Estate Planning

Question 1

James is the grantor of an irrevocable life insurance trust. The beneficiaries are his two children, Jordan and Colin. The trust has a crummey provision and James uses a split gift election with his wife, Donna, to contribute $52,000 as the initial trust contribution. Which of the following statements is/are correct?

1-This transaction creates a 5/5 lapse problem.
2-The children, Jordan and Colin, should affirmatively lapse the right to withdraw by responding in the negative to the crummey letter within the time allowed.

Answer 1

Statement 2 is wrong. The children should simply let the power to withdraw lapse by time, not affirmatively. Statement 1 is correct. This creates a 5/5 lapse problem.

The 5/5 rule serves a very specific purpose, it serves as a “limit”, either on unintended gifts inside a trust for multi-beneficiaries or to limit how much is included in a gross estate where a beneficiary has somewhat unrestricted use of funds. The CFP® exam does not generally get into the details of the 5/5 except where it is included as a power for a Crummey Trust with multiple beneficiaries. (If there is only one beneficiary to the trust, no risk of unintended gifts, so all is fine.)

With a split gift, each beneficiary is getting an amount and then gifting it back to the trust in excess of the 5x5 amount thereby creating a future interest gift for themselves to the other bene.

Question 2

Which of the following is not an accurate statement regarding powers?

-A release of a power is a formal statement by the donee giving up the power.
-A lapse is the termination of a power without exercise.
-Powers of appointment are presumed limited if not so stated in the document in some states.
-Powers of appointment can be exercised in any manner deemed convenient by the power holder.

Answer 2

The correct answer is D.

Answers “A,” “B” and “C” are true statements. Power holders must exercise powers in accordance with the provisions of the power, Will, or trust.

Question 3

Which of the following are characteristics of a private annuity?

Answer 3

Title to the property is conveyed to the individual responsible for making annuity payments at the time of the transaction.

Each payment received by the annuitant is divided into gain, interest income, and a non-taxable recovery of basis.

Question 4

In calculating the estate tax liability, which of the following statements are true:

1 Personal Casualty and theft losses are subtracted from the final 1040.
2 The marital deduction is a credit against the taxable estate.
3 Adjustable taxable gifts are added back to the taxable estate to determine the tentative tax base.
4 The tentative tax is reduced by the unified credit.

Answer 4

III and IV only.

The marital deduction is not a credit, but is a deduction against the adjusted gross estate in calculating the taxable estate. TCJA repealed personal Casualty and Theft losses for Dec 31, 2017 - Jan 1 2026. If a loss happens during the administration of the estate, the estate can either deduct on the 706 or 1041.

Question 5

Prairie Dog Corporation (PDC), an oil drilling company, has a “key-person” variable universal life policy on Digger Phelps, its vice-president of drilling operations. The owner and beneficiary of the policy are the corporation. Which of the following is correct?

Answer 5

Any death benefit paid will be nontaxable to PDC

PDC is the owner and beneficiary of the policy. For the same reason, premiums are NOT considered a gift or taxable to Digger, nor will they appear in his gross estate. “Key person” life premiums are not deductible as a business expense. Any death benefit paid will be nontaxable to PDC.

Question 6

TBE can be terminated in which ways?

Answer 6

Death, whereby the survivor takes the entire tenancy.
Mutual agreement.
Divorce, which converts the tenancy into a tenancy in common or a joint tenancy.

In a tenancy by entirety, the interest of one spouse cannot be terminated or severed without the consent of the other spouse.

Question 7

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

Answer 7

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

Question 8

What is a reversionary interest

Answer 8

A reversionary interest is one that reverts back to the donor after some time or event.

Question 9

George Beatty wants to establish a single trust with the following characteristics and provisions:

• The income will be distributed to his grandchild at the discretion of the trustee until the grandchild reaches age 21.
• The remaining trust assets will then be distributed equally between his children and the grandchild.
• George would be entitled to the maximum possible annual exclusion for any assets placed in trust.

Which one of the following trusts can have all these characteristics or provisions?

A Crummey Trust.
A Section 2503(b).
A Section 2503(c).
An Unfunded irrevocable life insurance trust (ILIT).

Answer 9

The correct answer is A.

The Crummey trust meets all of the client’s objectives. B is wrong because it requires annual income distributions. C is wrong because it permits accumulation of income and then distribution of assets to the beneficiary (1) at age of majority 21. D is wrong as it does not produce income until George dies which could be later than granchild age 21.

Question 10

In which of the following situations would you be required to file a gift tax return?

I. You gift $17,000 in cash to your spouse.

II. You and your spouse split a gift of a $40,000 mobile home to your son and his wife.

III. You gift your residence to your children, but retain a life estate in the property.

IV. You personally donate $17,000 to a charity in exchange for tickets to a charity gala. The tickets are valued at $1,000 for income tax purposes.

Answer 10

II and III only

None of the above situations results in gift taxes having to be paid, but Statements “II” and “III” require the filing of an IRS form 709 (gift tax) because of the split gift and the retained interest. Gifts to charities have unlimited transfers requiring NO gift tax filing.

Question 11

Which of the following correctly describes fee simple separate property ownership:

Not included in probate estate, but it is included in gross estate.
Can include personal property (chattel) of all types.
Is presumed in common law states.
Is not presumed in community property law states.

Answer 11

II, III and IV only.

Fee simple ownership is included in probate and is not presumed in community property states.

Question 12

Joyce’s gross estate was $1,000,000. Her funeral costs were $16,000. She left $20,000 to charity and $14,000 to a community hospital. Her home mortgage (owned in JTWROS with her spouse) was $100,000. The home was valued at $200,000. She had personal consumer debt of $15,000. Her spouse was her personal representative and waived his fees. She left $260,000 in cash outright to her spouse. What is the value of her adjusted gross estate?

Answer 12

Of the $1,000,000, we subtract $16,000 for funeral costs, then we subtract $50,000 (her share under JTWROS) of the mortgage and $15,000 of consumer debt, leaving $919,000. Charitable contributions and marital deductions are not taken into account in determining the adjusted gross estate. These two items constitute part of the calculation of the taxable estate.

Question 13

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

The decedent handwrote a will and signed it but did not date it.
The decedent was not of “sound mind” when he signed his statutory will.
The decedent prepared a proper will listing every asset that he owned at the time. He died 5 years later.

Answer 13

Choices A, B and C.

Answer “A” describes an invalid holographic will. Answer “B” describes a situation in which the testator is not “of sound mind” and therefore cannot make a valid will. Answer “C” describes a will with no residuary clause. If the decedent dies without a valid will or a will that only covers part of his assets, he is said to have died intestate. A proper will means it was signed, dated and witnessed.

Question 14

In the current year (2023), George made taxable gifts to his two sons. One was for $500,000 to his son Chris and another was to his son Alex for $500,000. George’s wife, Lois died several years ago. George used his applicable credit amount to offset any gift tax liability, and would like to know how much applicable gift tax credit does he have left at this time?

Answer 14

George gave $1,000,000 in the current year in taxable gifts so he has $11.920 M of remaining exemption left which translates to a $4,768,000 credit ($5,113,800 - $345,800). There is no indication from the stem that he has any portability from his deceased wife.

Choice A is incorrect. This is the tax that would be due on the gift of $1,000,000.

Choice B is incorrect. This is the total of the gift.

Choice D is incorrect. This is the amount of the remaining of the lifetime exemption.

Watch the vocabulary on this one. Taxable gifts is a term meaning net of any annual exclusion.

Note: the $345,800 is from the estate tax table. It is the calculated tax due on 1 million dollars of gift or estate amounts. The table is in the front of your Estate and Tax Pre-study book.

Question 15

Under what circumstances would property be subject to ancillary probate?

Answer 15

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

Question 16

Dan Ryan wishes to estimate his probate estate. The following are assets listed on his data form. What is included in the probate estate?

-$5,000 Limited Partnership Interest held as JTWROS with his brother who made no contribution.

-$150,000 home held in tenants by the entirety (TE).

-$20,000 municipal bonds held in a separate account.

-$20,000 child UTMA accounts.

-$25,000 Mutual Fund held in community property with his spouse.

Answer 16

$32,500

Joint tenants with rights of survivorship and tenants by the entirety pass outside probate. The municipal bond and one half of the community property are included in probate, equaling $32,500.

Question 17

A nuncupative will.

Answer 17

This is an oral expression of testamentary intentions restricted to tangible personalty

Question 18

Which of the following is NOT a disadvantage of UGMA/UTMA custodial accounts?

The assets are owned by the student for financial aid purposes.
The custodian loses control of the assets at time of maturity.
The assets are included in the donor’s gross estate until maturity.
The assets are non-transferable.

Answer 18

The correct answer is C.

One of the advantages of utilizing UTMA and UGMA accounts is the ability to lower the gross estate by contributing to the accounts. The annual gift tax exclusions apply but the assets in the account are in the child’s estate not the donor’s.

Choice A is incorrect because these accounts can severely reduce the child’s ability for financial aid.

Choice B is incorrect because the custodian no longer has any control over the assets upon maturity. The child may or may not choose to use the assets wisely.

Choice D is incorrect because the assets placed in this account may not be transferred or revoked.

Question 19

A person or entity entitled to act on behalf of another is known as:

Answer 19

An attorney in fact.

The power of attorney appoints an attorney in fact. This is the non-lawyer (agent) who acts on behalf of the principal. This is not an “attorney at law” although it may be.

Question 20

Which of the following accurately describes ownership as Tenancy in Common?

Undivided interests in the property.
Fractional share included in gross estate.
Is presumed when property is transferred to two or more people.
Income and costs are shared in proportion to ownership interests.

Answer 20

I, II, III and IV only.

The ownership interests of a tenancy in common do not have to be equal but income and costs are shared in proportion to ownership.

Question 21

Which of the following is an undivided ownership in the property that, upon death of one owner, automatically passes to the surviving owner?

Tenants by the Entirety.
Tenants in Common.
Community Property.
Joint Tenancy with Rights of Survivorship.

Answer 21

I and IV only

Tenancy by Entirety is Joint Tenancy or Joint Interest that can only exist between a married couple. This and JTWROS allow for automatic passage of property rights to other owners. Tenants in Common provides for ownership to pass to the owners’ heirs. Community Property has no automatic retitling feature and therefore the decedents’ half passes through probate.q1

Question 22

To qualify for the marital deduction, qualified terminable interest property (QTIP) must meet which of the following conditions?

-The surviving spouse must have a general power to appoint the property.
-All of the income must be paid out either to the surviving spouse or to the children of the decedent and the surviving spouse at least annually.
-The executor must make the QTIP election.
-The surviving spouse must be entitled to make lifetime gifts to family members directly from the QTIP.

Answer 22

III only.

The surviving spouse generally has no dispositive powers in a QTIP trust. The surviving spouse must be the SOLE income beneficiary who must receive ALL income from the trust at least once each year for the rest of his/her life.

Question 23

Which of the following accurately describes special and general powers?

-The surviving spouse can be given the power to invade the entire corpus of a marital trust for an ascertainable standard.
-Exercise, lapse or release of a general power of appointment are considered a transfer of the property by the power holder for gift, estate, and generation skipping tax purposes.
-The existence of a general power of appointment will cause the power holder to be considered the owner of all or part of the trust for federal estate tax purposes in the event the power holder dies.
-The existence, lapse, exercise, or release of a special power will not cause inclusion in the power holder’s gross estate.

Answer 23

All of the above statements accurately describe special and general powers.

Question 24

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

-The difference between the fair market value of the asset and the consideration received in exchange for the asset is considered a gift.
-The gift portion of a bargain sale will qualify for the annual exclusion.
-A bargain sale is generally not adviseable if the buyer of the property is a family member.
-If the property is sold for more than the seller’s basis in the property, taxable income will result.

Answer 24

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

Question 25

Which of the following statements is/are correct? -The value of a CRAT where the only noncharitable income beneficiary was the decedent is included in the gross estate of the decedent. -The value of a CRUT where the decedent and his currently surviving spouse were both the only non-charitable income beneficiaries is included in the decedents' gross estate.

Answer 25

The correct answer is C. Both trust assets are included in the gross estate of the decedent. The CRAT is then deductible as a charitable deduction from the adjusted gross estate (AGE). The CRUT is partially deductible as a qualified terminable interest property transfer under the unlimited marital deduction from AGE and the remainder is deductible as a charitable deduction from AGE.

Question 26

Which of the following statements accurately reflect(s) the requirements for a valid family partnership? 1.The partnership interests must receive a pro-rata share of distributed income. 2.Personal service income may be earned by the partnership. 3.General partners must be adequately compensated for services rendered. 4.Capital must be a material income-producing factor.

Answer 26

I, III and IV only Personal service income cannot be valid earnings by a family limited partnership.

Question 27

Which of the following are deducted from a decedent's gross estate: -A whole life policy that he owned on his mother. -A mortgage on community property. -A credit card balance on a sole & separate account. -Income taxes paid earlier in the year. -Interest owed on the credit card balance.

Answer 27

III and V only Debts and obligations of the decedent are deductible from the gross estate. Only 1/2 the mortgage on community property is deductible.

Question 28

Which of the following is not a principal reason for establishing a revocable living trust? a Reducing the grantor’s gross estate. b Grantor trust income tax treatment. c Probate Avoidance. d Management of assets.

Answer 28

The correct answer is A. A revocable living trust is primarily established so that the trust assets avoid the probate process and provides for management of assets and grantor trust income tax status. The trust assets will transfer per the trust document and will not need to pass through probate. A revocable living trust does not reduce a grantor’s gross estate. The assets of a revocable living trust are included in a grantor’s gross estate at the fair market value at the grantor’s date of death.

Question 29

Which of the following techniques can be used to lower the value of an individual’s gross estate? Totten Trust. Qualified Personal Residence Trust. Family Limited Partnership. Irrevocable Life Insurance Trust.

Answer 29

II, III, and IV only 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 30

Which of the following statements is correct? -Unpaid medical expenses of a decedent can be deducted on the final 1040 or form 1041 but not on both. -Any executor fees may be deducted on form 706 or the 1041 return.

Answer 30

2 only Unpaid medical expenses can be deducted on the 1040 or the 706 but not the 1041, which makes statement 1 false as it included the 1041. Statement 2 is true. The 1040 is the decedent's file Federal tax filing. The 1041 is the estate tax return. The 706 the estate tax is used to figure the estate tax due.

Question 31

A testator-selected survivorship clause inserted in a Will is preferable to a state's Uniform Simultaneous Death Act (USDA) because:

Answer 31

The USDA presumption will not apply if the order of deaths can be determined

Question 32

For a deed to effectively act as a "will substitute", which of the following is required?

Answer 32

Competent grantor's signature There must be delivery of deed during the grantor's lifetime with an intent to gift. The grantor must be competent and the deed must be delivered. Recording of deed does not affect gifting, but may affect future rights in the property. A gift can be made subject to a mortgage.

Question 33

This estate planning tool can be revocable and, when in grantor form, does not lower the income or estate tax of the grantor:

Answer 33

An intervivos trust Intervivos trusts can be either revocable or irrevocable, but if revocable, they become fully irrevocable at the time of the grantor's death, thus avoiding probate. During life, the revocable trust income is taxable to the grantor and at death of the grantor, the trust assets are included in the grantor's gross estate.

Question 34

Which of the following accurately describes a testamentary trust?

Answer 34

Generally the assets included in a testamentary trust are subject to probate A testamentary trust does not take effect (funded) until the will is administered. The trust funding is establish by the will through the probate process (process of validating the will). The trust itself is typically set up to be funded prior to death. The assets in the trust will come from the will and therefore were generally included in the probate estate.

Question 35

Which of the following accurately describes the income tax implications of a sale-leaseback using an installment payment method?

Answer 35

`The transferor may not be able to deduct lease payments made to a family member as ordinary and necessary business expenses. `A fully depreciated property that is transferred by sale-leaseback to a family member can nonetheless be depreciated by the new owner. `The transferor of a sale-leaseback may be subject to depreciation recapture in the year of sale.

Question 36

Jean-Claude and his wife, Marie, are both resident aliens living in Ohio. He has total assets of $9,000,000, of which $2,920,000 are located within the United States. Assuming Jean-Claude died today, leaving all his assets to his wife, which of the following statements is false regarding estate tax return filing requirements for 2023?

Answer 36

Jean-Claude’s estate would not be required to file an estate tax return due to the size of his estate. An estate tax return is required for a U.S. resident alien when the estate income is greater than $600 or the beneficiary is a resident alien.

Question 37

Devon Wright asked if you could help him structure an irrevocable trust. His ultimate goal is to remove the trust corpus from his gross estate while still reporting the income taxes on any income generated by the trust during his life. His best choice of trust to accomplish this is? A Chapter 14 Trust. A Defective Grantor Trust. A Crummey Trust. A Bypass Trust. A GRAT.

Answer 37

The correct answer is B. There is no such thing as a Chapter 14 Trust. Crummey is a provision or power to withdraw from a trust. A Bypass trust is used in marital estate planning. A grantor trust is subject to income tax to the grantor. A defective grantor trust is treated as a grantor trust for income tax purposes but as a completed gift for gift and estate tax purposes.

Question 38

An estate freeze would accomplish which of the following?

Answer 38

Any property transferred would be appreciating in value and the future gain would occur in the transferee's estate. In the case of an estate freeze, the property transferred would be appreciating in value and any future gain would occur in the transferee's estate.

Question 39

All property acquired by the efforts of either spouse during the marriage is owned equally by both spouses at the time of acquisition. This statement best describes:

Answer 39

Community property The ownership described here is the community property relationship. Property can be kept separate even in community property if one does not mix or mingle gifted property or inherited property (two examples of separate property) with community property.

Question 40

An installment sale has which of the following characteristics?

Answer 40

Allows pro-rata recognition of profits in the year payments are received. Has a fixed selling price contractually agreed to by both parties In the year payments are made they are recognized for tax purposes, but the entire amount is not accelerated in the year of payment. Note that installment sale treatment is mandatory but need not be a sum certain at time of sale (i.e., purchase of business with earn-out). The selling price is agreed to and set in an installment sale.

Question 41

Which of the following assets would be considered an IRD asset, and also avoids probate? a. Life insurance policy on the decedent’s life, with the decedent’s son named as beneficiary. b. Traditional IRA, with decedent’s surviving spouse named as beneficiary. c. Employer securities in an ESOP received as a lump-sum distribution two months before the date of death. D. Installment note receivable with payments being made post mortem.

Answer 41

Traditional IRA, with decedent’s surviving spouse named as beneficiary. IRAs are IRD assets, but do avoid probate by way of contract (beneficiary). If the estate is the beneficiary, it will pay to the estate and pass through probate. A is incorrect. A life insurance policy is not an IRD asset. C is incorrect. Net Unrealized Appreciation on employer securities is an IRD asset, but it does not avoid probate. D is incorrect. Installment note receivable is an IRD asset, but does not avoid probate.

Question 42

With regard to the required income distribution of the various types of marital trust, which of the following trusts permit accumulation of income? A QTIP Trust. A TPP Trust. A Power of Appointment Trust (GPOA). An Estate Trust.

Answer 42

The correct answer is D. Both the GPOA Trust and Q-Tip Trust require distribution of income at least annually to the spouse. A TPP Trust holds tangible personalty. A special type of power of appointment trust, called an estate trust, grants the surviving spouse a testamentary general power of appointment over the trust assets. Only the Estate Trust permits income accumulation.

Question 43

In a QPRT the following is true:

Answer 43

QPRTs can hold only one residence. You may own 2 QPRTs. The donor retains all tax advantages.

Question 44

AVD

Answer 44

The alternate valuation date is utilized to save on estate taxes. Most assets can utilize the AVD, with the exception of "wasting assets" and assets sold during the estate administration. "Wasting assets" are any assets that naturally will decline in value as time passes. Copyrights become less valuable as they come closer to their expiration. Annuitized annuities will decline due to payouts. These “wasting assets” cannot use the AVD, they must use Date of Death value. Any assets sold between DOD and AVD will use the sale price.

Question 45

Which of the following is not a prerequisite for gift splitting? Both spouses must be U.S. citizens or resident aliens when the gift is made. Donors must be married at the time the gift is completed. Two gift tax returns must be filed if gifts are split. Each spouse must signify their consent in writing on the gift tax form (709).

Answer 45

The correct answer is C. All are prerequisites of gift-splitting, but only one gift tax return is required either where neither party or only one party exceeds the annual exclusion as determined after the gift splitting.

Question 46

At the age of 45, Steven died in a car accident, leaving behind a wife and three young children. Which of the following assets would be included in Steven’s gross estate at the full date of death value?

Answer 46

A Uniform Gifts to Minors Account established four years ago for Steven’s 12-year-old son. Steven was the custodian of the account at the time of his death. The value of an UGMA account is included in the custodian’s gross estate if the custodian is the legal guardian of the child and dies before the child takes control of the account (which occurs at the age of majority). If the child had died, the child would include the UGMA in his/her own gross estate. However, in this scenario, the child is still alive.

Question 47

Which of the following apply to gifts to a 2503(c) trust?

Answer 47

The annual income is usually taxed to the trust. Unexpended principal and income must be payable to the beneficiary at the attainment of age 21. Crummey powers are found in irrevocable life insurance trusts. The purpose of the 2503(c) trust is to reduce income tax to the grantor by naming a minor beneficiary.

Question 48

Which of the following describe accurately the meaning of the terms "tax inclusive" and "tax exclusive"?

Answer 48

Estate tax payments include tax on the tax payment, while gift tax payments do not. Estate tax payments include tax on the tax payment, while gift tax payments do not.

Question 49

This estate planning tool is created and managed by a qualified charity to provide a variable income stream (based on portfolio performance) to non-charitable beneficiaries.

Answer 49

A charitable pooled income fund. The question describes a charitable pooled income fund which operates similarly to a mutual fund.

Question 50

Suzanne York has a personal residence that she wants to pass to her children upon her death. Rather than waiting, she gives the children the home with the stipulation that she can continue to live in the home for the rest of her life. What best describes the transaction to the children?

Answer 50

She has made a gift with a remainder interest. Reversionary interest would have the home ownership returning to her. A life interest would be a controlling interest for life, and term interest would be a limited time.