Estate Planning | Lesson 4: Advanced Estate Planning Flashcards
Jeff died in the current year. He inherited the following property from his wife in 2018:
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Considering only the property listed above, what is the value of the property included in Jeff’s gross estate?
a) $250,000.
b) $704,000.
c) $750,000.
d) $1,350,000.
Answer: C
Property inherited by a surviving spouse is only included in his gross estate to the extent the asset has not been consumed. It is included at the fair market value at his date of death. If a surviving spouse inherits terminable interest property and the QTIP election was made on the property, the surviving spouse must also include the fair market value of the QTIP property. Accordingly, Jeff’s gross estate will consist of the value of the cash at his date of death and the value of the IRA. $250,000 + $500,000 = $750,000. The life estate in the home is a terminable interest, and the QTIP election was not made, so the property value is not included in Jeff’s gross estate, and Jeff did not own the Chevrolet at his date of death.
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 boat, 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 the policy’s designated beneficiary. How much of this death benefit is taxable to Ronald?
a) $0.
b) $50,000.
c) $150,000.
d) $200,000
Answer: B
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 above 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.
The death benefit of a life insurance policy would be taxable, partially or wholly, in which of the following situations?
a) Deborah, as the designated beneficiary, received the $80,000 death benefit of Larry’s life insurance policy. Larry had purchased the policy for $35,000 from his employer when he retired in 2018.
b) Clean-it, LLC, received the $100,000 death benefit of David’s life insurance policy. In 2019, David, the owner of 50% of the stock of Clean-it, LLC, sold the policy to Clean-it for $12,000 as part of an entity-type buy-sell agreement.
c) Weakam, Ullo, and Evans, LLP, received the $1,000,000 death benefit of a life insurance policy on Randy Evans, one of the managing partners. Randy had sold the policy to Weakam, Ullo, and Evans, LP in 2019 when the business was just starting out as part of an entity-type buy-sell agreement.
d) Adam sold a $100,000 death benefit life insurance policy to Dawson for $35,000 as part of a cross-purchase buy-sell agreement. Dawson and Adam were the only two shareholders of Cupper Corporation, and each owned a policy on the other.
Answer: D
If a life insurance policy is transferred for valuable consideration, the death benefit above the transferee’s adjusted basis will be subject to income tax. An exception exists for any transfer of the life insurance policy for valuable consideration to the insured, a partner of the insured, a partnership in which the insured is a partner, a corporation in which the insured is a shareholder or officer, or a transferee who takes the transferor’s basis in the contract. Answer A is an example of a transfer to the insured. Answer B is an example of a transfer to a corporation in which the insured is a shareholder. Answer C is an example of a transfer to a partnership where the insured is a partner. Answer D does not fit any of the exceptions. The life insurance policy is transferred to Dawson, not Cupper Corporation.
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 owners 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 company. 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: B
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.
An executor may elect the unlimited marital deduction for which of the following transfers?
1. Decedent’s will directs the creation of a CRAT, and the decedent’s nonresident alien spouse is the income beneficiary. The trustee of the CRAT is a citizen of the United Kingdom.
2. Bequest to US citizen spouse of the right to use the property for the remainder of her life. The executor has elected QTIP on the property.
3. A payment of $650,000 to fulfill a specific bequest to the decedent’s US-citizen spouse. The decedent’s spouse became a US citizen two months before the filing of the decedent’s estate tax return.
4. A payment of $250,000 to fulfill a specific bequest to the decedent’s resident alien spouse.
a) 2 only.
b) 2 and 3.
c) 3 and 4.
d) 1,2, and 3.
Answer: B
Statement 2 is eligible for the marital deduction because the executor made a QTIP election on the property.
Statement 3 is eligible for the marital deduction because, at the time of the distribution, the spouse was a US citizen. Statements 1 and 4 do not qualify for the marital deduction because if the spouse is a nonresident or non-citizen, a QDOT must be used for a transfer to qualify for the marital deduction. The CRAT in Statement 1 does not qualify as a QDOT because the trustee is not a US citizen.
Janice died in 2022. She married 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 estate’s residual to Thomas. Janice’s will directs the residual to pay the estate taxes. What is the marital deduction on Janice’s federal estate tax return?
a) $12,060,000. b) $11,195,000. c) $1,150,000. d) $865,000.
Answer: C
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 non-spouse beneficiaries and are taxable transfers that will utilize the applicable estate exemption. The bypass trust will receive $11,195,000 ($12,060,000-$865,000), an amount necessary to use any available available 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 $1,150,000 - the gross estate of $13,210,000 reduced by the specific bequests of $865,000 and the amount transferred to the bypass trust ($11,195,000).
Four years ago, Marvin gave a life insurance policy with a $750,000 death benefit to his daughter, Marsha.
At the time of the gift, the value of the life insurance policy was $65,000, and Marvin paid $10,000 in federal gift taxes. Marvin unexpectedly died this year. What amount will be included in Marvin’s federal gross estate related to this life insurance policy?
a) $0. b) $10,000. c) $400,000. d) $410,000.
Answer: A
Because Martin died more than three years after the gratuitous transfer of the life insurance policy, Martin’s federal gross estate would not include any amount related to this life insurance policy.
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: C
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.
Travis, age 28, and his wife, age 26, have recently moved into a new home. They financed $350,000 of the $500,000 purchase price and used their savings to pay the additional $150,000. Travis’ wife stays at home with their 3-year-old son, Alex, and is expecting a baby in two months. Of the following statements, which is not correct?
a Travis should consider a 30-year term life insurance policy on his life which could fund his children’s
educational needs if he should die during the term.
b) universal life insurance policy would provide Travis with the insurance protection of a term life insurance policy and would also provide him with a tax-deferred savings mechanism.
c A whole life insurance policy would provide Travis with the least expensive temporary life insurance
needed to eliminate the mortgage at his death.
d) Travis should consider a whole life insurance policy on his life, which could fund his children’s educational needs or pay off the mortgage if he dies while those needs exist, and which could also provide Travis with a source of funds if he lives through his retirement.
Answer: C
A whole life insurance policy is a permanent type of insurance - eliminating a mortgage is a temporary need.
Also, whole life insurance at Travis’s age would have the highest premium. All of the other statements are correct.
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 the 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: A
A life insurance policy gift is not a transfer for valuable consideration. As such, the death benefit, payable because of Tim’s death, is not included in Pamela’s taxable income.
Gayle is the owner and insured on a $1,000,000 face-value life insurance policy in pay status. Gayle’s adjusted basis in the life insurance contract is $250,000. If Gayle gifts this life insurance policy to her daughter and listed beneficiary, Celeste, which of the following statements is correct?
a) After the gift date, any dividends paid on the life insurance policy will be taxable to Gayle.
b) Celeste can amend the beneficiary designation of the life insurance policy to include her son, Matt, as a co-beneficiary.
c) If Celeste dies before Gayle, Celeste’s probate estate will include the replacement value of the life insurance policy.
d) If Gayle dies within 3 years of the gift of the life insurance policy to Celeste, the death benefit will be included in Gayle’s probate estate.
Answer: B
After Gayle has gifted the life insurance policy to Celeste, Celeste can select the designated beneficiary of the life insurance policy. Celeste has the right to change the beneficiary chosen by Gayle and does not need Gayle’s approval to amend the designation. Answer A is incorrect because any dividends issued on the life insurance policy will be paid to Celeste, and the dividends are nontaxable distributions equal to the return of capital. Answer C is incorrect because the value of a life insurance policy in pay status is the sum of the interpolated terminal reserve plus any unearned premium. Answer D is wrong, as the life insurance policy will be included in Gayle’s federal gross estate if she dies within three years of the gift of the life insurance policy.
In 2020, Amy funded an Irrevocable Life Insurance Trust (ILIT), naming her children as the beneficiaries.
Amy contributed yearly cash to the trust to pay the life insurance policy premiums. In 2022, Amy died in a car accident, and the policy death benefit of $1,000,000 was paid to the ILIT. Of the following statements regarding this ILIT and Amy’s estate, which is false?
a) The ILIT will be included in Amy’s gross estate because Amy had contributed to the trust within three years of her death.
b) If Amy’s executor can demand a distribution from the ILIT to pay Amy’s estate taxes, the value of the ILIT will be included in Amy’s gross estate.
c) Amy’s executor can sell the assets from Amy’s estate to the ILIT without causing the value of the ILIT to be included in Amy’s gross estate.
d) If Amy had released her right to revoke the ILIT in 2021, the value of the ILIT would have been included in
Amy’s gross estate.
Answer: A
Answer A is a false statement. Since Amy established the plan with a new policy and was only making cash contributions to the trust, the value of the ILIT will not be included in Amy’s gross estate. If Amy had transferred an existing insurance plan into the ILIT, the three-year rule would be applicable. If Amy had to pay any gift tax on the contributions to the ILIT, the gift tax paid on the contributions would be included in her gross estate. All of the other options are factual statements. Answer D is a true statement because, to the extent, the grantor of an ILIT releases a right to revoke the trust within three years of death, the value of the ILIT is included in their gross estate.
Joseph died this year. His will bequeaths explicitly $1,000,000 to his son, Kevin, and endows the residual of his estate to his wife, Martha. At the time Joseph had written his will, his net worth was over $4,000,000, but at his death, his net worth had plummeted to $1,050,000. Because his mother would only receive $50,000 ($1,050,000 - $1,000,000) of his father’s assets, Kevin fully disclaimed his bequest three months after his father’s death. How much will Kevin have to report as a taxable gift because of this disclaimer?
a) $0. b) $38,000. c) $50,000. d) $1,000,000.
Answer: A
A qualified disclaimer is a disclaimer that is made in writing, filed within nine months of the decedent’s date of death, does not allow the disclaiming party to specify to whom the property will pass, and does not allow the disclaiming party to benefit from the property before disclaiming his interest. If a disclaimer is qualified, the property will pass to the residual heirs of the estate, or as directed by a disclaimer clause, with no effect on the disclaiming party. In this case, Kevin has no taxable gift related to this disclaimer.
David, age 78, retired from his 40-year career at BBB Corporation last year. As part of an overall estate plan, David has established many different trusts. Of the following list of beneficiaries listed in David’s trusts, who would be a skip person for purposes of the GSTT?
a) Jenna, age 31, David’s wife.
b) Tiffany, age 22, David’s girlfriend.
c) Peter, age 25, David’s grandson, whose mother is living but whose father (David’s son) is deceased.
d) Bill, David’s 81-year-old lifelong neighbor.
Answer: B
Because Tiffany is technically a stranger and is more than 37.5 years younger than David, she is a skip person. Jenna is not a skip person because a spouse is always deemed to be in the transferor’s generation. Peter is not a skip person because of the predeceased ancestor rule. Bill is not a skip person because he is older than David.
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, neighbor, and daughter.
Answer: B
Only the transfer to his neighbor would be subject to GSTT. If the transferee is a stranger over 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.
