Review Questions & Answers. Estate Planning

Transcription

1 Review Questions & Answers Estate Planning

2 , College for Financial Planning, all rights reserved. This publication may not be duplicated in any way without the express written consent of the publisher. The information contained herein is for the personal use of the reader and may not be incorporated in any commercial programs, other books, databases, or any kind of software or any kind of electronic media including, but not limited to, any type of digital storage mechanism without written consent of the publisher or authors. Making copies of this material or any portion for any purpose other than your own is a violation of United States copyright laws. The College for Financial Planning does not certify individuals to use the CFP, CERTIFIED FINANCIAL PLANNER, and CFP (with flame logo) marks. CFP certification is granted solely by Certified Financial Planner Board of Standards, Inc. to individuals who, in addition to completing an educational requirement such as this CFP Board-Registered Program, have met its ethics, experience, and examination requirements. Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP, CERTIFIED FINANCIAL PLANNER, and federally registered CFP (with flame logo), which it awards to individuals who successfully complete initial and ongoing certification requirements. At the College s discretion, news, updates, and information regarding changes/updates to courses or programs may be posted to the College s website at or you may call the Student Services Center at

3 Table of Contents Introduction... 1 True/False Statements... 2 Module Module 1 Answers... 4 Module Module 2 Answers... 9 Module Module 3 Answers Module Module 4 Answers Module Module 5 Answers Module Module 6 Answers Module Module 7 Answers Module Module 8 Answers Practice Questions Session 1 (Module 1) Session 1 Answers Session 2 (Module 2) Session 2 Answers... 60

4 Session 3 (Modules 3-5) Session 3 Answers Session 4 (Module 4) Session 4 Answers Session 5 (Module 3) Session 5 Answers Session 6 (Modules 3-4) Session 6 Answers Session 7 (Module 5) Session 7 Answers Session 8 (Modules 3-5) Session 8 Answers Session 9 (Module 5) Session 9 Answers Session 10 (Module 6) Session 10 Answers Session 11 (Modules 3-5) Session 11 Answers Session 12 (Module 6) Session 12 Answers Session 13 (Module 6) Session 13 Answers Session 14 (Module 7) Session 14 Answers Session 15 (Module 8)

5 Session 15 Answers Session 16 (Module 8) Session 16 Answers Estate Planning Final Review Review Questions: Class Review Answers: Class Review Questions: Class Review Answers: Class

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7 Introduction This Instructor Guide review now contains the end-of-class, multiplechoice practice exam, as well as true/false questions for every module. Please contact Gregg Parish with any questions you may have: Gregg Parish, JD Professor College for Financial Planning Administrative Offices 9000 East Nichols Avenue, Suite 200 Centennial, CO Introduction 1

8 True/False Statements Module 1 T F 1. Estate planning is the process of planning for the accumulation, conservation, and distribution of an estate to most efficiently and effectively accomplish tax and nontax objectives. T F 2. Power of appointment is another term for a power of attorney. T F 3. One method of estate transfer during life is by right of survivorship. T F 4. A nontax characteristic of the sole ownership form of property ownership is that it goes through probate. T F 5. A nontax characteristic of the tenancy by the entirety form of property ownership is the survivorship rights. T F 6. The tenancy in common form of property ownership may serve as an income-splitting device. T F 7. The joint tenancy with right of survivorship form of property ownership allows tenants to own unequal shares of an asset. T F 8. Ron and Marie Woods, husband and wife, want to own their home so that neither spouse could convey his or her interest in the property without the consent of the other. The tenancy in common form of property ownership would accomplish this goal. T F 9. Because David Norwood and his brother, George, are planning to buy a duplex in which each wants to be assured that his children eventually will inherit ownership interests, the most appropriate form of property ownership for them is tenancy in common. T F 10. In a community property state, income earned by each of the spouses after marriage is considered community property. 2 Estate Planning

9 T F 11. In a community property state, property acquired after marriage and classified as separate pursuant to a spousal agreement is considered community property. T F 12. Reinhard and Beverly Schultz invested the proceeds from the sale of their home in a community property state into a home in a common law state; thus, for estate purposes, the new home will be treated as a community property asset. T F 13. Before their recent move to California, Joseph and Rose Derby, while married, lived in a common law state, where they accumulated substantial assets that they titled in Joseph s name; for federal estate tax purposes, the property will be treated as belonging solely to Joseph. T F 14. Reducing or freezing the value of assets is not a method that is commonly used to achieve the goal of reducing estate taxes. T F 15. Placing title to property in joint tenancy with right of survivorship with one s spouse can accomplish the goals of avoiding probate and delaying payment of transfer taxes. T F 16. It is an estate planning mistake not to recommend that a client who has established a revocable living trust also make a will. T F 17. Gathering client data is the first step in the estate planning process. True/False Statements 3

10 Module 1 Answers True 1. Estate planning is the process of planning for the accumulation, conservation, and distribution of an estate to most efficiently and effectively accomplish tax and nontax objectives. False 2. Power of appointment is another term for a power of attorney. Rationale: They are two different kinds of documents. First, a power of appointment usually is a clause in either a will or a trust, while a power of attorney usually is a separate document. Second, the former is narrow and authorizes one person to dispose of property belonging to another in the holder s discretion, while the latter authorizes one person to undertake a broader range of specified acts for another but at the principal s direction. False 3. One method of estate transfer during life is by right of survivorship. Rationale: This is a method of estate transfer at death. Transfer by sale and transfer by gift are the two types of estate transfers during life. True 4. A nontax characteristic of the sole ownership form of property ownership is that it goes through probate. True 5. A nontax characteristic of the tenancy by the entirety form of property ownership is the survivorship rights. True 6. The tenancy in common form of property ownership may serve as an income-splitting device. False 7. The joint tenancy with right of survivorship form of property ownership allows tenants to own unequal shares of an asset. Rationale: Unless otherwise stated and allowed by state law, joint tenants own property in equal shares regardless of their contribution toward the purchase of the asset. 4 Estate Planning

11 False 8. Ron and Marie Woods, husband and wife, want to own their home so that neither spouse could convey his or her interest in the property without the consent of the other. The tenancy in common form of property ownership would accomplish this goal. Rationale: The only form of property ownership that would always provide this safeguard is tenancy by the entirety. Joint tenancy with right of survivorship and community property may provide this safeguard in certain states. True 9. Because David Norwood and his brother, George, are planning to buy a duplex in which each wants to be assured that his children eventually will inherit ownership interests, the most appropriate form of property ownership for them is tenancy in common. True 10. In a community property state, income earned by each of the spouses after marriage is considered community property. False 11. In a community property state, property acquired after marriage and classified as separate pursuant to a spousal agreement is considered community property. Rationale: The purpose of the spousal agreement is to negate the community property implication that otherwise is present. If the agreement is valid, the designation of separate property is conclusive. True 12. Reinhard and Beverly Schultz invested the proceeds from the sale of their community property home in a community property state into a home in a common law state; thus, for estate purposes, the new home will be treated as a community property asset. True 13. Before their recent move to California, Joseph and Rose Derby, while married, lived in a common law state, where they accumulated substantial assets that they titled in Joseph s name; for federal estate tax purposes, the property will be treated as belonging solely to Joseph. True/False Statements 5

12 False 14. Reducing or freezing the value of assets is not a method that is commonly used to achieve the goal of reducing estate taxes. Rationale: Estate taxes depend initially upon the size of a person s gross estate. The size of the gross estate depends upon the value of the assets included in the gross estate. Many estate planning techniques have as their main purpose, or at least as an added benefit, the reduction or freezing of the value of assets in the gross estate. True 15. Placing title to property in joint tenancy with right of survivorship with one s spouse can accomplish the goals of avoiding probate and delaying payment of transfer taxes. True 16. It is an estate planning mistake not to recommend that a client who has established a revocable living trust also make a will. False 17. Gathering client data is the first step in the estate planning process. Rationale: Establishing and defining the client-planner relationship is the first step in the estate planning process. 6 Estate Planning

13 Module 2 T F 1. Federal tax law defines what property interests are included in a decedent s probate estate. T F 2. Owning property in joint tenancy with right of survivorship (JTWROS) is not a will substitute since the property passes outside of probate. T F 3. The surviving spouse s elective share can alter a decedent s estate distribution plan. T F 4. Probate of the decedent s real property, regardless of where it is located, must be conducted in the state in which the decedent was a resident at the time of death. T F 5. Probate is generally more costly than using will substitutes. T F 6. An executor is the person who executes a will. T F 7. Any person can make a valid will. T F 8. A codicil is an amendment to a will that is executed separately and that leaves the will otherwise intact. T F 9. If a decedent s property does not pass to someone else by will substitute or under a provision in the decedent s will and there are no legal heirs under the applicable state intestate succession statute, the property escheats to the state. T F 10. Failing to name contingent beneficiaries for specific bequests in a will can cause partial intestacy if the will does not have a residuary clause. T F 11. The phrase operation of law is used to describe a method of estate transfer in which a contractual provision, such as that in a pension plan, indicates who is entitled to receive the asset at another person s death. T F 12. One advantage of all will substitutes is that they are revocable. True/False Statements 7

14 T F 13. Assets transferred by will substitute cannot receive a stepped-up basis. T F 14. A revocable living trust is the best will substitute for a person who does not want to make a will, but who would like to leave all of their assets to multiple beneficiaries at death. T F 15. Placing assets in a revocable trust will protect them from the claims of the grantor s creditors. T F 16. Placing assets in joint tenancy with right of survivorship with a spouse will assure the original owner that such assets will be available for current living expenses, if necessary. 8 Estate Planning

15 Module 2 Answers False 1. Federal tax law defines what property interests are included in a decedent s probate estate. Rationale: Individual state laws define the probate estate. False 2. Owning property in joint tenancy with right of survivorship (JTWROS) is not a will substitute since the property passes outside of probate. Rationale: JTWROS is a will substitute precisely because it does pass property outside of probate. True 3. The surviving spouse s elective share, if taken, can alter a decedent s estate distribution plan. False 4. Probate of the decedent s real property, regardless of where it is located, must be conducted in the state in which the decedent was a resident at the time of death. Rationale: The state in which the real property is located is the state in which it must be probated. True 5. Probate is generally more costly than using will substitutes. False 6. An executor is the person who executes a will. Rationale: An executor is the person who carries out the provisions of a will i.e., the personal representative. A testator/testatrix is the person who executes a will. False 7. Any person can make a valid will. Rationale: Because a person must meet age and testamentary capacity requirements, not every person can make a valid will. True/False Statements 9

16 True 8. A codicil is an amendment to a will that is executed separately and that leaves the will otherwise intact. True 9. If a decedent s property does not pass to someone else by will substitute or under a provision in the decedent s will and there are no legal heirs under the applicable state intestate succession statute, the property escheats to the state. True 10. Failing to name contingent beneficiaries for specific bequests in a will can cause partial intestacy if the will does not have a residuary clause. False 11. The phrase operation of law is used to describe a method of estate transfer in which a contractual provision, such as that in a pension plan, indicates who is entitled to receive the asset at another person s death. Rationale: The method of estate transfer described is beneficiary designation. An estate transfer by operation of law occurs when property passes from one person to another by the mere application of established rules of law, such as a right of survivorship provision. False 12. One advantage of all will substitutes is that they are revocable. Rationale: Some will substitutes are revocable (e.g., P.O.D. designations), but some are not (e.g., irrevocable living trusts). False 13. Assets transferred by will substitute cannot receive a stepped-up basis. Rationale: Assets transferred by will substitute do receive a stepped-up basis if they are included in the decedent s gross estate. 10 Estate Planning

17 True 14. A revocable living trust is the best will substitute for a person who does not want to make a will, but who would like to leave all of their assets to multiple beneficiaries at death. False 15. Placing assets in a revocable trust will protect them from the claims of the grantor s creditors. Rationale: The grantor s creditors would acquire the grantor s right to revoke the trust and thus would be able to get at the assets. False 16. Placing assets in joint tenancy with right of survivorship with a spouse will assure the original owner that such assets will be available for current living expenses, if necessary. Rationale: A joint tenant cannot be forced to dispose of his or her interest. Therefore, the half interest owned by the recipient spouse might not be available for current living expenses. True/False Statements 11

18 Module 3 T F 1. The purpose of the federal transfer tax system is to tax the gratuitous transfer of wealth at least once each generation. T F 2. The terms exemption equivalent and applicable credit amount mean the same thing. T F 3. The general valuation principle for the federal estate tax is the fair market value of the asset as of the valuation date. T F 4. Applicable zoning restrictions are a factor to be considered in valuing real estate for the federal estate tax. T F 5. A minority discount for estate tax purposes is applicable only when the decedent owned less than 50% of the stock of a publicly held corporation. T F 6. The value of a life insurance policy owned by a decedent when the insured has not yet died is the face amount of the policy. T F 7. If property is owned as tenants by the entirety, a deceased spouse s share of the asset is equal to 50% of its fair market value. T F 8. Only spouses can own property as tenants by the entirety, and each is deemed to own one-half of the property. T F 9. If special use valuation is applicable, all assets in an estate will be valued at their current use rather than at their fair market value. T F 10. A federal estate tax return is due if the value of the decedent s gross estate exceeds the applicable exclusion amount for the year of death. T F 11. If the alternate valuation date is used, all estate assets, except those that naturally decline in value with the passage of time, must be valued as of the alternate valuation date. T F. 12. The applicable estate tax rate is based in part on a person s cumulative lifetime taxable transfers. 12 Estate Planning

19 T F. 13. Lifetime taxable transfers are cumulated to ensure that a decedent s taxable estate is taxed at the highest possible marginal rate. T F 14. A decedent s gross estate does not include income earned but not received prior to death. T F 15. If a decedent owned property only with his spouse as joint tenants with right of survivorship, the amount of such property included in the decedent s gross estate is determined by the amount each spouse contributed to its initial purchase. T F 16. If the decedent held a general power of appointment at death, her gross estate must include the value of any property subject to the power at death. T F 17. The value of property excluded from the gross estate because it is subject to a qualified conservation easement also can be deducted from the gross estate to arrive at the taxable estate. T F 18. If a decedent irrevocably transferred title to an asset prior to death, such asset never can be included in his gross estate. T F 19. Property placed in an irrevocable trust during the lifetime of the grantor will be included in her gross estate if the grantor retains a right to trust income. T F 20. Property owned by a decedent at death that has an encumbrance for which the decedent is not personally liable, is included in the decedent s gross estate at the property s fair market value less the encumbrance s outstanding balance as of the date of death. T F 21. For property in the gross estate to qualify for the estate tax marital deduction, it must go to the decedent s surviving spouse by a bequest in the decedent s will. T F 22. The unlimited marital deduction has abolished the terminable interest rule. T F 23. The estate tax charitable deduction is allowed only when the decedent transfers cash or property to a qualified charity in a qualifying form. True/False Statements 13

20 T F 24. A decedent s adjusted taxable gifts are added to his taxable estate to determine his estate s tax base. T F 25. The gift-taxes-payable credit is allowed for gift taxes paid out of pocket by the decedent since T F 26. The deduction allowed against the federal estate tax for state death taxes paid by a decedent who died after 2004 is limited to the lesser of the state death taxes actually paid or 10% of the taxable estate. T F 27. The prior transfer credit may be allowed to the estate of a decedent who dies within 10 years of receiving property from another decedent. T F 28. Through an outright gift, a person can reduce his potential gross estate by more than the value of the gifted asset. T F 29. A decedent s gross estate does not include property passing to the surviving spouse. T F 30. For federal estate tax purposes, the taxable estate consists of the gross estate less available deductions, plus adjusted taxable gifts made after T F 31. For federal estate tax purposes, only one-half of the value of property owned jointly with the surviving spouse is included in the gross estate of a decedent. T F 32. The three most powerful tools in dealing with estate taxes are the marital deduction, the charitable deduction, and the applicable credit amount. T F 33. The marital deduction prevents the property to which it is applied from being subject to transfer taxation when the recipient spouse disposes of the property. T F 34. The surviving spouse is given power to name the remaindermen of a power of appointment trust. T F 35. The surviving spouse must be one of several income beneficiaries of a QTIP trust. T F 36. An outright bequest to children is an example of bypass planning. 14 Estate Planning

21 T F 37. If a decedent leaves a remainder interest in a farm or personal residence to a qualified charity, the bequest will always receive an estate tax charitable deduction. T F 38. For estate tax deduction purposes, in a charitable lead trust the qualified charity must receive either an annuity amount or a unitrust amount. T F 39. Pooled income funds (PIFs) cannot be for a term certain. T F 40. If one spouse has a gross estate of $10.5 million and the other a gross estate of $50,000, transfers from the richer spouse to the poorer that qualify for the marital deduction can be used to reduce the overall estate tax on both estates if the DSUEA of the poorer spouse is not available to the richer spouse. T F 41. The estate of a decedent who establishes a testamentary charitable lead trust with his spouse as the sole remainder beneficiary will be entitled to both a charitable and a marital estate tax deduction. T F 42. The best testamentary transfer technique to use when a decedent wants to give a specific asset to a specific individual, but retain total control of the asset until death, is either a bequest in a will or a revocable will substitute. True/False Statements 15

22 Module 3 Answers True 1. The purpose of the federal transfer tax system is to tax the gratuitous transfer of wealth at least once each generation. False 2. The terms exemption equivalent and applicable credit amount mean the same thing. Rationale: The exemption equivalent refers to the amount of taxable value that is allowed to escape federal gift and estate taxation. This amount is also known as the applicable exclusion amount. The applicable credit amount refers to the amount of federal gift or estate tax owed that can be incurred before an individual actually has to pay these taxes out of pocket. This amount was formerly known as the unified credit. The applicable credit amount is the tax on the corresponding applicable exclusion amount. True 3. The general valuation principle for the federal estate tax is the fair market value of the asset as of the valuation date. True 4. Applicable zoning restrictions are a factor to be considered in valuing real estate for the federal estate tax. False 5. A minority discount for estate tax purposes is applicable only when the decedent owned less than 50% of the stock of a publicly held corporation. Rationale: A minority discount applies only to a minority position in a closely held business. False 6. The value of a life insurance policy owned by a decedent when the insured has not yet died is the face amount of the policy. Rationale: If the insured has not yet died, the precondition for payment of the face amount has not been fulfilled. Therefore, the value is the policy s replacement cost. True 7. If property is owned as tenants by the entirety, a deceased spouse s share of the asset is equal to 50% of its fair market value. 16 Estate Planning

23 True 8. Only spouses can own property as tenants by the entirety, and each is deemed to own one-half of the property regardless of contribution. False 9. If special use valuation is applicable, all assets in an estate will be valued at their current use rather than at their fair market value. Rationale: Only real estate used in a closely held business or farming operation can be valued at its current use rather than its fair market value. True 10. A federal estate tax return is due if the value of the decedent s gross estate exceeds the applicable exclusion amount for the year of death. True 11. If the alternate valuation date is used, all estate assets, except those that naturally decline in value with the passage of time, or those that are sold in an arm s length transaction prior to six months after the decedent s death must be valued as of the alternate valuation date. True 12. The applicable estate tax rate is based in part on a person s cumulative lifetime taxable transfers. True 13. Lifetime taxable transfers are cumulated to ensure that a decedent s taxable estate is taxed at the highest possible marginal rate. False 14. A decedent s gross estate does not include income earned but not received prior to death. Rationale: Income earned but not received prior to death is known as income in respect of a decedent (IRD) and is included in the gross estate under Code Section False 15. If a decedent owned property only with his spouse as joint tenants with right of survivorship, the amount of such property included in the decedent s gross estate is determined by the amount each spouse contributed to its initial purchase. Rationale: The decedent s estate must include half of the property s value, regardless of contribution, unless the property was purchased prior to True/False Statements 17

24 True 16. If the decedent held a general power of appointment at death, her gross estate must include the value of any property subject to the power at death. False 17. The value of property excluded from the gross estate because it is subject to a qualified conservation easement also can be deducted from the gross estate to arrive at the taxable estate. Rationale: Either the exclusion (allowed under Code Section 2031(c)) or the deduction (allowed under Code Section 2055(f)) can be taken, but not both. False 18. If a decedent irrevocably transferred title to an asset prior to death, such asset never can be included in his gross estate. Rationale: Such an asset can be included in the gross estate if the three-year rule (Code Section 2035) or the transfer sections (Code Sections ) apply. Property placed in joint tenancy with right of survivorship with anyone other than a spouse can also be included in a decedent s gross estate if no contribution was paid for the transaction. True 19. Property placed in an irrevocable trust during the lifetime of the grantor will be included in her gross estate if the grantor retains a right to trust income and dies holding such right, or gave up such right within three years of death. True 20. Property owned by a decedent at death that has an encumbrance for which the decedent is not personally liable, is included in the decedent s gross estate at the property s fair market value less the encumbrance s outstanding balance as of the date of death. False 21. For property in the gross estate to qualify for the estate tax marital deduction, it must go to the decedent s surviving spouse by a bequest in the decedent s will. Rationale: Property that passes from the decedent to his or her surviving spouse by will substitute or by intestate succession also qualifies for the marital deduction. False 22. The unlimited marital deduction has abolished the terminable interest rule. Rationale: The terminable interest rule determines qualification for the marital deduction. 18 Estate Planning

25 True 23. The estate tax charitable deduction is allowed only when the decedent transfers cash or property to a qualified charity in a qualifying form. True 24. A decedent s adjusted taxable gifts are added to his taxable estate to determine his estate s tax base. False 25. The gift-taxes-payable credit is allowed for gift taxes paid out of pocket by the decedent since Rationale: This credit is allowed only for gift taxes paid out of pocket on gifts made since 1976, when the gift and estate taxes were unified. False 26. The deduction allowed against the federal estate tax for state death taxes paid by a decedent who died after 2004 is limited to the lesser of the state death taxes actually paid or 10% of the taxable estate. Rationale: The deduction is the amount of state death taxes actually paid. True 27. The prior transfer credit might be allowed to the estate of a decedent who dies within 10 years of receiving property from another decedent. True 28. Through an outright gift, a person can reduce his potential gross estate by more than the value of the gifted asset. False 29. A decedent s gross estate does not include property passing to the surviving spouse. Rationale: If this statement were true, there would be no need for the estate tax marital deduction. Qualified property passing to the surviving spouse is not included in the taxable estate. False 30. For federal estate tax purposes, the taxable estate consists of the gross estate less available deductions, plus adjusted taxable gifts made after Rationale: This is a definition of the tax base. The taxable estate is simply the gross estate less all available deductions; it does not include adjusted taxable gifts. True/False Statements 19

26 True 31. For federal estate tax purposes, only one-half of the value of property owned jointly with the surviving spouse (purchased after 1977) is included in the gross estate of a decedent. True 32. The three most powerful tools in dealing with estate taxes are the marital deduction, the charitable deduction, and the applicable credit amount. False 33. The marital deduction prevents the property to which it is applied from being subject to transfer taxation when the recipient spouse disposes of the property. Rationale: The marital deduction only delays transfer taxation until the recipient spouse disposes of the property. True 34. The surviving spouse is given power to name the remaindermen of a power of appointment trust. False 35. The surviving spouse must be one of several income beneficiaries of a QTIP trust. Rationale: The surviving spouse must be the sole income beneficiary of a QTIP trust. True 36. An outright bequest to children is an example of bypass planning. False 37. If a decedent leaves a remainder interest in a farm or personal residence to a qualified charity, the bequest will always receive an estate tax charitable deduction. Rationale: The bequest will always be entitled to a charitable deduction. However, if a life estate in the same property is given solely to the decedent s surviving spouse, and if the decedent s personal representative so elects, the estate can take a marital deduction for the entire property, rather than a charitable deduction for the remainder interest, since the property is considered QTIP. True 38. For estate tax deduction purposes, in a charitable lead trust the qualified charity must be entitled to either an annuity amount or a unitrust amount. 20 Estate Planning

27 True 39. Pooled income funds (PIFs) cannot be for a term certain. True 40. If one spouse has a gross estate of $10.5 million and the other a gross estate of $50,000, transfers from the richer spouse to the poorer that qualify for the marital deduction can be used to reduce the overall estate tax on both estates if the DSUEA of the poorer spouse is not available to the richer spouse. True 41. A decedent who establishes a testamentary charitable lead trust with his spouse as the sole remainder beneficiary will be entitled to both a charitable and a marital estate tax deduction. True 42. The best testamentary transfer technique to use when a decedent wants to give a specific asset to a specific individual, but retain total control of the asset until death, is either a bequest in a will or a revocable will substitute. True/False Statements 21

28 Module 4 T F 1. The federal gift tax and federal estate tax are described as a unified tax system because both are administered by the Internal Revenue Service. T F 2. A gift may be valued at the date of gift or six months later. T F 3. When a donor transfers a partial interest in an asset, the gift tax value may be the full fair market value of the entire asset. T F 4. To receive favorable tax treatment under IRC sections 2701 and 2702 (Chapter 14 rules), any interest retained by a donor must be a qualified interest. T F 5. Only direct transfers of present interests are completed transfers that are taxable for federal gift tax purposes. T F 6. If a donor reserves certain powers over property that has been irrevocably transferred to a donee, what would otherwise be a completed transfer will be treated as an incomplete transfer. T F 7. An important factor in determining the value of gifted property is the kind of property gifted. T F 8. Although some financial advisors recommend hiring an appraiser and filing an informational gift tax return for gifts of certain property, this is a waste of time and money if a donor reasonably believes that the property has a value that is less than the allowable annual exclusion amount. T F 9. The Internal Revenue Code definition of a gift is narrower than the common law definition of a gift. T F 10. When a donee chooses not to accept a gift, he or she may incur a gift tax liability that is apart and separate from the gift tax liability incurred by the donor. T F 11. If Eileen writes a $9,900 check payable to her grandson so he can pay his tuition to Regional College, the gratuitous transfer will not be considered a gift for federal gift tax purposes. 22 Estate Planning

29 T F 12. Expenses incurred for prevention of disease are not medical care payments to a provider that are exempted from federal gift tax. T F 13. Gift splitting is an advantage only if the gift is of a present interest, which would entitle the spouses to reduce the gift value by up to twice the annual exclusion amount. T F 14. If Wes creates an irrevocable trust funded with securities valued at $90,000 that gives his mother a mandatory income interest with a present value of $8,000 and gives his daughter a remainder interest with a present value of $82,000, his taxable gifts on these transfers will be $90,000 minus two maximum annual exclusions. T F 15. If a gift is taxable, it will decrease the applicable credit amount available to offset tax on transfers at death. T F 16. A taxable gift can cause an increase in the amount of tax paid on each dollar for future taxable gifts. T F 17. A completed gift to a donee spouse that qualifies for the marital deduction eliminates the estate tax on that property when it passes to a third party at the donee spouse s death. T F 18. The full date-of-death fair market value of the assets in a qualified terminable interest property (QTIP) trust for which the QTIP election has been made is includible in the donee spouse s gross estate even though the donee spouse receives only a life income interest and cannot control who will receive the assets at his or her death. True/False Statements 23

30 Module 4 Answers False 1. The federal gift tax and federal estate tax are described as a unified tax system because both are administered by the Internal Revenue Service. Rationale: Since 1977, the gift tax and estate tax have been described as a unified tax system because they are integrated, and share the same tax rate table and unlimited marital and charitable deductions. False 2. A gift may be valued at the date of gift or six months later. Rationale: Gifts are valued as of the date of completion of the gift. Valuation as of a date six months after the transfer (alternate valuation) applies to estate tax only. True 3. When a donor transfers a partial interest in an asset, the gift tax value may be the full fair market value of the entire asset. Rationale: Under certain of the Chapter 14 rules enacted in 1990, a taxpayer is penalized for any intrafamily transfer that does not meet specific requirements. The interest that a donor retains is valued at zero for gift tax purposes if the transfer fails to satisfy the requirements of Chapter 14. The effect is to tax the fair market value of the entire asset rather than only the present value of the partial interest(s) in the asset that was given away. True 4. To receive favorable tax treatment under IRC sections 2701 and 2702 (Chapter 14 rules), any interest retained by a donor must be a qualified interest. False 5. Only direct transfers of present interests are completed transfers that are taxable for federal gift tax purposes. Rationale: A completed transfer may be either direct or indirect and may involve either present or future interests. The distinguishing characteristic of a completed transfer is that the donor relinquishes all dominion and control over the gifted property. 24 Estate Planning

31 True 6. If a donor reserves certain powers over property that has been irrevocably transferred to a donee, what would otherwise be a completed transfer will be treated as an incomplete transfer. True 7. An important factor in determining the value of gifted property is the kind of property gifted. False 8. Although some financial advisors recommend hiring an appraiser and filing an informational gift tax return for gifts of certain property, this is a waste of time and money if a donor reasonably believes that the property has a value that is less than the maximum allowable annual exclusion amount. Rationale: If a return is not filed when a gift is made, the IRS can contest the value of the gift at any future time, including on the donor s estate tax return. Furthermore, even if a gift tax return is filed, the IRS can contest the valuation of the gift disclosed on the return for three years. Thus, filing an informational gift tax return so that the threeyear statute of limitations will begin to run and obtaining a professional appraisal may be prudent for almost all gifts and essential for property that is difficult to value. False 9. The Internal Revenue Code definition of a gift is narrower than the common law definition of a gift. Rationale: The Internal Revenue Code definition of a gift is much broader. The gift tax applies whether or not the donor intended to make a gift, regardless of the form of the gift or the type of property or property interests that are transferred, and to any transfer where the donor did not receive equal value for what was transferred. True 10. When a donee chooses not to accept a gift, he or she may incur a gift tax liability that is apart and separate from the gift tax liability incurred by the donor. False 11. If Eileen writes a $9,900 check payable to her grandson so he can pay his tuition to Regional College, the gratuitous transfer will not be considered a gift for federal gift tax purposes. True/False Statements 25

32 Rationale: Only payments made directly and exclusively to the educational provider on behalf of another are exempted for federal gift tax purposes. False 12. Expenses incurred for prevention of disease are not medical care payments to a provider that are exempted from federal gift tax. Rationale: The definition of medical care that is exempted from federal gift tax is broad. It includes amounts (1) incurred for the diagnosis, cure, mitigation, treatment, or prevention of disease, (2) for the purpose of affecting any structure or function of the body, (3) for transportation primarily for and essential to medical care, and (4) for medical insurance on behalf of any individual. False 13. Gift splitting is an advantage only if the gift is of a present interest, which would entitle the spouses to reduce the gift value by up to twice the maximum annual exclusion amount. Rationale: Whether a gift qualifies for the annual exclusion or not, gift splitting may decrease the total amount of gift tax on the gift, since the taxable gift is split between two different gift tax returns, and therefore, the taxable amount may be taxed at a lower rate than would be the case without gift splitting. False 14. If Wes creates an irrevocable trust funded with securities valued at $90,000 that gives his mother a mandatory income interest with a present value of $8,000 and gives his daughter a remainder interest with a present value of $82,000, his taxable gifts on these transfers will be $90,000 minus two maximum annual exclusions. Rationale: A taxable gift of $90,000 minus two maximum annual exclusions incorrectly reduces the $90,000 gift by a maximum annual exclusion for each of the two donees, his mother and his daughter. Wes is not entitled to the annual exclusion for the remainder interest to his daughter because it is a future interest. In addition, he is entitled to only an $8,000 exclusion for the income interest to his mother 26 Estate Planning

33 (rather than the maximum annual exclusion, because the annual exclusion amount cannot exceed the value of the present interest gift). Therefore, his taxable gift is $82,000. True 15. If a gift is taxable, it will decrease the estate tax applicable credit amount available to offset tax on transfers at death. True 16. A taxable gift can cause an increase in the amount of tax paid on each dollar of future taxable gifts. False 17. A completed gift to a donee spouse that qualifies for the marital deduction eliminates the estate tax on that property when it passes to a third party at the donee spouse s death. Rationale: Use of the marital deduction to avoid taxation of a gift to a spouse only defers the transfer tax on that property. Except when the transferring spouse makes his/her spouse the sole income beneficiary of a CRAT or CRUT, regardless of the spouse s rights in a property, if the donor spouse received the marital deduction for the gift, the date-of-death fair market value is includible in the donee spouse s gross estate. True 18. The full date-of-death fair market value of the assets in a qualified terminable interest property (QTIP) trust for which a 100% QTIP election has been made is includible in the donee spouse s gross estate even though the donee spouse receives only a life income interest and cannot control who will receive the assets at his or her death. True/False Statements 27

34 Module 5 T F 1. The GSTT achieves the goal of replacing all lost revenue when wealth is not transferred at each generational level. T F 2. The GSTT is not solely dependent upon the transfer being to a lineal descendant of a grandparent of the transferor or the transferor s spouse or former spouse who is two generations younger than the transferor (or the transferor s spouse or former spouse where applicable). T F 3. The time at which the generation-skipping transfer tax is due can be at the time the donor makes the transfer or later. T F 4. The generation-skipping transfer tax is integrated with the federal estate and gift taxes so as to avoid double taxation. T F 5. The deceased ancestor skip rule can prevent application of the GSTT to a transfer. T F 6. The generation-skipping transfer tax provides an exemption for each donee. T F 7. The use of the exemption in the generation-skipping transfer tax is elective. T F 8. For an indirect generation-skipping transfer, the return computing GSTT due will be filed by either a skip party or a trustee. T F 9. An example of a generation-skipping transfer is when the transferor makes an outright gift to her niece. T F 10. An indirect generation-skipping transfer occurs when the only transferees with an interest in the transferred asset are nonskip parties. T F 11. An example of a direct generation-skipping transfer is when the transferor establishes and funds a revocable trust whose only beneficiary is the transferor s grandchild. T F 12. No annual exclusions are allowed in the computation of the generation-skipping transfer tax. T F 13. Income tax issues related to estate planning can affect either gain or ordinary income. 28 Estate Planning

35 T F 14. When gain is realized, it must be recognized immediately. T F 15. Common estate planning goals in regard to income tax are the deferment of the realization and/or recognition of gain if possible and, if not possible, the taxation of such gain as long-term versus short-term, and at as low a rate as possible. T F 16. Altering the receipt and/or taxation of ordinary income can have estate as well as income tax consequences. T F 17. The donee of appreciated property that is acquired by gift has an income tax basis equal to the fair market value of the property at the time of the gift. T F 18. There may be no step-up in basis in a reverse gift situation. T F 19. Installment reporting of gain is never available if the installment payments are unsecured. T F 20. Assets owned by a decedent at death that are subsequently received as the beneficiary of an estate are not reportable as ordinary income unless it constitutes income in respect of a decedent. T F 21. The transfer for value rule applies when assets are purchased from an estate. T F 22. An employer that provides group term life insurance to its employees cannot deduct the premiums paid. T F 23. A person who holds a general power of appointment over trust assets may be taxable on trust income. T F 24. If trust income is or may be used to pay premiums on insurance on the life of the grantor or the grantor s spouse, trust income will be taxed to the trustee. T F 25. The charitable income tax deduction is available only for taxpayers who itemize deductions and who give an inter vivos gift of cash or property to a qualified charity in a qualified form. True/False Statements 29

36 Module 5 Answers False 1. The GSTT achieves the goal of replacing all lost revenue when wealth is not transferred at each generational level. Rationale: GSTT is applied only once for direct skips no matter how many generations are skipped in the transfer. True 2. The GSTT is not solely dependent upon the transfer being to a lineal descendant of a grandparent of the transferor or the transferor s spouse or former spouse who is two generations younger than the transferor (or the transferor s spouse or former spouse where applicable). True 3. The time at which the generation-skipping transfer tax is due can be at the time the donor makes the transfer or later. False 4. The generation-skipping transfer tax is integrated with the federal estate and gift taxes to avoid double taxation. Rationale: The generation-skipping transfer tax is not integrated with the federal gift and estate tax. It is an additional tax that is intended to deter generation-skipping transfers. True 5. The deceased ancestor skip rule can prevent application of the GSTT to a transfer. False 6. The generation-skipping transfer tax provides an exemption for each transferee. Rationale: The GSTT provides an exemption for each transferor. True 7. The use of the exemption in the generation-skipping transfer tax is elective. True 8. For an indirect generation-skipping transfer, the return computing GSTT due will be filed by either a skip party or a trustee. 30 Estate Planning

37 False 9. An example of a generation-skipping transfer is when the transferor makes an outright gift to her niece. Rationale: A transferor s niece is only one generation younger than the transferor, and therefore, no generationskipping transfer is made. False 10. An indirect generation-skipping transfer occurs when the only transferees with an interest in the transferred asset are nonskip parties. Rationale: Every generation-skipping transfer must have at least one skip party as a transferee. An indirect skip must have at least one skip party and one nonskip party. False 11. An example of a direct generation-skipping transfer is when the transferor establishes and funds a revocable trust whose only beneficiary is the transferor s grandchild. Rationale: The first requirement for a generation-skipping transfer is that the transfer be complete. Transfers to a revocable trust are not complete. False 12. No annual exclusions are allowed in the computation of the generation-skipping transfer tax. Rationale: An inter vivos direct generation-skipping transfer allows the deduction of an annual exclusion if the gift was one of a present interest. True 13. Income tax issues related to estate planning can affect either gain or ordinary income. False 14. When gain is realized, it must be recognized immediately. Rationale: Gain is realized when an asset is sold for more than its adjusted basis. If the transaction qualifies for installment sale treatment, gain can be recognized as installments of the purchase price are received. True/False Statements 31

38 True 15. Common estate planning goals in regard to income tax are the deferment of the realization and/or recognition of gain if possible and, if not possible, the taxation of such gain as long-term versus short-term, and at as low a rate as possible. True 16. Altering the receipt and/or taxation of ordinary income can have estate as well as income tax consequences. False 17. The donee of appreciated property that is acquired by gift has an income tax basis equal to the fair market value of the property at the time of the gift. Rationale: The donee of a gift usually assumes the donor s basis adjusted for any gift tax paid out of pocket on unrealized appreciation. True 18. There may be no step-up in basis in a reverse gift situation. False 19. Installment reporting of gain is never available if the installment payments are unsecured. Rationale: This statement is false of a private annuity as well as other types of installment sales. True 20. Assets owned by a decedent at death that are subsequently received as the beneficiary of an estate are not reportable as ordinary income unless it constitutes income in respect of a decedent. False 21. The transfer for value rule applies when assets are purchased from an estate. Rationale: The transfer for value rule applies when ownership of a life insurance policy is transferred for a valuable consideration. False 22. An employer that provides group term life insurance to its employees cannot deduct the premiums paid. Rationale: Premium payments made by an employer for group term life insurance are deductible as this benefit is offered on a non-discriminatory basis. 32 Estate Planning