Estate Practice Test Questions

Question 1

1. Mr. Todd (married) has an interest in the following assets.
   – $100,000 in stock (in his name)
   – Land worth $200,000 (in tenancy in common with his sister 50%/50%)
   – $350,000 in a home (in tenancy with rights of survivorship with his wife)
   – $250,000 in trust (with a general power)

If he dies, how much will be included in his gross estate?

A. $375,000
B. $475,000
C. $625,000
D. $725,000

Answer 1

Answer: C
Stock $100,000
½ land/home $275,000
Trust $250,000 (retained interest)
$625,000

Question 2

Bob and Beverly (married) own the following property interests.
Residence (JT) $300,000
2 cars (JT) $50,000
IRA (Bob) $200,000
IRA (Beverly) $200,000
Checking/Money Market (JT) $50,000
Mutual Funds (Beverly) $200,000
Common Stock (Bob) $100,000
Life Insurance (Bob) (owner/insured) $20,000 CV
$200,000 DB

If Bob dies first, what would be the value of his gross estate?
A. $300,000
B. $500,000
C. $600,000
D. $700,000
E. $720,000

pt 2 - If Beverly dies first, what would be the value of her gross estate?
A. $300,000
B. $500,000
C. $600,000
D. $700,000
E. $0

Answer 2

Answer: D
Separately held $300,000
½ of joint held. +200,000
Life Insurance +200,000 (DB*)
Gross Estate $700,000

pt 2 - Answer : C
Separately held. $400,000
½ of jointly held. 200,000
$600,000

Note: Granted that #2 and #3 there would be no tax due, but the exam may still ask you to calculate what is in the gross estate.

Question 3

Which of the following is a community-property interest?
A. Property received as a gift by one spouse.
B. Income earned by one spouse during marriage.
C. Property inherited by one spouse.
D. Income earned by spouses prior to marriage.

Answer 3

Answer: B
Even if only one of the spouses is an income earner, it is presumed that the efforts of the nonworking spouse contributed to the benefit of the marital property.

Question 4

Mr. and Mrs. Able have lived in California, a community-property state, for all their married working lives. These are their assets. Which of these assets will get a full step-up in basis if Mrs. Able dies?
I. A variable annuity Mr. Able purchased for $100,000 in cash now worth $200,000.
II. A 401(k) plan Mrs. Able has through work now worth $150,000.
III. A home they purchased for $400,000 now worth $750,000.
IV. A CD owned by Mrs. Able worth $100,000.
V. A mutual fund purchased in joint names for $100,000 now worth $150,000.

A. I, II, IV
B. II, III, IV, V
C. III, IV
D. III, V

Answer 4

Answer: D
Only long-term gain type property will get a step-up in gain. Answers I, II, and IV are all ordinary income type property.

Question 5

What is the disadvantage of holding property in JTWROS with a non-spouse joint tenant?
A. The property will be subject to probate.
B. The joint tenant will only get a one-half step-up in basis.
C. The full value of the jointly held property could be included in the gross estate of the first tenant to die.
D. The property is not controlled by the terms of a will.

Answer 5

Answer: C
Answer A is incorrect. It will not be subject to probate. If Answer C happens, which it could, then the property would get a full step-up in basis. JTWROS transfers by operation of law. This is not necessarily a disadvantage.

Question 6

What is a disadvantage of tenancy by the entirety?
A. Can only be held by spouses.
B. Creditor protection from the claims of each spouse’s separate creditors.
C. The property is divided between the spouses equally, like JTWROS.
D. Avoids probate.

Answer 6

Answer: A
Answers B, C, and D are advantages. Answer A is a disadvantage because of the restriction placed on the joint owners (husband and wife only).

Question 7

Which type of property is subject to ancillary probate?
A. Solely owned real estate located in a state other than that of the decedent’s residence.
B. JTWROS owned real estate located in a state other than that of the decedent’s residence.
C. Solely owned personal property located in a state other than that of the decedent’s residence.
D. Solely owned real estate located in the state of the decedent’s residence.

Answer 7

Answer: A
Answer D is subject to probate, but not ancillary probate. Answer B passed by operation of law. Answer C is referring to personal property not real estate.

Question 8

To whom should highly appreciated assets be gifted to?

I. A family member in a high tax bracket
II. A family member in a low tax bracket
III. A charity
IV. A private university

A. All of the Above
B. I, III
C. II, III, IV
D. II

Answer 8

Answer: C
A charity (including a private university) and a donee in a lower tax bracket are the best answers.

Question 9

Which of the following are exceptions to the present interest requirement for gifts of future interests?
I. 2503(b) trust
II. 2503(c) trust
III. UTMA
IV. 529 plan

A. All of the Above
B. I, II
C. II, III, IV
D. III, IV

Answer 9

Answer: C
A 2503(b) trust is a gift of a future interest.

Question 10

Jane Murphy wants to gift stock worth $750,000 to her son. Jane was gifted the stock when it was worth $200,000. Jane’s mother bought the stock for $100,000. If she gifts the stock, and her son sells the stock for $800,000, what will be the income tax implications to her son?
A. A STCG of $50,000
B. A LTCG of $50,000
C. A LTCG of $550,000
D. A LTCG of $600,000
E. A LTCG of $700,000

Answer 10

Answer: E
There is no change in basis as the stock is gifted from generation to generation. Her son’s basis will be $100,000. The gain is $700,000 ($800,000 - $100,000).

Question 11

Which of the following is a completed gift?
A. A donor gives the donee a personal check.
B. The gift is Causa Mortis.
C. The gift is beyond the donor’s recall.
D. Creation of revocable bank account.

Answer 11

Answer: C
Answer A is not a completed gift. The transfer of a personal check is not complete until it is paid by the drawee. Causa Mortis is a gift conditional upon the donor’s dying. It is incomplete as long as the donor is alive. In a revocable joint bank account, the donor retains the power to revoke the gift.

Question 12

Under a durable power of attorney, which powers cannot be given to the attorney-in-fact?
A. The power to make disclaimers.
B. The power to execute a will.
C. The power to make a living trust to benefit the principal.
D. The power to operate the principal’s business.

Answer 12

Answer: B
Per the information in Estate Lesson 4.

Question 13

What is the disadvantage of a nondurable power of attorney?
A. It is subject to probate.
B. It is included in the gross estate.
C. It ceases when the principal is no longer legally competent.
D. It continues when the principal becomes incompetent.

Answer 13

Answer: C

Question 14

Who appoints a guardian?
A. A mother or father.
B. The closest relative if the mother and father have died.
C. The executor.
D. The court.

Answer 14

Answer: D
A guardian is appointed by the court.

Question 15

Which of the following will be deductible from the gross estate to arrive at the adjusted gross estate?
A. Property held by the entirety
B. A bequest of $100,000 to the decedent’s college
C. An unpaid federal gift tax of $20,000
D. Marital deduction property

Answer 15

Answer: C
The other answers are deductions from the adjusted gross estate (marital and charitable deductions).

Question 16

What is added to the taxable estate to determine the tentative tax base?
A. Taxable Gifts
B. Non-Citizen Assets
C. Gift Taxes Paid
D. GST Taxes

Answer 16

Answer: A
Taxable gifts are added to the taxable estate to determine the tentative tax base.

Question 17

Which of the following is an advantage of a revocable trust?
A. Funding burden
B. Longer creditor period
C. Avoidance of probate
D. Legal fees to prepare

Answer 17

Answer: C

Question 18

In a QTIP trust, who has postmortem control over the property when the surviving spouse dies?
A. The first spouse to die
B. The second spouse to die
C. The beneficiary of the trust
D. The trustee

Answer 18

Answer: A
The main advantage of the QTIP is that it allows the decedent (the first spouse to die) to have postmortem control over the property when the surviving spouse dies.

Question 19

A QTIP trust can be used for which of the following?
I. A spouse
II. A non-marital partner
III. A child
IV. An ex-spouse by divorce decree
A. I, II
B. I, IV
C. I
D. All of the Above

Answer 19

Answer: C
A QTIP is just for a husband and wife.

Question 20

Which of the following is true about a dynasty trust?
I. It lasts for the lives being plus 21 years and 9 months or as long as local law allows.
II. It is a simple trust.
III. It benefits multiple future generations.
IV. It is a gift of a future interest.

A. All of the Above
B. I, II
C. I, III
D. II, III, IV

Answer 20

Answer: A
Because it is a simple trust, income only, it is a gift of a future interest.

Question 21

Which of the following charitable transfers must pay out a specific amount of income (a sum certain) each year (at least 5%)?
A. CLAT
B. Pooled Income Fund
C. Private Foundation
D. Charitable Gift Annuity

Answer 21

Answer: C
The other choices have no 5% requirement.

Question 22

A wealth replacement trust is a (an)?
A. Estate Trust
B. Bypass Trust
C. Irrevocable Life Insurance Trust
D. Dynasty Trust

Answer 22

Answer: C
A wealth replacement trust is just a fancy name for an ILIT.

Question 23

In regards to life insurance, which of the following is not an incident of ownership?
A. Insured has the right to borrow against the cash reserves.
B. Insured has the right to assign the policy.
C. Insured pays the premium.
D. Insured can change the beneficiary.

Answer 23

Answer: C
Premium paying is not an incident of ownership.

Question 24

A recapitalization is which of the following?
A. Removes the asset from the gross estate.
B. Discounts the asset in the gross estate.
C. Freezes the asset in the gross estate.
D. Is a retained life estate.

Answer 24

Answer: C
A recap is considered a freezing technique.

Question 25

Linda Lee dies owning a small business. The business before her death is quite valuable. Since Linda was not married, her taxable estate is above the exemption amount (taxes will be due). What could her executor claim to reduce the size of the estate?
A. A Minority Discount
B. A Co-Ownership Discount
C. A Blockage Discount
D. A Key Person Discount

Answer 25

Answer: D
A key person discount may be allowed for a business that lost a key employee who was responsible for its goodwill or administrative and management skills. A co-ownership discount is for real estate ownership with another person.

Question 26

A qualified domestic trust qualifies the estate for:
A. Applicable Credit Amount
B. Applicable Exemption Amount
C. The Marital Deduction
D. Unified Credit for Marital Property

Answer 26

Answer: C
Per definition.

Question 27

The main reason to do a SCIN over and installment sale is?
A. For the seller to pay more income tax while living.
B. For the seller to remove the balance of any payments due at a premature death from his/her estate.
C. For the seller to receive a larger income stream (a premium) while living.
D. For the seller to remove and gain (taxable income) either prior to death or due to a premature death.

Answer 27

Answer: B
Although Answer C is true, the main reason for doing the SCIN is to remove the asset from the estate due to a premature death. Answer A is true, but it is a disadvantage.

Question 28

How much in gifts could a client and spouse give away using the annual exclusion ($17,000) to 8 family members if the IRS allowed for a 50% valuation discount using a FLP?
A. $272,000
B. $544,000
C. $1,088,000
D. $2,176,000

Answer 28

Answer: B
$17,000/50% = $34,000

$34,000 x 2 (client & spouse) x 8 (members) = $544,000

Question 29

Intentionally defective grantor trust can be defective for?
I. Income tax
II. Estate tax

A. I
B. II
C. Both I and II
D. Neither I nor II

Answer 29

Answer: C
They can be defective for both income and estate tax.

Question 30

When is a reversionary interest tainted for income tax purposes?
A. Never, the interest is only tainted for estate tax purposes.
B. When the interest exceeds 5% of the trust value at the time of creation.
C. When the interest exceeds basis.
D. When the client has the right to use or enjoy the trust property.

Answer 30

Answer: B
By definition

Question 31

Sam Smith, a financial planner, died unexpectedly. He had billed a client $20,000 for professional advice concerning a buy-out of a competitor. Sam was single and as a result of the fee being paid, his estate tax liability increased by $9,000, and his income tax liability increased by $7,000. What will be the tax result?

A. His estate will pay $16,000 in taxes.
B. The $9,000 estate tax will be due, but his estate is allowed an income tax deduction for the estate taxes attributable to the fee collected.
C. The $7,000 income tax will be due, but his estate is allowed an estate tax deduction for the income taxes attributable to the fee collected.
D. $2,000 in taxes will be due.

Answer 31

Answer: B
This is an IRD income tax treatment situation. The $9,000 of estate tax will be due.

Question 32

Which of the following is not a probate avoidance strategy?
A. Place assets in a revocable trust
B. Place assets in tenancy in common
C. Place assets in a Totten trust
D. Place assets in a payable on death account

Answer 32

Answer: B
Tenancy in common assets are subject to probate.