Estate Review Questions Flashcards

Question

``` A client purchases property for $7,634,000. Now a few years later the property values have declined. He gifts it this year at a FMV of $6,634,000 to his son. If the client has not used any of his exemption, how much gift tax did he pay in 2014? A. $0 B. $394,000 C. $400,000 D. $512,000 E. $517,600 ```

Answer 1

``` D - Gift $6,634,000 less annual exclusion -14,000 less exemption 5,340,000 $1,280,000 $1,280,000 @ 40% = $512,000 ```

Answer 2

A - There is no gain or loss. It is between $6,634,000 and $7,634,000.

Answer 3

D - There are eight persons at $28,000 each. He agreed to a split gift.

Answer 4

E - The annual exclusion ($14,000) plus the gift exemption ($5,340,000)

Answer 5

B - The gift taxes paid ($435,000) will be brought back into the gross estate but not the GSTT. (NOTE: see page 2- 1.) The gross-up rule is limited to federal gift taxes only. It is only after the taxable estate calculation that taxable gifts are added back to get the tentative tax base. Taxable gifts are not in the gross estate or taxable estate. You must know the flow chart on page 2-1.

Answer 6

A - The 709 is for gift tax and GSTT.

Answer 7

D - The gift tax remains in force with a maximum exemption of $5,340,000. The exclusion is $14,000.

Answer 8

E - The exemption amount of $5,340,000.

Answer 9

A - The gain is measured using the donor's basis. ($50,000). There is no step-up in basis with a gift.

Answer 10

C - The mother can use taxable income (high yield bonds) The sister can use the depreciation (Real Estate). The son can use income plus growth (Dividend paying stocks). The grandson can use tax-free income. The kiddie tax applies until the child turns age 24. This is a test-writer's evaluation question/answer. With the information provided, Answer C is the best answer.

Answer 11

A - The gift was to the granddaughter rather than directly to the educational Institution. If it were paid directly to the college, there would be no taxable gift. Estate Planning Quiz - Lesson 4

Answer 12

E - To be valid, the documents must be executed prior to the principal's incapacity.

Answer 13

C - Answers A and D are true for both instruments. Answer B is spelling out the terms of a special power of attorney.

Answer 14

A - The other answers are advantages.

Answer 15

C - Some may view Answer C as an advantage. The question doesn't indicate that any additional documents exist. Therefore, this is a disadvantage. The durable power ceases when the principal dies.

Answer 16

B - The trustor and grantor are the same person. At death a revocable living trust becomes irrevocable. These trusts can have multiple beneficiaries. 'Only' makes it wrong.

Answer 17

B - A pour-over will normally passes separately owned assets into a trust. A gift at death is included in the gross estate even if it is to a charity or to a wife. The CRAT is included because the spouse has an interest. Then it passes tax-free to the spouse by the marital. When she dies it passes to charity. The annuity is included.addresses how an annuity is included in the estate. Answer B is the only choice.

Answer 18

A - The trust is tax-neutral (conduit).

Answer 19

A - In a sprinkle (or spray) trust, the trustee could distribute or accumulate income as the trustee thinks best. Both simple and complex trusts are irrevocable. QTIPs are simple trusts. Irrevocable trusts could be simple trusts. Difficult, but really Answer A is the only choice.

Answer 20

B - DNI accounts for the income to the beneficiary.

Answer 21

A - The trustee holds legal title to the property.

Answer 22

B - To qualify as terminal interest property, the surviving spouse is normally given a power to make all of the trust assets income producing. She has a right to try to get the trustee to reposition the nonproducing assets. She could go to court and break the trust if it does not produce income.

Answer 23

A - Mr. Ingalls has postmortem control of the B and C trust ultimate beneficiaries (remainderman).

Answer 24

C - The Crummey clause provides a right of withdrawal equal to the lesser of the amount of annual exclusion or the value of the gift transferred. The noncumulative power to lapse is the 5 or 5 power.

Answer 25

C - Only $5,340,000 is exempted in 2014, the remainder should go into the C trust (2nd marriage).

Answer 26

B - The $1,680 is under the point where the kiddie tax starts ($2,000). In addition, there is a time element. His daughter will be going to school in approximately 5 years the CD will mature for face value. He should not wait until his daughter is age 24. This is a favorable tax situation. The corporate bond ($1,960) and the preferred stock have interest rate risk. This is subjective.

Answer 27

C - The donor has gifted the property away.

Answer 28

D - With a 2503(b) trust, principal doesn't have to be distributed. Income distributions are mandatory. The gifts to the trust will be gifts of a future interest. It is not a bad answer, but Answer D is a better choice. The irrevocable trust can solve all the concerns, but the son will have to waive his Crummey rights. It best suits Bill's situation.

Answer 29

C - An irrevocable trust must have Crummey provisions. If Crummey is not stated, the gift is a future interest.

Answer 30

B - The simplest answer is Answer B. Felix gets a charitable deduction, and the children get an estate and income tax free death benefit. In a bargain sale, Felix gets the cash and a partial income tax deduction, but he has gain to report on the sale portion. Although Answer c sounds good, Felix will get an income tax deduction, and the property will be out of his estate, but he does not improve his children's situation. The lead trust is unclear as to whether he will set up the trust while living or at death. In addition, the normal usage of a CLAT is for a large donation. $500,000 would be small. Answer D is not a bad answer, it just is not a very practical or as simple as Answer B.

Answer 31

B - This answer, though incomplete, is still the best answer of the four choices. Answer B is a total of $30,000 ($24,000 + $6,000). The $6,000 difference would be carried forward to next year. If she sells the stock, she would have to pay capital gains tax and would get a smaller charitable deduction. In addition, it says she wants to gift the stock, not sell the stock. The notewith the question has been added for your information as that notewould not be there when you take the exam. In the overall, FMV is better than basis. By using basis, she gets $1,000 more to deduct this year, but she losses $6,000 she can deduct next year. The present value of $6,000 is a lot more than $1,000 (PV) this year.

Answer 32

A - From information from the prior pages

Answer 33

C - Pooled income and gift annuity do not allow a term certain other than the actual life of the beneficiary.

Answer 34

A - By gifting now, she will be able to see the results of the gift while living, and she will get an income tax deduction. If she waits, she will not see either of these results at death.

Answer 35

B - The keys are the variable income and the ability to change the choice of charities.

Answer 36

A - Even a pooled-income fund is considered a charitable remainder trust. A charitable lead trust works in reverse of the remainder trust. I forced you into A. There was no other answer.

Answer 37

D - Unlike the CRAT, CRUT and the family foundation where the 5% is required, there is no required minimum distribution with a CLUT.

Answer 38

A - CRAT pays a fixed income

Answer 39

B - A CRUT pays a fixed percentage of the assets as revalued annually. The percentage is fixed not the income.

Answer 40

C - This is a pooled income fund.

Answer 41

D - This is a charitable lead trust. NOTE: Answer E is a charitable trust. Estate Planning Quiz - Lesson 7

Answer 42

B - The three-year rule applies to all transfers including to a life insurance trust or to a spouse. Any incident of ownership, such as the right to change the beneficiary includes the policy in the estate. Answer IV has no incident of ownership by the decedent.

Answer 43

C - This is a famous estate planning case. IRS has not been able to enforce the premium payor rule. Beamed theorywas the principal that the IRS used to show an incident of ownership. Mr. Leder owned the company which paid the premium. Premium payment is not an incident of ownership. Answer IV is too general an answer to be true. The word alwaysmakes it wrong.

Answer 44

B - The normal gift tax would be $200,000 ($500,000 x 40%). When the son pays the gift tax, it will be $142,857 ($200,000 Ö 1.40). The 1.40 is 1 plus the gift tax bracket (40%).

Answer 45

B - III would not cause the date-of-death value of the gifted property to be included in the gross estate. It is added to the taxable estate. IV is debatable. For example, life insurance would be included at date-of-death value if given within 3 years of death. IV is too broad an answer to be correct. In both Answers A and B is the word retain. Except for 529 plans, a retained interest of any kind is included in the gross estate.

Answer 46

D - A and B are wrong because the children are minors. They have limited assets except for life insurance. If the revocable trust is the named beneficiary, the life insurance ($2,000,000) and all other separate assets could go into the applicable credit amount trust at the first death. These assets could remain there for 40-50 years. Rather than leaving them in trust, when one spouse dies, the survivor should get all the assets (Answer D). In my opinion, Answer D is the more practical answer with the current $6,340,000 exemption or $10,680,000 if they both died.

Answer 47

``` D - Tax base $6,340,000 less exemption 5,340,000 1,000,000 $1,000,000 x 40% = $400,000 Estate Planning Quiz - Lesson 8 ```

Answer 48

B - See page 8-1

Answer 49

E - The question says ever.The donor must outlive the term, or the QPRT and GRAT are included in the donor's estate. Unless the donor gives away all the S corporation stock, something will be included in the donor's gross estate. If II and V are correct and I and III are wrong, the S corporation can not be a right answer. In addition, without saying all the stock was given a way, I do not see how it can be correct. Completed gifts, except certain life insurance transfers and gift taxes paid are never included in the gross estate. There is no 3 year rule with them.

Answer 50

C - The private annuity creates phantom income.

Answer 51

A - With a GRAT and A QPRT, the assets are frozen when transfer is made (taxable gift). The donor must outlive the term. A recap is a freezing technique using preferred stock. With a private annuity or a SCIN, the property is transferred for a stream of income, and if the owner dies, no value is included in the estate.

Answer 52

C - The keys to the solution are conduit income and new equipment. The new equipment could be depreciated, producing minimal income to the client for the next few years. Then when the daughter is at least 17, gift the stock at FMV. $28,000 of stock at 10% return might trigger a kiddie tax in 4 years, but in 4 years the $1,200 could be the standard deduction and $1,200 could be at 10%. Future years could trigger a kiddie tax. Why not take advantage of the standard deduction and the 10% bracket. Meaning, keep the income received under the kiddie tax parents' rate.

Answer 53

E - All the bonds will be worth about $2,000,000 after the term ends. Best answer for the exam - property likely to appreciate. It will be worth more than $2,000,000 at the end of the term. The main purpose of a GRAT is to save on future estate taxes. That is why answer E is the best answer. Income issues are a distant secondary issue.

Answer 54

B - The word freeze suggests a recapitalization. Answer A, suggesting an FLP, is incorrect because the children cannot be limited partners and also be active in the business. Answer C is the reverse of Answer B, but when he owns the common shares, that doesn't freeze the value. Answer D would be a good answer, but it doesn't freeze the value either.

Answer 55

A - The GRAT has a fixed income for a number of years.

Answer 56

A - The trust is tainted by a combination of trust income used to pay premium and support. Estate Planning Quiz - Lesson 9

Answer 57

B - This is a taxable termination. The GSTT is paid by the trustee at the time of distribution. The $6,000,000 would be subject to gift tax at the time of transfer into the trust.

Answer 58

B - There is no GSTT tax on distributing income to his daughter. However, the best answer is that the income will be income taxable to the daughter.

Answer 59

A - This is taxable distribution.

Answer 60

A - The daughter's children (grandchildren) are the donees. Even the annual exclusion can be used for both the GST and gift tax. (6,492,000 - 42,000 = $6,450,000). But it is $1,000,000 over the GST exemption. Answer C is true but it doesn't answer the question.

Answer 61

C - The executor will be called on to take responsibility for business, financial, and administration decisions during the estate settlement period. That takes some skill and knowledge. The trustee receives his or her powers from the trust instrument, including investment activities.

Answer 62

B - No annual exclusion is available at death. $150,000 x 40% = $60,000 estate tax due. Then $150,000 Ð 60,000 = $90,000. $90,000 x 40% = $36,000 GSTT.

Answer 63

C - The grandnephew ($186,000) and the housekeeper ($186,000) are skip-persons, but you may have forgotten to subtract the two annual exclusions ($14,000 each). The sister's daughter is not a skip person. The sister's granddaughter is a skip person. The grandson is no longer a skip person when both of his parents die. There is no generational gap. The grandson is no longer a skip person when both of his parents die. There is no generational gap. Estate Planning Quiz - Lesson 10

Answer 64

B - The alternate valuation date cannot be elected. No estate tax is due. Assets get a step-up to date of death.

Answer 65

B - Not enough is known about the closely held business. There is no indication of real property. Special use valuation can only be used for real property.

Answer 66

C - Dividends declared but not paid are IRD. The IRA will be paid to the CRT (tax-exempt). Life insurance death benefits are income tax free. The royalties receivable will be subject to IRD. Answer II is a tough answer. The IRA money goes into the CRT under charitable gifts. It is not subject to estate taxes. There is no IRD if no estate taxes are paid.

Answer 67

C - Her basis for her half of the jointly held stock is $10,000, and she gets a step-up in basis on his half to $35,000 ($45,000 total). The holding period for property acquired from a decedent is long-term, regardless of the actual holding period. The capital gain is the sales price $80,000 less the basis $45,000 or $35,000.

Answer 68

A - She gets a full step-up in basis to $70,000.

Answer 69

D - She can disclaim 1/2 of the JTWROS property. That is his 1/2, not her 1/2. She still retains her 1/2. The entirety cannot.

Answer 70

D - He died without a valid will. The court will decide is the best answer.

Answer 71

``` D - She does not get a full step-up in basis. Due to joint tenancy, she gets half step-up in basis. Her basis $100,000 His basis after step-up +750,000 ($100,000 to $750,000) $850,000 NOTE: You might argue that this was a community property question. They were not married. ```

Answer 72

``` B - Her gain is calculated as follows: Sale $1,500,000 ss basis - 850,000 less single exclusion (Section 121) - 250,000 Taxable gain $400,000 Since she files as single (they were never married), the 121 is $250,000. Estate Planning Final ```

Answer 73

C - Using a beneficiary or joint tenancy allows assets to flow by contract. They are included in the gross estate. Life insurance payable to a person's estate is subject to probate.

Answer 74

C - 100% will be included in the estate of the non-spouse, Mr. Path or Jennifer, depending on who dies first. The survivor will have to show consideration to get it out of the estate. Joint tenancy passes by contract, not will.

Answer 75

D - Bill's separate assets would automaticallypass by trust or beneficiary arrangements. The USDA is the uniform simultaneous death act.

Answer 76

A - The assets passing to his Wife pass estate tax-free that wipes out the gross estate of $6,500,000. The $6,500,000 tax base qualifies for the marital deduction. The $1,000,000 is wiped out by the $5,340,000 exemption. The answer is zero. The exemption wipes out the tentative tax. This is a good question using the chart on page 2-1.

Answer 77

D - If Answer II is correct, then Answer III is wrong. A tenancy in common is subject to probate.

Answer 78

C - In regards to the testamentary trust, the assets first go through probate. All debts and expenses are paid. After the estate is cleared, the remainder goes into the testamentary trust. The trust is not funded until all aspects of the probate estate are settled. It is not in the probate or gross estate. It does not exist until the estate is settled and all taxes are paid. A testamentary trust can be funded before death, but that is not its normal usage.

Answer 79

D - A direct gift of tuition is not subject to gift tax. $34,000 to his daughter his split (less $28,000 exclusions) $3,000 taxable gift by him and $3,000 by his wife. $44,000 to his son is split (less $28,000 annual exclusion) $8,000 by him and $8,000 by his wife. The life insurance will pass by marital exclusion. The gift to his mother ls based on FMV and is also split, resulting in a taxable gift of $8,000 by him and $8,000 by his wife. Since they are above the $14,000 annual exclusion, they will both need to file gift tax returns. A total of $19,000 ($3,000 + $8,000 + $8,000) or 34,000 + 44,000 + 44,000 = 122,000 Ö 2 = 61,000 then 61,000 - 42,000 = 19,000. The $42,000 is three $14,000 annual exclusions.

Answer 80

A - Aunt's substituted basis Between $660,000 and $1,200,000 no gain or loss FMV date of gift $660,000 loss

Answer 81

C - The daughter's basis is her mother's basis ($20 inheritance value). The gain is $60 less $20.

Answer 82

D - I believe the whole trust is included under beneficial enjoyment because the reversionary interest exceeds 5%.

Answer 83

D - The will is subject to the probate process. Estate taxes are paid by the executor of the estate (part of administration). The testamentary trust is generally funded after death by the will. It is normally set up at death but it can be set up while living, then it is just an irrevocable trust you do while living.

Answer 84

E - The question says probateestate not the gross estate. A general power will be in the gross estate, but it can't be probated. Tenancy by the entirety avoids probate but is included in the gross estate. In Answer II, the insured has not died. The owner died. The replacement value (the interpolated terminal reserve) will be included in the decedent's probate estate. This is one of two ways an insurance policy is included; the second is naming the beneficiary the estate of the insured.

Answer 85

D - Trust I General Power of Appointment Marital ATrust Trust II A QTIP has special powers for the surviving spouse (could have HEMS). Trust III An Estate Trust has a general power of appointment. The spouse can receive income if it produces income. The assets in the estate trust generally don't produce income. Trust IV A Disclaimer Trust (like a non-marital) enables the surviving spouse to receive income, but it is subject to an ascertainable standard (special could have HEMS)

Answer 86

C - All the trusts can qualify except the bypass.

Answer 87

A - Normally a life interest (exception to the terminal interest rule) requires income, but allowing her to live in the home is the same as paying her housing expenses. Mrs. B has a beneficiary enjoyment.

Answer 88

C - STRIPS and high yield corporate bonds produce income. This could cause kiddie tax problems. Always avoid similar investments. Residential real estate produces depreciation (losses) and may have too long a holding period to be an appropriate investment for a child.

Answer 89

B - If the donor/custodian dies before the child comes of age, it might be contended that the donor possessed a general power of appointment (beneficial enjoyment).

Answer 90

C - With a private annuity and the GRAT, he would lose control and lose any remaining depreciation. The GRAT might be included in his estate (the string). With an installment sale, he would lose control, depreciation, and would not share extra cash flow with his children. The installment sale would be included in his estate. With a gift leaseback, he would lose control, and all the income would go to his children. In addition, the private annuity really doesn't work anymore.

Answer 91

B - A CRAT can pay out a fixed percentage of the initial FMV (at least 5%). The specified amount must be paid at least annually to the beneficiary out of income and/or principal. With a CRAT, capital gains will be avoided. With a charitable gift annuity, only part of the capital gains are avoided. With a CRUT, a fixed percentage of the net FMV, as revalued annually, must be payable.

Answer 92

``` E - The following assets are included in his probate estate. Jerico stock $2,960,000 Muni bonds 1,235,000 Income stock 1,187,000 Insurance policy # 1 82,000 Insurance policy #2 350,000 Probate estate $5,814,000 Why is the insurance included? #1 policy - He owns the policy on his wife's life. She did not die; he died. Since he owned the policy, the interpolated terminal reserve is included in his estate and subject to probate. #2 - Ownership (irrevocable assigned to his wife) doesn't affect the beneficiary. He named his estate the beneficiary, and it never says the beneficiary was changed. The insurance carrier will make the check out to his estate and it will go through probate. ```

Answer 93

``` D - Probate estate $5,814,000 1/2 jointly held 337,000 IRA 508,000 Gross estate $6,659,000 NOTE: Debt on the jointly held property isn't subtracted to get the probate or gross estate. Debt is subtracted from the gross estate to get the adjusted gross estate. ```

Answer 94

D - This is not a gift to a 2503{c) trust nor did the irrevocable trust use Crummey provisions. Therefore, the gifts are of a future interest and don't qualify for the annual exclusion [(not $455,000 - $140,000)]. NOTE: Just because it is an irrevocable trust does not mean it has Crummey provisions.

Answer 95

B - The answer is a Charitable Pooled Income Fund. A CRUT requires the client to do a trust. In a pooled income fund, the charity creates and maintains the trust.

Answer 96

D - The answer is a Combined Power of Appointment (A) and Family Bypass (''B) Trust.

Answer 97

D - The initial ownership by Lamar and Alice causes the policy to be included in the estate. They applied for the policy. II is false. The premium payments didn't cause the inclusion. The initial ownership caused the inclusion (They applied). IV is false. USDA (Uniform Simultaneous Death Act) has nothing to do with the inclusion.

Answer 98

C - Answer B is partially true. He did wait more than 30 days, but no accident occurred. So there was no loss. Answer C is the answer. Vans used in business cannot be covered by a personal auto policy; they have to be covered under a business policy.

Answer 99

C - I is false. All gratuitous transfers are not subject to federal gift taxes. Examples are political contributions, payments of tuition directly to an educational institution, and direct payment of another person's medical and hospital bills. II is false. Spouses must file a gift tax return if one spouse consents to gift splitting.IV is a direct payment of tuition. V is true. You must use the exemption. If you exceed $5,340,000, then gift tax is payable at 40%.

Answer 100

C - I is false. The exemption is per donor. II is true. III is false. Annual exclusions are allowable in the calculation of the generation-skipping transfer tax. IV is false. The generation-skipping tax is an additional tax and is intended to deter generation skipping transfers. V is true. Indirect skips cause the GSTT to be due later.

Answer 101

E - With a replacement cost of $175,000, Lamar needs to have insurance coverage of at least $140,000 (80% of $175,000). In fact, Lamar has $150,000. So he will get 100% coverage for a partial loss less the deductible. If the homeowner coverage exceeds 80%, then the claim is paid in full. See Insurance Lesson 3.

Answer 102

D - Answer A is wrong. We don't know the value of the real estate, so 2032A can't apply, and 2032A is only available at death. Answers B and C are wrong. They are usable only at death. Answer D is correct. This is usable now and would reduce the size of his future estate by freezing the size of the asset. Also, his children would own the common shares and would benefit from the growth of the common shares.

Answer 103

E - Answer B is false. If he took out a pure life annuity (at retirement), nothing would remain or be included in his estate. The annuity ceases at Lamar's death. Answers C and D are true. E is the best answer. The P&C agent made correct statements (Answers C and D). NOTE: Unless it says it is variable, it is a fixed annuity.

Answer 104

D - Profit-sharing and stock bonus plans can have 401(k) provisions.

Answer 105

E - Benefits are no longer reduced for ages 66. They are reduced $1 for $3 earned above a threshold until NRA (normal retirement age), but as written this is false. II is false. Currently insured workers are not eligible for retirement benefits. Only fully insured workers are eligible. III is false. Alice isn't eligible yet; she is only 59.

Answer 106

D - In the case, it says You have gathered all the information contained on these pages. The next step is to prepare a financial plan.

Answer 107

D - The total business value (by agreement) is $400,000. He owns 50%. The company will purchase the stock from his estate, and the stock will get a step-up in basis. It appreciates to FMV at death just like any other appreciated asset.

Answer 108

C - Based on a salary of $250,000*, Tom has all the disability he can purchase (individual and group). Refer to Insurance Lesson 5. The universal life policy beneficiary agreement is due to a divorce decree. There are no deficiencies. The homeowners insurance liability limits are too low, not enough liability coverage is always a deficiency. There is no coverage for the doll collection. *Their AGI is estimated to be $280,000. (given in case data). This is called a client evaluationquestion. $100/$300/$50 for a professional is considered inadequate. He needs an umbrella and $100/$300/$50 auto coverage will not be enough. You may consider this unfair, but this is what the exam is like. Answer III (homeowners with only liability coverage of $50,000) forces you into answer C. There is no other possible answer.

Answer 109

D - The smallest gain is the sale of the short-term mutual fund is $6,000 ($11 less $8 cost = $3 per share x 2,000 shares = $6,000), but the gain is taxed at 33% or $1,980 of tax. The gain on the long-term mutual fund ($8,000) is taxed at 15% or $1,200 of tax. Gain in the one stock would be $12,000 long-term and the other gain unknown (no basis was given).

Answer 110

A - The short-term policy will pay until the end of 26 weeks (for the first 6 months). The individual policy starts after 90 days (including the Social Security rider).

Answer 111

C - Short-term disability is usually based on payments per week, and its limits are low (not 70% of salary). Life insurance and a dental program look like the best choices considering a limited amount of money.Tom has sufficient long-term disability but has no personal life insurance. Although LTC could be a good answer, Tom is relatively young. The ages of the other doctor and employees are unknown. The benefit could be attractive and inexpensive or the opposite. This again, is a client evaluation question.

Answer 112

D - Sandra currently has medical coverage under Alice's medical plan. If Alice loses her job, she can get coverage under Tom's medical plan with no preexisting under HIPAA. The settlement provides for specialized schooling only. There are potentially other education needs.

Answer 113

A - Cynthia is 14 years old. The earned income is not subject to the kiddie tax. The deposits into the UTMA account can create unearned income subject to the kiddie tax (up to age 24).

Answer 114

C - Cynthia's earnings would not be subject to FICA or self-employment tax because of the following. The real question is Is employment by a member of one's own family covered by Social Security?A child, under age 18, in the employ of a parent does not come under Social Security. She is still subject to kiddie tax.

Answer 115

C - Inflation and interest rates are low. Even if they rise, the stock market should still perform considering the economy is good to improving. Answers A and B have words like guaranteeand aggressive growthwhich just don't fit the case or client. Answer C is the best choice.

Answer 116

B - All the remaining answers defer tax in some manner. If Tom and Alice buy the building, they can take the depreciation. Private activity bonds avoid 1040 taxes but are subject to AMT.

Answer 117

B - Other than punitive damages, any damages received due to personal physical injuries or physical sickness are not includable in gross income. This is true whether the damages are received by suit or agreement or as a lump sum or periodic payments.

Answer 118

C - He doesn't have a revocable living trust (probate). He does need a durable power of attorney and a living will (incompetence). Although it says he has a will and trust arrangement, it never states that it is a revocable trust. It could be a testamentary trust. A revocable trust has many benefits; avoids probate, privacy, incapacity, etc. it is good planning. They really do not have a very large estate. A life insurance trust is not needed. A QPRT at age 47 for a house worth $250,000 does not seem very practical under the circumstances.

Answer 119

E - Mortgages don't affect appreciation. Does a bigger home appreciate more than a smaller home? I think E is the best answer. (My opinion)

Answer 120

E - How many hours can a 14-year-old work per year? 500. She makes $7,240 or about $14.50/hour. It's hard to justify paying her more. Using $40,000 as a PV, an 5% return and 4 years, the payments (end), Tom needs to gift only a total of $14,000 per year to fund easily the $100,000. I would leave the UTMA alone (not triggering any taxes) and start a 529 plan. Tom can then contribute $14,000 to the 529 plan. The UTMA is partially funded by Cynthia's earnings. That should retain her money. Tom can always recover money from the 529 plan, but it should be his money. Answer C is a good answer. The gift lease-back would be paid with tax deductible dollars. However, this is unearned income and would be subject to the kiddie tax. This is client evaluation.

Answer 121

C - Tom owns the policy (included in his estate). If the insured possessed any incidents of ownership at death, exercisable either alone OR IN CONJUCTION WITH ANY PERSON (such as the irrevocable beneficiary), then it's included in the insured's estate. With his ex-wife as beneficiary, he will have to use $250,000 of his exemption amount which will diminish the amount he can transfer into the bypass trust. Please review the bottom of page 7-1.

Answer 122

D - If he transfers the existing policy to his ex-wife, he will have to get his current wife to consent to gift-splitting and file two gift tax returns. In addition, the policy will remain in his estate for 3 years. Answer B will accomplish nothing. It says, as written, Tom will buy a 20-year term policy. Then the policy still remains in his estate and is not tax deductible. If his ex-wife purchases a policy on his life, it is out of his estate, and it can qualify as alimony (income tax deductible).

Answer 123

C - He doesn't qualify for any of the answers.

Answer 124

E - Most of his assets will go directly to his children. The bypass and disclaimer trust will not reduce his taxes because his assets go to his children by trust or beneficiary. The Q-TIP Trust will defer taxes not decrease them. A QDRO is a pension distribution due to divorce. A CRUT is an estate tax reduction technique.

Answer 125

B - The pension plan and the variable annuity will get no step-up in basis, and they will be subject to both estate and income tax. The residence will get a step-up in basis but will not be liquid. The life insurance will be the face value/liquid. The premium paid is just a fraction of the death benefit is the basis. The death benefit has to be a step-up in value.

Answer 126

D - If R.J. and Florence own the policy, it would be included in their estate, increasing estate taxes. It's not prudent to have four children of two marriages and own a policy like this. The grandchildren have problems, so having them own the policy isn't an option. An irrevocable trust without Crummey provision will make gifts of premium gifts of a future interest. These gifts will not qualify for the annual exclusion.

Answer 127

E - The 2503(c) is for minors. The 2503(b) will work, but yearly gifts would be gifts of a future interest and won't qualify for the annual exclusion. A support trust is to discharge an obligation. R.J. doesn't have an obligation to a grown child. A granter trust would cause the income to be taxed to R.J. With regard to an irrevocable trust, please go back to Lesson 6. Yes, she could demand under the Crummey provisions, but none of the other trusts work.

Answer 128

D - Life insurance is considered ordinary income property. Even though the life insurance policy cost R.J. $40,000, the donor's maximum gift would be the fair market value of $30,000. The stock is STCG, and the gift would be based on basis. The Arizona LP would be like the life insurance. R.J. should hold the LP until disposition and take the loss. Finally, Deep Hole Oil & Gas, with a $60,000 non-recourse loan, will cause two major problems. The $60,000 would be income taxable to R.J. as debt release, and the charity can't accept a gift which has debt associated with it. The equity mutual fund has appreciated. I believe it is the best answer. A non-recourse loan is a loan from the bank to buy the partnership. His financial statement shows the loan as a liability, just like a mortgage loan.