Estate Planning | Practice Exam Flashcards
Which of the following is a deduction from the gross estate used to calculate the adjusted gross estate?
a) Costs associated with maintaining estate assets.
b) Nontaxable gifts made within three years of death.
c) Federal estate tax marital deduction.
d) Property inherited from others.
Answer: A
Costs associated with maintaining estate assets are deducted from the gross estate to calculate the adjusted gross estate. The other answers are incorrect.
Which one of the following goals can be accomplished using a “pour over” provision in a will?
a) Transfer of assets from an estate into a trust created before the “pour over” provision.
b) Minimization of estate taxes resulting from assets owned before the existence of the “pour over” provision.
c) Transfer of assets from an estate to the estate of another person who died within the past three years.
d) Reduction of probate expenses during administration.
Answer: A
The purpose of a pour-over provision is to make sure that assets from an estate transfer to a previously established trust. Using a pour-over provision does not necessarily minimize taxes or reduce probate expenses.
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 outlived the other by a microsecond.
d) The USDA presumption, when applicable, almost always results in higher estate taxes.
e) The USDA presumption only applies when the two people who die are married.
Answer: C
A survival clause is a clause that requires that a legatee survives for a specific period 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 particular time before inheriting. In contrast, 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 fully disclose all their income and assets to the
other party.
b) When each party has significant wealth and wishes to protect their 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, or children from a previous marriage.
e) When one party considers making a substantial gift to the other in consideration of the marriage.
Answer: A
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.
A correct statement regarding the use of a Grantor Retained Annuity Trust (GRAT) as an estate planning technique is that such a strategy:
a) Is appropriate only if the remainder beneficiary is the grantor’s spouse.
b) Saves estate taxes only if the grantor lives beyond the trust term.
c) Guarantees that the trust property will receive a stepped-up basis at the grantor’s death.
d) It Is generally inappropriate if the trust corpus consists of income-producing assets.
Answer: B
A GRAT is only an effective device if the grantor survives the GRAT term. Although the beneficiaries of the GRAT are generally related to the grantor, there is no requirement that the remainder beneficiary is the grantor’s spouse.
While deciding whether to equalize the estates at the death of the first spouse or to defer estate taxes until the death of the surviving spouse, it is essential to consider the following:
1. The age and health of the surviving spouse.
2. Whether the combined estates exceed two unified credit equivalents.
3. Whether the surviving spouse wants to make gifts to the children.
4. Whether the estates have substantial appreciation potential.
a) 1,2 and 3.
b) 3 only.
c) 2 and 4.
d) 1,2, and 4.
e) 1, 2, 3, and 4.
Answer: E
All of the considerations listed are important in deciding whether to equalize the estates at the death of the first spouse or to defer estate taxes until the death of the second spouse, particularly if the death of the second spouse closely follows the death of the first spouse.
Harold used his funds to create an irrevocable life insurance trust 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 was terminated and went to their children by right of representation.
Assuming a properly drafted irrevocable trust document, which statements) is/are true?
1. The proceeds will not be taxed as part of Harold’s estate.
2. The trust will not be subject to probate.
3. The proceeds will not be taxed as part of Ruth’s estate.
4. The trust will not direct the trustee to pay estate taxes.
a) 1,2 and 3.
b) 1 and 3.
c) 2 and 4.
d) 4 only.
e) 1, 2, 3, and 4.
Answer: E
All statements regarding an irrevocable life insurance trust with income to the spouse and the remainder to the children are factual.
Which combination of the following statements about the marital deduction is valid?
1. The marital deduction treats the husband and wife as one economic unit for gift and estate taxes.
2. Property that qualifies for the marital deduction is excluded from the surviving spouse’s estate.
3. Qualifying all of the decedent’s property for the marital deduction may result in more estate tax being paid.
4. qualified domestic trust is used to provide for the spouse when there has been a second marriage.
a) 1,2 and 3.
b) 2 and 4.
c) 1,3, and 4.
d) 1 and 3.
e) 2 only.
Answer: D
Statements #2 and #4 are not valid. Statement #2 is not true because a property that qualifies for the marital deduction is included in the surviving spouse’s estate to the extent that it is not consumed or otherwise disposed of. Statement #4 is incorrect because a QDOT is used to take advantage of the marital deduction when the surviving spouse is not a US citizen. Therefore, Answers A, B, C, and E can be eliminated.
Which gifts made two years before the donor’s death will be included in the gross estate at the total date-of-death value?
1. A gift of $50,000 cash is split equally between a son and daughter-in-law.
2. A gift in which the donor retains an income interest for life.
3. Donor’s residence transferred into joint tenancy with the donor’s daughter.
4. Stock worth $30,000 given to a friend.
5. Life insurance policy (cash value $5,000) transferred by the deceased to an irrevocable trust.
a) 1,2 and 3.
b) I and 4.
c) 1, 2, and 5.
d) 3,4, and 5.
e) 2,3, and 5.
Answer: E
Statements #2, #3, and #5 are gifts that will be included in the donor’s gross estate at the total 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 the date-of-gift, rather than date-of-death, value.
Identify the statements) below that correctly characterizes) property interests held by the decedent that, at death, pass by operation of law.
1. If the property passes according to the operation of law, the property avoids probate.
2. If the property passes according to the operation of law, it will not be included in the decedent’s gross
estate.
3. Property that passes by operation of law cannot qualify for the marital deduction.
4. The titling on the instrument determines who shall receive the property.
a) 1 only.
b) 2,3, and 4.
c) 1 and 4.
d) 1,3, and 4.
e) 2 and 3.
Answer: C
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?
1. The surviving spouse must have general power to appoint the property.
2. All of the income must be paid out either to the surviving spouse or to the children of the decedent and the surviving spouse.
3. The executor must make the QTIP election.
4. The surviving spouse must be entitled to make lifetime gifts to family members directly from the QTIP.
a) 1 and 2.
b) I and 3.
c) 2 and 4.
d) 3 only.
e) 1, 2, 3, and 4.
Answer: D
Statements #1, #2, and #4 are false. The surviving spouse is entitled to all trust income for life, which must be paid out at least annually. The executor is required to make the appropriate election to qualify a QTIP for the marital deduction
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 paralyzed 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 1999, which left all her assets to her children equally. Of the following estate planning considerations, which is/are appropriate for Doris now?
1. Transfer ownership of her home to her children so it will not be counted as a resource should she have to go into a nursing home and apply for Medicaid.
2. Execute a durable general power of attorney and a durable power of attorney for health care.
3. Place all her assets in an irrevocable family trust with her children as beneficiaries.
4. Start a gifting program transferring assets up to the annual exclusion amount to each of her children and grandchildren.
a) 1, 2, 3, and 4.
b) 2 and 3.
c) 1 and 4.
d) 4 only.
e) 2 only.
Answer: E
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 unacceptable due to its irrevocability. Therefore, Answer E is the correct answer.
Mr. and Mrs. Jones own 640 acres of farmland deeded as “joint tenants, not as tenants in common.” Currently, the land is appraised at $3,000 per acre and continues to escalate annually in value. In addition, Mr.
Jones holds a $250,000 CD in his name only, and Mrs. Jones holds a $250,000 CD in her name only. Mr. and Mrs. Jones have no debts. Mrs. Jones’ last will provides that “all of my assets at my death shall be divided into three equal portions among my children and my husband.”
Mrs. Jones dies unexpectedly, leaving her husband and two children as her sole heirs. Which of the following statements is true?
a) The children will inherit two-thirds of Mrs. Jones’ interest in the CD and her 50% interest in the farm.
b) The children will inherit two-thirds of Mrs. Jones’interest in the CD and no interest in the farm.
c) The children will inherit two-thirds of Mrs. Jones’interest in the CD and two-thirds of her 50% interest in the farm.
d) The children will inherit a statutory interest in the CD and the farm.
e) The children’s share of Mrs. Jones’ CD and her 50% interest in the farm are subject to probate.
Answer: B
Mr. and Mrs. Jones held the farmland as joint tenants, which implies a right of survivorship. Therefore, upon Mrs. Jones’ death, her husband will receive her interest in the farmland by operation of law. In addition, the children will inherit two-thirds of Mrs. Jones’ interest in her CD under her last will and testament.
Mr. and Mrs. Jones own 640 acres of farmland deeded as “joint tenants, not as tenants in common.” Currently, the land is appraised at $3,000 per acre and continues to escalate annually in value. In addition, Mr.
Jones holds a $250,000 CD in his name only, and Mrs. Jones holds a $250,000 CD in her name only. Mr. and Mrs. Jones have no debts. Mrs. Jones’ last will provides that “all of my assets at my death shall be divided into three equal portions among my children and my husband.”
Two weeks after Mrs. Jones’ death, Mr. Jones dies, and his will provides that, “I at this moment give all my real property to my brother James, and I give all my personal property to my children, share and share alike.
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Which one of the following statements is true?
a) The children will inherit Mr. Jones’ CDs and his interest in the farm.
b) The children will inherit Mr. Jones’ CDs and none of his interest in the farm.
c) The children will inherit no interest in either Mr. Jones’ CD or the farm.
d) Mr. Jones’ CDs are subject to probate, but Mr. Jones’s farm interest is not subject to probate.
e) Neither the CDs nor Mr. Jones’ interest in the farm is subject to probate.
Answer: B
According to Mr. Jones’ will, his brother (not his children) will inherit the farmland. The CD is not real property; therefore, it will be inherited by his children.
Jack, who had never married, died this year. Two years before his death, he paid a gift tax of $15,000 due to making the following gifts (these were the only gifts he made that year).
• Stock worth $40,000 to Mickey.
• A $300,000 (death benefit life insurance policy on his life to Molly. (The policy was worth $5,000
at the time of transfer.)
At Jack’s death, the stock had increased in value to $70,000, and the life insurance company paid the $300,000 to Molly. Consider the two transfers and the gift taxes spent when answering the following questions.
By how much will Jack’s gross estate be increased? a) $15,000. b) $60,000. c) $315,000. d) $355,000.
Answer: C
Jack’s gross estate will be increased by $315,000 ($300,000 of insurance + $15,000 of gift tax).
