Fundamentals of Estate Planning

Question 1

Which of the following is not an estate-planning goal?

A) Maximizing the gross estate
B) Minimizing transfer taxes
C) Providing for liquidity at death
D) Fulfilling client’s healthcare decisions

Answer 1

The correct answer is (A).
Minimizing transfer costs, not maximizing the gross estate, is a common estate-planning goal. All of the other answers are common estate planning goals.

Question 2

Which of the following statements is incorrect regarding probate property?

A) An LLC passed to a key employee when the business owner retires will be considered probate property when the business owner dies.
B) Assets through a testamentary trust are probate property.
C) Property held as tenants in common is probate property.
D) Property passed through a revocable trust is not probate property.

Answer 2

The answer is (A).
Property passed at retirement is not considered estate property because it is out of the estate when the decedent passes away, therefore it is not probate or non-probate property.

Question 3

Which of the following statements regarding the probate process is not correct?

A) The probate process can cause delays during which the heirs will be waiting to receive their assets.
B) One advantage of the probate process is that it provides clear title to the heirs and beneficiaries.
C) The probate process ensures that creditors are given proper notice to make claims against the estate, and that heirs are protected from late claims by creditors.
D) The probate process ensures the proceedings are kept private and confidential.

Answer 3

The answer is (D).
The probate process is available as public record and is not private.

Question 4

What are the 5 types of wills (explain them)?

Answer 4

1. Statutory Will - drafted by an attorney and complies with the statutes of the domiciliary state. Must be witnessed and signed by the testator.
2. Holographic Will - hgeneraly handwritten by the testator. Must be signed and dated by the testor but does not usually require a witness. Valid in most states.
3. Noncupative Wills - Oral, dying declarations made before a sufficient number of witnesses. Generally not valid in most states and only apply to tangible property.
4. Mutual or Reciprocal Will - involves two identical wills leaving all assets to the other. “Sweetheart Will”. Surviving party is not bound to the will and can change it.
5. Joint Will - For two people, at the death of the first person, the survivor is contractually bound by the joint will. Uncommon.

Question 5

Per Stirpes

Answer 5

Equal distribution among each branch of the family tree

Question 6

Per Capita

Answer 6

Equal distribution among each individual

Question 7

Per Capita At Each Generation

Answer 7

Equal distribution among heirs of the same generation.

Question 8

Zuri gives Omani a power of appointment. Which of the following powers would be deemed a general power of appointment?

A) The power to use Zuri’s money to pay Zuris’ creditors
B) The power to sell and buy property on Zuri’s behalf
C) The power to use Zuri’s money to pay Omani’s creditors
D) The power to make gifts to Zuri’s heirs and charities

Answer 8

The correct answer is (C).
The power to pay the powerholder’s own creditors creates a general power of appointment over the assets. The other powers do not benefit the power holder and thus do not create a general power of appointment.

Question 9

Zuri gives Omani a power of appointment. Which of the following powers would be deemed a general power of appointment?

A) The power to use Zuri’s money to pay Zuris’ creditors
B) The power to sell and buy property on Zuri’s behalf
C) The power to use Zuri’s money to pay Omani’s creditors
D) The power to make gifts to Zuri’s heirs and charities

Answer 9

The correct answer is (C).
The power to pay the power holder’s own creditors creates a general power of appointment over the assets. The other powers do not benefit the power holder and thus do not create a general power of appointment.

Question 10

Barry is 55 years old and he is creating his estate planning documents. He wants his assets to pass to his spouse, and then to his children if his spouse pre-deceases him. Which of the following fiduciary selections is the best choice?

A) Barry should name his father as his executor.
B) Barry should name his spouse as the custodian of the assets that will pass to his minor children.
C) Barry should choose a trustworthy family member or friend to serve as his primary or alternate financial power of attorney.
D) Barry does not need to create a medical power of attorney because in his state, this power defaults to his spouse, who he would have named anyway.

Answer 10

The correct answer is (C).
Barry should chose a trustworthy individual to serve as his financial power of attorney because this person will have access to all of his assets.

Question 11

Which of the following is the most effective way to revoke a will?

A) Physically destroy all copies of the current will.
B) Send an email notifying the attorney and beneficiaries that the will is revoked.
C) Notify the attorney that the will is revoked and a new will is needed.
D) Write a letter to the executor instructing them to ignore the old will and to follow the instructions in the letter instead.

Answer 11

The answer is (A).
Physically destroying all copies of a will is the most effective revocation method. All of the other statements leave the possibility that a copy of the old will will surface, causing uncertainty.

Question 12

Which of the following statements is true regarding tenancy in common?

A) The creditors of one tenant can seize 100% of the property.
B) The creditors of one tenant can seize the portion of the property owned by the tenant that is liable to the creditor.
C) The creditors of one tenant may force the sale of the property.
D) The creditors of one tenant can convert the property into a joint tenancy with survivorship.

Answer 12

The correct answer is (B).
The creditors of one tenant can seize the portion of the property owned by that tenant. None of the other statements are true.

Question 13

Jack and Jill are not married and own farmland titled as joint tenants with rights of survivorship (JTWROS). Jack originally contributed $90,000 and Jill contributed $60,000 toward the purchase price. The land is currently valued at $800,000 and each of them has a 50 percent interest in the property. If Jack died today, what amount of the value of the farmland would be included in his gross estate?

A) $90,000
B) $400,000
C) $480,000
D) $800,000

Answer 13

The correct answer is (C).
Property owned JTWROS follows the actual contribution rule for non-spouses for inclusion in the gross estate. Therefore, since Jack contributed 60 percent of the property, his estate will include 60 percent of the fair market value (60% × $800,000 = $480,000).

Question 14

Bob and Charles own a townhouse together and are not married. Charles contributed 30 percent of the purchase price and Bob contributed 70 percent of the purchase price. Each of them has an equal interest in the property. Which of the following are permissible ways they could title the property?

I. Sole ownership
II. Tenancy in common
III. Joint tenancy with rights of survivorship
IV. Tenancy by the entirety

Answer 14

II and III

The property could be titled either as tenancy in common or joint tenancy with rights of survivorship. The property could not be owned as tenancy by the entirety because Bob and Charles are not married. Sole ownership is not an option because there is more than one owner.

Question 15

Sherri purchased a home many years ago for $100,000. She married Gary five years ago when the house was worth $200,000. Sherri and Gary live in a community property state. Assume Sherri died today and left her entire interest in the property to her son Brody. The property is currently valued at $400,000. What is Brody’s basis in the home after Sherri’s death?

A) $0
B) $100,000
C) $200,000
D) $400,000

Answer 15

The correct answer is (D).
Gary does not own any interest in the property because community ownership has no survivorship rights. Sherri purchased the home before she was married to Gary. At the time of marriage, the property remained Sherri’s separate property. When Sherri died, her interest (100 percent) transferred to Brody. Thus, Gary does not own any of the property and does not have any basis in the property. Brody will have a basis of $400,000 (the step-up basis).

Question 16

Four people own one piece of property. Which of the following forms of property ownership titling of those listed must they use?

A) Life estate
B) Tenancy by the entirety
C) Community property
D) Tenancy in common

Answer 16

The correct answer is (D).
A life estate is only appropriate if the ownership is split between present interests and future interests. It is not appropriate for four concurrent tenants. Tenancy in common is the only one of the choices that allows four owners. Both tenancy by the entirety and community property are between two spouses.

Question 17

What is the Crummy Provision and the 5/5 (5 and 5) Lapse Rule?

Answer 17

Crummy Provision/ Power allows trust benes to withdraw some trust assets for a limited period each year. Allows the gift to be a present interest gift even if the benes don’t actually access the assets in the trust.

5/5Lapse Rule requires that if a bene had the power to withdraw more than 5k or 5% of the trust assets and allowed that power to lapse, the bene has made a taxable gift to the other benes of the amount they did not withdraw that exceeds the greater of 5k or 5% of the trust assets.

Question 18

Dan Donor gifts property with $75,000 fair market value and $100,000 basis to his son, Bill. Dan and Bill report no taxable income upon the transfer. What is the the tax consequence for:
1. Property sold by Bill for $150,000
2. Property sold by Bill for $60,000
3. Property sold by bill for $85,000

Answer 18

1. $50,000 gain (basis is $100,000
2. $15,000 loss ($75,000 basis
3. No gain or loss

Question 19

Which of the following is not true regarding strategies for gifting?

a. Gift tax paid on gifts within three years of death are included in the decedent’s gross estate only if the gift itself is also included.

b. A donor is responsible for additional tax on property that has appreciated in value prior to gifting the property.

c. It is better to sell property that has decreased in value, rather than gift it.

d. Income producing property should be gifted to family members in lower income tax brackets.

Answer 19

Answer - a

Gift tax paid on gifts made within three years of a decedent’s date of death is included in the decedent’s gross estate, regardless of whether or not the gift is included in the gross estate.

Question 20

Bernard made a gift of $500,000 cash to his brother last year. At the time of the gift, he paid $200,000 of gift tax. At Bernard’s death this year, what is included in his gross estate?

A) $0
B) $200,000
C) $250,000
D) $500,000

Answer 20

The correct answer is (B).
Gift tax paid within 3 years is included in the gross estate. Therefore, all of the $200,000 will be included in the gross estate.

Question 21

What is a GRAT?

Answer 21

Grantor Retained annuity Trust

In a GRAT, the grantor’s retained interest is a fixed annuity for the trust term. At the end of the term, the remainder assets are passed to a non-charitable beneficiary.

Question 22

What is a GRUT?

Answer 22

Grantor Retained Unitrust

In a GRUT, the grantor’s retained interest is a variable annuity for the trust term that is calculated as a stated percentage of the annual value of the trust assets. At the end of the term, the remainder assets are passed to a non-charitable beneficiary.

Question 23

What is a QPRT?

Answer 23

Qualified Personal Residence Trust

In a Qualified Personal Residence Trust (QPRT), the asset transferred into the trust is a residence. The grantor’s retained interest is not a payment, but rather, it is the right to live in the home for the trust term. At the end of the trust term, the residence is transferred to the beneficiaries.

Question 24

Which of the following is true of an intentionally defective grantor trust (IDGT)?

a. The grantor is prohibited from exchanging property of equal value with the trust or from controlling the trust investments.

b. The grantor has a reversionary interest in the trust assets.

c. Trust income may be payable to the grantor’s spouse.

d. The grantor may revoke the assets at any time.

Answer 24

C

The first choice is incorrect because if a grantor has the powers to substitute assets or control investments, the trust is an IDGT. The second choice is incorrect because the grantor’s reversionary interest must be greater than 5% of the trust value in order to qualify as an IDGT. The fourth choice is incorrect because an IDGT is an irrevocable trust.

Question 25

In a FLP, there may be special valuation discounts available to enable wealth to pass to younger generations at a significantly lower tax cost than would otherwise be possible. One of these is the “lack of marketability” discount. What is the other?

A) The “general partner” discount.
B) The “majority interest” discount.
C) The “minority interest” discount.
D) The “management” discount.

Answer 25

The correct answer is (C).
A minority interest discount is available for business property that does not allow the owner to control the entity.

Question 26

A FLP offers all of the following advantages EXCEPT:

A) Significant discounts in valuing transfers of partnership interests.
B) A convenient way to gift assets that are generally difficult to break into easily giftable pieces.
C) A method of keeping appreciation of the FLP assets taxable to the older generation rather than heirs.
D) A means of giving away property while still maintaining control.

Answer 26

The correct answer is (C).
A FLP provides just the opposite — a method of shifting future appreciation in the value of assets to the next generation, who would likely be in a lower tax bracket.

Question 27

A niece and uncle agreed to transfer ownership of the uncle’s convenience store to the niece via a self-cancelling installment note (SCIN). Under the terms of the SCIN, she pays $20,000 per year plus interest for 10 years. If the uncle died four years later, what is the niece’s adjusted basis in the home?

A) $0
B) $80,000
C) $120,000
D) $200,000

Answer 27

The correct answer is (D).
The purchaser’s basis in property purchased through an installment note is the full sale price, even if the purchaser didn’t make all of the payments due to a SCIN provision.

Question 28

Which of the following is not a benefit of an Intentionally Defective Grantor Trust (IDGT)?

A) IDGTs allow the grantor to transfer property free of estate taxation.
B) A grantor can transfer appreciated property into an IDGT without incurring taxable capital gains on the transfer.
C) The grantor is liable for the trust’s income tax.
D) The grantor can reclaim the trust assets once they are transferred into an IDGT.

Answer 28

The correct answer is (D).

IDGT transfers are irrevocable. Therefore, they are free of estate tax, however the grantor is still liable for income tax on income earned by the trust assets because the trust is a grantor trust. In addition, because the trust is a grantor trust, transfers of property into the trust are not subject to capital gains tax.

Question 29

James bought the family business using a private annuity that would require payments of $30,000 per year plus interest for the remainder of his father’s life, which is expected to be 20 years. His father died 10 years later. James immediately sold the business for $1,000,000. What is James’ capital gain/loss on the transaction?

A) $300,000
B) $1,000,000
C) $700,000
D) $400,000

Answer 29

The correct answer is (C).
James’ basis is $300,000 (10 payments). Therefore, his gain on the sale is $1,000,000 - $300,000 = $700,000.

Question 30

Hannah, a wealthy business owner, wants to sell her business to her neighbor Dylan. Which of the following statements is not true regarding potential sale strategies?

A) If the sale is structured as a private annuity, Hannah cannot secure the sale with the business collateral and she will owe capital gains on the sale immediately.
B) If the sale is structured as an installment sale, Dylan and Hannah can negotiate the installment term, payment amount, and interest rate.
C) If the sale is structured as a SCIN, Dylan will make payments to Hannah for the rest of her life.
D) If the sale is structured as an installment sale, Hannah will recognize capital gains on each installment payment made.

Answer 30

The correct answer is (C).
The term of a SCIN is the installment term, however, if Hannah dies before the end of the installment term, Dylan is not required to make additional payments. All of the other statements are true.

Question 31

John is 67 years old and would like to transfer some of his assets to his adult son, Murray. John does not want to incur any gift tax liability and also needs some cash flow, so he is considering selling the assets to his son. A friend recently informed John that a self-canceling installment note (SCIN) is a good planning strategy. Which of the following statements regarding self-canceling installment notes (SCINs) is/are correct?

I. To be effective, a SCIN must reflect a risk premium to compensate the seller for the possibility of cancellation.
II. A seller of a SCIN may accept security without jeopardizing the installment sale treatment.
III. At the seller’s death, the present value of any remaining SCIN balance is excluded from the seller’s gross estate.
IV. A SCIN is a debt ordinarily extinguished at the seller’s death.

Answer 31

I, II, III, IV

All are correct. The present value of a self-canceling installment note balance is not included in the gross estate of the seller (decedent) since the value at death goes to zero.

Question 32

Which of the following is an appropriate transfer strategy for rapidly appreciating property with a low basis?

A) Sell the property via a SCIN to a family member.
B) Bequeath the property via a will.
C) Sell the property via GRAT.
D) Gift the property to a family member who wants to sell it.

Answer 32

The correct answer is (A).
A SCIN will allow the property to be removed from the estate at the current value, and the recipient receives the property with basis equal to the sale price. B is incorrect because the appreciated property will cause inflation of the estate value if it is retained until death. C is incorrect because a GRAT is utilized to make a gift, not a sale. D is incorrect because if the property is gifted, the recipient will receive the property with low carryover basis.

Question 33

Which of the following statements regarding a Qualified Personal Residence Trust (QPRT) is/are true?

I. The grantor must survive the trust term to realize any estate tax savings.
II. After the trust term, the house will revert back to the grantor.
III. The grantor will have a taxable gift upon the creation of the QPRT.
IV. A QPRT is generally inappropriate for vacation homes.

Answer 33

I and III

The correct answer is (C).
Statement I is correct. If the grantor dies during the trust term, the entire value of trust property is included in the grantor’s gross estate. Statement II is incorrect. At the end of the trust term, ownership of the house will be transferred to the beneficiaries. Statement III is correct. The taxable gift will be based on the fair market value of the house (on the date of transfer) less the present value of the right to live in the house. Statement IV is incorrect. Vacation homes are often transferred to QPRTs.

Question 34

A bypass trust is also known as a:

A) Credit shelter trust.
B) Marital trust.
C) Charitable remainder trust.
D) QTIP trust.

Answer 34

The correct answer is (A).
A bypass trust is also known as a credit shelter trust.

Question 35

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

I. At the end of the GRAT term, a taxable gift will occur when trust assets are transferred to the beneficiary.
II. If the grantor dies during the trust term, a pro rata share of the trust assets will be included in the grantor’s estate.
III. Interest and dividends earned by assets in a GRAT are taxed to the grantor.
IV. If the grantor survives the trust term, none of the trust assets are included in the grantor’s gross estate.

Answer 35

3 and 4

Statement I is incorrect. A taxable gift will occur when the GRAT is established, not at the end of the GRAT term. Statement II is incorrect. If the grantor dies during the trust term, the entire value of the trust assets is included in the grantor’s gross estate, not a pro rata portion. Statement III is correct. The trust is a grantor trust; therefore, all income will be taxed to the grantor. Statement IV is correct. If the grantor survives the trust term, none of the trust assets will be included in the grantor’s gross estate. However, the taxable gift (that occurs when the trust is established) must be added back to the taxable estate as a prior taxable gift.

Question 35

What is an advantage of a revocable living trust?

A) Reducing the grantor’s gross estate
B) The trusts allow the grantor to avoid income tax
C) Faster distribution of assets to beneficiaries when the grantor dies, compared to probate
D) Minimizing estate taxes

Answer 35

The correct answer is (C).
When the grantor dies, the trust becomes irrevocable and the trust runs under the existing terms, which allow property to be distributed faster compared to the probate process. A and D are incorrect because revocable trusts are included in the gross estate and do not reduce taxes. B is incorrect because the grantor is liable for income tax.

Question 36

A donor with reservations about a child’s financial and emotional sophistication at the time they receive an outright distribution of all property from a 2503(c) trust at age 21 can do which of the following:

A) Delay the distribution by up to 10 years.
B) Dictate that the distribution be split into 5 equal parts spread over 5 years.
C) Make a decision at the time the minor turns 21 on whether to go ahead with the distribution or to allow the trust property to revert back to the donor’s estate.
D) Consider alternatives to the 2503(c) trust because full distribution at age 21 is a required part of the trust.

Answer 36

The correct answer is (D).
There is no way around the mandated full distribution of trust property at age 21, so donors with reservations about the wisdom of such a distribution should look into other options instead of the 2503(c) trust.

Question 37

Angela and Barry, both in their late sixties, recently got married. Angela is wealthy and has a large portfolio of investments and real estate, with significant accrued gains. On her death, Angela wants to ensure a comfortable lifestyle for Barry, and she also wants to protect the balance of her children’s inheritance in the event that Barry remarries. In order to achieve these objectives and minimize tax on her death, Angela should leave her estate to Barry:

A) and the children in a QTIP trust, with access to income and capital available to all beneficiaries on her death.
B) in a revocable trust, with the remainder trust assets distributed to her children.
C) in a SLAT, with Barry named as the income beneficiary for life, and her children as remainder beneficiaries. She will utilize her marital deduction to shelter the trust assets from federal estate tax.
D) in a bypass trust, with an income right for Barry using the 5x5 Power, and the remainder to her children upon death. The balance of her estate would flow into a QTIP trust, with her children as remainder beneficiaries.

Answer 37

The correct answer is (D).

A bypass trust with a QTIP trust would fulfill the objectives as it could provide income for life to her husband and the remainder will go to children. The QTIP trust naming her children as income beneficiaries would not be appropriate because only the surviving spouse can be an income beneficiary of a QTIP. The revocable trust would not fully utilize the marital deduction. The SLAT could be utilized, however, the trust does not qualify for the marital deduction.

Question 38

Explain the 60 50 30 20 Percent Limitation Rules

Answer 38

Question 39

Pooled Income Funds

Answer 39

Donor contributions are pooled in a trust maintained by the charity in exchange for a lifetime income payment to the donors. Donor receives income tax deduction for present value of initial contribution to charity.

Income for life to donor

Remainder to charity

Good for small gifts

Question 40

Non-Trust Split Interest Charitable Gifts

Answer 40

Charitable gifts can be donated where the donor retains some right to use the property for their life or a certain number of years.

Example

Mary donated her farmland to Farms for America but reserved the right to live on the farm for the remainder of her life.

Question 41

Charitable Split Interest Trusts

Answer 41

A charitable split interest trust is a trust where a charity is one of the trust beneficiaries. The value of the trust distributions made to the charity is the charitable contribution. Trusts are less flexible than pooled income funds and are more appropriate for large charitable donations.

Question 42

Charitable Remainder Trusts

Answer 42

The charity is named as the remainder beneficiary. Income payments are made during the trust term to the donor or another named beneficiary.

Question 43

Charitable Lead Trust

Answer 43

The charity is named as the income beneficiary. Income payments are made during the trust term to the charity, and the remainder interest goes to the donor’s named beneficiary.

Question 44

Which of the following statements is not true regarding the need for an estate plan?

A) A wealthy, successful business owner who wants to pass his business to his
children would have complex estate planning needs.

B) The sole breadwinner in a family would need an estate plan with significant life and disability insurance coverage.

C) A single individual with no family who does not own any assets and lives paycheck to paycheck would not need an estate plan.

D) An 80-year old with 5 adult children and 4 grandchildren who just married his third wife would require estate planning for blended families.

Answer 44

The correct answer is (C).
Even individuals without significant assets need an estate plan. The individual in Statement (C) would still need healthcare planning and an executor to oversee his or her final burial wishes. Statement (A) would need an estate plan to determine how to transfer his business in the most cost-efficient manner and minimize estate taxes. Statement (B) would need an estate plan to ensure the individual has sufficient life, long-term care, and disability insurance. Statement (D) would need an estate plan because issues with protection of inheritance often arise in blended families.

Question 45

T/ F

A general power of attorney may or may not be durable.

Answer 45

True

Question 46

T/ F

Special powers of attorney give the agent unlimited power to deal with the principal’s affairs.

Answer 46

False

Special powers of attorney limit or restrict the powers of the agent.

Question 47

T/ F

The powerholder can use the principal’s money to pay for their own bills.

Answer 47

True

Question 48

T/ F

If the powerholder is limited to an ascertainable standard, they have a limited power of appointment.

Answer 48

False

A power under an ascertainable standard is still considered a general power of appointment, but is not included in the powerholder’s estate if the power lapses.

Question 49

Mimi and John are married and have always lived in a community property state. They purchased the home 25 years ago for $140,000. After many improvements and a surge in the market, the home is now worth $500,000. John and Mimi both have wills leaving their entire estates to their daughter, Bette. What would Mimi’s basis in the home be if John died today?

Answer 49

Mimi’s one-half interest in the home will have a basis of $250,000 due to a step-to fair market value of both halves at Johns’ death because the property is owned as community property.

Question 50

Avi and Chaim are siblings that own a rental property as Joint Tenants with Rights of Survivorship. Avi contributed $75,000 and Chaim contributed $25,000. The land is currently valued at $200,000 and each of them has a 50% interest in the property. If Chaim died today, what amount of the value of the property would be included in his gross estate?

Answer 50

Property owned JTWROS follows the actual contribution rule for inclusion in the gross estate unless the tenants are married. Therefore, since Chaim contributed 25% of the property, his estate will include 25% of the Fair Market Value (25% x $200,000 = $50,000).

Question 51

Three siblings want to start a bed and breakfast. The two older siblings have stable incomes and minimal debt. The youngest sibling has not been consistently employed and she has significant debt from her credit cards and student loans. The two older siblings can contribute most of the purchase price, while the youngest will contribute less but will take on most of the management of the property. Which of the following is correct regarding titling of the property?

A) If they title the property as tenants in common, each sibling will have a survivorship right to a deceased sibling’s ownership interest.
B) If they title the property jointly with right of survivorship, creditors of the third sibling can potentially claim the property of the other two siblings to satisfy the third siblings’ debt.
C) If they title the property jointly with right of survivorship, they can allocate ownership percentages according to the amounts they contribute.
D) If they title the property as tenants in common, creditors of the third sibling can potentially claim the property of the other two siblings to satisfy the third siblings’ debt.

Answer 51

The correct answer is (B).

The property owned by joint tenants with right of survivorship could potentially be claimed by creditors of one of the tenants. Co-owners of tenancy-in-common property are not liable for the debts of the other co-owners.

Question 52

Watson owns the following property:

A solely owned home worth $500,000. His basis in the home is $380,000.

A $200,000 life insurance policy on his own life. His sister, who died last year, is the only named beneficiary.

A boat valued at $25,000 titled as JTRWROS with his son.

What is the current value of Watson’s probate estate?

Answer 52

$700,000

The probate estate will include the personal residence and the life insurance policy. The life insurance policy is included because the named beneficiary was already deceased at the time of Watson’s death, therefore, the property will be classified as probate and distributed in accordance with the state’s intestacy laws. The boat is not included because JTWROS property is non-probate property that transfers by operation of law.

Question 53

Assume the decedent did not have a will. Which of the following property would be included in the decedent’s probate estate?

1. A Pay on Death checking account owned by the decedent that will be transferred to the decedent’s grandchild.
2. Community interest property owned with the decedent’s wife
3. Retirement plan proceeds made payable to the decedent’s daughter 
4. A mountain vacation home the decedent owns jointly (JTWROS) with his siblings

Answer 53

2 Only

Options I, III and IV are not included in the probate estate. POD and retirement contracts are transfers by contract law, and property owned JTWROS transfers by operation of law to the surviving joint tenants.

Question 54

Jane and John recently sold some land they owned for $500,000 this year. They received the land as a wedding gift from Brody’s Aunt Jeanette. Aunt Jeanette purchased the land many years ago when the property was worth $200,000. At the date of the gift, the property was worth $300,000 and Aunt Jeanette paid $65,000 in gift tax. What is the long-term capital gain on the sale of the property?

Answer 54

$278,333

In general, when a donor makes a gift of property the donee will take the property at the donor’s adjusted basis. The holding period of the donee will include the holding period of the donor for purposes of subsequent transfers and the determination of long- or short-term capital gains. An exception to the general basis rule occurs when the donor gives property with a fair market value in excess of his adjusted basis and the donor pays gift tax. The gift tax associated with the appreciation is added to the donor’s original adjusted basis to determine the donee’s basis. Thus, the basis would be:

$200,000 (Original Basis) + ($65,000 (Gift Tax) x $100,000/$300,000) = $$221,667

The gain on the asset would be $500,000 – $221,667 = $278,333.

Question 55

Harriet and Wendy transfer $90,000 to an irrevocable trust, naming their three children, Renaldo, Francisco and Bartolo as the beneficiaries. The trust provisions include a right to withdraw an amount equal to 1/3rd of any contribution for 30 days for each beneficiary up to the annual exclusion limit for the 2 spouses (assume the annual exclusion is $15,000 for the current year). After 30 days, all the brothers have lapsed the power to withdraw the $30,000 available to them. Which statement is true regarding the brother’s lapsing of their powers?

A) Each has made a taxable gift to the others Renaldo and Bartolo in the amount of $5,000.
B) Each has made a taxable gift to the others of $8,333.
C) Each has made a taxable gift to the others of $15,000.

Answer 55

The correct answer is (B).

This question addresses the 5/5 Lapse Rule. The 5/5 Lapse Rule states that a taxable gift has been made where a power to withdraw in excess of $5,000 or 5% of the trust assets is lapsed by the powerholder. In this case, all 3 brothers have allowed their power to withdraw $30,000 to lapse. As a result, all 3 have made gifts to themselves and to their brothers of $8,333 ($30,000 – $5,000= $25,000/3)

Question 56

Six months ago, Jeanette transferred a piece of real estate to her son, Charles, valued at $125,000. Jeanette purchased the real estate for $90,000 6 years ago. All the following statements are true EXCEPT:

A) If Charles were to sell the property for $80,000 today, the loss would be a long-term capital loss.
B) Charles’s basis will be $90,000.
C) Charles will have a dual basis for income tax purposes.
D) If Charles sold the property for $220,000 after holding it for 5 years, his gain would be $130,000.

Answer 56

The correct answer is (C).

The holding period for gifts begins on the date the gift was acquired by the donor. A dual basis only occurs when the donor’s basis in the property was greater than the fair market value (FMV) of the property on the date she gifted it.

Question 57

T/ F

The unlimited marital deduction must include assets in the decedent’s gross estate.

Answer 57

True

Question 58

T/ F

An estate tax return is not required if all of the decedent’s property is passed to the surviving spouse.

Answer 58

False

incorrect because an estate tax return should be filed to preserve the portability provision.

Question 59

The death benefit of a life insurance policy transferred within X years of the decedent’s date of death is included in the decedent’s gross estate.

Answer 59

3

Question 60

Holden is the executor of his mother’s estate. Holden determines that his mother’s gross estate contains the following assets and debts:

$450,000 of real estate

$300,000 in cash and cash equivalents

$670,000 in qualified retirement plans

$370,000 outstanding debt

Prior to her death, his mother’s home caught fire and the damage totaled $26,000. Administrative fees to manage the estate total $136,000.

Which number will NOT be used in this calculation?

Answer 60

$26,000

Question 61

All the following transactions will be included in Jonathan’s gross estate EXCEPT:

A) Jonathan gave $40,000 to each of his three grandchildren 2 years ago. No gift tax was due on the gifts.

B) Jonathan purchased a life insurance policy on his life. The policy has a face value of $300,000. Jonathan transferred the policy to his son 2 years ago. 

C) Jonathan and his wife owned their personal residence valued at $250,000 as tenants by the entirety.

D) After inheriting a mountain vacation home from his mother, Jonathan gifted the vacation home to his daughter to remove it from his gross estate. Jonathan continued to use the property as a weekend getaway and continued all maintenance on the property.

Answer 61

The correct answer is (A).

The $40,000 gifts to his grandchildren are excluded from his gross estate because only gifts of life insurance within 3 years of the transferor’s death and any gift tax paid on such a gift are included in a transferor’s gross estate.

Question 62

Leila is the sole owner of an LLC worth $15,000,000. Her children are ready to take over her business and she would like to retire within the next two years. She comes to you for advice on how to transfer the business with as little transfer taxes as possible. She has already used her federal exemption on past gifts. Which of the following is an appropriate suggestion?

A) Transfer the property via a 5-year GRAT.

B) Transfer the property via a SCIN.

C) Transfer the property via a CLT.

D) Retire from her position as the CEO but retain her ownership interests until death.

Answer 62

The correct answer is (B).

A SCIN will allow immediate transfer to her children and since the transfer is a sale, there will be tax at the lower capital gains rate, not the higher gift tax or estate tax rate. A is incorrect because she wants to retire within 2 years, and a 5 year GRAT would delay transfer to her children. C is incorrect because a CLT will provide income to a charity and she has not stated any charitable intentions. D is not appropriate because her children are ready to take over the business now, and withholding ownership in the business will cause misalignment of goals because they do not control the business.

Question 63

IDGT stands for

Answer 63

Intentionally defective grantor trust

Question 64

T/ F

An IDGT can be set up for the following tax efficient reason:

Having the grantor(s) retain the liability of the income taxes due on the assets in trust will help “burn down” the grantor’s assets for transfer tax purposes.

Answer 64

True

Question 65

T/ F

An IDGT can be set up for the following tax efficient reason:

IDGT can be revocable trust and still accomplish their desired income and transfer tax objectives.

Answer 65

False

incorrect as transfer tax objectives will not be accomplished by the use of a revocable trust.

Question 66

T/ F

The following is a characteristic of family limited partnerships:

Family values and business/financial lessons gained can be transferred to the recipient family members in the running of the FLP.

Answer 66

True

Question 67

T/ F

The following is a characteristic of family limited partnerships:

Although they are effective transfer vehicles of family wealth, the structure of FLPs do not offer the general partners (GP) any tools by which they can dissuade the creditors of limited partners (LP) from attaching to the income stream generated by the LP shares

Answer 67

False

incorrect as FLP shares are not effective devices to attach to for creditors of limited partners as the general partners control the income assigned to each share/interest and limited partners have no right to demand payment.

Question 68

A donor contributed $2,000 to a fundraiser that provided all donors with the option to buy season tickets to an NFL game. The tickets are worth $1,000. How much is her deductible charitable contribution for the year?

Answer 68

$0

The cost of the option to buy tickets is the donation, which is $2,000. Therefore, the deduction is valued at $0 for income tax purposes.

Question 69

Janet would like to use her recent inheritance of $350,000 to establish a charitable remainder trust. She would like to have the flexibility to make additional contributions to the charitable remainder trust in the future. Which of the following would you recommend for Janet?

A) Charitable Remainder Annuity Trust
B) Charitable Gift Annuity
C) Charitable Lead Unitrust
D) Charitable Remainder Unitrust

Answer 69

The correct answer is (D).

Option A is incorrect because additional contributions may not be made to a CRAT. Option C is incorrect because a CLUT is not a charitable remainder trust. Option B is incorrect because each donation is a separate annuity and the annuity is not a remainder trust.

Question 70

T/ F

To get the estate tax marital deduction for assets passing at death, the property must have been included in the gross estate of the deceased spouse.

Answer 70

True

Question 71

T/ F

Property passing to an ex-spouse upon the death of a former spouse will qualify for the deduction assuming all other requirements are met and the decedent and the recipient were married at some point during the year of death.

Answer 71

False

To qualify for the marital deduction, spouses must be married at the time of death or gift, even if legally separated. The other answers are all correct statements.