuation date and property is disposed of within the six-month period after the decedent’s death, the valuation date is the date of disposition.

Question 14

What is a nonexoneration clause?

Answer 14

A nonexoneration clause can be placed in a will, to the effect that the beneficiary who receives property burdened by a mortgage must accept the property subject to the mortgage. The remaining answer choices are postmortem, not premortem, liquidity planning techniques.