Exam Q's

Question 1

All of the following statements concerning the deferral of payment of estate tax under Sec. 6166 for estates that hold closely held business interests are correct EXCEPT [LO 17-4]

(A) The tax deferral is limited to the estate tax created by the inclusion of a qualified business interest.

(B) The principal payments on the deferred tax may begin up to 5 years after the normal due date, with interest only payable during this initial period.

(C) To qualify for such a deferral, the estate must hold a closely held business interest valued at greater than 65 percent of the adjusted gross estate.

(D) The deferred tax is accelerated if the heirs dispose of the business interest.

Answer 1

The answer is (C). The threshold value of closely held business interests is in excess of 35 percent of the adjusted gross estate for Sec. 6166 qualification.

Question 2

All of the following statements concerning the computation of federal estate tax are correct EXCEPT [LO 17-2]

(A) Casualty losses are deductible from the gross estate only to the extent they are reimbursed by insurance.

(B) Gift taxes and estate taxes are unified and paid at the same tax rate.

(C) The executor can deduct certain costs, fees, and taxes from the gross estate before arriving at the adjusted gross estate.

(D) Gift taxes paid on post-1976 gifts made by a decedent within 3 years of death become part of the gross estate.

Answer 2

The answer is (A). Losses due to theft, fire, and floods are deductible from the gross estate but only to the extent they are not reimbursed by insurance.

Question 3

Which of the following statements concerning state death taxes is (are) correct? [LO 16-2]

I. The federal state death tax deduction is allowed only if a federal estate tax Form 706 return must be filed.

II. State, estate, and inheritance taxes are generally imposed at the same rate regardless of the relationship of the deceased to the beneficiary.

Answer 3

II is incorrect because states that impose an inheritance tax often have tax rates that vary with the relationship of the beneficiary to the decedent.

Question 4

Which of the following interests in real property gives the owner of the interest the most control over the property? [LO 3-2]

(A) a life estate

(B) a remainder interest

(C) a retained interest

(D) a fee simple estate

Answer 4

The answer is (D). (A), (B), and (C) are incorrect because they involve limitations on the holder’s property interest. The holder of a life estate, remainder interest, or retained interest does not own the property in all events since some possessory term in the property belongs to another interest holder.

Question 5

Mary Bennett and her husband purchased property 22 years ago for $100,000 and titled it in joint names with the right of survivorship. However, the entire contribution for the property came from funds that Mary had inherited from her father. When Mary died last year, the property was worth $800,000. What is her husband’s basis in the property?

Answer 5

Half of the property will be included in Mary’s estate, for which her husband will receive a stepped-up basis of $400,000. He will continue to have a $50,000 basis in the half of the property that was not included in her estate. Thus, his total basis is $450,000.

Question 6

Which of the following items would be included in a decedent’s gross estate for federal estate tax purposes? [LO 22-3]

(A) a life insurance policy on the decedent’s life that was transferred by the decedent 2 years earlier to an irrevocable trust for the benefit of her children

(B) proceeds of a wrongful death suit brought by the decedent’s executor against the drunk driver who caused the decedent’s death

(C) real estate given to the decedent by an aunt that, in accordance with the aunt’s will, passes to the decedent’s sister at the decedent’s death

(D) property in a trust established by the decedent’s father for his grandchildren with the decedent and the decedent’s sister as cotrustees of the trust

Answer 6

The answer is (A). The transfer was less than 3 years prior to the decedent’s death. (B) is incorrect because the amount of the wrongful death claim belongs to the decedent’s estate and not the decedent, since the claim was initiated by the estate after the decedent died. (C) is incorrect because it is a life estate that the decedent could not transfer at his or her death. (D) is incorrect because the decedent had no beneficial interest in the trust.

Question 7

All of the following constitute basic elements of a gift for gift tax purposes EXCEPT [LO 5-1]

(A) a transfer for less than adequate consideration

(B) valuation on a fair-market-value basis

(C) delivery of the subject matter of the gift to the donee

(D) acceptance of the gift by the donee

Answer 7

The answer is (B). The valuation of a gift is not an element of the gift for gift tax purposes.

Question 8

All of the following statements regarding lifetime gifts are correct EXCEPT [LO 5-3]

(A) Titling a home in another person’s name is considered a gift.

(B) Retitling a bank account as a joint bank account is a gift.

(C) The annual exclusion is only available for present interest gifts.

(D) The IRS does not care if property is real or personal property for gift tax purposes.

Answer 8

The answer is (B). A joint bank account is not a gift until the joint owner actually withdrawals money from the account.

Question 9

Which of the following statements concerning the installment sale of property is (are) correct? [LO 21-1]

I. Installment sales are often used to help find more buyers by offering a variety of financing and payment options.

II. The gain on the sale is recognized by the seller ratably as the installment payments are received.

Answer 9

Both I and II are correct.

Question 10

The following are facts concerning a decedent’s estate: Gross estate = $6,800,000. Funeral and administrative expenses = $75,000. Marital deduction = $400,000. Post-1976 adjusted taxable gifts = $50,000. State death tax = $48,000. The tentative tax base for this estate is [LO 17-1]

(A) $6,027,000

(B) $6,175,000

(C) $6,227,000

(D) $6,327,000

Answer 10

The answer is (D). The tentative tax base is computed as follows: Gross estate, less deductions, plus post-1976 adjusted taxable gifts ($6,800,000 - $523,000 + $50,000) = $6,327,000. Deductions are as follows: funeral and administration $75,000, marital deduction $400,000, state death tax deduction $48,000.

Question 11

All of the following statements concerning property held by a married couple as tenants by the entirety are correct EXCEPT [LO 3-4]

(A) The entire property must be included in the estate of the first to die.

(B) The property passes automatically to the survivor at the time of the first death.

(C) Each holds an undivided interest in the whole property.

(D) Neither spouse can unilaterally transfer his or her interest.

Answer 11

The answer is (A). One-half of property held as tenants by the entirety is included in the gross estate of the first spouse to die.

Question 12

All of the following statements concerning property are correct EXCEPT [LO 3-1]

(A) Life insurance is tangible personal property.

(B) Crops growing on land are real property.

(C) Any property that is not real property is personal property.

(D) A bond issue secured solely by the assets of a corporation is intangible personal property.

Answer 12

The answer is (A). Life insurance is intangible personal property.

Question 13

Which of the following statements concerning the federal estate tax marital deduction is (are) correct? [LO 14-2]

I. Property passing outside the probate estate cannot qualify for the marital deduction.

II. Double taxation from state and federal estate tax can be avoided, when necessary, by taking the federal state death tax deduction.

Answer 13

Neither
I is incorrect because property passing outside the probate estate, such as jointly held property, can qualify for the marital deduction.
II is incorrect because the marital deduction is unlimited in amount for qualifying property.

Question 14

Believing that his death was imminent, a widower gave his daughter some real estate 2 years ago and filed a timely gift tax return. The widower died on January 1 of this year. Additional facts are these: Widower’s basis in the real estate = $300,000. Value of real estate when gifted = $1,710,000. Value of real estate on date of death = $2,200,000. Amount of gift tax paid by widower = $650,300. Assuming the widower made no additional gifts to his daughter, all of the following statements concerning this situation are correct EXCEPT [LO 11-4]

(A) The gift of the real estate is included in the calculation of the widower’s federal estate tax as an adjusted taxable gift.

(B) The gift tax paid is brought back into the widower’s gross estate at $650,300.

(C) The daughter’s income tax basis in the real estate is $2.2 million.

(D) The widower recognized no gain for income tax purposes at the time the gift was made.

Answer 14

The answer is (C). The daughter’s income tax basis is not stepped up to the date-of-death value since she received it by gift before the transferor’s death.

Question 15

All of the following statements concerning a testamentary trust are correct EXCEPT [LO 4-2]

(A) Its provisions are included in a decedent’s will.

(B) It saves probate costs.

(C) It is revocable until the death of the testator.

(D) It becomes irrevocable once it is operative.

Answer 15

The answer is (B). By definition the testamentary trust, as part of a testator’s will, is also part of the probate estate and therefore is subject to normal probate costs.

Question 16

Which of the following statements concerning valuation for gift tax purposes is (are) correct? [LO 9-2]

I. The value of a life insurance contract is equal to the aggregate gross premium paid, regardless of when the contract was gifted.

II. Annuities and other assets that diminish in value over time are valued at present value at the date of death.

Answer 16

II is correct

I is incorrect because only a life insurance policy gifted immediately after purchase has a value for gift tax purposes equal to the gross premium paid. A paid-up life policy has a value equal to the premium payable for the same type of single-premium policy based on the insured’s age on the date of the gift. A premium-paying policy has a value equal to the interpolated terminal reserve plus any unearned premiums.

Question 17

Allen died last month and was survived by his spouse, Ellen. Among the items of family property are the following: A $400,000 life insurance policy on Allen’s life with Ellen designated as beneficiary (Ellen has been the owner of the policy ever since it was issued 4 years ago), the family residence with a fair market value of $200,000 (Allen and Ellen own the residence jointly with the right of survivorship even though Allen purchased it in 1988 with his separate funds), and a $10,000 bank account (Allen and Ellen own the account jointly with the right of survivorship even though Ellen made all the deposits). What amount of the family property will be included in Allen’s gross estate for federal estate tax purposes? [LO 12-2]

(A) $105,000

(B) $200,000

(C) $500,000

(D) $505,000

Answer 17

The answer is (A). The life insurance is not included because Allen held no incidents of ownership in the policy within 3 years of death. One-half of the property held jointly by Allen and Ellen will be included under Sec. 2040. Thus, the answer is $105,000.

Question 18

Important factors in assessing liquidity needs in estate planning include which of the following? [LO 1-3]

I. the amount and terms of debt of the estate owner

II. residuary beneficiaries are not of great concern for liquidity planning.

Answer 18

Both I and II are correct.

Question 19

All of the following are ethical principles of a professional EXCEPT [LO 2-4]

(A) diligence

(B) partiality

(C) confidentiality

(D) objectivity

Answer 19

The answer is (B). All of the other answer choices are ethical principles. The professional should be impartial and not show favoritism.

Partiality: unfair bias in favor of one thing or person compared with another; favoritism.

Question 20

Which of the following statements concerning federal estate tax is correct? [LO 8-3]

(A) All transfers made within 3 years of death must be brought back into the gross estate for federal estate tax purposes.

(B) Jointly held property is not subject to federal estate tax.

(C) Property passing outside the probate estate is not subject to federal estate tax.

(D) For all estates required to file a return, a federal estate tax return must be filed within 9 months of death unless an extension is granted.

Answer 20

The answer is (D). (A) is incorrect because, subject to certain exceptions, gifts made within 3 years of death by donors who die are not brought back into the donor’s gross estate. (B) and (C) are incorrect because jointly held property and nonprobate property are subject to federal estate tax.

Question 21

All of the following statements concerning income taxation of estates and trusts are correct EXCEPT [LO 19-3]

(A) An estate is a separate taxpaying entity.

(B) A complex trust is a separate taxpaying entity.

(C) Income distributed by a trust to an income beneficiary of the trust is taxable to the trust.

(D) The executor or administrator of an estate is responsible for filing an income tax return.

Answer 21

The answer is (C). Income distributed to an income beneficiary of a trust is taxable to the beneficiary.

Question 22

All of the following statements concerning gifts to minors are correct EXCEPT [LO 6-4]

(A) The gift generally involves some complexity since state laws often restrict the titling of property in the minor’s name.

(B) The annual gift tax exclusion is unavailable unless the minor receives the property outright.

(C) Gifts to a Uniform Transfers to Minors (UTMA) custodial account provide for the outright distribution to the minor at the time the minor reaches the age of majority.

(D) Gifts to a Sec. 2503(c) minors trust permit the trustee to accumulate and reinvest income but still qualify for the annual exclusion.

Answer 22

The answer is (B). Several types of transfer mechanisms are available to make gifts to minors that both qualify for the annual gift tax exclusion and restrict the minor’s current access to the funds.

Question 23

All of the following statements concerning the unlimited estate tax marital deduction are correct EXCEPT [LO 14-2]

(A) The marital deduction was designed to equalize the federal estate tax treatment of decedents in common-law states with those in community-property states.

(B) The marital deduction is available against all death taxes imposed by state law.

(C) The marital deduction only applies to property interests that are included in a decedent’s gross estate for federal estate tax purposes.

(D) The marital deduction available to a decedent in a common-law state is equal to the net amount of qualifying property passing to the surviving spouse.

Answer 23

The answer is (B). State laws vary, and some states don’t exempt transfers to a surviving spouse for death tax.

Question 24

Which of the following statements concerning the generation-skipping transfer tax (GSTT) is (are) correct? [LO 20-2]

I. Payments directly to an education provider can avoid the GSTT.

II. Each donor is entitled to a lifetime exemption amount from the GSTT.

Answer 24

Both statements are correct. Each donor is entitled to a lifetime exemption amount and payments directly to education providers are exempt from GSTT.

Question 25

An irrevocable trust is treated as a completed gift for tax purposes at the time of the transfer.

Answer 25

True

Question 26

An estate is a separate taxpaying entity

Answer 26

True

Question 27

A wife decides she is going to transfer some property to her husband when she dies. Upon her death, her will states that a $100,000 bank account and a $500,000 house with a $200,000 mortgage will pass to her husband outright. In addition, a trust with $500,000 of assets will pay income for life to her sister and then will pass to her husband after the death of her sister. The present value of the husband’s remainder interest in the trust is $150,000. How much would qualify for the federal estate tax marital deduction? [LO 14-2]

Answer 27

The $100,000 bank account, and the house will qualify for the marital deduction. However, only the net value of the house will qualify - $500,000 - $200,000 = $300,000. $300,000 house plus $100,000 bank = $400,000 marital deduction. None of the trust will qualify because it is a potentially terminable interest. It is not certain that anything will pass to the husband. Property also has to go to the husband in order to qualify.

Question 28

All of the following are factors that must be considered in determining whether an estate tax return must be filed EXCEPT [LO 17-4]

(A) the size of the gross estate

(B) citizenship and residency

(C) the amount of the decedent’s post-1976 taxable gifts

(D) the amount of gifts made to a spouse that qualifies for the gift tax marital deduction

Answer 28

The answer is (D). A gift qualifying for the gift tax marital deduction is not considered a taxable gift and therefore is not a factor in determining the filing requirements of a federal estate tax return.

Question 29

Nontax benefits of lifetime gifts include which of the following? [LO 5-4]

I. obtaining privacy that is not possible when testamentary transfers are made

II. reducing probate and administrative costs

Answer 29

Both statements are correct

Question 30

Which of the following powers held by the income beneficiary is (are) considered to be a general power of appointment, thus causing all or a portion of the trust corpus to be includible in the beneficiary’s gross estate for federal estate tax purposes? [LO 12-3]

I. the power to withdraw the greater of $5,000 or 5 percent of trust corpus in any one year

II. the power to direct the trustee to pay the beneficiary’s personal debts

Answer 30

II is correct

I is incorrect because it is a special power of appointment.

Question 31

A complex trust is a separate taxpaying entity.

Answer 31

True

Question 32

Henry, Harry, and Hobie form a closely held corporation, XYZ Corp. Each one receives 100 shares of stock. The three shareholders enter into a stock redemption (entity purchase) buy-sell agreement. If Henry dies, which of the following statements concerning this arrangement is correct? [LO 10-3]

(A) Harry and Hobie now own 150 shares of XYZ.

(B) Harry and Hobie are obligated to purchase Henry’s shares from his estate.

(C) Harry and Hobie continue to own the same number of shares as they did prior to Henry’s death.

(D) There are 300 shares of stock outstanding in XYZ Corp.

Answer 32

The answer is (C). (A) is incorrect because with a stock redemption Harry and Hobie will each own 100 shares after Henry’s death. (B) is incorrect because it is XYZ Corp. that is obligated to purchase Henry’s shares from the estate. (D) is incorrect because XYZ will retire Henry’s shares, which leaves Harry and Hobie with 100 shares each.

Question 33

Which of the following statements concerning the federal estate tax charitable deduction is correct? [LO 15-2]

(A) In order to be allowed as a charitable deduction, the bequest must first be includible in the donor’s gross estate.

(B) The amount of the deduction is limited to a percentage of the adjusted gross estate.

(C) For the deduction to be obtained, the bequest must be in the form of an outright gift.

(D) Gratuitous services are deductible to the extent of the present value of the services provided.

Answer 33

The answer is (A).
(B) is incorrect because there is no percentage limitation for an estate charitable deduction.
(C) is incorrect because there are a variety of forms of charitable bequests that can qualify as charitable deductions.
(D) is incorrect because gratuitous services are never allowed for federal estate tax charitable deductions.

Gratuitous: uncalled for; lacking good reason; unwarranted.

Question 34

Which of the following gratuitous property transfers will be included in a donor’s gross estate at its date-of-death value for federal estate tax purposes? [LO 11-5]

I. a lifetime transfer in which the donor retained the power to change the donees’ shares of the transferred property

II. a lifetime transfer in which the donor retained a reversionary interest on the date of death equivalent to 3 percent of the value of the property

Answer 34

The answer is (A). II is incorrect because the threshold for a reversionary interest to be included in the gross estate of a grantor is 5 percent.

Question 35

Mrs. Jones would like to buy more life insurance but wants to avoid inclusion of the insurance in her gross estate at death. If Mrs. Jones creates an irrevocable trust to apply for the life insurance policy, which of the following trust terms is (are) recommended? [LO 22-6]

I. a provision for Mrs. Jones to replace the trustee

II. a provision directing the trustee to pay Mrs. Jones’s estate taxes

Answer 35

I and II are incorrect because either provision would cause the proceeds paid to the trust to be included in Mrs. Jones’s estate.

Question 36

Which of the following statements concerning community-property law is (are) correct? [LO 3-5]

I. Transmutation is the change of separate property and community property characterization by the community owners.

II. The character of community property does not typically change when a couple moves from a community property state to a common law property state.

Answer 36

Both I and II are correct.

Question 37

Which of the following statements is true regarding a charitable remainder unitrust (CRUT)? [LO 15-3]

(A) A CRUT pays out to the charity for the grantor’s life and then pays the remainder to the grantor’s estate.

(B) The only payment option of a CRUT is a life annuity.

(C) One downside of a CRUT is that the donor cannot add more money to it over time.

(D) Payments from a CRUT are variable, which requires the trust assets to be revalued each year.

Answer 37

The answer is (D).
(A) is incorrect because the CRUT pays out to the grantor for the grantor’s life and then pays the remainder to the charity.
(B) is incorrect because a term payment from the CRUT can also be permissible under current law.
(C) is incorrect because the donor can add more money to a CRUT over time.

Question 38

All of the following statements concerning the inclusion and valuation of all or part of a commercial annuity in the estate of an annuitant are correct EXCEPT [LO 12-1]

(A) A joint and survivor annuity is includible in proportion to the amount of the total premium paid by the decedent.

(B) An annuity is includible at its date-of-death value even if the executor elects the alternate valuation date.

(C) A life annuity with a period certain is includible to the extent of the present value of any remaining guaranteed payments.

(D) A life annuity with no period certain is includible in proportion to the amount of the total cost received as payments by the decedent prior to death.

Answer 38

The answer is (D). A pure life annuity terminates at the annuitant’s death, and nothing remains to be included in the decedent’s estate.

Question 39

All of the following are true regarding pooled income funds EXCEPT [LO 15-3]

(A) A pooled income fund is akin to a mutual fund operated by a charity.

(B) Pooled income funds typically have donations from a variety of sources.

(C) A pooled income fund cannot pay any money back to the donor.

(D) The remainder value in the pooled income fund ends up going to the charity.

Answer 39

The answer is (C). Pooled income funds are akin to mutual funds run by charities. The fund pays out income to the grantor for life and upon the grantor’s death, the charity keeps the remainder.

Question 40

A guardian for personal care is called a guardian ad litem?

Answer 40

False.
A guardian ad litem is a guardian appointed for a particular purpose such as legal guidance and protection during a specific lawsuit.

Question 41

Which of the following statements concerning grantor- retained annuity trusts (GRATs) is (are) correct? [LO 21-3]

I. These trusts provide the grantor with a fixed annual annuity for a term of years or life and the grantor is taxed on the trust income.

II. A goal in establishing a GRAT is to transfer property at a reduced transfer tax cost through the use of an irrevocable trust.

Answer 41

Both I and II are correct.

Question 42

Which of the following statements concerning income taxation of trusts and estates is correct? [LO 19-2]

(A) Trusts and estates are taxed like corporations.

(B) A complex trust is allowed an exemption of $1,000.

(C) An estate is taxed the same as a grantor trust.

(D) An estate is allowed an exemption of $600.

Answer 42

The answer is (D).
(A) is incorrect because trusts have a much different tax system than do estates– trusts are taxed on retained income.
(B) is incorrect because a complex trust has an exemption of $100.
(C) is incorrect because grantor trust taxation is irrelevant to the taxation of estates. Grantor retained trusts are taxed to the grantor as if the trust did not exist for tax purposes.

Question 43

Which of the following statements concerning estate planning using life insurance is (are) correct? [LO 22-5]

I. One benefit of using life insurance to fund an ILIT is that the arrangement avoids any generation skipping transfer tax issues.

II. Crummey powers are often used on life insurance trusts to help the premium payments to the trust qualify for the present interest annual exclusion.

Answer 43

I is incorrect because ILITs are still subject to GSTT if the premiums are over $15,000 a year or if the contributions to the trust does not qualify as a present interest.

Question 44

All of the following statements concerning estates and trusts are correct EXCEPT [LO 19-1]

(A) The personal representative of an estate and a trustee have similar fiduciary responsibilities.

(B) Both estates and trusts come into being by operation of law.

(C) Both estates and complex trusts are separate taxpaying entities.

(D) There are lots of reasons why a trust document might allow for removal of a trustee, including changes in tax and trust laws.

Answer 44

The answer is (B). A trust is created by the action of a grantor (settlor).

Question 45

Sam Silver purchased a joint life annuity for himself and his good friend from an insurance company. Assuming Sam contributed the entire purchase price, how will the annuity be valued at his death for purposes of determining his gross estate? [LO 12-1]

(A) at the original cost of the joint life annuity

(B) at the cost of a single life annuity on Sam’s life at the date of his death

(C) at the cost of a single life annuity for his friend at the time the original annuity was purchased

(D) at the present value cost of a single life annuity for his friend at the time of his death

Answer 45

The answer is (D). (A), (B), and (C) are incorrect because the value of commercial annuity contracts is based on the cost of comparable contracts issued to the surviving annuitant as of the date of the decedent’s death.

Question 46

In 2019 a wife makes outright gifts of $100,000 to her son, and her husband agrees to split the gifts with her. Which of the following correctly states the amount of the taxable gifts? [LO 6-3]

(A) wife $70,000, husband $0

(B) wife $35,000, husband $35,000

(C) wife $50,000, husband $50,000

(D) wife $85,000, husband $0

Answer 46

The answer is (B). The calculation of taxable gifts is as follows: Total gifts, less annual exclusion = total taxable gifts. Wife: $50,000 - $15,000 = $35,000. Husband: $50,000 - $15,000 = $35,000.

Question 47

Which of the following examples of a terminable interest left to a surviving spouse qualifies for the federal estate tax marital deduction? [LO 14-2]

(A) a property interest that passes to someone else if the surviving spouse remarries

(B) a life estate in property

(C) a life interest in a trust over which the surviving spouse has a special power of appointment

(D) a property interest that passes to the surviving spouse only if the spouse actually survives the decedent by 3 months

Answer 47

The answer is (D). (A), (B), and (C) are incorrect because they are nondeductible terminable interests. (B) and (C) may become eligible for a marital deduction only if the executor makes a QTIP election.

Question 48

Which of the following statements concerning the marital deduction is (are) correct? [LO 14-2]

I. Federal estate tax and state death taxes may be payable from a surviving spouse’s share of the estate.

II. Subject to certain qualifying provisions, terminable interests passing to a surviving spouse can qualify for the marital deduction.

Answer 48

Both I & II are correct

Question 49

While estates need to file income tax returns, complex trusts do not need to file income tax returns.

Answer 49

False

Question 50

On January 1 of this year, a father gave his daughter a $100,000 ordinary life insurance policy on his life and filed a timely gift tax return. Premiums are paid annually. The pertinent facts concerning the policy are the following: Date of issue: July 1, 15 years ago. Premium paid on July 1 of this year = $1,600. Terminal reserve on July 1 of last year = $10,000. Terminal reserve on July 1 of this year = $12,000. What is the value of the policy for federal gift tax purposes? [LO 5-1]

(A) $11,000

(B) $11,600

(C) $11,800

(D) $12,000

Answer 50

The answer is (C). The calculation of the value of a life insurance policy for gift or estate tax purposes is as follows: Interpolated terminal reserve plus unearned premium at the time of valuation. Since the time of the gift, January 1 of this year, falls at the midpoint of the time interval presented, the interpolated terminal reserve is $11,000 (the sum of $10,000 and $12,000 divided by two). Since one-half of the annual premium ($800) is unearned as of January 1 of this year, the value of the policy on January 1 of this year for gift tax purposes is $11,800 ($11,000 + $800 = $11,800).

Question 51

Among the assets in a decedent’s gross estate is stock in a closely held corporation that was left to a nephew. The interest passing to the nephew is required to bear the burden of all estate taxes and expenses. The relevant facts about this estate are as follows: Adjusted gross estate = $7,700,000. Fair market value of stock in the closely held corporation = $3,300,000. Administration and funeral expenses = $35,000. Federal and state estate taxes = $945,000. Bona fide debts of the decedent = $60,000. What amount of closely held corporate stock can be redeemed under IRC Sec. 303 so that the redemption will be treated as a sale or exchange rather than a dividend distribution? [LO 21-6]

(A) $0

(B) $980,000

(C) $1,040,000

(D) $3,395,000

Answer 51

The answer is (B). The calculation of the amount redeemable under Sec. 303 involves two steps. First, the estate must be eligible for Sec. 303. The estate is eligible only if the value of the closely held stock exceeds 35 percent of the adjusted gross estate. In this question the estate qualifies since the value of the stock is over 42 percent ($3,300,000 divided by $7,700,000) of the adjusted gross estate. The second step involves determining the amount redeemable. Since the nephew’s bequest is liable for estate expenses and taxes, the amount of stock redeemable ($980,000) is equal to the sum of estate expenses and death taxes (not, however, the debts of the decedent): Funeral and administrative expenses + federal and state estate taxes = maximum Sec. 303 redemption ($35,000 + $945,000 = $980,000).

Question 52

Which of the following items is a deduction from a decedent’s gross estate in determining the adjusted gross estate? [LO 13-1]

(A) foreign death taxes

(B) state excise taxes

(C) claims against the estate

(D) the marital deduction

Answer 52

The answer is (C). (A) and (B) are incorrect because foreign death taxes and state excise taxes are not a deduction against the gross estate. (D) is incorrect because the marital deduction is a deduction against the adjusted gross estate to determine the taxable estate.

Question 53

An election against a will by a surviving spouse is not considered a will contest

Answer 53

True

spousal right of election against the will
The right of election against the will is an elective right of a spouse to receive a specific portion
or percentage of the decedent-spouse’s estate in spite of the will. A spouse who is legally married to the testator at the time of death cannot be totally disinherited under most state laws.

Disappointed heirs, entirely or partially overlooked in the will, may attempt to have the will set aside through legal channels. After a will is admitted to probate, any interested parties may file an action to contest the will’s validity. An interested party is one who stands to benefit if the will is overturned.

Question 54

(C) Both estates and complex trusts are separate taxpaying entities.

Answer 54

True

Question 55

A woman is the income beneficiary of an irrevocable trust created by her mother. Which of the following powers given to her by the trust will cause all the assets in the trust to be includible in her gross estate for federal estate tax purposes? [LO 4-4]

(A) the testamentary power to direct the trustee to use trust assets to pay her estate taxes or debts owed upon death

(B) the power to direct the trustee to pay her trust assets limited in amount to an ascertainable standard relating to her health and education

(C) the power each year to direct the trustee to pay her an amount of trust assets not exceeding the greater of $5,000 or 5 percent of the assets held by the trust

(D) the testamentary special or limited power to direct the trustee to distribute trust assets to her children

Answer 55

The answer is (A). (B), (C), and (D) are incorrect because only general powers of appointment are included in the gross estate by the holder of the power. These selections are examples of limited powers of appointment.

Question 56

Which of the following statements concerning valuation of assets for federal estate tax purposes is (are) correct? [LO 9-2]

I. The date of valuation of an estate is the date of the decedent’s death or, if applicable, date of distribution or the alternate valuation date, which is 6 months later.

II. All estate assets are valued at fair market value, which is the value placed on the estate assets by the executor with the advice of the attorney for the estate.

Answer 56

I is correct

II is incorrect because, depending on the type of estate assets and the particular circumstances, fair market value may be inappropriate for federal estate tax valuation purposes. Special-use value, adjusted-book value, and capitalization of adjusted earnings are other possible valuations.

Question 57

All of the following can be deducted from the adjusted gross estate EXCEPT [LO 17-2]

(A) marital deduction

(B) charitable deduction

(C) attorney fees

(D) state death taxes

Answer 57

The answer is (C). Attorney fees would have already been deducted from the gross estate to arrive at the adjusted gross estate. As such, they cannot be deducted again.

Question 58

Calculation of the Taxable Estate

Answer 58

Calculation of the Taxable Estate
1. Determine the gross estate
2. Determine the adjusted gross estate by deducting the following:
• funeral expenses
• administration expenses attributable to property subject to claims against the estate
• claims against the estate
• unpaid mortgages
• other administration expenses
• losses

Question 59

Inter Vivos Trust

Answer 59

A living trust (inter vivos trust) is created and operates before the death of the settlor. A revocable living trust is created when the grantor transfers the trust property to the trustee but reserves the power to alter or terminate the arrangement and reclaim the trust property.

Question 60

A decedent died on January 1, 2019. The facts concerning the decedent’s estate are as follows: Estate tax payable before credits = $4,865,000. Funeral and administrative expenses = $75,000. Basic credit amount = $4,505,800. State death taxes paid = $15,900. Based on the above information, the net federal estate tax payable is [LO 17-2]

Answer 60

The net federal estate tax payable is calculated as follows: estate tax before credits, less basic credit amount (2019): $4,865,000 - $4,505,800 = $359,200

Question 61

Which of the following is a gift for federal gift tax purposes? [LO 6-1]

(A) without compensation, a carpenter builds a chicken shed for a neighbor

(B) a valuable oil painting owned by a father is delivered to his son to be displayed at the son’s residence with a provision that the painting is to be returned to the father on demand

(C) a father waives the interest payment his son was to pay on a $50,000 interest-bearing note evidencing to the father

(D) a mother promises to give her son her new car as soon as the odometer reads 50,000 miles

Answer 61

The answer is (C). Forgiveness of money owed is considered a gift unless it is in a business context. (A), (B), and (D) are incorrect because they do not constitute gifts for federal gift tax purposes.

Question 62

Which of the following terms refers to the property of a decedent reverting to his or her state of domicile when he or she has no surviving relatives? [LO 1-4]

(A) intestate

(B) succession

(C) apportionment

(D) escheat

Answer 62

The answer is (D). (A), (B), and (C) are incorrect because although those terms refer to a decedent’s property passing at death, they do not pertain to property reverting to a decedent’s state of domicile when he or she has no surviving relatives.

Question 63

All of the following statements concerning the federal income taxation of estates are correct EXCEPT [LO 19-1]

(A) An estate is taxed on accumulated income.

(B) An estate is allowed a tax deduction for reasonable expenses.

(C) An estate is taxed at a flat income tax rate.

(D) An estate is entitled to a tax deduction for amounts of income distributed.

Answer 63

The answer is (C). Estates are taxed at progressive income tax rates.

Question 64

Which of the following statements is (are) correct regarding joint-tenancy with right of survivorship (JTWRS)? [LO 3-4]

I. If a husband and a wife own property as JTWRS in a common law state, only the portion included in the gross estate will receive a step up in basis, not the entire value of the property.

II. Even though JTWRS property cannot be transferred through a will, the value of the ownership interest at death is included in the decedent’s gross estate.

Answer 64

Both I and II are correct.

Question 65

Once the estate tax is computed, there are currently four possible credits that may be applied
against the tax to arrive at the net federal estate tax payable. As with income tax credits, these
credits are allowed as a dollar-for-dollar reduction of the estate tax. They are the

Answer 65

• basic credit amount
• credit for foreign death taxes
• credit for gift tax paid on pre-1977 gifts (irrelevant for this course)
• credit for taxes paid on prior transfers

Question 66

A trustee has beneficial ownership of property in his or her care?

Answer 66

False
A trustee is only the legal owner of trust property. The beneficiary of a trust is the equitable owner of the trust property and is entitled to the trust income.

Question 67

Which of the following statements regarding the generation-skipping transfer tax (GSTT) is correct? [LO 20-1]

(A) The GSTT is seen most frequently in situations where a grandparent transfers property to a grandchild.

(B) The GSTT is a graduated tax based on the total amount of transfers made by the decedent.

(C) GSTT liability is always on the donor.

(D) GSTT only applies if there is no estate tax due on the transfer.

Answer 67

The answer is (A). (B) is incorrect because the GSTT is a flat tax. (C) is incorrect because GSTT liability depends on the type of distribution. Sometimes the trustee is liable for paying the taxes. (D) is incorrect because the GSTT is a tax on top of gift and estate taxes already due.

Question 68

Which of the following statements concerning a revocable trust is (are) correct? [LO 4-3]

I. It avoids probate.

II. It enables the grantor to save income taxes.

Answer 68

I is correct

II is incorrect because a revocable trust permits the grantor to alter or amend the trust and to get back the trust property at any time. Therefore, all the income from the trust is taxable to the grantor.

Question 69

In which of the following situations in 2019 will a child’s income be taxed at the trust and estates’ tax rate? [LO 19-3]

(A) A 25-year-old child receives $12,000 in stock dividends.

(B) An 8-year-old child receives income as a bona fide employee in the family business.

(C) A 12-year-old child with no other income earns $500 in interest from a bank account gifted by a parent.

(D) A 17-year-old child earns $10,000 income from a trust created by grandparents.

Answer 69

The answer is (D). (A) is incorrect because children above age 19 (or 24 for a full-time student) are taxed at their rates for their income. (B) is incorrect because the kiddie tax rules are inapplicable to earned income of children. (C) is incorrect because the child’s unearned income is not taxed at the parents’ highest income tax rate until it exceeds $2,200 (2019).

Question 70

Which of the following statements concerning a valid written will is (are) correct? [LO 7-2]

I. A testator’s signature must be notarized when the will is executed.

II. A testator must have testamentary capacity at the time of death.

Answer 70

Neither

I is incorrect because a notarization causes a will to be self-proved to a probate court but is not required since a will can be formally proved to a probate court by establishing the validity of the testator’s signature.

II is incorrect because the validity of a will requires that the testator have capacity when the will is executed.

Question 71

The following are facts concerning a decedent’s estate: Taxable estate = $8,800,000. Post-1976 adjusted taxable gifts = $150,000. Post-1976 gifts made to a qualified charity = $300,000. The tentative tax base of this estate is [LO 17-1]

(A) $8,250,000

(B) $8,650,000

(C) $8,950,000

(D) $9,450,000

Answer 71

The answer is (C). Once the taxable estate is determined, the amount of adjusted taxable gifts made after 1976 is added to the taxable estate. The sum of these two figures is the tentative tax base.

Tentative Taxable Base
Recall from earlier discussions that the federal estate and gift tax are unified. This means that for tax calculation purposes, taxable gifts are added to the taxable estate in order to calculate the total amount of federal gift and estate tax liability. Once the taxable estate is determined, the amount of adjusted taxable gifts made after 1976 is added to the taxable estate. The result is the tentative tax base.

Question 72

Which of the following statements concerning federal gift and estate taxes is (are) correct? [LO 6-2]

I. The donor’s gross estate includes the amount of any gift taxes paid by the donor on gifts made within 3 years of death.

II. Gifts made within 3 years of death are brought back into the donor’s gross estate.

Answer 72

I is correct

II is incorrect because the general rule is that completed gifts are not brought back into a decedent’s gross estate. There are exceptions, however; transfers of property with retained rights and gifts of life insurance policies within 3 years of death are brought back into a decedent (insured’s) gross estate.

Question 73

A father and son have been farming land owned by the father for the past 12 years. Just prior to his death the father was offered $3 million for his farm because of its possible use as a shopping center. The son would like to continue to farm the land if it can be included in his father’s estate at its current-use value. Additional facts are as follows: Average annual gross rentals from nearby farms of similar acreage are $160,000. Average annual state and local real estate taxes on the farm are $32,000. The interest rate for loans from the Federal Land Bank is 8 percent. For federal estate tax purposes, the farm-method valuation formula would result in a current-use value for the farm of [LO 9-4]

(A) $1,400,000

(B) $1,600,000

(C) $1,750,000

(D) $1,850,000

Answer 73

The answer is (B). The current-use value is calculated as follows:

Net comparable income

($160,000 less $32,000) = $ 128,000

Capitalized net income

$128,000/.08 = $1,600,000

Question 74

Which of the following statements concerning property is (are) correct? [LO 3-1]

I. All property must be either real or personal property.

II. A mortgage is considered intangible personal property.

Answer 74

Both I and II are correct.

Question 75

A sale of property will not qualify for installment-sale reporting unless the installments are paid over more than one taxable year and at least 30 percent of the purchase price is paid at the time of settlement.

Answer 75

False
The only requirement for installment-sale reporting is that the entire purchase price not be paid in the year of the sale.