Sample Exam 1 Flashcards
Which of the following is not a transfer cost associated with estate planning?
A) Document preparation
B) Attorney’s fees
C) CPA’s fees
D) Insurance premiums
The correct answer is (D).
Insurance premiums are not a transfer cost associated with estate planning. All of the other answers are costs associated with estate planning.
You are opening a new financial planning practice and you would like to put together a team of experts to help your clients with estate planning. Which of the following groups represents the best team to help your clients?
A) Financial planner, CPA, and attorney.
B) CPA, psychiatrist, and insurance salesman.
C) Financial planner, attorney, and real estate agent.
D) Attorney, insurance salesman, and IRS agent.
The correct answer is (A).
The best team for your client would include a financial planner, CPA, and attorney. A licensed insurance specialist and real estate agent are also good additions to an estate planning team, but the team described in statement (A) covers all of the required aspects of an estate planning team: financial planning, tax planning, and legal representation.
LO 1.3
Although he has a vast fortune, Ricky has decided not to prepare an estate plan because he believes that his surviving family members will divide up his assets appropriately. Which of the following is not a risk associated with failing to plan an estate?
A) Ricky’s estate could incur excessive transfer taxes.
B) Ricky’s favorite Corvette may not be transferred to his ex-wife, Carla.
C) Ricky’s insurance policy on his own life may not be paid out to the named
beneficiary.
D) Ricky’s current wife, Lucille, may not provide for Ricky’s children from a previous marriage
The correct answer is (C).
The proceeds of insurance policies with named beneficiaries pass outside of probate via state contract law. Ricky’s failure to plan his estate will not affect the payment of his insurance policy.
LO 1.1
Tracey is a financial planner who recently received his CFP® designation. Tracey does not have any other designations or licenses. Although Tracey’s expertise is investment planning, he is anxious to expand his client base and is willing to assist clients with any area of financial planning. Over the last month, Tracey engaged in the following activities with Troy, a new client.
I. During the initial meeting, Tracey collected personal data about Troy, including the estate planning documents Troy had previously executed.
II. During the second meeting, Tracey recommended the use of a trust to fulfill some of Troy’s estate planning goals.
III. Troy called Tracey one afternoon and asked if Tracey could explain the probate process to him, which Tracey promptly did.
IV. Tracey downloaded a copy of a generic will from the internet, filled in Troy’s information and gave the document to Troy to be executed.
Of the activities above, which would be considered the unauthorized practice of law?
A) IV only
B) II and III
C) III and IV
D) II, III, and IV
E) I, II, III, and IV
The correct answer is (A).
Only statement four would be considered the unauthorized practice of law. The drafting of legal documents is reserved for attorneys. Inquiring about estate planning documents should be completed by all practitioners. Recommending appropriate estate planning devices, such as trusts, can be done by financial planners. Explaining the probate process to a client would not be the unauthorized practice of law; the line would be crossed if Tracey gave legal advice regarding the probate process.
LO 1.3
Which of the following is not a common estate planning goal?
A) Maximizing transfer costs.
B) Minimizing transfer taxes.
C) Providing for liquidity at death.
D) Fulfilling client’s healthcare decisions.
The correct answer is (A).
Maximizing transfer costs is not an estate planning goal. Transfer costs should be minimized to the greatest extent possible, while also fulfilling the client’s goals. All of the other answers are common estate planning goals.
LO 1.1
Of the following, who should generally be a member of the estate planning team?
I. Investment Advisor
II. Trustee
III. Insurance agent
IV. Attorney
A) I and II
B) I, III, and IV
C) I, II, and III
D) I, II, III, and IV
The correct answer is (B).
A trustee is not a member of the estate planning team, because the trustee’s responsibility is not to advise the client about forming the estate plan but to carry out the terms of the trust document.
LO 1.3
You are a CFP® professional and although you never went to law school, you consider yourself to be very good at reviewing wills. Your client, Catherine, asks you to prepare a will for her. Should you prepare a will for Catherine?
A) Yes, Catherine is your best client and you might lose her if you do not prepare the will.
B) Yes, it is permissible for a CFP® professional to prepare a legal document.
C) No, preparing Catherine’s will would be considered the unauthorized practice of law.
D) No, you should only prepare Catherine’s will if you are going to be a beneficiary under the will.
The correct answer is (C).
Drafting legal documents, such as wills, is an activity reserved for licensed attorneys. If you are not a licensed attorney and you prepare a legal document, you have engaged in the unauthorized practice of law.
LO 1.3
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.
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.
Which of the following is correct regarding a power of attorney?
A) The principal is the individual that is granted decision-making power.
B) A guardian ad litem is an agent of the principal.
C) The agent is the person granting the power.
D) The attorney who prepares the document is the power of attorney.
The correct answer is (B).
The parties to a power of attorney are the principal and the agent. A guardian ad litem is an agent acting on behalf of the principal for a specific purpose (usually a minor child in this instance). Statement (A) is incorrect because the principal is the individual who is granting the power to the agent to make decisions or act on their behalf. Statement (C) is incorrect because the principal is the person granting the power. Statement (D) is incorrect because the attorney is simply serving an administrative function to execute the document.
LO 2.3
Which of the following individuals died testate?
A) Manuel met with his attorney and prepared a will, leaving all of his assets to charity shortly before his death from a heart attack.
B) Paula wrote an email to her children before her death, designating which children would receive specific property when she died.
C) Frank notified his attorney before his death in writing that he was satisfied with all of his property going to his wife and children, so he had no need for a will.
D) Kayla, a stay at home mother, did not prepare a will before she died because she owned no assets in her name.
The correct answer is (A).
Even though Manual left all of his assets to charity, his will was valid, so he died testate. The other answers describe individuals who died intestate (without a valid will). Statement (B) is incorrect because an email is not satisfactory as a valid will. Statements (C) and (D) are not correct because even though in both cases the individuals did not believe they needed a will, they failed to create one before their deaths.
LO 2.2
Nellie recently executed a power of attorney giving Jessie the power to perform certain tasks. Which of the following powers given to Jessie would cause the power to be deemed a general power of appointment?
A) Nellie gave Jessie the power to use Nellie’s money to pay Nellie’s creditors.
B) Nellie gave Jessie the power to sell and buy property on Nellie’s behalf.
C) Nellie gave Jessie the power to use Nellie’s money to pay Jessie’s creditors.
D) Nellie gave Jessie the power to make gifts to Nellie’s heirs and charities.
The correct answer is (C).
Giving Jessie the power to pay his own creditors creates a general power of appointment over the assets. The other powers do not benefit Jessie and thus do not create a general power of appointment.
LO 2.3
Margie has come to you and said that she is considering executing a power of attorney for health care or an advance medical directive (also known as a living will). Although her state utilizes both documents, she believes that she only needs one of these documents. Which of the following statements is true regarding the two documents?
A) Margie is correct in believing that an individual does not need both documents, she only needs to execute one document because they both accomplish the same goals.
B) Margie should execute both documents as they cover different aspects of medical care.
C) Margie only needs to execute the power of attorney for health care, because it covers everything the advance medical directive covers and more.
D) Margie does not need to execute either document; she can solve her medical concerns by executing a DNR.
The correct answer is (B).
The documents address different medical care concerns. A power of attorney authorizes an agent to make decisions about her medical care, but generally does not address the ending of life-sustaining treatment. The living will addresses the ending of life-sustaining treatment, but not the providing of medical care. A DNR is not a replacement for the other two documents; it is an additional document that addresses the prevention of resuscitation in the event of heart failure for a terminally ill patient.
LO 2.4
Which type of will is handwritten and does not generally require a witness?
A) Holographic
B) Oral
C) Nuncupative
D) Statutory
The correct answer is (A).
Holographic wills are handwritten. The material provisions of the will must be in the testator’s handwriting. The will must be dated and signed by the testator, and does not generally need to be witnessed.
LO 2.1
Elizabeth has drafted her own will using the “EZ Wills” software that she purchased on the internet. She sends it to you for a review. In your first review of the will, you look for which of the following common provisions?
A) A statement of the domicile of the testator
B) A secondary clause
C) A specific bequest of property owned in tenancy by the entirety
D) A disclosure clause
The correct answer is (A).
A statement of the domicile of the testator is a provision that is commonly found in a will and establishes the jurisdiction for the will to be administered. Neither a secondary clause nor a disclosure clause exists. Property owned in tenancy by the entirety transfers by operation of law and is not disposed of through a will.
LO 2.1
Why is a springing durable power of attorney useful?
A) In the event that the principal becomes disabled, the power of attorney will automatically become ineffective.
B) It allows the principal to choose an agent to make decisions on her behalf if she becomes unable to do so.
C) It ensures the decedent’s property will be distributed according to her wishes.
D) It provides medical professionals with detailed instructions on the disabled individual’s wishes for medical care.
The correct answer is (B).
A springing durable power of attorney becomes effective only when the principal becomes disabled, and lasts as long as the disability. Statement (A) is incorrect because the durable nature of the power of attorney ensures that it remains valid through the principal’s disability. Statement (C) is incorrect because this is referring to a will; the power of attorney can make decisions regarding the decedent’s property that may or may not align with the decedent’s wishes. Statement (D) is incorrect because this is referring to a living will.
LO 2.3
Which of the following is an advantage of dying intestate?
A) Liquidity can be easily generated by selling small business ownership interests.
B) Estate property can be designated to charity and friends.
C) Minor children and surviving spouses will get priority with distributing estate assets.
D) Only the very wealthy need estate planning services, so money can be saved by avoiding the creation of a will.
The correct answer is (C).
State intestacy laws distribute most or all of an estate to the surviving spouse and minor children. Statement (A) is incorrect because small businesses are not easily liquidated and may be liquidated for much less than fair market value. Statement (B) is incorrect because intestacy laws only allow for distribution to family members. Statement (D) is incorrect because most people need estate planning services to ensure their wishes are protected and transfer costs are minimized.
LO 2.2
Robert has a falling out with his adult children and wants to “write them out of his will.” Which of the following is an effective means of fulfilling Robert’s wishes?
A) Robert throws his old will into a fire and writes a new will leaving everything to charity.
B) Robert sends his children a certified letter telling them they have been disinherited.
C) Robert directs his attorney to call each of his children to tell them they have been disinherited.
D) Robert calls his attorney and tells her that he wants to disinherit his children.
The correct answer is (A).
A will can be revoked by physically destroying the will. None of the other answers would effectively revoke Robert’s will.
LO 2.1
Ralphie, a real estate mogul, dies owning a great deal of real property. Which of the following would be included in Ralphie’s probate estate?
A) A building owned in sole ownership by Ralphie’s wife. Ralphie and his wife do not live in a community property state.
B) A vacant lot owned joint tenancy with rights of survivorship by Ralphie and his brother.
C) A beach house owned tenancy in common by Ralphie and his mother.
D) An office building owned tenancy by the entirety by Ralphie and his wife.
The correct answer is (C).
Statement (A) is incorrect because the property of Ralphie’s wife would not be included in his probate estate. Statement (B) is incorrect because property owned JTWROS passes outside of probate. Statement (D) is incorrect because property owned tenancy by the entirety passes outside of probate.
LO 3.4
Which of the following accurately describes a life estate?
A) An interest in property for a specified number of years.
B) An interest in property that ceases upon the death of an individual.
C) An undivided interest in property held by two or more related or unrelated persons.
D) A complete interest in property with all the rights associated with outright ownership.
The correct answer is (B).
Statement (B) is the definition of a life estate. Statement (A) is the definition of an interest for a term. Statement (C) is the definition of tenancy in common. Statement (D) is the definition of fee simple.
LO 3.3
An aunt and her nephew own a rental property as tenants in common valued at $200,000. The aunt owns an 80% interest and her nephew owns a 20% interest. The aunt is elderly and in failing health. She wants to sell the property to get cash to pay off her medical bills. What impact will her sale have on her nephew?
A) The nephew will have to agree to the sale.
B) The aunt can sell 100% of the property and reimburse the nephew for his loss.
C) The nephew will become co-tenants with the person the aunt sells to.
D) The nephew will lose his right of survivorship.
The correct answer is (C).
Statement (C) is correct because the aunt can sell her interest to another individual, who becomes a co-tenant. Statement (A) is incorrect because a tenant in common does not need permission from the other tenants to dispose of their property interest. Statement (B) is incorrect because the aunt cannot sell a greater share of the property than she owns. Statement (D) is incorrect because there is no right of survivorship with tenancy in common.
LO 3.2
Laurie and Chance are considering purchasing a piece of land on which they plan to build a vacation home. Laurie and Chance are engaged to be married, and are unsure of how they should title the property. Which of the following statements is correct regarding their ownership and titling of the land?
A) Laurie and Chance cannot own the property as joint tenants because joint tenancies may only be established between married parties.
B) If Laurie and Chance were married and owned the property in tenancy by the entirety, one-half of the value of the property will be included in the probate estate of the first spouse to die without regard to the actual contribution of each spouse.
C) If the property is held as a joint tenancy with right of survivorship then Laurie and Chance will each own the same fractional share in the property regardless of how much they contribute.
D) If the property is held as a joint tenancy with right of survivorship and Chance dies first, the property will pass to Laurie unless Chance’s will directs a different disposition.
The correct answer is (C).
Joint tenancy with right of survivorship requires equal ownership. Statement (A) is incorrect because joint tenancies may be established by spouses or non-spouses. Statement (B) is incorrect because in tenancies by the entirety, each would be deemed to have contributed 50%, therefore only 50% would be included in the gross estate of the first spouse to die. Nothing will be included in the probate estate. Statement (D) is incorrect because if the property is held as JTWROS, then the property will transfer automatically at the first tenant’s death, regardless of what the will dictates.
LO 3.2
Kathi and Darrin, who are married, live in a community property state. They purchased the home 17 years ago for $100,000 using joint funds. After many improvements and a surge in the market, the home is now worth $200,000. If Darrin died today and left his share of the home to his daughter Elizabeth, what is Kathi’s basis in the home?
A) $50,000.
B) $100,000.
C) $150,000.
D) $200,000.
The correct answer is (B).
Kathi’s one-half interest in the home will have a basis of $100,000 due to a step-to fair market value of both halves at Darrin’s death because the property is owned as community property. Their daughter will receive her half of the home with step up basis as well.
LO 3.2
Chris and Jenn gave their son, Evan, a car worth $4,000. The car was originally owned by Chris and Jenn as community property. Evan is married to Michelle and lives in a community property state. After the gift, how is Evan’s ownership of the car classified?
A) Sole Ownership
B) Joint tenants with Chris and Jenn
C) Tenancy in Common with Michelle
D) Community Property with Michelle
The correct answer is (A).
The car is owned by Chris as sole owner. Statement (B) is incorrect because there is no indication that Chris or Jenn retained any interest in the car after the gift. Statement (C) is incorrect because the gift was made only to Evan. Statement (D) is incorrect because even though Evan is married, a gift to an individual would not be community property.
LO 3.2
Natalie and Ashley own farm land as Joint Tenants with Rights of Survivorship. Natalie contributed $60,000 and Ashley contributed $40,000. The land is currently valued at $1,000,000. If Natalie died today, what amount of the value of the farm land would be included in her gross estate?
A) $60,000.
B) $500,000.
C) $600,000.
D) $1,000,000.
The correct answer is (C).
Even though the ownership shares are equal in JTWROS, the actual contribution rule is followed for inclusion in the gross estate for unmarried tenants. Therefore, since Natalie contributed 60% of the property, her estate will include 60% of the Fair Market Value (60% x $1,000,000 = $600,000).
Maria owns a rental property. She would like to jointly own the property with her husband, Miguel and leave the property to her daughter, Sophia. Which of the following ways could she title the property?
A) As joint tenants with right of survivorship with Miguel.
B) As tenants in common with Miguel.
C) As community property, regardless of which state they live in.
D) As tenants by the entirety so she can sell the property without Miguel’s consent if she needs to.
The correct answer is (B).
Tenants in common may bequest property as they wish. Statement (A) is incorrect because JTWROS passes directly to the surviving tenants, and cannot be passed to anyone else. Statement (C) is incorrect because only community property states allow community titling. Statement (D) is incorrect because tenants by the entirety need the other tenants’ consent to sell the property.
LO 3.3
Which of the following is/are considered real property?
I. Bonds.
II. Patents.
III. Hot water tank inside of a residential home.
IV. Land held for investment.
A) III only
B) I and II
C) III and IV
D) I, II, and III
The correct answer is (C).
Real property is land and buildings. A hot water tank affixed inside of a home and land for investments are tangible real property. The nature of the property in the hands of the owner (investment, personal, inventory) does not affect the type of property. Bonds and patents are intangible property.
LO 3.1
Which of the following empowers an executor to act as the agent of a probate court?
A) Surety Bond
B) Letters of Administration
C) Letters Testamentary
D) Intestacy Laws
The correct answer is (C).
Statement (A) is the bond that an administrator must generally post. Statement (B) is what empowers an administrator to act as the agent of a probate court. Statement (D) describes the state laws that govern the disposition of a decedent’s estate if he has failed to prepare a valid will.
LO 4.1
Nate owns the following property:
- A personal residence titled as fee simple valued at $500,000.
- A $500,000 life insurance policy on his own life. The only named beneficiary is Nate’s brother Jaime, who died 6 months ago.
- A car valued at $15,000 titled as JTWROS with Nate’s mother.
- An IRA valued at $400,000 with Nate’s mother as the named beneficiary.
What is the current value of Nate’s probate estate?
A) $500,000.
B) $1,000,000.
C) $1,400,000.
D) $1,415,000.
The correct answer is (B).
The probate estate will include the personal residence and the life insurance policy. Life insurance policies are usually not included in probate, but in this instance, the beneficiary named is deceased and is therefore not available to take the proceeds. Therefore, the death benefit must be included in the probate estate so the court can determine how it will be distributed. The car is not included because of the JTWROS ownership, and thus it transfers by operation of law. The IRA is not included because there is a living named beneficiary and thus will transfer via contract law.
LO 4.2
Which of the following is/are considered a disadvantage(s) of probate?
I. The process can result in delays.
II. The process may be expensive.
III. The process does not provide clear title to heirs and legatees.
IV. The process is open to public scrutiny.
A) I only
B) I and II
C) I, II, and IV
D) I, II, III, and IV
The correct answer is (C).
An advantage of probate is that it provides clear title to heirs and legatees. All of the other options are disadvantages of the probate process.
LO 4.1
Uncle Joe died recently. In Uncle Joe’s will, he left his house to his favorite niece, Rachel, and his car to his other niece, Margaret. He did not use a residuary clause. Uncle Joe also owned a life insurance policy on his own life and named his two nieces the beneficiaries of the policy. He also owned a 401(k) plan without a listed beneficiary.
Which of the following statements is correct?
A) All assets will be transferred via the will.
B) All assets will be transferred via the state’s intestate probate laws.
C) Some assets will be transferred via the will, and the remaining assets will transfer by operation of contract.
D) Some assets will be transferred via the will, some by contract, and some by the state’s intestate probate laws.
The correct answer is (D).
The house and the car will transfer under the will. The life insurance policy will transfer by contract outside the probate process because of the named beneficiaries. The 401(k) plan will transfer to Uncle Joe’s probate estate because there is no listed beneficiary. Since the will does not cover the 401(k) plan, the asset will transfer via the state’s intestate succession laws.
LO 4.2
Chad and Ryan have been partners for the past 25 years. They are not married. Chad’s family is quite wealthy, and is also very conservative. They do not approve of Chad’s relationship with Ryan. Chad was diagnosed with cancer last year and was given only 12–15 months to live. Chad plans to leave his substantial wealth to Ryan. Over the holidays, Chad and his family argued about his estate plan. Chad has come to you, an estate planning attorney, and asks you to recommend ways he can ensure that Ryan will receive his assets. Which of the following would you be least likely to recommend to Chad to meet his objectives?
A) A well-drafted will leaving everything to Ryan with a no-contest clause.
B) A revocable living trust created and funded now with Ryan as the beneficiary at Chad’s death.
C) An irrevocable trust created and funded with Chad as the income beneficiary and Ryan as the remainder beneficiary.
D) Retitling all assets as JTWROS with Ryan.
The correct answer is (A).
While all of these options may accomplish Chad’s goal, statement (A) has the most inherent risk. The use of a will in this situation is very susceptible to a contest. The no-contest clause is irrelevant, because Chad did not leave anything to anyone else to encourage them not to contest. The trust and titling options are much less likely to be susceptible to fraud and undue influence claims.
LO 4.2
Tom loans $5,000 to his daughter Tina. Which of the following is true regarding the loan?
A) Interest would not be imputed because the loan is less than the amount of the annual exclusion.
B) Interest would not be imputed because loans of $100,000 or less are exempt from both income tax and gift tax consequences.
C) Interest would not be imputed because the loan is less than $10,000.
D) If Tom forgives the loan, the outstanding loan amount is taxable income to Tina.
The correct answer is (C).
Statement (A) is incorrect because the annual exclusion is not relevant to imputed interest. Statement (B) is incorrect; loans of less than $10,000 are exempt from both income tax and gift tax consequences. Statement (D) is incorrect because a loan forgiven by family members is considered a gift, not taxable income.
LO 5.1
Which of the following statements concerning the use of Crummey powers with an irrevocable life insurance trust is correct?
A) Crummey powers are used to make trust contributions a future-interest gift.
B) The right to exercise the Crummey powers must exist for a reasonable period of time each year.
C) If there are several beneficiaries, Crummey powers should be given to only one beneficiary.
D) A danger with the Crummey power is that the beneficiary can request an amount greater than the grantor’s annual addition to the corpus.
The correct answer is (B).
Statement (A) is incorrect because Crummey powers are used to make an irrevocable life insurance trust a present-interest gift. Statement (C) is incorrect because if there are several beneficiaries, Crummey powers should be given ratably to each. Statement (D) is incorrect because with the way the powers are stated, a beneficiary cannot request an amount greater than the grantor’s annual addition.
LO 5.3
Trey decides to set up a trust for the benefit of his two sons, Ronnie and Chad. Trey makes an annual contribution to the trust in the amount of $30,000 and gives each son the right to withdraw up to $15,000. In the current year, when the total trust assets are $52,000, Ronnie decides to withdraw $15,000, but Chad does not withdraw anything. What is the result of Chad’s decision not to withdraw any of Trey’s contribution to the trust?
A) Chad has made a taxable gift to Ronnie of $5,000.
B) Ronnie has made a taxable gift to Chad of $15,000.
C) Trey has made a taxable gift to Ronnie of $15,000.
D) No taxable gifts are made by Chad.
The correct answer is (A).
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, Chad has allowed his power to withdraw $15,000 to lapse. As a result, Chad has made a gift to himself of $5,000 ($7,500 – ($5,000/2)) and a gift to Ronnie of $5,000 ($7,500 – ($5,000/2)).
LO 5.3
- Amount of Lapse
- Less: Greater of $5,000 or 5%
- Divide By: Number of Bene’s
- Taxable Gift to Each
Bernard made a gift of $500,000 to his brother in 1997. At the time of the gift, the applicable gift tax credit was $192,800, but due to Bernard’s prior taxable gifts he paid $200,000 of gift tax. When Bernard died in 2021, the applicable gift tax credit had increased to $4,625,800. At Bernard’s death, what amount related to the $500,000 gift to his brother is included in his gross estate?
A) $0.
B) $153,000.
C) $200,000.
D) $500,000.
The correct answer is (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. In this case, Bernard made the gift more than three years before his death, so $0 is included in his gross estate related to this gift. The gift will be included in Bernard’s adjusted taxable gifts amount, and Bernard will get credit for the gift tax paid of $200,000.
LO 5.6
Which of the following statements relating to qualified transfers for gift tax purposes is not correct?
A) The relationship between the donor and the donee is irrelevant with a qualified transfer.
B) A payment made directly to an individual for the purpose of paying medical expenses is a qualified transfer.
C) The exclusion for a qualified transfer may exceed the annual exclusion.
D) A payment made to a qualified education institution for tuition costs is a qualified transfer.
The correct answer is (B).
A payment made directly to an individual to reimburse him for medical expenses is not a qualified transfer. To be a qualified transfer, the payment must be made directly to the healthcare provider. All of the other options are true.
LO 5.2
Brody and Tanya recently sold some land they owned for $150,000. They received the land and a check equal to the amount of the then-current annual exclusion five years ago as a wedding gift from Brody’s Aunt Jeanette. Aunt Jeanette purchased the land when the property was worth $20,000. One the wedding day, the property was worth $100,000 and Aunt Jeanette paid $47,000 in gift tax. What is the long-term capital gain on the sale of the property?
A) $42,400.
B) $50,000.
C) $92,400.
D) $130,000.
The correct answer is (C).
When a donor makes a gift of property other than cash to a donee, the donee will take the property at the donor’s adjusted basis including any gift tax paid on the appreciation of the asset. Thus, donee’s basis would be:
Donor’s basis + (Gift tax x % appreciation). In this case, the % appreciation is 80% (80,000/100,000). 80% of the gift tax paid is attributed to the appreciation on the land. So, the equation would be:
$20,000 + (47,000 x 80%) = $57,600
The gain on the asset would be $150,000 – $57,600 = $92,400.
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.
LO 5.5
Which of the following transfers would result in gift tax?
A) Bob gifts $11,000 to his daughter, Barbie.
B) Elroy gifts $50,000 to his wife, Elizabeth, who is a U.S. citizen.
C) Adam gives his favorite employee, Aaron, a new car at Aaron’s retirement worth $20,000.
D) Pete transfers $20,000 to his ex-wife, Patricia. Pete and Patricia were divorced five years ago.
The correct answer is (D).
Statement (A) would not result in gift tax because the gift does not exceed the annual exclusion. Statement (B) is incorrect because a person can gift an unlimited amount to his or her spouse, who is a U.S. citizen, without incurring gift tax. Statement (C) is incorrect because transfers in a business setting are presumed to be compensation. For Statement (D), if Pete had transferred $20,000 to Patricia pursuant to a divorce decree, there would be no taxable gift, but transfers to an ex-spouse five years after the divorce is final are not considered “transfers pursuant to a divorce decree.”
LO 5.2
Donna and Daniel have lived in Louisiana their entire marriage. Currently, their combined net worth is $4,000,000 and all of their assets are community property. After meeting with their financial advisor, Donna and Daniel begin a plan of lifetime gifting to reduce their gross estates. During 2020, they made the following cash gifts:
Son $80,000
Daughter $160,000
Republican National Committee $75,000
Granddaughter $15,000
What is the amount of the taxable gifts to be reported by Donna?
A) $35,000.
B) $90,000.
C) $127,500.
D) $255,000.
The correct answer is (B).
Because the assets are community property, the gifts are deemed to be made 50% by each spouse. Gift-splitting is not an issue. The cash payment to the Republican National Committee is not a gift for gift tax purposes. Donna’s taxable gifts are calculated as follows:
LO 5.2
Which of the following is true regarding the gift tax return?
A) The due date for the gift tax return is 9 months after the gift is made.
B) During the year, James gifts his son $10,000. James must file a gift tax return.
C) Renata gifts her granddaughter a $36,000 tuition payment, made directly to her university. Renata does not need to file a gift tax return.
D) Frankie gifts his wife a surprise trip to the Bahamas, worth $17,000. He must file a gift tax return.
The correct answer is (C).
Gift tax returns do not need to be filed for qualified transfers. Statement (A) is incorrect because the gift tax return must be filed by April 15 of the year following the gift. Statement (B) is incorrect because the return does not need to be filed for gifts under the annual exclusion. Statement (D) is incorrect because gifts between spouses do not need to be reported.
LO 5.4
Despite his efforts to transfer all of his property out of his estate during his life, Gordon died on January 16th. His family provided the following information about Gordon’s assets:
What is the value of Gordon’s gross estate?
A) $124,500
B) $128,500
C) $422,500
D) $424,500
The correct answer is (C).
The personal residence, the rental property, the cruise refund and the cash are all included at the fair market value at Gordon’s date of death. The rental income is not included because the payment was made after Gordon’s death, and it was not owed to Gordon before his death. $320,000 + $80,000 + $4,500 + $18,000 = $422,500. The rental income would be included in the estate’s income tax return (Form 1041).
LO 6.2
