Estate Planning Flashcards
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.
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.
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.
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.
Which of the following are characteristics of a private annuity?
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.
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.
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.
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?
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.
TBE can be terminated in which ways?
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.
Jose created a joint bank account for himself and his friend, Amparo. At what earliest point has a gift been made to Amparo?
A completed gift does not occur until the donee withdraws money from the account for her own benefit.
What is a reversionary interest
A reversionary interest is one that reverts back to the donor after some time or event.
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).
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.
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.
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.
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.
II, III and IV only.
Fee simple ownership is included in probate and is not presumed in community property states.
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?
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.
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.
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.
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?
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.
Under what circumstances would property be subject to ancillary probate?
If the decedent is a resident of one state and owns real property in another state
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.
$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.
A nuncupative will.
This is an oral expression of testamentary intentions restricted to tangible personalty
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.
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.
A person or entity entitled to act on behalf of another is known as:
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.
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.
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.
