Estate Planning Flashcards
Anne is a financial planner in the state of Texas. Although she attended law school, she never passed the bar and is not a licensed attorney. Which of the following actions may cause Anne to be seen as “practicing law”?
a) Reviewing wills, trust documents, and powers of attorney.
b) Drafting wills, trust documents, and powers of attorney.
c) Directing a client to seek legal advice from a licensed attorney.
d) Acting as trustee for a client’s trust.
Answer: B
Drafting legal documents is considered practicing law. Any of the other actions would not be considered practicing law. (Note: This varies according to state law and could be different in some states.)
Tracey is a financial planner and just received his CFP® certification. Tracey does not have any other designations or licenses. Although Tracey’s expertise is investment planning, he is anxious to expand his client base and is willing to assist clients with any area of financial planning. Over the last month Tracey engaged in the following activities with Troy, a new client.
- During the initial meeting, Tracey collected personal data about Troy including the estate planning documents Troy had previously executed.
- During the second meeting, Tracey recommended the use of a trust to fulfill some of Troy’s estate planning goals.
- Troy called Tracey one afternoon and asked if Tracey could explain the probate process to him, which Tracey promptly did.
- Tracey downloaded a copy of a generic will from the Internet, filled in Troy’s information and gave the document to Troy to be executed.
Of the activities above, which would be considered the unauthorized practice of law?
a) 4 only.
b) 2 and 3.
c) 3 and 4.
d) 2, 3 and 4.
e) 1, 2, 3 and 4.
Answer: A
Only activity four is the unauthorized practice of law. Drafting legal documents is reserved for attorneys. Inquiring about estate planning documents should be completed by all practitioners. Recommending appropriate estate planning devices, such as trusts, can be done by financial planners. Explaining the probate process would not be the unauthorized practice of law; Tracey would cross the line if he gave legal advice regarding the probate process.
Brent does not want to write a will. It upsets him to contemplate his own death and he wishes to avoid the estate planning process. Which of the following is not a risk Brent’s estate may face because of Brent’s inaction?
a) Brent’s property transfers contrary to his wishes.
b) Brent’s estate may face liquidity problems.
c) Brent’s estate faces increased estate administration fees.
d) Brent’s estate faces increased debt payments for outstanding debts at death.
Answer: D
Brent’s inaction will cause him to die intestate and be subject to the intestacy laws of his state. Brent’s inaction will also cause him to die without an estate plan. There is no risk that his estate will be subject to increased debt payments for outstanding debts at death simply because he dies intestate or without an estate plan. All of the other options are risks when someone dies intestate or without an estate plan.
Elizabeth, who is not a licensed attorney, recently started her own financial planning practice. Which of the following activities would be considered the unauthorized practice of law?
a) Preparing a last will and testament for her first client.
b) Helping clients to identify their financial planning goals.
c) Preparing financial statements for prospective clients.
d) Referring clients to her brother, Jack, who happens to be a licensed attorney.
Answer: A
Only licensed attorneys should prepare last will and testaments for clients.
Under which of the following circumstances would a decedent be considered to have died intestate?
a) The decedent hand wrote a will, but did not sign or date it.
b) The decedent was not of “sound mind” when he signed his statutory will.
c) The decedent failed to prepare a last will and testament.
d) All of the above.
Answer: D
Answer A describes an invalid holographic will. Answer B describes a situation in which the testator is not “of sound mind” and, therefore, cannot make a valid will. If the decedent dies without a valid will, he is said to have died intestate.
What is the requirement to disclaim a bequest?
A disclaimer clause functions to remind any heirs that they can disclaim a bequest, while still allowing the testator to direct the distribution of disclaimed property. To be effective,
- the disclaiming party cannot benefit from the property (with the exception, in certain circumstances, of the surviving spouse)
- nor direct any future interest in the property,
- the disclaiming party must disclaim the property within nine months of the decedent’s date of death and
- the disclaimer must be in writing.
Jose recently died with a probate estate of $900,000. He was predeceased by his wife, Guadalupe, and his daughter, Lucy. He has two surviving children, Pete and Fred. Jose was also survived by several grandchildren: Pete’s three children, Naomi, Daniel, Nick; Fred’s three children, Heather, Chris, and Steve; and Lucy’s two children, David and Rachel. Jose’s will states the following “I leave everything to my three children. If any of my children shall predecease me then I leave their share to their heirs, per stirpes.” Which of the following statements is correct?
a) Under Jose’s will David will receive $225,000.
b) Under Jose’s will Chris will receive $150,000.
c) Under Jose’s will Nick will receive $100,000.
d) Under Jose’s will Fred will receive $300,000.
Answer: D
Under the will, Pete and Fred will each receive 1/3 shares. Lucy’s 1/3 share will flow to her children, with each of them receiving 1/2 of the 1/3 share.
Nellie recently executed a power of attorney giving Jessie the power to perform certain tasks. Which of the following powers given to Jessie would cause the power to be deemed a general power of appointment?
a) Nellie gave Jessie the power to use Nellie’s money to pay Nellie’s creditors.
b) Nellie gave Jessie the power to sell and buy property on Nellie’s behalf.
c) Nellie gave Jessie the power to use Nellie’s money to pay Jessie’s creditors.
d) Nellie gave Jessie the power to make gifts to Nellie’s heirs and charities.
Answer: C
Giving Jessie the power to pay his own creditors creates a general power of appointment over the assets. The other powers do not benefit Jessie and, thus, do not create a general power of appointment.
What is the difference between a power of attorney and a power of appointment?
The ability for the agent to appoint assets to himself, to his estate, his creditors, or his estate’s creditors is considered a general power of appointment over the property covered by the power of attorney.
Eugene is considering having his attorney prepare a springing power of attorney in which he gives his friend, Eleanor, the power to handle his finances. Why should Eugene include such a document in his overall estate plan?
a) In the event that Eugene becomes disabled, Eleanor will be able to pay Eugene’s bills.
b) Eleanor is not legally competent.
c) Eleanor is only 16 years old.
d) Eugene wants Eleanor to be able to handle all of his finances immediately.
Answer: A
Eugene should not make Eleanor the agent of his springing power of attorney if she is not legally competent or is not of the age of majority. If Eugene wants Eleanor to be able to handle his finances immediately, he should not use a spring power of attorney, which only becomes effective upon the principal’s disability or incapacity.
Margie has come to you and told you that she is considering executing a power of attorney for health care or an advance medical directive (also known as a living will). Although her state utilizes both documents, she believes that she only needs one of these documents. Which of the following statements is true regarding the two documents?
a) Margie is correct in believing that an individual does not need both documents, she only needs to execute one document because they both accomplish the same goals.
b) Margie should execute both documents as they cover different aspects of medical care.
c) Margie only needs to execute the power of attorney for health care because it covers everything the advance medical directive covers and more.
d) Margie doesn’t need to execute either document; she can solve her medical concerns by executing a DNR.
Answer: B
The documents address different medical care concerns. A power of attorney addresses the providing of medical care, but generally does not address the ending of life-sustaining treatment. The living will addresses the ending of life-sustaining treatment, but not the providing of medical care. A DNR is not a replacement for the other two documents; it is an additional document that addresses the prevention of resuscitation in the event of heart failure for a terminally ill patient.
Laurie and Chance are considering purchasing a piece of land on which they plan to build a vacation home. Laurie and Chance are engaged to be married, so they are unsure of how they should title the property. Which of the following statements is correct regarding their ownership and titling of the land?
a) Laurie and Chance cannot own the property as joint tenants because joint tenancies may only be established between spouses.
b) If Laurie and Chance were married and owned the property as a joint tenancy between spouses, one-half of the value of the property will be included in the probate estate of the first spouse to die without regard to the contribution of each spouse.
c) If the property is held as a joint tenancy then Laurie and Chance will each own the same fractional share in the property regardless of how much they contribute.
d) If the property is held as a joint tenancy and Chance dies first, the property will pass to Laurie unless Chance’s will directs a different disposition.
Answer: C
Joint tenancy requires equal ownership. Answer A is incorrect because joint tenancies may be established by spouses or nonspouses. Answer B is incorrect because if the two were married, each would be deemed to have contributed 50%; therefore, only 50% would be included in the gross estate of the first spouse to die. Nothing will be included in the probate estate. Answer D is incorrect because if the property is held as a joint tenancy then the property will transfer automatically at the first tenant’s death regardless of what the will dictates.
Natalie and her younger sister Kate purchased a beach-front condo together 15 years ago. They own the property as a joint tenancy with rights of survivorship. At the time of the purchase, Natalie, being the older sister, was in a better financial position. Therefore, Natalie contributed $300,000 and Kate contributed $100,000 to the purchase price. The property is now worth $800,000. Which of the following statements is correct?
a) Natalie and Kate each own 50% of the condo.
b) If Natalie were to die today, her share of the condo would transfer to her husband Brian.
c) If Kate were to die today, Natalie’s new basis in the property would be $400,000.
d) If Natalie and Kate were to disagree on how the property was being managed, the only way they could partition their share of the property would be to find a willing buyer that would purchase both of their interests.
Answer: A
Because the property is owned JTWROS they automatically own 50% each. Answer B is incorrect because if Natalie were to die today, then her share of the condo would transfer to Kate. Answer C is incorrect because if Kate died today, then Natalie’s new basis would be $500,000 (Natalie’s original $300,000 basis and Kate’s step-to fair market value basis of $200,000 based on the contribution rule). Answer D is incorrect because if they disagree on how the property is being managed, then either one can easily sell their share to any person. They do not need the consent of the other party.
Kathi and Darrin, who are married, own their home together as community property. They purchased the home 17 years ago for $100,000. After many improvements and a surge in the market, the home is now worth $200,000. If Darrin died today and left his share of the home to his daughter Elizabeth, what is Kathi’s basis in the home?
a) $50,000.
b) $100,000.
c) $150,000.
d) $200,000.
Answer: B
Kathi’s 1/2 interest in the home will have a basis of $100,000 due to a step-to-fair-market value of both halves at Darrin’s death because the property is owned as community property.
What are the similarities and differences among the types of property ownership?
Rosie and her brother Michael decided recently to purchase an RV together. They both want to use the RV to take their families camping. The price for the RV was $10,000. Since Michael expects to use the RV 60% of the time and Rosie 40% of the time, Michael contributed $6,000 and Rosie contributed $4,000. Their ownership percentage equals their contribution percentage. Which type of property titling must the RV be to reflect their ownership interest?
a) Sole Ownership.
b) JTWROS.
c) Tenancy in Common.
d) Tenancy by the Entirety.
e) Community Property.
Answer: C
Sole ownership is for one owner. They cannot own the property JTWROS because they own unequal ownership percentages. Tenancy by the Entirety and Community Property must be owned between married people.
How do assets in the probate process flow?
Ralphie, a real estate mogul, dies owning a great deal of real property. Which of the following would be included in Ralphie’s probate estate?
a) A building owned fee simple by Ralphie’s wife. Ralphie and his wife do not live in a community property state.
b) A vacant lot owned joint tenancy with rights of survivorship by Ralphie and his brother.
c) A beach house owned tenancy in common by Ralphie and his mother.
d) An office building owned tenancy by the entirety by Ralphie and his wife.
Answer: C
Answer A is incorrect because the property of Ralphie’s wife would not be included in his probate estate. Answer B is incorrect because property owned JTWROS passes outside of probate. Answer D is incorrect because property owned tenancy by the entirety passes outside of probate.
Which of the following assets would pass through the probate process?
a) Life insurance policy with a named beneficiary.
b) Assets held in trust.
c) Pay-on-death accounts with a named beneficiary.
d) Household goods.
Answer: D
All other answers describe assets transfer by other means than the probate process.
Under what circumstances would property be subject to ancillary probate?
a) If the decedent is a resident of one state and owns real property in another state.
b) If the decedent is a tenant in common with an unrelated person.
c) If the decedent was a resident of a community property state.
d) If the decedent owns a life estate in real property located in a state other than his state of residence.
Answer: A
None of the other answers describe circumstances under which the decedent’s property would be subject to ancillary probate.
Which of the following empowers an executor to act as the agent of a probate court?
a) Surety Bond.
b) Letters of Administration.
c) Letters Testamentary.
d) Intestacy Laws.
Answer: C
Answer A is the bond that an administrator must generally post. Answer B is what empowers an administrator to act as the agent of a probate court. Answer D describes the state laws that govern the disposition of a decedent’s estate if he has failed to prepare a valid will. Administrators, not executors, are governed by intestacy laws.
Tom loans $11,000 to his daughter Tina. Why would interest not be imputed on this loan?
a) Interest would not be imputed because the loan is less than the amount of the annual exclusion.
b) Interest would not be imputed because loans of $100,000 or less are exempt from both income tax and gift tax consequences.
c) Interest would not be imputed because Tina has unearned income of $500.
d) Interest would not be imputed because Tina’s earned income is less than $1,000.
Answer: C
Answer A is incorrect because, while interest may be imputed, the annual exclusion deals with whether a gift is taxable. Answer B is incorrect; loans of less than $10,000 are exempt from both income tax and gift tax consequences. Answer D is incorrect because whether interest is imputed on this loan is based on Tina’s level of unearned income, not earned income.
Which of the following transfers would not be considered a qualified transfer?
a) Piper pays $50,000 to her friend Paige, who uses the money to pay for her medical expenses.
b) Piper pays $35,000 to Harvard University for her niece’s tuition.
c) Piper pays $10,000 to Children’s Hospital for her granddaughter’s medical expenses.
d) Piper pays $15,000 to Prestigious Preparatory School for her nephew’s tuition.
Answer: A
Answers B, C, and D described qualified transfers. Answer A is not a qualified transfer because the payment was not made directly to the healthcare provider.
Which of the following transfers would result in gift tax?
a) Bob gifts $10,000 to his daughter Barbie.
b) Elroy gifts $50,000 to his wife, Elizabeth, who is a US citizen.
c) Adam gives his favorite employee, Aaron, a new car at Aaron’s retirement.
d) Pete transfers $20,000 to his ex-wife, Patricia. Pete and Patricia were divorced five years ago.
Answer: D
Answer A would not result in gift tax because the gift does not exceed the annual exclusion. Answer B is incorrect because a person can gift an unlimited amount to his or her spouse without incurring gift tax. Answer C is incorrect because transfers in a business setting are presumed to be compensation. If Pete had transferred $20,000 to Patricia pursuant to a divorce decree, there would be no taxable gift, but transfers to an ex-spouse five years after the divorce was final are not considered “transfers pursuant to a divorce decree.”
Part 1
Jordan, a single woman, is very generous. She enjoys giving gifts to others and has given taxable gifts of $6,000,000 in prior years and paid gift tax of $350,000. This year she gave the following gifts:
- $32,000 cash to her friend Judy so that Judy could pay her medical bills.
- A new car worth $48,000 to her friend Mark.
- A painting to her friend Kristen worth $7,000.
- A check for $19,000 to LSU for her niece Haley’s tuition for the year. Calculate Jordan’s total taxable gifts for the current year.
a) $37,000.
b) $50,000.
c) $56,000.
d) $62,000.
e) $106,000.
* Part 2*
Calculate Jordan’s gift tax liability due for the current year.
a) $0.
b) $15,170.
c) $16,120.
d) $22,140.
e) $22,960.
Part 1
Answer: B
$32,000 cash - $15,000 Annual Exclusion = $17,000 (Note this is taxable because it was not paid to the institution) $48,000 car - $15,000 Annual Exclusion = $33,000 $7,000 painting - $15,000 Annual Exclusion = $0 $19,000 check is a qualified transfer and thus non taxable.
Part 2
Answer: A
What are some various gifting strategies?
If one of the purposes of gifting is to minimize future taxes for the donor, and if there are multiple donees, it is wise to consider which assets to give to which donee. Here is a general set of guidelines:
- Never gift property when the fair market value is less than the adjusted basis. Rather, sell the property and let the donor recognize a capital loss for income tax. The donor can then gift the cash proceeds to the donee who can then purchase the property with the proceeds.
- Consider gifting property with the greatest appreciation potential to the youngest donee available who has the most time for the asset to appreciate.
- When making gifts to charities, always gift appreciated property to avoid the capital gain taxes on the difference between the fair market value and the donor’s adjustable taxable basis. For such property, the donor may be able to deduct the fair market value as a charitable deduction, subject to the income tax limitations.
- Gift income-producing property to the donee in the lowest marginal income tax bracket so that the income is subject to the lowest possible income tax.
Bernard made a gift of $5,000,000 to his brother in 2015. At the time of the gift, the applicable gift tax credit was $2,117,800, but due to Bernard’s prior taxable gifts he paid $175,000 of gift tax. When Bernard died in 2021, the applicable gift tax credit had increased by $2,508,000. At Bernard’s death, what amount related to the $5,000,000 gift to his brother is included in his gross estate?
a) $0.
b) $175,000.
c) $2,687,000.
d) $5,000,000.
Answer: A
Gift tax paid on gifts made within three years of a decedent’s date of death is included in the decedent’s gross estate. In this case, Bernard made the gift more than three years before his death, so $0 is included in his gross estate related to this gift. The value of the gift, $5,000,000 is added to the decedent’s taxable estate to determine the tentative tax base and Bernard will get credit for the gift tax paid of $175,000.
How are different types of transfers to revocable and irrevoable trusts taxed?
What are the characteristics of Charitable Remainder Trusts?
What are the alternative estate tax deductions?
* Only casualty losses from a federally declared disaster are deductible for tax years after December 31, 2017, and before January 1, 2026.
** Casualty losses that occur during the administration of the estate.
*** Taxpayer Certainty and Disaster Relief Act of 2020 removed the 10% AGI floor and increased the casualty floor from $100 to $500.
What are the special elections available to closely held businesses?
