Estate Planning

Question 1

Gloria is in her second marriage. When she married Ralph, she signed a prenuptial agreement waiving all her rights to an elective share of Ralph’s estate. He signed nothing. Which of the following statements is true?

A. If he dies, she can claim an elective share.
B. If she dies, he can claim an elective share.
C. If he dies, she can claim a homestead and exempt property award.
D. The elective share is only available in the context of a first marriage where there were no children.

Answer 1

B She signed the prenuptial agreement; he didn’t. Not enough information is known about the homestead or exempt property. If the property was held in Ralph’s name only, she waived her rights. If it was held in joint tenancy, she would receive his half of the property.

Question 2

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

A. Property held by tenancy by the entirety
B. Life insurance owned by Lucy on her husband
C. A POD account
D. A Totten trust

Answer 2

B The life insurance policy is subject to probate unless there is a contingent owner (very rare). The probate process determines the new owner of the policy.

Question 3

What type of property shown below would ancillary probate affect?

A. Stocks or bonds C. Real property
B. Personal property D. Business interests

Answer 3

C Ancillary probate is required for real property that is located in the non-domicile (other) state. The business interests in Answer D are not specified and may not include any real property.

Question 4

Tom and Claire Thomas have lived in a community property state throughout their marriage. Their condominium is registered solely in Claire’s name. What will happen if Claire dies before Tom?

A. Tom will automatically inherit the condominium.
B. The condominium will pass through Claire’s will, and the entire condominium will pass to Tom.
C. Claire’s children will inherit the condominium.
D. Claire’s half of the condominium will pass through her will. Tom already owns one-half of the condominium under community property law.

Answer 4

D Unless the condominium was purchased by Claire with money earned prior to marriage or with gift or inheritance funds Claire received, the condo is community property. Tom owns one half.

Question 5

During the initial financial planning meeting with Pamela, she also wanted to know which of the following planning techniques she should advise her attorney to draw up. What would a CFP® professional be most likely to suggest?

A. A Revocable Living Trust
B. Equalization of assets
C. A Life Insurance Trust for her term policy
D. A Bypass Trust

Answer 5

A Community property generally equalizes the estates. Spousal remainder trusts are not an effective planning technique (covered–later). Life insurance is deemed to be community property because the premium payment comes from community property. Therefore, one half of each policy is owned by each spouse. It would be better for Pamela to buy a new policy and pay the premium with her inheritance money. In addition, Pamela will be able to avoid the three-year rule when she purchases the new policy.

Question 6

Mr. Parker titled property in JTWROS with his wife. His will states the property will pass to his brother. Who will receive the property?

A. Mrs. Parker
B. His brother
C. Neither as the property will pass through probate

Answer 6

A JTWROS property passes outside the terms of a will.

Question 7

A tenancy by the entirety ownership arrangement may be terminated in which of the following ways?
I. By either spouse
II. By mutual agreement by both spouses
III. At the death of either spouse
IV. Upon divorce settlement
V. By claims of one spouse’s creditors

A. I, II, III, IV D. II, III
B. II, III, IV, V E. IV, V
C. II, III, IV

Answer 7

C Both spouses must agree to sever the TBE arrangement. Only if a creditor claim is against both spouses can the TBE property be attached.

Question 8

Which of the following is not an advantage associated with joint tenancy by the entirety?

A. Creditor protection from joint creditors
B. Avoidance of probate delays and costs
C. Privacy
D. Simplicity

Answer 8

A TBE property can be attached by joint creditors. Tennants By Entirety

Question 9

Mr. Harper has been working with his attorney to write a new will before he gets married. The attorney has handwritten instructions signed by Mr. Harper in his file. What happens if Mr. Harper dies on the way to sign the new will?

A. Only his old will (existing) can be admitted to probate
B. Both his old will and the unsigned will can be admitted to probate
C. This is functionally an oral will and can be admitted to probate
D. This is a nuncupative will, and it can be admitted to probate

Answer 9

B This handwritten, signed document is a holographic will. Requirements are that it must be in the testator’s handwriting and signed. The Uniform Probate Code allows courts to accept such documents. Nuncupative wills are oral wills. They must be made in the presence of witnesses generally during a final illness or combat situation.

Question 10

At what point is an estate settled?
A. When an executor or administrator is named
B. When the will is probated
C. When debts and estate taxes are paid
D. When the executor makes the final distributions and is discharged by the probate court

Answer 10

D After all distributions are made, and a final accounting is presented, the executor is discharged by the court, and the estate is closed.

Question 11

Mike and Dan are living together in California. They want to leave all their assets and belongings to each other. Which is the most effective way to accomplish this objective?

A. A will D. A testamentary trust
B. A pour-over will and trust E. Community property titling
C. A revocable trust

Answer 11

C The revocable trust can be changed if the relationship dissolves. Further, assets passing by trust are not subject to probate. Probate assets are exposed to elective share, a will contest, or a family settlement agreement.

Question 12

Mr. Alan Lay, age 60, and Mrs. Doris Lay, age 62, live in a community property state. Before marriage, they both acquired assets in their own names. Which of the following could be classified as community property if they have only been married for 10 years?

A. Mr. Lay started AL, Inc. 30 years ago. All of the stock is in his name.
B. Mr. Lay started a Roth IRA 10 years ago with the earnings (compensation) from AL, Inc. He contributes to the account annually.
C. Mrs. Lay has 10,000 shares of a non-dividend paying stock that she received as part of her divorce settlement from a prior marriage.
D. Mrs. Lay has a frozen 401(k)QDRO account that was distributed to her when ex-husband turned 55 eight years ago. It is now in an IRA account in her name.

Answer 12

B AL, Inc. was started before Alan’s marriage. Unless Doris performs services for the company the business will not be community property. However, the earnings he receives from Al, Inc. are community property money and will cause the Roth IRA to become a community property asset. Doris’ assets are separate property acquired before the marriage.

Question 13

James Adams was married to Lilly for 10 years. They had no children. After a difficult marriage, they divorced. Time passed and Mr. Adams became wealthy. Last week, he died in an auto accident. His mother found out that the title to his house was in JTWROS with Lilly. At James’ death, the house is worth $500,000. The mortgage is only $50,000. How will the house be treated for transfer purposes?

A. As JTWROS and it will pass to Lilly
B. As probate property because Lilly is no longer a spouse
C. Subject to a will contest
D. Probate court will decide

Answer 13

A The JTWROS asset passes by title to Lilly. It is not subject to probate; therefore, there cannot be a will contest and the court cannot decide.

Question 14

Alan Bates died with the property listed below. Which assets would be included in his probate estate?
I. The Bates Hotel and Suites
II. A life insurance policy naming his girlfriend as the beneficiary
III. His mother’s jewelry (that he inherited)
IV. His mother’s house (that he inherited)
V. Customers’ cars left in his possession for unpaid hotel fees
A. All of the above D. II, V
B. I, II, III, IV E. III, IV
C. I, III, IV

Answer 14

C The hotel, jewelry and house are owned outright by Alan. The life insurance policy named a beneficiary. It is included in his gross estate for federal estate tax purposes; however, it is not subject to probate. The cars are not titled in his name.

Question 15

Which of the following is included in Matthew’s gross estate for federal estate tax purposes?
I. Insurance that Matthew (owner and beneficiary) holds on the life of his spouse
II. Insurance that the spouse (owner and beneficiary) holds on Matthew’s life
III. A single life annuity paying $1,000/month to Matthew
IV. A pension account balance of $100,000 with Matthew’s wife entitled to a survivor’s pension of
V. $50,000

A. All of the above C. I, II, IV
B. I, IV D. II

Answer 15

B There is no incident of ownership by Matthew in Answer II because his wife owned the policy. The single life annuity ceases payments when Matthew dies. Thus, no value is included in Matthew’s gross estate.

Question 16

Which of the following assets is included in the decedent’s gross estate?
I. A $100,000 life insurance policy on the decedent’s life that the decedent assigned to his daughter within three years of death
II. A $100,000 life insurance policy on the decedent’s life that her son purchased two years before her death
III. A duplex worth $100,000 that the decedent deeded to his spouse two years before he died
IV. $10,000 in gift tax paid by the decedent on a gift to her brother that was made one year before she died

A. All of the above C. I, IV
B. I, II, IV D. II, III

Answer 16

C There is no incident of ownership by the decedent in Answer II. A gift of property like a duplex or cash is not subject to the three-year rule. Only gift tax paid is subject to the three-year lookback rule.

Question 17

Todd (married) has an interest in the following assets:
• $100,000 in stock (in his name)
• Land worth $200,000 (held in tenancy in common with
his sister 50%/50%)
• $350,000 in a home (held in tenancy with rights of
survivorship with his wife)
• $250,000 in trust (with a general power of
appointment granted to Todd)

When Todd dies, what amount will be included in his gross estate?

A. $375,000 C. $625,000
B. $475,000 D. $725,000

Answer 17

C
Stock $100,000
½ land + home $275,000
Trust (retained interest) $250,000
$625,000

Question 18

Which of the following annuity contracts is (are) included in the owner’s gross estate?

I. A decedent had an enforceable right to receive payments during his/her lifetime, and his/her estate had a right to receive future payments after his/her death.

II. A decedent had an enforceable right to receive payments during his/her lifetime only.

A. I only C. Both I and II
B. II only D. Neither I nor II

Answer 18

A Answer I will be treated as a survivor annuity and the value of the annuity at death will be included in his/her gross estate. Answer II is a single life (pure life) annuity and will terminate with the annuitant’s death.

Question 19

Which of the following items will be deductible from the gross estate to arrive at the adjusted gross estate (tentative taxable estate)?
I. Unpaid federal gift tax of $10,000
II. A mortgage on a house owned jointly by a husband
and wife
III. An accountant’s fee to prepare the estate tax return
IV. A utility bill for the decedent’s residence during estate
administration
V. Fire damage (not covered by insurance) to the
decedent’s residence during estate administration

A. All of the above C. II, IV, V E. III, V
B. II, III, IV, V D. I, III

Answer 19

A Gift tax incurred, but unpaid is a debt. When the house is owned jointly the mortgage is subtracted from the gross estate (a debt).

Question 20

Which of the following item(s) is/are deductible from Fred’s adjusted gross estate to arrive at the taxable estate?
I. Property held by the entirety
II. An insurance policy on Fred’s life naming Mrs. Fred as
the primary beneficiary
III. A bequest of $50,000 to Fred’s alma mater
IV. A bequest of $10,000 to Fred’s favorite club

A. All of the above D. II
B. I, II, III E. I, III
C. II, III

Answer 20

B Tenancy by the entirety property can only pass to the surviving spouse. The decedent’s favorite club is probably not be a qualified charity. The only assumption that can be made with respect to the life insurance is that Fred owned the policy at death. Therefore, it was included in his estate and is payable to the spouse. No one else is named as owner. Then the face value is deducted from the AGE because it passes by the marital deduction.

Question 21

The nature of the transfer tax system is:
A. Cumulative D. Regressive
B. Proportionate E. Discriminatory
C. Flat

Answer 21

A The transfer tax system uses the same rate for lifetime gifts and testamentary transfers. The calculation is based on cumulative transfers.

Question 22

Which of the following statements regarding the gift and estate tax exemption is/are correct?

I. The exemption must be used during lifetime to offset
taxable gifts.
II. If it is used up on lifetime taxable gifts, it obviously
cannot be used again at death to pay estate taxes.
III. In calculating the estate tax due, only the unused
portion of the exemption can be applied to the estate
tax due.
IV. The applicable credit is available for federal estate tax
liability.

A. I, IV D. I
B. II, III E. IV
C. II

Answer 22

A All questions and calculations consider the exemption of $12,060,000 (2022). There is also an applicable credit.

Question 23

Estate, gift, and GST taxes all feature which of the following?

A. A progressive rate
B. A flat rate
C. An inverse rate
D. An accumulative rate

Answer 23

B A flat rate of 40% applies to all 3 types of transfer tax.

Question 24

In general, what happens to life insurance cash value when the insured dies?

A. The cash value is added to the policy’s death benefit
B. The cash value is retained by the carrier at death

Answer 24

B The insurer only pays the death benefit (unless the policy is an UL or VUL Option B).

Question 25

Which of the following phrases describes a special power of appointment?

A. Power that can be exercised for the holder’s comfort,
welfare, and happiness
B. Power that can be exercised in favor of the creditors of
the holder’s estate
C. Power that can be exercised in favor of the holder for
the holder’s education
D. Power that can be exercised in favor of the holder’s
children only

Answer 25

D A special power may not be exercised in favor of the holder or the financial equivalent of the holder. The holder is not one of the grantor’s children. In Answer A, the words comfort, welfare, and happiness make it a general power. Answer B is a general power. Answer C reflects an ascertainable standard, not a special power.

Question 26

Which of the following are general powers?

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

A. I, II, III, IV C. I, IV E. II, III
B. I, II, IV D. III, IV

Answer 26

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

Question 27

Which of the following items would be included in a decedent’s gross estate for federal estate tax purposes?

A. Taxable gifts
B. Any interest in property that was given to the decedent
by another, the transfer of which the decedent cannot
control and that ceases at the decedent’s death
C. A special power of appointment
D. A general power of appointment

Answer 27

D A general power is included in the gross estate. Taxable gifts are added to the taxable estate. Answer B indicates a life estate. A life estate is not included in the gross estate because the decedent transfers nothing at death. A special power is not included because the holder cannot take the property for himself.

Question 28

Gus Jameston, age 80, reduced the size of his gross estate and potential taxes by gifting extensively to family members. He gifted $1,160,000 to 10 family members ($116,000 each) for each of the prior 3 years (annual exclusion $16,000 per person). During the 3rd year, he died in a car accident. How much will be added to his gross estate?

A. $0 C. $3,000,000
B. $16,000 D. $3,450,000

Answer 28

A He never exceeded the $12,060,000 gift tax exclusion and thus never paid any gift tax. The $3 million ($1 million per year) will be added to his taxable estate to create his tax base. Gifts are generally not added to his gross estate.

Question 29

Tom Silverton is confused about the probate estate versus the gross estate. Various financial advisors have made statements, but they seem to contradict each other. Which one below is false?

A. All probate assets are automatically included in the
gross estate
B. If you have a probate estate you must have a gross
estate
C. The gross estate includes both probated assets and
non-probate assets
D. If the probate estate is zero, there will be no gross
estate

Answer 29

D All the probate assets are included in the gross estate. A decedent dying with no probate assets, can have non-probate assets such as JTWROS property.

Question 30

Harvey’s mother died in 2022. She was a widow. The family attorney told Harvey that $400,000 of estate taxes are due to settle the estate after all the expenses and debts were paid. Out of the $12,060,000 gross estate, $400,000 would go to IRS. Harry wants to know why.

A. The taxable estate was actually $1,000,000
B. Harvey’s mother had made taxable gifts of $1,000,000
C. Harvey’s mother died within 3 years of making a
taxable gift and paying $250,000 in gift tax
D. The tax on a $12,060,000 estate is $400,000

Answer 30

Gross estate $12,060,000
Taxable gifts +$1,000,000
Tax base $13,060,000
less exemption ($12,060,000)
Excess $1,000,000
Tentative tax x 40%
$400,000

Question 31

Mrs. Black gifts to her daughter Jane a stock worth $216,000. Mrs. Black bought the stock for
$20,000 some years ago. What is the amount of taxable gift?

A. $16,000 C. $200,000
B. $20,000 D. $215,000

Answer 31

C $216,000 minus the $16,000 annual exclusion

Question 32

Mrs. Black gifts to her daughter Jane a stock worth $216,000. Mrs. Black bought the stock for
$20,000 some years ago

What is Jane’s adjusted basis for income tax purposes?

A. $20,000 C. $200,000
B. $34,000 D. $216,000

Answer 32

A Mrs. Black’s basis. This is carryover basis.

Question 33

In 2022, Mr. Eden gifts to his son, John, a stock worth $1,016,000. Mr. Eden bought the stock for
$200,000 many years ago. What is the amount of taxable gift?

A. $0 C. $984,000 E. $1,016,000
B. $16,000 D. $1,000,000

Answer 33

D $1,016,000 minus the $16,000 annual exclusion.

Question 34

What is John’s adjusted basis for income tax purposes?

A. $16,000 C. $200,000
B. $184,000 D. $1,016,000

Answer 34

C Mr. Eden’s basis

Question 35

Mrs. Falk purchased stock for $50,000. At the date she gave the stock to her daughter, the stock had a FMV of $25,000. What was the amount of the taxable gift?

A. $9,000 C. $34,000
B. $16,000 D. $50,000

Answer 35

A The value of the gift for gift tax purposes is the fair market value ($25,000) less the annual exclusion ($16,000).

Question 36

Mrs. Falk purchased stock for $50,000. At the date she gave the stock to her daughter, the stock had a FMV of $25,000.

What are the income tax implications to the daughter when she sells the stock for $70,000 two years later?

A. $0 C. $25,000 LTCG
B. $20,000 LTCG D. $45,000 LTC

Answer 36

B For a loss gift, the gain is measured by the donor’s basis ($50,000).

Question 37

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

A. $0 C. $660,000 E. $1,200,000
B. $644,000 D. $1,184,000

Answer 37

B The amount of the taxable gift is $660,000 - $16,000.

Question 38

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

What are the income tax implications to you if you sell the property for $600,000 18 months later?

A. $0 D. $584,000 LTCL
B. $44,000 LTCL E. $600,000 LTCL
C. $60,000 LTCL

Answer 38

C The loss is determined by the lesser of date of gift FMV
($660,000) or the donor’s basis ($1,200,000). See the
chart above.

Question 39

Mr. R bought stock for $1,016,000. The stock increased in value to $2,000,000. By the time he gifted the stock to his son the FMV was $1,016,000. Mr. R. paid a gift tax of $400,000 (full exemption used). What was the son’s basis?

A. $1,000,000 B. $1,016,000 C. $1,400,000

Answer 39

B There is no appreciation. Basis was unchanged from the donor’s basis.

Question 40

Bryce purchased a property for $1,500,000. A few years later, when the property values have declined, he gifts it to his son when it has an FMV of $1,266,000. His son sells the property two years later for $1,100,000. What is the amount of the taxable gift?

A. $165,000 C. $1,250,000 E. $1,484,000
B. $400,000 D. $1,266,000

Answer 40

C The value of the gift is still the FMV date of gift less the annual exclusion. The taxable gift is ($1,266,000 – $16,000 = $1,250,000).

Question 41

In 2022, Tony and Linda Anderson gave their two sons $80,000 each. They agreed to split the gift. How much can either of them claim as an annual exclusion for the gifts to their two sons?

A. $16,000 C. $48,000 E. $160,000
B. $32,000 D. $80,000

Answer 41

B The annual exclusion is $16,000 (each son). The taxable gifts answer would have been $48,000. $80,000 in gifts less $32,000 equals $48,000. The question asks about the annual exclusion for the gifts to their two sons.

Question 42

Under what circumstances below must a gift tax return be filed?

A. A grandparent pays $32,000 directly to his grandchild
for tuition
B. A grandparent writes a check for $16,000 to a UTMA
account for his grandchild
C. A grandparent deposits $16,000 in a 2503(c)-trust set
up for his grandchild
D. A grandparent pays $20,000 directly to a medical
provider for the benefit of his grandchild

Answer 42

A The check was paid to the grandchild. To be an exempt gift, the check must be paid directly to an educational institution for tuition payments.

Question 43

Which of the following is a completed gift?

A. A mother lends a daughter $20,000 and then forgives
the debt.
B. A grandfather puts $20,000 into a joint account at the
bank with his grandson.
C. A grandfather creates a joint tenancy brokerage
account with his granddaughter.

Answer 43

A Gifts can take unexpected forms like forgiveness of debt. Answers B and C are not completed gifts.

Question 44

Hal and Beverly Barnes live in a community property state. They want to gift to various family members. Which one of the following statements regarding a gift of community property is false?

A. A gift of $32,000 will not require filing of gift tax returns
B. If, after the split, the value of the gift exceeds the
annual exclusion, two gift tax returns (one by each
spouse) must be filed (including consent by the non-
donor spouse)
C. Only one spouse needs to file a gift tax return if the
split brings the gifts down to or below the annual
exclusion
D. Community property will be treated like joint tenancy
with right of survivorship for gift purposes

Answer 44

C Community property, like JTWROS, is owned in equal shares. The transfer is automatically split into two $16,000 gifts. Only when the $16,000 annual exclusion is exceeded does a gift tax return have to be filed.

Question 45

Which of the following gifts requires a filing of a 709 with spousal consent?

A. A gift of $32,000 made to a daughter for college
tuition from her mother’s checking account
B. A gift of $32,000 made to a daughter for college
tuition from her parents’ joint checking account
C. A gift of $32,000 made to a daughter for college
tuition from her parents’ community property checking
account.
D. A gift of $32,000 made directly to the university for
college tuition

Answer 45

A If the check is written to the daughter, her mother will have to file a 709 with spousal consent signed by her husband.

Question 46

Sid and Irma Ledbetter live in a community property state. They would like to make a gift of $32,000 to each of their two children from their money market account. Which of the following statements is true?

A. Unless the money market account is registered in joint
tenancy, they will both have to file a 709 and consent
to the split gift
B. Gift splitting is not allowed in community property
states
C. They can only gift $32,000 in total without having to
file a 709. One spouse will have to file a Form 709, and
the other will have to consent to the split when they
gift $64,000.
D. They should write separate checks to each child

Answer 46

D With community property, the money is assumed to be one-half owned (like JTWROS with a spouse). No 709 is required until more than $32,000 is gifted to a single individual.

Question 47

Before she got married, Lilly decided to gift $64,000 ($32,000 each) to her two children. Later that year she married Adam. Can Adam consent to a gift split for Lilly’s gifts that were made earlier that year?

A. Yes, they were married during the same calendar year
B. No, they were not married at the time of the gift
C. Yes, if the 709 wasn’t filed before they got married,
Adam can consent to a gift split
D. No, the 709 had to be filed before they got married

Answer 47

B The privilege of gift splitting is available only for gifts made while the couple is married.

Question 48

Mrs. Generous made the following gifts this year:

Donee Basis Amount of gift
Her husband $99,000 $111,000
Her daughter $11,000 $21,000
Her son $31,000 $21,000
Her sister $16,000 $16,000

What is the total amount of current year taxable gifts made by Mrs. Generous?

A. $10,000 C. $32,000 E. $58,000
B. $13,000 D. $48,000

Answer 48

A The gifts to her daughter ($21,000), her son ($21,000) and her sister ($16,000), less $48,000 (three annual exclusions)

Question 49

Which of the following transfers escape(s) gift tax liability?

I. Leo agrees to give his wife a lump sum settlement of
$1,000,000 upon their divorce. In turn, his wife agrees
to give up all marital rights she has in his estate.

II. After his divorce is settled, Leo agrees to support his
adult children.

A. I only
B. II only
C. Both I and II
D. Neither I nor II

Answer 49

A Transfers of property or property interests made under a written agreement between spouses in settlement of marital property are deemed to be for full consideration and therefore are not gifts. Transfers to or for the benefit of adult children are generally treated as gifts unless the transferor is required to support the child for some reason (college tuition, etc.). Court ordered child support for minor children is not treated as a gift. Leo was not ordered to pay the child support.

Question 50

Paul purchased a property for $1,500,000. A few years later when the property values have declined, he gifts it for $1,266,000 to his son using his annual exclusion. His son sells the property two years later for $1,100,000. What amount of gift tax was Paul required to pay?

A. $0 D. $1,084,000
B. $234,000 E. $1,250,000
C. $400,000

Answer 50

A The question does not indicate that he used his $12,060,000 exemption, therefore it is available.

Question 51

Janice Altman gave stock worth $80,000 with a basis of $10,000 to her daughter, Sara. A few years later Sara gifts the stock now worth $96,000 to her own daughter, Jane. What is Jane’s basis in the stock now?

A. $10,000
B. $80,000
C. $96,000
D. $96,000 - $16,000 or $80,000

Answer 51

A There is no change in basis. There was no death as the stock passed between family members.

Question 52

Lucy (AGI $200,000) wants to gift her universal life insurance policy to a public charity. If the face value is $500,000, the cash value is $80,000 and the basis is $50,000, what is the amount of the charitable income tax deduction that Lucy can claim?

A. $50,000 C. $80,000
B. $64,000 (30% of AGI) D. $100,000 (50% of AGI) E. $200,000

Answer 52

A The charitable contribution is the cash value of the policy ($80,000) or the cost basis ($50,000) whichever is less. This deduction is further limited to 50% of Lucy’s AGI. Life insurance is an ordinary income type of asset. It is not a LTCGs type asset that can be valued at FMV for charitable income tax deduction purposes.

Question 53

Mrs. Bower, age 80, is in reasonably good health. A number of years ago, her husband died leaving her $13 million and also placing $3.5 million in a bypass trust for her benefit. In addition, their home was owned in JTWROS. The home, FMV value $500,000, and the $15 million of common stock ($13 million inherited plus $2 million of her own) have a high basis of $14,000,000 million. Mrs. Bower has two married children and 5 grandchildren. She wants to make yearly gifts to these children and grandchildren to get her estate under $12,060,000. What type of asset should she give and to whom?

A. Low basis, high dividend paying investments to both
children and grandchildren
B. High basis, high dividend paying investments to both
children and grandchildren
C. Low basis, growth investments to children and high
basis, growth investments to grandchildren
D. High basis, growth investments to children and low
basis, growth investments to grandchildren

Answer 53

B Given that Mrs. Bower is in her 80’s, grandchildren are likely to be in their thirties or forties. With a high basis, they can sell the stock with little or no tax or keep it for the dividends that could be taxed at 0%, 15% or 20%. Sales of low basis assets could be subject to capital gains at 0%, 15% or 20% rates

Question 54

Agnes bought a stock at the height of the dot.com market in 2000. Today, it is trading at 50% of her purchase price. Now, at age 75, Agnes is in poor health. What would you suggest she do?

A. Sell the stock, take the loss, and invest the proceeds in
CDs.
B. Sell the stock, take the loss, and invest the proceeds in
REITs.
C. Gift the stock to her favorite charity and claim a
charitable deduction for the original purchase price.
D. Gift the stock to a family member who can sell it for a
loss.

Answer 54

A Agnes may need income if her health is poor. The CDs carry more safety of principal than do the REITs. Answer C is incorrect. The tax deduction would be based on the stock’s value today.

Question 55

Mrs. Wealthy, a widow age 75, owns $110 million in assets. She has already gifted $12,060,000 to family members. When her husband died years ago, he placed the maximum allowable amount in a bypass trust for her benefit and left the remainder to her outright. She has no need for this much money. She would like to help various family members live better, establish businesses, and improve their health. What could she do that would reduce estate taxes at her death if she lives more than 3 years?

I. Gift the maximum annual exclusion to family members
each year
II. Gift a large sum now ($40 million, for example), to
family members and save estate taxes, plus remove
the future appreciation from her estate

A. I C. I and II
B. II D. Neither I nor II

Answer 55

C Both strategies would reduce the federal estate tax liability.

The 3-year rule on gift taxes paid is important. Using it appropriately can save on estate taxes. Someone older could give away all their assets and pay gift taxes. Millions of dollars could be saved in estate taxes, as long as they live 3 years after the taxable gift. The intent of the strategy is to save taxes on 40% of the gift taxes paid.

Question 56

Which of the following phrases match with the following answers? Use only one answer per blank. Answers may be used more than once or not at all.

A. Durable power D. A, B, & C
B. Nondurable power E. Special power of attorney
C. Springing DPOA F. Living trust

1. Become(s) legally invalid at the onset of the
   principal’s incapacity
2. Become(s) effective at the principal’s incapacity
3. Continue(s) after the principal’s death
4. Empower(s) the attorney-in-fact to make gifts to the
   principal’s spouse and his/her descendants of
   whatever degree in amounts not exceeding $16,000
5. Empower(s) the attorney-in-fact to only control
   specific property

Answer 56

• *Nondurable POA**: Become(s) legally invalid at the onset of the principal’s incapacity
• *Springing Power:** Become(s) effective at the principal’s incapacity
• *A revocable trust:** Continue(s) after the principal’s death
• *DPOA, Nondurable POA, Springing DPOA:** All empower the attorney-in-fact to make gifts to the principal’s spouse and his/her descendants of whatever degree in amounts not exceeding $16,000
• *Special POA:** Empower(s) the attorney-in-fact to only control specific property

Question 57

Mrs. Rich has been diagnosed with a brain tumor. She will need a major operation which may cause a short or long-term incapacity. She is considering the following options. What would a CFP® professional be most likely to suggest?

1. A Power of Attorney
2. A Durable Power of Attorney given to a son in another state so he can put her assets in a living trust
3. A living trust
4. It’s too late; Mrs. Rich is already incapacitated
5. I am going to get sued if I answer questions like this
6. I, II, III C. III E. V
7. II, III D. IV

Answer 57

B A Durable Power of Attorney is not invalidated by subsequent incompetency of the principal. A Power of Attorney which is not a Durable Power of Attorney terminates upon the incompetency of the principal.

Question 58

A guardian is appointed by:

1. A parent C. The trustee
2. The court D. An executor

Answer 58

B A guardian is appointed by the court and is charged with the responsibility of caring for another (the ward). Parents can name a guardian of their minor children in a will. The court usually honors their choice (that person is a testamentary guardian).

Question 59

Mr. Pierce is 93 years old and incapacitated. Mrs. Pierce is 88 and quite sharp mentally. She wants a plan in place if she becomes incapacitated or dies, but she doesn’t want to lose control of their assets until that time. What arrangement below best satisfies Mrs. Pierce’s objectives?

A. Durable power of attorney

B. Revocable trust

C. Springing durable power of attorney

D. Supplemental trust

Answer 59

B A revocable trust best suits Mrs. Pierce’s needs. It would be recognized in virtually all states and can continue to hold property after she dies

Question 60

Madeline has a 25-year-old granddaughter, Sue, who is totally disabled and receives government benefits. Madeline wants to leave her $320,000 in her will. What would a CFP® professional be most likely to advise?

1. Leave the money outright to Sue
2. Transfer the money to a special needs trust naming Sue as its beneficiary

Answer 60

B The Special Needs Trust would not deprive Sue of need-based government benefits.

Question 61

A CFP®’s client base is mainly elderly individuals and couples. She realizes that she should be aware of signs of forgetfulness or dementia. Senior citizens are also especially vulnerable to financial fraud. What kind of financial signals should the CFP® professional be looking for?

1. The client had been requesting $4,000 a month but now is requesting $8,000 a month
2. A caretaker requests that distributions be sent to him or her, not to the client
3. The client starts to ask questions about high-risk investments
4. The client requests that account transactions be sent to their attorney

Answer 61

Dramatic changes in cash demands or investment risk tolerance could indicate that someone is misusing the elder client. It is normally not a red flag if account transactions are being sent to the client’s attorney.

The client had been requesting $4,000 a month but now is requesting $8,000 a month

A caretaker requests that distributions be sent to him or her, not to the client

The client starts to ask questions about high-risk investments

Question 62

Your mother, age 60, is becoming forgetful. Your father died three years ago. Since then, you have been handling her financial affairs. At this time, she owns the house that was purchased 40 years ago and some investable assets. Your father worked for a company that had a defined benefit plan. She gets $2,500 per month in QJSA benefits but lately you have had to sell some of her investments to cover her expenses. What should you do first?

A. Qualify her for Medicaid by gifting her assets away

B. Review her budget to see why she cannot live on $2,500 per month

C. Have her apply for Social Security benefits

D. Take her to an attorney to prepare various legal documents like an advanced medical directive, a durable power of attorney or a living trust

Answer 62

D While your mother still retains some mental capacity, she should execute an incapacity plan through powers of attorney and living trusts. Answers B and C are not bad answers, but the question is asking what should you do first. There is nothing here that indicates she has any of these legal documents. Answer A seems dreadful. You are stripping away her flexibility and it may not work because of the defined benefit pension plan.

Question 63

In the inter-vivos trust, theholds legal title, and thehave/has equitable title.

A. Grantor, beneficiaries

B. Trustee, beneficiaries

C. Grantor, grantor

D. Trustee, grantor

E. None of the answers are correct.

Answer 63

B The trustee holds legal title. The beneficiaries hold equitable title.

Question 64

Which of the following is a complex trust?

A. A trust that may distribute income

B. A trust that must distribute income

C. A trust that is required to distribute all of its income

Answer 64

A The key word is “may.” In a complex trust, income is accumulated, or the trustee has the discretion to accumulate income.