Estate Planning

Question 1

Texas - Sep Prop Owned Prior To Marriage maintained by joint account funds

Answer 1

In Texas, community funds that are used to maintain, improve or pay the expenses of a spouses separate property does not give the community any ownership interest in that asset, Instead, the community is only entitled to be reimbursed for all of those payments. By virtue of these examples you can now understand how one asset can have both separate and community ownership. In Texas, this is known as proportional ownership of property by the marital estate. The respective ownership is determined by the rule of inception of title. Under this rule, the character of the asset as separate or community property is determined at the time the asset is acquired. The manner in which title is held in Texas does not determine ownership.

Ex: Spouse A owned a house prior to marriage. Once married, Spouse B starts helping with mortgage payment. This does not necessarily mean that the house is now considered comm prop.

or if Spouse A used sep prop funds for downpayment, Spouse A would be 100% owner (even if both spouses names are on the house). Spouse B would only have right of reimbursement.

Question 2

Dying without a will - Texas

Answer 2

• In Texas, there is a presumption that all property acquired during a marriage community property.
• When someone dies without a will = dying “intestate”. State determines how probatable assets will be distributed.
• Probabtable assets = any asset that does not pass outside the will
  
  • Assets that pass outside the will - IRA with bene, TOD, living trusts, joint tenant accounts
• Dying without a will - married with no kids = all comm. prop goes to surviving spouse. Sep prop. gets divided between your surviving spouse and any remaining relatives (parents/siblings)
• Dying without a will - married with kids that are also kids of your surviving spouse = spouse gets 100% of comm prop, ⅓ of sep. prop along with right to use decedents real estate for rest of their life. Kids get the rest of the sep .prop

Question 3

Seperate Property

Answer 3

Separate Property

Separate property is property that you owned before marriage, or acquired, even during a marriage, by gift or inheritance. The intestate distribution formula is different for separate property:

Question 4

Disclaimer Clause (in a will)

Answer 4

• Reminds heirs they may disclaim.
• Rules to make an Effective Disclaimer:
  
  • The disclaimer must be in writing.
  • The disclaimer must be delivered to executor within 9 months.
  • The disclaiming party cannot have benefited from the disclaimed assets (interest income).
  • The person disclaiming can’t direct the disposition of the disclaimed property. (It’s as if the disclaiming party is deceased.)
• A disclaimer clause is when an heir or legatee refuses to accept a gift or bequest. The disclaimer allows assets to pass to other heirs or legatees without additional transfer tax.

Question 5

Simultaneous Death vs Survivorship Clause

Answer 5

• Simultaneous Death Clause (SDC)
  
  • Presumption regarding which individual died first in the event that both individuals die in the same event and it is impossible to determine who died first (otherwise state law will control).
• Survivorship Clause (SC)
  
  • Requires any beneficiary to survive the decedent for a specified period of time in order to inherit.
  • A survivorship clause typically lasts 6 months or less.

Question 6

Mutual or Reciprocal Wills vs. Joint Will

Answer 6

Mutual or Reciprocal Wills

• Two identical wills leaving all assets to the other (usually spouses).
• Sometimes referred to as Sweetheart wills.
  
  • A “Sweetheart will” is not binding on either party. If the testator dies after making a sweetheart will, the will is effective. However there is no assurance that sweetheart wills made jointly (at the same time) will not be changed later by the individual parties. They are not irrevocable.
• These wills do not bind the other party or prevent them from changing their wills in the future

Joint Will

• One will for two people.
• At the death of the first person, the survivor is contractually bound by the joint will.
• Joint wills can also complicate probate administration and prevent future planning.

Question 7

Noncupative Wills

Answer 7

• An oral dying declaration made before sufficient witnesses.
• Are not valid in all states.

Question 8

Holographic Wills

Answer 8

• A will written in the testator’s handwriting (not typed).
• The will must be signed and dated by the testator.
• No witnesses are required.

Question 9

Risks to Dying Intestate

Answer 9

• A surviving spouse may receive the same share of the decedent’s probate estate as a child.
  
  • 1 child vs. 10 children
• A spouse may share assets with in-laws.
• The decedent’s children are usually treated equally in intestacy, which may not be equitable.
• The Probate Court will appoint an administrator and require a surety bond making the cost of probate increase.
  
  • Administrator Generally means court appointed; can also result if an executor fails to qualify (such as by having a felony conviction). An administrator must generally post a surety bond.
• The decedent with a valid will could have appointed an executor to serve and without bond.
  
  • Executor: A testator with a valid will selects the executor and is permitted to waive the surety bond.

Question 10

Intestacy laws are created by the ______legislature.

Answer 10

Answer: State.

Dying intestate (without will or SUFFICIENT WILL) means state will determine how assets are disbursed

Question 11

Per Stirpes vs. Per Capita

Answer 11

• Per stirpes – by the roots
• Per capita – by the head

Question 12

No-Contest Clause

Answer 12

• Need something to lose
• A clause that causes a party in interest to risk what they are to receive in order to challenge the will
• If Mike changes his will to leave his entire $5million to Nurse June, and leave his daugter Ally with nothing, the no contest rule does not help because if ally protests the will and loses she doesn’t inherit anything anyway.

howvever, if the will gives ALly $1 mln and the nurs $4 mln, Ally is less likely to contest the will because if she loses, she will get $0.

Question 13

Revoking a Will

Answer 13

To revoke a will the testator can:

• Simply destroy the old will by shredding or burning it.
• Create a new will specifically revoking the old one.

Question 14

Codicils

Answer 14

• A supplement to a will.
• A separate document that must meet all the legal requirements of a will used to: modify, explain, or amend a will.
• The testator must be competent each time a codicil is written.
• A codicil is frequently used due to a change in family circumstances (birth of a child) and is less expensive than drafting an entirely new will.

Question 15

Statutes Affecting Wills

Answer 15

• Forced Heirship - Requires that a certain portion of the estate be transferred to the decedent’s children.
• Marital Portion - Requires a certain portion of the estate to be transferred to the decedent’s surviving spouse.
• Felonious Homicide Statutes - Prevents legatees and heirs who have been convicted of intentionally killing the decedent from inheriting under the decedent’s will or through intestacy.
• Divorce Statutes - Invalidates a provision in a will that leaves assets to a former spouse.
• Anti-Lapse Statutes - A presumption that if a close relative such as a child or sibling is not alive then the testator would have wanted the assets to flow to their heirs.

Question 16

Side Letters of Instruction

Answer 16

• Generally details the testator’s wishes to the executor regarding the disposition of specific tangible possessions as well as the funeral and burial wishes of the decedent (not a part of the will).
• While the letter has no legal standing, the executor will generally carry out the wishes of the decedent.
  
  • If the testator wants the bequest to be legally binding, then put it in the will.

Ex: Giving specific china to a grandchild.

**NOT LEGALLY BINDING*

Question 17

Power of Attorney vs Power of Appointment

Answer 17

Power of Attorney

• A legal document authorizing a trusted person (agent) to act on one’s (principal) behalf.
  
  • General Power of Attorney (very broad)
  • Limited Power of Attorney (more specific)
• Does not survive the death of the principal.
• A power of attorney permits an agent to act. A power of appointment permits the agent to appoint assets.
• A stand-alone document that allows an agent to act for the principal and may include the power to appoint assets
• Power to act
• Ends at the death of the principal
• May be general or limited
• May be revoked at anytime by the principal
• useful tool to provide for medical care or care of assets if one is incapacitated.
• Ex: you are out of the country during your home closing. You can have POA sign docs on your behalf

*may or may not include Power of Appointment which is the below”

**is a feature of the POA document

• The ability for the agent to appoint assets of the principal to:
  
  • Himself
  • His estate
  • His creditors
  • His estate’s creditors
• Power to transfer assets
• May survive the death of the grantor
• The power remains in effect even if the principal becomes incapacitated or disabled.

A power of appointment is a legal right to determine who gets assets after you (i.e. at your death.) Its granted in a will or trust and must be exercised in a will or trust.

A power of appointment is beneficial because it provides an added layer of flexibility in an estate plan. For example, suppose that a husband has established a trust for the benefit of his wife after he dies. The trust authorizes the wife to exercise a limited power of appointment over the trust assets on her death allowing her to appoint to her descendants. If she fails to exercise this power, the trust assets will be divided equally and held in further trust for each of their children

Question 18

Advantages/Disadvantages of Power of Attorneys/Appointment

Answer 18

Advantages

• Eliminates the need to go to a court to appoint a guardian of the estate.
• Allows the agent to sell or manage property if needed.

Disadvantages

• The agent may abuse the power.
• If the agent holds a general power of appointment, then the assets will be included in the agent’s gross estate if the agent predeceases the principal.

Question 19

Durable Power of Attorney for Health Care

Answer 19

• Durable power of attorney for health care appoints an agent to make health care decisions in case of a principal’s incapacity or disability.
• The power of the agent does not expire with a person’s incapacity or disability, it only expires at death.
• It is possible to use a springing power.
• The power is always revocable by the principal.
• Hospitals are becoming more and more reluctant to take directions from someone without these types of documents (Example: Reluctance to amputate a leg after a car accident).

Question 20

Diff bw POA and DPOA

Answer 20

The key differentiation between DPOA vs POA is simple: incapacitation. As a General POA, your agency ends the moment your parents become incapacitated. This means that if they suddenly become unable to make decisions for themselves, you will no longer be able to make important decisions for them.

Question 21

Living Wills/Advance Medical Directives

Answer 21

• A legal document expressing an individual’s last wishes regarding the sustainment of his life under specific circumstances.
• There may be a statutory exception for a pregnant patient.
• Some states have an elective registry so the document can be filed and easily retrieved.
• This document may instruct health care providers to not connect you to life support systems.

Question 22

Types of Property

Answer 22

1. Realty (Real Property) – land and buildings affixed to the land.
2. Tangible Property – property that can be touched and is not realty (not affixed to the land and is generally movable).

3. Intangible Property – property that can not be touched (stocks, bonds, patents, and copyrights).

Question 23

Types of Ownership of Property

Answer 23

Fee Simple - Outright Ownership - complete ownership of property by one person. Grants owner right to use, sell, gift, convey/bewqueth. Prop transfers via PROBATE by will/intestancy. 100% of value of prop is included in gross (taxable for estate tax purposes) and probate estate.

TIC - An interest in property held by two or more related or unrelated people.Each tenant(a person who has ownership rights in a property) holds an undivided interest in the whole. *DO NOT NECESSARILY OWN EQUAL INTERESTS. Upon death, tenant’s interest transfers via probate. The Fair Market Value (FMV) of the ownership interest is included in the gross estate of a decedent and in the probate estate.

tenant % receives a step up in basis when they die

JTWROS - An interest in property held by two or more related or unrelated parties. Each tenant owns an equal undivided interest in the whole. Percentage ownership of each tenant must be equal. There is an implied right of survivorship(at the death of the first tenant the decedent’s interest transfers to the other joint tenant). Int passes outside of probate bc of survivorship feature. There is a possible gift at the inception if the contribution of each joint tenant is not equal.

TE - Similar to JTWROS except this occurs only between married people. Neither tenant can severe without the consent of the other tenant. A right of survivorship is implied.There is a deemed 50% contribution rule because these are married people. 50% of the total value of the property will be included in the gross estate of the decedent.

If question is a Community Property (CP) state,the state likely does not also have Tenancy by the Entirety (TE).

Comm Prop -

Community Property includes: All assets and earnings acquired during the marriage.

Separate Property includes:

1. Property acquired before the marriage.
2. Property acquired by gift or inheritance during marriage.

• The fruits (e.g., interest or rents) from Separate Property may be separate or community.
  
  1. Depends on state law.
• • There is no automatic right of survivorship for CP.

There is a step-to-FMV for both halves of the property for income tax purposes at the death of the first spouse regardless of who receives the property.

Question 24

Advantages/Disadvantages of Probate

Answer 24

Advantages
Protects the decedent wishes

• Fulfill the decedent’s wishes.
• Protects the legatees and the heirs
  
  • An orderly legal administration to prevent one heir from taking inappropriate priority over another.
  • Provides clean title to heirs and legatees.
  • Probate requires notice such that creditors and heirs have an opportunity to be heard.
• Protects the creditors
  
  • Makes sure that debts are paid.

Disadvantages

• The process is complex and takes time
• Generally takes 6-24 months
• There are monetary expenses
  
  • Court costs – 5 to 10% (some up to 20%)
  • Ancillary probate (probate in a non-domicile state for ancillary property)
• There is a loss of privacy
  
  • Court proceedings are open to public scrutiny

Question 25

When is due date of estate tax return?

Answer 25

The due date of the estate tax return is nine months after the decedent’s date of death, however, the estate’s representative may request an extension of time to file the return for up to six month

Question 26

Nontraditional Relationships

Answer 26

If the testator contemplates that a family member will object to who they have left their money to (for example: charity), or if the transfer is not the norm (for example: nontraditional beneficiaries), then they may want to avoid probate.

• Persons in non-traditional relationships should avoid probate!!!
• There are other ways of transferring party to the non-traditional partner:
  
  • Lifetime gifts
  • Named beneficiary of a contract (life insurance, IRA)
  • State Titling laws with survivorship (JTWROS)
  • State Trusts law where surviving partner is the trust beneficiary

Question 27

Probate Process

Answer 27

• The executor (testate) or administrator (intestate) is appointed by the probate court.
• The personal representative (executor or administrator) will manage and distribute the estate and take the following actions.
  
  • Marshal assets.
  • Post legal notices.
  • Pay the debts, costs and taxes from assets in probate.
    
    • From what assets?
  • Compile list of of assets
• Manage and distribute the estate

Question 28

Ademption vs. Abatement

Answer 28

ADEMPTION EXAMPLE (extinguish)

Kristi leaves the car to Bill, but the car has been sold when she dies.Bill gets nothing.

ABATEMENT EXAMPLE (reduction)

The will says $100K to Chad and $100K to Brad, and the testator dies with only $100K in total, then each person’s bequest would be reduced to $50K.

Question 29

Probate (cont’d)

Answer 29

What Property Passes through Probate?

• Fee Simple Property
• Tenancy in Common Property
• Community Property
• Invalid beneficiary designations to contracts such as insurance, annuities, IRAs, etc.

What Property Passes Outside Probate?

• State contract law retitles to beneficiary directly
  
  • Life insurance contracts
  • Annuity contracts
  • IRAs, SEPs, SIMPLEs, & qualified plans
  • Pay-on-Death (bank accounts) & Transfer-on-Death accounts (investment accounts)
• State titling law with survivorship features (JTWROS, TE)
• State trust law (property already retitled to trust)

Question 30

Common Duties of Executor and/or Administrator

Answer 30

Common Duties of Executor and/or Administrator

• Locates and assembles all of the decedent’s property.
• Safeguards, manages, and invests property.
• Advertises in legal newspapers that the person has died and that creditors and other interested parties are on notice of the death and opening of probate.
• Locates and communicates with potential beneficiaries of the decedent.
• Pays the expenses of the decedent.
• Pays the debts of the decedent.
• Files both federal and state income, fiduciary, gift tax, and estate tax returns (such as Forms 1040, 1041, 709, and 706 for federal tax purposes) and makes any required tax payments.
• Distributes remaining assets to beneficiaries according to the will or to the laws of intestacy.
• Closes the estate formally or informally.

Question 31

FOrm 709

Answer 31

gift tax return

Question 32

Types of Gifts

Answer 32

Direct

• A direct payment of cash or transfer of property from one person to another.
• Example of a direct gift: Aunt Martha writes a check for $15,000 to her favorite nephew, Martin.

Indirect

• An indirect transfer on behalf of a donor for the benefit of a donee.
  
  • Makes a payment for someone else.
  • Titles property jointly (there are exceptions).
  • Below-market rate loans.
    
    • Gift loans, interest free loans, below market rate loans, in which phantom interest income must be imputed for the interest income they would have earned had the loan arrangement been bona fide
  • Forgiving debt is a form of an indirect gift”. For example: Joe loans Laureen $50,000 for her to buy a new car. Six months later, Joe forgives the loan, he has made an indirect gift to Laureen.
• Another example: A titles a vacation home JTWROS with B and receives no consideration in return. This would be an indirect gift of ½ the value of the vacation home.

Complete

Completed gifts are gifts that have come to fruition.

• The donor has released all control over the asset and the donee can be identified.
• Renunciation of retained or reversionary interests.

Incomplete

• Incomplete gifts are gifts that have not yet come to fruition.
  
  • They are not taxable gifts for gift tax purposes.
  • Joint bank accounts may be incomplete gifts, but are not completed until noncontributing party withdraws funds from the account”. For example: Joe opens a joint bank account with his daughter Sydney. Joe contributes $25,000 to the account and Sydney contributes zero. This is an incomplete gift, until Sydney withdraws funds from the account. Once Sydney withdraws funds, the funds withdrawn represent a completed gift.
• An example of an incomplete gift would be if a gift is revocable, such as a transfer to a revocable trust. A revocable gift is not a gift for gift tax purposes.

Reversionary Interests

An interest that has been transferred by a transferor and subsequently reverts back to the transferor.

• If donor renounces his retained or reversionary interest, or trust becomes irrevocable by election or death of transferor, or at the direction of trust, then it would be a completed gift for gift tax purposes
• Example: Chuck transfers property to a trust for five years for the benefit of Robbie. At the end of the five years the property reverts back to Chuck. Since the property reverts back to Chuck, his interest is a reversionary interest and the value of the gift is less than the full value of the property.

Net Gifts

• Normally the donor is responsible for all gift taxes.
• A net gift is a gift made on the condition that the donee pay any gift tax.
• The donor will have taxable income to the extent that any gift tax paid by the donee exceeds the donor’s adjusted basis in the property transferred.

YOu include in gross income (for gift tax) any gift tax paid IN EXCESS of cost basis

Question 33

Below Market Rate Loan

Answer 33

Question 34

Annual Exclusion

Answer 34

Annual Exclusion

All individuals (donor) may gift up to $16,000 (for 2022) tax free per donee each year (adjusted for inflation).

The gift must be of a present interest to qualify for the annual exclusion.

Use it or lose it!

For non-U.S. citizen spouses (donees)

• “Super Annual Exclusion” = $164,000 (for 2022) indexed

Question 35

Valuation of a Gift

Answer 35

Fair Market Value (FMV) at the date of the gift.

Real estate will need an appraisal.

Publicly traded securities are valued at the high and low trading price for the day.

Bonds are valued at the present value (PV) of the expected future payments.

Discounts may be allowed for:

• lack of marketability - A reduction in the fair market value of a transferred asset because the interest is more difficult to sell to the public.
• lack of liquidity - The inability to convert to cash without experiencing price concessions.
• lack of control - Owning a minority interest in a company is not as valuable as having a majority or controlling interes

Question 36

Split Gifts

Answer 36

Married spouses (donor) can elect to split gifts effectively doubling the annual exclusion per donee to $32,000 (for 2022).

Split gifts require a gift tax return (Form 709) to be filed.

Split gifts must be elected for all gifts for that year.

Split gifts only count for the time during the year which a couple was married.

No gift-splitting for community property (no 709 returns needed).

No 709 on jointly held property.

Married couples in community property states (Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, and Washington), and in Wisconsin where Marital Property Laws have been adopted, are not required to split gifts because a gift by either spouse is deemed to have been divided by each spouse.

Question 37

Crummey Provision

Answer 37

A provision that allows the trust beneficiary to withdraw some or all of any contribution to the trust for a limited period so as to create a gift of a present interest.

The donee does not have to withdraw, the mere right creates the present interest.

May limit to annual exclusion or less, converting a future interest in trust to a gift of present interest.

5/5 Lapse Rule

• A taxable gift occurs when the power to withdraw in excess of $5,000 or 5% of the trust assets is lapsed by the powerholder.
• This only comes into being when there is more than one beneficiary

Ex: ExP: Harry and Wendy transfer to an irrevocable trust $90,000 naming their three children (Adam, Billy, and Christopher) as the beneficiaries. The trust provisions include a right to withdraw an amount equal to one-third of any contribution for 30 days for each beneficiary up to the annual exclusion limit for both spouses ($32,000 total for 2022).

• After 30 days, Adam has lapsed the power to withdraw $30,000.
• Adam has made a gift of one-third of $30,000 to each of Adam, Billy, and Christopher.
• The gift to himself is no problem, but the gift of one-third of $30,000 ($10,000) to each of Billy and Christopher violates the 5/5 Lapse Rule (5% of $30,000 assets = $1,500 and $5,000 whichever is higher) and has therefore made a taxable gift of $8,333 ($10,000 - $1,667) to each of Billy and Christopher. (One-third of $5,000 = $1,667)
• When presumably, Billy and Christopher also lapse, they likewise have made taxable gifts which are gifts of a future interest and therefore do not qualify for the annual exclusion and require the filing of a gift tax (709) return.

Question 38

Qualified Transfers

Answer 38

Qualified Transfers

• A qualified transfer is a payment made by a donor for someone else paid directly to:
  
  • A qualified educational institution for tuition and fees.
  • A medical care provider for qualifying medical expenses.
    
    • The key is that it must be paid directly to the institution.
• A qualified transfer does not count against the annual exclusion or applicable lifetime exclusion amounts.

Political organizations, qualified transfers, payments for legal support, payments between divorcing spouses and transfers within a business setting are not subject to gift tax.

Transfers in a Business Setting

• Transfers in a business setting are presumed to be compensation, and therefore not a gift.
• De minimis gifts are the exception to the compensation rule.

PaymentsPayments for Legal Support

Payments for legal support are not gifts.

Legal support does not necessarily stop at age 18 (state law will rule).

Payments to Divorcing Spouses

Payments pursuant to a divorce decree are nontaxable property settlements and therefore are not gifts.

There is a carryover income tax basis for property transferred from one spouse to the other.

Alimony payments are deductible for income tax by the payor and includible as income by payee for divorces finalized prior to 12/31/18. Divorces finalized or materially modified after 12/31/18 will not be deductible by the payor, or includible as income to the payee.

Transfers in the year of the termination of the marriage are considered part of the original divorce decree.

Question 39

Gifts

Answer 39

Gifts to Spouses

• There is an unlimited marital deduction allowance for transfers between married people.
• The transferee spouse must be a U.S. citizen.
• There are different rules for non-U.S. citizens.
  
  • There is a super annual exclusion for non-US citizen spouses, since they do not receive the unlimited marital deduction $164,000 in 2022.

Charitable Gifts

• There is an unlimited gift and estate tax deduction for gifts and bequests made to a qualified charity.

Question 40

Estate Formula & Tentative Tax

Answer 40

• Adjusted Gross Estate
• Less Marital deduction
• Less Charitable deduction
• Less State Death Tax Deduction
• Equals Taxable Estate
• Plus Post ‘76 gifts – added back to gross up total gifts.
• Equals Tentative Tax Base

Question 41

Estate Tax Liability

Answer 41

• An estate tax is paid by the executor or the administrator.
• If there is no executor or administrator, then the person in receipt of the property must pay.
• If the executor distributes to heirs before paying tax, then the executor may be personally liable.

Question 42

Paying and Reporting Taxes

Answer 42

Return

• Form 706 is due 9 months after death.
• Extension to file (but not to pay) can be granted for an additional 6 months.

Penalties

• Failure to file - 5% per month up to 25%
• Failure to pay - 0.5% per month up to 25%
• Failure to file is reduced by failure to pays

Memory techniques to help remember form numbers:

• 706 = “six feet under” is an estate tax return
• 709 = “nine lives” is a gift tax return

Question 43

Grantor Retained Annuity Trust (GRAT)

*

Answer 43

Pays a fixed annuity to the grantor for a defined term.

The remainder interest is transferred to a noncharitable beneficiary at the end of the GRAT term.

• There is a gift = The PV of remainder interest (FMV - PV of annuity = gift).

If the grantor dies during the GRAT term, then the value of the trust is included in the gross estate of the transferor, so no estate tax is saved.

Best property to use is property that is expected to appreciate at a rate greater than the 7520 rate (federal rate).

Risk – the grantor dies too early.

If grantor outlives the term, then the remainder interest is removed from the gross estate.

Question 44

Qualified Personal Residence Trust (QPRT)

Answer 44

A specialized form of a GRAT for a personal residence.

The grantor receives use of the house transferred instead of money.

A QPRT is ideal if the house is appreciating faster than the Section7520 interest rate and the family plans to keep the home.

Gift equals the present value of the remainder interest (calculated like a GRAT).

If the grantor dies during the QPRT term then the entire asset is included in the grantor’s gross estate.

Question 45

Family Limited Partnerships (FLP)

*

Answer 45

A partnership is created to transfer assets generally to a younger generation.

There are two interest components: General and Limited Partnership (LP) interests.

1% general partner is the transferor.

99% limited partner which these are gifted to the lower generation by making use of the annual gift tax exclusion amount.

An FLP takes advantage of valuation discounts.

An FLP is used when the transferor is intent on gifting all or part of the asset while maintaining control of the entity.

FLPs are designed to get portions of the gross estate out using the annual exclusion and valuation discounts.

Question 46

Simple vs. Complex Trust

Answer 46

Simple Trust

A trust that requires all of the trust income to be distributed on an annual basis to the beneficiaries and does not have a charitable organization as one of its beneficiaries.

Complex Trust

• If the trust is revocable then it is not a completed gift.
• If the trust is irrevocable then it is generally a completed gift(unless the grantor has a retained interest).

Question 47

Taxation of Trusts

Answer 47

For income tax purposes, trusts are treated as hybrid entities.

• Income of the trust that is distributed is taxed to beneficiaries.
• Income of the trust that is accumulated is taxed at trust rates.

Question 48

Trust Tax

Answer 48

Answer 49

Revocable Trusts

• Avoids probate.
• Provides for management of the grantor’s assets if grantor is incapacitated.

Irrevocable Trusts

• Used to achieve estate and gift objectives.

Inter Vivos Trust

• Created during life. (ex: GRAT)
• Opposite of test trust

Testamentary Trusts

• Created at death.

Standby Trust

• Unfunded or minimally funded.
• Waiting for triggering event which is usually incapacity.

Pourover Trust

• Receives assets from another source.

Grantor Trust

• Inter vivos trust for the grantor.
• Grantor pays all income tax.

Funded or Unfunded

• A funded trust has received property from the grantor.
• An unfunded trust has been drafted but not funded.

Question 50

Specific Trusts Used in Estate Planning

Answer 50

Inter Vivos Revocable

• Important in states with high probate costs.
• Privacy is maintained.
  
  • No notice requirements.
  • Terms are confidential.
• Will contests are discouraged.
  
  • State law controls, but generally more difficult.
• NOT effective for reducing estate taxes because the grantor still controls the assets.

Inter Vivos Irrevocable Trusts

• Completed gift!
• Use annual exclusion - remember need a present interest.
  
  • Distributions of income are considered a present interest.
  • Crummey (do not forget “5-and-5” power) Provision creates a present interest.

Irrevocable Life Insurance Trusts (ILIT)

• The trust owns a life insurance policy - The life insurance policy is a future interest.
• Need a present interest to use annual exclusion.

Bypass Trusts (Credit Shelter or B)

Spouse can still get the income, HEMS, “5-and-5.” (health, education, mainteneance, support)

Usually Testamentary, but can be Inter Vivos and exclude future appreciation

Power of Appointment Trust

Generally used to take advantage of the unlimited marital deduction.

May be used to avoid Generation Skipping Transfer Tax.

Qualified Terminable Interest Property (QTIP) Trust (also called the “C” or “Q” trust)

Used to take advantage of the unlimited marital deduction.

Grantor Retained Income/Interest Trust (GRITs)

Grantor retains an interest in the trust (usually an income interest).

GRATS, GRUTS, QPRTS, TPPTs.

Grantor Retained Annuity Trust (GRAT)

Fixed percentage of the initial contribution for life or for a term of years is paid to the grantor.

Transfer future appreciation out of estate without gift/estate tax consequences.

If the grantor dies within the trust term, the FMV of the trust property is brought back into the gross estate.

Grantor Retained Unitrust (GRUT)

Fixed percentage of the current value of the trust assets is paid to the grantor.

Need to revalue assets every year.

Not as popular as a GRAT.

Qualified Personal Residence Trust (QPRT)

Personal residence trust.

Tangible Personal Property Trust

Personal property - artwork, antiques, etc.

Dynasty Trust

Long periods of time.

Used to avoid transfer tax at the death of each generation.

Grantor Trust

Income taxed to grantor.

Completed transfer for gift and estate tax purposes.

Incomplete transfer for income tax purposes.

Totten Trusts (Pay on Death Bank Accounts)

Payable on Death (POD) accounts (not really trusts).

Blind Trusts

Revocable trust used when self management might be a conflict of interest (e.g., a politician).

Question 51

Marital Deduction

Answer 51

• A married couple is considered one single economic unit thus entitled to unlimited transfer between husband and wife if citizens.
• The advantages of the unlimited marital deduction:
  
  • It defers the payment of estate taxes generally to the death of the second spouse.
  • It creates the ability to fund the estate of the second-to-die spouse.
• The requirements for the unlimited marital deduction include the following:
  
  • The parties must be married at the date of death or on the date of the gift.
  • There is a citizen requirement - discussed later.
• The limitations of the unlimited marital deduction:
  
  • Remember - net value!!!
    
    • Only the assets the surviving spouse actually receives are deductible for the unlimited marital deduction.

The marital deduction is the the attached example $800K, not the full $1,000,00 of gross estate because you have to take into account administrative expenses.

Question 52

The Terminable Interest Rule

Answer 52

Exceptions to the rule:

• 6 month survival contingency.
  
  • Remember back to the wills chapter, the survivorship clause cannot require that the spouse survive by more than 6 months; otherwise, the unlimited marital deduction may not apply.
• A terminable interest where the spouse has a general power of appointment.
• A QTIP trust.
• A Charitable Remainder Trust where the spouse is the only noncharitable beneficiary.

The idea behind the terminal interest rule is that you only get an unlimited marital deduction if the property goes outright to the spouse or meets an exception to the rule.

Question 53

Life Insurance in Estate Planning

Answer 53

Term Insurance

• Coverage for a definite period of time.
• Funds temporary income needs.
• Can be used as a hedge (to cover estate tax) when engaging in GRATs, GRUTs, QPRTs, etc., when may result in estate tax inclusion if grantor does not survive the term.

Universal Life

• A term policy with a cash accumulation feature.
• The premium is flexible.
• May fund permanent needs.

Variable Universal Life

• Universal life with the ability of the owner to determine how to invest the cash accumulation.

Whole Life

• Permanent insurance.
• Funds permanent need.
• Invested by insurer-though usually pays a minimum guaranteed return. Even if cash account runs out, life insurance is guaranteed to remain in force provided the insured pays the premium.

Second-to-Die Insurance

• Covers two parties (usually spouses) and pays only when the second person dies.
• Useful when one party is uninsurable.
• Often used to pay estate tax at second spouse’s death.
• Can be term or permanent.
• May be whole life or UL and is usually owned by an ILIT.

Question 54

Federal Estate Tax Treatment of Life Insurance

Answer 54

• I.R.C. Sec 2033 – Life insurance on someone else’s life
  
  • The interpolated terminal reserve plus any unearned premium will be included in the gross estate.
• Life insurance on the insured/decedent’s life
  
  • The death benefit will be included in the gross estate.
• I.R.C. Sec. 2035 – The three year rule

A policy owned by the decedent on his own life that are assigned within 3 years will be included in the decedent’s gross estate at the face value (Death Benefit).

Question 55

Which of the following assets will pass through probate?

1. A house subject to a mortgage and owned fee simple by the decedent.
2. Property held tenancy by the entirety.
3. Bank accounts with named beneficiaries.
4. None of the above will pass through probate.

Answer 55

Solution: The correct answer is A.

Answers B and C will not pass through probate because they pass by operation of law or state contract law. Answer A will pass through probate because it is owned fee simple by the decedent. The fact that the house is subject to a mortgage does not affect whether it passes through probate.

Question 56

Devisee

1. A person who inherits under state intestacy laws.
2. 1(of a person)not having a will; die intestate 2(of things) not disposed of by will
3. Having made and left a valid will.
4. A person who inherits real property under a valid will.
5. A person who inherits under a valid will.

Answer 56

Solution: The correct answer is D.

Question 57

Uncle Joe died recently. He is survived by two nieces, Rachel and Margaret. Uncle Joe owned the following property at his death.

• A house he inherited from his parents.
• A car owned by Uncle Joe.
• A life insurance policy on his own life.

Uncle Joe’s two nieces are the beneficiaries of the policy.

A 401(k) plan without a listed beneficiary.

Uncle Joe’s will left the house to his favorite niece, Rachel, and the car to his niece, Margaret. Which of the following statements is correct?

1. A.All assets will be transferred via the will.
2. B.All assets will be transferred via the state’s intestate probate laws.
3. C.Some assets will be transferred via the will and the remaining assets will transfer outside the probate process.
4. D.Some assets will be transferred via the state’s intestate probate laws, some assets will transfer via the will and some will transfer outside the probate process.

Answer 57

Solution: The correct answer is D.

The house and the car will transfer under the will. The life insurance policy will transfer outside the probate process because of the named beneficiaries. The 401(k) plan will transfer to Uncle Joe’s probate estate because there is no listed beneficiary. Since the will does not cover the 401(k) plan, the asset will transfer via the state’s intestate succession laws.

Question 58

Legatee

1. A person who inherits under state intestacy laws.
2. 1(of a person)not having a will; die intestate 2(of things) not disposed of by will
3. Having made and left a valid will.
4. A person who inherits real property under a valid will.
5. A person who inherits under a valid will.

Answer 58

Solution: The correct answer is E.

Question 59

Which of the following is/are considered a disadvantage(s) of probate?

1. The process can result in delays.
2. The process may be expensive.
3. The process provides clear title to heirs and legatees.
4. The process is open to public scrutiny.

Answer 59

Solution: The correct answer is C.

The fact that probate provides clear title to heirs and legatees is an advantage, not a disadvantage, of the process. All of the other options are disadvantages of the probate process.

Question 60

Jaime, a wealthy doctor, wrote a will many years ago after his first child was born. His will leaves his home on Drury Lane to his daughter, Taylor. Jaime sold the home on Drury Lane last year and purchased a new home on Mulberry Lane. The extinction of Taylor’s legacy is called what?

1. Abatement
2. Ademption
3. Surety
4. Letters testamentary

Answer 60

Solution: The correct answer is B.

Abatement is the reduction in an estate when there is insufficient assets to satisfy all legatee provisions. A surety bond is a bond posted by the administrator of the probate process. Letters testamentary is the document given to the executor from the probate court authorizing the executor to act on behalf of the estate.

Question 61

Ademption vs Abatement

Answer 61

• Manage and distribute the estate
  
  • Distribute specific bequests
    
    • What if the asset no longer exists?
    • Ademption – Extinction of right
  • Then distribute the remaining assets
    
    • What if there are not enough assets to satisfy all bequests?
    • Abatement - Reduction

ADEMPTION EXAMPLE (extinguish)

Kristi leaves the car to Bill, but the car has been sold when she dies.Bill gets nothing.

ABATEMENT EXAMPLE (reduction)

The will says $100K to Chad and $100K to Brad, and the testator dies with only $100K in total, then each person’s bequest would be reduced to $50K.

Question 62

Heir

1. A person who inherits under state intestacy laws.
2. 1(of a person)not having a will; die intestate 2(of things) not disposed of by will
3. Having made and left a valid will.
4. A person who inherits real property under a valid will.
5. A person who inherits under a valid will.

Answer 62

Solution: The correct answer is A.

Question 63

Legatee

Answer 63

A person who inherits under a valid will.

Question 64

Natalie and Ashley own farm land as Joint Tenants with Rights of Survivorship. Natalie contributed $60,000 and Ashley contributed $40,000. The land is currently valued at $1,000,000 and each of them own 50% of the property. If Natalie died today, what amount of the value of the farm land is included in her gross estate?

1. $60,000
2. $500,000
3. $600,000
4. $1,000,000

Answer 64

Solution: The correct answer is C.

Property owned JTWROS follows the actual contribution rule for inclusion in the gross estate. Therefore, since Natalie contributed 60% of the property, her estate will include 60% of the Fair Market Value (60% × $1,000,000 = $600,000).

Tenants by entirety follows the 50/50 contribution rule because they are married people. Comm prop follows 50/50 too.,

Question 65

Value included in gross estate is 50% deemed contribution rule

1. JTWROS and Tenancy by the Entirety
2. Tenancy in Common and JTWROS
3. Fee Simple
4. Tenancy by the Entirety and Community Property

Answer 65

Solution: The correct answer is D.

The deemed contribution rule ALWAYS applies between spouses so it must be used for community property and TE since the marital relationship is a requirement of the ownership interest. JTWROS can be between spouses, and then it is assumed a 50% contribution rule too, BUT JTWROS can also be used by non-spouses and then the actual contribution rule applies

Question 66

Can partition property without consent

1. A.JTWROS and Tenancy by the Entirety
2. B.Tenancy in Common and JTWROS
3. C.Fee Simple
4. D.Tenancy by the Entirety and Community Property

Answer 66

Solution: The correct answer is B.

Question 67

Sylvia and Rachel are friends that own a townhouse together. Rachel contributed 40% of the purchase price and Sylvia contributed 60% of the purchase price. Each of them own 50% of the property. Which of the following are permissible ways they could title the property?

1. Fee Simple
2. Tenancy in Common
3. Joint Tenancy with Rights of Survivorship
4. Tenancy by the Entirety
5. Community Property
6. 2 only
7. 2 and 3
8. 1, 3 and 4
9. 2, 3 and 4
10. 2, 3, 4 and 5

Answer 67

Solution: The correct answer is B.

The property could be titled either as Tenancy in Common or Joint Tenancy with Rights of Survivorship. The property could not be owned at Tenancy by the entirety or Community Property because Sylvia and Rachel are not married. Fee Simple is not an option either because there is more than one owner.

Question 68

Sherri purchased a home many years ago for $40,000. She married Gary five years ago when the house was worth $150,000. Sherri and Gary live in a community property state. Assume Sherri died today and gave her interest in the property to her son Casey. The property is currently valued at $200,000. What is Gary’s basis in the home after Sherri’s death?

1. $0
2. $75,000
3. $100,000
4. $200,000

Answer 68

Solution: The correct answer is A.

Gary does not own any interest in the property. Sherri purchased the home before she was married to Gary. At the time of marriage, the property remained Sherri’s separate property. When Sherri died, her interest (100%) transferred to Casey. Thus, Gary does not own any of the property and does not have any basis in the property. Casey will have a basis of $200,000.

Question 69

Chris and Jenn, a married couple, made the following gifts this year:

Chris gave their son, Evan, a car worth $4,000 owned as community property. Chris also gave his son his stamp collection (separate property) valued at $60,000.

Chris gave his brother, Stephen, $20,000 of Chris’ separate property so Stephen could purchase a new home.

Chris gave his sister, Heather, $4,000 in cash from his and Jenn’s joint checking account which consists only of community property. He also gave Heather a piece of land he purchased before his marriage to Jenn, valued at $49,000.

After the gift, how is Evan’s ownership of the car classified?

1. Fee Simple
2. Joint Tenancy with Chris
3. Tenancy in Common with Chris and Jenn
4. Community Property with Evan’s wife Michelle

Answer 69

Solution: The correct answer is A.

The car is owned by Evan as fee simple. There is no indication that Chris or Jenn retained any interest in the car after the gift. Even though Evan is married, a gift to an individual would not be community property.

Question 70

Kate and her brother, Rustin, own a piece of property in Dallas as tenants in common valued at $50,000. Kate owns 75% and Rustin owns 25%. Rustin also owns a home in New Orleans, but the home is too expensive and Rustin defaulted on the loan. Even after the bank seized Rustin’s home in New Orleans, there was a $50,000 debt remaining. Assuming the bank received a default judgment against Rustin and could seize the Dallas property, what portion of the property could be seized to satisfy Rustin’s debt?

1. 0%
2. 25%
3. 50%
4. 100%

Answer 70

Solution: The correct answer is B.

Co-owners of tenancy in common property are not liable for the debts of their co-owners. Thus, the bank can only seize Rustin’s portion of the property to satisfy his debt.

Question 71

Jill lends $25,000 to her sister for cosmetic surgery. The note calls for repayment over 5 years at 6% interest. One year later, Jill forgives the debt. What type of gift is this?

1. Complete Gift
2. Indirect Gift
3. Incomplete Gift
4. Direct Gift

Answer 71

Solution: The correct answer is B. This is an indirect gift since the donor is forgiving an obligation of the donee.

Question 72

Types of Gifts

Answer 72

Direct

• A direct payment of cash or transfer of property from one person to another.
• Example of a direct gift: Aunt Martha writes a check for $15,000 to her favorite nephew, Martin.

Indirect

• An indirect transfer on behalf of a donor for the benefit of a donee.
  
  • Makes a payment for someone else.
  • Titles property jointly (there are exceptions).
  • Below-market rate loans.
    
    • Gift loans, interest free loans, below market rate loans, in which phantom interest income must be imputed for the interest income they would have earned had the loan arrangement been bona fide
  • Forgiving debt is a form of an indirect gift”. For example: Joe loans Laureen $50,000 for her to buy a new car. Six months later, Joe forgives the loan, he has made an indirect gift to Laureen.
• Another example: A titles a vacation home JTWROS with B and receives no consideration in return. This would be an indirect gift of ½ the value of the vacation home.

Complete

Completed gifts are gifts that have come to fruition.

• The donor has released all control over the asset and the donee can be identified.
• Renunciation of retained or reversionary interests.

Incomplete

• Incomplete gifts are gifts that have not yet come to fruition.
  
  • They are not taxable gifts for gift tax purposes.
  • Joint bank accounts may be incomplete gifts, but are not completed until noncontributing party withdraws funds from the account”. For example: Joe opens a joint bank account with his daughter Sydney. Joe contributes $25,000 to the account and Sydney contributes zero. This is an incomplete gift, until Sydney withdraws funds from the account. Once Sydney withdraws funds, the funds withdrawn represent a completed gift.
• An example of an incomplete gift would be if a gift is revocable, such as a transfer to a revocable trust. A revocable gift is not a gift for gift tax purposes.

Reversionary Interests

An interest that has been transferred by a transferor and subsequently reverts back to the transferor.

• If donor renounces his retained or reversionary interest, or trust becomes irrevocable by election or death of transferor, or at the direction of trust, then it would be a completed gift for gift tax purposes
• Example: Chuck transfers property to a trust for five years for the benefit of Robbie. At the end of the five years the property reverts back to Chuck. Since the property reverts back to Chuck, his interest is a reversionary interest and the value of the gift is less than the full value of the property.

Net Gifts

• Normally the donor is responsible for all gift taxes.
• A net gift is a gift made on the condition that the donee pay any gift tax.
• The donor will have taxable income to the extent that any gift tax paid by the donee exceeds the donor’s adjusted basis in the property transferred.

Question 73

Joe gives his sports car with the title to his brother Frank. What type of gift is this?

1. Direct Gift
2. Indirect Gift
3. Incomplete Gift
4. Complete Gift

Answer 73

Solution: The correct answer is D. An outright gift with no limitations or future requirements directed to a specific named donee is considered a completed gift.

Question 74

Brandon opens a joint checking account with his brother Shane. Brandon deposits $30,000 into the account and Shane deposits nothing. Three months later, Shane withdraws $15,000. What type of gift is this?

1. Complete Gift
2. Indirect Gift
3. Incomplete Gift
4. Direct Gift

Answer 74

Solution: The correct answer is A. Until Shane removed funds, this was an incomplete gift, once Shane removed money, the gift was complete, to the extent he took funds.

Question 75

Jane transferred a piece of real estate to her son Christopher 6 months ago. Jane purchased the real estate for $90,000 six years ago and the property was valued at $65,000 on the date of transfer. Jane paid $26,000 in gift tax on the transfer. All of the following statements are true, except:

1. If Christopher were to sell the property for $60,000 today, then the loss is a short term loss.
2. Christopher’s basis will be adjusted for a portion of the gift tax paid.
3. Christopher will have a dual basis for income tax purposes.
4. If Christopher sold the property for $120,000 after holding it for 5 years, then his gain would be $30,000

Answer 75

Solution: The correct answer is B.

Because Jane’s basis in the property was greater than the FMV of the property on the date that she gifted the property, Christopher will be subject to the double basis rules.

All but “B” are correct; it’s important to remember that double basis gifts will NEVER be adjusted for gift tax paid since there was no appreciation on the transfer date.

Question 76

Which of the following statements relating to qualified transfers for gift tax purposes is not correct?

1. A qualified transfer does not take the relationship between the donor and the donee into account.
2. A payment made directly to an individual to reimburse him for medical expenses is a qualified transfer.
3. The exclusion for a qualified transfer is in addition to the annual exclusion.
4. A payment made to a qualified education institution for tuition costs is a qualified transfer

Answer 76

Solution: The correct answer is B.

A payment made directly to an individual to reimburse him for medical expenses is not a qualified transfer. To be a qualified transfer, the payment must be made directly to the healthcare provider. All of the other options are true.

Question 77

Qualified Transfers

Answer 77

• A qualified transfer is a payment made by a donor for someone else paid directly to:
  
  • A qualified educational institution for tuition and fees.
  • A medical care provider for qualifying medical expenses.
    
    • The key is that it must be paid directly to the institution.
• A qualified transfer does not count against the annual exclusion or applicable lifetime exclusion amounts.

Political organizations, qualified transfers, payments for legal support, payments between divorcing spouses and transfers within a business setting are not subject to gift tax.

Question 78

Ivan pays tuition for his nephew William. Ivan makes the payment directly to the university. What type of gift is this?

1. Complete Gift
2. Indirect Gift
3. Incomplete Gift
4. Direct Gift

Answer 78

Solution: The correct answer is B.

Question 79

Jose created a joint bank account for himself and his friend, Amparo. At what point has a gift been made to Amparo?

1. When the account is created.
2. When Jose notifies Amparo that the account has been created.
3. When Amparo withdraws money from the account for her own benefit.
4. When Jose dies.

Answer 79

Solution: The correct answer is C.

A completed gift does not occur until the donee withdraws money from the account for her own benefit.

Question 80

Brandon opens a joint checking account with his brother Shane. Brandon deposits $30,000 into the account and Shane deposits nothing. What type of gift is this?

1. Complete Gift
2. Indirect Gift
3. Incomplete Gift
4. Direct Gift

Answer 80

Solution: The correct answer is C. There is no gift to Shane until Shane withdraws funds, as a result this is an incomplete gift.

Question 81

Chris and Jenn, a married couple, made the following gifts this year:

• Chris gave their son, Evan, a car worth $4,000 owned as community property. Chris also gave his son his stamp collection (separate property) valued at $60,000.
• Chris gave his brother Stephen $20,000 of Chris’ separate property so Stephen could purchase a new home.
• Chris gave his sister Heather $4,000 in cash from his and Jenn’s joint checking account which consists only of community property. He also gave Heather a piece of land he purchased before his marriage to Jenn, valued at $49,000.

Assuming Jenn did not want to split gifts, what is Chris’ total taxable gifts after taking into account any available deductions or exclusions and ignoring the $12.06 million (2022) exemption equivalent.

1. $48,000
2. $85,000
3. $89,000
4. $133,000

Answer 81

Solution: The correct answer is B.

Taxable gifts is a term meaning net of annual exclusions.

Recipient

Amount

Gift split

- annual excl.

- Charitable Deduction

- Marital deduction

= taxable

Evan$62,000*016,0000046,000Stephen$20,000016,000004,000Heather$51,000*016,0000035,000Total133,000048,0000085,000

*Gifts of community property reflect Chris’ half of the property for the gift. The car for Evan and the cash for Heather are community property.

Question 82

Julie recently hit it big at the casino. Because of her good fortune, Julie would like to begin a gifting program in which she will give her family and friends yearly gifts equal to the annual exclusion. She would like to learn more about the gift tax system and how gifts are valued. All of the following statements regarding the valuation of a gift are true, except:

1. Publicly traded securities are valued at the average of the opening and closing market price for the day of the gift.
2. Real estate is generally valued utilizing an appraisal.
3. The value of a bond is the present value of the expected future payments.
4. Certain valuation discounts may be available due to lack of marketability, lack of liquidity, and lack of control.

Answer 82

Solution: The correct answer is A.

Publicly traded securities are valued at the average of the high and the low trading price for the day of the gift.

Question 83

When Ronnie died seven months ago, he left his prize art collection to his daughter, Kate. Three months before his death, Ronnie purchased an enchanting oil painting for $4,000. Kate has been offered $100,000 for the painting. Kate is extremely excited because the painting was only valued at $15,000 when her father died. If Kate sold the painting today, what would her taxable gain be for income tax purposes.

1. $85,000 short term gain
2. $85,000 long term gain
3. $96,000 short term gain
4. $96,000 long term gain

Answer 83

Solution: The correct answer is B.

Question 84

Use the following scenario to answer questions:

Donny died on January 1, 2022 after a drunk driver hit his car. The property he owned at his death included the information below.

All property listed above was owned in sole ownership by Donny. The annuity is a joint and survivor annuity and will continue to pay his wife Jeanette. Donny’s will leaves all probate assets to his son and daughter in equal shares. Donny also owned a life insurance policy on his life. The basis in the policy was $89,000 and the death benefit was $1,000,000. The beneficiary of the insurance policy was Donny’s daughter, Cheryl. The family sued the drunk driver and received $500,000 for wrongful death payable to Jeanette and $200,000 for Donny’s pain and suffering payable to Donny’s estate. Donny made substantial gifts during his life. He paid gift tax of $98,000 in 2017 and $67,200 in 2019. Donny’s funeral cost $15,000. The car was sold 4/1/2022 for its fair market value on that date in order to pay for Donny’s $16,000 hand-carved marble headstone. Donny had $250,000 of medical expenses from the accident, but all expenses were covered by his medical insurance. The note receivable was being paid monthly.

What is the value of Donny’s gross estate assuming the alternate valuation date is selected?

1. $1,280,607
2. $2,610,200
3. $2,639,559
4. $3,237,559

Answer 84

Solution: The correct answer is C.

$2,639,559

Question 85

Amounts received by surviving annuitant under joint and survivor annuity contract.

Answer 85

1.691(d)-1 Amounts received by surviving annuitant under joint and survivor annuity contract.

(a) In general. Under section 691(d), annuity payments received by a surviving annuitant under a joint and survivor annuity contract (to the extent indicated in paragraph (b) of this section) are treated as income in respect of a decedent under section 691(a) for the purpose of allowing the deduction for estate tax provided for in section 691(c)(1)(A). This section applies only if the deceased annuitant died after December 31, 1953, and after the annuity starting date as defined in section 72(c)(4).

(b) Special value for surviving annuitant’s payments. Section 691(d) provides a special value for the surviving annuitant’s payments to determine the amount of the estate tax deduction provided for in section 691(c)(1)(A). This special value is determined by multiplying:

(1) The excess of the value of the annuity at the date of death of the deceased annuitant over the total amount excludable from the gross income of the surviving annuitant under section 72 during his life expectancy period (see paragraph (d)(1)(i) of this section)

by

(2) A fraction consisting of the value of the annuity for estate tax purposes over the value of the annuity at the date of death of the deceased annuitant.

Question 86

IRD

Answer 86

What is the IRD tax deduction? Income in respect of a decedent (IRD) is income that was owed to a decedent at the time he or she died. Examples of IRD include retirement plan assets, IRA distributions, unpaid interest and dividends, salary, wages, and sales commissions, to name only a few. Items of IRD, along with other estate assets, are eventually distributed to the beneficiaries of an estate. While the beneficiaries receive most assets of the estate income-tax free, IRD assets are generally taxed at beneficiaries’ ordinary income tax rates. However, if a decedent’s estate has paid federal estate taxes on the IRD assets, a beneficiary may be eligible for an IRD tax deduction based on the amount of estate tax paid. Best of all, the IRD deduction is not subject to the 2% floor, as are other miscellaneous itemized deductions. With tax advisors and attorneys focused on the estate-tax return and the transfer of assets, it is easy to overlook the potential for heirs to benefit from IRD deductions. Here’s how to make sure you get the tax benefits you deserve

Examine the decedent’s estate-tax return To determine if you can benefit from the IRD tax deduction, obtain a copy of the decedent’s estate-tax return (IRS Form 706) from the executor or administrator of the estate. Look to see if the estate paid an estate tax (for 2017, estates valued at less than $5.49 million will not owe estate tax). Then, take note of the value of any items of IRD you inherited. If estate tax was paid on those items, it is likely that you can claim the IRD deduction. If the decedent’s estate did not pay estate tax on the IRD assets, then the beneficiaries can claim no IRD deduction.

Question 87

Donny died on January 1, 2022 after a drunk driver hit his car. The property he owned at his death included the information below.

All property listed above was owned in sole ownership by Donny. The annuity is a joint and survivor annuity and will continue to pay his wife Jeanette. Donny’s will leaves all probate assets to his son and daughter in equal shares. Donny also owned a life insurance policy on his life. The basis in the policy was $89,000 and the death benefit was $1,000,000. The beneficiary of the insurance policy was Donny’s daughter, Cheryl. The family sued the drunk driver and received $500,000 for wrongful death payable to Jeanette and $200,000 for Donny’s pain and suffering payable to Donny’s estate. Donny made substantial gifts during his life. He paid gift tax of $98,000 in 2017 and $67,200 in 2019. Donny’s funeral cost $15,000. The car was sold 4/1/2022 for its fair market value on that date in order to pay for Donny’s $16,000 hand-carved marble headstone. Donny had $250,000 of medical expenses from the accident, but all expenses were covered by his medical insurance. The note receivable was being paid monthly.

What is the value of Donny’s gross estate assuming the date of death valuation is selected?

1. $1,343,000
2. $2,610,200
3. $2,639,559
4. $3,208,200

Answer 87

Solution: The correct answer is B.

$2,610,200

Question 88

Deductions from Gross estate

Answer 88

funeral expenses

last medical expenses

admin expenses

debts

losses during administration

Question 89

Gina, age 79, recently had a stroke. Afraid that she may not live long enough to see her family enjoy it, she would like to transfer the beach house she owns to her daughter, Taylor. While Gina is willing to make the transfer gratuatous in whole or part, Gina does not want to pay any gift tax or utilize any of her lifetime credit amount. Which of the following techniques, if used by Gina to transfer the beach house to Taylor, will not result in a taxable gift?

1. GRAT
2. QPRT
3. SCIN
4. GRUT

Answer 89

Solution: The correct answer is C.

A SCIN is a note with a self canceling premium payment attached so that the note will cancel at the transferor’s death. The GRAT, QPRT and the GRUT are irrevocable trusts and will result in a current taxable gift.

Question 90

Which of the following statements is false regarding a bargain sale?

1. The difference between the fair market value of the asset and the consideration received in exchange for the asset is considered a gift.
2. The gift portion of a bargain sale will qualify for the annual exclusion.
3. A bargain sale is generally inappropriate if the buyer of the property is a family member.
4. If the property is sold for more than the seller’s basis in the property, a taxable gain will result

Answer 90

Solution: The correct answer is C.

Answer C is a false statement because bargain sales usually occur among related parties. All of the other statements are true.

Question 91

Under which of the following circumstances would a decedent be considered to have died intestate?

1. A.The decedent handwrote a will, but did not sign or date it.
2. B.The decedent was not of “sound mind” when he signed his statutory will.
3. C.The decedent failed to prepare a last will and testament.
4. D.All of the above.

Answer 91

The correct answer is d. Option a describes an invalid holographic will. Option 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.

Question 92

Dawson recently prepared a last will and testament in which he left all of his assets to his girlfriend Jen. Dawson and Jen broke up last night and now Dawson wants to leave all of his worldly possessions to his best friend, Joey. What can Dawson do to prevent Jen from receiving any of his assets?

1. A.Dawson can shred the will under which Jen receives all of his assets.
2. B.Dawson can send Jen an email telling her that he is cutting her out of his will.
3. C.Dawson can tell Joey that he plans to write a new will.
4. D.Dawson can give the will to Joey.

Answer 92

The correct answer is a. A will can be revoked by physically destroying the will. None of the other answers would effectively revoke Dawson’s will.

Question 93

• Springing Power
  *

Answer 93

A power that “springs” into existence upon some defined event or determination (e.g., the principal is unconscious or leaves the country.)

Ex: Power of Attorney for Property

• Specific type of power of attorney (may be durable or not and springing or not).
• This power of attorney is used to allow an agent to manage the principal’s property.

Question 94

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?

1. A.In the event that Eugene becomes disabled, Eleanor will be able to pay Eugene’s bills.
2. B.Eleanor is legally competent.
3. C.Eleanor is only 16 years old.
4. D.Eugene wants Eleanor to be able to handle all of his finances immediately.

Answer 94

Correct Answer is A

Question 95

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?

1. Nellie gave Jessie the power to use Nellie’s money to pay Nellie’s creditors.
2. B.Nellie gave Jessie the power to sell and buy property on Nellie’s behalf.
3. C.Nellie gave Jessie the power to use Nellie’s money to pay Jessie’s creditors.
4. D.Nellie gave Jessie the power to make gifts to Nellie’s heirs and charities.

Answer 95

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.

Question 96

Power of Appointment

Answer 96

• A power of appointment may or may not be included in a general power of attorney.
• A limited power of appointment may or may not be included in a limited power of attorney.
• The ability for the agent to appoint assets of the principal to:
  
  • Himself
  • His estate
  • His creditors
  • His estate’s creditors

Question 97

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?

1. A.Under Jose’s will, David will receive $225,000.
2. B.Under Jose’s will, Chris will receive $150,000.
3. C.Under Jose’s will, Nick will receive $100,000.
4. D.Under Jose’s will, Rachel will receive $150,000.

Answer 97

The correct answer is 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.

Question 98

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, and are unsure of how they should title the property. Which of the following statements is correct regarding their ownership and titling of the land?

Select one:

a. Laure and Chance cannot own the property as joint tenants because joint tenancies may only be established between married parties.
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 actual 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 98

Correct option is C

Explanation:

The correct answer is c. Joint tenancy requires equal ownership. Option a is incorrect because joint tenancies may be established by spouses or nonspouses. Option 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. Option 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.

Question 99

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 of 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 should they use to reflect their ownership interest?

A. Sole Ownership.

B. JTWROS.

C. Tenancy in Common.

D. Tenancy by the Entirety.

Answer 99

ANswer :C

Question 100

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 100

Answer: B

The correct answer is b. Kathi’s one-half 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.

Question 101

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?

1. A.Natalie and Kate each own 50% of the condo.
2. B.If Natalie were to die today, her share of the condo would transfer to her husband Brian.
3. C.If Kate were to die today, Natalie’s new basis in the property would be $400,000.
4. 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 101

The correct answer is 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 condominium 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.

Question 102

joint tenant - non spouse contribution rules

Answer 102

Property owned jointly with a nonspouse may be subject to estate tax on 100% of its value at your death. If the surviving joint tenant is not your spouse, tax law presumes that the entire value of joint property must be included in your taxable estate. Even though this property is not a part of your probate estate, it is still a part of your taxable estate for estate tax purposes to the extent of your contribution.

Question 103

Which of the following accurately describes a life estate?

1. A.An interest in property for a specified number of years.
2. B.An interest in property that ceases upon the death of the owner of the life estate.
3. C.An undivided interest in property held by two or more related or unrelated persons.
4. D.A complete interest in property with all the rights associated with outright ownership.

Answer 103

Answer: A

Question 104

Which of the following states is not a community property state?

1. Louisiana
2. B.Idaho
3. C.Wisconsin
4. D.Florida

Answer 104

Answer: D

Question 105

36.0% completeQuestion

Under what circumstances would property be subject to ancillary probate?

1. If the decedent is a resident of one state and owns real property in another state.
2. B.If the decedent is a tenant in common with an unrelated person.
3. C.If the decedent was a resident of a community property state.
4. D.If the decedent owns a life estate in real property located in a state other than his state of residence.

Answer 105

Answer : a. If the decedent is a resident of one state and owns real property in another state.

Question 106

Jackie and Julie have been in a long-term relationship. Jackie wants to make sure that if she dies first, Julie will be provided for. Which of the following would you be likely to recommend to fulfill Jackie’s goal of transferring assets to Julie at Jackie’s death?

1. A.Name Julie as the beneficiary of Jackie’s retirement plan.
2. B.Transfer the ownership of Jackie’s real estate investments into Tenancy by the Entirety.
3. C.Advise Jackie against writing a will that specifically bequeaths assets to Julie.
4. D.Recommend that Jackie and Julie move to a community property state.

Answer 106

Answer: A

A.

Name Julie as the beneficiary of Jackie’s retirement plan

By naming julie as the beneficiary of jackie’s retirement plan, Jackie can make sure that after her death Julie would be provided for.

As a beneficiary is the person who will get all the assets of the person after his/ her death.

Of all the options given this is the most suitable one as here they don’t even have to move in together or even Jackie won’t eve nhave to write a will.

That is why, the correct option here is OPTION A.

Question 107

Which of the following empowers an executor to act as the agent of a probate court?

1. Surety Bond
2. B.Letters of Administration
3. C.Letters Testamentary
4. D.Intestacy Laws

Answer 107

ANswer: C

Question 108

Which of the following is not a method for transferring property outside of the probate process?

1. A.State contract law
2. B.State intestacy law
3. C.State property titling law with survivorship feature
4. D.State trust law

Answer 108

Answer: B

Question 109

At the time of his death, Nate owned the following property:

• A personal residence titled fee simple valued at $500,000.
• A $500,000 life insurance policy on his own life. The only named beneficiary is Nate’s brother Jaime, who died 6 months ago leaving two children, Michael and Kristi.
• A car valued at $15,000 titled JTWROS with Nate’s mother.
• An IRA valued at $400,000 with Nate’s mother as the named beneficiary.

What is the value of Nate’s probate estate?

1. A.$500,000
2. B.$1,000,000
3. C.$1,400,000
4. D.$1,415,000

Answer 109

Answer is option B

The probate estate shall consist only the personal residence and the life insurance policy. Life insurance policy is included because the beneficiary was dead at Nate’s death. Car is not included because the ownership is of JTRWROS , it gets transferred by operation of law. IRA is not considered because there beneficiary is alive and thus it gets transfers through contract law.

Question 110

Chad and Ross (both males) have been involved in an intimate relationship for the past 25 years. Chad’s family is quite wealthy, and has provided Chad with every “extra” in life. Unfortunately, Chad’s family is also very conservative and they do not approve of Chad’s relationship with Ross. Chad was diagnosed with cancer last year and given only 12-15 months to live. Chad plans to leave the substantial wealth he has inherited over the years to Ross. After a few too many glasses of wine last Christmas, Chad’s mother proclaimed, “Chad, I hope you have a great estate planning attorney, because I will spend every penny I have to keep Ross from inheriting a dime from you!” In a fit of rage, Chad has come to you, an estate planning attorney, and asks you to recommend ways he can ensure that Ross will receive his assets. Which of the following would you be least likely to recommend to Chad to meet his objectives?

1. A well-drafted will leaving everything to Ross with a no-contest clause.
2. B.A revocable living trust created and funded now with Ross as the beneficiary at Chad’s death.
3. C.An irrevocable trust created and funded with Chad as the income beneficiary and Ross as the remainder beneficiary.
4. D.Retitling all assets as JTWROS.

Answer 110

Answer A. This option has the most inherent risk.

Question 111

Tom loans $11,000 to his daughter Tina. Why would interest not be imputed on this loan?

1. A.Interest would not be imputed because the loan is less than the amount of the annual exclusion.
2. B.Interest would not be imputed because loans of $100,000 or less are exempt from both income tax and gift tax consequences.
3. C.Interest would not be imputed because Tina has unearned income of $500.
4. D.Interest would not be imputed because Tina’s earned income is less than $1,000.

Answer 111

Answer: A

Question 112

Brody and Tanya recently sold some land they owned for $150,000. They received the land five years ago as a wedding gift from Brody’s aunt Jeanette. Aunt Jeanette purchased the land many years ago when the property was worth $20,000. At the time of the gift the property was worth $100,000 and aunt Jeanette paid $47,000 in gift tax. What is the long-term capital gain on the sale of the property?

a) 42,400
b) 50,000
c) 92,400
d) 130,000

Answer 112

C
When a donor makes a gift of property the donee will take the property at the donor’s adjusted basis. The holding period of the donee will include the holding period of hte donor for purposes of subsequent transfers and the determination of short or long term gains. The gift tax associated with the appreciation is added to the donors original adjustede basis to determine the donee’s basis.
$20,000 +($47,000 X $80,000/$100,000) = $57, 600.
$150,000 - $57,600 = $92,400

Question 113

Melissa is a very generous single woman. Before this year 2022, she had given over $12,060,000 in taxable gifts over the years and has completely exhausted her applicable credit amount. In the current year, Melissa gave her daughter Riley $100,000 and promptly filed her gift tax return. Melissa did not make any other gifts this year. How much gift tax must Riley pay the IRS because of this transaction?

1. $0
2. B.$33,600
3. C.$40,000
4. D.$45,000

Answer 113

Answer: B

Question 114

Jeff has always been a successful businessman. Several years ago he purchased what he thought was prime property in Louisiana for $100,000. Unfortunately, he didn’t realize the property was pure swamp land and completely uninhabitable by anyone (except maybe some cajuns from New Orleans). Shortly after he purchased the property, Jeff realized the investment was a flop! To hide his embarrassing investment, he decided to give the property to his cousin Rustin as a graduation present when Rustin graduated from LSU (Geaux Tigers!). When Jeff gave the property to Rustin, the value of the property had fallen to $80,000. Rustin promptly built a house in the middle of the swamp and made it his home. After six months of owning the property, and sharing his bed with alligators, Rustin decided to move back to the city. Luckily, he sold the property a week later to an old cajun named Boudreaux for $75,000. What is Rustin’s loss on the sale of the land?

1. A.$5,000 short term capital loss
2. B.$4,000 long term capital loss
3. C.$25,000 short term capital loss
4. D.$25,000 long term capital loss

Answer 114

ANswer A

Question 115

Donald has created a trust for the benefit of his three nephews, Huey, Dewey, and Louie, who are all minors. Donald plans on making annual contributions to the trust. Donald would like his annual contributions to the trust to qualify for the annual exclusion. What would be the best way to accomplish this goal?

1. A.Donald should make sure that he does not contribute more than $16,000 for each nephew, or $48,000 in total, each year.
2. B.Donald should give his nephews an unlimited ability to remove funds from the trust.
3. C.Donald should give his nephews the right to remove some or all of the annual contribution from the trust for a limited period of time.
4. D.Donald’s annual contributions to the trust will not qualify for the annual exclusion under any circumstances.

Answer 115

Correct option: a. Donald should make sure that he does not contribute more than $16,000 for each nephew, or $48,000 in total, each year.

Question 116

Which of the following transfers would result in taxable gift or a gift tax?

1. A.Bob gifts $10,000 to his daughter Barbie.
2. B.Elroy gifts $50,000 to his wife, Elizabeth, who is a U.S. citizen.
3. C.Adam gives his favorite employee, Aaron, a new car at Aaron’s retirement.
4. D.Pete transfers $20,000 to his ex-wife, Patricia. Pete and Patricia were divorced five years ago.

Answer 116

Ans: Option d. Kevin transfers $20,000 to his ex-wife, Cindy, to help support their kids. They were divorced five years ago.

Reason:

Option a would not result in gift tax because the gift does not exceed the annual exclusion.

Option b is incorrect because a person can gift an unlimited amount to his or her spouse without incurring gift tax.

Option c is incorrect because transfers in a business setting are presumed to be compensation.

Question 117

Which of the following is true concerning the 5/5 Lapse Rule?

1. The 5/5 Lapse Rule deems that a taxable gift has been made where a power to withdraw in excess of $5,000 or five percent of the trust assets is lapsed by the powerholder.
2. B.The 5/5 Lapse Rule only comes into play with a single beneficiary trust.
3. C.Amounts that lapse under the 5/5 Lapse Rule qualify for the annual exclusion.
4. D.Gifts over the 5/5 Lapse Rule do not have to be disclosed on a gift tax return.

Answer 117

Answer A

Question 118

Which of the following is not a reason that the proceeds of a life insurance policy would be included in a decedent’s gross estate?

1. A.The proceeds of the policy are payable to the estate.
2. B.The decedent transferred the ownership of the policy to his daughter six years before his death, but retained the right to change the beneficiary of the policy.
3. C.The decedent transferred the ownership of the policy to his son six months before his death.
4. D.The decedent transferred the ownership of the policy to his wife four years ago.

Answer 118

Answer D

Question 119

Fred, the founder and CEO of WonderCo, recently passed away. At his death, Fred owned 80% of the stock of WonderCo and the WonderCo stock was his only asset. WonderCo is a closely held company. Which of the following discounts would be applicable to Fred’s WonderCo stock?

1. Key Person Discount
2. B.Minority Discount
3. C.Both a and b
4. D.Neither a nor b

Answer 119

Answer: A Key persom

Question 120

Rachel died in 2022 and her executor is finalizing her estate tax return. The executor has determined that Rachel’s adjusted gross estate is $13,110,000 and that her estate is entitled to a charitable deduction in the amount of $500,000. Calculate the estate tax liability, in 2022, for Rachel’s estate.

1. A.$274,000
2. B.$220,000
3. C.$2,660,000
4. D.$4,989,800

Answer 120

Answr B

Question 121

Bernard made a gift of $500,000 to his brother in 2015. Due to Bernard’s prior taxable gifts he paid $200,000 of gift tax. When Bernard died in 2022, the applicable gift tax credit had increased. At Bernard’s death, what amount related to the $500,000 gift to his brother is included in his gross estate?

1. A.$0
2. B.$153,000
3. C.$200,000
4. D.$500,000

Answer 121

Answer A

Gift tax on gifts within 3 years of date of death is included in gross estate. But as in this case the gift was made more than 3 years before death, so $0 would be included in Bernard’s gross estate with regards to this gift.

Question 122

Maxwell died August 8, 2021. Of the following transfers made during his life, which is included in his gross estate?

1. The transfer of a whole life insurance policy on Maxwell’s life to an ILIT on September 16, 2017.
2. B.The sale of his term insurance policy to his brother, Donald, for fair market value on July 12, 2019.
3. C.The transfer of a whole life insurance policy on Maxwell’s life (face value $150,000) valued at $20,000 to his son on September 16, 2019.
4. D.A gift of $15,000 to Maxwell’s sister on August 7, 2021. No gift tax was due on the gift.

Answer 122

Answer: C

Question 123

Carolyn made the following transfers during her life:

1. The transfer of her home to an irrevocable trust for the benefit of her four children on January 1, 2018. Carolyn retained the right to live in the home for the remainder of her life. The fair market value of the home at the date of the transfer to the trust was $1,000,000. The fair market value of the home at Carolyn’s date of death was $1,200,000.

A transfer of $44,000 to an irrevocable trust for the benefit of her four children on January 2, 2018. Carolyn retained the right to a 4% annuity payment from the trust for the years 2018 and 2019. At Carolyn’s date of death, the trust had a value of $62,000.

If Carolyn died on July 13, 2022, with regard to the above transfers, how much is included in Carolyn’s gross estate?

1. A.$0
2. B.$1,144,000
3. C.$1,200,000
4. D.$1,262,000

Answer 123

Answer C

Question 124

Mario’s executor determined that the estate tax liability for Mario’s estate is $600,000. However, Mario’s executor forgot to file the estate tax return and filed and paid 65 days late. Calculate the penalties that Mario’s estate will now have to pay.

1. A.$81,000
2. B.$90,000
3. C.$99,000
4. D.$108,000

Answer 124

Solution: The correct answer is B.

The failure-to-file penalty of $90,000 (5% × $600,000 × 3 months) is reduced by the failure-to-pay penalty of $9,000 (.5% × $600,000 × 3 months), creating an adjusted failure-to-file penalty of $81,000. Adding the failure-to-pay penalty of $9,000 to the adjusted failure-to-file penalty creates a total penalty of $90,000.

Question 125

Bobby owned a building with a fair market value of $2,000,000. Bobby’s adjusted basis in the building was $1,000,000. Bobby agreed to sell the building to his son, Robby, for $1,300,000. What is the amount of Bobby’s taxable gift?

1. Bobby has made a taxable gift of $300,000.
2. B.Bobby has made a taxable gift of $684,000.
3. C.Bobby has made a taxable gift of $2,000,000.
4. D.Bobby has not made a taxable gift.

Answer 125

Answer B

Question 126

Which of the following statements regarding SCINs is correct?

1. A.If the seller outlives the SCIN term, the buyer continues to pay the SCIN payment until the seller’s death.
2. B.The payments received by the seller under a SCIN are treated as interest income.
3. C.A SCIN can provide the seller with a collateral interest in the property sold.
4. D.If the seller dies before the end of the SCIN term, the seller is deemed to have made a taxable gift to the buyer equal to the difference between the payments made and the total principal payments due on the SCIN.

Answer 126

Solution: The correct answer is C.

Answer a is incorrect because the buyer of a SCIN only makes payments until the earlier of (1) the seller’s death or (2) the term set forth in the SCIN. Answer b is incorrect because each payments received by the seller consists of (1) interest income, (2) capital gain, and (3) return of adjusted basis.

Question 127

Alton would like to transfer the ownership of his Picasso painting to his son Edgar, but Alton would like to continue to have the painting hanging in his house. Which of the following would you recommend to Alton?

1. A.TPPT
2. B.CRAT
3. C.QPRT
4. D.FLP

Answer 127

ANswer A

the above will be the answer..

TPPT is Tangible Personal Property Trusts enables the transfer of ownership of things like furniture, paintings etc.

Question 128

Lina made the following transfers during the current year:

1. $19,000 to her grandson for his law school tuition.
2. $1,000 to her neighbor to help him pay a hospital bill.
3. A transfer of property valued at $100,000 to a GRAT. Lisa retained an annuity valued at $40,000 and her daughter is the remainder beneficiary.

What is the total amount of Lina’s taxable gifts for the current year?

1. A.$46,000
2. B.$60,000
3. C.$63,000
4. D.$64,000

Answer 128

Answer C

Question 129

Which of the following statements is true?

1. A.Angela transferred her home to a QPRT five years ago. She retained the right to live in the home for 13 years, and at the end of the term, the home transfers to Angela’s three children. Angela died this year, when the home has a fair market value of $250,000. The value of the home is excluded from Angela’s gross estate because the children are the remainder beneficiaries of the QPRT.
2. B.Missy transfers rental property to a Family Limited Partnership (FLP) in return for a 99% limited partnership interest and a 1% general partnership interest. Missy immediately begins a gifting program by gifting a portion of the limited partnership interests to her children and grandchildren. Six years after the initial formation of the FLP, Missy continues to own the 1% general partnership interest and 45% of the limited partnership interests in the FLP. Because Missy does not own a majority (greater than 50%) of the interest in the FLP, Missy cannot control the operations of the FLP.
3. C.Rose has been diagnosed with an illness that is expected to substantially reduce her life expectancy. Before she dies, Rose would like to transfer her extremely valuable art collection to her wealthy daughter. The art collection does not generate any income, as it is just displayed in Rose’s home, but Rose really needs money for her living expenses for the remainder of her life. A TPPT would be the most appropriate transfer device to fulfill Rose’s desires.
4. D.Earl has four children - Kenny, Tim, Aaron, and Cathy. Earl’s will directs all of his property to be divided equally among his four children, and if any child predeceases Earl, that child’s heirs will inherit Earl’s property per capita. Cathy died two years before Earl. Cathy had three children. At Earl’s death, Kenny receives 1/6 of Earl’s estate.

Answer 129

Solution: The correct answer is D.

Answer d is correct because Cathy’s surviving heirs become equal heirs in Earl’s estate because Cathy predeceased Earl. Accordingly, each heir receives 1/6 (Kenny, Tim, Aaron, Cathy’s three kids) of Earl’s estate. Answer a is incor­rect because the value of the home transferred to the QPRT will be included in Angela’s gross estate because Angela died during the term of the QPRT. Answer b is incorrect because ONLY the general partner can control the oper­ations of a limited partnership and Missy is the general partner so she CAN control the operations of the FLP. Answer c is incorrect because a TPPT would not fulfill Rose’s desires because the TPPT would only give Rose the right to use the art for the rest of her life, and would not provide any income.

Question 130

Maxine agrees to purchase Jacob’s property utilizing a private annuity. Jacob’s table life expectancy is ten years at the date of the agreement and the property has a fair market value of $400,000. The private annuity payment is $45,000 per year, and Maxine dies after making two payments. At Maxine’s death, what amount is included in her gross estate with regards to the private annuity and the transferred property? A. $0. B. $90,000. C. $310,000. D. $400,000.

Answer 130

The correct answer is d. Maxine bought the property utilizing the private annuity. Maxine’s gross estate will include the fair market value of the property purchased. The expected present value of the remaining private annuity payments will be a debt of the estate.

Question 131

During the year, Edward created a trust for the benefit of his five children. The terms of the trust declare that his children can only access the trust’s assets after the trust has been in existence for 20 years and the trust does not include a Crummey provision. If Edward transfers $100,000 to the trust during the year, what is his total taxable gifts for the year?

1. $0
2. $20,000
3. $80,000
4. $100,000

Answer 131

Solution: The correct answer is D.

Because the trust does not include a Crummey provision, the transfer to the trust is a gift of a future interest and is not qualified to be offset by the annual exclusion. Therefore, the entire transfer to the trust is subject to gift tax.

Question 132

Brett died recently leaving all his assets in a trust for his wife Greer. Brett was concerned that Greer would not be able to manage her money adequately to maintain her standard of living for the rest of her life. Therefore, he placed the assets into a spendthrift trust and gave Greer the right to receive a certain amount of property each year. Brett appointed his good friend Paul to be the trustee of the trust. How is Paul’s ownership classified?

1. Paul holds a life estate over the property.
2. Paul holds the legal title to the property.
3. Paul holds the equitable title to the property.
4. Paul does not hold an interest in the property.

Answer 132

Solution: The correct answer is B.

Paul holds the legal title to the property as trustee for the trust. Greer as the beneficiary holds the equitable title. A life estate identifies the person who has a current beneficial right in the property, which in this case would be Greer.

Question 133

In 2013, Price funded a bypass trust with $5,250,000, the applicable estate tax credit equivalency amount at that time. At Price’s death in 2022, his will included a testamentary bypass trust and a residual bequest to his U.S. citizen wife. If Price’s net worth at his death was $15,000,000, how much will be transferred to the bypass trust to maximize its benefits?

1. $6,810,000
2. $1,000,000
3. $5,250,000
4. $12,060,000

Answer 133

Solution: The correct answer is A.

Price’s executor would fund the testamentary bypass trust with the difference between the applicable estate tax credit equivalency at Price’s death (2022 - $12,060,000) and the funding amount of the inter vivos bypass trust ($5,250,000). In this case, the amount would be $6,810,000 ($12,060,000 - $5,250,000)

Question 134

Which of the following techniques can be used to lower the value of an individual’s gross estate?

1. Totten Trust
2. Qualified Personal Residence Trust
3. Family Limited Partnership
4. Irrevocable Life Insurance Trust

Answer 134

Solution: The correct answer is C.

Totten trusts are used to avoid probate, not to lower the value of the gross estate. All of the other techniques can be used to lower the value of an individual’s gross estate.

Question 135

A charity receives the income and the remainder is left to a non charity.

1. Revocable Living Trust
2. CRAT
3. CLT
4. CRUT

Answer 135

Solution: The correct answer is C.

Question 136

This trust pays a fixed annuity to the donor based on the initial fair market value of the trust.

1. Revocable Living Trust
2. CRAT
3. CLT
4. CRUT

Answer 136

Solution: The correct answer is B.

Question 137

CRAT

Answer 137

KEY TAKEAWAYS

• A charitable remainder annuity trust (CRAT) is a type of gift transaction in which a donor contributes assets to a charitable trust that then pays a fixed income to a designated noncharitable beneficiary.
• Noncharitable beneficiaries receive their income in the form of an annuity, which is typically calculated as a fixed percentage of the initial value of trust assets.
• The annuity distribution value must be at least 5% but no more than 50%.
• When a CRAT’s term is up, any funds that remain in the trust are donated to one or more previously selected charitable beneficiaries.

Pros and Cons of a CRAT

The chief pro of a CRAT is its tax savings. The trustor not only gets a partial tax deduction for their donation to the trust; they also can see a reduction in capital gains, gift, and estate taxes. Another advantage is that unlike with a charitable lead trust, a trustor or their designated noncharitable beneficiary can get a regular income stream from a CRAT while simultaneously donating money to charity from the trust.² After death, the CRAT protects the money from creditors or greedy family members, passing it on instead to charity as directed by the trustor.¹

The greatest con of a CRAT is that it is irrevocable, giving the trustor no access to or control over the funds in the trust and making it difficult to impossible to alter the terms of the trust. Also, because it is a fixed annuity, the payment to the noncharitable beneficiary cannot grow if the CRAT’s investments do particularly well in any given year, as it can with a CRUT.¹ A third disadvantage is that a CRAT is a complex construction whose creation and administration can be complicated and costly. It is important to run a thorough cost-benefit analysis to make sure that it is the best use for the assets you are planning to put into it.

Question 138

Which type of charitable remainder trust permits additional contributions to the trust after its inception?

1. CRATs
2. CRUTs
3. Both CRATs and CRUTs
4. Neither CRATs nor CRUTs

Answer 138

Solution: The correct answer is B.

Only CRUTs permit additional contributions to the trust after its inception. CRATs do not permit additional contributions.

Question 139

Caroline transfers $87,000 of stock to a charitable organization in return for a life annuity on her life valued at $40,000. With regard to this transfer, how much is Caroline’s charitable income tax deduction?

1. $0
2. $40,000
3. $47,000
4. $87,000

Answer 139

Solution: The correct answer is C.

When an individual transfers property in exchange for a charitable annuity, the value of the property less the value of the retained annuity is the value of the charitable deduction. In this case, $87,000 - $40,000 = $47,000.

Question 140

Chelsea graduated from the University of Alabama. Each year, football season tickets are sold only to those who make a contribution to the university of $2,000 or more. Chelsea contributes $2,000, so that she meets the requirements to purchase season tickets, and also spends $500 on the season tickets. How much is her deductible charitable contribution for the year?

Answer 140

Solution: The correct answer is $0

For a contribution to a university where the donor receives the right to purchase tickets to athletic events, none of the contribution will be allowed as a charitable contribution. The price of the actual tickets is not deductible.

Question 141

Which of the following does not qualify as a charitable organization?

1. State of Louisiana
2. City of New Orleans
3. Red Cross
4. Democratic National Committee

Answer 141

Solution: The correct answer is D.

Political organizations are not qualifying charitable organizations. The other options are all considered qualified charitable organizations under Section 170(c).

Question 142

Which of the following qualifies for the unlimited marital deduction?

Outright bequest to resident alien spouse.
Property passing to noncitizen spouse in QTIP.
Outright bequest to resident spouse who, prior to the decedent’s death was a noncitizen, but who after the decedent’s death and before the estate return was filed, became a U.S. citizen.
Remainder beneficiary of a CLAT who is a nonresident alien spouse.

Answer 142

Solution: The correct answer is C.

Of the options, only an outright bequest to a resident alien spouse who becomes a U.S. citizen before the estate return is filed qualifies for the unlimited marital deduction.

Question 143

Your client was visited by Al State, the local insurance salesman. Al convinced your client he needed to buy a new life insurance policy on your client’s three month old baby’s life. The policy has a $10,000 death benefit. Your client is the owner of the policy, the policy is on child’s life, and your client’s spouse is the beneficiary. Your client paid his first premium payment then had a heart attack and died. Which of the following statements is correct?

1. The interpolated terminal reserve plus any unearned premium will be included in your client’s gross estate.
2. The death benefit will be included in your client’s gross estate.
3. The replacement cost will be included in your client’s gross estate.
4. The policy will not be included in your client’s gross estate because he is not the beneficiary.

Answer 143

Solution: The correct answer is A.

The interpolated terminal reserve plus any unearned premium will be included in your client’s gross estate. In this instance, the value is probably zero because only one premium payment had been made.

Question 144

George is considering transferring his life insurance policy to an ILIT. Which of the following statements is true?

1. If George included a clause that said, “George can change the beneficiary of the trust at any time to any person other than himself” then the assets would be included in George’s gross estate when he died.
2. If the trust allows the trustee to lend money to the George’s estate at George’s death, then the proceeds of the life insurance policy will be included in George’s gross estate.
3. Transferring the policy to the ILIT will eliminate the chance that the proceeds will be included in George’s gross estate at George’s death.
4. If George continues to pay the trustee an amount needed to pay the premiums on the policy, the proceeds will be included in his gross estate when he dies.

Answer 144

Solution: The correct answer is A.

Retaining the right to determine the ultimate beneficiary will cause inclusion in George’s gross estate. The trust may be allowed to lend money to George’s estate. Inclusion will occur when the trust is required to lend money. George must survive for three years before the asset will not be included in his gross estate. George can still pay the premiums on the policy without causing inclusion in his gross estate.

Question 145

Sarah, age 90, would like to spend the few years she has left enjoying her life. She is currently unable to eat and bathe without assistance. She would like to use her life insurance policy to fund the remainder of her life. Which of the following statements is correct?

1. If Sarah surrenders her policy for accelerated death benefits, she will be subject to income tax on the gain because she is not terminally ill.
2. Sarah could exchange the policy in a 1035 exchange for an annuity without being subject to income tax on the transfer.
3. If Sarah borrows from the policy, then the loan will be considered a taxable distribution.
4. If her son purchases the policy from Sarah at the fair market value, he will receive the insurance proceeds income tax free at Sarah’s death.

Answer 145

Solution: The correct answer is B.

Sarah can exchange the policy for an annuity income tax free. While Sarah is not terminally ill, she is chronically ill because she is unable to perform 2 of the 6 activities of daily living (eating and bathing). Thus, surrendering her policy for accelerated benefits will not cause her to be subject to income tax. The loan is not considered a taxable distribution because the policy is not a MEC. If her son purchases the policy then Sarah has transferred the policy for value. This will cause the policy to be taxed in the son’s income when Sarah dies.

Question 146

Assume Brandon died last year. He is survived by his spouse, Betty and his 30 year old son, Steve, who is married and healthy. Which filing status can Betty use on her current year income tax return?

1. Single
2. Head of Household
3. Married Filing Jointly
4. Qualifying Widow

Answer 146

Solution: The correct answer is A.

The facts do not indicate that Betty has a qualifying dependent that would allow her to claim Head of Household or Qualifying widow.

Taxpayers who do not remarry in the year their spouse dies can file jointly with the deceased spouse. For the two years following the year of death, the surviving spouse may be able to use the Qualifying Widow(er) filing status.

The surviving spouse must be eligible to claim their son, daughter, stepson, or stepdaughter as a dependent in each of these qualifying years.

Question 147

Of the following statements, which is not true regarding selling an estate’s assets to generate cash?

1. The estate may have income tax consequences.
2. The assets may not be sold at full, realizable fair market value.
3. Any losses on the sale of the assets are deductible as losses on the estate tax return.
4. Any selling expenses are deductible on the estate tax return.

Answer 147

Solution: The correct answer is C.

A net capital loss of an estate or trust will reduce the taxable income of the estate or trust, but no part of the loss is deductible by the beneficiaries. If the estate or trust distributes all of its income, the capital loss will not result in a tax benefit for the year of the loss.

Question 148

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Lane established a trust with $500,000. The terms of the trust say that Lane’s son Anthony will receive the income for his life and Lane’s grandson Brady will receive a $50,000 principal distribution at age 25 and the remainder of the trust when Anthony dies. What type of Generation Skipping Transfer occurs when the distribution is made to Brady at age 25?

1. Direct Skip
2. Taxable Termination
3. Taxable Distribution
4. This is not a generation skipping transfer

Answer 148

Solution: The correct answer is C.

The payment of the remainder is a taxable termination. The distribution at age 25 is a taxable distribution.

Question 149

Beth, age 90, made $30,000 gifts to the following individuals:

Her son, John, age 45

Her daughter’s son, Wayne, age 55

Her best friend’s son, Andrew, age 45

Her new boyfriend, Bill, age 40

Which of these individuals is not a “skip” individual for purposes of Generation Skipping Transfer Tax?

1. John
2. Wayne
3. Andrew
4. Bill

Answer 149

Solution: The correct answer is A.

John is Beth’s child and is not a skip individual. The fact that John is more than 37.5 years younger than Beth is irrelevant because the age is only important for non-lineal descendants.

Question 150

Grantor Retained Annuity Trust (GRAT)

Answer 150

• Fixed percentage of the initial contribution for life or for a term of years is paid to the grantor.
• Transfer future appreciation out of estate without gift/estate tax consequences.
• If the grantor dies within the trust term, the FMV of the trust property is brought back into the gross estate.

Answer 151

Grantor Retained Unitrust (GRUT)

• Fixed percentage of the current value of the trust assets is paid to the grantor.
• Need to revalue assets every year.
• Not as popular as a GRAT.

Question 152

Robbie transferred $100,000 to an irrevocable trust for the benefit of his minor child, Dominic. The transfer was eligible for the annual exclusion. The trust requires the trustee to distribute trust income from the trust to Dominic annually. The trust does not need to be terminated when Dominic reaches age 21. Which type of trust has Robbie created?

1. 2503(b) Trust.
2. 2503(c) Trust.
3. Totten Trust.
4. Intentionally Defective Grantor Trust (IDGT).

Answer 152

Solution: The correct answer is A.

A 2503(b) trust requires the trustee to make annual income distributions to the minor beneficiary. Robbie has created a 2503(b) trust. A 2503(c) trust allows income to be accumulated within the trust until the minor beneficiary attains the age of majority and the transfer of property to the trust qualifies for the annual exclusion. A Totten Trust is a bank account which includes a payable on death clause. An IDGT is a grantor trust which requires the grantor to pay the income tax on the income of the trust.

Question 153

Interest Gifts

Gifts of a Present Interest

Answer 153

A 2503(b) trust may hold property in trust for the lifetime of the beneficiary (or beneficiaries), and must make income distributions to the beneficiary (or beneficiaries) on an annual basis. Gifts made to a 2503(b) trust will partially qualify for the gift tax annual exclusion. The portion qualifying for the gift tax annual exclusion equals the present value of the income interest that the child will receive over the term of the trust.

2503(c)

Allows income to be accumulated in the trust, and allows the grantor to qualify the entire gift to the trust up to the annual exclusion amount for the gift tax annual exclusion, but can have only one beneficiary.

Question 154

The best life insurance policy for the payment of federal estate taxes for a 55-year-old couple with illiquid assets is:

1. An individual whole-life policy on each spouse on a cross-ownership basis.
2. A joint first-to-die life insurance policy owned jointly.
3. A joint last-to-die life insurance policy owned by the spouse with the larger estate.
4. A joint and last-to-die life insurance policy owned by an irrevocable life insurance trust.

Answer 154

Solution: The correct answer is D.

A second-to-die life policy provides insurance for a lower cost than insuring each spouse individually. Due to the unlimited marital deduction, there is no need for liquidity until the death of the second spouse. The ILIT keeps the insurance proceeds from being included in the gross estate of either spouse as long as neither has any incidence of ownership in the trust or policy.

Question 155

Use of an Irrevocable Life Insurance Trust can accomplish which of the following?

1. Create a vehicle to avoid Generation Skipping Transfer Tax.
2. Make proceeds available to the surviving spouse.
3. Ensure that proceeds will be included in the probate and gross estate of grantor.
4. Shelters cash contributed for premiums from taxation up to the annual exclusion amount.

Answer 155

1, 2, and 4.

Question 156

In which of the following situations would the use of a marital deduction be allowed?

1. Tom dies and is survived by his wife, Tina, who is not a U.S. citizen.
2. Regina dies and is survived by her husband, Raul, who becomes a U.S. citizen two months after Regina’s death.
3. Harold dies and does not have a surviving spouse but has a significant other.
4. Franz, who is not a U.S. citizen, dies and is survived by his wife, Francine, who is a non-resident alien.

Answer 156

Solution: The correct answer is B.

Option b describes a situation in which the use of a QDOT would be unnecessary because Raul became a U.S. citizen prior to the due date of the estate tax return and therefore, any property transfers to Raul would qualify for the unlimited marital deduction. Option c is not correct because there is no unlimited martial deduction available if Harold does not have a surviving spouse. Option a & d are not correct because the surviving spouse is not a U.S. citizen.

Question 157

Of the following, which is not a benefit of the unlimited marital deduction?

1. The use of the unlimited marital deduction can shelter future appreciation of an asset from estate taxes at the death of the second-to-die spouse.
2. The estate tax on property can be deferred until the death of the second-to-die spouse.
3. The unlimited marital deduction can fund the applicable estate tax credit of the surviving spouse.
4. The unlimited marital deduction can ensure the surviving spouse has sufficient assets to support her lifestyle.

Answer 157

Solution: The correct answer is A.

Property that transfers to the second-to-die spouse is eligible for the marital deduction and, to the extent that it is not consumed, will be included in the second-to-die spouse’s gross estate at the fair market value at his date of death, including any appreciation that may have occurred since the first-to-die spouse’s estate. Therefore, future appreciation of an asset is not sheltered by using the unlimited marital deduction.

Question 158

Nate owns the following property:

• A personal residence titled fee simple valued at $500,000.
• A $500,000 life insurance policy on his own life. The named beneficiary is Nate’s brother Jaime.
• A car valued at $15,000 titled JTRWROS with Nate’s mother.
• An IRA valued at $400,000 with Nate’s mother as the named beneficiary.

What is the current value of Nate’s probate estate?

1. $500,000.
2. $1,000,000.
3. $1,400,000.
4. $1,415,000.

Answer 158

Solution: The correct answer is A.

The probate estate will include the personal residence. The life insurance policy is not included because there was a named beneficiary. The car is not included because of the JTWROS ownership, thus it transfers by operation of law. The IRA is not included because there is a living named beneficiary and thus will transfer via contract law.

Question 159

Assume Melissa and Kenny had their baby today and named him Kole. Which of the following individuals is a skip person in relation to Kenny?

1. Riley
2. Kole
3. Melissa
4. 1 only
5. 1 and 3
6. 2 and 3
7. 1, 2, and 3

Answer 159

Solution: The correct answer is B.

Riley and Melissa are skip persons in relation to Kenny. Riley is a skip person because of her lineal line standing as a grandchild. Melissa is a skip person because of the age requirement for nonlineal descendants. Because Kenny and Melissa are not married, the nonlineal rules apply. She is more than 37 1/2 years younger than Kenny. Kole is not a skip person because he is the blood son of Kenny. Therefore, the lineal rules apply and the age rules do not apply.

Question 160

Regarding gifts made by Kenny, what is the total annual exclusion available for the Generation Skipping Transfers made in the current year?

1. $16,000
2. $18,000
3. $28,000
4. $48,000

Question 161

Which of the following is true with regard to Kenny’s transfer to the trust benefiting the grandchildren?

1. When distributions are made from the trust, the distributions will be taxable distributions.
2. The transfer is a direct skip.
3. When the trust expires and the assets are distributed to a charitable organization, then the distribution will be a taxable termination.
4. The trust is not subject to GSTT because of the charitable beneficiary.

Answer 161

Solution: The correct answer is B.

The transfer to the trust is a direct skip, because all parties in interest to the trust are direct skips. Normally the charitable organization would be a non-skip person, but because a specific charity has not been named, no charity actually has an interest in the trust. Because the trust is a direct skip, GSTT is due for the current year, and future distributions will not be subject to GSTT.

Question 162

Assume, for this question only, that Kenny and Melissa were married today. They went straight to Kenny’s lawyer’s office to execute new wills. On the way home from executing a valid will leaving all assets to Melissa, Kenny and Melissa were in a serious car accident. Kenny was comatose for several days before dying. His unpaid medical expenses were $150,000. The day after Kenny died, Melissa gave Kenny’s children and grandchildren each $22,000 then left for France to stay with her mother. Would a deduction on Kenny’s final income tax return for the unpaid medical expenses be available?

1. Yes, this election would be available.
2. No, this election would not be available.

Answer 162

Solution: The correct answer is A.

A deduction for the unpaid med­ical expenses could be deducted on Kenny’s final income tax return or the estate tax return. The executor may elect to deduct unpaid medical expenses as of the date of the decedent’s death on form 1040 or form 706, but not on both forms.

Question 163

Kenny is considering transferring his life insurance policy to an ILIT. Which of the following statements is true?

1. If Kenny included a clause that said, “Kenny can change the beneficiary of the trust at any time to any person other than himself” then the assets would be included in Kenny’s gross estate when he died.
2. If the trust allows the trustee to lend money to the Kenny’s estate at Kenny’s death, then the proceeds of the life insurance policy will be included in Kenny’s gross estate.
3. Transferring the policy to the ILIT will eliminate the chance that the proceeds will be included in Kenny’s gross estate at Kenny’s death
4. If Kenny continues to pay the trustee an amount needed to pay the premiums on the policy, the proceeds will be included in his gross estate when he dies.

Answer 163

Solution: The correct answer is A.

Retaining the right to determine the ultimate beneficiary will cause inclusion in Kenny’s gross estate. The trust may be allowed to lend money to Kenny’s estate. Inclusion will occur when the trust is required to lend money. Kenny must survive for three years before the asset will not be included in his gross estate. Kenny can still pay the premiums on the policy without causing inclusion in his gross estate.

Question 164

Assume Kenny had charitable inclinations and decided he wanted to bequeath something to charity. Which of the following assets would be the most advantageous to leave to the charity considering the tax effects on other non charitable beneficiaries?

1. $60,000 in cash
2. $60,000 in qualified plan assets
3. $60,000 in portfolio assets.
4. The boat

Answer 164

Solution: The correct answer is B.

Transferring the qualified plan assets is the best choice because they are IRD assets and subject to ordinary income in the hands of the beneficiary. Since charities are not subject to income tax, they are the best beneficiary of the asset.

Question 165

Assume for this question only that Kenny and Melissa had the baby today. When Kenny returned home, Kenny’s neighbor, Stue Farm, came over. Stue is the local insurance salesman and he immediately convinced Kenny he needed to buy a new life insurance policy on the baby’s life. The policy has a $10,000 death benefit. Kenny is the owner, the policy is on Kole’s life, and Melissa is the beneficiary. Kenny paid his first premium payment then had a heart attack and died. Which of the following statements is correct?

1. The interpolated terminal reserve plus any unearned premium will be included in Kenny’s gross estate.
2. The death benefit will be included in Kenny’s gross estate.
3. The replacement cost will be included in Kenny’s gross estate.
4. The policy will not be included in Kenny’s gross estate because Kenny is not the beneficiary.

Answer 165

Solution: The correct answer is A.

The interpolated terminal reserve plus any unearned premium will be included in Kenny’s gross estate. In this instance, the value is probably zero because only one premium payment had been made.

Question 166

Assume Kenny and Melissa had Kole today and Kenny wanted to create a trust for Kole’s future benefit. Kenny would like to create a trust that allows him to make use of the annual exclusion. He wants the trust to accumulate income until Kole reaches age 21, at which point the entire trust will be distributed to Kole. Which of the following devices would be appropriate to accomplish Kenny’s goals?

1. An UGMA device
2. An UTMA device
3. A section 2503(b) device
4. A section 2503(c) device

Answer 166

Solution: The correct answer is D.

A 2503(c) trust would accomplish Kenny’s goals. A 2503(b) trust would require annual distributions of income. UGMA and UTMA accounts are not trusts and limit the control the donor has over the assets.

Question 167

Kenny is considering changing his will today. He wants the new will to leave everything to Melissa. Which of the following statements is true.

1. A no-contest clause could be added to discourage Kati and Karli from contesting the will.
2. A simultaneous death clause could be used to require Melissa to survive six months.
3. A guardianship clause can be used to identify Kenny’s preferred legal guardian of Kole.
4. A disclaimer clause allowing Melissa to disclaim the property in favor of Kenny’s children could be used to prevent overqualification of the estate.

Answer 167

Solution: The correct answer is C.

A guardianship clause can be used to identify Kenny’s preferred legal guardian of Kole. A no-contest clause would not discourage Kati or Karli because they do not stand to inherit anything. A survivorship clause could be used to require Melissa to survive six months. A simultaneous death clause only addresses situations where two individuals die in the same cause of action and it is unclear as to which died first. Overqualification is not an issue in this instance because Melissa and Kenny are not married.

Question 168

At Melissa’s urging, Kenny contributed $25,000 in cash to a foreign charitable organization. At the time of the contribution, the organization told Kenny that his contribution was tax deductible for income tax purposes. Ignoring any income limitations, how much of the $25,000 contribution is deductible?

1. $0
2. $12,500
3. $21,000
4. $25,000

Answer 168

Solution: The correct answer is A.

Foreign charitable organizations are not qualified charitable organizations and contributions to such organizations do not qualify for a charitable deduction. It is always the responsibility of the donee to determine the deductibility of his contribution.

Question 169

Kenny is confused about the rules relating to charitable contributions. He has asked you, his advisor, for more clarification regarding the issues to consider when making a contribution. Of the following, which is not an issue when considering whether to deduct the adjusted basis or the fair market value of property contributed to a charitable organization?

1. The current market rate of interest.
2. The donor’s current and projected adjusted gross income for the 5 years after the contribution.
3. The fair market value of the donated property.
4. The capital gains rate in effect at the time of the transfer.

Answer 169

Solution: The correct answer is D.

Answer d is not an issue when deciding whether to deduct the adjusted basis or the fair market value since the transfer generally does not create a capital gain. All of the other options are issues to consider.

Question 170

Kenny is considering transferring the vacation property to a QPRT next year naming his two daughters as the remainder beneficiaries. The value of his retained interest is valued at $48,000. What would Kenny’s total taxable gift be for this transfer?

1. $36,000
2. $48,000
3. $52,000
4. $100,000

Answer 170

Solution: The correct answer is C.

The present value of the expected future remainder interest is a gift of a future interest subject to gift tax. The value of the expected future remainder interest is $52,000 ($100,000 - $48,000). Because this is a gift of a future interest, it does not qualify for the annual exclusion.

Question 171

Kenny is considering creating a testamentary trust. Which of the following is not a feature of a testamentary trust?

1. Creation under a last will and testament
2. Shifts an income tax burden to a lower-bracket taxpayer
3. Results in the inclusion of assets in the gross estate
4. Does not avoid probate

Answer 171

Solution: The correct answer is B.

All of the other answers are features of a testamentary trust.

Question 172

Kati has decided that any inheritance she receives from her father will be used to establish a charitable remainder trust. Kati would like to have the flexibility to make additional contributions to the charitable remainder trust in the future. Which of the following would you recommend for Kati?

1. CRAT
2. CRUT
3. CLUT
4. CLAT

Answer 172

Solution: The correct answer is B.

Additional contributions may not be made to a CRAT. CLATs and CLUTs are not charitable remainder trust.

Question 173

This year, Karli donated $30,000 in cash and provided services to the Red Cross valued at $10,000. Karli’s AGI for this year is $40,000. What is Karli’s charitable contribution deduction for the year assuming both are qualified charities?

1. $15,000
2. $24,000
3. $30,000
4. $40,000

Answer 173

Solution: The correct answer is B.

The deduction of charitable donations in the form of cash is limited to 60% of AGI. Karli’s AGI is $40,000, so the deduction of any cash donations to a public charity will be limited to $24,000. The services provided are not a charitable contribution.

Question 174

Kenny is concerned about protecting his assets in the event he decides to marry Melissa. He has asked you for more information on QTIP trusts. Which of the following accurately describes a QTIP Trust?

1. A QTIP is sometimes called a “B” or “Q” Trust.
2. Trust income must be paid to the spouse or other designated beneficiary at least annually.
3. The trust assets will be included in the gross estate of the surviving spouse.
4. The surviving spouse designates the remainder beneficiaries of the QTIP.

Answer 174

Solution: The correct answer is C.

Answer a is incorrect because a QTIP is not the same as a “B” trust. Answer b is incorrect because the income of the trust must be paid to the spouse, not to any other beneficiary. Answer d is incorrect because the surviving spouse does not choose the remainder beneficiaries of the QTIP.

Question 175

Which of the following is not a requirement of the unlimited marital deduction?

1. In order to claim a marital deduction on the 706, the decedent must have been married as of the date of his death.
2. The surviving spouse must receive property through the estate.
3. The surviving spouse must be a U.S. citizen.
4. The gross value of qualifying property left to the surviving spouse is included in the marital deduction.

Answer 175

Solution: The correct answer is D.

Answers a, b, and c are all requirements of the unlimited marital deduction. Answer d is incorrect because only the net value, not the gross value, of qualifying property left to the surviving spouse is included in the marital deduction. The term “net value” for marital deduction purposes equals the gross value of the qualifying property left to the surviving spouse less any taxes, debts, or estate administration expenses payable out of the spousal interest.

Question 176

Property ownership

Answer 176

Question 177

A gift is complete when the donor releases all control over the asset and the donee can be identified at the date of the gift

Answer 177

• transfers that include a revocable beneficiary designation, or a transfer to a revocable trust are incomplete transfers which are not gifts for gift tax purposes
• the creation of joint bank accounts are the purchase of US savings bonds are treated differently from other apparent joint gifts, because a completed gift does not occur until the noncontributing party with draws money for their own benefit

Question 178

when a decedent trasnfers property and retains right or rservers an interest for any period of time, and that interest does not end before deceden’t sdeath, the FMV of the property at the decedend’s DOD must be included in his gross estate.

Answer 178

Pg. 59

Question 179

reversionary interest

Answer 179

any interest which includes a possibility that property transferred by the decedent may return to him or his estate or the possibility that property transferred by the decedent may become subject to a power of disposition by him.

FMV of a decedent’s revisionary interest is calculated as of the moment befiore his death.

usually included in gross estate

Question 180

Nellie places property in a for Jessie. The trusdt is an irr. trust and both the income and the remainder are payable to Jesse. Nellie retains the right to accumulate or distribute earings and the right to change the income bene. Even though Jesse will receive the property attermination of the trust, Nellie’s right to change the income bene cuasses inclusion of the FMV of the trust assets in Nellie’s gross estae

Question 181

straight life annuity is not included in gross estate because it’s an annuity paid until his/her death

survivorship annuity provides payment to first and second to die. is included in grosse state.

Question 182

contribution rule

Answer 182

Ex: don and his wife diane own a tract of land jt with rights. Tract of land has a FMV of $600k at Diane’s DOD. at the time tract of land was purchased, don paid full purchase price of $120K. Diane’s gross estate will include 50% or $300K., relkated to the tract of land because the actual contribution rule does not apply to property owned jointly between spouses.

Question 183

power of appointment

Answer 183

the power to name who will enjoy or own property

gross estate of a decendenti 8includes any assets over which the decedent had a power of appointment over

Question 184

life insurance gross estate inclusion

Answer 184

includes life insurance proceeds in gross estate if the estate was the bene or the decedent had incident’s of ownerhssip in the policy

Question 185

minority discount - estate vlaluation

lac of marketability discount

key person discount

Answer 185

reduction in the value of an asset transferred and is often allowed is the asset transferred represents a minority interest in a business. usualy bet5wen 15-50%

lack of marketability = usuallyt 15-50%

Question 186

valuation of securiteis - gross estate

Answer 186

average of the high and low trading price

Question 187

accrued interest

Answer 187

any interst accrued but not yet paid is added to value of the FMV of any securities at death

Question 188

gross estate deductions

Answer 188

funeral expenses

last medical expesnses

administrative expenses

debts of the decedent

losses during estate administration

Question 189

taxable gross estate

Answer 189

adjusted gross estate less the unlimited charitable and marital deductions

Question 190

Deducting credits

Once your tentative estate tax has been calculated, there are credits available to apply against the tax.

• The unified credit: This credit ($4,769,800 in 2022, $4,625,800 in 2021) allows you to pass an amount referred to as the basic exclusion amount (formerly known as the applicable exclusion amount) free from gift and estate tax. This lifetime exclusion (which is sometimes referred to as an exemption) effectively exempts $12,060,000 (in 2022, $11,700,000 in 2021) from gift tax and estate tax. For 2011 and later years, the exclusion amount is portable, that is, any exclusion that is unused by the first spouse to die may be used by the surviving spouse for gift tax and estate tax. [Technically, the Internal Revenue Code refers to the portable unused exclusion as the deceased spousal unused exclusion amount (DSUEA).]

Answer 190

Question 191

form 406

Answer 191

• federal estate tax return
• only needs to be filled if decedent’s gross estate plus adjusted taxable gifts, is greater than the applicabl estate tax credit equivalency

when required, form 706 and payment of any estate tax owed is due nine months after DOD

FTF = 5%/mo. of tax still not paid up to 25%

FTP = .5%/mo. of unpaid tax up to 25%

Question 192

comm prop

Answer 192

comm prop does not have an automatic right of survivorshup at the death of one spouse and at the death of a decdeeent who owns comm prop wit hhis spouse only one half of the FMV of a propy is includded uin the gross estate

Question 193

pain and suffering awards are included in gross estate because it is personal to the decedent, but wrongful death lawsuits are not included in the gross estate

Question 194

alimony payments are deductible for income tax purposes by the payor and included in the recipient’s taxable income for divorces finalized prior to 12.31.2018. alimony is not a taxable gift

Question 195

grat - grantor retained annuity

Answer 195

an irrevocable trust that pays a fixed anuity (income interest ) to the grantor for a defined term and pays the remainder interest of the trust to a noncharitable bene at end of grat term

• if grantor dies within annuity term, the FMV of the value of the prop within the GRAt (as of DOD) is inlcuded in his gross estate
• grantor includes annuity payments in his gross income
• no income tax consequences on the initial transfer to the GRAT becausse for tax pruposes, the grantor is still d33eemed to own all assets in the GRAT

Question 196

grut-

Answer 196

similar to grat but pays a fixedd percentage of trust’s assets each year

less suitable for hard to value assets

Question 197

QPRT (qualified personal residence trust)

Answer 197

special form of GRAT. grantor contributes personal residence to a trust and instead of receiving an annuity in dollars, the grantor receives use of the residence as the annuity component

if grantor dies before the expiration of the trust term the FMV is included in the grantor’s gross estate

Question 198

TPTT (tangible personal property trust)

Answer 198

simliar to QRPT except it is funded with personal property, not real property. (artweork, antiques, and other items )

Question 199

FLP (family limtied partnerhship)

Answer 199

primary purpose of transferring assets to younger generations using valuation discounts

one or more members of a family transfer highly appreciating property to a limited partnership in return for both the one percent general and the 99 percent limited partnership interests. LP are passive investors with limited liability and no management rights

upon creation no income or gift tax consequences because entity created is owner by same persons, who owned it before the transfer.

once FLP is created the owner of the GP and LP interests values the LP interests.

LP interests are usually valued with a substantial discount.

original transferror (grantor) then begins annual gifting program utilizing the discounts, the gift tax annual exclusion to transfer LP interests to younger family members

original owner/transferor can maintain control of the property transferred to the limited partnership byh only retaining a smal GP interest

Question 200

medicaid assets transdfers

Answer 200

any transfers that happened 60 months prior to applying for Medicaid will be included in penalty (amount of money gifted or transferred in 60 months prior to application divided by the cost of the nursing home)

Question 201

two types of titling that have right of survivorshiup

Answer 201

JTWROS and TE

Question 202

irrevocable trust operate in accordance with the terms of its governing document and is not subject tothe probate process

Answer 202

some trusts are created by will (test trust) or are created (but not funded) prior to grantor’s death waiting for assets to be transferred to them pursuant to the terms of the grantor’s will

Question 203

if property is placed in a trust with appropriate spendthrift protection instead of being transferred outright, the creditors of the bene will be able to access the funds in the trust to satisfy outstanding creditor claims

Answer 203

a spendthrift clause combined with a provision that allows the trustee to make distribution soley on a discretionary basis is a very strong and effective asset protection tool

most popular uses of a trust is to avoid probate. alternative to the probate process is the use of a revocable living trust. Rev trusts do not avoid estate taxes, it only avoids probate fees and expenses

Question 204

simple trusts vs complex

Answer 204

mandate the distribution of all trust income

complex - can retain income

Question 205

to the extent that the income of the trust is distributed to the benes the benes who receive the distributions will be subject to income tax on the icnome

Answer 205

The trust is allowed to deduct distributiuouns to benes frolm its taxable income. Therefore trustsa can eliminate income by making distributions to benes

Question 206

Tax issues related to trusts

Question 207

Trusts

Question 208

transfers to rev trusts are not taxable since its not a completed gift (you have retained an interest)

Answer 208

transfers to irr trust are taxed for gift tax purposes

Question 209

a crummy power makes it possible to qualify for a transfer to an irrevocable trust for the gift tax annual exclusion

Answer 209

allows bene of trust to withdraw any contribution mad3e to the trust within a cetain period of time

5 and 5 power must be considered (withdrawal right of bene can be no more than $5K or 5% of trust)

Question 210

ILIT

Answer 210

irrevocable inter vivos trust often referred to as an irrevocable life insreuance trust

prupose: prevent LI proceeds from being included in TE. Prevents an insured party from having incidents of ownership in a LI policy on his life.

when a person owns a LI policy on his own life the proceeds are includ. in his estate.

provided that an insured person did not have incidents of ownershuip within three years of his death, it is not included in TE

Question 211

bypass trust

Answer 211

aka credit shelter trust. can be either inter vivos or testamentary.

most common : creation at individual;s death for couple who have over $12 mln and less thatn $24 in joint assets can avoid federal estate taxes by transferring 12.06 in property to a bypass trust at death of first spouse. while it will be subject ot estate tax, (since it will not qualify for marital deduction) the decedents’ applicable estate tax credit will be available to completely offset estate tax

income of trust can be payable to surviving spouse.

upon surviving spouse death, the assets in bypass trust pass to children and are not included in surviving spouse’s gross estate

Question 212

QTIP trust

Answer 212

typically created at the death of the frist spouse to die, grants the surviging spouse a lifetime right to the income of atrust while transferring remainder interest to individuals of grantor’s choosing.

qualifies for unlimited marital deduction

assets are included in gross estate of surviving spouse

Question 213

altenative transfers outside of estate that qualify for marital deduction

Answer 213

gpoa (general power of appt) trust, QTIP (qualified terminal int. property) trust, outirght transfers to spouse

Question 214

exceptions to terminable interest rule (for marital deduction):

Answer 214

• a six month survival contingency
• a terminable interest either ouright or in trust, over which the survivng spouse has a GPOA
• a qtip trust
• a char4itable remainder tryst (Crt)

(b) Terminable interests. A “terminable interest” in property is an interest which will terminate or fail on the lapse of time or on the occurrence or the failure to occur of some contingency. Life estates, terms for years, annuities, patents, and copyrights are therefore terminable interests.

Question 215

gpoa trust

Answer 215

“A trust” creates a terminable interest for a survigin spouse that will require the uncomsumed assets to be included in the surviving spouse’s gross estate and thus qualify the transfer of the property to the trust for the unlimited marital deduictiojn

Question 216

for a transfer to qualify for the marital deduction (3 requirements)

Answer 216

1. property must be included in gross estate
2. property must be transferred to surviving spouse
3. interest must not be a terminable interest unless it meets one of the exceptions

Question 217

qtip trust

Answer 217

“ c trust” allows a decedent to qualify a transfer for the marital deduction at death yet still control the ultimate disposition of property

holds property for benefit of surviving spouse and makes income distributions to the surviving spouse at least annnually. at surviving spouse’s death trust property will transfer to remainder beneficiary as determined by grantor of QTIP trrust

Question 218

annual exclusion amount for non-citizen spouse transfesr

Answer 218

$164K.

no estate transfers at death that qualify for marital deduction. THe $164K must be made while U.S. citizen spouse is alive.

solutions: become citizen before finalizing of estate tax return or createa a QDOT (used when surviging spouse is not a u.s citizen)

Question 219

life insurance needs models

Answer 219

needs analysis, human value method, capitalized income

Question 220

universal life insurance is , in essence, a term policy with a cash acumulation account attached to it.

variable universal life policies are universal life with one added feature - the insured can choose how to invest the cash in the cash accumulation acccount

whole life provides gurantees from the insurer that ar enot fouind in term and universal life policues

Answer 220

second to die policy pays DB at death of second spouse - usually objective is to provide liquidyty to pay estate taxes at death of second spouse (usualy owned by an ILIT)

Question 221

as a general rule, the DB on a life insurance policy wil escape income taxation to the beneficiary. Transefer for value rule is only exception

Answer 221

transfer for value rule does not apply (exceptions are);

transfer of a life insurance policy to:

• spouse
• partner of insured
• insured
• corporation in which the insured is a shareholder
• transferre who takes the transferor’s basis in the contract

Question 222

a dividend on a life insurance policy is a return of policy’s basis (premium). not taxed

Question 223

when owner of a life insurance policy transfers ownership of a policy to another by gift, a gift tax max result

Answer 223

potential issue arises when owner/insured transfers a life insurance policy to a charity and dies within three years of the transfer. Could require inclusion in gross estate. But since there is an unlimited charitable deduction, there is not estate tax

when an individual dies owning a life insurance policy on life of another person the value of the policy wil be included in his gross estate

note: a new life insurance policy bought withing the ILIT would not be subject to three year look back. three year lookbacks does not apply to sale of a policy

Question 224

gstt (gneration skipping transfer tax)

Answer 224

excise tax in addition to gift of estate tax imposed on the transfer of property to a donee (other than a spouse) who is two more generations younger than the donor

annual exclusion $16K

GSTT applies to (3) taxable transfer:

1. direct skip
2. taxable distirbution
3. taxable termination