Estate Planning Flashcards
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.
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.
Which of the following types of ownership are only held by married couples?
- JTWROS.
- Tenancy in common.
- Tenancy by the entirety.
- Tenants by marriage.
a) 1 only.
b) 3 only.
c) 1, 2, and 4.
d) 1, 2, 3, and 4.
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.
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
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.
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
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).
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
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.
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
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.
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.
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.
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?
- The imputed interest is considered a taxable gift from Crystal to Holly.
- The imputed interest is taxable income on Crystal’s income tax return.
- The imputed interest is an interest expense deduction for Crystal.
- 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.
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.
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
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
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.
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
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
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.
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
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
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.
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.
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?
- Jerry’s inability to make payments timely.
- The market rate of interest.
- The remaining term of the note.
- 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.
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.
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.
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.
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.
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
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
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.
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.
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.
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.
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.
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.
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.
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
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
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.
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
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
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.
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.
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.
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.
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.
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.
b) CRUT.
- Only a CRUT allows additional contributions. A CRAT does not allow additional contributions. A CRET and CRIT do not exist.
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.
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).
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.
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.
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.
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.
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
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
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
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.
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.
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.
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.
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.
Which combination of the following statements is correct about a 401(k)?
- The employee must have a choice of receiving an employer contribution in cash or having it deferred under the plan.
- 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.
- As a condition of participation, the plan requires that an employee complete at least three years of service with the employer.
- 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
c) (1) and (4) only
- Statement #1 is correct. Statement #4 is correct; the 2019 limit for covered compensation is $280,000.
According to ERISA, which of the following is/are required to be distributed automatically to defined benefit plan participants or beneficiaries?
- Annual accrued benefit as of the end of the previous year
- The plans summary annual report
- A detailed descriptive list of investments in the plan’s fund
- 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)
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.
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?
- A pension plan would allow Pat to save for her own retirement.
- The tax savings from the pension plan contributions would help to offset the cost of this employee benefit.
- 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)
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.
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.
- Have salary deferrals made in his new 401(k) plan equal to the amounts his previous employer contributed to his profit sharing plan.
- Take advantage of employer matching in the 401(k) plan, if available.
- Have the employer make qualified non-elective contributions to his account, if available.
- 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
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.
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
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.
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
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.
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.
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.
Which of the following statements is/are characteristics of tax-sheltered annuities (TSAs)?
- Salary reduction contributions are not reported as W-2 income and are not subject to Social Security tax.
- Maximum salary deferral limit is $19,000 for a newly hired employee.
- Employer contributions are deductible.
- 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)
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.
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.
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.
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
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.
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.
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.
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.
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
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?
- The proceeds will not be taxed as part of Harold’s estate.
- The trust will not be subject to probate.
- The proceeds will not be taxed as part of Ruth’s estate.
- 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.
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.
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?
- A gift of $50,000 cash which is split equally between a son and daughter-in-law.
- A gift in which the donor retains an income interest for life.
- Donor’s residence transferred into joint tenancy with donor’s daughter.
- Stock worth $30,000 given to a friend.
- 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.
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.
Identify the statement(s) below that correctly characterize(s) property interests held by the decedent that, at death, pass by operation of law.
- If the property passes according to the operation of law, the property avoids probate.
- If the property passes according to the operation of law, it will not be included in the decedent’s gross estate.
- Property that passes by operation of law cannot qualify for the marital deduction.
- 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.
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.
To qualify for the marital deduction, Qualified Terminable Interest Property (QTIP) must meet which of the following conditions?
- The surviving spouse must have a general power to appoint the property.
- All of the income must be paid out either to the surviving spouse or to the children of the decedent and the surviving spouse.
- The executor must make the QTIP election.
- 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.
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.
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?
- 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.
- Execute a durable general power of attorney and a durable power of attorney for health care.
- Place all of her assets in an irrevocable family trust with her children as beneficiaries.
- 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
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.
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?
- Donor retains a life estate in the gift property.
- Donor retains the power to revoke or amend the gift. 3. Donor gives more than $10,000 to one donee in one year.
- 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.
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
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.
- Which of the following statements is/are correct?
- 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.
- Upon the transfer of the rental property to the trust, all excess prior years’ depreciation will be recaptured.
- 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.
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.
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.
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.
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.
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.
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.
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).
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:
- Are subject to estate taxes in the estate of the insured if the insured owned the policy.
- May be subject to income taxes if the policy was sold to a third party.
- 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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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).
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.
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.
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.
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.
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.
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.
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.
$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.
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.
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)).
