Estates Ch 7 Transfers during Life & at Death

Question 1

The SCIN level premium is like a term insurance premium over a declining value.
a. True b. False

Answer 1

True

Question 2

At the date a GRAT is funded, the value of the remainder interest is the excess of the value of the contribution to the trust over the present value of the annuity stream.

a. True b. False

Answer 2

True

Question 3

The value of a GRIT is calculated by using the FMV less the present value of the retained interest.

a. True b. False

Answer 3

True

Question 4

A family limited partnership utilizes lack of control and marketability discounts to transfer the partnership interests at a reduced transfer tax cost.

a. True b. False

Answer 4

True

Question 5

Which of the following statements regarding installment sales is correct?

a. All payments received by the seller in an installment sale are considered interest income.

b. At the death of the seller, the principal balance of the installment sale is included in the seller’s gross estate.

c. The present value of the expected remainder value of the property sold in an installment sale is subject to gift tax at the date of the transfer.

d. An installment sale would never be used with a related party.

Answer 5

The correct answer is b.

At the death of the seller, the fair market value of the remaining payments from the installment sale are included in the seller’s gross estate.
Assuming that interest rates have not changed substantially since the
note was issued, the present value of the installment payments (the fair market value) will equal the remaining principal balance.

Option a is incorrect because the payments received by the seller,
depending upon the seller’s adjusted basis in the property, are allocated as return of capital, capital gain, and interest income.

Option c is incorrect because an installment sale is a sale and does not have an expected remainder value - at the end of the installment payments, $0 principal remains on the note.

Option d is incorrect because an installment sale may be used to transfer potentially appreciating property to a related party. Even though an installment sale would not create a related party advantage, future income and appreciation from the property sold are removed from the seller’s gross estate

Question 6

In 2022, Laila paid Badlaw University $12,000 for her nephew’s tuition and gave her nephew $26,000 in cash. Laila is single and did not make any other gifts during the year. What is the amount of Laila’s taxable gifts for the year?

a. $0.
b. $2,000.
c. $10,000.
d. $24,000.

Answer 6

The correct answer is c.

The transfer to Badlaw University would be a qualified transfer not subject to gift tax and the $26,000 cash transfer would be eligible for the annual exclusion of $16,000 ($26,000-$16,000 = $10,000).

Question 7

Todd purchased his mother’s home through use of a SCIN. Under the terms of the SCIN, Todd was to pay his mother $20,000, plus interest, per year for 10 years.
If Todd’s mother died after four payments were made, what would be Todd’s adjusted basis in the home?

a. $0.
b. $80,000.
c. $160,000.
d. $200,000

Answer 7

The correct answer is d.

The buyer’s adjusted basis in property transferred in exchange for a SCIN is the sale price of the property at the date of the sale regardless of the number of payments made by the buyer.

In this case, the sale price
of the property must have been the annual principal payment times the expected term of the SCIN, or $200,000 ($20,000 x 10).

Question 8

Jocelyn, age 60, owns 400 shares of ABC Corporation, which she expects to increase 300% over the next four years. Jocelyn eventually wants to transfer the stock in ABC Corporation to her son, Stevie, but Stevie is currently incapable of managing the stock or the income from the stock. Jocelyn expects Stevie to be responsible in five years.

Of the following, which transfer method would work best to remove the expected appreciation of the stock from Jocelyn’s gross estate and protect the property for Stevie?

a. Private annuity.
b. SCIN.
c. GRAT.
d. QPRT.

Answer 8

The correct answer is c.

The GRAT with a term of five or more years will allow Jocelyn to transfer the stock to Stevie at a gift tax cost equal to the current fair market value of the stock (before the 300% appreciation) less the sum of the annuity payments that will be paid back to Jocelyn. This transfer method is not as ideal as a direct gift
of the property because the annuity payments will return to Jocelyn and will be included in her gross
estate. Also, if Jocelyn dies during the term of the GRAT, the amount necessary to replace the annuity
payments specified in the GRAT (up to a maximum of the value of trust assets), at Jocelyn’s date of death,
will be included in her gross estate.

Neither a private annuity nor a sale will meet Jocelyn’s goals because
both give Stevie access to the stock immediately.

A QPRT is also not an option because a QPRT is a special GRIT which transfers a personal residence.

Question 9

Of the following statements regarding a Qualified Personal Residence Trust (QPRT), which is true?

a. At the end of the QPRT term, the residence reverts to the grantor.

b. At creation of the QPRT, the grantor has a taxable gift to the remainder beneficiary eligible for the annual exclusion.

c. At the end of the QPRT term, the grantor must begin paying rent to the remainder beneficiaries of the QPRT if he continues to live in the residence.

d. A QPRT is ideal for a personal residence that is expected to appreciate at a lower rate than the Section 7520 rate.

Answer 9

The correct answer is c.

Option c is a true statement.

Option a is incorrect because the residence transfers to the remaindermen at the end of the QPRT term.

Option b is incorrect because the remainder interest is not eligible for the
annual exclusion.

Option d is incorrect because the QPRT is ideal for a personal residence which is
expected to appreciate at a higher rate than the Section 7520 rate

Question 10

Which of the following does not transfer property at death by operation of law?

Property owned JTWROS.
Property owned tenancy in common.
Intestacy.
A revocable living trust.

Answer 10

Property owned tenancy in common.
Rationale

Property owned tenancy in common transfers per the will or the state intestacy laws.
All of the other options transfer property at death by operation of law.

Question 11

Medicaid is primarily for those people who meet the following eligibility requirements:

Disabled.
Children.
Low Income.
Elderly.

Answer 11

Low Income.
Rationale

Medicaid is primarily for those with low incomes.

Question 12

In 2024, Laila paid Badlaw University $12,000 for her nephew’s tuition and gave her nephew $26,000 in cash. Laila is single and did not make any other gifts during the year.
What is the amount of Laila’s taxable gifts for the year?

$0.
$8,000.
$20,000.
$26,000.

Answer 12

$8,000.

Rationale

The transfer to Badlaw University would be a qualified transfer not subject to gift tax and the $26,000 cash transfer would be eligible for the annual exclusion of $18,000 ($26,000-$18,000=$8,000) for 2024.
$17,000 ($26,000-$18,000 = $8,000) for 2023.

Question 13

Perry’s father sold the family business to him using a private annuity. The private annuity was structured such that Perry would pay his father $40,000 per year plus interest, for the remainder of his father’s life. At the date of the sale, Perry’s father’s life expectancy was 20 years and Perry’s father was in great health
. After six years, Perry’s father died of a heart attack and Perry sold the business for $2,000,000 six months after his father’s death.
What is Perry’s capital gain/loss on the transaction?

$240,000.
$1,760,000.
$1,960,000.
$2,000,000.

Answer 13

$1,760,000.
Rationale

A buyer’s adjusted basis of property purchased with a private annuity is equal to the sum of all annuity payments paid. In this scenario, Perry made six annuity payments of $40,000, or a total of $240,000. Since he sold the property for $2,000,000, his gain is calculated by subtracting his basis from the sales price to arrive at $1,760,000 ($2,000,000-$240,000)

Question 14

During the year, Shiloh created a trust for the benefit of her five children. The terms of the trust declare that her children can only access the trust’s assets after the trust has been in existence for 15 years and the trust does not include a Crummey provision.

If Shiloh transfers $85,000 to the trust during the year, what is his total taxable gifts for the year?

$0.
$5,000.
$60,000.
$85,000.

Answer 14

$85,000.
Rationale

Because the trust does not include a Crummey provision, the transfer to the trust is a gift of a future interest not available to be offset by the annual exclusion. As such, the entire transfer to the trust for the year is subject to gift tax.

Question 15

Which of the following statements regarding private annuities is correct?

If a seller dies before the end of the private annuity term, the buyer continues to pay the annuity to the seller’s estate.

A private annuity must include a risk premium to compensate the seller for the possibility of cancellation at the seller’s death.

A private annuity cannot give the seller a security interest in the property.

With a private annuity, the buyer must make the annuity payments for the lesser of the term of the annuity or the life of the seller.

Answer 15

A private annuity cannot give the seller a security interest in the property.

Rationale

A private annuity cannot give the seller a security interest in the property or the private annuity treatment is disallowed.

Options a and d are incorrect because a private annuity requires the buyer to pay the annuity payment for the remaining life of the seller.

Option b is incorrect because the risk for the buyer in the private annuity is that the seller lives longer than his life expectancy and the buyer overpays. To compensate for this risk, the buyer does not have to make the payments if the seller dies before his life expectancy

Question 16

Which of the following assets are not generally counted for Medicaid planning eligibility purposes?

Certificates of Deposit.
Equity Securities.
Vacation Home.
Primary Residence.

Answer 16

Primary Residence.
Rationale

All are counted, except a primary residence.

Question 17

Which of the following does not transfer property at death by contract?

Tenancy by the entirety
IRAs.
Life insurance.
POD accounts

Answer 17

Tenancy by the entirety.
Rationale

Tenancy by the entirety transfers property by operation of state titling law. All of the other options transfer property by contrac

Question 18

which of the following statements regarding installment sales is correct?

All payments received by the seller in an installment sale are considered interest income.

At the death of the seller, the principal balance of the installment sale is included in the seller’s gross estate.

The present value of the expected remainder value of the property sold in an installment sale is subject to gift tax at the date of the transfer.

An installment sale would never be used with a related party.

Answer 18

At the death of the seller, the principal balance of the installment sale is included in the seller’s gross estate.

Rationale

At the death of the seller, the fair market value of the remaining payments from the installment sale is included in the seller’s gross estate. Option a is incorrect because the payments received by the seller, depending upon the seller’s adjusted basis in the property, are allocated as return of capital, capital gain, and interest income. Option c is incorrect because an installment sale is a sale and does not have an expected remainder value - at the end of the installment payments, $0 principal remains on the note. Option d is incorrect because an installment sale may be used to transfer potentially appreciating property to a related party. Even though an installment sale would not create a related party advantage, future income and appreciation from the property sold are removed from the seller’s gross estate.

Question 19

In an effort to keep any of its future appreciation out of her gross estate, Gretchen, a 73-year-old widow, transferred her home into a Qualified Personal Residence Trust (QPRT) naming her only son as the remainder beneficiary.
Which of the following statements regarding a QPRT is false?

If Gretchen has a taxable gift at the date of formation of the trust, the gift is not eligible for the annual exclusion.

If Gretchen outlives the term of the QPRT and continues to live in the house, she must pay her son rent.

At the termination of the QPRT, the personal residence is distributed to Gretchen’s son.

If Gretchen dies during the term of the QPRT, her gross estate will include the value of her home at the date of the transfer to the QPRT.

Answer 19

If Gretchen dies during the term of the QPRT, her gross estate will include the value of her home at the date of the transfer to the QPRT.
Rationale

All of the options are correct with the exception of option d. If Gretchen dies during the term of the QPRT, her gross estate will include the value of her home at her date of death.

Question 20

Kane transferred $5,500,000 to a GRAT naming his two children as the remainder beneficiaries while retaining an annuity valued at $500,000. If this is the only transfer Kane made during the year, what is Kane’s total taxable gift for the year?

$0.
$4,964,000.
$5,000,000.
$5,464,000.

Answer 20

$5,000,000.
Rationale

The remainder interest is a taxable gift from Kane to his children equal to the value of the property contributed to the GRAT less the value of the annuity retained, $5,500,000-$500,000 = $5,000,000. Because the remainder interest is a gift of a future interest it is not eligible for the annual exclusion.

Question 21

Of the following statements regarding a Qualified Personal Residence Trust (QPRT), which is true?

At the end of the QPRT term, the residence reverts to the grantor.

At creation of the QPRT, the grantor has a taxable gift to the remainder beneficiary eligible for the annual exclusion.

At the end of the QPRT term, the grantor must begin paying rent to the remainder beneficiaries of the QPRT if he continues to live in the residence.

A QPRT is ideal for a personal residence that is expected to appreciate at a lower rate than the Section 7520 rate.
Confidence of your answer

Answer 21

At the end of the QPRT term, the grantor must begin paying rent to the remainder beneficiaries of the QPRT if he continues to live in the
residence.
Rationale

Option c is a true statement. Option a is incorrect because the residence transfers to the remaindermen at the end of the QPRT term. Option b is incorrect because the remainder interest is not eligible for the annual exclusion. Option d is incorrect because the QPRT is ideal for a personal residence which is expected to appreciate at a higher rate than the Section 7520 rate.

Question 22

Which of the following statements regarding a Grantor Retained Annuity Trust (GRAT) is correct?

The remainder interest of a GRAT is payable to a noncharitable beneficiary.

The term of the trust should be set equal to the life expectancy of the grantor.

The remainder beneficiary is taxed on the income in the GRAT each year.

At the end of the GRAT term, the property reverts to the grantor.

Answer 22

The remainder interest of a GRAT is payable to a noncharitable beneficiary.

Rationale

The remainder interest of a GRAT is payable to a non-charitable beneficiary.

Option b is incorrect because the term of the GRAT should be less than the grantor’s life expectancy because if the grantor dies during the term of the trust the amount necessary to replace the annuity payments specified in the GRAT, as of the grantor’s date of death, is included in their gross estate.

Option c is incorrect because the grantor is taxed on the income in the GRAT each year.

Option d is incorrect because at the end of the GRAT term, the property is payable to the non-charitable beneficiary

Question 23

Before her death, Meg loaned Ryan $400,000 in return for a note. The terms of the note directed Ryan to make monthly payments including interest at the applicable federal rate. If Meg dies before the note is repaid, which of the following affects the valuation for Meg’s gross estate?

1. Ryan’s inability to make payments timely
2. The market rate of interest
3. The remaining term of the note
4. Meg forgives the note as a specific bequest in her will

1 only.
1 and 2.
1, 2, and 3.
2, 3, and 4

Answer 23

1, 2, and 3.
Rationale

If Meg dies before Ryan repays the note, the note is included in Meg’s gross estate at the fair market value of the note plus any accrued interest due at Meg’s date of death.

This fair market value is affected by the interest rate, maturity date, and Ryan’s ability to make the note payments, but not by Meg’s forgiveness of the note in her will.

The forgiveness of the note is deemed a specific bequest and the fair market value of the note is still included in Meg’s gross estate.

Question 24

Mork and his wife, Mindy, want to establish a family limited partnership (FLP) and transfer their business to the FLP.
The value of the business interest is $4,000,000. They want to make use of the annual exclusion and have been advised that a 25% discount is appropriate for gifting a minority interest of limited partnership shares.
The general partnership interest (1%) is valued at $40,000. They have eight family members (children and grandchildren) to whom to transfer limited partnership interests. Mork and Mindy are unwilling to utilize any of their lifetime exemptions.
Presuming the annual exclusion remains the same and the value of the business interest remains unchanged in the future, how many years does it take them to transfer all of the limited partnership interest?

11 years.
12 years.
14 years.
22 years.

Answer 24

11 years.
Rationale
2024: $18,000 ÷ (1-25%) = $24,000 pre-discount unit value that can be transferred under the annual exclusion
2023: $17,000 ÷ (1-25%) = $22,666.67 pre-discount unit value that can be transferred under the annual exclusion

2024: $3,960,000 ÷ $24,000 = 165 units
2023: $3,960,000 ÷ $22,666.67 = 174.71 units
8 beneficiaries and 2 donors = 16 units per year

2024: 165 ÷ 16 = 10.31 years (rounded up to 11 years
2023: 174.71 ÷ 16 = 10.92 years (rounded up to 11 years)

Question 25

Which of the following techniques will not help an individual lower his gross estate?

Pay-on-Death Arrangement (POD).
Grantor Retained Annuity Trust (GRAT).
Sale.
Self-Cancelling Installment Note (SCIN).

Answer 25

Pay-on-Death Arrangement (POD).
Rationale

A POD is a transfer mechanism that transfers a bank account to a beneficiary according to contract law.
A POD does not reduce an individual’s gross estate as the full value of the POD bank account is included in the individual’s gross estate.
A GRAT, sale, and SCIN may all reduce an individual’s gross estate by removing appreciation and future income from the property transferred

Question 26

Which of the following statements regarding Family Limited Partnerships (FLPs) is correct?

The primary purpose of creating a FLP is to provide joint management of the property contributed to the FLP.

At the creation of the FLP, the transferring individual will have a capital gain equal to the difference between the fair market value of the property transferred and their adjusted basis in the property.

The limited partners in the FLP control all of the day-to-day functions of the FLP.

Transfers of the limited partnership interests in the FLP are usually eligible for minority and lack of marketability valuation discounts.

Answer 26

Transfers of the limited partnership interests in the FLP are usually eligible for minority and lack of marketability valuation discounts.
Rationale

Option d is a correct statement. Option a is incorrect because the primary purpose of the FLP is to transfer interests in property utilizing various valuation discounts and for the general partner to retain complete control. Option b is incorrect because the transfer of property to a partnership is generally a tax-free exchange. Option c is incorrect because limited partners are barred from participating in the day-to-day operations of the FLP.

Question 27

Which of the following statements regarding self-cancelling installment notes (SCINs) is correct?

If a seller outlives the SCIN term, the buyer continues to pay the SCIN payment until the seller’s death.

If the buyer dies before the end of the SCIN term or the death of the seller, his gross estate includes a debt equal to the present value of the remaining payments.

A SCIN cannot give the seller a collateral interest in the property sold.

If the seller dies before the end of the note term, the seller is deemed to have made a taxable gift to the buyer equal to the difference between the payments made and total principal payments on the SCIN.

Answer 27

If the buyer dies before the end of the SCIN term or the death of the seller, his gross estate includes a debt equal to the present value of the remaining payments.

Rationale

If the buyer dies before the end of the SCIN term or the death of the seller, their gross estate includes a debt equal to the present value of the remaining payments. Answer a is incorrect because SCIN payments cease at the earlier of the death of the seller or the end of the SCIN term. Answer c is incorrect because a SCIN can allow the seller to retain a collateral interest in the property sold. Answer d is an incorrect statement because no gift occurs if the seller dies before the end of the term.

Question 28

Todd purchased his mother’s home through use of a SCIN. Under the terms of the SCIN, Todd was to pay his mother $20,000, plus interest, and a SCIN premium, per year for 10 years.
If Todd’s mother died after 4 payments were made, what would be Todd’s adjusted basis in the home?

$0.
$80,000.
$160,000.
$200,000.

Answer 28

$200,000.
Rationale

The buyer’s adjusted basis in property transferred in exchange for a SCIN is the fair market value of the property at the date of the sale regardless of the number of payments made by the seller. In this case, the fair market value of the property must have been the annual principal payment times the expected term of the SCIN, or $200,000 ($20,000 x 10).

Question 29

Medicare is primarily for those people who meet the following eligibility requirements:

Disabled.
Children.
Low Income.
Elderly.

Answer 29

Elderly
Rationale

Medicare is primarily for the elderly, age 65 and above, but it can cover the disabled.

Question 30

Gina, age 79, recently had a stroke. Afraid that she may not live long enough to see her family enjoy it, she would like to transfer the beach house she owns to her daughter, Taylor. While Gina is willing to make the transfer gratuatous in whole or part, Gina does not want to pay any gift tax or utilize any of her lifetime credit amount.

Which of the following techniques, if used by Gina to transfer the beach house to Taylor, will not result in a taxable gift?

A.GRAT
B.QPRT
C.SCIN
D.GRUT

Answer 30

Solution: The correct answer is C.

A SCIN is a note with a self canceling premium payment attached so that the note will cancel at the transferor’s death.

The GRAT, QPRT and the GRUT are irrevocable trusts and will result in a current taxable gift.

Question 31

Which of the following statements is false regarding a bargain sale?

A.The difference between the fair market value of the asset and the consideration received in exchange for the asset is considered a gift.

B.The gift portion of a bargain sale will qualify for the annual exclusion.

C.A bargain sale is generally inappropriate if the buyer of the property is a family member.

D.If the property is sold for more than the seller’s basis in the property, a taxable gain will result.

Answer 31

Solution: The correct answer is C.

Answer C is a false statement because bargain sales usually occur among related parties. All of the other statements are true

Question 32

Jennifer purchased her mother’s home through the use of a SCIN. Under the terms of the SCIN, Jennifer was to pay her mother $22,000, plus interest and a SCIN premium, per year for 10 years. If Jennifer’s mother died after six payments were made, what would be Jennifer’s adjusted basis in the home?

A.$0
B.$88,000
C.$132,000
D.$220,000

Answer 32

Solution: The correct answer is D.

The buyer’s adjusted basis in property transferred through the use of a SCIN is the fair market value of the property on the date of the sale regardless of the number of payments made by the seller. In this case, the fair market value of the property must have been the annual principal payments times the expected term of the SCIN, or $220,000 ($22,000 × 10).

Question 33

which of the following is true regarding a Grantor Retained Annuity Trust (GRAT)?

A.At the end of the GRAT term, a taxable gift occurs.

B.If the grantor dies during the trust term, a pro rata portion of the trust assets will be included in the grantor’s estate.

C.Interest and dividend earned by assets in a GRAT are taxed to the grantor.

D.If the grantor survives the trust term, all of the trust assets will be included in the grantor’s estate.

Answer 33

Solution: The correct answer is C.

Answer A is incorrect because a taxable gift occurs when the GRAT is established, not when the GRAT term ends. Answer B is incorrect because if the grantor dies during the trust term, all of the trust assets are included in his gross estate. Answer D is incorrect because if the grantor survives the trust term, none of the trust assets are included in his estate.

Question 34

Ben is interested in using a Qualified Personal Residence Trust (QPRT) as part of his estate plan. Which of the following are false regarding QPRTs?

A.At the end of the trust term, the house will revert back to the grantor.

B.With a QPRT, the grantor must survive the trust term to realize any estate tax savings.

C.A QPRT can be used with either primary residences or vacation homes.

D.The grantor will have a taxable gift upon the creation of the QPRT.

Answer 34

Solution: The correct answer is A.

At the end of the trust term, ownership of the house is transferred to the beneficiaries of the QPRT. All of the other statements are true