Estate Planning

Question 1

Olivia is married and owns and manages several rental properties. She is concerned that if she became incapacitated, the properties would not be properly managed and her tenants would be upset. Of the following arrangements, which one could fulfill Olivia’s desire to plan for the management of her rental properties in the case of her unanticipated physical or mental incapacity?

a) A durable power of attorney.
b) Owning the property as joint tenancy.
c) Owning the property as tenancy by the entirety.
d) All of the above.

Answer 1

d) All of the above.
- Any of the methods can be used to plan for asset management in the case of incapacity. A durable power of attorney would give the power holder the ability to manage the property if Olivia becomes incapacitated. If the property is owned joint tenancy or tenancy by the entirety, the joint tenant could manage the property in the event of Olivia’s incapacity.

Question 2

Which of the following types of ownership are only held by married couples?

1. JTWROS.
2. Tenancy in common.
3. Tenancy by the entirety.
4. Tenants by marriage.

a) 1 only.
b) 3 only.
c) 1, 2, and 4.
d) 1, 2, 3, and 4.

Answer 2

b) 3 only.
- Of the property types listed, only tenancy by the entirety is an ownership form exclusive to married couples. Tenants by marriage is not a form of property ownership.

Question 3

Christina and Preston have lived in Arizona since their marriage. Christina received an inheritance from her father during their marriage. Christina and Preston are moving to Massachusetts for a new job and have some questions regarding their move to a common law (separate property) state from a community property state. Of the following statements, which is true?

a) When a couple moves from a community property state to a common law (separate property) state, separate property will generally remain separate property.
b) When a couple moves from a common law (separate property) state to a community property state, separate property will generally become community property.
c) Community property avoids probate at the death of the first spouse and automatically passes to the surviving spouse by operation of law.
d) To get the step-to fair market value in basis at the death of the first spouse, a couple who lives in a common law (separate property) state can elect to treat their separate property as community property

Answer 3

a) When a couple moves from a community property state to a common law (separate property) state, separate property will generally remain separate property.
- Answer A is the only correct statement. When a couple moves from a community property state to a common law (separate property) state, separate property will generally remain separate property. Answer B is incorrect because separate property does not generally become community property when a married couple moves from a common law state to a community property state. Answer C is incorrect because community property may be disposed of by will and does not automatically pass to the surviving spouse by operation of law. Finally, answer D is incorrect because couples living in common law states cannot elect community property treatment at the death of the first spouse in order to get a step-up in basis.

Question 4

Meredith has owned 100% of the stock of Meredith’s Medical Supplies, a corporation, for 22 years. In the current year, she gifted 50% of the business to her daughter, Izzie, who lives in California. Izzie does not work at the business and reinvests any income in the company. With respect to the transfer of the business interest, which of the following statements is/are true?

a) Izzie’s 50% interest in Meredith’s Medical Supplies is community property, owned equally by Izzie and her husband.
b) If Izzie’s husband dies tomorrow, both his share of Meredith’s Medical Supplies and Izzie’s share of Meredith’s Medical Supplies would receive a step-to fair market value in basis.
c) Izzie owns 50% of Meredith’s Medical Supplies outright, and the interest will not be considered com-munity property.
d) If Izzie dies tomorrow, the executor of her estate would include 25% of the value of Meredith’s Medical Supplies in her gross estate

Answer 4

c) Izzie owns 50% of Meredith’s Medical Supplies outright, and the interest will not be considered community property.
- Answer C is correct because gifted property is generally considered separate property. Answer A is incorrect because gifted property is generally considered separate property unless Izzie elected to treat the property as community property, or commingled the assets. In this case, Izzie does not commingle the assets and the problem does not mention that she elected community property status over the assets. Answer B is incorrect because Izzie’s interest in Meredith’s Medical Supplies will not be included in her husband’s gross estate. Separate property is only included in the gross estate of the separate property owner. Because the interest is not in her husband’s gross estate, it does not receive a step-to fair market value. Answer D is incorrect because if Izzie dies tomorrow she must include 100% of the value of all of her assets owned as separate property (thus 50% of Meredith’s Medical Supplies).

Question 5

In 2014, brothers Darryl and Larry, agree to purchase real property and title it as joint tenancy with right of survivorship. At the time of the purchase, Darryl did not have any cash, so Larry paid the $50,000 purchase price himself. Over the next five years, Darryl and Larry allocated the income and expenses of the property equally, and luckily for them the value of the property increased to $350,000. In 2019, Larry dies, how much will his executor include in his federal gross estate as the value of this real property?

a) $50,000.
b) $175,000.
c) $300,000.
d) $350,000

Answer 5

d) $350,000
- The contribution rule applies to property owned as a joint tenancy with right of survivorship. Because Darryl did not contribute any amount towards the original purchase price of the property, Larry’s executor must include the full fair market value of the property in Larry’s gross estate for federal estate tax purposes.

Question 6

In 2014, Ray and Debra, having been married for 3 years, agree to purchase some real property and title it joint tenancy with right of survivorship. At the time of the purchase, Debra did not have any cash, so Ray paid the $50,000 purchase price himself. Over the next five years, Ray and Debra allocated the income and expenses of the property equally, and luckily for them the value of the property increased to $350,000. In 2019 Ray dies, how much will his executor include in his federal gross estate as the value of this real property?

a) $50,000.
b) $175,000.
c) $300,000.
d) $350,000

Answer 6

b) $175,000.
- When a married couple owns property joint tenancy with right of survivorship, there is an automatic assumption that each spouse contributed 50% to the original purchase price. In this case, the contribution rule will deem that each would include 50% of the value of the property in the decedent’s federal gross estate. At Ray’s death, his executor will include 50% of the value of the property or $175,000 (50% x $350,000) in Ray’s federal gross estate.

Question 7

Carol’s executor has located all of her property. Given the following list, what is the total value of Carol’s probate estate?
Life Insurance Face $1,000,000 Beneficiary is James, Carol’s son
401(k) Balance $350,000 Beneficiary is Carla, Carol’s Daughter
Vacation Home Value $460,000 Titled Tenancy by Entirety with Jim
Automobile Value $24,000 Owned by Carol
a) $24,000.
b) $484,000.
c) $834,000.
d) $1,024,000.

Answer 7

a) $24,000.
- Only the automobile, valued at $24,000, would be included in Carol’s probate estate. Because Carol has a named beneficiary, the life insurance and the 401(k) will transfer per contract law to the listed beneficiaries. The property owned tenancy by the entirety will transfer automatically, per the state law, to Carol’s husband Jim.

Question 8

Crystal loans Holly $650,000, so that Holly can buy a home. Holly signs a note, with a term of 5 years, promising to repay the loan. The home is the collateral, but because Crystal and Holly have been friends since childhood, Crystal does not charge Holly interest. Of the following statements which is true?

1. The imputed interest is considered a taxable gift from Crystal to Holly.
2. The imputed interest is taxable income on Crystal’s income tax return.
3. The imputed interest is an interest expense deduction for Crystal.
4. Holly can deduct the imputed interest on her income tax return.

a) 2 only.
b) 2 and 4.
c) 1, 2, and 4.
d) 1, 2, 3, and 4.

Answer 8

c) 1, 2, and 4.
- The loan is greater than $100,000 and does not meet any of the exceptions to imputing interest. Crystal will have imputed interest income based on the applicable federal rate and the imputed interest will also be considered a taxable gift to Holly. Because the loan is secured by Holly’s personal residence, Holly will also have an itemized deduction equal to the imputed interest. Crystal does not have an interest expense.

Question 9

Timothy made the following transfers to his only daughter during the year:
1. A bond portfolio with an adjusted basis of $130,000 and a fair market value of $140,000.
2. 2,000 shares of RCM Corporation stock with an adjusted basis of $126,000 and a fair market value of $343,000.
3. An auto with an adjusted basis of $15,000 and a fair market value of $9,000.
4. An interest-free loan of $2,000 for a personal computer on January 1st. The applicable federal rate for the tax year was 8%.
What is the value of Timothy’s gross gifts for this year?
a) $271,000.
b) $492,000.
c) $494,000.
d) $498,000

Answer 9

b) $492,000.
- The total of gross gifts is the fair market value of all gifted property before any deductions for gift splitting, the marital deduction, or the annual exclusion. Because the loan in Statement 4 is less than $10,000, it meets one of the exceptions of the imputed interest rules. The fact that the basis in Statement 3 is higher than the FMV is ignored for purposes of calculating the total gross gifts. The double-basis rule will apply to the donee in a subsequent sale. $140,000 + $343,000 + $9,000 = $492,000

Question 10

Celeste and Raymond have been married for 29 years. Last year, Raymond sold his extremely successful automotive repair shop and his net worth now exceeds $10 million dollars. Celeste and Raymond have twin daughters, Kelly and Shelly, who will be 35 next month. Celeste and Raymond, neither of whom have given any gifts in the past, would like to give their daughters the maximum amount of cash possible without paying any gift tax. How much can Celeste and Raymond each give to Kelly and Shelly this year?

a) $15,000.
b) $30,000.
c) $11,430,000.
d) $22,860,000.

Answer 10

c) $11,430,000.
$15,000 (for 2019) per child (annual exclusion)
$11,400,000 (for 2019) per parent (applicable gift tax exemption)
Total that can be gifted per parent without paying gift tax = $11,430,000

Question 11

While completing Joelle’s tax returns, Joelle’s CPA asked her if she made any gifts during the year. Joelle faxed her the following information. Of the following, which would not require the filing of a gift tax return?

a) Joelle created a revocable trust under the terms of which her son is the income beneficiary for his life and her grandson is the remainder beneficiary. Joelle created the trust with a $6,000,000 contribution and the trust made an income distribution in the current year.
b) Joelle opened a joint checking account in the name of herself and her sister with $75,000. The day after Joelle opened the account, her sister withdrew $35,000 to purchase a car.
c) Joelle created an irrevocable trust giving a life estate to her husband and a remainder interest to her daughter. Joelle created the trust with a $1,000,000 contribution.
d) Joelle gave her husband one-half of an inheritance she received from her uncle. The inheritance was $3,000,000

Answer 11

d) Joelle gave her husband one-half of an inheritance she received from her uncle. The inheritance was $3,000,000
- The transfer in Answer D would qualify for the unlimited marital deduction, so it is not a taxable gift and Joelle would not have to file a gift tax return. All of the other transfers would create taxable transfers and would require a gift tax return to be filed. The transfer in Answer a to a revocable trust would still be subject to gift tax reporting because the trust has current beneficiaries, as Joelle’s son received an income distribution in the current year.

Question 12

Donna and Daniel have lived in Louisiana, a community property state, their entire marriage. Currently, their combined net worth is $4,000,000 and all of their assets are community property. After meeting with their financial advisor, Donna and Daniel begin a plan of lifetime gifting to reduce their gross estates. During this year, they made the following cash gifts: 
Son $80,000 
Daughter $160,000 
Republican National Committee $75,000 
Granddaughter $15,000
What is the amount of the taxable gifts to be reported by Donna? 
a) $59,000. 
b) $90,000. 
c) $196,000. 
d) $255,000

Answer 12

b) $90,000.
- Because the assets are community property, the gifts are deemed to be made 50% by each spouse. Gift splitting is not an issue. The cash payment to the Republican National Committee is not a gift for gift tax purposes
- Donna can exclude up to $15,000 for the non-Republican national Committee gifts

Question 13

Charles had been working with an estate planner for several years prior to his death. Accordingly, Charles made many transfers during his life in an attempt to reduce his potential estate tax burden, and Charles’ executor, Tom, is thoroughly confused. Tom comes to you for clarification of which assets to include in Charles’ gross estate. Which of the following transactions will not be included in Charles’ gross estate?

a) Charles gave $40,000 to each of his three grandchildren two years ago. No gift tax was due on the gifts.
b) Charles purchased a life insurance policy on his life with a face value of $300,000. Charles transferred the policy to his son two years ago.
c) Charles and his wife owned their personal residence valued at $250,000 as tenants by the entirety.
d) After inheriting a mountain vacation home from his mother, Charles gifted the vacation home to his daughter to remove it from his gross estate. Charles continued to use the property as a weekend getaway and continued all maintenance on the property.

Answer 13

a) Charles gave $40,000 to each of his three grandchildren two years ago. No gift tax was due on the gifts.
- The $40,000 gifts to his grandchildren are excluded from his gross estate because only gifts of life insurance within three years and any gift tax paid on a gift within three years are included in a transferor’s gross estate. The life insurance policy included in Answer B is included in the Charles’ gross estate because transfers of life insurance within three years of death are included in the decedent’s gross estate. Any property owned at the decedent’s date of death, as in Answer C, is included in the decedent’s gross estate. (Do not confuse gross estate inclusion with probate inclusion.) Even though Charles gave the mountain home in Answer D to his daughter, and the value of the property generally would not be included in Charles’ gross estate, the fact that Charles continued to utilize the property each weekend and maintained the property would cause inclusion in his gross estate.

Question 14

Before her death, Alice loaned Jerry $400,000 in return for a note. The terms of the note directed Jerry to make monthly payments including interest at the applicable federal rate. If Alice dies before the note is repaid, which of the following affects the valuation for Alice’s gross estate?

1. Jerry’s inability to make payments timely.
2. The market rate of interest.
3. The remaining term of the note.
4. Alice forgives the note as a specific bequest in her will.
   a) 1 only.
   b) 1 and 2.
   c) 1, 2, and 3.
   d) 2, 3, and 4.

Answer 14

c) 1, 2, and 3.
- If Alice dies before Jerry repays the note, the note is included in Alice’s gross estate at the fair market value of the note plus any accrued interest due at Alice’s date of death. This fair market value is affected by the interest rate, maturity date, and Jerry’s ability to make the note payments, but not by Alice’s forgiveness of the note in her will. The forgiveness of the note is deemed a specific bequest and the fair market value of the note is still included in Alice’s gross estate.

Question 15

During the year, Johnson created a trust for the benefit of his six 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 15 years and the trust does not include a Crummey provision. If Johnson transfers $72,000 to the trust during the year, what is his total taxable gifts for the year?

a) $0.
b) $12,000.
c) $60,000.
d) $72,000.

Answer 15

d) $72,000.
- Because the trust does not include a Crummey provision, the transfer to the trust is a gift of a future interest not available to be offset by the annual exclusion. As such, the entire transfer to the trust for the year is subject to gift tax.

Question 16

Harry, age 60, owns 400 shares of ABC Corporation, which he expects to increase 300% over the next four years. Harry eventually wants to transfer the stock in ABC Corporation to his son, Billy, but Billy is currently incapable of managing the stock or the income from the stock. Harry expects Billy to be responsible in five years. Of the following, which transfer method would work best to remove the expected appreciation of the stock from Harry’s gross estate and protect the property for Billy?

a) Private annuity.
b) SCIN.
c) GRAT.
d) QPRT.

Answer 16

c) GRAT.
- The GRAT with a term of five or more years will allow Harry to transfer the stock to Billy at a gift tax cost equal to the current fair market value of the stock (before the 300% appreciation) less the sum of the annuity payments that will be paid back to Harry. This transfer method is not as ideal as a direct gift of the property because the annuity payments will return to Harry and will be included in his gross estate. Also, if Harry dies during the term of the GRAT, the full fair market value of the stock, at Harry’s date of death, will be included in Harry’s gross estate. Neither a private annuity nor a sale will meet Harry’s goals because both give Billy access to the stock immediately. A QPRT is also not an option because a QPRT is a special GRAT which transfers a personal residence

Question 17

Dave transferred $1,500,000 to a GRAT naming his two children as the remainder beneficiaries while retaining an annuity valued at $500,000. If this is the only transfer Dave made during the year, what is Dave’s total taxable gift for the year?

a) $0.
b) $974,000.
c) $1,000,000.
d) $1,474,000

Answer 17

c) $1,000,000.
- The remainder interest is a taxable gift from Dave to his children equal to the value of the property contributed to the GRAT less the value of the annuity retained, $1,500,000-$500,000 = $1,000,000. Because the remainder interest is a gift of a future interest it is not eligible for the annual exclusion.

Question 18

A trustee is subject to which of the following?

a) Prudent Man Rule.
b) Trustee’s Ethical Code.
c) Uniform Trustee Provisions.
d) Fiduciary Responsibilities Doctrine.

Answer 18

a) Prudent Man Rule.
- A trust fiduciary must follow the Prudent Man Rule demonstrating a duty of loyalty and duty of care on behalf of the trust’s beneficiaries. The Prudent Man Rule specifically states that the trustee, as fiduciary, must act in the same manner that a prudent person would act if the prudent person was acting for his own benefit after considering all of the facts and circumstances surrounding the decision. None of the other options are existing codes, provisions, or doctrines.

Question 19

Which of the following situations would not cause the inclusion of an irrevocable trust in a grantor’s gross estate?

a) The grantor has retained the right to receive the income from the irrevocable trust.
b) The grantor has retained the right to use the assets contributed to the irrevocable trust for the remainder of his life.
c) The grantor retains an annuity from the irrevocable trust for a term of years less than his life expectancy.
d) The grantor retains the right to revoke the trust.

Answer 19

c) The grantor retains an annuity from the irrevocable trust for a term of years less than his life expectancy
- If the grantor retains an annuity from an irrevocable trust, this right alone will not cause the inclusion of the irrevocable trust in his gross estate. A GRAT is an irrevocable trust in which the grantor retains an annuity from the trust. If the grantor outlives the trust, the assets of the irrevocable trust will not be included in his gross estate. All of the other situations would cause the inclusion of an irrevocable transfer in a grantor’s gross estate.

Question 20

Stephanie contributed $450,000 to a revocable living trust 8 years ago. She named herself as the income beneficiary and her only son as the remainder beneficiary. The term of the trust was equal to Stephanie’s life expectancy. Stephanie died this year, when the fair market value of the trust’s assets is $2,000,000. How much is included in Stephanie’s probate estate related to the revocable living trust?

a) $0.
b) $345,800.
c) $450,000.
d) $2,000,000.

Answer 20

a) $0.
- The question asks for the amount included in Stephanie’s probate estate. Because a revocable living trust transfers assets per the trust document, $0 of the value of the trust is included in Stephanie’s probate estate. Remember, however, that the full value of a revocable living trust is included in a decedent’s gross estate.

Question 21

Justin’s grandfather contributed $350,000 to a simple irrevocable trust naming Justin as the income beneficiary and his brother, Ryan, as the remainder beneficiary. At the time of the transfer Justin’s grandfather paid $12,000 of gift tax. This year, the trust generated $14,000 of taxable dividend income and $3,000 of capital gains. What amount of taxable income will Justin include on his federal Form 1040 from this trust this year?

a) $0.
b) $12,000.
c) $14,000.
d) $17,000

Answer 21

c) $14,000.
- Since Justin is the income beneficiary of a simple irrevocable trust, he is taxed on the current year income of the trust. This year, Justin will include $14,000 on his federal Form 1040. Justin is not taxed on the capital gains unless they are distributed to him

Question 22

Of the following statements regarding an Irrevocable Life Insurance Trust (ILIT), which of the following is true? a) A contribution to an ILIT that includes a Crummey power is eligible for the gift tax annual exclusion.

b) Contributions to an ILIT are not taxable gifts until the insured dies and the transfer is deemed complete.
c) ILITs are designed so the insured retains ownership of the life insurance policy.
d) The grantor of an ILIT is deemed the owner of the life insurance policy to the extent he remains the insured of the life insurance policy.

Answer 22

a) A contribution to an ILIT that includes a Crummey power is eligible for the gift tax annual exclusion.
- Answer A is a correct statement. Answer B is incorrect as contributions to an ILIT are taxable gifts, and are not eligible for the annual exclusion without a Crummey provision. Answer C is incorrect because an ILIT is designed to prevent an insured party from having ownership of the life insurance policy on his life. Answer D is an incorrect statement

Question 23

Which of the following is not a correct statement regarding a power of appointment trust?

a) The trust will qualify for the unlimited marital deduction if the surviving spouse is given a general power of appointment over the trust’s assets.
b) Powers of appointment trusts are irrevocable trusts that can be created either during lifetime or at death.
c) A general power of appointment trust qualifies the grantor’s contributions for the gift tax annual exclusion if the beneficiary is allowed to take withdrawals at his discretion.
d) A special power of appointment trust that limits the surviving spouse’s right to an ascertainable standard qualifies the trust for the unlimited marital deduction

Answer 23

d) A special power of appointment trust that limits the surviving spouse’s right to an ascertainable standard qualifies the trust for the unlimited marital deduction
- A special power of appointment trust that limits the surviving spouse’s right to an ascertainable standard (health, education, maintenance and support) does not qualify the trust for the unlimited marital deduction. All of the other statements are true statements regarding power of appointment trusts.

Question 24

Chris donated one of his original creation paintings to his alma mater, Backwoods University. His adjusted basis in the artwork was $400 and the fair market value was $150. Chris also contributed 100 shares of XYZ corporation that had an adjusted basis of $50 and a fair market value equal to $1,000 (held long-term). Ignoring the AGI limitations, what is the maximum amount Chris can deduct in relation to these donations?

a) $200.
b) $1,150.
c) $1,300.
d) $1,400.

Answer 24

b) $1,150.
- The painting has a fair market value less than its adjusted basis, and is considered ordinary income property. When the fair market value is less than the adjusted basis, a contribution of ordinary income property is limited to the fair market value ($150). Because Chris created the painting, we do not have to worry about the related-use test. The contribution of stock is a contribution of capital gain property and the deductible amount is equal to the fair market value of the stock ($1,000). The total of both items, and the deduction for the year, equals $1,150.

Question 25

Denis sold a parcel of land to a qualified charitable organization for $10,000. The parcel of land had a fair market value of $100,000 and an adjusted basis of $50,000. What taxable gain must Denis recognize at the time of the contribution? a) $0. b) $5,000. c) $50,000. d) $90,000.

Answer 25

c) $50,000. - Because Denis sold the property at 10% ($10,000 / $100,000) of its fair market value, 10% of its adjusted basis offsets the sales proceeds. The capital gain is $5,000, ($10,000 - $5,000) = $5,000.

Question 26

Four years ago, Walter created a charitable remainder trust with himself as the income beneficiary and a charity as the remainder beneficiary. In the current year, Walter would like to make an additional contribution to the trust. Which of the following charitable trusts would allow Walter to make an additional contribution during the year? a) CRAT. b) CRUT. c) CRET. d) CRIT.

Answer 26

b) CRUT. - Only a CRUT allows additional contributions. A CRAT does not allow additional contributions. A CRET and CRIT do not exist.

Question 27

Janice died in 2019. She had been married to Thomas for 17 years, and the two had amassed a community property estate of $26,420,000. Janice’s will directs three specific bequests to her mother, brother, and father of $380,000, $355,000, and $130,000, respectively and creates a bypass trust to receive property equal to any remaining applicable estate tax credit available after her specific bequests. The bypass trust gives Thomas the right to income for his life and the remainder of the trust to her two sons and leaves the residual of the estate to Thomas. Janice’s will directs the residual to be used to pay the estate taxes. What is the marital deduction on Janice’s federal estate tax return? a) $11,400,000. b) $15,865,000. c) $1,810,000. d) $3,365,000.

Answer 27

c) $1,810,000. - Since Janice and Thomas own the property as community property, each is deemed to own 1/2 of the property. In this case, Janice would include $13,210,000 in her federal gross estate. The three specific bequests totaling $865,000 are directed to nonspouse beneficiaries and are taxable transfers which will utilize the applicable estate exemption. The bypass trust will receive $10,535,000 ($11,400,000-$865,000), an amount necessary to utilize any remaining available applicable estate exemption, and will not qualify for the marital deduction. Thomas will receive the residual, which will be eligible for the marital deduction. No estate tax will be due because only an amount equal to the applicable estate exemption transfers outside of the marital deduction. The marital deduction on Janice’s estate tax return is $1,810,000 - the gross estate of $13,210,000 reduced by the specific bequests of $865,000 and the amount transferred to the bypass trust ($10,535,000).

Question 28

Louie gave a $1,000,000 life insurance policy on his own life to his brother. At the date of the gift, the life insurance policy was valued at $200,000. Of the following statements regarding the gift of this life insurance policy, which is correct? a) If Louie dies two years after this gift, his federal gross estate will include $200,000. b) If Louie dies four years after this gift, his federal gross estate will include $200,000. c) If Louie dies two years after this gift, his federal gross estate will include $1,000,000. d) If Louie dies four years after this gift, his federal gross estate will include $1,000,000.

Answer 28

c) If Louie dies two years after this gift, his federal gross estate will include $1,000,000. - The three-year rule (IRC Section 2035) states that if an individual gratuitously transfers ownership of a life insurance policy on his life, or any incident of ownership in a policy on his life within three years of death, the death benefit of the policy is included in his federal gross estate. In this case, only answer C provides the correct solution. If Louie dies two years after the gift, the gratuitous transfer of the policy falls within the three-year rule and the death benefit is included in Louie’s federal gross estate. All of the other answers are incorrect.

Question 29

Jim purchased a yacht from Ronald for $200,000 seven years ago. The terms of the sale included a note of $50,000 and cash for the remaining amount. Ronald had a zero basis in the yacht. Immediately after purchasing the yacht, Jim’s business began to fail and Jim could not make the payments. In exchange for the note, Jim gave Ronald a life insurance policy on his life with a face value of $50,000. This year, Jim died and Ronald received the death benefit as designated beneficiary of the policy. How much of this death bene-fit is taxable to Ronald? a) $0. b) $50,000. c) $150,000. d) $200,000.

Answer 29

b) $50,000. - The transfer of the life insurance policy for the note is a transfer for valuable consideration. If a life insurance policy is transferred for valuable consideration, the death benefit in excess of the transferee’s adjusted basis will be subject to income tax. Ronald did not have any basis in the boat, so correspondingly, he does not have any basis in the note, and must recognize gain to the extent any value is received. As such, the $50,000 death benefit received is taxable income to Ronald.

Question 30

Pamela’s dad, Tim, died on August 10 of this year. Six years ago, Tim had gifted ownership of a paid-up $1,000,000 whole life insurance policy on his life with a replacement value of $150,000 and an adjusted basis of $100,000 to Pamela. If Pamela, as designated beneficiary, receives the death benefit of the life insurance policy this year, how much will be taxable to her? a) $0. b) $50,000. c) $100,000. d) $1,000,000

Answer 30

a) $0. - A gift of a life insurance policy is not a transfer for valuable consideration, and as such the death benefit, payable by reason of Tim’s death, is not included in Pamela’s taxable income

Question 31

Josh was a majority owner in a closely held business. He had an adjusted basis in his interest of $400,000, and at his death this year, the fair market value reported on his estate tax return was $6,000,000. Like most majority owner’s in closely held businesses, Josh did not have much liquidity in his estate and his executor was forced to redeem some of his interest in the business. If Josh’s executor redeemed 30% of Josh’s interest for $2,500,000 to pay the estate tax and administration fees, how much is subject to capital gains tax? a) $0. b) $700,000. c) $2,100,000. d) $2,500,000

Answer 31

b) $700,000. - Josh’s estate would have an adjusted basis in the 30% interest equal to 30% of the fair market value at Josh’s date of death, or $1,800,000. If the executor of Josh’s estate sold the interest for $2,500,000, the gain of $700,000 ($2,500,000 - $1,800,000) would be subject to capital gains tax under Section 303 (only available at the death of the owner). Ordinarily, unless a redemption is a complete redemption, the redemption is treated as a dividend.

Question 32

Byron, age 65, gave $30,000 each to his son, his daughter, his 6-year-old niece, his 21-year-old female neighbor, and his wife. Which of the transfers would be subject to GSTT? a) The transfer to his wife. b) The transfer to his neighbor. c) The transfer to his niece and the neighbor. d) The transfer to his niece, his neighbor, and his daughter.

Answer 32

b) The transfer to his neighbor. - Only the transfer to his neighbor would be subject to GSTT. If the transferee is a stranger who is more than 37.5 years younger than the transferor, the transfer is subject to GSTT. All of the other transfers are transfers to relatives within one generation. A niece is only one generation below.

Question 33

An employee retired under a defined benefit retirement plan at the end of 20x3. Her highest consecutive annual salaries were $90,000, $100,000, and $110,000, respectively, in 20x1, 20x2, and 20x3. What is the maximum annual benefit that could have been paid to her under the plan? a) $30,000 b) $90,000 c) $100,000 d) $220,000 e) There is no limit on benefits under a defined benefit plan.

Answer 33

c) $100,000 - The maximum benefit under a defined benefit plan cannot exceed the average of the 3 highest consecutive earnings years within the limit of covered compensation.

Question 34

Which combination of the following statements is correct about a 401(k)? 1. The employee must have a choice of receiving an employer contribution in cash or having it deferred under the plan. 2. Section 401(k) states that during the first year of participation in a qualified CODA, the vested benefit derived from employee contributions can be forfeited if the employee is terminated. 3. As a condition of participation, the plan requires that an employee complete at least three years of service with the employer. 4. In addition to an indexed limitation for any taxable year on exclusions for elective deferrals, the law caps the amount of pay that can be taken into consideration for qualified plans. a) (1), (2) and (3) only b) (2) and (4) only c) (1) and (4) only d) (1), (2), (3) and (4) e) (2), (3) and (4) only

Answer 34

c) (1) and (4) only | - Statement #1 is correct. Statement #4 is correct; the 2019 limit for covered compensation is $280,000.

Question 35

According to ERISA, which of the following is/are required to be distributed automatically to defined benefit plan participants or beneficiaries? 1. Annual accrued benefit as of the end of the previous year 2. The plans summary annual report 3. A detailed descriptive list of investments in the plan’s fund 4. Terminating employee’s benefit statement a) (1), (2) and (3) only b) (1) and (2) only c) (2) and (4) only d) (4) only e) (1), (2), (3) and (4)

Answer 35

c) (2) and (4) only - The plan’s summary annual report (Statement #2) must be distributed, and a benefit statement for terminated employees (Statement #4) must be distributed. Statements #1 and #3 are false.

Question 36

Patricia Wilson’s business is having its first anniversary. The business has been able to secure several profitable contracts, which has allowed Pat to hire two full-time assistants. Pat utilized independent contractors for other services. Pat would like to plan for her future security. She also wants to set up benefits for her two assistants but on a contributory basis. She is, however, concerned about having enough cash flow for the continued growth of the company, unforeseen business obstacles, and the increase in her personal income taxes. Which of the following is/are also (an) appropriate reason(s) to recommend the establishment of a retirement plan for Pat’s company given the objectives and circumstances described? 1. A pension plan would allow Pat to save for her own retirement. 2. The tax savings from the pension plan contributions would help to offset the cost of this employee benefit. 3. A retirement plan would give the appearance of business stability and would be an asset in the securing of business loans to meet growth and cash flow needs. a) (1) only b) (2) only c) (1) and (3) only d) (1) and (2) only e) (1), (2) and (3)

Answer 36

d) (1) and (2) only - Statement #1 is an appropriate reason because it satisfies one of her objectives. Statement #2 is also appropriate because lowering the tax of the participant is generally beneficial and appropriate. Statement #3 is not appropriate because one should not use a retirement plan for the purpose of appearance.

Question 37

Joe is considering taking a position with a new employer at a salary of $150,000. His salary would make him a highly compensated employee in the new company. His previous employer, where he also earned $150,000, has been making the maximum allowed contributions to a money purchase plan. The new company has a 401(k) plan. Joe wishes to continue the highest possible level of pretax deferred savings for retirement. Identify all of the options available to Joe through the new employer’s 401(k) plan. 1. Have salary deferrals made in his new 401(k) plan equal to the amounts his previous employer contributed to his profit sharing plan. 2. Take advantage of employer matching in the 401(k) plan, if available. 3. Have the employer make qualified non-elective contributions to his account, if available. 4. Contribute the maximum allowable through salary deferral. a) (1) and (2) only b) (1), (2) and (3) only c) (2) and (4) only d) (2), (3) and (4) only e) (3) and (4) only

Answer 37

c) (2) and (4) only - Statement #1 is false; the limit on 401(k) plans is $19,000 (2019), and his former employer was contributing approximately $30,000. Statement #2 is true. Statement #3 is false; this technique is used to increase amounts to nonhighly compensated employees to meet the ACP test. Statement #4 is true.

Question 38

Jack Jones, age 40, earning $100,000 a year, wants to establish a defined contribution plan. He employs four people whose combined salaries are $60,000 and who range in age from 23 to 30. The average employment period is 31⁄2 years. Which vesting schedule is best suited for Jack’s plan? a) 3-year cliff vesting b) 3-to-7-year graded vesting c) 5-year cliff vesting d) immediate vesting e) 2-to-6-year graded vesting

Answer 38

e) 2-to-6-year graded vesting - This is a top-heavy plan as evidenced by the salary of Jack in comparison to other employees. The choices for vesting schedules in a top-heavy plan are (a) immediate, (b) 3-year cliff, and (c) 2-to-6-year graded. Due to the average length of employment, the most suitable vesting schedule from Jack’s point of view (cash flow if termination occurs and forfeiture) is the graded vesting schedule. Options B and C would be unavailable to Jack.

Question 39

Many employers are now making flexible spending accounts (FSAs) available to employees. Which of the following statements concerning the nature of these accounts is incorrect? a) The balance in an employees FSA can be carried forward or exchanged for cash if unused for expenses incurred. b) An FSA is technically a cafeteria plan that can be used by itself or as part of a broader cafeteria plan. c) A separate FSA salary reduction must be made for each type of eligible benefit. d) A salary reduction for an FSA will lower an employee’s income for Social Security tax purposes if the employee earns less than the Social Security wage base

Answer 39

a) The balance in an employees FSA can be carried forward or exchanged for cash if unused for expenses incurred. - Option A is incorrect. Contributions to a FSA that are not used during that year will expire after the end of the year. Because of the consequences of forfeiture of unused benefits, FSAs are often referred to as “Use It or Lose It” accounts. However, after 2012, the IRS permits FSA funds to be used in the “grace period,” which must not extend beyond the 15th day of the third calendar month after year-end.

Question 40

The maximum retirement benefit a participant in a target-benefit plan can actually receive depends on the: a) Initial actuarial computation according to the plan’s formula. b) Amount of contributions determined in reference to the targeted benefit. c) Maximum annual additional amounts. d) Value of the participant’s account at retirement.

Answer 40

d) Value of the participant’s account at retirement. - Maximum retirement benefits from all defined contribution plans is dependent on the value of the participant’s account at retirement. A target benefit plan is both a pension plan and a defined contribution plan.

Question 41

Which of the following statements is/are characteristics of tax-sheltered annuities (TSAs)? 1. Salary reduction contributions are not reported as W-2 income and are not subject to Social Security tax. 2. Maximum salary deferral limit is $19,000 for a newly hired employee. 3. Employer contributions are deductible. 4. Loans and “catch-up” contributions may be permitted. a) (4) only b) (1) and (3) only c) (2) and (4) only d) (1), (2), and (3) only e) (1), (2), (3) and (4)

Answer 41

c) (2) and (4) only - TSAs are for nonprofit, nontaxed entities. Statement #1 is wrong because salary reduction contributions are subject to Social Security tax. Statement #2 is correct for newly hired employees. Employees who are eligible for the catch-up provisions may defer more. Statement #3 is incorrect since 501(c)(3) organizations are nontaxable entities and, therefore, do not have any deductions. Statement #4 is correct. The best answer is C.

Question 42

Transport Inc. sponsors a qualified plan that requires employees to complete the standard eligibility requirement before entering the plan. The plan also excludes all other employees as permitted under the code. Which of the following employees would be covered under the plan? a) Jessica, age 32, who has been a secretary for the company for 4 years and works 500 hours per year. b) Brian, age 20, who works in accounting and has been with the company for 23 months. c) Marjorie, a commissioned sales clerk, who works in the Atlanta office. Marjorie is 25 years old and has been with the company for 4 years. d) Peter, age 29, who works in the factory. George has been with the company for 9 years and is covered under a collective bargaining agreement.

Answer 42

c) Marjorie, a commissioned sales clerk, who works in the Atlanta office. Marjorie is 25 years old and has been with the company for 4 years. - The standard eligibility means 21 and 1 year of service defined as at least 1,000 hours in a 12 month period. Marjorie meets the age and time requirement. Jessica does not meet the service requirement because she only works 500 hours per year. Brian does not meet the age requirement. Peter is excluded because he is covered under a collective bargaining agreement.

Question 43

Stephen, age 60, is a participant in the stock bonus plan of Simi, Inc., a closely held corporation. Stephen received contributions in shares to the stock bonus plan and Simi, Inc. took income tax deductions as fol-lows: Year 1 – 500 shares valued at $10 per share at the time of contribution. Year 2 – 100 shares valued at $12 per share at the time of contribution. Year 3 – 250 shares valued at $14 per share at the time of contribution. Year 4 – 200 shares valued at $16 per share at the time of contribution. Year 5 – 50 shares valued at $18 per share at the time of contribution. Stephen terminates employment and takes a distribution from the plan of 800 shares of Simi, Inc., having a fair value of $20,000. He sells the stocks for $25,000 6 months later. What is Stephen’s long term capital gain treatment and when is it taxed? a) $0 b) $5,000 c) $6,200 d) $11,200

Answer 43

a) $0 - This question is tricky! It looks like an NUA question, however, it is not. In this case, Stephen did not take a lump sum distribution and therefore does not qualify for NUA treatment. All of distribution will be subject to ordinary income and all of the remaining growth will be short term capital gain at the time of sale since he only held it 6 months from distribution.

Question 44

A testator-selected survival clause inserted in a will is better than reliance on a state’s Uniform Simultaneous Death Act (USDA) because: a) Most states have not enacted a USDA. b) The USDA always creates the presumption that the husband died first. c) The USDA presumption will not apply if the order of deaths can be determined, even if one person out-lived the other by a microsecond. d) The USDA presumption, when applicable, almost always results in higher estate taxes. e) The USDA presumption is applicable only where the two people that die are married.

Answer 44

c) The USDA presumption will not apply if the order of deaths can be determined, even if one person out-lived the other by a microsecond. - A survival clause is a clause included in a will requiring that a legatee survive for a specific period of time in order to inherit under the will. The USDA, in contrast, establishes a presumption of which person died first in simultaneous death situations. Therefore, a survival clause requires a legatee to survive for a certain period of time before inheriting while the USDA merely requires the legatee to survive the decedent, even if only for long enough that the deaths are not simultaneous.

Question 45

A premarital agreement should not be considered by individuals contemplating marriage in which one of the following situations? a) When one or both parties are unwilling to make a full disclosure of all their income and assets to the other party. b) When each party has significant wealth and wishes to protect his/her financial independence. c) When there is a significant difference in the wealth of each party. d) When one or both parties have ongoing obligations, rights and/or children from a previous marriage. e) When one party is considering making a substantial gift to the other in consideration of the marriage.

Answer 45

a) When one or both parties are unwilling to make a full disclosure of all their income and assets to the other party. - Premarital agreements should not be undertaken without full financial disclosure by both parties. All of the other answers are situations in which individuals contemplating marriage would consider forming a premarital agreement

Question 46

Harold used his own funds to create an irrevocable life insurance trust created five years before his death. The trustee purchased a single premium life insurance policy at that time. Harold and Ruth were married. Harold was the insured. The insurance was paid to the trustee after Harold died. Ruth received trust income for life. Ruth recently died and the trust terminated and went to their children by right of representation. Assuming a properly drafted irrevocable trust document, which statement(s) is/are true? 1. The proceeds will not be taxed as part of Harold’s estate. 2. The trust will not be subject to probate. 3. The proceeds will not be taxed as part of Ruth’s estate. 4. The trust will not direct the trustee to pay estate taxes. a) 1, 2 and 3. b) 1 and 3. c) 2 and 4. d) 4 only. e) 1, 2, 3 and 4.

Answer 46

e) 1, 2, 3 and 4. - All of the statements regarding an irrevocable life insurance trust with income to the spouse and the remainder to the children are true.

Question 47

Which of the following gifts made two years before the donor’s death will be included in the gross estate at full date-of-death value? 1. A gift of $50,000 cash which is split equally between a son and daughter-in-law. 2. A gift in which the donor retains an income interest for life. 3. Donor’s residence transferred into joint tenancy with donor’s daughter. 4. Stock worth $30,000 given to a friend. 5. Life insurance policy (cash value $5,000) transferred by the deceased to an irrevocable trust. a) 1, 2 and 3. b) 1 and 4. c) 1, 2 and 5. d) 3, 4 and 5. e) 2, 3 and 5.

Answer 47

e) 2, 3 and 5. - Statements #2, #3, and #5 are gifts that will be included in the donor’s gross estate at full date-of death value. Therefore, the correct answer is Answer E. Statements #1 and #4 are gifts that will be added to the taxable estate at date-of-gift, rather than date-of-death, value.

Question 48

Identify the statement(s) below that correctly characterize(s) property interests held by the decedent that, at death, pass by operation of law. 1. If the property passes according to the operation of law, the property avoids probate. 2. If the property passes according to the operation of law, it will not be included in the decedent’s gross estate. 3. Property that passes by operation of law cannot qualify for the marital deduction. 4. The titling on the instrument determines who shall receive the property. a) 1 only. b) 2, 3 and 4. c) 1 and 4. d) 1, 3 and 4. e) 2 and 3.

Answer 48

c) 1 and 4. - Statement #1 is true. Therefore, Answers B and E can be eliminated. Statement #3 is not true; even though property passing by operation of law avoids probate, it is still included in the gross estate and may qualify for the marital deduction. Therefore, Answer D is eliminated. Statement #4 is correct. Therefore, Answer A is eliminated.

Question 49

To qualify for the marital deduction, Qualified Terminable Interest Property (QTIP) must meet which of the following conditions? 1. The surviving spouse must have a general power to appoint the property. 2. All of the income must be paid out either to the surviving spouse or to the children of the decedent and the surviving spouse. 3. The executor must make the QTIP election. 4. The surviving spouse must be entitled to make lifetime gifts to family members directly from the QTIP. a) 1 and 2. b) 1 and 3. c) 2 and 4. d) 3 only. e) 1, 2, 3 and 4.

Answer 49

d) 3 only. - Statements #1, #2, and #4 are false. The surviving spouse is entitled to all trust income for life and that income must be paid out at least annually. In order to qualify a QTIP for the marital deduction, the executor is required to make the appropriate election.

Question 50

Doris Jenkins is a 71-year-old widow with a son and daughter ages 43 and 45 and six grandchildren. Doris has an estate currently worth $572,000 that includes her home worth $250,000 and a life insurance policy on her life with a face value of $160,000. Her children are named as primary beneficiaries. Doris recently suffered a severe stroke that left her paralyzed on her right side. She is home from the hospital but her health will continue to decline and she will need to go into a nursing home within one year. The only estate planning she has done to date is to write a will in 1989 which left all her assets to her children equally. Of the following estate planning considerations, which is/are appropriate for Doris at this time? 1. Transfer ownership of her home to her children so it will not be counted as a resource should she have to go into a nursing home and apply for Medicaid. 2. Execute a durable general power of attorney and a durable power of attorney for health care. 3. Place all of her assets in an irrevocable family trust with her children as beneficiaries. 4. Start a gifting program transferring assets up to the annual exclusion amount to each of her children and grandchildren. a) 1, 2, 3 and 4. b) 2 and 3. c) 1 and 4. d) 4 only. e) 2 only

Answer 50

e) 2 only - Statement #1 is false. Transferring ownership of her home to her children is inappropriate and may have serious adverse consequences. Given Doris’ declining health, Statement #2 is appropriate. Statement #3 is inappropriate due to its irrevocability. Therefore, Answer E is the correct answer.

Question 51

Which of the following circumstances would definitely cause the date-of-death value of the gifted property to be included in the donor’s gross estate? 1. Donor retains a life estate in the gift property. 2. Donor retains the power to revoke or amend the gift. 3. Donor gives more than $10,000 to one donee in one year. 4. Donor dies within three years of the date of the gift. a) 1, 2 and 3. b) 1 and 2. c) 2 and 4. d) 3 and 4. e) 1, 2, 3 and 4.

Answer 51

b) 1 and 2. - Statements #1 and #2 are true because neither is a completed gift. Statements #3 and #4 are false because the gift tax, not the date-of-death value of the gifted property, would be included in the gross estate. Therefore, Answers a, C, D, and E can be eliminated

Question 52

Grantor has established a trust, naming a bank as trustee. Pursuant to the terms of the trust document, Grantor is to receive all of the income generated by the trust assets during his life. Grantor may withdraw assets from the trust or place additional assets into it. The assets placed into the trust consist of Grantor’s mutual fund portfolio, personal residence, a rental property located in another state, and two installment notes held by Grantor. Upon Grantor’s death, all of the assets remaining in the trust are to be distributed to Grantor’s two children. 20. Which of the following statements is/are correct? 1. Upon the transfer of the installment notes to the trust, any deferred gain will be recognized as taxable income. 2. After the transfer, the income from the mutual funds will be reported on Grantor’s tax return. 3. Upon the transfer of the rental property to the trust, all excess prior years' depreciation will be recaptured. 4. After the transfer, the $250,000 exclusion from capital gain remains available for the principal residence. a) 4 only. b) 1 and 3. c) 2 and 4. d) 1, 2, and 3. e) 1, 2, 3, and 4.

Answer 52

c) 2 and 4. - The trust is revocable because the grantor will receive a life income and is permitted to withdraw assets from the trust. Statement #1 is not true because the trust is revocable. Therefore, Answers B, D, and E can be eliminated. Statement #2 is true because the trust is a grantor trust and the income of a grantor trust is taxable to the grantor. Therefore, Answer C is the correct answer.

Question 53

Grantor has established a trust, naming a bank as trustee. Pursuant to the terms of the trust document, Grantor is to receive all of the income generated by the trust assets during his life. Grantor may withdraw assets from the trust or place additional assets into it. The assets placed into the trust consist of Grantor’s mutual fund portfolio, personal residence, a rental property located in another state, and two installment notes held by Grantor. Upon Grantor’s death, all of the assets remaining in the trust are to be distributed to Grantor’s two children. Upon Grantor’s death, the assets remaining in the trust will: 1. Be included in Grantor’s taxable estate. 2. Be subjected to the probate process. 3. Receive a new basis except for the installment notes. 4. Be distributed as directed by Grantor’s will. a) 4 only. b) 1 and 3. c) 1, 2, and 3. d) 1, 2, 3, and 4.

Answer 53

b) 1 and 3. - Since the trust is revocable, the value of the trust assets will be included in the grantor’s taxable estate. Therefore, Answer A can be eliminated. Statement #2 is false; trusts become irrevocable at death and the trust assets will not be subject to probate. Therefore, Answers C and D can be eliminated.

Question 54

The best life insurance policy for the payment of federal estate taxes for a 50-year-old couple with illiquid assets is: a) An individual whole life policy on each spouse on a cross-ownership basis. b) A joint first-to-die life insurance policy owned jointly. c) A joint last-to-die life insurance policy owned by the spouse with the larger estate. d) A joint and last-to-die life insurance policy owned by the spouse with the smaller estate. e) A joint and last-to-die life insurance policy owned by an irrevocable trust.

Answer 54

e) A joint and last-to-die life insurance policy owned by an irrevocable trust. - Using the proceeds of an insurance policy to pay estate taxes is most efficient and effective when the insured has no ownership interest in the policy (thus avoiding inclusion in the insured’s gross estate). Therefore, the best answer would be ownership outright by an heir or ownership by an irrevocable trust.

Question 55

Sam, age 95, transferred $600,000 of common stock to an irrevocable trust. Sam provides that the income from the trust is payable to himself for life; and upon his death, the trust corpus will pass to his sister. The trust prohibits Sam from changing the trust beneficiaries. If Sam dies 1 year from now when the value of the trust assets is $650,000, how much of the trust will be included in Sam’s gross estate? a) $0; because Sam cannot change the beneficiaries. b) $25,000; because of Sam’s unified credit. c) $650,000; because Sam has the right to the trust’s income for life. d) $600,000; because Sam created an irrevocable trust.

Answer 55

c) $650,000; because Sam has the right to the trust’s income for life. - The date of death value of the trust assets must be included in Sam’s gross estate because Sam had an incidence of ownership in the trust at the time of his death (the right to receive income for life).

Question 56

A client asks you to explain the statement, “Life insurance proceeds are tax free.” You answer that the general rule(s), subject to some exceptions, is/are that death benefits received from a life insurance policy due to the death of the insured are income-tax-free to the beneficiary, but: 1. Are subject to estate taxes in the estate of the insured if the insured owned the policy. 2. May be subject to income taxes if the policy was sold to a third party. 3. Not if the contract was modified at purchase. a) 1 only. b) 2 only. c) 1 and 2. d) 2 and 3. e) 1, 2, and 3.

Answer 56

c) 1 and 2. - Statement #1 is correct. Therefore, Answers B and D can be eliminated. Statement #2 is correct. Sale of the policy may cause the policy to be subject to income taxes. Therefore, Answer A can be eliminated. Statement #3 is incorrect; modification of the contract at the time of purchase does not affect whether the proceeds of a life insurance policy are tax-free to the beneficiary. Therefore, Answer E can be eliminated.

Question 57

John and Mary Meyers have a combined estate of $900,000 including a $250,000 life insurance policy on John’s life. The Meyers have two children. John prefers Mary receive the income from the policy if he dies but wants the proceeds to go to his children after her subsequent death. John and Mary have recently executed wills that contain unified credit trusts. What is the best beneficiary designation for John’s life insurance policy? a) His wife Mary. b) His two children. c) A charitable remainder trust. d) His testamentary trust.

Answer 57

d) His testamentary trust. - Because John wants the income to go to his wife but wants the proceeds of the policy to go to his children after his wife’s death, a trust would be an appropriate device. The scenario does not mention any charitable intent, so a charitable remainder trust would not be appropriate.

Question 58

Horatio dies during the current year while holding a note receivable from Bill for $250,000. All of the following items surrounding the note could directly impact the valuation of his estate with the exception of which one? The maturity date of the note. The note is forgiven in Horatio's will. The interest rate of the note. Bill's financial health.

Answer 58

The note is forgiven in Horatio's will - The note must be included in the gross estate at the fair value of the note. A long time to maturity, accrued interest, and a rate below market affect note valuation for estate purposes, thus estate valuation. Also, if Bill is in poor financial health the note may be discounted, directly impacting the value of Horatio’s estate. Forgiveness of the note itself, however, does not impact the value of the note to the estate. The note will be included for estate tax purposes even if it is forgiven at death.

Question 59

Lisa Brimstone has a large estate of $16,000,000. Her husband, William Brimstone, is a great husband and father, but can't manage money. Lisa wants to make sure William has sufficient income to live on after her death if she predeceases him, but does not want him to have unfettered access to the principal. She wants her three children to receive equal shares of her estate at William's death. Which is the most appropriate technique to use for her estate plan? Put all assets in an "A" trust. Put all assets into a QTIP trust. Create a credit shelter trust (B) equal to the exemption equivalent (with a provision for no invasion of principal) with the balance going into a QTIP trust, each with an outside trustee. Place the entire estate into an estate trust.

Answer 59

Create a credit shelter trust (B) equal to the exemption equivalent (with a provision for no invasion of principal) with the balance going into a QTIP trust, each with an outside trustee. - The "A" trust might give William complete access and would overqualify the estate. The QTIP must distribute income annually to William and the B trust and QTIP precludes invasion of corpus.

Question 60

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? Premiums paid by PDC are taxable income to Digger. Premiums paid by PDC are considered gifts to Digger. Premiums paid by PDC are tax deductible as a business expenses. Any death benefit paid will be nontaxable to PDC

Answer 60

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 pad will be nontaxable to PDC.

Question 61

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

Answer 61

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 62

Which of the following statements is/are correct? I. The value of a CRAT where the decedent was the only non-charitable beneficiary is included in the gross estate of the decedent. II. Gift taxes paid two years prior to the death of the decedent for gifts made four years ago are included in the gross estate of the decedent under the gross up rule. I only. II only. Both I and II. None of the choices.

Answer 62

I only. - The value of the CRAT is included in the gross estate and then deducted from the adjusted gross estate as a charitable deduction. Only gift taxes paid on gifts made within three years are included under the gross up rule.

Question 63

Which of the following accurately describes joint and survivorship life insurance? The premiums are generally less than if purchasing two individual policies on the same insureds. The proceeds are never includible in any insured's gross estate. It effectively provides liquidity to an estate because it is estate tax exempt. It is not permitted to be used in an ILIT.

Answer 63

The premiums are generally less than if purchasing two individual policies on the same insureds. - Premiums are usually less than two single life insurance policies. Proceeds may or may not be includible in one of the insured's gross estates. Survivorship life insurance can be used in an irrevocable life insurance trust (ILIT).

Question 64

Which of the following applies to the marital deduction: In 2019 it is limited to $11,400,000 or 1/2 of the gross estate, whichever is lesser. The spouse may be of any citizenship. The property may be in the form of an incomplete transfer. The marital deduction may be applied to terminable interest property.

Answer 64

The marital deduction may be applied to terminable interest property. - Answer "A" is incorrect because in 2019, it is the applicable exclusion amount not the marital deduction that is $11,400,000. The spouse must be a U.S. citizen unless a QDOT is utilized and property must be a complete transfer to qualify for the marital deduction. The terminal interest property that will qualify are those items which are the exception to the terminal interest rule such as (1) GPOA trusts (2) QTIP trust and (3) charitable trusts where the surviving spouse is the only non-charitable beneficiary.

Question 65

Diana’s will leaves all of her property to her husband, George. If he does not survive her by more than 240 days, the property will transfer to Diana’s only daughter. Diana dies on May 1 and George dies on the following February 1. Of the following statements, which is true? Diana’s property will transfer to her daughter and the property will be eligible for the unlimited marital deduction in Diana’s estate. Diana’s property will transfer to her daughter and the property will not be eligible for the unlimited marital deduction in Diana’s estate. Diana’s property will transfer to George and the property will be eligible for the unlimited marital deduction in Diana’s estate. Diana’s property will transfer to George and the property will not be eligible for the unlimited marital deduction in Diana’s estate.

Answer 65

Diana’s property will transfer to George and the property will not be eligible for the unlimited marital deduction in Diana’s estate. - Diana’s property will transfer to George because he survived her for at least eight months. Therefore, both answer "A" and answer "B" are incorrect. Answer "C" is incorrect because the property that transfers to George will not be eligible for the unlimited marital deduction in Diana’s estate because the survivorship clause exceeds 6 months.

Question 66

Diana’s will leaves all of her property to her husband, George. If he does not survive her by more than 240 days, the property will transfer to Diana’s only daughter. Diana dies on May 1 and George dies on the following February 1. Of the following statements, which is true? Diana’s property will transfer to her daughter and the property will be eligible for the unlimited marital deduction in Diana’s estate. Diana’s property will transfer to her daughter and the property will not be eligible for the unlimited marital deduction in Diana’s estate. Diana’s property will transfer to George and the property will be eligible for the unlimited marital deduction in Diana’s estate. Diana’s property will transfer to George and the property will not be eligible for the unlimited marital deduction in Diana’s estate.

Answer 66

Diana’s property will transfer to George and the property will not be eligible for the unlimited marital deduction in Diana’s estate. - Diana’s property will transfer to George because he survived her for at least eight months. Therefore, both answer "A" and answer "B" are incorrect. Answer "C" is incorrect because the property that transfers to George will not be eligible for the unlimited marital deduction in Diana’s estate because the survivorship clause exceeds 6 months.

Question 67

Rick and Amber (husband and wife), residents of a non-community property state, owned unimproved land that they have titled in joint tenancy with rights of survivorship. Rick purchased the land with his own funds for $100,000 five years ago, and he died in the current year when the land was worth $400,000. What is the amount associated with the land that will be included in Rick's gross estate? $100,000. $200,000. $300,000. $400,000.

Answer 67

$200,000. - 50% of the fair market value must be included in Rick's estate because of the deemed contribution rule because his joint tenant Amber is his spouse. If he titled JTWROS with anyone but a spouse we would use the "actual contribution rule" in which case he would have $400,000 included in his gross estate. Note that is he had titled the property tenants in common, he would have had $400,000 inclusion.

Question 68

Federal estate and gift taxes are determined by the fair market value of the property transferred. Which of the following statements are true? I. Asset values are based upon the fair market value on the date of death or six months after the date of death for the gross estate. II. Taxes are progressively higher as more assets are transferred during life. III. Value is determined on the date of the transfer of the assets for lifetime transfers. IV. Special use valuation is always available for special use property. I only. I and III only. I, III and IV only. I, II, and III only.

Answer 68

I, II, and III only. - The value of the assets transferred may use an alternative valuation date. Special use valuation is only available if certain qualifications are met (see 2032 (a)).

Question 69

A bequest to which of the following organizations would NOT be included in the gross estate? ``` The United States of America. The University of Phoenix. Mothers Against Drunk Driving. The Society for the Protection of Wild Birds. None of the choices. ```

Answer 69

None of the choices. - All bequests are included in the gross estate. Although not relevant to the question, all of the bequests except for the one to the University of Phoenix qualify for the unlimited charitable deduction. The University of Phoenix is a for-profit institution and is therefore, not a charity.

Question 70

What is the appropriate estate planning strategy for married couples to minimize taxes over the death of both spouses? Bequeath the entire estate to a trust, giving the surviving spouse a general power of appointment over the assets at her death. Bequeath the applicable exemption equivalent amount to a qualified terminable interest property trust (QTIP) and the balance outright to the surviving spouse. Bequeath the applicable exemption equivalent amount to a bypass trust and the balance to the surviving spouse in a qualifying way. Bequeath the applicable exemption equivalent amount to the surviving spouse and the balance to the children.

Answer 70

Bequeath the applicable exemption equivalent amount to a bypass trust and the balance to the surviving spouse in a qualifying way. - Answer "A" - This creates a situation where the entire value of the estate will be includible in the estate of the second to die although with portability this could possibly result in the same outcome as "C" but is not as good a choice. Answer "B" - This still leaves the entire amount in the estate of the second to die. Answer "D" - This statement is opposite of the correct order strategy.

Question 71

Which of the following is a way to transfer assets out of the gross estate during a client's lifetime? The creation of a joint tenancy with right of survivorship with the creator's spouse. A Testamentary Trust. A Grantor Retained Interest Trust with children as beneficiaries. A Client-owned life insurance policy recently transferred to an ILIT.

Answer 71

The creation of a joint tenancy with right of survivorship with the creator's spouse. - This is because 1/2 of the asset is removed from the gross estate of decedent due to the deemed contribution rule. Answer "B" is incorrect because a testamentary trust is created at death. Answer "C" is incorrect because it is an incomplete gift until the grantor survives the trust term. Answer "D" is incorrect because if a client owns his own life insurance the proceeds are included in his gross estate. - You will find questions like this on the exam, you can get down to two reasonable choices but one will have a slight advantage. In this case the re-titling of property is an immediate reduction in gross estate. The ILIT would not be for 3 years.

Question 72

Which of the following statements is correct? I. Unpaid medical expenses of a decedent can be deducted on the final 1040 or form 1041 but not on both. II. Any executor fees may be deducted on form 706 or the 1041 return. 1 only. 2 only. Both 1 and 2. Neither 1 nor 2.

Answer 72

2 only. | - Unpaid medical expenses can be deducted on the 1040 or the 706 but not the 1041.

Question 73

Godfrey died last year. Two years before his death, he paid gift tax of $15,000 as a result of making the following gifts (these were the only gifts he made last year): - stock worth $40,000 was given to Gwain - a $300,000 (death benefit) life insurance policy on his life was given to Guinivere. (The policy was worth $5,000 at the time of transfer). At Godfrey's death, the stock had increased in value to $70,000 and the life insurance company paid $300,000 to Guinivere. (Note: Consider the two transfers and the gift taxes paid when answering). By how much will Godfrey's gross estate be increased as a result of the two gifts? $15,000 $60,000 $315,000 $355,000

Answer 73

$315,000 - Both gift tax paid on gifts made within 3 years of death and life insurance proceeds are includible in the donor's gross estate when these are given (or paid) less than three years prior to the donor's death. The gift of stock is a completed gift and is not included in the donor's gross estate.

Question 74

Which of the following rights will not cause an insurance policy to be included in the gross estate of the owner/insured if retained within the three years prior to the death of the owner/insured assuming the policy was in an ILIT? The right to borrow from the cash value in the policy. The right to assign the policy, but only to a qualified charity. The right to surrender the policy, but only in case of terminal illness. The right to change the name of a charitable beneficiary to another charitable beneficiary.

Answer 74

The right to change the name of a charitable beneficiary to another charitable beneficiary. - Any incidence of ownership (answers A, B or C) constitute incidence of ownership and would cause the policy to be included in the gross estate. The right to change a charitable beneficiary to another charitable beneficiary is not an incidence of ownership because the first charitable beneficiary may no longer exist.

Question 75

Greg died January 7, 2019. He was penniless at the time. At the time, his wife, Buffy, has an estate of $10,000,000. In March 2019, Buffy won the lottery and collected $5,250,000 which she added to her estate. She continued to live her life off of her wages until she suddenly died on June 25, 2019. Presuming her executor makes all timely elections, what is Buffy’s estate tax? (Presume she has only the $10,000,000 and the $5,250,000.) $0. $1,628,000. $4,417,800 $6,045,800

Answer 75

$0. - The executor could file a 706 for Greg and preserve his applicable exclusion of $11,400,000. Added to her applicable exclusion of $11,400,000 no tax would be due.

Question 76

Jack is a dentist who never married. Three years before his death, he made the following gift: A $300,000 (death benefit) life insurance policy on his life to Molly. (The policy was worth $5,000 at the time of transfer). - The only gifts he made this year was: Stock worth $40,000 was given to Mickey. At Jack's death, the stock had increased in value to $70,000 and the life insurance company paid $300,000 to Molly. What amount will be added back to determine the estate tax base? $0 $25,000 $40,000 $370,000

Answer 76

$25,000 - The question is asking about what is added back to get to the ESTATE TAX BASE, not what is included in the gross estate. A very important factor in correctly answering this question. Adjusted taxable gifts are added back to the taxable estate in determining the estate tax base at the date-of-gift value ($40,000) minus the annual gift tax exclusion ($15,000) to arrive at $25,000. The gift to Molly is included as a gift of the $5,000 transfer value, but application of the annual gift exclusion fully offsets the gift.

Question 77

Mrs. Bailey dies in 2019 leaving her entire $17.2 million estate through her Will to her penniless husband, George. His estate goes to their children at his death. He has terminal cancer with a life expectancy of 1 to 2 years. The alternative valuation date value of Mrs. Bailey's entire estate is equal to $17,000,000. Select the post mortem technique George should utilize to reduce the overall estate tax liability of both estates: Elect Portability. Elect to use the alternative valuation date. Disclaim $7,000,000 and elect to use the alternative valuation date. Do Nothing.

Answer 77

Elect Portability. - The alternative valuation can only be used if it reduces both the gross estate (yes) and reduces the estate tax due (no, because it was all left to a spouse so no estate tax would be due in either situation). Since the new estate law permits the portability of the estate applicable exclusion between spouses, disclaiming any of the property is not necessary as Mrs. Bailey's unused credit can be utilized by George in addition to his own (up to $22,800,000 in 2019).

Question 78

The best life insurance policy for the payment of federal estate taxes for a 50-year-old married couple with illiquid assets is: An individual whole-life policy on each spouse on a cross-ownership basis. A joint first-to-die life insurance policy owned jointly. A joint last-to-die life insurance policy owned by the spouse with the larger estate. A joint and last-to-die life insurance policy owned by an irrevocable life insurance trust.

Answer 78

A joint and last-to-die life insurance policy owned by an irrevocable life insurance trust. - 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 79

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. Total amount of 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 her taxable estate? $525,000 $539,000 $575,000 $589,000

Answer 79

$575,000 - AGE: $1,000,000 - $16,000 (admin cost) - $50,000 (1/2 debt from the mortgage) - $15,000 (credit card debt) = $919,000 Taxable Estate: $919,000 - $310,000 (marital deduction) - $34,000 (charitable deduction) = $575,000 The maritable deduction is calculated as follows: The total amount of the home is $200,000 therefore her portion would be $100,000. If the debt is $100,000 then her portion is $50,000. So she would be leaving $100,000 - $50,000 = $50,000 to the spouse for the home. So total marital deduction is $260,000 + $50,000 = $310,000.

Question 80

A decedent has made substantial lifetime gifts exceeding the lifetime exemption and such that her estate is in the 40% marginal tax bracket. In her will, she made a bequest of $100,000 to her adult son with NO special arrangements, or allocations, for the payment of the estate taxes. The balance of her estate is left to her husband in a qualifying way. How much of the bequest to the son will the son actually receive, assuming NO other bequests to him from her estate? $60,000. $51,000 $85,000. $100,000.

Answer 80

$60,000. - Unless special arrangements are made for the residual estate to satisfy the estate tax payment, then the 40% tax will be charged against the bequest based on the information provided. The $15,000 annual exclusion is not available for bequests. Answer "B" is wrong (100,000 - 15,000) × 60% = $51,000 Answer "C" is wrong (100,000 - 15,000) = $85,000 Answer "D" is wrong because the son will have to pay the estate tax.

Question 81

Which of the following is not a characteristic of a CRUT? Must pay out at least 5% of trust assets annually. Requires the invasion of trust corpus to pay annual income. The longer the trust period, the lower the charitable deduction. Charitable deductions in excess of the annual deductible limit are carried forward up to 5 years.

Answer 81

Requires the invasion of trust corpus to pay annual income. | - The CRAT requires invasion of corpus to pay annual income if there is a shortage. The CRUT does not.

Question 82

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

Answer 82

The capital gains rate in effect at the time of the transfer. - Answer "D" is not an issue when deciding whether to deduct the adjusted basis or the fair market value since such a transfer does not create a capital gain. All of the other options are issues to consider. Interest is relevant because of the time value of money issue and the interest earned on any possible tax deduction/refund. Current and projected AGI for the next 5 years is relevant because any amount that is over the limit for this year can be carried forward for the lesser of 5 years or until death. When LTCG property is donated to a charity, to determine the income tax deduction on Schedule A you typically value it at FMV and then are limited to deducting only up to 30% of AGI. However, a special election can be made where you value at cost basis and then the limit is 50% of AGI. The question is asking about the factors that would impact that decision. The FMV and adjusted basis are also relevant factors since they determine the value of the gift under each option (FMV and limit to 30% of AGI, or basis and limit to 50% of AGI).

Question 83

An estate planning tool which permits (but does not require) invasion of principal (corpus) to meet income payout requirements is known as: A charitable remainder unitrust. A charitable annuity. A charitable annuity trust. A charitable lead trust.

Answer 83

A charitable remainder unitrust. - The CRUT permits it. The CRAT requires invasion if the income is insufficient to meet the annuity payment requirements.

Question 84

All of the following apply to charitable lead trusts, except: Beneficiaries can be named as trustees of the CLT. Property transfers to a CLT are irrevocable. The maximum period for a CLT trust is 20 years if the trust is for a fixed term. The ultimate recipient of the remainder interest may NOT be the grantor of the trust.

Answer 84

The ultimate recipient of the remainder interest may NOT be the grantor of the trust. - In the case of charitable lead trusts, the remainder interest may revert to the grantor as the income for the term passes to a 501 (c)(3) charity.

Question 85

Which of the following statements concerning a durable power of attorney (DPOA) is false? It becomes effective only upon determination of incompetency of the principal. The attorney-in-fact is not obligated to utilize the DPOA. It must be in writing. It ceases at the death of the principal.

Answer 85

It becomes effective only upon determination of incompetency of the principal. - Answer "A" refers to a springing DPOA. The remaining options refer to the DPOA.

Question 86

Under which of the following circumstances would a decedent be considered to have died intestate? A. The decedent handwrote a will and signed it but did not date it. B. The decedent was not of "sound mind" when he signed his statutory will. C. The decedent prepared a proper will listing every asset that he owned at the time. He died 5 years later. D. Choices A and B. E. Choices A, B and C.

Answer 86

E. 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. 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.

Question 87

A will can accomplish which of the following estate planning objectives? Avoids probate. Provides for decisions in the event of incompetency. Can establish a testamentary credit shelter trust. Can override a beneficiary designation on a qualified retirement plan.

Answer 87

Can establish a testamentary credit shelter trust. - Wills are always probated. Incompetency management must be addressed in a separate document, such as a trust or power of attorney. Contract named beneficiaries take trump over will stipulations. Business price or value is determined either in an appraisal or in a buy/sell agreement.

Question 88

Which of the following accurately describes a Will substitute? Property passes outside of probate. A will substitute is open to the public. A will substitute permits testamentary control of the distribution of assets. A will substitute can be "overridden" by a specific bequest.

Answer 88

Property passes outside of probate. - A Will substitute avoids public scrutiny, testamentary control, and cannot be overridden by bequests. An example might be a contractual agreement as a life insurance beneficiary.

Question 89

Which of the following does NOT relate to a will? A Codicil. A Devisee. A Legatee. None of the choices.

Answer 89

None of the choices. - A Codicil is a document used to alter a will. A Devisee is a gift of real property through a will. A Legatee is a person who inherits property under the will.

Question 90

Which of the following best describes a "mutual will"? Two persons who leave all of their property to each other. Oral instructions made in front of witnesses and each other concerning disposition of assets. Two or more persons draw up wills to bequeath or dispose of property in a predetermined and agreed upon manner at the same time. One will which covers both parties with the same result for the surviving party regardless of which one survives.

Answer 90

Two persons who leave all of their property to each other. - A mutual will is also referred to as a sweetheart will where both spouses leave all assets to each other. Answer "B" is nuncupative. Answer "C" is a joint will. Answer "D" is wrong and is also a joint will.

Question 91

Which of the following is the least important factor in choosing an appropriate/competent Personal Representative? Being willing and able to accept fiduciary responsibility. A trusted family memeber. Having knowledge and competency in dealing with investments. Possessing sufficient common sense to know when to retain competent legal assistance. Being honest.

Answer 91

Having knowledge and competency in dealing with investments. | - The other qualities are much more important than investment expertise which can be hired.

Question 92

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? Abatement. Ademption. Extinction Parabis. In terrorem.

Answer 92

Ademption. - Abatement is the reduction in an estate when there is insufficient assets to satisfy all legatee provisions. Extinction Paribus is for those guessers who have no clue. An In terrorem clause is a "no-contest" clause.

Question 93

Which of the following are characteristics of a qualified disclaimer? I. It may not redirect the bequest to another person selected by the disclaimant. II. It must be received by the executor of the estate within 9 months of the death of the decedent. III. It must be written and irrevocable. IV. The disclaimant may disclaim a part of an asset. I and II only. I, II and III only. I, III and IV only. I, II, III and IV.

Answer 93

I, II, III and IV. - A qualified disclaimer must be written, irrevocable and received by the executor of the estate within 9 months. It must not direct the asset and can be for any interest partial or full.

Question 94

Which of the following accurately describes special and general powers? I. The surviving spouse can be given the power to invade the entire corpus of a marital trust for an ascertainable standard. II. 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. III. 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. IV. The existence, lapse, exercise, or release of a special power will not cause inclusion in the power holder's gross estate. I, II and III only. I, II and IV only. I, III and IV only. I, II, III and IV.

Answer 94

I, II, III and IV. | - All of the above statements accurately describe special and general powers.

Question 95

Clark Trent is 80 years of age and his wife, Lois, is 76. Clark recently had a stroke that left him partially paralyzed, totally and mentally incapacitated. Clark owns a vacation home in another state and some securities in his own name. Other assets are held jointly between them. Lois is finding it difficult to care for Clark by herself and would like advice about what is important for her to do now for financial and estate planning purposes. Which of the following should a financial planner recommend for the Trents? I. Clark should execute a power of attorney for healthcare. Clark should execute a will. II. Lois should obtain a long-term care insurance policy for Clark. III. Lois should obtain a health insurance policy for Clark. I only. I and II only. I, II and III only. None of the choices.

Answer 95

None of the choices. - Since Clark is mentally incapacitated he cannot execute a valid will or power of attorney. Insurers are unlikely to write insurance on Clark for long-term care or health care after he has suffered a debilitating stroke.

Question 96

Clarke and Lois Kent, spouses, own equal shares of an S corporation, which operates a growing garden center. They have considered forming a family limited partnership with their son, Jimmy. The S Corporation would be the general partner, and Clarke and Lois would gift limited partner interests to Jimmy over the next decade or so. They want to maintain control of the business until they retire. They also want a fixed income stream from the business. This would be considered an intra-family transfer. Which of the following accurately describes the tax implications of the transfers Clarke and Lois are considering? I. The family limited partnership interests will be eligible for valuation discounts in spite of the fact that IRC Chapter 14 may apply. II. Income paid to Clarke and Lois after the limited partnership is formed will be subject to double taxation, both at the partnership level and the individual level. III. The control maintained by Clarke and Lois will bring the limited partnership interests gifted to Jimmy back into their estates if made within three years of death. IV. Lois and Clarke's right to fixed income from the partnership will be a qualified payment right when valuing the limited partnership interest gifted to Jimmy. II only. I and III only. I and IV only. II, III and IV only.

Answer 96

I and IV only. - Limited partnerships are conduit entities and do not pay taxes. IRC Chapter 14 affects valuation only by assigning a value of zero to any non-qualified interests retained by the donor. The right to the income retained in this question is considered qualified because it is income that is fixed in time and dollar amount and thus can be valued.

Question 97

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 97

A bargain sale is generally not adviseable if the buyer of the property is a family member - Answer "C" is a false statement because bargain sales usually occur among related parties. All of the other statements are true.

Question 98

Which one of the following statements is NOT correct about trusts? A sprinkling provision allows the trustee to make payments of income or corpus to beneficiaries based upon specific needs. A discretionary provision allows trustees to distribute corpus or income, or not, as they determine is most prudent. A spendthrift provision prohibits a trust beneficiary from assigning interests in the trust corpus. The CRUT is subject to a test for remainder interest of 10% and the probability test.

Answer 98

The CRUT is subject to a test for remainder interest of 10% and the probability test. - The CRAT but not the CRUT is subject to the probability test.

Question 99

Which of the following is an argument that favors the use of a revocable intervivos trust? Probate costs are avoided by the use of a revocable trust. There can be a substantial savings in income tax by the use of a revocable trust. There can be a substantial savings in estate tax by the use of a revocable trust. All of the above are valid reasons for the use of a revocable trust.

Answer 99

Probate costs are avoided by the use of a revocable trust. - There are no estate or income tax savings by using a revocable trust. There will be a savings of probate costs, because the use of a revocable trust avoids probate.

Question 100

An installment sale has which of the following characteristics? I. Allows pro-rata recognition of profits in the year payments are received. II. Multiple payments received in the same calendar year qualify for installment sale treatment. III. Has a fixed selling price contractually agreed to by both parties. IV. Installment sale tax treatment is optional under the IRC. I and II only. III and IV only. I, III and IV only. I and III only.

Answer 100

I and III only. - 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 101

A QTIP trust must contain all the following provisions except: The surviving spouse usually has a general power of appointment over trust assets. All trust income must be paid to the surviving spouse at least annually. Upon the death of the surviving spouse, the trust assets may pass directly to the children from the marriage of the decedent. The personal representative has discretion over the amount and selection of the decedent's assets to be placed into the QTIP trust.

Answer 101

The surviving spouse usually has a general power of appointment over trust assets. - The spouse must have limited control over the QTIP to maintain the trust benefits but it would be very unusual for the surviving spouse to have a GPOA over QTIP asset. The marital trust (A trust) allows the surviving spouse a general power of appointment.

Question 102

Jessie Jones gave a testamentary life interest in a sole & separate residence to his current wife, Jessica, until her death. Upon her passing, the children of a previous marriage who are older than Jessica will receive the home. Which of the following is correct? The residence is included in Jessica's estate at her death because this effectively is a QTIP. Jessica only has an income interest in the residence and that portion will qualify for the marital deduction. Jessica has sufficient interest in the property because the children may die before her that it will qualify for the marital deduction. The testamentary interest will not qualify for the marital deduction.

Answer 102

The testamentary interest will not qualify for the marital deduction. - Jessica's interest is a terminable interest. In other words, her interest terminates at her death and, as it is not a qualified terminable interest, it will not be included in her gross estate and will not qualify in his estate for the marital deduction.

Question 103

"Crummey Powers" are powers which have the following characteristics: The ability to request a distribution of income or corpus up to age of majority. A lapsing right to withdraw a limited amount of the trust corpus. No formal trustee is required for withdrawal. The right to withdraw accumulated interest without the approval of the trustee.

Answer 103

A lapsing right to withdraw a limited amount of the trust corpus. - Crummey Powers allow for distribution of newly contributed funds to the trust corpus on a lapsing basis. Crummey powers transmute a future interest to a current gift.

Question 104

When Harry O’Forniture died he left a will with a trust. The terms of his will were such that his trust was to pay his widow, Patty, a payment of $50,000 per year. Harry also arranged for $25,000 to go to each of his two sons each year. There were no charitable bequests. The distributable net income of the simple trust for the current year was $96,000. What amount was Patty O’Forniture required to include in her gross income? $50,000 $48,000 $25,000 $0

Answer 104

$48,000 - The amount taxed to beneficiaries is limited to the trust's DNI. If the amount distributed is greater than the total DNI, a proportional amount is allocated to each beneficiary based on the total distributed to beneficiaries. Example: ($50,000/$100,000) × $96,000 = $48,000.

Question 105

Charles Bronson placed blue-chip stocks valued at $200,000 into an irrevocable trust. The trust must pay 7% of the trust value to Charles each year for 10 years. After the 10-year period, the remainder is to be paid to his daughter, Lucy. Which of the following statements are correct: I. Charles will be required to file a gift tax return as of April 15 of the following year with extensions following the creation of the trust for the present value of the remainder interest less the annual exclusion. II. The total value of the trust will be included in Charles' gross estate if he dies before the end of the term of the trust. I is correct only. II is correct only. Both are correct. Both are incorrect.

Answer 105

II is correct only. - This is a grantor trust. To have removal from the gross estate, Charles would have to live beyond the trust term. Charles does not get an annual exclusion for Lucy because her interest is a future not a present interest and therefore will not qualify for the annual exclusion.

Question 106

Which of the various types of trusts permits income sharing? QTIP Trusts By-pass Trusts General Power of Appointment Trusts Estate Trusts

Answer 106

By-pass Trusts - The A Trust, the Q-Tip Trust and the Estate Trust do not allow for splitting or sharing of income streams. Only the By-pass Trust allows for this income splitting or sharing. The bypass trust is the only non-marital trust of the list given.

Question 107

Allan wants to do estate planning with his spouse, Maryanne. Which of the following statements concerning their marital planning alternatives are accurate? I. Maryanne can be given a special power of appointment over the corpus of a testamentary bypass trust established by Allan's estate. II. In a marital trust established by Allan, Maryanne can be one of several income beneficiaries. III. The QTIP trust is equally viable as either a marital trust or a credit shelter trust. III only. I only. I and III only. I and II only.

Answer 107

I only. | - In a marital trust, Maryanne must be the ONLY income beneficiary, and QTIP trusts are a marital trust.

Question 108

Maxwell and Jim have resided together for several years. They are not married, so they cannot rely on the state intestacy laws to transfer assets to each other at the death of either. Additionally, Maxwell is concerned that if he dies first, his family may contest the transfer of his assets to Jim through his will so he wants to avoid any transfers through his will. Of the following statements, which transfer arrangements would ensure that Maxwell’s assets will be transferred to Jim at Maxwell’s death? I. A Qualified Personal Residence Trust (QPRT). II. An Irrevocable Trust. III. A Revocable Living Trust. IV. A Testamentary Trust. II only. I, III and IV only. I, II and III only. I, II, III and IV.

Answer 108

I, II and III only. - The QPRT, Irrevocable Trust, and Revocable Living Trust would ensure that Jim would receive Maxwell’s assets at Maxwell’s death because the assets will transfer per the trust document. Maxwell’s family will not be able to contest the transfers from the trust. A testamentary trust will not ensure that Jim will receive Maxwell’s assets because a testamentary trust would be first created in Maxwell’s will. The family could contest the will and block the transfer to the testamentary trust. In such a case, Jim may not receive the assets.

Question 109

Which of the following accurately describes a testamentary trust? It is created as part of a will package and takes effect when the will is executed. Generally the assets included in a testamentary trust are subject to probate. It is a grantor revocable trust until death and then becomes irrevocable. It is an irrevocable intervivos trust.

Answer 109

Generally the assets included in a testamentary trust are subject to probate. - A testamentary trust is created under a Will. The assets in the trust will come from the will and therefore are generally included in the probate estate.

Question 110

Charles Bronson placed blue-chip stocks valued at $200,000 into an irrevocable trust. The trust must pay 7% of the trust value to Charles each year for 10 years. After the 10-year period, the remainder is to be paid to his daughter, Lucy. Which of the following statements are correct: I. The trust will pay the income tax on earnings each year. II. If Charles dies before the trust term ends, the value in the trust less what he has already received will be included in his gross estate. I is correct only. II is correct only. Both are correct. Both are incorrect.

Answer 110

Both are incorrect. - The grantor will pay the income tax on all distributions and the full value of the trust will be included in Charles' gross estate if he were to die before the end of the trust term.

Question 111

Which of the following is considered a complex trust? I. A 2503(c) trust. II. A trust which allows the trustee discretion to distribute or accumulate current income. III. A trust which allows a beneficiary a limited noncumulative right to demand. IV. A Section 2503(b) mandatory income trust that has only individual beneficiaries. I and IV only. I, III and IV only. II and IV only. I, II and III only.

Answer 111

I, II and III only. - The Section 2503(b) is a simple trust. A complex trust is a non-grantor trust which in a given year accumulates fiduciary income or distributes trust corpus, whereas a simple trust distributes no corpus. A 2503(c) trust allows for accumulation.

Question 112

Which of the following statements is correct about a charitable remainder unitrust (CRUT) with husband and wife as joint and survivor annuitants? A fixed dollar amount is paid to the annuitant every year. At the death of the first annuitant, the remaining assets are paid to the charity. If the trust assets do not earn sufficient income to pay the required income stream, the difference must be paid from the trust corpus. The full value of the assets in the CRUT are included in the gross estate of the grantor (assuming he dies first).

Answer 112

The full value of the assets in the CRUT are included in the gross estate of the grantor (assuming he dies first). - The amount paid annually in a CRUT varies with the annual revaluation of the trusts assets. Thus, the CRUT corpus need not be used to make up for insufficient income payments. Assets are permanently "given" to the charity upon transfer to the CRUT, which is irrevocable. If the CRUT is for the life of the grantor and spouse, the assets are included in the first to die's gross estate at the value of the assets and then the remainder interest is netted out as the unlimited charitable deduction reducing the AGE to the taxable estate.

Question 113

Which of the following statements is/are correct? I. The value of a CRAT where the only noncharitable income beneficiary was the decedent is included in the gross estate of the decedent. II. 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. I only. II only. Both I and II. None of the choices.

Answer 113

Both I and II. - 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 114

An estate freeze would accomplish which of the following? Any property transferred would be appreciating in value and the future gain would occur in the transferee's estate. A property with a decreased value could be transferred and the loss would freeze the basis at the lower amount. A property with an increased value would be transferred and the gain would be frozen in the estate of the transferee. A property transferred would be appreciating in value but any loss would occur in the transferee's estate.

Answer 114

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 115

Which of the following are characteristics of a private annuity? I. Title to the property is conveyed to the individual responsible for making annuity payments at the time of the transaction. II. It involves a promise on the part of the individual receiving the property to make an annuity payment to the transferor, usually secured by the transferred property. III. The individual responsible for making annuity payments can deduct the interest portion of those payments. IV. Each payment received by the annuitant is divided into gain, interest income, and a non-taxable recovery of basis. I and II only. I and IV only. II, III and IV only. I, III and IV only.

Answer 115

I and IV only. - The private annuity cannot be secured by the transferred property and the interest portions of payments to the annuitant cannot be deducted by the transferee.

Question 116

Which of the following accurately describes a QTIP Trust? A QTIP is sometimes called “B” Trust. Trust income must be paid to the spouse or other designated beneficiary at least annually. The trust assets will be included in the gross estate of the surviving spouse and the spouses estate will pay any estate taxes. The surviving spouse may demand that the trustee only have income producing property in the trust.

Answer 116

The surviving spouse may demand that the trustee only have income producing property in the trust. - 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 correct because the surviving spouse may demand only income producing property. "C" is incorrect because the remaindermen will pay any estate taxes.

Question 117

Which of the following statements is incorrect? When a decedent’s taxable estate is less than the applicable estate tax credit equivalency because of the overuse of the marital deduction, the estate is said to be overqualified. When too few assets pass to a decedent’s surviving spouse, and as such the decedent’s taxable estate is greater than the applicable estate tax credit equivalency, the decedent’s estate is said to be underqualified. An ABC Trust arrangement utilizes a General Power of Appointment Trust, a QTIP Trust. and a Bypass Trust to maximize the use of a decedent’s applicable estate tax credit. The ultimate beneficiary of a QTIP Trust is selected by the surviving spouse.

Answer 117

The ultimate beneficiary of a QTIP Trust is selected by the surviving spouse. - Answer "D" is incorrect because the ultimate beneficiary of a QTIP Trust is chosen by the grantor of the QTIP Trust. All of the other statements are correct.

Question 118

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

Answer 118

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

Question 119

Your client, Zoe, has established a revocable grantor trust, naming a bank as the trustee. Pursuant to the terms of the trust document, your client receives all the income annually generated by the trust assets during her life. The assets placed into the trust consist of Zoe's mutual fund portfolio, her personal residence, a rental property located in another state, and two installment notes held by Zoe. Upon your client's death, all of the assets remaining in the trust are to be distributed to Zoe's two children. Upon Zoe's death, the assets remaining in the trust will: I. Be included in Zoe's gross estate. II. Be subject to the probate process. III. Receive a new income tax basis equal to the fair market value at death or her alternate valuation date if properly elected. IV. Be distributed as directed by Zoe's will. I only. I and III only. I, II and III only. I, II, III and IV.

Answer 119

I only. - Grantor trusts do not remove assets from the grantor's gross estate, but do allow assets to pass outside of probate. Installment notes are IRD property and therefore do not get a step to fair market value. The trust document will determine how the assets are distributed, not the will.

Question 120

Grantor is single and has established a trust, naming a bank as trustee. Pursuant to the terms of the trust document, Grantor is to receive all of the income generated by the trust assets during his life. Grantor may withdraw assets from the trust or place additional assets into it. The assets placed into the trust consist of Grantor's mutual fund portfolio, personal residence, a rental property located in another state, and two installment notes held by Grantor. Upon Grantor's death, all of the assets remaining in the trust are to be distributed to Grantor's two children. Which of the following statements is/are correct? I. Upon the transfer of the installment notes to the trust, any deferred gain will be recognized as taxable income. II. After the transfer to the trust, the income from the mutual funds will continue to be reported on the Grantor's tax return. III. Upon the transfer of the rental property to the trust, all the excess prior year's depreciation will be recaptured as ordinary income. IV. After the transfer, the $250,000 exclusion from capital gains remains available for the principal residence. II, III and IV only. I, II and III only. II and IV only. I, II, III and IV.

Answer 120

II and IV only. - Statement "I" is incorrect because deferred gain is not recognized as taxable income until such time as it is received. Statement "III" would ordinarily be true except that this is a grantor trust with control remaining with the grantor and all rental income taxable to the grantor, thus no true transfer which would cause depreciation recapture. This is a grantor trust.

Question 121

Which of the following is not a characteristic of a testamentary trust? Is created under a last will and testament. It shifts the income tax burden to a lower-bracket taxpayer. The assets are included in the gross estate. It is included in probate

Answer 121

It shifts the income tax burden to a lower-bracket taxpayer. | - All of the other answers are characteristics of a testamentary trust.

Question 122

Your client, Simon Legree, has one child, Donna Legree (age 6). He has a rental property, valued at $100,000. Simon has the following goals: Get discretionary income to Donna, immediately. Avoid all gift taxes. Preserve his applicable estate credit. Allow access to all principal and interest at her age of 18 for college expenses. Remove the property from his gross estate. Which of the following gifting strategies best accomplishes his goals? ``` Establish 2503(b) trust with Donna as income and remainder beneficiary, gifting $15,000 interest in the property per year to the trust. Establish UTMA custodial account for Donna and fund with a $15,000 interest in the property each year. Establish UGMA custodial account and transfer entire property into the account. Establish a Crummey trust with a 5 & 5 power for Donna's benefit. ```

Answer 122

Establish UTMA custodial account for Donna and fund with a $15,000 interest in the property each year. - The 2503(b) requires mandatory income distribution annually. An UGMA account may not hold real property. The 5 & 5 power would limit the withdrawal to $5,000.

Question 123

Your clients, Jane and Tang R. Zahn, are considering a corporate trustee to administer their trusts, rather than his Uncle, Chi Ta Zahn. Which of the following are reasons to favor the corporate trustee? I. Generally stronger financial security and technical skills. II. Lower costs to the estate and trusts. III. Closer relationship with beneficiaries. IV. The corporate trustee will have specialized and sophisticated knowledge of decedent's business interests. I only. I and IV only. II, III and IV only. I, II, III and IV.

Answer 123

I only. - Though there are many good reasons to favor corporate trustees, the only one listed here is statement "I". The other statements favor personal acquaintances or relatives.

Question 124

Dr. Ben Allen has two primary assets in addition to his home and personal property. He is an osteopathic physician. He owns an S corporation that is producing substantial income. He has an X-ray machine and support equipment which is fully depreciated. His son, 18, has decided to go to chiropractic school after graduating from college. He would like to pay for the college and chiropractic school with pre-tax dollars. Based on this information, which of the following intra-family planning techniques would be appropriate? Gift stock in the S corporation to his son and use the education deduction. Sell X-ray equipment on an installment sale basis. Gift and leaseback the equipment and X-ray machine. Transfer the S corporation into a Family Limited Partnership.

Answer 124

Gift and leaseback the equipment and X-ray machine. - Gift and leaseback addresses the means to accomplish the desired objective of using pre-tax dollars to pay his son's tuition because the lease payments are a deductible business expense to the physician.

Question 125

Marie is the founder and sole owner of Purple Cakes Bakery. Allen has offered to buy her business for a price Marie considers reasonable, but Allen does not have all of the funds necessary to pay for the business at the current time. Marie is in good health, her true life expectancy is much greater than the IRS life expectancy factor, and she wants to accept Allen's offer. Allen is not related to Marie and has good credit. Given these facts, which transfer method should be used to transfer the business to Allen? Grantor Retained Annuity Trust. Self-Cancelling Installment Note. Private Annuity. Installment Sale.

Answer 125

Installment Sale. - Marie would sell the business to Allen utilizing an installment sale and would charge a reasonable rate of interest. Because Allen would not have to pay the full sale price at the date of the transfer, he would not need to have all of the funds necessary at that time. Because Allen is not related to Marie, she would not have any reason to enter into a GRAT, SCIN, or Private Annuity, which may inequitably benefit Allen. The best situation would be for Marie to sell the business to Allen in an outright cash sale, but that is not an option in this problem.

Question 126

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? I. This transaction creates a 5/5 lapse problem. II. 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. 1 only. 2 only. Both 1 and 2. Neither 1 nor 2.

Answer 126

1 only. - 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.

Question 127

Which of the following accurately describes the income tax implications of a sale-leaseback using an installment payment method? I. The transferor may not be able to deduct lease payments made to a family member as ordinary and necessary business expenses. II. A fully depreciated property that is transferred by sale-leaseback to a family member can nonetheless be depreciated by the new owner. III. A sale-leaseback reduces the transferor's gross estate more than a gift-leaseback would. IV. The transferor of a sale-leaseback may be subject to depreciation recapture in the year of sale. I and II only. I and IV only. I, II and IV. II, III and IV.

Answer 127

I, II and IV. - All of the above are true statements regarding sale and leaseback except the gross estate will be reduced less not more for a sale in comparison to a gift.

Question 128

Use of an Irrevocable Life Insurance Trust can accomplish which of the following? Create a vehicle to avoid Generation Skipping Transfer Tax. Make proceeds available to the surviving spouse. Ensure that proceeds will be excluded from the probate of both spouses. Shelters cash contributed for premiums from gift taxation up to the annual exclusion amount. I and II only. II, III and IV only. I, II and III only. I, II, III and IV.

Answer 128

I, II, III and IV. | - An ILIT will accomplish all of the items listed in this question.

Question 129

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 129

The assets are included in the donor’s gross estate until maturity. - 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 130

Which of the following apply to gifts to a 2503(c) trust? I. In order to qualify for the annual exclusion, Crummey powers must be used for beneficiaries under age 21 because the gift is a gift of a future interest. II. The annual income is usually taxed to the trust. III. If annual income is used to pay for support items for the grantor, then the income is taxed to the grantor. IV. Unexpended principal and income must be payable to the beneficiary at the attainment of age 21. II and IV only. I, III and IV only. II, III and IV only. I, II, III and IV.

Answer 130

II, III and IV only. - 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 131

Which of the following functional roles may be commonly simultaneously filled by the same person(s) in respect to a grantor trust. I. Grantor. II. Trustee. III. Successor Trustee. IV. Beneficiary. I, II and IV only. I and IV only. I, II, III, and IV. I and II only.

Answer 131

I, II and IV only. - A grantor trust provides inclusion of trust assets in grantor's estate; therefore, a trust grantor (Statement "I") can also be the beneficiary (Statement "IV") of the trust, as well as the trustee. If the grantor is the trustee, he or she cannot be the successor trustee, a successor trustee only operates after original trustee can no longer serve.

Question 132

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 132

A Crummey Trust. - 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 133

A charitable trust which provides an immediate charitable income tax deduction and income to the non-charitable beneficiary from the trust as a sum certain without annual revaluation of assets is known as: A charitable remainder annuity trust (CRAT). A charitable remainder unitrust (CRUT). A grantor retained annuity trust (GRAT). A charitable lead trust (CLAT).

Answer 133

A charitable remainder annuity trust (CRAT). - A CRAT provides a sum certain income payout without annual revaluation of underlying trust assets. A GRAT has no charitable beneficiary. A CLAT pays income to a charity and the remainder usually to a non-charitable beneficiary.

Question 134

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 134

An Estate Trust - Both the GPOA Trust and Q-Tip Trust require distribution of income at least annually to the spouse. A TPP Trust holds tangible personalty. Only the Estate Trust permits income accumulation.

Question 135

In a QPRT the following is true: A QPRT can hold up to two residences. Any income is taxed to the donor. The donor surrenders the tax advantages of ownership. Any income generated in the trust must be distributed by the trust.

Answer 135

Any income is taxed to the donor. | - QPRTs can hold only one residence. You may own 2 QPRTs. The donor retains all tax advantages.

Question 136

Which of the following are disadvantages or "costs" of the 2503(c) trust? I. The 2503(c) trust is irrevocable and the grantor must relinquish control. II. The 2503(c) trust can have only one beneficiary, meaning that funds cannot be taken away from a child who is not observing the wishes of the grantor. III. The 2503(c) trust requires mandatory distribution of income on an annual basis. IV. The 2503(c) trust has expenses involved in filing tax returns and estimated quarterly tax payments. I and II only. I, III and IV only. II, III and IV only. I, II and IV only.

Answer 136

I, II and IV only. | - The 2503(c) trust does not require annual distribution of income. It is the 2503(b) trust that has this requirement.

Question 137

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? A reversionary interest. A life interest. A term interest. A remainder interest.

Answer 137

A remainder interest. - 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.

Question 138

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 gratuatious 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? GRAT. QPRT. SCIN. GRUT.

Answer 138

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

Question 139

For a deed to effectively act as a "will substitute", which of the following is required? Competent grantor's signature. The property is free and clear and not subject to any mortgage. There must be delivery of deed during the grantor's lifetime with an intent to gift. There must be a pre-death recording of the deed. I and IV only. I and III only. I, II and III only. I, II and IV only.

Answer 139

I and III only. - 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 140

Of the following statements, which one best describes the characteristics of a reverse or (reversionary) gift? In the case of a reverse gift, the donee’s projected estate tax liability is not a consideration. Properties with high income tax basis are an excellent choice for this type of gift. The reverse gift may be given at any time prior to the donee’s death. The gift is given with the intention that the donor receive it back with a step-up in basis.

Answer 140

The gift is given with the intention that the donor receive it back with a step-up in basis. - Answer "D" is the only true statement. Answer "A" is incorrect because the property is included in the donor’s gross estate, thus possibly causing estate tax to the donee that might have been avoided. Answer "B" is untrue as gain is not an issue with high basis property. Answer "C" is incorrect as the gift must be completed one year prior to the donee’s death.

Question 141

Julie recently hit it big at the casino. Because of her good fortune, Julie would like to begin a gifting program in which she gives 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: Publicly traded securities are valued at the average of the opening and closing market price for the day of the gift. Real estate is generally valued requiring a written, independent, appraisal. The value of a bond is the present value of all expected future payments. Valuation discounts may be available for lack of marketability, lack of liquidity, and for lack of control.

Answer 141

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

Question 142

George G. Enrind has given taxable gifts equal to his unified credit. He still wants to gift a property to his favorite nephew "Lucky" Fellow, valued at $35,000, without personally paying any gift tax. Which of the following can be considered a correct statement about a "net gift"? "Lucky" can use his unified credit to offset the gift tax. Gift taxes paid by "Lucky" cannot be used as a credit against George's estate tax. George's personal representative will be required to add back the net of the $35,000 less the taxes into his taxable estate because he did not pay any gift tax. George may have to recognize taxable income on the transaction.

Answer 142

George may have to recognize taxable income on the transaction. - Lucky's unified credit cannot be used to offset George's gift. Estate tax is not related to gift tax credits. The tax is to be paid out of the gift, hence the mention of "net gift" in the question. If George's adjustable taxable basis is less than the tax paid, George will have to recognize taxable income equal to the difference.

Question 143

Which of the following may result in a gift for federal gift tax purposes? The exercise of a durable power of attorney for property. The lapse of a general power of appointment which lapsed as a result of time. The exercise of a limited power of appointment (excludes trustees). The simple conversion of an individual to a joint tenancy investment account with your child.

Answer 143

The simple conversion of an individual to a joint tenancy investment account with your child. - The creation (conversion) is a completed property transfer under state property law and is thus a gift.

Question 144

Which of the following accurately reflect(s) the attributes of the unified gift and estate tax? Gift and estate tax forms are the same. Gift and estate taxes have the same exclusions. Gift and estate taxes have the same deductions. Gift and estate taxes have the same exemptions. IV only. I, II and IV only. II, III and IV only. None of the above.

Answer 144

IV only. - The two forms differ. The estate tax return is the 706. The gift tax return is the 709. There are different deductions and exclusions.

Question 145

Which of the following statements concerning the federal gift tax IN 2019 is correct? The federal gift tax applies to all gratuitous transfers. Joint donors can file a joint gift tax return. The federal gift tax system prohibits gift splitting. Taxable gifts from prior years are not added to current year taxable gifts for the determination of the applicable gift tax bracket.

Answer 145

The federal gift tax applies to all gratuitous transfers. - Federal gift tax applies to all gratuitous transfers, but the annual exclusion provides an exemption for the first $15,000. Gifts can be split.

Question 146

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? A well-drafted will leaving everything to Ross with a no-contest clause. A revocable living trust created and funded now with Ross as the beneficiary at Chad's death. An irrevocable trust created and funded with Chad as the income beneficiary and Ross as the remainder beneficiary. Retitling all assets as JTWROS.

Answer 146

A well-drafted will leaving everything to Ross with a no-contest clause. - While all of these options may seem to accomplish Chad's goal, answer "A" has the most inherent risk. The trust options and titling option are much less likely to be susceptible to fraud and undue influence claims. The use of a will in this situation is very susceptible to a contest. The no-contest clause is irrelevant because Chad did not leave anything to anyone else to encourage them not to contest

Question 147

Your client has asked you to assist her in structuring her estate plan. You tell her that though you are not an attorney, you will do what you can. Which parts of the process are appropriate actions that can be completed without the aid of an attorney? I. Advising the client to make her revocable trust irrevocable. II. Calculating the value of the client’s probate estate. III. Advising the client on the need for diversification in her investment portfolio. IV. Advising the client that title of assets would be better as community property. V. Explaining the strategic use of the annual gift tax exclusion. ``` I, III and V only. II, III and V only. III and IV only. III only. I, II, III, IV and V. ```

Answer 147

II, III and V only. - The client is looking for advice in areas that involve the practice of law. This would include "selecting the type of trust," especially in a case when ownership is surrendered and in a case where property titling is involved. Advising on investments, estimating values and explaining the working of a tax do not constitute the unauthorized practice of law.

Question 148

Elizabeth, who is not a licensed attorney, recently started her own financial planning practice. Which of the following activities would be considered the unauthorized practice of law? Analyzing the will to determine which heirs and legatees will receive what. Advising the client as to the implication of a provision in a GRAT Describing the elements of a QTIP trust to a client. Careful reading of trust documents.

Answer 148

Advising the client as to the implication of a provision in a GRAT - Careful reading (D), analyzing (A) and describing the elements (C) are within the financial planners scope assuming the planner is competent to do so. Advising a client of legal implications of a provision is the unauthorized practice of law.

Question 149

Which of the following describe accurately the meaning of the terms "tax inclusive" and "tax exclusive"? Estate tax payments include tax on the tax payment, while gift tax payments do not. Gift tax and estate tax include the tax payment making them inclusive, while income tax payments exclude the payment, thus they are tax exclusive. Tax inclusive items are gift, inheritance and income that will be taxed, while tax exclusive items will avoid such taxation. Gift tax payments include tax on the tax payment, while estate tax payments do not.

Answer 149

Estate tax payments include tax on the tax payment, while gift tax payments do not. - Estate taxes require that tax be paid on the full amount, including the portion of it that will be used to pay taxes.

Question 150

Yana and Bill are married and are in the process of establishing their estate plan. Currently they only have simple mutual wills in place. Yana’s gross estate is currently worth $14 million and Bill’s is $5 million. Bill has made a cumulative taxable gift to his children from a first marriage of $6 million in the current year. If Bill dies this year before completing their new estate plan, how much of Bill’s unused applicable exclusion amount is available for Yana? None $4,505,800 $5,400,000 $11,400,000

Answer 150

$5,400,000 - Bill made taxable gifts of $6 million, which he paid no gift tax on due to the applicable exclusion amount. Therefore, he has reduced his exclusion amount from $11.4 million to $5.4 million. His entire estate is then transferred to his wife so none of the remaining $5 million in his gross estate is taxable. So the total unused exclusion is $5.4 million.

Question 151

Which of the following is not necessary to carry out a Section 303 stock redemption? The value of the stock must be greater than 35% of the decedent’s adjusted gross estate, including gifts made in the last 3 years. The 303 redemption can only be used if the corporation has the cash to redeem the shares. The 303 redemption can be made even without a positive earnings and profits account. The Section 303 redemption is limited to an amount that cannot exceed the death taxes of the estate, plus funeral and administrative expenses for which the decedent is liable.

Answer 151

The 303 redemption can be made even without a positive earnings and profits account. - The closely-held stock must make up 35% of the decedent's adjusted gross estate value and must be the stock of a closely-held firm. The E and P account must be positive or there is no need for a 303 redemption.

Question 152

XYZ Corporation is a closely held corporation. Martin McFly, along with the three other owners, set up a stock redemption agreement requiring the corporation to buy all shares of a deceased or disabled shareholder. The plan is funded by entity life insurance policies on each shareholder. Premiums are paid by the corporation. The agreement states that the share price will be established by an independent, competent third party appraiser. What are the tax implications of this plan? A deceased shareholder's gross estate will be increased by the amount of the life insurance. There is no step-up in basis for decedent's family on the shares of stock covered by the plan. The corporation will owe income tax on the difference between the cash value of the policy and the death benefit amount. I, II and III only. I and III only. II only. None of the above.

Answer 152

None of the above. - The deceased shareholder's estate will not increase due to the life insurance, as the deceased shareholder does not own the policy and already has the value of his interest in his gross estate. There is a step-up in basis because the decendant died and the shares are "purchased" by the corporation. The corporation is "owed" the premiums by the individual at death and does not pay tax.

Question 153

Maria Olmsted Chavez, age 58, is the owner of a closely-held partnership business which makes up 65% of her adjusted gross estate. More than half the assets of the partnership are real estate holdings. Maria wants to undertake a transfer of some sort to her son, Ernesto, to reduce her potential income tax obligations and possible future estate tax liability. Such a transfer would accomplish both of these goals and reduce Maria’s interest in the business by 35%, meaning the business would make up only 30% of her adjusted gross estate. Maria will also be bequething $50,000 to her favorite public charity and the balance to her husband upon her death. In light of these activities and transfers, which of the following elections does Maria lose? Maria can no longer use the special use election. Maria can no longer use the reverse QTIP election. Maria can no longer use the Section 303 election. Maria gives up the right to use the 6166 election.

Answer 153

Maria gives up the right to use the 6166 election. - The amount required to use the Section 6166 is that the ownership asset must make up at a minimum of 35% of the estate. Section 303 is not appropriate because this is a partnership and there is not stock in a partnership. Special use is for valuation of real property used in a trade or business. The reverse QTIP is a generation transfer tax election.

Question 154

Which of the following trusts can permit the trustee to invade the principal for health, education, maintenance, and support (HEMS) for all beneficiaries presuming each trust is structured the same way with the grantor the decedent, the spouse of the grantor the income beneficiary, and the children of the grantor the remainder beneficiaries? 1. An ILIT. 2. A bypass Trust. 3. A GPOA (general power of appointment) Trust. 3 only. 1 and 2. 1 and 3. 1, 2 and 3.

Answer 154

1 and 2. - Statements 1 and 2 are the nonmarital rusts and therefore the trustee can have the power to invade for all beneficiaries. The GPOA trust is a marital trust and the trustee would be redirected to invade for the spouse only or the trust would not qualify for the marital deduction.

Question 155

As the personal representative for the Kazinski estate, your client must or may do the following: I. Defend the estate against creditor claims. II. Hold all income from the estate until all claims have been resolved. III. Favor a certain beneficiary over others. IV. Enhance the value of the estate properties, if possible. IV only. I and IV only. II and III only. I, II and III only.

Answer 155

I and IV only. - Statement "I" is accurate if a creditor's claims should not be paid because it is illegitimate. The personal representative cannot withhold income from the estate, so statement "II" is incorrect. The personal representative cannot favor any beneficiary over another beneficiary, so statement "III" is incorrect.

Question 156

John was married to Holly. All of their jointly held assets were community property. Recently Holly died. John was Holly's only legatee. They had 2 children, Patrick (deceased) and Mary, age 44. John wrote a will some years ago and included was a testamentary trust. Which of the following assets of Johns will be included in the testamentary trust as of John's death? An IRA with Holly named as the beneficiary and Mary the contingent beneficiary. One half of a Qualified Plan that named Holly as the beneficiary with no contingent beneficiary. All of the assets included in an intervivos trust created by Holly for her seperate property with John as the only income beneficiary and the children living as remainder beneficiaries. None of the above choices.

Answer 156

None of the above choices. - The IRA will pass via contract law. All not half of the Qualified Plan will be included in the testamentary trust - no named beneficiary. None of the intervivos trust will be included in probate.

Question 157

Which of the following is an advantage of the probate process? The elimination of income taxation while the property is in probate. Probate reduces estate administration costs. Probate reduces public access to financial information. Probate limits creditor claims against estate property.

Answer 157

Probate limits creditor claims against estate property. - A creditor must file a claim against the estate during the period that the probate is open. Once probate is closed, creditors no longer have the ability to obtain payments (Note: Creditors must be notified). If the creditor does not come forward, the claim is lost forever.

Question 158

Which of the following is not a method for transferring property outside of the probate process? State contract law. State intestacy law. State property titling law with a survivorship feature. State trust law.

Answer 158

State intestacy law. | - Property transferred via the state intestacy law will pass through probate.

Question 159

At the time of his death, Rodney had the following assets: A condominium titled JTWROS with his brother Kevin valued at $400,000. Kevin made no contribution to the condo at the time of purchase or later. A personal residence titled community property with his wife Amy valued at $320,000. When purchased Rodney had contributed $100,000 and his wife Amy had contributed $60,000 to the total purchase price of $200,000. An installment note with an interest rate of 6% when the 7520 rate was 6% and the balance of the note was $190,000. A life insurance policy on Rodney's life that had been assigned to an irrevocable life insurance trust during the last year. The cash value of the policy was $100,000; the death benefit was $250,000 and the beneficiary of the trust was Amy, Rodney's wife. How much is included in Rodney's probate estate? $160,000 $200,000 $350,000 $390,000

Answer 159

$350,000 | - One-half of community property plus the installment notes.

Question 160

Julia Cooperston asked your advice about restructuring an existing brokerage account. She wants to set it up as a brokerage account in her name, and have her son James named as a "transfer on death" beneficiary. The advantage or disadvantage of this arrangement is/are: Julia has reduced her probate estate, an advantage to her. Julia will no longer have sole control over the account, a disadvantage to her. Julia has reduced her gross estate, an advantage to her. Julia will not be able to make any changes on the account without James' consent, a disadvantage to her. I, II, III and IV. I, III and IV only. I only. I, II and IV only.

Answer 160

I only. | - The only impact that a transfer on death will have is to remove the account from her probate estate.

Question 161

A tenancy by the entirety may be terminated in which of the following 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. Severance, whereby one tenant transfers his or her interest to a third party with or without the consent of the other tenant. I and II only. I and III only. II and IV only. I, II and III only. I, II, III and IV.

Answer 161

I, II and III only. - In a tenancy by entirety, the interest of one spouse cannot be terminated or severed without the consent of the other spouse.

Question 162

R and O have been married for 6 years. They live in California, which is a community property state. On the day after their marriage, they purchased a small home for $200,000 with “no money down.” During the course of the six years, they paid $90,000 (R) and $60,000 (O) respectively toward the principal obligation. They now owe $50,000. The value of the house is $400,000 when R suddenly dies. His will leaves everything to Jasmine, his daughter. What is O’s basis in her interest in the property? $60,000. $160,000. $200,000. $400,000.

Answer 162

$200,000. - O gets a step to FMV on her half at the death of R. There is a deemed contribution rule but one-half of community property goes to probate under the will.

Question 163

Five months ago, Sammy Free inherited property from his uncle's estate. The value of the property received by Sammy was declared in the estate to be valued at $20,000. Sammy titled the property in Community Property with his spouse, Alline. Sammy died last month when the property was valued at $50,000. Sammy's will left everything to his spouse, Alline. Within weeks, Alline sold the property for $55,000. What is her gain or loss at the date of the sale? A $5,000 long-term capital gain. A $35,000 long-term capital gain. A $20,000 long-term capital gain. A $35,000 short-term capital gain.

Answer 163

A $5,000 long-term capital gain. - When one spouse dies, both halves of the community property receive a "stepped-up" income tax basis. While his original basis was $20,000, her basis in her half of the community property is $25,000 and since she also inherited his half of community property her total basis at the time of the sale was $50,000 therefore the gain is $5,000 and because it was inherited property the gain is long-term.

Question 164

Which of the following accurately describes a life estate? An interest in property for a specified number of years. An interest in property that ceases upon the death of the owner of the life estate. An undivided interest in property held by two or more related or unrelated persons. A complete interest in property with all the rights associated with outright ownership.

Answer 164

An interest in property that ceases upon the death of the owner of the life estate. - Answer "B" is the definition of a life estate. Answer "A" is the definition of an interest for a term. Answer "C" is the definition of tenancy in common. Answer "D" is the definition of a fee simple.

Question 165

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 and III only. I, II and III only. II, III and IV only. I, II, III and IV.

Answer 165

II, III and IV only. | - Fee simple ownership is included in probate and is not presumed in community property states.

Question 166

Which of the following is an undivided ownership in the property that, upon death of one owner, automatically passes to the surviving owner? I. Tenants by the Entirety. II. Tenants in Common. III. Community Property. IV. Joint Tenancy with Rights of Survivorship. ``` I and IV only. I and II only. II and IV only. I, III and IV only. III and IV only ```

Answer 166

I and IV only. - Tenancy by Entirety is Joint Tenancy or Joint Interest that can only exist between a husband and wife. 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 decendants' half passes through probate.

Question 167

Presuming Big Mike has used his entire lifetime generation skipping transfer tax exemption and this year he gives his granddaughter Jordan, age 16, $1 million dollars in cash after giving her $15,000 (equal to the annual exclusion) on her birthday. Big Mike has the permission of both of Jordan’s parents to make the gift. How much is the gift tax on this gift? (The GST rate is 40%). There is no GST tax or gift tax. There is no gift tax but there is $400,000 of GST. $400,000 gift tax. $560,000.

Answer 167

$560,000. | - The GST tax of $400,000 is added to the gift for the determination of the gift tax. Thus, $1,400,000 × 0.40=$560,000.

Question 168

Big Mike age 65 establishes a trust for his son James, age 40, and his 4 grandchildren ages 7, 5, 3, and 1. The provisions of the trust are that James is the income beneficiary and the grandchildren are the remainder beneficiaries. Which of the following statements is/ are correct? The trust is a skip person because only skip persons are the remainder beneficiaries. The greatest risk to this trust being a skip person is a taxable termination. 1 only. 2 only. Both 1 and 2. Neither 1 nor 2.

Answer 168

2 only. | - The correct answer is B.

Question 169

Kenny Zee (age 65) died after creating a testamentary bypass trust with his wife, Liz (age 65), as the income beneficiary and his two children, Will (age 37), and Doug (age 35) as remainder beneficiaries. His executor funds the bypass trust with the full life time exemption for estates in 2019. The remainder of his estate he leaves as follows: • $1,000,000 outright to his wife, Liz. • $2,000,000 to his girlfriend, Dolly Wink (age 27) in a GPOA trust. The other $4,000,000 in a QTIP with Liz as the income beneficiary and his two children, Walter (age 5) and Devin (age 3) from his girlfriend, Dolly Wink, as the remainder beneficiaries. If the bypass trust has the power to invade for an ascertainable standard for all beneficiaries, which of the following is true? The bypass trust can only permit invasion of corpus for the spouse. If the bypass trust has such a provision, it will be a non-marital trust. If the trust has such a provision, it will cause inclusion of the trust assets in the gross estate of the surviving spouse. If the trust has such a provision, then the trustee must get the permission of the other beneficiaries when distributing corpus to any beneficiary as long as the surviving spouse is living.

Answer 169

If the bypass trust has such a provision, it will be a non-marital trust. - A bypass trust is always a non-marital trust. The income beneficiary will not have inclusion and the trustee does not need to seek permission.

Question 170

Kenny Zee (age 65) died after creating a testamentary bypass trust with his wife, Liz (age 65), as the income beneficiary and his two children, Will (age 37), and Doug (age 35) as remainder beneficiaries. His executor funds the bypass trust with the full life time exemption for estates in 2019. The remainder of his estate he leaves as follows: • $1,000,000 outright to his wife, Liz. • $2,000,000 to his girlfriend, Dolly Wink (age 27) in a GPOA trust. The other $4,000,000 in a QTIP with Liz as the income beneficiary and his two children, Walter (age 5) and Devin (age 3) from his girlfriend, Dolly Wink, as the remainder beneficiaries. Which of the following statements is true? The QTIP trust will be a GST trust because the age difference between Kenny and Walter and Devin is greater than 37.5 years. The QTIP trust assets will be included in Liz’s gross estate at her death even though the assets go to Dolly Wink’s children. The QTIP trust can accumulate income but it must pay all income out to Liz or Liz’s heir prior to any distribution to Walter and Devin. The executor can put the personal residence of Kenny in the QTIP trust and there is nothing that Liz can do about it.

Answer 170

The QTIP trust assets will be included in Liz’s gross estate at her death even though the assets go to Dolly Wink’s children. - QTIP assets are always included in the gross estate of the surviving spouse. The QTIP trust may or may not be a GST trust. Answer A is incorrect because the age difference is irrelevant. Answer C is incorrect because the QTIP must pay out all income at least annually. Answer D is incorrect because the income beneficiary (spouse) of the QTIP can force the trustee to invest the assets in income producing investments.

Question 171

Kenny Zee (age 65) died after creating a testamentary bypass trust with his wife, Liz (age 65), as the income beneficiary and his two children, Will (age 37), and Doug (age 35) as remainder beneficiaries. His executor funds the bypass trust with the full life time exemption for estates in 2019. The remainder of his estate he leaves as follows: • $1,000,000 outright to his wife, Liz. • $2,000,000 to his girlfriend, Dolly Wink (age 27) in a GPOA trust. The other $4,000,000 in a QTIP with Liz as the income beneficiary and his two children, Walter (age 5) and Devin (age 3) from his girlfriend, Dolly Wink, as the remainder beneficiaries. Which of the following statements are true? The GPOA trust qualifies for the unlimited marital deduction. The GPOA trust will cause inclusion in the gross estate of Dolly Wink at her death. 1 only. 2 only. Both 1 and 2. Neither 1 nor 2.

Answer 171

2 only. - Statement 1 is incorrect because Kenny and Dolly are not married. Statement 2 is correct because Dolly has a GPOA over the assets therefore they are included in her gross estate.