Estates Ch 12 Special elections / Postmortem PLanning

Question 1

Funerals are expensive and can be pre-funded to reduce the expense burden for the family and the estate.

a. True b. False

Answer 1

True

Question 2

Administrative expenses of an estate include the expense of the preparation of the estate tax return.

a. True b. False

Answer 2

True

Question 3

Any passive loss carryforwards are deductible on the decedent’s final income tax return.

a. True b. False

Answer 3

True

Question 4

An executor may choose to waive their executor’s fee.

a. True b. False

Answer 4

true

Question 5

A casualty loss, if permitted, may be deducted on the fiduciary income tax return (Form 1041) or on the estate tax return (Form 706).

a. True b. False

Question 6

U.S. savings bonds do not receive a step-to fair market value at the decedent’s date of death. When redeemed, all interest is subject to ordinary income tax.

a. True b. False

Answer 6

True

Question 7

A couple that elects to split gifts must agree to split all gifts made to third parties during the year.

a. True b. False

Answer 7

True

Question 8

A decedent’s assets are included in their gross estate at the fair market value at the decedent’s date of death or the alternate valuation date.

a. True b. False

Answer 8

True

Question 9

To reap the full benefits of special use valuation, the heirs of the property must use the property in the same use as the decedent for at least ten years after the decedent’s date of death.

a. True b. False

Answer 9

True

Question 10

Which of the following is not a typical reason an estate will have liquidity needs?

a. To meet specific bequests.
b. To pay taxes.
c. To pay life insurance premiums on the decedent’s life.
d. To pay funeral and administrative expenses and the executor’s fee.

Answer 10

The correct answer is c.

Generally, an estate does not need cash to pay the premiums on a life insurance policy for the decedent since the decedent is dead.

All of the other options are reasons an estate will have liquidity needs

Question 11

Which of the following statements regarding selling an estate’s assets to generate cash is not correct?

a. The estate may have income tax consequences.

b. The assets may need to be sold at less than their full, realizable fair market value.

c. Any losses on the sale of the assets are deductible as losses on the estate tax return.

d. Any selling expenses are deductible on the estate tax return.

Answer 11

The correct answer is c.

Any losses on the sale of the assets are inc ome tax losses and are deductible on the estate’s income tax return, not on the estate tax return. All of the other answers are true statements.

Question 12

Darnell was a majority owner in a closely-held corporation. 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 (which is 45% of the value of his adjusted gross estate). Like most majority owners in closely-held businesses, Darnell did not have much liquidity in his estate and his executor was forced to redeem some of his interest in the business.
If Darnell’s executor redeemed 30% of Darnell’s interest back to the corporation 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 12

The correct answer is b.

Darnell’s estate would have an adjusted basis in the 30% interest equal to 30% of the fair market value at Darnell’s date of death, or $1,800,000.
If the executor of Darnell’s estate redeemed the interest back to the corporation 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

Question 13

Mary Jane’s husband died in October of 2022. Which filing status will Mary Jane probably use on her 2022 income tax return?

a. Single.
b. Head of household.
c. Married filing jointly.
d. Qualifying widow

Answer 13

The correct answer is c.

In the year of death, the surviving spouse can file either married filing separately or married filing
jointly.

Question 14

Before his death in 2022, Melvin, age 66, incurred $65,000 in medical bills which were not reimbursed by insurance. Melvin’s taxable estate at his death was $675,000 and his adjusted gross income for 2022 was $100,000.
How much of Melvin’s medical expenses will be deducted on his estate tax return?

a. $0.
b. $57,500.
c. $65,000.
d. $100,000

Answer 14

The correct answer is a.

In this situation, Melvin’s executor would not elect to deduct any of the final medical expenses on Melvin’s estate tax return because the medical expenses will not change the estate tax due on Melvin’s
estate tax return - Melvin’s taxable estate is less than the applicable estate tax credit equivalency.

Melvin’s executor will deduct the expenses, to the extent they exceed 7.5% of Melvin’s AGI, on Melvin’s final income tax return.

Question 15

Which of the following is not a typical reason an estate will have liquidity needs?

To meet specific bequests.
To pay taxes.
To pay life insurance premiums on the decedent’s life.
To pay funeral and administrative expenses and the executor’s fee.

Answer 15

To pay life insurance premiums on the decedent’s life.
Rationale

Generally, an estate does not need cash to pay the premiums on a life insurance policy for the decedent since the decedent is dead. All of the other options are reasons an estate will have liquidity concerns.

Question 16

Mary Jane’s husband died in October of 2024. Which filing status will Mary Jane probably use on her 2024 income tax return?

Single.
Head of household.
Married filing jointly.
Qualifying widow.

Answer 16

Married filing jointly.
Rationale

In the year of death, the surviving spouse can file either married filing separate or married filing jointly.

Question 17

In 2022, Sloan created and funded an irrevocable life insurance trust (ILIT) naming her children as the beneficiaries. The trustee purchased a policy on Sloan’s life and Sloan contributed cash each year to the trust to pay the life insurance policy premiums. In 2024, Sloan died in a car accident, and the policy death benefit of $1,000,000 was paid to the ILIT.
Which of the following statements regarding this ILIT and Sloan’s estate is false?

The ILIT will be included in Sloan’s gross estate because Sloan made a contribution to the trust within three years of her death.

If Sloan’s executor can demand a distribution from the ILIT to pay Sloan’s estate taxes, the value of the ILIT will be included in Sloan’s gross estate.

Sloan’s executor can sell the assets from Sloan’s estate to the ILIT without causing the value of the ILIT to be included in Sloan’s gross estate.

If Sloan had released any rights she had to revoke the ILIT in 2023, the value of the ILIT would be included in Sloan’s gross estate.

Answer 17

The ILIT will be included in Sloan’s gross estate because Sloan made a contribution to the trust within three years of her death.

Rationale

Option a is false statement. Since Sloan was only making cash contributions to the trust, the value of the ILIT will not be included in Sloan’s gross estate. If Sloan 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 true statements.

Option 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.

Question 18

The executor of an estate makes many elections before filing an estate tax return and the estate’s income tax return.
Which of the following is not an available election for the executor?

Utilizing the annual exclusion against the testamentary transfers.

Selection of the tax year-end.

Electing QTIP on certain property passing to the surviving spouse.

Deducting the expenses of administering the decedent’s estate on the estate’s income tax return.

Answer 18

Utilizing the annual exclusion against the testamentary transfers.
Rationale

The annual exclusion cannot be used against testamentary transfers. All of the other options are available elections for the executor.

Question 19

Which of the following statements concerning an illiquid estate is true?

If the executor of an illiquid estate takes a loan to pay estate taxes, and pledges the estate’s assets as security for the loan, the interest on the loan is deductible.

When an executor sells an estate’s assets eight months after the decedent’s date of death, any gain or loss is included in the fair market value of the asset in the decedent’s gross estate.

An heir who agrees to take an in-kind distribution, instead of a cash distribution, from the estate, will take the property with an adjusted basis equal to the decedent’s adjusted basis immediately before his death.

Real property valued under the special use valuation rules can be sold after four years for an unrelated use without suffering recapture.

Answer 19

If the executor of an illiquid estate takes a loan to pay estate taxes, and pledges the estate’s assets as security for the loan, the interest on the loan is deductible.

Rationale

The interest on a loan used to pay estate taxes is deductible by the estate.

Option b is a false statement as the property is reported on the estate tax return at the fair market value at the decedent’s date of death, or the alternate valuation date.

Option c is incorrect as the heir would receive the property with an adjusted basis equal to the fair market value at the decedent’s date of death.

Option d is incorrect as the recapture occurs if property valued under the special use valuation rules is sold within ten years of the decedent’s date of death.

Question 20

Which of the following is not a benefit of taking a loan to pay estate taxes and administration fees?

The interest on the loan is deductible for income tax purposes.

The executor of the estate will have more time to sell the estate’s assets.

The estate’s assets will not be sold in a fire-sale fashion.

The principal of the loan is a debt on the estate tax return.

Answer 20

The principal of the loan is a debt on the estate tax return.
Rationale

The principal of the loan is not a debt on the estate tax return.
The estate tax return would only include those debts that existed at the date of the decedent’s death.
This debt would have been acquired by the executor after the decedent’s date of death. All of the other answers are true benefits.

Question 21

Mel died this year. His will specifically bequeaths $1,000,000 to his daughter, Vera, and bequeaths the residual of his estate to his wife, Alice.
At the time Mel had written his will, his net worth was in excess of $4,000,000, but at his death his net worth had plummeted to $1,050,000.
Because Vera’s mother would only receive $50,000 ($1,050,000-$1,000,000) of her father’s assets,
Vera fully disclaimed her bequest in writing three months after her father’s death and prior to receiving any benefit from the bequest. How much will Vera have to report as a taxable gift because of this disclaimer?

$0.
$38,000.
$50,000.
$1,000,000

Answer 21

0.
Rationale

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 their 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 to the disclaiming party. In this case, Vera has no taxable gift related to this disclaimer.

Question 22

Addison’s husband died in October of 2021. Addison has a one-year-old dependent child and has not remarried. Which filing status will Addison use on her 2024 income tax return?

Single.
Head of household.
Married filing jointly.
Qualifying widow.

Answer 22

Head of household.
Rationale

Addison will file as head of household in 2024. Since Addison’s husband died in 2021, she will file married filing jointly for the year of her husband’s death. In the two years after her husband’s death (2022 and 2023), Addison will file as qualifying widow. For the 2024 tax year, Addison will file head of household, and this will continue until she remarries or no longer provides a home for her child

Question 23

UPDATED FOR 2024:
In July 2024, the year of Casper’s death, Casper has a taxable estate equal to $14,850,000. At the time of Casper’s death, his only asset is a closely-held business interest.
Casper’s executor properly elects Sec. 6166 installment payments on a timely filed estate tax return. If the long-term annual AFR is 3%, how much is the first annual interest payment? (Assume no previous taxable gifts.)

$0.
$9,920.
$14,880.
$40,970.
Confidence o

Answer 23

$9,920.

Rationale

Tax Estate $14,850,000
Estate Tax $5,885,800 ($345,800 + 0.4 x $13,850,000)
Applicable Credit $5,389,800
Estate Tax $496,000
$496,000 @ 2% $9,920 (First $740,000 is taxed at 2%)
$9,920

Under Sec. 6166, the closely-held business interest is treated as the last amount to the added to the estate, therefore, only the tax on the value of the business in excess of $13,610,000 (in 2024), up to a maximum of $1,850,000 (in 2024), receives the special two percent interest rate. The excess over $13,610,000 is $1,240,000, which is less than $1,850,000, so the tax on the full $1,240,000 is subject to the 2 percent rate. The tax on $1,240,000 is 40% x $1,240,000 = $496,000. The interest at the 2 percent rate is $496,000 x 2% = $9,920.

Question 24

Before his death in 2024, Melvin, age 66, incurred $65,000 in medical bills which were not reimbursed by insurance. Melvin’s taxable estate at his death was $675,000 and his adjusted gross income for 2024 was $100,000. How much of Melvin’s medical expenses will be deducted on his estate tax return?

$0.
$57,500.
$65,000.
$100,000.

Answer 24

$0.
Rationale

In this situation, Melvin’s executor would not elect to deduct any of the final expenses on Melvin’s estate tax return because the medical expenses will not change the estate tax due on Melvin’s estate tax return - Melvin’s taxable estate is less than the applicable estate tax credit equivalency. Melvin’s executor will deduct the expenses, to the extent they exceed 7.5% of Melvin’s AGI, on Melvin’s final income tax return.

Question 25

In which of the following cases will Preston, the executor of his father’s estate, not waive his executor’s fee?

Preston is a 37% taxpayer and his father’s estate is a 24% taxpayer. Preston is also a beneficiary of the estate.

Preston is the only heir of his father’s estate.

Preston and his mother are the only heirs to his father’s estate. Neither Preston’s father or his mother are very wealthy and his mother has very expensive prescription costs.
Preston is in the 37% marginal tax bracket.

Preston is one of three beneficiaries of his father’s estate. The beneficiaries will share the residual of the estate equally

Answer 25

Preston is one of three beneficiaries of his father’s estate. The beneficiaries will share the residual of the estate equally.
Rationale

Based on the scenario, Preston will not waive his executor’s fee in option d. If he waived the fee he would have to share the residual with two other beneficiaries, and he would be left with less than if he would have taken the executor’s fee.

Preston would waive his fee in the scenarios under options a and b as the overall tax burden would be lower. Preston would also waive his fee in option c because he would most likely want to help his mother.

Question 26

Which of the following is not a requirement of using the special use valuation of property?

The property must be used in a farming operation or a trade or business that was actively managed by the decedent or the decedent’s family for 5 out of the 8 years immediately preceding the decedent’s death.

The value of the real and personal property used in a qualifying manner must equal or exceed 50 percent of the decedent’s gross estate as adjusted.

The value of the real property used in a qualifying manner must equal or exceed 75 percent of the value of the decedent’s gross estate as adjusted.

The qualifying property must pass to qualifying heirs who must actively participate in the farming activity or trade or business.

Answer 26

The value of the real property used in a qualifying manner must equal or exceed 75 percent of the value of the decedent’s gross estate as adjusted.

Rationale

Option c simply reads the percentage incorrectly. The value of the real property used in a qualifying manner must equal or exceed 25 percent of the value of the gross estate as adjusted.

Question 27

Which of the following statements regarding selling an estate’s assets to generate cash is not correct?

The estate may have income tax consequences.

The assets may need to be sold at less than their full, realizable fair market value.

Any losses on the sale of the assets are deductible as losses on the estate tax return.

Any selling expenses are deductible on the estate tax return

Answer 27

Any losses on the sale of the assets are deductible as losses on the estate tax return.
Rationale

Any losses on the sale of the assets are income tax losses and are deductible on the estate’s income tax return, not on the estate tax return. All of the other answers are true statements.

Question 28

The Dalton Family Winery (an LLC) has operated a winery with estate grown grapes for generations. Mike owns 100% of the winery valued at $8.5 million, $6.5 million of which is the value of the real property. His estate is valued at $15 million. His son and daughter-in-law have long since toiled in the vineyards to pick the grapes. Mike plans to leave the entire operation to them.
Which postmortem election(s) could Mike’s executor make use of presuming Mike is not married at the time of his death and that his adjusted gross estate is equal to his gross estate?

IRC Sections 303 and 6166.
IRC Sections 2032A and 303.
IRC Sections 2032A and 6166.
IRC Sections 303, 2032A and 6166.

Answer 28

IRC Sections 2032A and 6166.
Rationale

Mike’s executor can elect Section 2032A and Section 6166 (not Section 303 as the business is not a C corporation with residual earnings and profits)

Question 29

Which of the following estates will most likely have the greatest liquidity problem?

An estate with $4,000,000 of marketable securities.

An estate comprised of rental real estate valued at $1,000,000 and marketable securities totaling $2,000,000.

An estate consisting of a closely held business interest valued at $13,600,000, several pieces of artwork valued at $400,000, and $500,000 of cash.

An estate comprised of a closely held business interest valued at $142,500,000, and cash of $100,000.

Answer 29

An estate comprised of a closely held business interest valued at $142,500,000, and cash of $100,000.

Rationale

The estate in option d will most likely have the greatest liquidity problem because of the lack of cash that will be necessary to pay the estate tax, and the fact that the closely-held business interest will generally not be very liquid. Option a is completely comprised of marketable securities, which can easily be converted to cash. Option b owes no estate tax, and there are marketable assets which can be liquidated to use to pay the other estate expenses. The estate in option c may have a liquidity problem but not as bad of a liquidity problem as option d.

Question 30

he executor of an estate liquidated assets to generate the cash necessary to pay the estate taxes. Of the following assets, which is the least likely to generate income tax consequences upon its sale?

Real estate sold within three months of the decedent’s date of death.

Publicly traded securities sold two weeks after the decedent’s date of death.

The redemption of the stock of a closely-held business seven months after the date of death. The redemption qualified for Section 303 treatment.

Publicly traded securities sold eight months after the decedent’s date of death.

Answer 30

Real estate sold within three months of the decedent’s date of death.
Rationale

The real estate sold within three months of the decedent’s date of death would not generally create any income tax consequences because the fair market value on the estate tax return of that piece of real estate would likely be that sales price (real estate prices do not ordinarily fluctuate greatly over short periods of time).

So, when the estate sold the real estate within a few months of the date of death it would typically not have any gain or loss on the transaction because its adjusted basis (the fair market value on the estate tax return) would be equal to the proceeds of the sale.

Options b and d would create income tax consequences as the adjusted basis of the securities to the estate would be the fair market value of the securities at the decedent’s date of death.
Since these are publicly traded securities, their value changes daily, and the estate would most likely have some gain or loss on the sales. The stock redemption in option c would create favorable tax consequences.
Section 303 redemption takes an otherwise dividend distribution subject to ordinary income tax and subjects any gain to capital gains tax.

Question 31

Which of the following requirements must be met for a disclaimer to be considered qualified for estate tax purposes?

A.The disclaimer must be made within 6 months of the transfer.

B.The disclaimant can specify who will receive the disclaimed property.

C.The disclaimer must be in writing.

D.The disclaimant can accept benefits from the disclaimed property prior to disclaiming.

Answer 31

Solution: The correct answer is C.

The disclaimer must be in writing to be acknowledged.

Choice A is incorrect. The disclaimer must be made within 9 months, not 6 months.

Choice B is incorrect. The disclaimant cannot specify who will receive the disclaimed property.

Choice D is incorrect. The disclaimant cannot accept any benefits from the disclaimed property prior to disclaiming.

Question 32

A deceased spouse’s unused estate tax exemption may be transferred to the surviving spouse by:

A.Filing an election on a timely filed estate tax return by the executor of the deceased spouse’s estate.

B.Having the surviving spouse file an amended individual income tax return claiming the unused exemption.

C.The unused exemption is automatically transferred to the surviving spouse without any special election.

D.Contacting the IRS within 6 months of the death to transfer the unused exemption to the surviving spouse.

Answer 32

Solution: The correct answer is A.

The executor must file an election on a timely filed estate tax return of the deceased spouse to transfer any unused exemption to the surviving spouse.

Choice B is incorrect. No special amended income tax return is required to be filed by the surviving spouse. The election is made by the executor of the deceased spouse’s estate.

Choice C is incorrect. The transfer of the unused exemption to the surviving spouse requires an affirmative election by the executor of the deceased spouse’s estate. It is not an automatic transfer.

Choice D is incorrect. There is no requirement to separately contact the IRS to transfer the unused exemption. It is done through the timely filed estate tax return

Question 33

Which of the following statements does not correctly reflect the rules applicable to the alternate valuation date?

A.The general rule is the election covers all assets included in the gross estate and cannot be applied to only a portion of the property.

B.Assets disposed of within six months of decedent’s death must be valued on the date of disposition.

C.The election can be made even though an estate tax return does not have to be filed.

D.The election must decrease the value of the gross estate and decrease the estate tax liability.

Answer 33

Solution: The correct answer is C.

The election must be made on Form 706 to be valid. Therefore, statement C is incorrect. Statements A, B, and D are correct.

Question 34

Of the following statements, which is not true regarding selling an estate’s assets to generate cash?

A.The estate may have income tax consequences.

B.The assets may not be sold at full, realizable fair market value.

C.Any losses on the sale of the assets are deductible as losses on the estate tax return.

D.Any selling expenses are deductible on the estate tax return

Answer 34

Solution: The correct answer is C.

Any losses on the sale of the assets are income tax losses and are deductible on the estate’s income tax return. All of the other answers are true statements.

Question 35

Assume Brandon died last year. He is survived by his spouse, Betty and his 30 year old son, Steve, who is married and healthy.
Which filing status can Betty use on her current year income tax return?

A.Single
B.Head of Household
C.Married Filing Jointly
D.Qualifying Widow

Answer 35

Solution: The correct answer is A.

The facts do not indicate that Betty has a qualifying dependent that would allow her to claim Head of Household or Qualifying widow.