Estate Planning

Question 1

Mr. Substantial decided to gift $12,000,000 into an irrevocable trust for his daughter. He paid the gift tax. Mr. Substantial appointed an independent trustee who had discretion to distribute money to Mr. Substantial’s daughter and her three children. The trust will be distributed after his daughter’s death to her children.

What is the GSTT consequence of distributing income to the daughter?

• A taxable termination
• Income is taxable to the daughter
• No GSTT because Mr. Substantial paid the GSTT tax

Answer 1

Income is taxable to the daughter - There is no GSTT tax on distributing income to his daughter. However, the best answer is that the income will be income taxable to the daughter.

Question 2

Mr. and Mrs. Billings have lived in California, a community property state, for all their married working lives. These are their assets.

1. $1,000,000 home
2. $500,000 term life insurance policy on Mr. Billings (Mrs. Billings is the named beneficiary)
3. $400,000 in Mr. Billings IRA (Mrs. Billings is the named beneficiary)
4. $100,000 in a CD owned by Mrs. Billings
5. $50,000 Lexus and $40,000 BMW

Which of the assets will get a full step-up in basis if Mr. Billings dies?

Answer 2

1. $1,000,000 home
2. $500,000 term life insurance policy on Mr. Billings (Mrs. Billings is the named beneficiary)

Only appreciated property gets a full step-up in basis. Consider the life insurance death benefit a step-up in basis. Mr. Billings may only have paid one premium, and Mrs. Billings received $500,000.

Question 3

Which of the following is not a characteristic of JTWROS?

• Full control and ownership for the survivor
• Partial basis step-up at the first death
• An undivided interest in the whole property
• Passage of property by operation of law

Answer 3

An undivided interest in the whole property - Undivided interest applies to tenancy in common, not JTWROS. JTWROS creates an “equal interest”.

Question 4

Dr. Zenith and his spouse are German citizens living in the United States. If Dr. Zenith dies, he wants all his assets to pass to his spouse. The U.S. assets are all in his name and total $12,700,000 (resident aliens). What will be the estate tax situation if he does not do a QDT (2021)?

1. The assets will pass estate tax-free to his wife using the unlimited marital deduction.
2. If she remains in the U.S. after his death, no estate tax will apply.
3. There will be an estate tax of $5,080,0000 if she receives the assets at his death in 2021.
4. There will be an estate tax of $400,000 If she receives the assets at his death.

Answer 4

4. There will be an estate tax of $400,000 If she receives the assets at his death. The estate tax payable on a taxable estate of $1,000,000 after the applicable credit is applied is $400,000 (2021). (40% x $1,000,000)

Tax base = $12,700,000

less exemption = -11,700,000

Total = 1,000,000

Question 5

Aunt Sara wants to make a gift to various young nieces and nephews. Which of the following gifts will qualify for the gift tax annual exclusion?

1. A gift to an irrevocable trust with Crummey provisions.
2. A gift to a 2503(b) trust
3. A gift to an UTMA account
4. A gift to an irrevocable trust

Answer 5

1 & 3 - An irrevocable trust must have Crummey provisions. If Crummey is not stated, the gift is a future interest.

• A gift to an irrevocable trust with Crummey provisions.
• A gift to an UTMA account

Question 6

Ellen, age 70, is gifting as much of her assets as possible. She hopes to reduce her federal estate tax and is worried that she won’t live long enough to do so. Who among the following is a skip person?

• Her son, age 30
• Her sister’s son, age 32
• Her best friend from high school
• A friend, age 108
• None of the above

Answer 6

None of the above - None of the parties shown appears to be a skip person. A friend from high school has to be close to her age. The 37½ year rule applies to younger generation individuals, not older generations.

Question 7

Which of the following are general powers?

1. Power that can be exercised in favor of the holder for the holder’s health, education, maintenance, and well-being
2. Power that can be exercised in the favor of holder subject to an ascertainable standard
3. Power that can be exercised in the favor of the holder for all medical expenses including expenses for the convalescence of the holder
4. Power that can be exercised in favor of the holder

Answer 7

1 & 4 - To avoid being classified as a general power, answer I must say support. Well-being is not a ascertainable standard. If a power is subject to an ascertainable standard, it cannot be a general power. Medical is the same as health(HEMS).

• Power that can be exercised in favor of the holder for the holder’s health, education, maintenance, and well-being
• Power that can be exercised in favor of the holder

Question 8

When is an estate settled?

1. When an executor or administrator is named
2. When the will is probated
3. When debts and estate taxes are paid
4. When the executor makes the final distributions and is discharged by the probate court

Answer 8

4. When the executor makes the final distributions and is discharged by the probate court. - After all distributions are made, the executor is discharged by the court, and the estate is closed.

Question 9

How much can one person gift to one person and pay no gift tax in 2021?

• $15,000
• $1,015,000
• $5,000,000
• $11,700,000
• $11,715,000

Answer 9

$11,715,000 - The annual exclusion ($15,000) plus the gift exemption ($11,700,000) (2021)

Question 10

Frank died owning $2 million in stock XYZ and $3 million in ABC stock. His other assets, including his home, are worth another $2 million. He bought these two stocks for their high dividends. When he bought these stocks years ago, the dividend payment was about 30% of his original purchase price. As money came in, Frank spent it. After he died, XYZ jumped in value by 50% because of a buy-out offer. The assets pass to his daughter, what can she do?

1. Under IRD rules take an income tax deduction equal to the estate taxes due.
2. Elect the alternate valuation date for the stock
3. Sell the stock after the next individual distribution and pay STCGs
4. Inherit the stock and receive the dividends

Answer 10

4. Inherit the stock and receive the dividends - At a $7 million (approximately) date of death estate tax base, there is no estate tax due. The AVD cannot be elected if there is no estate tax due. It can’t be elected to get a higher step-up in basis. Because of that, answer A does not apply. Lastly, gains due to inheritance are always LTCGs. His daughter can keep the stock or sell it.

Question 11

Which of the following planning techniques are considered “freezing” techniques?

1. GRAT
2. Re cap
3. QPRT
4. Private annuity
5. SCIN

Answer 11

All of the above - With a GRAT and a QPRT, the assets are frozen when transfer is made (taxable gift). The donor must outlive the term. A recap is a freezing technique using preferred stock. With a private annuity or a SCIN, the property is transferred for a stream of income, and if the owner dies, no value is included in the estate.

Question 12

Janice Altman gives stock worth $80,000 with a basis of $10,000 to her daughter, Sara. A few years later Sara gifts the stock now worth $95,000 to her daughter, Jane. What is Jane’s basis?

• $10,000
• $80,000
• $95,000
• $95,000 – $15,000 or $80,000

Answer 12

$10,000 - There is no change in basis. There was no death as the stock passed between family members.

Question 13

Which of the following assets should be transferred to a GRAT?

• $2,000, 000 of treasury bonds paying 5%
• $2,000,000 of corporate bonds paying 6%
• $2,000,000 of municipal bonds paying 4%
• $2,000,000 of junk bonds paying 7%
• $2,000,000 of stock that is expected to appreciate

Answer 13

$2,000,000 of stock that is expected to appreciate - All the bonds will be worth about $2,000,000 after the term ends. Best answer for the exam - property likely to appreciate. It will be worth more than $2,000,000 at the end of the term. The main purpose of a GRAT is to save on future estate taxes.

Question 14

Mrs. Delmar, age 78, is in reasonably good health. She has an estate of $7 million. Her major asset is a small strip shopping center worth $2.5 million. It is fully depreciated, producing substantial income. She is concerned about estate taxes but needs the income from the property to maintain her lifestyle. What would you recommend?

1. Enter into a private annuity with a family member she can trust
2. Enter into an installment sale with the highest bidder
3. Arrange a SCIN to get a higher principal amount or interest rate

Answer 14

3. Arrange a SCIN to get a higher principal amount or interest rate. Although the installment sale and SCIN are subject to income tax recapture, the IRS proposed regulatory changes have halted private annuity usage. Under a SCIN the property will be removed from her estate. A SCIN is often an effective strategy.

Question 15

Which of the following about GSTT is true?

1. The $11,700,000 exemption is available per grandchild.
2. The annual exclusion is available for transfers at death.
3. A skip person is a son or daughter of the transferor.
4. A GSTT gift is also subject to gift tax.

Answer 15

4. A GSTT gift is also subject to gift tax. - If the amount of a gift to a skip person exceeds the GSTT exemption ($11,700,000 + $15,000), it also exceeds the federal gift tax exemption. Thus, both taxes are incurred. The $11,700,000 is not per donee but to all donees. A skip person is a beneficiary who is at least two generations younger than the transferor.

Question 16

Which of the following statements concerning a Grantor-Retained Annuity Trust is incorrect?

1. A GRAT has a fixed Income for life.
2. The property has a string on it.
3. The gift portion of the GRAT transfer is a future-interest gift to the remainderman.
4. The GRAT only saves estate taxes if the grantor lives beyond the trust term.

Answer 16

1. A GRAT has a fixed Income for life. The GRAT has a fixed income for a number of years.

Question 17

Your client, Sherman Simmons, purchased stock for $120,000 in 2000. He died 6 months ago. and left all of his property to his wife, Sylvia. The FMV of the stock on the date of death was $70,000. The stock value on the alternate valuation date was $80,000. If Sylvia sells the stock on the alternate valuation date, what will be the income tax result?

1. Sylvia will be able to take a long-term loss of $40,000.
2. Sylvia will incur a long-term gain of $10,000.
3. There will be no gain or loss.
4. Sylvia will be able to take a long-term loss of $50,000.

Answer 17

2. Sylvia will incur a long-term gain of $10,000.

Sherman passed all of his property to his wife under the marital deduction. Because no federal tax applies, the alternate valuation date cannot be elected. Sylvia’s basis will be the FMV date of death. $80,000 (proceeds) - $70,000 (basis) = $10,000

Question 18

Bill and Claire were a very wealthy couple. Bill recently died. Claire discovers that the bypass trust will not be completely funded. Bill’s will contains a disclaimer trust provision. She asked you which of the following properties she can disclaim into the trust.

1. The residence in tenancy by the entirety
2. A life insurance policy naming Claire as the primary beneficiary and her children as the contingent beneficiaries
3. A brokerage account in joint tenancy with rights of survivorship
4. An IRA naming her as the primary beneficiary and her children as the contingent beneficiaries

Answer 18

3. A brokerage account in joint tenancy with rights of survivorship

The IRS has ruled that tenancy by the entirety property cannot be disclaimed. The ruling is based on the fact that the property can only be held by a husband and wife. If she disclaims the life insurance, the benefits will be paid to the contingent beneficiary (her children). JTWROS property can be disclaimed. She would retain her portion (one half). The other one-half will then pass by the will into the disclaimer trust. If she disclaims Answers B or D, the property would pass to her children.

NOTE: If at Bill’s death he has not used the $11,700,000 (2021) exemption, Claire will get to use the unused portion(under the portability rules). Disclaimers may not be as valuable as they were before the law changed under the American Tax Relief Act of 2012.

Question 19

Linda lives in California (community property state) with her husband Bill. Linda inherited $50,000 some years ago. When she inherited the $50,000, she set up a money market account with her son as beneficiary. A few years ago, she used some of the money market funds to purchase an extra car for her son (to go to college). Her son recently graduated, and she sold the car. If she dies, how would the money market and the proceeds of the car sale be classified?

1. As joint tenancy with her son
2. As community property with her husband
3. As separately owned property
4. As tenancy in the common with her son

Answer 19

3. As separately owned property​ - The inheritance was never commingled with other assets. She kept it separate from other assets.

Question 20

Richard’s father, Joseph Leder, died and was insured by a $1,000,000 policy purchased in 2017 (within three years of his death). Richard’s mother was the applicant-owner and beneficiary. Joseph Leder signed as the insured. Monthly premium payments ($3,900) were paid by a corporation wholly owned by Joseph. Was the life insurance included in the estate of Joseph?

1. Yes, it was included because the corporation paid the premium.
2. Yes, it was included because Joseph died within three years of the policy issue.
3. No, the policy was excluded from Joseph’s estate.
4. No, the corporations can pay premiums for their key employees, and the policies will always be excluded from their estates.

Answer 20

3. No, the policy was excluded from Joseph’s estate. This is a famous estate planning case. IRS has not been able to enforce the premium payor rule. “Beamed theory” was the principal that the IRS used to show an incident of ownership. Mr. Leder owned the company which paid the premium. Premium payment is not an incident of ownership. Answer IV is too general an answer to be true. The word “always” makes it wrong.

Question 21

Which of the following statements regarding power of appointment is correct?

1. A lapse of a general power subject to a 5 or 5 limitation will subject the holder to gift tax liability.
2. A release of a general power subject to a 5 or 5 limitation cannot subject the holder to a gift tax liability.
3. An exercise of a general power subject to a 5 or 5 limitation cannot subject the holder to a gift tax liability.
4. A lapse of a general power will subject the holder to a gift tax liability.

Answer 21

4. A lapse of a general power will subject the holder to a gift tax liability.

The others are written incorrectly. Please review the flow chart under general powers.

Question 22

Mr. Little wants to make a gift of $1,015,000 to his son. Which of the following methods should he use?

• Use some of his $11,700,000 (2021) exclusion amount and the annual exclusion
• Use the net gift technique and the annual exclusion

Answer 22

Use some of his $11,700,000 (2021) exclusion amount and the annual exclusion. Without exhausting the $11,700,000 (2021), the net gift technique cannot be used.

Question 23

What is the required minimum gifting amount under a CLUT?

1. No minimum required
2. 5% of the corpus
3. 5% of the original gift
4. 5% of the earned income

Answer 23

1. No minimum required - There is no required minimum under a CLAT or CLUT. The CRAT, the CRUT, and the family foundation require 5% distributions to the beneficiary.

Question 24

Madeline has a 25-year-old granddaughter, Sue, who is disabled and receives government benefits. Madeline wants to leave her $300,000 in her will. What do you tell her?

• Leave the money outright to Sue
• Transfer the money to a special needs trust naming Sue as its beneficiary

Answer 24

Transfer the money to a special needs trust naming Sue as its beneficiary. The Special Needs Trust would not deprive Sue of government benefits.

Question 25

Mr. Adams is single with no immediate family. He wants the executor of his will to pay his final bills and expenses. Besides his home, Social Security, and pension benefits, he has a small life insurance policy. How should the beneficiary of the life insurance policy be named?

1. Estate of the insured
2. His niece (the executor)
3. No beneficiary

Answer 25

Estate of the insured- By paying the proceeds to the estate of the insured, his executor will get the use of the proceeds and pay his final expenses. It is a small policy.

Question 26

Which of the following is a complex trust?

1. A trust that may distribute income
2. A trust that must distribute income
3. A trust that is required to distribute all of its income
4. A revocable trust

Answer 26

1. A trust that may distribute income. - The key word is “may.” A complex trust may accumulate income, or the trustee has the discretion to accumulate income. A complex trust must be irrevocable.

Question 27

Which of the following type of property is included in the probate estate?

1. Life insurance owned by a decedent with a named beneficiary
2. Pension plan with a named beneficiary
3. Ownership of corporation
4. Joint tenancy with son and daughter

Answer 27

3. Ownership of corporation - Assets passing by beneficiary designation are not subject to probate. Ownership of stock (sole ownership) is subject to probate.

Question 28

Mr. and Mrs. Billings have lived in California, a community property state, for all their married working lives. These are their assets.

1. $1,000,000 home
2. $500,000 term life insurance policy on Mr. Billings (Mrs. Billings is the named beneficiary)
3. $400,000 in Mr. Billings IRA (Mrs. Billings is the named beneficiary)
4. $100,000 in a CD owned by Mrs. Billings
5. $50,000 Lexus and $40,000 BMW

Which of the assets are subject to probate if Mr. Billings dies?

Answer 28

1, 4, & 5 - The IRAs will pass by beneficiary designation. All the assets are community property.

Question 29

Your aunt gives you property with a basis of $1,200,000 (her purchase price) but a FMV of only $660,000. What is the amount of the taxable gift?

Answer 29

$645,000- The amount of the taxable gift is $660,000 – $15,000.

Question 30

Mr. Atwater owns a family farming operation worth $13,000,000 (mainly land). It is a closely held corporation (100% owned by Mr. Atwater). His son and daughter expect to inherit and run the operation after his death. Mr. Atwater estimates his gross estate will total $28,000,000 with administrative expenses totaling $500,000 at his death. Estate taxes are still a concern because Mr. Atwater is divorced. Which of the following elections are available to the estate?

1. 6166
2. 303
3. 2032A
4. Net Gift Election

Answer 30

1 & 2 - As a corporation, the farm qualifies for a Section 303 stock redemption. The executor can pay the federal estate tax in installments because the business constitutes more than 35% of the AGE. 2032A qualifies under the 25% rule (real property) but not the 50% rule (gross estate). $13.0M : $28.0M = 46%. 303 and 6166 qualify under the 35% rule (adjusted gross estate $13.0M : $19.5M = 67%).