Estate Planning and Administration (Probate, Nonprobate Transfers, Power of Appt, Estate Taxation)

Question 1

During the probate process, a personal representative typically does NOT have to:

A. Inform interested persons
B. Settle the estate efficiently
C. Apply for formal probate
D. Take inventory of the estate
E. Appraise the value of the estate

Answer 1

C. Apply for formal probate

Remember that a personal representative has the duty to inform interested persons about the probate process, answer A, as well as to settle the estate efficiently, answer B.

A personal representative must also take inventory of the estate, answer D, and appraise the value of the estate, answer E.

However, a personal representative typically applies for informal probate rather than formal probate, which is only petitioned for when contesting a will.

Question 2

A personal representative must notify the decedent’s creditors of probate with published notice to a newspaper.

T/F

Answer 2

False

A personal representative may notify the decedent’s creditors of probate with published notice to a circulated newspaper or with actual notice sent directly to each creditor. Actual notice may be sufficient, even without published notice to a newspaper.

Question 3

Joey resides in his daughter Jessica’s home in New Jersey and owns land in Pennsylvania. While on vacation in Connecticut, Joey dies in a tragic boating accident.

Where are the probate courts that have domiciliary and ancillary jurisdiction over Joey’s estate?

A. Domiciliary in New Jersey; ancillary in Connecticut
B. Domiciliary in New Jersey; ancillary in Pennsylvania
C. Domiciliary in Connecticut; ancillary in New Jersey
D. Domiciliary in Connecticut; ancillary in Pennsylvania
E. Domiciliary in Pennsylvania; ancillary in New Jersey

Answer 3

B. Domiciliary in New Jersey; ancillary in Pennsylvania

Remember that a probate court has domiciliary jurisdiction in the county where the decedent was domiciled, or resided, at the time of his death.

A probate court has ancillary jurisdiction in any other county where the decedent owned real property at the time of his death.

Here, Joey resided in New Jersey and owned land in Pennsylvania at the time of his death. A probate court in New Jersey has domiciliary jurisdiction, while a probate court in Pennsylvania has ancillary jurisdiction. Thus, answer B is correct.

Question 4

Joey resides in his daughter Jessica’s home in New Jersey and owns land in Pennsylvania. While on vacation in Connecticut, Joey dies in a tragic boating accident.

Jessica recently agreed to store Joey’s will in her safe deposit box at the local bank. After Joey’s death, Jessica must deliver the will to a:

A. Probate court with domiciliary jurisdiction
B. Person able to secure probate
C. Either A or B
D. Both A and B
E. None of the above

Answer 4

C. Either A or B

Remember that a will must be delivered by its custodian to a person able to secure probate or to a probate court with domiciliary jurisdiction.

Here, Jessica has custody of the will because it is in her safe deposit box. Jessica must deliver the will to a person able to secure probate, answer A, or to a probate court with jurisdiction, answer B. Either of these answers is acceptable, so answer C is correct.

Question 5

Mickey is appointed personal representative of Donald’s estate, which is valued at $40,000. Donald’s will bequeaths $20,000 to his uncle Scrooge, as well as $20,000 to his nephew Huey. However, Donald’s estate owes $20,000 to Green Bank. Furthermore, Donald’s wife, Daisy, is claiming a homestead exemption of $20,000.

If Scrooge, Huey, Green Bank, and Daisy all have the right to their $20,000, how should Mickey proceed?

A. Give $20,000 each to Scrooge and Huey
B. Give $20,000 each to Daisy and Green Bank
C. Give $20,000 to Daisy and $10,000 each to Scrooge and Huey
D. Give $20,000 to Green Bank and $10,000 each to Scrooge and Huey
E. Ask a court to determine how to proceed

Answer 5

B. Give $20,000 each to Daisy and Green Bank

Remember that the personal representative of a decedent’s estate should distribute property in the following order: surviving spouse with a statutory right to support, creditors with a claim against the estate, and will beneficiaries.

Here, the order of distribution should be to Daisy, then to Green Bank, then to Scrooge and Huey. Because Donald’s estate is valued at $40,000, only Daisy and Green Bank may receive their $20,000. Thus, answer B is correct.

Question 6

What is the order of distribution?

Answer 6

The personal representative of a decedent’s estate should distribute property in the following order: surviving spouse with a statutory right to support, creditors with a claim against the estate, and will beneficiaries.

Question 7

Which of the following is NOT a type of nonprobate transfer?

A. Totten trust
B. Pour-over will
C. Inter vivos trust
D. Testamentary trust
E. Transfer-on-death deed

Answer 7

D. Testamentary trust

Remember that a Totten trust, pour-over will, inter vivos trust, and transfer-on-death deed are all types of nonprobate transfers.

A testamentary trust, on the other hand, is created by the decedent’s will and must pass through the probate process.

Question 8

A nonprobate transfer is completely outside of the personal representative’s control.

T/F

Answer 8

True

Remember that a personal representative has no control over a nonprobate transfer, which passes outside of the probate process.

Question 9

Cara’s retirement plan provides that any remaining funds in her retirement account are to be paid to her son upon her death.

Does Cara’s retirement plan provide for a nonprobate transfer?

A. No
B. Yes, always
C. Yes, under the common law
D. Yes, under the Uniform Probate Code
E. Depends on whether Cara has a will

Answer 9

D. Yes, under the Uniform Probate Code

Remember that, under the common law, a payable-on-death clause only provides for a nonprobate transfer when included in a life insurance policy.

However, under the Uniform Probate Code, a payable-on-death clause provides for a nonprobate transfer when included in any written instrument, such as a retirement plan.

Here, Cara has a retirement plan that contains a payable-on-death clause. The payment from her retirement account upon her death is considered a nonprobate transfer only under the Uniform Probate Code. Thus, answer D is correct.

Question 10

Paul creates a trust and instructs Teresa, the trustee, to distribute $20,000 to his children each year, starting immediately. Paul also executes a will that contains the following provision: “All of my money is to be transferred into the trust held by Teresa.”

Has Paul provided for a nonprobate transfer of his money?

A. Yes
B. No, because a will must pass through probate
C. No, because a named beneficiary is required
D. No, because his children are not trustees
E. No, because Teresa is not a beneficiary

Answer 10

A. Yes

Remember that a pour-over will is a will provision that transfers probate property into an inter vivos trust created during the settlor’s lifetime.

Both an inter vivos trust and a pour-over will are considered nonprobate transfers.

Here, Paul has created an inter vivos trust, as well as a pour-over will to transfer his money into the trust after his death. Paul has provided for a nonprobate transfer of his money. Thus, answer A is correct.

Question 11

Rose owns a joint bank account with Sarah. She also owns a beach with Shawn in a tenancy in common and individually owns the deed to her beach house. When Rose dies, the following events occur: (1) her share of the joint bank account passes to Sarah by right of survivorship; (2) her share of the beach passes to Shawn under the law of intestacy; and (3) her deed to the beach house passes to Shawn under her will.

Which of the above events are nonprobate transfers?

A. (1) only
B. (2) only
C. (1) and (2)
D. (2) and (3)
E. (1), (2) and (3)

Answer 11

A. (1) only

Remember that a nonprobate transfer passes outside of the probate process.

Property that passes by right of survivorship is considered a nonprobate transfer and may include, for instance, a joint bank account.

Property that passes to a named beneficiary by a transfer-on-death deed is also considered a nonprobate transfer.

Here, event (1) is a nonprobate transfer, because it involves the right of survivorship. Meanwhile, event (2) is not a nonprobate transfer, because it involves the law of intestacy rather than the right of survivorship. Similarly, event (3) involves Rose’s will rather than, for instance, a transfer-on-death deed. Thus, answer A is correct.

Question 12

A special power of appointment may be exercised in favor of anyone other than the person who holds the power of appointment.

T/F

Answer 12

False

Remember that a special power of appointment may not be exercised in favor of the person who holds the power of appointment, as well as his or her estate and creditors.

Question 13

Mark’s will gives Maria the power to give his estate to any family member of her choosing. Maria gives Mark’s estate to their daughter, Misty.

What are the roles of Mark, Maria, and Misty?

A. Mark is the donor; Maria is the appointee; Misty is the donee
B. Mark is the donor; Maria is the donee; Misty is the appointee
C. Mark is the appointee; Maria is the donor; Misty is the donee
D. Mark and Maria are the donors; Misty is the donee and appointee
E. Mark and Maria are the appointees; Misty is the donee

Answer 13

B. Mark is the donor; Maria is the donee; Misty is the appointee

Remember that a donor gives a donee the power to designate an appointee who receives the property.

Here, Mark is a donor giving Maria, a donee, the power to designate an appointee who receives his estate. Because Maria has appointed Misty to receive the estate, Misty is an appointee. Thus, answer B is correct.

Question 14

Jack creates an inter vivos trust, the terms of which provide that: (1) the trustee must distribute trust income to Jill monthly; and (2) Jill has the power to appoint the remaining trust property to any of her children or creditors upon her death.

How may Jill exercise her power of appointment?

A. Jill presently appoints the trust property to her sister
B. Jill presently appoints the trust property to her creditors
C. Jill includes a provision in her will to appoint the trust property to her son
D. Jill includes a provision in her will to appoint the trust property to her sister
E. None of the above; Jill does not have a power of appointment

Answer 14

C. Jill includes a provision in her will to appoint the trust property to her son

Remember that a donee may receive a power of appointment from a trust and, furthermore, has a special power of appointment when she may only appoint the property to a designated class.

Also, a donee has a testamentary power of appointment when she may only exercise the power in her will.

Here, Jill has a special testamentary power of appointment that may only be exercised in her will, so answer E is incorrect. She may not presently appoint the trust property but may include a provision in her will to appoint the trust property upon her death. Answers A and B are incorrect for presently appointing trust property, while answer D is incorrect for appointing trust property to someone other than Jill’s children or creditors. Jill may exercise her power of appointment by including a provision in her will to appoint the trust property to her son. Thus, answer C is correct.

Question 15

Jack creates an inter vivos trust, the terms of which provide that: (1) the trustee must distribute trust income to Jill monthly; and (2) Jill has the power to appoint the remaining trust property to any of her children or creditors upon her death.

If Jill does not exercise her power of appointment, may her creditors claim property from the trust after her death?

A. Yes, because the power of appointment may be exercised after Jill’s death
B. Yes, because they are a designated class who may benefit from the power
C. No, because creditors may not reach property under an unexercised power
D. A and B
E. None of the above

Answer 15

C. No, because creditors may not reach property under an unexercised power

Remember that creditors do not have any power to reach property covered by an unexercised power of appointment, regardless of whether they are a designated class who may benefit from the power of appointment.

Question 16

Hansel executes a will creating the following power of appointment: “I leave 100 acres of land to my sister, Gretel, for life, and then the remainder to whomever she desires.” Gretel’s will does not mention Hansel’s land or the power of appointment but contains the following provision: “I leave my car to my son and the remainder of my estate to my husband.”

Does Gretel’s will exercise her power of appointment when she dies?

A. Yes, always
B. Yes, if she did not receive a gift for not exercising her power
C. No, because her will did not mention Hansel’s land
D. No, because her will did not mention the power of appointment
E. None of the above

Answer 16

B. Yes, if she did not receive a gift for not exercising her power

Remember that a general power of appointment may be exercised in favor of anyone, including the donee.

Furthermore, a testamentary power of appointment may not be exercised during the donee’s lifetime and may only be exercised after her death.

Remember also that a residuary clause in a donee’s will exercises a general testamentary power of appointment if the donee did not receive a gift for not exercising the power, or if the will manifested the intent to exercise the power.

Here, Gretel has the power to appoint the remainder of Hansel’s land to anyone after her death, so she has a general testamentary power of appointment. Gretel’s will contains a residuary clause leaving the remainder of her estate to her husband. The residuary clause exercises Gretel’s general testamentary power of appointment, even though the will does not mention Hansel’s land or the power, only if she did not receive a gift for not exercising the power. Thus, answer B is correct.

Question 17

A gross estate includes the value of the decedent’s:

A. Real property
B. Intangible personal property
C. Share of a joint tenancy
D. A and B
E. All of the above

Answer 17

E. All of the above

Remember that a gross estate includes the value of all of the decedent’s probate and nonprobate property, including real property, intangible personal property, and interest in a joint tenancy.

Question 18

The federal estate tax is imposed on the estate of all decedents who are residents of the United States, even those who are not citizens of the United States.

T/F

Answer 18

True

Remember that the Internal Revenue Code imposes a federal estate tax on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States.

Question 19

Tom dies, leaving behind a gross estate worth $15 million. Some of his money is used to pay for his funeral ($1 million), the administration of his estate ($1 million), and claims against his estate ($1 million). Tom also owes $1 million in unpaid mortgages, and his will bequeaths $1 million each to his wife, his son, his ex-wife, his law firm, and the American Red Cross.

Tom’s gross estate may be deducted by:

A. $3 million
B. $4 million
C. $6 million
D. $7 million
E. $10 million

Answer 19

C. $6 mill

Remember that a number of deductions may be made from a decedent’s gross estate.

These include funeral expenses, estate administration expenses, claims against the decedent’s estate, and unpaid mortgages, as well as charitable and marital bequests.

However, bequests to children, ex-spouses, and law firms may not be deducted from the gross estate.

Here, Tom’s funeral expenses, estate administration expenses, claims against his estate, unpaid mortgages, charitable bequests, and marital bequests ($1 million each) add up to a total of $6 million. Thus, Tom’s gross estate may be deducted by $6 million, and answer C is correct.

Question 20

Tom dies, leaving behind a gross estate worth $15 million. Some of his money is used to pay for his funeral ($1 million), the administration of his estate ($1 million), and claims against his estate ($1 million). Tom also owes $1 million in unpaid mortgages, and his will bequeaths $1 million each to his wife, his son, his ex-wife, his law firm, and the American Red Cross.

Assume that the unified credit against federal estate tax is $5 million and that the federal estate tax rate schedule is as follows: 20% for under $5 million; 30% for $5 million up to $10 million; 40% for $10 million up to $15 million; and 50% for $15 million and above. How much does Tom owe in federal estate tax?

A. 20% of $4 million
B. 30% of $5 million
C. 30% of $9 million
D. 40% of $14 million
E. 50% of $15 million

Answer 20

A. 20% of $4 million

Remember that the federal estate tax is determined by applying the unified credit to the taxable estate, which is calculated by subtracting the available deductions from the gross estate.

The tax rate schedule is then applied to the taxable estate after the unified credit. See id. § 2001(b). Here, Tom’s gross estate is $15 million, and his deductions are $6 million, resulting in a taxable estate of $9 million. The unified credit of $5 million is then applied to the taxable estate, resulting in $4 million. Under the tax rate schedule, Tom owes 20% of $4 million in federal estate tax. Thus, answer A is correct.

Question 21

David dies without a will, leaving behind a mansion and a parcel of land, each worth $5 million. The mansion passes to his daughter, Darcy, under a transfer-on-death deed, while the land passes to Darcy under the law of intestacy. David also has an unexercised special power of appointment for his father’s farm, which is worth $5 million. After receiving $10 million from David’s life insurance policy, Daisy spends $5 million on funeral and administration expenses, $5 million on claims against the estate, and $5 million to keep David’s tech company from going bankrupt.

Assuming that the unified credit against estate tax is $5 million, the tax rate schedule should be applied to what amount to determine David’s federal estate tax?

A. $5 million
B. $10 million
C. $15 million
D. $20 million
E. David does not owe any federal estate tax

Answer 21

A. $5 million

The first step in calculating federal estate tax is to add up the decedent’s gross estate and subtract any deductions to determine the taxable estate.

The gross estate consists of all probate and nonprobate property owned or transferred by the decedent upon death, including life insurance proceeds and general, but not special, powers of appointment.

Deductions include funeral and administration expenses and claims against the estate, but not payments to a company.

Here, David’s gross estate consists of his mansion ($5 million), his parcel of land ($5 million), and the payment from his life insurance policy ($10 million). The only available deductions are the funeral and administration expenses ($5 million) and claims against the estate ($5 million). David’s taxable estate: $20 million - $10 million = $10 million. The second step in calculating federal estate tax is to apply the unified credit against estate tax. See I.RC. § 2010 (1986). Here, the unified credit is $5 million. David’s taxable estate after the unified credit: $10 million - $5 million = $5 million. In the third step, the tax rate schedule should be applied to the taxable estate after the unified credit to determine the decedent’s federal estate tax. See I.R.C. § 2001 (1986). Here, the tax rate schedule should be applied to $5 million. Thus, answer A is correct.