Chapter 7 - Transfers at Death

Question 1

Federal Estate Tax—Asset Valuation Dates

Answer 1

Federal Estate Tax—Asset Valuation Dates
• date of death (earliest date)
• date of sale, exchange, distribution, disposition
• alternate valuation date (6 months after death)

Question 2

Fair Market Value

Answer 2

The estate and gift tax regulations provide that value is meant to be fair market value, which is defined as:

The price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both
having reasonable knowledge of relevant facts.

Question 3

Special-use valuation (current-use valuation approach)

Answer 3

At the time Stuart Sims died in 2019, his estate included qualifying real property that had a highest- and best-use value of $6,500,000. The special-use value of the property is $5,480,000. The difference between the highest and best-use value and the special-use value is $1,020,000 ($6,500,000 – $5,480,000). Therefore, Stuart’s estate is allowed a
reduction of $1,020,000 in 2018 when the maximum reduction allowed is $1,160,000 in 2018.

Question 4

The farm-method formula of valuation is illustrated in the following example

Answer 4

Farmer Jones owns 300 acres of farmland in Swedesboro, New Jersey. Nearby farmland of about the same acreage produces an average annual gross rental of $172,000. Average annual state and local real estate taxes are $16,000. Assume the interest rate for
loans from the Federal Land Bank is 8 percent.
The average annual computations are made on the basis of the 5 most recent calendar years before the farmer’s death.

Under the farm-method formula of valuation, valuation of the farmer’s land is computed
as shown below:
($172,000 – $16,000) ÷ .08 = $1,950,000

Question 5

Recapture of the Special-use Tax Benefit

Answer 5

Recapture of the Special-use Tax Benefit. As previously stated, if the property is disposed of to nonfamily members within 10 years after the death of the decedent, there is an additional estate tax or recapture tax imposed on the qualified heir. If the heir or a member of the heir’s family fails to participate materially in the business operation for 10 years after the decedent’s death, it is treated as a cessation of the qualified use, also causing recapture.

Question 6

Willing-buyer Willing-seller Rule

Answer 6

The general rule for valuing household property and personal effects, such as watches, rings, and so forth, can be called the willing buyer-willing seller rule. A room-by-room itemization is typical, especially when household goods include articles of artistic or intrinsic value, such as jewelry, furs, silverware, paintings, engravings, antiques, books, statuary, oriental rugs, and coin or stamp collections.

Question 7

Blockage Discount

Answer 7

A blockage discount is determined by the effect that block sale of stock would have had on the market if it were sold over a reasonable period of time and in a prudent manner.

Question 8

Valuation of a stock

Answer 8

Where a stock has an established market and quotations are available to value the stock as of
the date in question, the fair market value (FMV) per share on the applicable valuation date governs for both gift and estate tax purposes.

Question 9

Valuation of a corporate bond

Answer 9

Valuation of bonds is similar to valuation of listed common stock.

Question 10

Valuation of series EE bonds

Answer 10

Series EE (or E) bonds are valued at their redemption price (market value) as of the date of death, since they are neither negotiable nor transferable and the only definitely ascertainable value is the amount at which the Treasury will redeem them.

Question 11

Valuation of certain Treasury Bonds (Flower Bonds)

Specifically purchased for estate tax purposes. The last of this type of bond matured in 1998.

Answer 11

Certain U.S. Treasury bonds (flower bonds) owned by a decedent at the date of death and forming part of the gross estate may be redeemed at par value if used to pay federal estate taxes. These bonds are valued at the higher of the market price and par value. Flower bonds were fixed-income bonds that were originally purchased at a discount in anticipation of federal
estate taxes.

Question 12

Testamentary Capacity

Answer 12

In the common law tradition, testamentary capacity is the legal term of art used to describe a person’s legal and mental ability to make or alter a valid will. This concept has also been called sound mind and memory or disposing mind and memory.

Question 13

Holographic Will

Answer 13

A holographic will is a handwritten and testator-signed document and is an alternative to a will produced by a lawyer. Some states do not recognize holographic wills. States that do permit holographic wills require the document meet specific requirements to be valid.

Question 14

Dying Testate vs Intestate

Answer 14

A person dies testate if he left a will. A person dies intestate if he does not have a valid will at the time of death.

Question 15

codicil

Answer 15

an addition or supplement that explains, modifies, or revokes a will or part of one

Question 16

A primary requirement of a typical will is that the document be signed at the end?

Answer 16

True

Question 17

Antenuptial and prenuptial agreements can legally bind two parties in anticipation of marriage and impact the will and intestacy rights of a surviving spouse?

Answer 17

True

Question 18

Per stirpes distribution provides for all beneficiaries under a will to take as individuals by their own right?

Answer 18

False
Per stirpes provides that members of a class take as members of a class or as representatives of deceased members of a class.

Question 19

A decedent must have testamentary capacity at the time of death for the decedent’s will to be upheld as valid?

Answer 19

False
The decedent or testator, who is the maker of the will, must have legal capacity to make a will at the time the will is written, not at the time of death.

Question 20

Life insurance is considered a transfer by contract?

Answer 20

True

Question 21

Joint tenants with right of survivorship is a form of ownership that passes ownership to the surviving joint tenant by contract?

Answer 21

False
Hide Feedback
Joint tenant with right of survivorship passes property by operation of law not by contract.

Question 22

In most states, it is impossible for a decedent to totally disinherit a nonconsenting surviving spouse?

Answer 22

Trueu

Question 23

A will is inoperative until a decedent’s death?

Answer 23

True

Question 24

Pour-over trusts have legal effect only when they are written after a will is created?

Answer 24

False
To have legal effect, a pour-over trust must be executed prior to the will and must be in existence at the time the will is written.

Question 25

A holographic will is oral and made in the presence of witnesses?

Answer 25

False

A holographic will is handwritten and may not (dependent on state law) need to be witnessed.

Question 26

A will may be set aside only if the testator was not of sound mind at its creation?

Answer 26

False
A will may be contested on several grounds: (a) it may have been executed improperly; (b) the testator may have been legally incompetent to write a will; (c) the testator may also have been under duress or undue influence when writing the will; (d) the testator may have been defrauded; (e) the will may be a forgery; and (f) the will may have been revoked by the testator before death.

Question 27

If a person dies without a valid will they are referred to as dying testate?

Answer 27

False

A person with a will would be dying testate and a person without a will would be referred to as dying intestate.

Question 28

Under a typical postnuptial agreement, each spouse gives up all rights to the other spouse’s estate?

Answer 28

True

Question 29

If a person dies intestate and has no living relatives, the decedent’s property escheats to the decedent’s state of domicile?

Answer 29

True

Question 30

A typical intestate-succession scheme allows a widow to receive all the decedent’s property whether or not there are minor children?

Answer 30

False
The intestate-succession laws of the states generally provide that if there is a surviving spouse and children, the decedent’s estate will be divided among them in such proportions as the statute decrees.

Question 31

If there are no living relatives and property goes to the state upon a person’s death, it is said to escheat to the state?

Answer 31

True

Question 32

A major advantage of a testamentary trust is that it avoids probate?

Answer 32

False

A testamentary trust is created under a will and thus is part of the probate estate.

Question 33

A testamentary trust is a trust created under a will that becomes effective and irrevocable at the death of the testator?

Answer 33

True

Question 34

A codicil is a modification of a will?

Answer 34

True