Review Questions & Answers. Estate Planning

Review Questions & Answers Estate Planning

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Table of Contents Introduction... 1 True/False Statements... 2 Module 1... 2 Module 1 Answers... 4 Module 2... 7 Module 2 Answers... 9 Module 3... 12 Module 3 Answers... 16 Module 4... 22 Module 4 Answers... 24 Module 5... 28 Module 5 Answers... 30 Module 6... 34 Module 6 Answers... 37 Module 7... 41 Module 7 Answers... 44 Module 8... 51 Module 8 Answers... 53 Practice Questions... 56 Session 1 (Module 1)... 56 Session 1 Answers... 58 Session 2 (Module 2)... 59 Session 2 Answers... 60

Session 3 (Modules 3-5)... 61 Session 3 Answers... 62 Session 4 (Module 4)... 63 Session 4 Answers... 64 Session 5 (Module 3)... 65 Session 5 Answers... 67 Session 6 (Modules 3-4)... 68 Session 6 Answers... 69 Session 7 (Module 5)... 70 Session 7 Answers... 73 Session 8 (Modules 3-5)... 74 Session 8 Answers... 77 Session 9 (Module 5)... 78 Session 9 Answers... 81 Session 10 (Module 6)... 82 Session 10 Answers... 83 Session 11 (Modules 3-5)... 84 Session 11 Answers... 86 Session 12 (Module 6)... 87 Session 12 Answers... 93 Session 13 (Module 6)... 94 Session 13 Answers... 95 Session 14 (Module 7)... 96 Session 14 Answers... 99 Session 15 (Module 8)... 100

Session 15 Answers... 101 Session 16 (Module 8)... 102 Session 16 Answers... 103 Estate Planning Final Review... 104 Review Questions: Class 17... 104 Review Answers: Class 17... 118 Review Questions: Class 18... 123 Review Answers: Class 18... 143

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 80112 Introduction 1

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

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

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

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

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

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

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

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

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

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

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

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

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 1932. 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 1976. 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

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

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

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 2033. 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 1977. True/False Statements 17

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 2036 2038) 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

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 1932. 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 1976. 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

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

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

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

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

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

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

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

(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

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

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

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

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

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

True 23. A person who holds a general power of appointment over trust assets may be taxable on trust income. False 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. Rationale: In these circumstances trust income will be taxed to the grantor because of one of the grantor trust rules. True 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 33

Module 6 T F 1. An advantage of giving property away during life rather than at death is that during life the donor can use the annual exclusion. T F 2. A disadvantage of giving property away during life rather than at death is that a gift during life is more private. T F 3. The donor cannot make a completed gift and still maintain an interest in or control over the gifted property. T F 4. A donor may initiate a reverse gift transaction in an attempt to get a stepped-up basis on highly appreciated property. T F 5. The grantor of a trust holds legal title to trust assets. T F 6. Gifts to a Section 2503(c) trust do not entitle the grantor to a gift tax annual exclusion. T F 7. A GRIT and a GRAT are treated differently for gift tax purposes if the grantor and the remaindermen are related. T F 8. One of the primary goals of an ILIT is to keep the life insurance death benefit from being included in the grantor s gross estate. T F 9. The payments to be made in an installment sale cannot be secured without losing the right to report gain on the installment basis. T F 10. The payments to be made in a private annuity will contain an ordinary income element. T F 11. One advantage of a sale-leaseback transaction is that the seller (or a business entity controlled by the seller) will get an income tax deduction if the property sold is used in a trade or business. T F 12. Custodial gifts can be made only to minors. T F 13. Since the seller in a remainder interest transaction (RIT) has sold an interest in the asset to another, he cannot continue to receive all income from the asset. 34 Estate Planning

T F 14. One advantage of a Section 2503(c) minor s trust is that it allows the grantor to receive an annual exclusion without having to distribute income or give the minor a Crummey power. T F 15. The annuitant in a private annuity transaction will never have to include any part of the annuity in his or her gross estate. T F 16. A sale or gift of out-of-state real property owned solely by the donor will allow the donor to avoid ancillary probate of this asset. T F 17. A sale of income-producing property can be used to reduce the seller s gross estate. T F 18. A major problem with closely held businesses is realizing their paper value. T F 19. In a cross-purchase buy-sell agreement, the business entity is obligated to purchase a deceased shareholder s interest. T F 20. Realizing the value of a solely owned business may require changing the form of the business entity. T F 21. Use of a buy-sell agreement requires an immediate transfer of an interest in the business to a third party. T F 22. The tax consequences of a buy-sell agreement always will be based on the purchase price called for by the agreement. T F 23. IRC Section 2701 can be applicable to the transfer of a closely held business interest when the transferor and transferee are related. T F 24. Freezing the value of a business entity for estate tax purposes is achieved in a preferred stock recapitalization by retaining an ownership interest that has a fixed liquidation value. T F 25. One common use of life insurance is as a source of income replacement when the insured dies. T F 26. Some life insurance policies pay benefits only when the insured dies, while others allow access to benefits before the insured dies. True/False Statements 35

T F 27. In a split-dollar life insurance plan, the employer can deduct the premium payments it makes. T F 28. The value of a life insurance policy for gift tax purposes is its replacement cost. T F 29. An advantage of second-to-die life insurance is that it allows the first spouse to die to leave everything to his or her surviving spouse without creating a liquidity problem in the surviving spouse s estate. T F 30. If a client purchases life insurance on his own life primarily for estate liquidity purposes, the client s estate should be made the beneficiary of the policy. 36 Estate Planning

Module 6 Answers True 1. An advantage of giving property away during life rather than at death is that during life the donor can use the annual exclusion. False 2. A disadvantage of giving property away during life rather than at death is that a gift during life is more private. Rationale: A gift during life is more private, but this is an advantage, not a disadvantage. False 3. The donor cannot make a completed gift and still maintain an interest in or control over the gifted property. Rationale: While retention of an interest in or control over the property may have adverse tax consequences for the donor, he can nevertheless make a completed gift of the property. True 4. A donor may initiate a reverse gift transaction in an attempt to get a stepped-up basis on highly appreciated property. False 5. The grantor of a trust holds legal title to trust assets. Rationale: The trustee of a trust (or the trust itself in certain states) holds legal title to trust assets. Even when the grantor is the trustee, he holds legal title as trustee and not as grantor. False 6. Gifts to a Section 2503(c) trust do not entitle the grantor to a gift tax annual exclusion. Rationale: Although the beneficiary of such a trust does not have a present interest in trust assets, which is usually necessary for the grantor to receive an annual exclusion, this Code section nevertheless grants the grantor an annual exclusion. True 7. A GRIT and a GRAT are treated differently for gift tax purposes if the grantor and the remaindermen are related. True/False Statements 37

True 8. One of the primary goals of an ILIT is to keep the life insurance death benefit from being included in the grantor s gross estate. False 9. The payments to be made in an installment sale cannot be secured without losing the right to report gain on the installment basis. Rationale: The right to report gain on the installment basis is not affected by whether the payments are secured, including with a private annuity transaction. True 10. The payments to be made in a private annuity will contain an ordinary income element. True 11. One advantage of a sale-leaseback transaction is that the seller (or a business entity controlled by the seller) will get an income tax deduction if the property sold is used in a trade or business. True 12. Custodial gifts can be made only to minors. False 13. Since the seller in a remainder interest transaction (RIT) has sold an interest in the asset to another, he cannot continue to receive all income from the asset. Rationale: The seller in a RIT can continue to receive all income from the asset because the seller retains a life estate in the asset. True 14. One advantage of a Section 2503(c) minor s trust is that it allows the grantor to receive an annual exclusion without having to distribute income or give the minor a Crummey power. False 15. The annuitant in a private annuity transaction will never have to include any part of the annuity in his or her gross estate. Rationale: The annuitant will have to include the present value of any payments resulting from this annuity that will be made to someone after his or her death (i.e., survivorship payments). 38 Estate Planning

True 16. A sale or gift of out-of-state real property owned solely by the owner will allow the owner to avoid ancillary probate of this asset. True 17. A sale of income-producing property can be used to reduce the seller s gross estate. True 18. A major problem with closely held businesses is realizing their paper value. False 19. In a cross-purchase buy-sell agreement, the business entity is obligated to purchase a deceased shareholder s interest. Rationale: This statement would be true of an entity buysell agreement. In a cross-purchase buy-sell agreement, only the surviving owners would be obligated to purchase a deceased owner s interest. True 20. Realizing the value of a solely owned business may require changing the form of the business entity. False 21. Use of a buy-sell agreement requires an immediate transfer of an interest in the business to a third party. Rationale: No actual business interests are transferred when the buy-sell agreement is entered into. False 22. The tax consequences of a buy-sell agreement always will be based on the purchase price called for by the agreement. Rationale: If the purchase price in the agreement does not meet the requirements of IRC Section 2703 (one of the Chapter 14 rules), the tax consequences will be based on the IRS s determination of fair market value. True 23. IRC Section 2701 can be applicable to the transfer of a closely held business interest when the transferor and transferee are related. True/False Statements 39

True 24. Freezing the value of a business entity for estate tax purposes is achieved in a preferred stock recapitalization by retaining an ownership interest that has a fixed liquidation value. True 25. One common use of life insurance is as a source of income replacement when the insured dies. True 26. Some life insurance policies pay benefits only when the insured dies, while others allow access to benefits before the insured dies. False 27. In a split-dollar life insurance plan, the employer can deduct the premium payments it makes. Rationale: This expense is not deemed to be a necessary and reasonable business expense and thus is not deductible. True 28. The value of a life insurance policy for gift tax purposes is its replacement cost. True 29. An advantage of second-to-die life insurance is that it allows the first spouse to die to leave everything to his or her surviving spouse without creating a liquidity problem in the surviving spouse s estate. False 30. If a client purchases life insurance on his own life primarily for estate liquidity purposes, the client s estate should be made the beneficiary of the policy. Rationale: It would be better to name the trustee of an ILIT established by the client as the beneficiary. With proper provisions, this trust can act as a source of estate liquidity for the client (and his or her spouse, if any), and the death benefit will not be included in the client s gross estate if he or she survives the transfer by at least three years. This three-year waiting period can be avoided by giving the trustee of the ILIT cash with which to purchase a life insurance policy on the grantor. 40 Estate Planning

Module 7 T F 1. Insufficient liquidity can cause an estate to be smaller after a decedent s death than it was immediately before his or her death. T F 2. A commonly recommended estate liquidity planning strategy is to take steps to eliminate all estate administrative expenses. T F 3. To determine an estate s liquidity requires an analysis of the estate s current or future potential to meet its cash requirements. T F 4. Generally, there is no direct relationship between the size of an estate and the need for liquidity. T F 5. Premortem planning has only a negligible, minor role in liquidity planning. T F 6. Premortem planning focuses primarily on finding techniques to reduce the cash needs of a deceased s estate. T F 7. One premortem technique for reducing the possible cash needs of an estate is to make sure that the decedent s will has a nonexoneration clause. T F 8. Often, reducing or eliminating assets such as collectibles, rental property, or closely held business interests prior to death can enhance an estate s liquidity position. T F 9. The best way to use life insurance to increase the cash available to an estate is to make the estate the beneficiary of the life insurance policy. T F 10. Selling illiquid assets during life can enhance the liquidity position of an estate in three different ways. T F 11. If a client has real estate in a state other than his state of domicile, making sure that this asset is specifically devised in the client s will is the best way to enhance estate liquidity. T F 12. Qualifying estate assets for the estate tax marital or charitable deduction can help estate liquidity. True/False Statements 41

T F 13. For estate liquidity purposes, as clients age, they should be encouraged to move into investments such as growth stocks that tend to produce a greater return on their investment because this should increase the amount of cash available to their estate at their death. T F 14. An estate s personal representative (PR) can enhance liquidity by diligently carrying out his or her duties under the probate code. T F 15. Special-use valuation of property in an estate may decrease the estate tax and requires only that, at the time of the decedent s death, the property be held in a qualified use and pass to a qualified heir. T F 16. When the marginal estate tax rate is lower than the marginal fiduciary income tax rate, a PR may minimize the total tax paid by electing to deduct the decedent s unreimbursed medical expenses on the estate s fiduciary income tax return (Form 1041) rather than on the estate tax return (Form 760). T F 17. A personal representative must select the calendar year in which to report estate income. T F 18. Qualifying for the installment method of paying estate tax under Section 6166 can reduce the immediate need for cash but requires that a decedent s business be a going concern at the time of the decedent s death and organized as a partnership or corporation. T F 19. If the obligation to pay transfer taxes falls to a beneficiary receiving any closely held business interest, the beneficiary may sell all or part of the business interest received back to the business and avoid having the amount received from the business treated as a dividend (that is, as ordinary income). T F 20. The election to report accrued interest on EE or HH savings bonds on the decedent s final income tax return (Form 1040), rather than over time on the estate s income tax return (Form 1041), may minimize the total tax liability of the estate and its beneficiaries. 42 Estate Planning

T F 21. A disclaimer by a surviving spouse within nine months of the decedent spouse s death, on the condition that the surviving spouse retains an income interest in the property, will not be subject to the federal gift tax. T F 22. Having family members agree to distribute a decedent s assets in a way other than according to the decedent s will provisions is preferable to a will contest because it will not adversely affect the estate s liquidity position. T F 23. If a surviving spouse, who is dissatisfied with his or her share of the estate, elects against the will to take a statutory percentage of the estate rather than the amount given under the will, it can have a profound effect on both the distribution and liquidity of the estate. T F 24. Claiming statutory rights, such as the homestead and exempt property allowances or the family allowance, can have an adverse affect on estate liquidity. T F 25. An estate that has a closely held partnership business interest with a value that exceeds 35% of the decedent s adjusted gross estate is eligible for a Section 303 stock redemption. T F 26. The PR of an estate that is placed in a QTIP trust should never make the QTIP election for trust assets that are necessary to allow the decedent to fully use his or her applicable credit amount. True/False Statements 43

Module 7 Answers True 1. Insufficient liquidity can cause an estate to be smaller after a decedent s death than it was immediately before his or her death. False 2. A commonly recommended estate liquidity planning strategy is to take steps to eliminate all estate administrative expenses. Rationale: All estates, whether large or small, have administrative expenses. These expenses can be diminished by proper premortem planning but can never be eliminated completely. Although the decedent s personal representative may waive his or her fees, it is virtually certain that the attorney, accountant, appraiser, and so forth will not waive their fees. True 3. To determine an estate s liquidity requires an analysis of the estate s current or future potential to meet its cash requirements. False 4. Generally, there is no direct relationship between the size of an estate and the need for liquidity. Rationale: This statement is false because generally the need for liquid assets increases as the size of an estate increases. Both large and small estates may need liquidity to provide for the family after the decedent s death. However, in most situations, as an estate becomes larger so does the need for additional liquidity to cover increased tax and administrative costs. False 5. Premortem planning has only a negligible, minor role in liquidity planning. Rationale: This statement is false because premortem planning is the key to avoiding a liquidity crisis. Premortem planning is important because, if a liquidity shortage is identified, plans can be made to increase the estate s liquidity. If premortem planning does not occur, there are only a few options available to the estate. 44 Estate Planning

False 6. Premortem planning focuses primarily on finding techniques to reduce the cash needs of a deceased s estate. Rationale: This statement is false because premortem planning is a two-pronged approach. It focuses on finding techniques to (1) reduce the cash needs of a deceased s estate and (2) ensure that the estate has adequate cash or cash-equivalent assets available to cover the cash needs that remain after attempting to minimize them. True 7. One premortem technique for reducing the possible cash needs of an estate is to make sure that the decedent s will has a nonexoneration clause. True 8. Often, reducing or eliminating assets such as collectibles, rental property, or closely held business interests prior to death can enhance an estate s liquidity position. False 9. The best way to use life insurance to increase the cash available to an estate is to make the estate the beneficiary of the life insurance policy. Rationale: This statement is false because such a strategy unnecessarily causes the death benefit to be included in the decedent s gross estate. This may increase the amount of cash needed because of the increased amount of estate taxes that probably would result from such a large estate. It is preferable to make an irrevocable life insurance trust (ILIT) the owner and beneficiary of the life insurance policy and give the trustee the authority to make loans to the estate or purchase hard-to-sell assets from the estate (to avoid a forced liquidation). This strategy will not increase the size of the decedent s gross estate (unless a policy owned by the decedent is transferred to the trust within three years of the decedent s death), while making the cash remain available to the estate. True/False Statements 45

True 10. Selling illiquid assets during life can enhance the liquidity position of an estate in three different ways. Rationale: Selling illiquid assets during life can enhance the liquidity position of an estate in three different ways: 1. by increasing the liquid assets such as accounts receivable, notes, and mortgages receivable available to the estate; 2. by ensuring that the sale price is as close to fair market value as possible by avoiding the fire sale prices associated with a forced liquidation; and 3. by reducing the high estate administrative expenses usually associated with the assets sold. False 11. If a client has real estate in a state other than his state of domicile, making sure that this asset is specifically devised in the client s will is the best way to enhance estate liquidity. Rationale: The best way to enhance estate liquidity with regard to this asset is to place title in will substitute form or to sell or give the asset away prior to death to reduce estate administrative expenses to avoid ancillary probate. True 12. Qualifying estate assets for the estate tax marital or charitable deduction can help estate liquidity. False 13. For estate liquidity purposes, as clients age, they should be encouraged to move into investments such as growth stocks that tend to produce a greater return on their investment because this should increase the amount of cash available to their estate at their death. Rationale: This statement is false because as clients age they should be encouraged to move more of their assets to cash or cash-equivalent assets such as bonds, money market accounts, and CDs to provide cash to their estate at their death. Even though assets of this type generally tend to produce less return on investment, for older clients 46 Estate Planning

this is usually an acceptable and even desirable trade-off so that they are confident that cash will be readily available to their estate. Furthermore, the older client should not enter into transactions with long payouts or large front-end loads or buy green bananas. True 14. An estate s personal representative (PR) can enhance liquidity by diligently carrying out his or her duties under the probate code. False 15. Special-use valuation of property in an estate may decrease the estate tax and requires only that, at the time of the decedent s death, the property be held in a qualified use and pass to a qualified heir. Rationale: While it is true that special-use valuation of real estate used by a closely held business or farm may result in significant estate tax savings, there are multiple, complex requirements that must be met. Because of the complexity of the requirements and the harsh penalty for noncompliance (the estate is subject to recapture of the benefit received for a 10-year period after the decedent s date of death), expert advice and counsel is advisable. False 16. When the marginal estate tax rate is lower than the marginal fiduciary income tax rate, a PR may minimize the total tax paid by electing to deduct the decedent s unreimbursed medical expenses on the estate s fiduciary income tax return (Form 1041) rather than on the estate tax return (Form 760). Rationale: This statement is false because, while the statement regarding the relationship of the respective tax brackets is correct, the PR is required to deduct the decedent s unreimbursed medical expenses either on the decedent s final personal income tax return (Form 1040) or on the estate tax return (Form 706). In addition, an estate does not pay estate tax out of pocket at any less than 35%, while income tax may be payable at a lesser rate. True/False Statements 47

False 17. A personal representative must select the calendar year in which to report estate income. Rationale: It is the PR s right to select a specific fiscal tax year rather than a calendar tax year. It is the selection of a fiscal year that is not identical with the calendar year that allows estate income to be spread over several different tax years and taxpayers, which can result in a decrease in the income tax liability of the estate or its beneficiaries. The PR must select a fiscal year that ends on the last day of a month and does not end more than 12 months after the decedent s death. False 18. Qualifying for the installment method of paying estate (and generation skipping) tax under Section 6166 can reduce the immediate need for cash but requires that a decedent s business be a going concern at the time of the decedent s death and organized as a partnership or corporation. Rationale: While it is true that qualifying for the installment method of paying estate tax under Section 6166 can reduce the immediate need for cash, the business need not be in the form of a partnership or corporation. It could be in any form, even a sole proprietorship, as long as the value of the closely held business exceeds 35% of the decedent s adjusted gross estate, both with and without including all gifts made included in the gross estate by the three-year rule. False 19. If the obligation to pay transfer taxes falls to a beneficiary receiving any closely held business interest, the beneficiary may sell all or part of the business interest received back to the business and avoid having the amount received from the business treated as a dividend (that is, as ordinary income). Rationale: The statement is false because this special tax treatment applies only to a business organized as a corporation and only for a limited amount of the stock that is redeemed by the corporation from the beneficiary. Section 303 provides for a partial stock redemption if the obligation to pay certain estate items falls to the beneficiary receiving the shares of stock (or to the estate) and only to 48 Estate Planning

the extent that the proceeds from the sale are necessary to pay the decedent s estate and inheritance taxes, plus funeral and administrative expenses. True 20. The election to report accrued interest on EE or HH savings bonds on the decedent s final income tax return (Form 1040), rather than over time on the estate s income tax return (Form 1041), may minimize the total tax liability of the estate and its beneficiaries. False 21. A disclaimer by a surviving spouse within nine months of the decedent spouse s death, on the condition that the surviving spouse retains an income interest in the property, will not be subject to the federal gift tax. Rationale: For a disclaimer to be qualified, and thus not subject the disclaimant to gift tax, the disclaimer must be without condition. Retention of the right to income would constitute a conditional disclaimer. However, if prior to death the decedent spouse had established a disclaimer trust in his or her will to receive disclaimed property, the surviving spouse could disclaim the property, which would return it to the estate and the disclaimer trust. The disclaimer trust could provide for an income interest to the surviving spouse without triggering a transfer tax liability for the surviving spouse. False 22. Having family members agree to distribute a decedent s assets in a way other than according to the decedent s will provisions is preferable to a will contest because it will not adversely affect the estate s liquidity position. Rationale: This statement is false because a family settlement agreement requires court approval and thus will affect estate liquidity because of the costs and attorney fees involved in the required court proceedings. However, in relative terms, the will contest probably will be more costly and thus have a greater affect on liquidity than a family settlement agreement. True/False Statements 49

True 23. If a surviving spouse, who is dissatisfied with his or her share of the estate, elects against the will to take a statutory percentage of the estate rather than the amount given under the will, it can have a profound effect on both the distribution and liquidity of the estate. True 24. Claiming statutory rights, such as the homestead and exempt property allowances or the family allowance, can have an adverse affect on estate liquidity. False 25. An estate that has a closely held partnership business interest with a value that exceeds 35% of the decedent s adjusted gross estate is eligible for a Section 303 stock redemption. Rationale: Only closely held stock is eligible for redemption under this section. True 26. The PR of an estate that is placed in a QTIP trust should never make the QTIP election for trust assets that are necessary to allow the decedent to fully use his or her estate tax applicable credit amount. 50 Estate Planning

Module 8 T F 1. A person can be legally and/or mentally incompetent. T F 2. In states that have adopted the Uniform Probate Code (UPC), a conservator has only equitable title to the ward s property. T F 3. With a durable power of attorney, the authority of the attorneyin-fact will survive the principal s death. T F 4. A revocable living trust is funded only when the grantor becomes incompetent. T F 5. If a patient s desires concerning medical treatment in a specific situation are known, they generally will be enforced by courts. T F 6. A living will must be executed according to state statutes. T F 7. A person can preplan his or her own funeral. T F 8. One requirement to qualify for Medicaid nursing home benefits is that the applicant must require significant assistance with two or more activities of daily living or have a very significant need for supervision. T F 9. A qualified domestic relations order (QDRO) can identify the nonparticipant spouse as an alternate payee. T F 10. Minor children may be eligible for a Social Security death benefit if a parent obligated to pay child support dies. T F 11. A sprinkle trust requires distribution of trust assets to beneficiaries in equal amounts. T F 12. An adopted child cannot be intentionally disinherited. T F 13. If the donor or decedent is not a U.S. citizen, he or she is subject to estate and gift taxation on the same basis as a U.S. citizen only if he or she is a U.S. resident. T F 14. Gift splitting is allowed if one spouse is a nonresident alien, and the other spouse is a resident alien. True/False Statements 51

T F 15. A person in a nontraditional family arrangement must be particularly careful not to let the laws of intestate succession govern the distribution of his or her estate. T F 16. It is more important for unmarried cohabitants to enter into a property agreement than for a married couple. T F 17. A valid will can give property to someone to whom the testator is neither married nor related. T F 18. In certain states, common law marriages are recognized between same-sex cohabitants. T F 19. Joint tenancy with right of survivorship may not be as useful as tenancy in common as a way to minimize the estate taxes of unmarried cohabitants. T F 20. It may be difficult for an unmarried cohabitant to obtain a life insurance policy on the other cohabitant. T F 21. An unmarried cohabitant may be refused the right to visit the other cohabitant who is a patient in a hospital. T F 22. A fiduciary can have only such powers as are prescribed in applicable state statutes. 52 Estate Planning

Module 8 Answers True 1. A person can be legally and/or mentally incompetent. False 2. In states that have adopted the Uniform Probate Code (UPC), a conservator has only equitable title to the ward s property. Rationale: In UPC states, the conservator holds legal title to the ward s assets. False 3. With a durable power of attorney, the authority of the attorneyin-fact will survive the principal s death. Rationale: The authority of the attorney-in-fact will survive the principal s incompetency, but not his death. False 4. A revocable living trust is funded only when the grantor becomes incompetent. Rationale: A revocable living trust is funded when it is created. A contingent or standby trust is not funded until the grantor becomes incompetent. True 5. If a patient s desires concerning medical treatment in a specific situation are known, they generally will be enforced by courts. True 6. A living will must be executed according to state statutes. True 7. A person can preplan his or her own funeral. True 8. One requirement to qualify for Medicaid nursing home benefits is that the applicant must require significant assistance with two or more activities of daily living or have a very significant need for supervision. True 9. A qualified domestic relations order (QDRO) can identify the nonparticipant spouse as an alternate payee. True 10. Minor children may be eligible for a Social Security death benefit if a parent obligated to pay child support dies. True/False Statements 53

False 11. A sprinkle trust requires distribution of trust assets to beneficiaries in equal amounts. Rationale: A sprinkle trust gives the trustee discretion to distribute trust assets according to each beneficiary s need. False 12. An adopted child cannot be intentionally disinherited. Rationale: An adopted child can be disinherited in the same manner as a natural child. True 13. If the donor or decedent is not a U.S. citizen, he or she is subject to estate and gift taxation on the same basis as a U.S. citizen only if he or she is a U.S. resident. False 14. Gift splitting is allowed if one spouse is a nonresident alien, and the other spouse is a resident alien. Rationale: Gift splitting is not allowed if either spouse is a nonresident alien. True 15. A person in a nontraditional family arrangement must be particularly careful not to let the laws of intestate succession govern the distribution of his or her estate. True 16. It is more important for unmarried cohabitants to enter into a property agreement than for a married couple. True 17. A valid will can give property to someone to whom the testator is neither married nor related. False 18. In certain states, common law marriages are recognized between same-sex cohabitants. Rationale: Currently, no state recognizes common law marriages between same-sex cohabitants. True 19. Joint tenancy with right of survivorship may not be as useful as tenancy in common as a way to minimize the estate taxes of unmarried cohabitants. 54 Estate Planning

True 20. It may be difficult for an unmarried cohabitant to obtain a life insurance policy on the other cohabitant. True 21. An unmarried cohabitant may be refused the right to visit the other cohabitant who is a patient in a hospital. False 22. A fiduciary can have only such powers as are prescribed in applicable state statutes. Rationale: One of the advantages of making a trust or a will is that the fiduciary s powers can be custom crafted. True/False Statements 55

Practice Questions Session 1 (Module 1) 1. Mary Ellsworth has established and funded an irrevocable trust for the benefit of her family. She gave her husband, Tim, who is one of the income beneficiaries, the right to demand that the trustee distribute no more than the greater of $5,000 or 5% of the value of the trust assets to any trust beneficiary during the last three months of any calendar year. Which one of the following statements is correct? a. Mary has given Tim a special power of appointment. b. Mary has given Tim a general power of appointment. c. If Tim has not demanded that the trustee distribute any of the trust assets by December 31 of any year, he will be deemed to have released his power of appointment. 56 Estate Planning

2. Which one of the following statements regarding Henry White, who recently married for the first time, is correct? a. In a community property state, Henry s spouse is deemed to have a vested 50% interest in all of the property Henry owned at the time of the marriage. b. In a community property state, Henry s earnings from his job subsequent to the date of his marriage will be considered community property. c. In a traditional community property state, any property Henry owns at death will go to his spouse by right of survivorship. 3. If the proceeds from the sale of a community property home in a community property state are reinvested in a new home in a common law state, the new home will be considered to be community property. True False Practice Questions 57

Session 1 Answers 1. b. is correct. The power holder, Tim, can appoint the property to himself without prior consent or subject to an ascertainable standard. Ascertainable standard limits the use of property, not its amount. 2. b. Paycheck earnings are community property. Assets owned prior to marriage (option a.) are not community property as long as they are kept solely in the name of the acquiring owner and are not commingled. Traditional community property (option c.) does not have a right of survivorship provision, and must, therefore, go through probate. 3. True. The property does not lose its character because of the move. 58 Estate Planning

Session 2 (Module 2) 1. Which one of the following types of statutes specifies the order in which the shares of beneficiaries of a decedent s estate will be reduced in order to satisfy debts against the estate? a. abatement b. tax apportionment c. ademption d. exempt property award 2. Preventing a surviving spouse from being left destitute upon the death of his or her spouse is not a purpose of which one of the following? a. community property laws b. spousal elective share statutes c. laws of intestate succession d. advancement statutes Practice Questions 59

Session 2 Answers 1. a. Tax apportionment (option b.) allocates tax liability. Ademption (option c.) deals with a bequest of specific property that cannot be found at death. Exempt property award statutes exempt certain personal property in a decedent s estate from being sold to satisfy the claims of general creditors. 2. d. Advancement statutes apply in the situation where some estate beneficiaries are claiming that what another beneficiary received from the decedent before death was meant to be an advancement upon what he was to receive at death. 60 Estate Planning

Session 3 (Modules 3-5) 1. The general valuation principle for the federal estate tax is the fair market value of the asset as of the valuation date. True False 2. The Chapter 14 Rules apply to both gift and estate taxation. True False 3. 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. True False Practice Questions 61

Session 3 Answers 1. True. The valuation date is either date of death, or 6 months after date of death (alternate valuation date-elective). 2. True. Sections 2701 and 2702 apply only to gift tax; Section 2703 and 2704 apply to both gift and estate tax. 3. False. A minority discount is given only for a minority position in a closely held business. 62 Estate Planning

Session 4 (Module 4) 1. Only direct transfers of present interests are completed transfers that are taxable for federal gift tax purposes. True False 2. Gift splitting means that spouses may file a joint gift tax return. True False Practice Questions 63

Session 4 Answers 1. False. Indirect transfer such as paying someone s debt, and future interest transfers (remainder interest in a trust) are also subject to gift tax. 2. False. There is no such thing as a joint gift tax return. Gift splitting takes place when one spouse owns the property that is given away, and the other (non-donor) spouse agrees to be responsible for the tax on one half of the gift. Non-owner spouse becomes a deemed donor. 64 Estate Planning

Session 5 (Module 3) 1. Which one of the following is not an example of a retained interest that will cause the assets in question to be included in the transferor s gross estate? a. The transferor places assets in an irrevocable trust and retains the right to replace the bank that is named as trustee with another bank if he is dissatisfied. b. The transferor places assets in an irrevocable trust and retains the right to receive the income from trust assets for the rest of his life. c. The transferor places assets in a revocable trust and names himself as trustee and sole income beneficiary. d. The transferor gives his child a remainder interest in his house, but retains a life estate for himself. 2. Which one of the following statements regarding the three-year inclusionary rule (IRC Section 2035) is not correct? a. It requires the decedent to take certain actions within three years of death. b. The gross-up rule is part of this rule. c. Any insurance policy that a decedent transfers within three years of death is subject to this rule. d. A decedent who gives up the right to receive income from a trust he established within three years of his death will be affected by this rule. Practice Questions 65

3. Which one of the following statements regarding the estate tax marital deduction is not correct? a. The property receiving the deduction must be included in the deceased spouse s gross estate. b. If property receives a marital deduction in the estate of the first spouse to die, it will be subject to transfer taxation when the surviving spouse disposes of the property. c. The deduction is elective for property placed in a power of appointment trust. d. If the spouse is given a terminable interest in property as well as a general power of appointment over the same property, the decedent s estate will be allowed to take a marital deduction. 66 Estate Planning

Session 5 Answers 1. a. is correct. However, if the transferor retained the right to replace the transferee with anyone he chose (including himself) it would probably be a retained interest that would cause inclusion-most trustees have some power that would cause this result. 2. c. is the answer. Only policies where the owner is the insured are affected by this section. 3. c. is the answer. Only the QTIP is elective. Practice Questions 67

Session 6 (Modules 3-4) 1. H1 dies and leaves W a DSUE amount of $3 million. W makes her first taxable gift of $1 million and marries H2. H2 dies and leaves W a DSUE amount of $1 million. What is W s available exclusion amount in 2015 after H2 s death? a. $5,250,000 b. $6,430,000 c. $7,250,000 d. $8,250,000 2. The recipient spouse is given power to name the remainder beneficiaries of a power of appointment trust. True False 3. The recipient spouse must be one of several income beneficiaries of a QTIP trust. True False 68 Estate Planning

Session 6 Answers 1. b. is the answer. Basic Exclusion amount of $5,430,000 plus H2 s DSEU amount of $1 million. Gift was paid by H1 s DSUE amount. H2 becomes W s last deceased spouse. 2. True. Called recipient spouse to emphasize that trust can be established either inter vivos or testamentary. True because of the GPOA. Remainder beneficiaries named by grantor will take only if spouse does not exercise GPOA to name someone else. 3. False. In all marital trusts, the grantor s spouse must be the exclusive income beneficiary. Practice Questions 69

Session 7 (Module 5) 1. Which one of the following is a true statement about taxable distributions? a. The return used to report a taxable distribution is the federal estate tax return, Form 706. b. The trust involved in a taxable distribution is responsible for paying any GSTT due. c. Each skip person who received a taxable distribution is responsible for paying the GSTT due. d. If the skip person is incompetent, it is the responsibility of the fiduciary of the trust making a taxable distribution to pay the GSTT out of additional trust funds. 2. A transfer where at least one non-skip party has a current interest in the transferred property after completion of the transfer is known as a. an indirect skip. b. a taxable distribution. c. a taxable termination. d. a direct skip. 70 Estate Planning

3. Which one of the following is a true statement about the GSTT? a. Only that part of a gift that will go to non-skip parties is subject to the GSTT. b. GSTT due on an indirect skip is reported when the gift is given on Form 706 or Form 709. c. The transferor reports the GSTT due on an indirect skip and the federal gift or estate tax due on the transfer at the same time. d. GSTT on indirect skips cannot be immediately determined upon completion of the transfer. 4. Which one of the following is the valuation date used to establish the value of property transferred during the life of the transferor whenever an indirect skip is involved? a. the date of completion of the transfer b. the date a taxable distribution or termination occurs c. the date that the direct skip portion of the transfer occurs d. six months after the actual date of transfer 5. The applicable credit amount can be applied to offset generation-skipping transfer taxes, gift taxes, or estate taxes. True False Practice Questions 71

6. If generations are determined by age, for the GSTT to apply, the transferee must be a. 32½ years younger than the transferor. b. more than 32½ years younger than the transferor. c. 37½ years younger than the transferor. d. more than 37½ years younger than the transferor. 7. Taxable terminations occur when non-skip parties no longer have an interest in the trust property, whether or not an actual distribution of trust property is made to a skip party. True False 72 Estate Planning

Session 7 Answers 1. c. is correct. The return is Form 706GS(D) (a.). b. is incorrect because c. is correct. d. the financial guardian or conservator of the incompetent person is responsible. 2. a. Taxable distributions (option b.) and taxable terminations (option c.) are types of indirect skips. 3. d. With an indirect skip, we must wait for a taxable termination or distribution to occur before we can calculate the GSTT because only then can we be sure that something has (or definitely will in the future) go to skip parties. GSTT due (option b.) will then be calculated on either Form 706GS(T) or Form 706GS(D). These forms are filed at different times from the filing of the gift or estate tax return that was also filed on the transfer. 4. b. is correct. Since distributions with an indirect skip can be made to nonskip parties, nothing is really given to a skip party until a taxable distribution or termination occurs; thus the property is valued at this time. 5. False. The applicable credit amount is a gift and estate tax term; it has no application to GSTT 6. d. is correct. 7. True. Practice Questions 73

Session 8 (Modules 3-5) 1. A federal estate tax return is due if the value of the decedent s gross estate exceeds the basic exclusion amount for the year of death. True False 2. An estate tax return must be filed if the decedent s estate has a tax base that exceeds the applicable ET exclusion amount in the year of death. True False 3. Betty established and funded a QTIP trust for the benefit of her husband and their three children. Which of the following statements are correct? I. Betty must file a Form 706 tax return for her gifts to her husband and children. II. Betty does not need to report that a generation-skipping transfer has occurred. III. Betty must file a Form 709 tax return by nine months after the trust was funded. IV. If Betty dies, and is required to file an ET return, and her ET return is due before the date for filing her GT return, the GT return must be filed with the ET return. a. I and III only b. II and IV only c. I, II, and III only d. II, III, and IV only 74 Estate Planning

4. Gary made the following gifts in the years shown: 2010 gave $11,000 cash to his brother 2011 established and funded a CRAT naming his wife as sole income beneficiary 2014 gave $28,000 to his sister; Gary s wife agreed to split this gift Which of the following statements are correct? I. Gary does not need to file a gift tax return for the 2010 gift. II. Gary does need to file a gift tax return for the 2014 gift. III. Gary does not need to file a gift tax return for the 2011 gift. IV. Gary s wife must file a gift tax return for the 2014 gift, or evidence her consent to split on Gary s gift tax return. a. I and III only b. II and III only c. I, II, and IV only d. II, III, and IV only 5. For an indirect generation-skipping transfer, the return computing GSTT due will be filed by either a skip party or a trustee. True False Practice Questions 75

6. Donald established an irrevocable inter vivos trust for the benefit of his only son and grandson. The son and grandson are to receive equal income at the discretion of an institutional trustee until one of them dies, when the remainder will go to the survivor. Which one of the following statements is correct? a. Donald will have to file a Form 706 by April15 of the year following the year of the transfer. b. The trustee will have to file a Form 706GS(T) by April15 of the year following a distribution of income to the grandson. c. The PR of the estate of Donald s son will have to file a Form 706GS(D) by April15 of the year following his death if he dies first d. Donald, or the PR of his estate, will have to file a Form 709 gift tax return by the earlier of 9 months after Donald s death or April 15 of the calendar year following the year of the transfer. 76 Estate Planning

Session 8 Answers 1. True. Even if deductions would reduce the tax base to less than the exclusion amount, a return must be filed. 2. True. Even if the gross estate is less than the exclusion amount, a return must be filed. 3. b. is correct. I., the gift tax return is Form 709. III., the gift tax return is due April 15 of the following calendar year, except in the circumstances in IV. 4. c. is the correct answer. III., CRAT is a partial interest charitable gift. 5. True. Skip party if a taxable distribution. Trustee (or party in possession if no trust) if a taxable termination. 6. d. is correct. This transfer is subject to gift tax as well as GSTT (if a distribution is made to the grandson, or the son predeceases the grandson). a. is incorrect as this trust was inter vivos; therefore, as stated in d., Form 709 is required. b. is incorrect as the grandson would have to file Form 706GS(D) in this circumstance. c. is incorrect because the required form would be Form 706GS(T), and the trustee would be responsible. Practice Questions 77

Session 9 (Module 5) 1. Which one of the following is a true statement about a donee s basis in property acquired by gift? a. If no money changed hands between the donor and donee, the donee s basis will be zero. b. The donee will always receive a carryover cost basis from the donor. c. For loss property, if the donee sells the property for less than its FMV at the time of gift, then the donee s basis will be the property s FMV on the date of the gift. d. The donee will receive a step-up in basis to the FMV of the property gifted if, on the date of the gift, the FMV is greater than the cost basis of the donor. 2. A mother gave her son some stock that she purchased five years ago for $14,000. The current FMV of the stock is $23,000. What is the son s basis in the stock? a. $0 b. $14,000 c. $23,000 78 Estate Planning

3. If the son in Question 2 immediately sells the stock, what would be his holding period for capital gain purposes? a. 0 years b. 1 year c. 5 years 4. If the mother in Question 2 had to pay $4,000 in gift tax out of pocket on that gift, what would the son s basis be? a. $17,600 b. $18,000 c. $23,000 5. If father gives daughter stock that he bought for $50,000 and is now worth $30,000, and daughter later sells the stock for $36,000, what is the daughter s basis for computing her capital gain or loss? a. $30,000 b. $36,000 c. $50,000 Practice Questions 79

6. If a client with a current year AGI of $50,000 wants to make a contribution to a public library and get the largest possible income tax deduction in the current year, which of the following assets should he gift to the charity? a. A car he purchased for $20,000 four years ago that is now worth $10,000. b. A diamond ring he purchased eleven months ago for $11,000 that is now worth $13,000. c. A rare book that he purchased two years ago for $10,000 that is now worth $15,000. 80 Estate Planning

Session 9 Answers 1. c. is correct. a. is incorrect as gifted property always has a basis. b. is incorrect as a carryover of basis from the donor to the donee is the normal rule, but one exception is the rule state in c. A step-up in basis occurs only with property received from an estate. 2. b. $14,000 is correct because of carryover basis. 3. c. 5 years is correct; tacking is allowed. Gain would be long term. 4. b. is correct. Appreciation ($9,000)/taxable value ($23,000 minus $14,000) X Gift Tax Paid ($4,000) =$4,000 + donor s old basis ($14,000) = $18,000. 5. b. Basis is $36,000; there is neither gain nor loss; this is loss property. If daughter sold for $25,000, her basis would have been $30,000 = $5,000 capital loss. If daughter sold for $55,000, her basis would have been $50,000 = $5,000 capital gain. 6. c. is the correct answer: $15,000 v. $11,000 and $10,000; no need for a carry forward. He could deduct $10,000 in the current year for the car. Long term loss property; can deduct only current FMV up to 50% of AGI. He could deduct $11,000 for the diamond ring in the current year; short term property; can deduct basis only, up to 50% of AGI. He could deduct FMV ($15,000) limited by 30% of AGI ($15,000) in current year, so $15,000 in the current year. Alternatively, he could deduct basis ($10,000) limited by 50% of AGI, so $10,000 in the current year; this property is long term use related tangible personal property. Practice Questions 81

Session 10 (Module 6) 1. All of the following statements are true of both revocable and contingent trusts except a. both trusts are revocable. b. trust assets remaining at the grantor s death will be included in the grantor s gross estate. c. trust assets remaining at the grantor s death will avoid probate. d. both trusts are funded immediately after they are established. 2. All of the following are correct tax implications of a Crummey trust except a. the holder of the Crummey power will likely have to include some portion of the trust assets in his gross estate if he dies during the trust term. b. if the holder of the Crummey power exercises it to withdraw trust assets, the grantor of the trust will not be entitled to an annual exclusion. c. there are no gift tax consequences if the holder of the Crummey power exercises it to take trust assets for himself or herself. 3. All of the following statements regarding qualified personal residence trusts (QPRT) are correct except a. the grantor retains the right to live in the residence during the trust term. b. the Chapter 14 valuation rules require the grantor to pay gift tax on the entire value of the residence at the time the trust is funded. c. the grantor will be subject to gift tax only on the present value of the remainder interest. 82 Estate Planning

Session 10 Answers 1. d. The revocable trust is funded immediately, but the contingent trust is funded only when a stated contingency (usually incompetence of the grantor) occurs. 2. b. Option a. is a true statement because a Crummey power is a type of general power of appointment. Option c. is a true statement, as one cannot give a gift to himself. 3. b. QPRTs are not subject to the Chapter 14 rules. Practice Questions 83

Session 11 (Modules 3-5) 1. Which of the following statements are correct regarding a charitable remainder annuity trust (CRAT)? I. The trust can last for one or more persons lifetimes or for a term certain not to exceed 20 years. II. A qualified charity must receive the remainder interest. III. The income interest is paid to a noncharitable beneficiary named by the grantor. a. I only b. I and III only c. II and III only d. I, II, and III 2. Which one of the following statements regarding charitable remainder trusts that are qualified to receive the estate tax charitable deduction is not true? a. The charity must be given either an annuity or a unitrust interest. b. The charity must be qualified. c. The charity must be given the remainder interest in trust assets. d. The trust may last for one or more persons lifetimes. 84 Estate Planning

3. Which one of the following statements regarding charitable lead trusts that are qualified for the estate tax charitable deduction is not true? a. Charitable lead trusts are not subject to the same maximum annual payout (MAP) and minimum remainder interest (MRI) requirements as are charitable remainder trusts. b. The charity receives the income interest. c. A noncharitable beneficiary receives the remainder interest. d. The charity receives a right to all of the income from trust assets. 4. The estate of a decedent who establishes a testamentary charitable lead trust with his spouse as the sole remainder beneficiary would be entitled to both a charitable and a marital estate tax deduction. True False Practice Questions 85

Session 11 Answers 1. d. is correct. 2. a. is the answer. The charity gets the remainder in a CRT. 3. d. is the answer. Charity must have the right to an annuity or unitrst payment. 4. True. The spouse would be given title to the trust assets; therefore, MD is in order. 86 Estate Planning

Session 12 (Module 6) You want to sell your solely owned business. Your available options are: I. an installment sale II. a self cancelling installment note (SCIN) III. a private annuity Which one or combination of these choices would meet each of the following goals? 1. You don t want to incur any gift tax I. an installment sale II. a self cancelling installment note (SCIN) III. a private annuity a. I only b. II only c. III only d. I, II, and III Practice Questions 87

2. The seller wants to use installment reporting of gain. I. An installment sale II. A self cancelling installment note (SCIN) III. A private annuity a. I only b. I and II only c. II and III only d. I, II, and III 3. The seller wants to be assured of receiving a set number of installment payments. I. An installment sale II. A self cancelling installment note (SCIN) III. A private annuity a. I only b. II only c. III only d. I, II, and III 88 Estate Planning

4. Seller wants to take a security interest in the business in case the buyer defaults. I. An installment sale II. A self cancelling installment note (SCIN) III. A private annuity a. I only b. II only c. III only d. I, II, and III 5. Seller wants the payments to last for his or her lifetime. I. An installment sale II. A self cancelling installment note (SCIN) III. A private annuity a. I only b. II only c. III only d. I, II, and III Practice Questions 89

6. A, B, and C are the sole owners of a closely held business. They have entered into a cross-purchase buy-sell agreement. How many life insurance policies will need to be purchased to fund this agreement? a. 1 b. 2 c. 3 d. 6 7. A and B are the sole owners of a closely held business. They have entered into a cross-purchase buy-sell agreement. Who should be the owner and beneficiary on the life insurance policy on A? a. A b. A s estate c. B d. B s estate 90 Estate Planning

8. A and B are the sole owners of a closely held business. They have entered into an entity buy-sell agreement with the business (C). Who should be the owner and beneficiary of each policy purchased? a. A b. B c. C d. A and C on the policy on B e. B and C on the policy on A 9. The buy-sell agreements formula for purchase price is more likely to be accepted for gift and estate tax purposes if the owners are family members than if they are not. True False 10. Which one of the following statements regarding a preferred stock recapitalization freeze transaction is not correct? a. If shares are gifted to other family members, the donor may be able to claim discounts for minority interest and lack of marketability. b. If shares are gifted to other family members, they are valued as of the date of completion of the recapitalization. c. If shares are gifted to other family members, the Chapter 14 rules may apply. Practice Questions 91

11. David has recapitalized his closely held business to allow his children to become owners. David has retained an interest in the business that will pay him a cumulative fixed dividend on an annual basis. David has retained a qualified business interest for Chapter 14 purposes. True False 92 Estate Planning

Session 12 Answers 1. d. Gift tax can always be avoided by setting the purchase price at FMV. 2. b. All gain must be recognized in the year of sale in a private annuity. I. and II. can use installment reporting of gain. 3. a. Only an installment sale can meet this goal. The number of payments with a SCIN and private annuity depends on the seller s death. 4. d. is correct. Since all gain with a private annuity is now recognized in the year of sale, there is no longer any penalty for taking security. 5. c. Only a PA can meet this goal. 6. d. Each owner will have to purchase a policy on each of the other two owners. If they had entered into an entity buy-sell agreement, how many life insurance policies would need to be purchased? Answer: 3 7. c. B should be the owner and beneficiary of the policy on A. It is B who will be obligated to purchase A s business interest if A dies first. 8. c. The business entity is the party who will be obligated to purchase when an owner dies. 9. False. It is more likely to be accepted if they are not family members. 10. b. is the answer. Valuation would be as of the date of completion of the gift. 11. True. David s right to income is fixed in both time and amount. Practice Questions 93

Session 13 (Module 6) 1. Which of the following will cause the life insurance policy (owned by the insured) death benefit to be included in the gross estate of the insured? I. having an incident of ownership in the policy at death II. having the estate of the insured as the named beneficiary III. the insured gave up an incident of ownership in the policy within three years of death a. I and II only b. I and III only c. II and III only d. I, II, and III 2. Which of the following statements regarding ILITs are correct? I. ILITs can either be funded or unfunded. II. Funding with an existing policy may cause the three-year rule to apply. III. The main purpose of an ILIT is to remove policy death benefits from the grantor s gross estate IV. Most ILITs are also bypass trusts. a. I and II only b. III and IV only c. II, III, and IV only d. I, II, III, and IV 94 Estate Planning

Session 13 Answers 1. d. is correct. 2. d. is correct. Practice Questions 95

Session 14 (Module 7) 1. Carol owns 80% of IGU Corporation (one-half of the value of the stock is attributable to real estate owned by IGU). Currently, the value of Carol s stock in IGU is 64% of her projected adjusted gross estate. Carol is examining the implications of transferring three-quarters of her IGU shares to her children from her current marriage. Her will leaves specified property valued at 10% of her estate to her husband and the remainder of her estate to her children from her former marriage. Which one of the following postmortem elections would not be adversely affected due to the proposed transfer of the IGU shares from Carol to her children from her current marriage? a. a partial stock redemption under IRC Section 303 b. special use valuation c. the alternate valuation date d. deferral and installment payment of estate tax under IRC Section 6166 96 Estate Planning

2. Which one of the following is a qualifying requirement for Section 2032A special use valuation of real property used in a business? a. The business must be engaged in farming or ranching. b. The family member-owner of the business must have been a material participant in the business for at least 10 years prior to his or her death. c. The value of the decedent s business interest, minus secured debts and unpaid mortgages on such property, must equal 50% or more of the decedent s gross estate as adjusted for secured debts and unpaid mortgages on all property included in the gross estate. d. The real property used in the business must exceed 35% of the adjusted gross estate. Practice Questions 97

3. When Joe died in 2015, he was a widower with a gross estate of $5.5 million, which included a 50% partnership interest valued at $1.9 million. The partnership owned real estate valued at $1.4 million. His adjusted gross estate was $5.43 million. Joe s will left $100,000 to a qualified charity and the balance of his estate, including the business interest, to his two nephews. They currently participate in the business and plan to hold the business interest indefinitely. Joe made no taxable gifts during his lifetime. Given the facts stated above, which one of the following correctly states why Joe s estate cannot qualify to use the installment method of paying the estate tax (Section 6166)? a. His nephews are not considered qualified heirs. b. His estate does not contain any closely held shares of stock. c. The value of the business interests included in Joe s gross estate is not more than 35% of his adjusted gross estate. d. His estate will not owe any estate taxes. e. The closely held business does not have the prerequisite real estate ownership. 98 Estate Planning

Session 14 Answers 1. c. is correct, as the alternate valuation date is the only option that does not have percentage requirement that would be adversely affected by the sale. 2. c. is the answer. Option a. can be any CHB that owns real estate. Material participation requirement is 5 out of last 8 years (b.). A 35% requirement applies to 6166 and 303 (d.). 3. d. is the correct answer. His adjusted gross estate is equal to the 2015 exclusion amount. He has not made any adjusted taxable gifts, and has not yet taken the charitable deduction, so his estate will not have to pay estate tax out of pocket. Qualified heirs are not necessary for 6166 (a.). Do not have to have a corporation to use 6166(b.).35% of AGE ($5.43 million) is $1,900,500 (c.). Real estate ownership is not a prerequisite to use 6166 (e.). Practice Questions 99

Session 15 (Module 8) 1. Which one of the following statements regarding a conservatorship is not true? a. The conservator is subject to the jurisdiction of a court. b. The conservator has authority to decide where the ward will live. c. The conservator may have to post a bond. d. The conservator will likely have to file reports with a court. 2. All of the following are parties that may be involved in a court-ordered guardianship except a. a ward or protected person. b. a guardian or conservator. c. a trustee. d. the state. 3. All of the following are techniques commonly used to preplan for management of a non-minor s assets except a. a funded revocable living trust. b. a living will. c. a durable power of attorney. 4. Living wills are usually applicable only when the declarant is in a terminal or similar condition. True False 100 Estate Planning

Session 15 Answers 1. b. is the answer. Personal decisions are left to the guardian. 2. c. is the answer. A trustee is used in planning for incompetency. 3. b. is the answer. A living will is a medical, not a financial document. 4. True. Practice Questions 101

Session 16 (Module 8) 1. Which of these individuals will qualify for Medicaid nursing home benefits? a. Single; applied in 2013 in an income cap state; has Alzheimer s; needs help bathing and dressing, has total monthly income equal to 200% of the maximum monthly SSI benefit for the year; the only asset he owns is a house with equity of $400,000 to which he intends to return b. Single; applied in 2014; has MAGI of 150% of the 2015 federal poverty level; needs help with toileting; the only asset she owns is a house with equity of $500,000 to which she intends to return 2. Which one of the following community spouses will not affect benefits payable to his or her institutionalized spouse? a. has monthly income of $2,500 and assets of $100,000 b. has monthly income of $2,500 and assets of $160,000 c. has monthly income of $3,000 and assets of $60,000 3. Which of the following transfers might cause a period of ineligibility? a. sale of an asset worth $100 for $75 b. transfer of title to an automobile to a spouse c. failure to use coupons when grocery shopping d. purchase of a single life immediate annuity from an insurance company that will pay equal payments over the actuarial life of the institutionalized spouse, with the annuitant s disabled child as death time beneficiary 102 Estate Planning

Session 16 Answers 1. a. Person a. would qualify, as he meets all three requirements. He has a medical need because of his Alzheimer s; his income is under the maximum cap; his countable resources are $0. Person b. does not qualify, as she does not meet the medical test. She does not have a need for institutionalization, as she cannot perform only one ADL (toileting). All other tests are met. 2. a. is the correct answer. Spouse a. will not affect benefits of the institutionalized spouse. His income is below the maximum allowed for the MMMNA, and resources are below the maximum CSRA. Spouse b. will affect benefits of the institutionalized spouse. His income is below the maximum allowed for the MMMNA, but resources are above the maximum CSRA. Spouse c. will affect benefits of the institutionalized spouse. His income is above the maximum allowed for the MMMNA, but resources are below the maximum CSRA. 3. a. may cause ineligibility; $25 has been given away. b. will not cause ineligibility because the transfer was made to a spouse. c. will not cause ineligibility because it is de minimis (of too small a value). d. will not cause ineligibility because an exempt asset a Medicaid exempt annuity has been purchased, and a disabled child of the Medicaid recipient can be named as first death time beneficiary. Practice Questions 103

Estate Planning Final Review Review Questions: Class 17 1. Belinda Carr, a widow, wants to take advantage of the GSTT (generationskipping transfer tax) exemption by making equal gifts totaling $8 million outright to her four grandchildren in 2015. If Belinda has not made any prior taxable gifts, what amount of gift tax, if any, would she owe? a. $0 b. $989,800 c. $1,005,600 d. $1,077,600 2. Using the facts in Question 1, which one of the following is a correct statement regarding the application of the generation-skipping transfer tax (GSTT) to these transfers? a. These are examples of direct skip transfers. b. These are examples of taxable distributions. c. These are examples of indirect skip transfers. d. These are examples of taxable terminations. 104 Estate Planning

3. In 2004, Mary Nixon made a $16,000 taxable gift to her son. In 2005, she paid $12,000 to World College for her daughter s tuition. In 2010, she made a cash gift of $28,000 to her daughter. Her husband consented to gift splitting only for the gift made in 2010. What applicable credit amount does Mary have available to offset gifts in 2015? a. $1,327,600 b. $1,342,600 c. $1,995,800 d. $2,114,600 4. Ira Saliman, wants to provide financial assistance to his grandchildren. His objectives are: to set aside assets that he alone would control during his life minimize setup costs and avoid any gift tax to make gifts from the assets as long as he is alive. when he dies, he wants the assets transferred outright to his grandchildren while avoiding probate Which one of the following strategies is most appropriate to meet all of Ira s goals? a. Ira should place the assets in a P.O.D. (payable-on-death) account with his grandchildren. b. Ira should establish Uniform Transfers to Minors Act (UTMA) accounts naming each of his grandchildren as beneficiaries, and himself as custodian. c. Ira should place the assets in a separate bank account that is solely in his name. d. Ira should place the assets in a joint and survivor bank account that names both Ira and the grandchildren as account holders. Estate Planning Final Review 105

5. Richard has been given a non-cumulative power to require the trustee of an irrevocable trust established and funded by his sister to distribute not more than $15,000 of trust income or principal per calendar year to any of his sister s nieces and nephews as necessary for their maintenance and support. Which one of the following statements regarding this power is correct? a. Richard has a special power of appointment over the trust. b. If Richard appoints $15,000 of the trust property to his daughter, he will be deemed to have made a completed gift. c. Richard may have to include up to $15,000 in his gross estate because of this power. d. If Richard does not appoint any of the property in the current year, he will be deemed to have made a completed gift. 6. Carlyle, age 75, gave his ex-wife, age 35, $6 million in the current year. How much gift tax does Carlyle owe on this transfer after application of the gift tax applicable credit amount, if this is his first taxable gift? a. $0 b. $222,400 c. $788,480 d. $1,076,250 106 Estate Planning

7. Bryan Hampstead and his wife, Teresa, have combined gross estates of $6.5 million, all of which is owned in joint tenancy with right of survivorship. If either had died in 2015, his or her estate would owe no estate tax. However, if the surviving spouse continued to hold the combined property in sole ownership, his or her estate (assuming death in 2015) would owe $428,000 in estate tax (assuming no use of the first spouse s DSUEA). The Hampsteads might retitle their assets so that one-half will be solely titled in each of their names. Then, they could execute wills that would pass each spouse s share to a trust. The trust would not qualify for the marital deduction. With the new plan, what, if any, would the estate tax savings be on their combined estate of $6.5 million, assuming that Bryan and Teresa both died in 2015? a. $0 b. $157,500 c. $428,000 d. $780,800 Estate Planning Final Review 107

8. Pam Trucker and her brother, Mac, purchased and own a commercial office building currently valued at $750,000. She holds a 60% tenancy in common interest. Last year, when Mac was having financial problems, Pam agreed that Mac should take half of the $74,000 rental income from the office building. Earlier this year, Pam gifted 2% of her interest to each of her two children. Pam has made no other gifts to her children this year. Which one of the following statements is correct concerning the tax implications of Pam s tenancy in common ownership and the actions described? a. If Pam were to die, one-half of the value of the property would be included in her gross estate since she is one of two tenants in common. b. Last year Pam made a gift of $7,400 to Mac. c. The gifts made earlier this year from Pam to her children are taxable gifts that she must report. d. The full value of the rental property will be included in Pam s gross estate, unless her personal representative can show that her proportional contribution was less than 100%. 9. Amy Plante owns several hundred vending machines. Amy s son, Ben, could use additional income to supplement the income from the business he started last year. Since Amy needs only part of the income, she would like to transfer some interest in the machines and their income to Ben, but without giving up total ownership and control of the machines during her lifetime. Which one of the following is the most appropriate way for Amy to transfer an interest in the property to Ben? a. an exchange for a private annuity b. an outright gift to Ben with a leaseback c. an installment sale d. a minority interest in a family partnership created by Amy 108 Estate Planning

10. During his lifetime, Basil Boast has made the following gifts: $17,000 in cash to his mother in 1983, $15,000 in bonds to his wife in 1985, $14,000 to his son s college for tuition in 1988, $17,000 to United Charities in 1991, and $32,000 in growth stock to a Section 2503(c) trust for his granddaughter in 2015. His wife consented to gift-splitting only for the gift made in 2015. What is Basil s cumulative gift tax prior to use of the applicable credit amount? a. $720 b. $1,620 c. $2,400 d. $2,800 11. Gunter, a resident non-u.s. citizen, established and funded a power of appointment trust with his wife as the income beneficiary, and his children as remainder beneficiaries. Gunter s wife is also a resident non-u.s. citizen. Gunter funded the trust with $100,000 of income-producing securities. Which one of the following statements regarding this transaction is correct? a. If Gunter has not made any other gifts to his wife in the current year, no part of the income interest will be taxable because of the annual exclusion. b. No part of this transaction will be taxable under any circumstances because of the marital deduction. c. No part of this transaction will be taxable if the property is placed in a qualified domestic trust (QDOT) and the appropriate election is made on the gift tax return. d. The transaction is not subject to gift tax because Gunter is not a U.S. citizen. Estate Planning Final Review 109

12. Ernie Green, a married individual, died in the current year with a gross estate valued at $12.6 million. His estate tax bracket is the highest marginal rate. The majority of his estate consists of personal use assets and publicly traded stock, which has rapidly declined in value since his death. Ernie s will splits his estate equally between his wife and his nephew. During the last year of his life, Ernie incurred medical expenses of $50,000, all of which were reimbursed through health insurance. Two years before his death, he gifted $20,000 to his nephew and filed a gift tax return without Ethyl s consent to split gifts. Ernie and Ethyl were in the highest marginal income tax bracket immediately prior to his death. Which one of the following is a postmortem election that may minimize tax liability for Ernie s estate or its beneficiaries? a. a claim of medical expenses on his final income tax return b. making an election to pay estate taxes in installments under IRC Section 6166 c. filing of a gift tax return with Ethyl s consent to split gifts d. use of the alternate valuation date election for estate assets 13. Your client, Robin Loxley, has the following goals for a parcel of real estate that he owns: to provide his daughter, Chelsey (age 7), with a discretionary income from the real estate to receive an annual exclusion for each dollar of value transferred to Chelsey to provide Chelsey with the right to dispose of her interest in the property when she reaches age of majority as determined by state law to remove the entire $100,000 value of the property from his gross estate either immediately, or over several years Given his goals, which one of the following is the most appropriate gifting strategy for Robin? 110 Estate Planning

a. transfer an amount equal to the maximum annual exclusion each year to a UTMA (Uniform Transfers to Minors Act) custodial account for Chelsey with someone else named as custodian b. transfer the entire property interest to a UGMA (Uniform Gifts to Minors Act) custodial account for Chelsey this year with someone else named as custodian c. transfer the entire property interest to a Section 2503(b) trust with Chelsey as both the income and remainder beneficiary with someone else named as custodian d. transfer an amount equal to the maximum annual exclusion each year to an irrevocable trust that names someone else as trustee, and gives Chelsey a Crummey power to withdraw limited to the greater of 5% of each contribution or $5,000 14. Diane s will states that her entire probate estate is to go to her sister if her sister survives her by at least five days. The Uniform Simultaneous Death Act (USDA) as adopted by Diane s state of domicile (and the state in which all of her property is located) states that if a beneficiary who receives property as the result of another s death, survives the testatrix by any ascertainable period, the beneficiary shall be entitled to take the property of the testatrix. Diane and her sister were riding in the same car when her sister lost control causing a wreck. Diane was killed instantly. Diane s sister died two days later. Which one of the following statements is correct? a. The estate of Diane s sister is entitled to Diane s probate estate because she survived Diane by an ascertainable period. b. The estate of Diane s sister is not entitled to Diane s probate estate because she did not survive by at least five days. c. The estate of Diane s sister is not entitled to Diane s probate estate if the state of Diane s domicile has adopted a felonious homicide statute. d. The estate of Diane s sister is entitled to Diane s probate estate because Diane s will gives it to her. Estate Planning Final Review 111

15. Ellen died in 2015 with the following gross estate: Sole property worth $4.8 million Tenancy by the entirety (TBE) property with her share valued at $500,000 Property in a trust valued at $300,000 over which Ellen held a general power of appointment Property held in JTWROS with her son valued at $2 million; Ellen placed her son s name on the title five years ago without consideration; Ellen used $192,800 of her applicable credit amount on this gift. Ellen s will gives $500,000 to a qualified charity. The rest of her estate goes to her son. Assume the following: Total indebtedness on the TBE property is $200,000. The estate will pay Ellen s share of this debt. Total indebtedness on the property held in JTWROS is $500,000. Ellen made $500,000 in taxable gifts all attributable to the JTWROS property. Ellen s funeral, administrative expenses, and state death taxes total $300,000. What is Ellen s net federal estate tax? a. $0 b. $90,000 c. $108,000 d. $322,000 112 Estate Planning

16. Your client has executed a living will (LW) and durable power of attorney for health care (DPOAHC). Which one of the following statements is correct regarding the advantages and disadvantages of these two planning techniques? a. The DPOAHC can be used in more situations than the LW can. b. If the two appointed agents differ in what medical treatment should be given, the decision of the agent under the DPOAHC will be given priority. c. The two techniques are contradictory and each cancels the effect of the other. d. The authority granted under the LW takes effect immediately, while that granted under the DPOAHC does not. 17. California is a community property state. Pennsylvania and Ohio are common law property states. While married and living in Pennsylvania, Hub Howard purchased a Rolls Canardly and titled it in his name only. After moving to California, he became ill and his wife, Winnie, became the sole breadwinner. While living there, Hub inherited several bonds from his grandmother and Winnie invested part of her salary in a stock portfolio solely in her own name. Last year, the Howards moved to Ohio. Assuming the Howards still own the assets described, which one of the following statements concerning the classification of their assets after their move to Ohio is correct? a. The Rolls Canardly, which was licensed in California, is considered community property. b. The bonds inherited by Hub while living in California are community property. c. All property acquired while living in California is considered community property even after moving to Ohio. d. The stock portfolio acquired by Winnie is considered community property. Estate Planning Final Review 113

18. Which one of the following incorrectly states a rule for valuing property interests for federal transfer purposes? a. The replacement cost of a paid-up policy is the cost of a policy from the issuing company based on the insured s age on the date of transfer. b. A remainder interest is valued according to its present value as determined by the length of the term interest and the IRS-specified floating interest rate on the date of transfer. c. Listed stocks and bonds are valued at the mean between the high and low selling price on the date of transfer. d. The replacement cost of a commercial survivorship annuity is measured by the cost of an annuity for the survivor from the issuing company based on the donor annuitant s age on the date of transfer. 19. Eva Tower has the following goals: to provide her husband, Orval, with an income that is not discretionary with the trustee to qualify at least part of her estate for the marital deduction to be assured that her daughters from her first marriage receive whatever remains of her estate when her husband, Orval, dies to fully use her applicable credit amount Which one of the following will accomplish all of Eva s goals? a. a QTIP (C) trust b. a family bypass (B) trust c. a power of appointment (A) trust d. an estate trust 114 Estate Planning

20. J.J. Jefferson made a series of cash gifts from his solely owned assets to his children, his wife, and to a qualified charity. His wife, Annie, consented to split all eligible gifts. In 2001, he gave $30,000 to his daughter, $42,000 to his son, $50,000 to his wife, and $21,000 to the charity. In 2002, he gave $24,000 to his daughter and $18,000 to his son. During 2015, he gave his daughter $30,000, his son $22,000, and his wife $30,000. Which one of the following most closely approximates J.J. s gift tax liability for his 2015 gifts prior to use of the applicable credit amount? a. $200 b. $1,000 c. $1,500 d. $3,500 21. Your client would like to create and maintain a trust that will qualify for a charitable deduction while immediately providing his parents with an income stream that minimizes the possibility of depletion by inflation. Which one of the following is the most appropriate charitable technique for accomplishing your client s goals? a. a charitable pooled income fund b. a charitable remainder annuity trust c. a charitable lead unitrust d. a charitable remainder unitrust Estate Planning Final Review 115

22. Which one of the following statements about a grantor retained interest trust characteristic is incorrect? a. If a grantor transfers $500,000 worth of stock to a GRIT (grantor retained income trust) for 15 years with the remainder to her children, she has a taxable gift of $500,000. b. A GRUT (grantor retained unitrust) will pay income to the grantor based on a specified percentage of the trust s value on a specified date each year. c. Gifts cannot be made to a GRAT (grantor retained annuity trust) after it is initially funded. d. In contrast to a GRIT, if the grantor of a GRAT or GRUT dies during the term of the trust, there is no inclusion in his or her gross estate. 23. Your client, who lives in a community property state that permits a great flexibility in the ways that property may be held, has the following goals: to fully use his applicable credit amount to avoid probate to share income with others without triggering any gift tax regarding the income Which one of the following would be the most appropriate way for your client to hold his income-producing property? a. as a sole owner, while giving his wife one-half of the income b. as a joint tenant with right of survivorship with his son c. as a joint tenant with right of survivorship with his wife d. as community property with his wife 116 Estate Planning

24. Your client has the following goals: to eliminate inclusion of any value of a life insurance policy on his life from his and his wife s gross estate to receive an annual exclusion for gifts made to pay premiums on the policy Assuming he lives more than three years after taking each action described below, using which one of the following insurance techniques will accomplish the client s goals? a. assigning all incidents of ownership to his spouse b. an unfunded irrevocable life insurance trust with Crummey powers to beneficiaries c. a funded irrevocable life insurance trust d. an annually funded revocable life insurance trust Estate Planning Final Review 117

Review Answers: Class 17 1. c. is correct because it recognizes that the gift tax applicable exclusion amount in 2015 will shelter only $5.43 million of the $8 million gifted. Belinda is entitled to deduct $56,000 for four annual exclusions since she has made present interest gifts to four donees. Taxable gifts of $7,944,000 generate a tax of $3,123,400. This amount can be reduced by the gift tax applicable credit amount for 2015 ($2,117,800) to produce a gift tax due of $1,005,600. 2. a. Since the only parties benefitted are skip parties in relation to the transferor, these are direct skip transfers. Taxable distributions and terminations are terms related to indirect skip transfers. 3. d. is correct because the tax ($3,200) on the total taxable gifts ($17,000) for all years is subtracted from the $2,117,800 gift tax applicable credit amount for 20154. The gift to the son in 2004 is a taxable gift and has already been reduced by the annual exclusion. The tuition paid directly to World College is not subject to gift tax. 4. a. The other choices are incorrect for various reasons: b., establishment of an UTMA account requires an irrevocable transfer, so a gift tax would be due if the amount involved exceeded the annual exclusion and Ira would no longer have exclusive control of these assets; c., placing the assets in a separate account solely in Ira s name would not, in itself, assure him that the assets would go to the grandchildren at his death and would subject the assets to probate; and d., a joint bank account would not give Ira exclusive lifetime control and would trigger a gift tax if the grandchildren withdrew funds. (Chapter 2) 5. a. This is a special power of appointment because Richard cannot appoint trust property to himself or to his estate, or the creditors of either. Statements b, c, and d would be true of a general power of appointment, but not a special. (Chapters 1, 3, and 4) 6. b. After subtracting an annual exclusion of $14,000, the taxable amount of this transfer is $5,986,000. No marital deduction is available for a transfer to an exspouse. Gift tax due on this amount is $2,340,200. Since Carlyle has a gift tax applicable credit amount of $2,117,800, he will have to pay $222,400 gift tax out of pocket. (Chapter 4) 118 Estate Planning

7. c. If each spouse has title to $3.25 million of the assets and those assets are passed in a way that they do not qualify for the marital deduction (as would be the case for the trust described in the question), then neither spouse s estate would have owed estate tax in 2015 because the tentative estate tax for each spouse would have been completely offset by each spouse s estate tax applicable credit amount. Therefore, the savings with the new plan would be $428,000. (Chapter 3) 8. b. is the correct answer since Pam was entitled to $44,400 of the income, but took only $37,000. The other answers are incorrect for the following reasons: a. and d., because these rules are applicable to gross estate inclusions of joint tenancy with right of survivorship interests among nonspouses (the former for situations where all joint tenants simultaneously received the property interest as an inheritance or a gift, and the latter where it was purchased or one tenant made a gift to other tenants) a tenant in common s fractional interest as described in the document of title is includible in his or her gross estate; and c., because the value of the gift to each child ($450,000.02 = $9,000) would be offset by the annual exclusion. (Chapters 1, 3, and 4) 9. d. The other transfers are inappropriate for the following reasons: a. (private annuity), b. (gift-leaseback), and c.(installment sale), because each will result in the total loss of ownership and control by Amy, which is something she wants to prevent. With each of these techniques, Amy s son (Ben) becomes the outright owner with total control. (Chapter 6) 10. b. is the correct answer because the only taxable gifts were $7,000 in 1983 and $2,000 in 2015. Cumulative taxable gifts of $9,000 produce a cumulative gift tax of $1,620. The $32,000 gift to the Section 2503(c) trust was split (according to the facts), and by statute qualifies for the annual exclusion ($32,000 2 = $16,000 $14,000 = $2,000). The $14,000 paid directly to the college for Basil s son s tuition is not a gift for federal gift tax purposes. (Chapter 4) 11. a. The transfer is subject to gift tax because Gunter is a resident alien. A gift to a non-citizen spouse is not entitled to a marital deduction, and use of a QDOT is available only for a transfer at death. However, if the non-citizen spouse is given a present interest that is not a terminable interest, the transfer is eligible for a super annual exclusion in the base amount of $100,000. The income interest given to Gunter s wife is a completed gift that qualifies for this super annual exclusion. (Chapters 3, 4, and 8) Estate Planning Final Review 119

12. d. Using the alternate valuation date election will minimize tax liability since the stock (his major asset) has definitely declined in value, and his personal use assets are unlikely to have increased in value. The other choices are incorrect for various reasons: a. because the medical expenses were reimbursed and therefore cannot be deducted; b. because Section 6166 does not reduce the amount of estate tax owed, and because Ernie s estate does not include a closely held business interest; and c. because the surviving spouse can elect to split only those gifts for which a return is not due and has not been filed prior to death. (Chapter 7) 13. a. is the correct answer. b. is incorrect for two reasons: first, a UGMA cannot accept real estate; and second, if the entire property interest was transferred in one year, the donor s goal of receiving an annual exclusion for each dollar transferred could not be accomplished. c. is incorrect because a Section 2503(b) trust cannot have a discretionary distribution of income-distribution must be mandatory. Finally, d. is incorrect because the donor would be eligible for only a $5,000 annual exclusion. (Chapter 6) 14. b. The survival period specified in Diane s will would be enforced. The simultaneous death provision in the USDA does not apply since the order of deaths can be determined. (Chapter 2) 15. c. Ellen s gross estate is composed of the following assets and values: Assets Deductions Sole Property $4,800,000 Debts TBE Property $100,000 TBE Property $ 500,000 Debts JTWROS Property $500,000 GPOA Property $ 300,000 F&A and State Taxes $300,000 JTWROS Property $2,000,000 Charitable Deduction $500,000 Marital Deduction $500,000 Total $7,600,000 Total $1,900,000 Ellen s taxable estate is therefore $5,700,000. There are no adjusted taxable gifts because the one taxable gift that Ellen made (JTWROS property) must be included in her gross estate, because Ellen s son did not provide any consideration for the transfer. Thus, Ellen s tax base is also $5,700,000. This figure produces a gross estate tax of $2,225,800. The only credit available is the estate tax applicable credit amount of $2,117,800, leaving a net federal estate tax due of $108,000. 120 Estate Planning

16. a. The LW is effective only when the patient is in a terminal condition, whereas the DPOAHC can also be used in nonterminal situations in which the patient is incapable of giving informed consent. b. is incorrect because the LW has priority since it is a declaration of the patient s wishes. The two techniques are not contradictory, and the authority to act under both techniques is effective immediately. (Chapter 8) 17. d. Property acquired in a community property state with family earnings is considered community property regardless of how it is titled and retains that character even after a move to a common law state. While the Rolls Canardly, which was titled solely in Hub s name, might have been considered community property for purposes of a divorce or probate proceeding in California (because of quasi-community property laws), Winnie will not have a community property interest in this asset after the move to Ohio. Property that is received by one spouse as a gift or inheritance is separate property even when acquired while living in a community property state unless subsequently comingled, or made community property by placing the other spouse s name on the title. (Chapter 1) 18. d. is the correct answer because it is the false statement. The replacement cost of a commercial survivorship annuity is measured by the cost of an annuity for the survivor from the issuing company based on the donee annuitant s age on the date of transfer; since it is the life of the donee that will determine the length of the annuity payments. (Chapter 3) 19. a. The QTIP will provide Orval with a mandatory payment of all income from the trust at least annually for his life while assuring her that her daughters, as the named remainder beneficiaries, will receive what remains after he dies. By making a partial QTIP election, her executor can fully use her applicable credit amount on the part that is taxable to her estate and defer taxes on the remainder by electing marital deduction treatment for it. A family bypass will not accomplish the first and second goals. A power of appointment trust will not accomplish her third and fourth goals. An estate trust will not accomplish her first and fourth goals.(chapter 3) 20. a. Gifts to the son and daughter are split and the donor is entitled to a maximum annual exclusion for each; the gifts to the donor s wife and to the qualified charity have a taxable value of zero due to the annual exclusion and the unlimited marital and charitable deductions. Taxable gifts are: Estate Planning Final Review 121

Daughter Son Wife Charity Total Cumulative Taxable Gifts Cumulative Tax 2001 $5,000 $11,000-0- -0- $16,000 $16,000 $3,000 2002 $1,000-0- -0- -0- $1,000 $17,000 $3,200 2015 $1,000-0- -0- -0- $1,000 $18,000 $3,400 The 2015 tax liability is the total liability of $3,400 minus prior years tax liability of $3,200, which is equal to $200. (Chapter 4) 21. d. Although a pooled income fund would provide a variable income stream based on investment performance, it is created and maintained by a qualified charity, not the grantor. A charitable remainder annuity trust pays a fixed dollar amount annually that could be eroded by inflation. A charitable lead trust provides an income stream to the charity with a remainder to the noncharitable beneficiaries. (Chapter 4) 22. d. The grantor s death during the term of any type of grantor retained interest trust (GRIT, GRAT, GRUT, or QPRT) will cause the date-of-death fair market value of trust assets to be included in his or her gross estate because of the retained interest. a. is correct because the grantor has retained a nonqualified income right for IRC Chapter 14 ( 2702) purposes, and thus the gift tax is based on the entire value of the assets placed in the trust. (Chapters 3 and 6) 23. b. is the correct answer. a. will not accomplish his first and second goals; c. will not accomplish his first goal; and d. will not accomplish his first or second goals. (Chapters 1 4) 24. b. Assigning incidents of ownership to his wife will not accomplish his first goal. Also, a funded life insurance trust generally will not require the making of gifts to pay the premiums (because they are paid out of the trust income) and, therefore, is not structured to enable the donor to qualify for an annual exclusion. (Chapters 3, 4, and 6) 122 Estate Planning

Review Questions: Class 18 1. Hobart died. Which of the following are included in his gross estate? I. a bonus Hobart had earned, but not received at his death. II. III. IV. the value of a trust created by Hobart s mother giving Hobart a life income interest. gift tax paid in the amount of $23,000 for gifts made by Hobart in the year prior to his death. the fair market value of a trust created by Hobart s uncle, which states Hobart can withdraw as much income or principal as he desires, as long as he obtains my prior consent a. I and II only b. I and III only c. II and IV only d. III and IV only Estate Planning Final Review 123

2. Robert has recorded a deed giving his son a remainder interest in a parcel of real property that he owned in his sole name. Which of the following statements are correct regarding this transaction? I. Robert has made a completed gift and may take one annual exclusion in computing his gift tax liability. II. III. IV. Robert and his son now own the property as joint tenants with right of survivorship. Robert has made a completed gift, but will still have to report all income produced by the property. Robert has removed this asset from his probate estate. a. I and II only b. II and III only c. III and IV only d. I, III and IV only 124 Estate Planning

3. Kim Collins would like to transfer some business assets to her children while still retaining an income stream from the assets. Which of the following strategies could she use without having to pay increased transfer taxes due to application of the IRC Chapter 14 valuation rules? I. a partnership recapitalization with a noncumulative preferred interest retained by Kim and transfer of nonpreferred partnership interests to the children II. III. IV. A grantor-retained income trust with remainder to the children a single life private annuity to Kim and the assets to the children a stock recapitalization with a cumulative preferred stock interest retained by Kim and transfer of common stock to the children a. I and III only b. I and IV only c. II and III only d. III and IV only Estate Planning Final Review 125

4. Alvin Donahue created an irrevocable trust and funded it with incomeproducing securities valued at $530,000. He reserved a right to take income from the trust for the next 10 years, with the remainder to go to his three children. Alvin named his brother as trustee. Which one of the following statements is correct concerning the federal tax implications of this transaction? a. If Alvin dies four years after funding the trust, the value of the trust will be excluded from his gross estate. b. The transfer to the trust will not be a taxable gift because it can be completely offset with annual exclusions. c. Alvin will report trust income only to the extent that it is actually received. d. If Alvin dies at any time before the trust term ends, the full date-of-death fair market value of the trust will be included in his gross estate because of his retained income interest. 5. Rudi retitled some real estate that had previously been in his sole name in his and his son's names as joint tenants with right of survivorship. The son furnished no consideration for this transfer. The FMV of the entire parcel at the time of gift was $180,000. Rudi had purchased the real estate four years ago for $140,000. Rudi and his son now want to sell the parcel for $190,000. What is Rudi's son s basis in the real estate for the purpose of computing his potential gain? a. $70,000 b. $90,000 c. $85,000 d. $95,000 126 Estate Planning

6. Assume the facts stated in Question 5, except that Rudi dies in the current year, prior to sale of the property. The FMV of the property at Rudi's death was $190,000, and the property was valued in Rudi's estate at its date of death value. What is the basis of Rudi's son in the property when he sells it after Rudi's death? a. $70,000 b. $140,000 c. $165,000 d. $190,000 7. Mary Duncan, is considering a private annuity with her son that will pay her fixed payments for the remainder of her life. Which of the following are correct statements about the tax implications of a private annuity? I. For installment recognition of gain to apply, the sole requirement is that a payment must be received in a tax year other than the year of sale. II. III. IV. Mary cannot avoid immediate taxation of capital gains if the transaction is unsecured. Mary cannot avoid immediate taxation of capital gains if the transaction is secured. The present value of any future payments outstanding at Mary s death will be in her gross estate. a. I and IV only b. II and III only c. III and IV only d. I, II, and IV only Estate Planning Final Review 127

8. Shirley is a Certified Financial Planner certificant, but is not a licensed attorney. In which of these activities has Shirley engaged in the unauthorized practice of law while advising her client, Carole? I. advised Carole to rescind her current will II. III. IV. gave Carole a brochure describing the duties of a personal representative and the process of probate in Carole s state advised Carole regarding the federal income tax deduction she can expect if she makes an outright gift to a qualified charity drafted a durable power of attorney for health care for Carole to sign a. I and IV only b. II and III only c. II and IV only d. I, II, and III only 9. Sarah gave her daughter 100 shares of publicly traded stock for which Sarah paid $45,000 five years ago. The stock was worth $100,000 at the time of gift. Sarah had to pay $40,000 in gift tax out of pocket as a result of this gift. What is the daughter's basis in the property? a. $45,000 b. $55,000 c. $70,581 d. $72,850 128 Estate Planning

10. Jerri Jacobson holds 67% of the stock in JJAM, Inc., a closely held business. She is the founder, principal product developer, and marketer for JJAM, Inc. The company manufactures food products in a leased building. Which of the following valuation discounts would her estate be able to claim? I. lack of marketability discount II. III. IV. minority discount blockage discount key personnel discount a. I and III only b. I and IV only c. II and III only d. II and IV only Estate Planning Final Review 129

11. Bart s will directed that half of his probate estate should be paid to a qualified terminable interest property (QTIP) trust. Bart s estate can do which of the following? I. take a marital deduction for the entire value of this trust II. III. IV. take a marital deduction for the present value of the remainder interest of this trust take a marital deduction for the present value of the income interest of this trust allow the entire value of the trust to be taxable a. I and II only b. III and IV only c. II, III, and IV only d. I, II, III, and IV 130 Estate Planning

12. Which of the following are correct statements concerning a life insurance technique? I. Split-dollar life insurance death benefits provided by an employer will not be included in the employee s gross estate. II. III. IV. Survivorship life insurance can be used to provide funds to pay deferred estate taxes. Key person life insurance makes the employee the owner of an employer-paid policy on his or her life. First-to-die life insurance can be used to fund buy-sell agreements between two owners with a minimum number of policies. a. I and III only b. II and IV only c. I, II, and III only d. II, III, and IV only Estate Planning Final Review 131

13. Hortense placed all of her assets in a revocable living trust. Hortense was the sole income beneficiary and trustee of this trust. Her children are the remainder beneficiaries. Which of the following statements regarding this trust are correct? I. The assets of this trust will be included in Hortense s gross estate. II. III. IV. The assets of this trust will be included in Hortense s probate estate. She has avoided ancillary probate if she owned real property in a state other than the state of her domicile. The trust assets will be included in her gross estate at their value when the trust was funded. a. I and III only b. II and IV only c. I, II, and III only d. II, III, and IV only 132 Estate Planning

14. Which of the following are correct statements concerning gift tax deductions allowed to reduce gifts to taxable gifts? I. The annual exclusion is available each tax year for a completed gift of a present interest to an unlimited number of donees. II. III. IV. Gift splitting occurs when all gifts made by a married couple to third parties in one tax year are split equally at the election of the donor spouse and with the consent of the other spouse. A charitable gift tax deduction is limited to a maximum of 50% of the donor s AGI (adjusted gross income). The allowable annual exclusion is equal to the lesser of the value of the present interest or a maximum amount that is indexed for inflation. a. I and II only b. III and IV only c. I, II, and IV only d. I, III, and IV only 15. Jack and Jill purchased a parcel of real estate as tenants in common for $200,000. Jill purchased a 75% interest and Jack purchased a 25% interest. Jill died in the current year and left her 75% interest to Jack by her will. The FMV of the parcel at the time of Jill's death was $280,000. What is Jack's income tax basis in the property after Jill's death? a. $150,000 b. $230,000 c. $260,000 d. $280,000 Estate Planning Final Review 133

16. Tom would like to plan for his possible mental incompetency, but does not want to tie up his assets in trust unless the incompetency actually occurs. Which of the following techniques would be most appropriate for Tom to use? I. standby (contingent) trust II. III. IV. durable springing power of attorney support trust pourover trust a. I and II only b. III and IV only c. I, II, and IV only d. II, III, and IV only 17. Which of the following are deductible to determine the adjusted gross estate for estate tax purposes? I. a testamentary transfer to a power of appointment (A) trust II. III. IV. a bequest of a remainder interest in a farm to a qualified charity the fee paid to the personal representative unpaid prior year taxes on property in the estate a. I and II only b. II and III only c. III and IV only d. I, II, and IV only 134 Estate Planning

18. Which of the following are correct statements concerning a buy-sell agreement funded with life insurance? I. The business is a party to the contract if a stock (entity) redemption plan is used. II. III. IV. With a cross-purchase plan, the surviving shareholder s new cost basis is equivalent to his or her old cost basis plus the purchase price of the deceased shareholder s interest. With a stock (entity) redemption plan, premiums paid on life insurance to fund the purchase are taxable income to the shareholders. Under a stock (entity) redemption plan, the value of the deceased s business interest is included in his or her gross estate, while the life insurance proceeds used to purchase his or her business interest are excluded. a. I and III only b. II and IV only c. I, II, and IV only d. II, III, and IV only Estate Planning Final Review 135

19. Rick Shaw had a will with the following provisions: I leave my shares in UMT, Inc. to my son, Pete. I leave the rest and remainder of my estate, including any disclaimed property, to my wife, Cea. The applicable intestate statute distributes one-half of the intestate estate to the deceased s surviving spouse and one-half to the deceased s children on a per capita basis. Rick s son, Pete, made a qualified disclaimer of the UMT interest. Which one of the following statements about the implications of Pete Shaw s qualified disclaimer is incorrect? a. There are no federal gift tax implications because Pete is treated as if he had never received the UMT shares from his father, Rick. b. One-half of the UMT shares will go to his mother and one-half will escheat to the state. c. Pete could not make a legally binding designation of whom should receive the shares he disclaimed. d. The UMT shares will be distributed to Rick Shaw s wife. 136 Estate Planning

20. Which of the following are correct pairings of a charitable gifting technique with one of its basic features? I. charitable remainder unitrust: invasion of principal to provide a minimum fixed percentage of corpus annually is mandated by the Code II. III. IV. charitable bargain sale: sale to a charity at less than the fair market value; minimizes out-of-pocket cost to the charity charitable pooled income fund: created and managed by a qualified charity to provide a variable income stream based on investment performance to a noncharitable beneficiary charitable stock bailout: an informal redemption by the corporation of shares gifted by a shareholder to a qualified charity to avoid the ordinary dividend income tax treatment that occurs if redemption is directly from the shareholder a. I and III only b. I and IV only c. II, III, and IV only d. I, II, III, and IV Estate Planning Final Review 137

21. The will of Marie s deceased husband left her only a modest cash bequest with the balance of his estate to her husband s longtime attorney. Marie wants to get more of her husband s estate. Which of the following might accomplish her objective? I. claim a community property interest in certain assets if she and her husband ever lived in a community property state II. III. IV. request payment under her state s family allowance statute invoke her state s ademption statute initiate a proceeding to contest the will a. I and III only b. II and IV only c. I, II, and III only d. I, II, and IV only 22. Beatrice made one transfer in each of the last five years as follows. For which of these transfers was Beatrice required to file a federal gift tax return? I. payment of $40,000 to a hospital to pay for a friend s surgery II. a gift of a remainder interest valued at $9,000 III. a gift of $20,000 that Beatrice s husband agreed to split IV. funded a QTIP trust with $100,000 a. I and II only b. III and IV only c. I, II, and III d. II, III, and IV only 138 Estate Planning

23. Blythe would like to donate some publicly traded stock that she has owned for many years to charity. She has sought your advice on tax matters. Which of the following would be correct advice to give Blythe? I. Charitable gifts are deductible for income tax purposes up to a maximum of 50% of the donor s AGI (adjusted gross income) in the year of the gift. II. III. IV. She will be able to take a larger income tax deduction in the year of the gift if she contributes the stock to a private rather than public charity. She will be able to take a larger income tax deduction if the stock is use-related rather than use-unrelated. She will be able to take a larger percentage of her adjusted gross income as a tax deduction for the current year if she makes the contribution to a public charity and elects to deduct basis rather than fair market value. a. I and II only b. I and IV only c. II and III only d. III and IV only Estate Planning Final Review 139

24. Frank N. Earnest made the following lifetime transfers: Two years ago, he gave a qualified charity the remainder interest valued at $300,000 in his farm, and retained a life estate. Two years ago, he assigned all incidents of ownership in a life insurance policy on his wife s life to an irrevocable life insurance trust. Last year, he made irrevocable the Frank N. Earnest Revocable Trust and paid gift taxes of $55,500. If he were to die today, which of the following are correct statements about the impact of Frank s lifetime transfers on his estate tax liability? I. The remainder interest in Frank s farm that was gifted to charity would increase his adjusted taxable gifts. II. III. IV. Frank s gross estate would include the $55,500 paid as gift taxes last year. The date-of-death fair market value of the Frank N. Earnest Trust would be included in Frank s gross estate. The death benefit of the life insurance policy would be included in his gross estate. a. I and IV only b. II and III only c. I, II, and III only d. II, III, and IV only 140 Estate Planning

25. Hazel died. Her will established and funded a dynasty trust with $5.43 million for the benefit of her lineal descendants. Hazel was survived by all of her children, grandchildren, and great grandchildren. Which of the following statements regarding this trust are correct? I. This trust constitutes an indirect skip for purposes of the generationskipping transfer tax (GSTT). II. III. IV. Hazel can use any unused portion of her applicable credit amount to cover any GSTT liability that cannot be avoided by application of her GSTT exemption. If the trustee makes a distribution to a grandchild or great grandchild while any of Hazel s children are alive, the recipient skip party will be responsible for any GSTT liability. Any GSTT liability will be due with Hazel s estate tax return. a. I and III only b. II and IV only c. I, II, and IV only d. I, II, III, and IV Estate Planning Final Review 141

26. Don has made a cash gift of $50,000 to Bill on condition that Bill pay the gift tax that will result. Don has used his entire applicable credit amount on other taxable gifts, while Bill has not used any of his. Which of the following are correct statements regarding this transaction? I. This was a net gift transaction. II. III. IV. Bill will get a step-up in income tax basis only if he holds the gifted asset for one year or more. Bill will be able to use his applicable credit amount in computing the gift tax due. Don can take an annual exclusion in computing the gift tax due. a. I and III only b. I and IV only c. II and III only d. II and IV only 142 Estate Planning

Review Answers: Class 18 1. b. is correct because Hobart s gross estate includes only the gift tax paid on the gifts made last year (the gross-up rule ) and the value of the bonus from his employer (IRD, income in respect of a decedent). The life income interest does not cause the fair market value of the trust to be included because it is not a retained interest (it was given to him by his mother and he did not control who would receive the remainder). Finally, the right to withdraw is not included since it is a special power of appointment because he must have the donor s consent before exercising the power. 2. c. is correct. Robert has made a completed gift of a future interest, which is, therefore, not eligible for an annual exclusion. Since Robert still owns a life estate in the property, he will have to report all income until he dies. When he dies, his life estate ends, and the remainder interest held by his son will be the sole remaining equitable interest. Because this interest was already transferred by Robert during his life, there is no probate asset at death. Robert and his son do not own the property as joint tenants with right of survivorship, as joint tenants have equal interests in the property unless otherwise stated, and their interests are not equal. 3. d. is correct because III is not subject to the Chapter 14 Rules, and while IV is subject to these rules, Kim will have retained a qualified payment right that will not cause adverse gift tax consequences. The other strategies listed would be subject to the special gift tax valuation rules of IRC Chapter 14, and would require Kim to pay gift tax on something that she did not give away because she has retained a nonqualified interest. 4. d. The trust described is an irrevocable trust in which the grantor (Alvin) retained an income right. Even though the transfer to the trust and the trust itself is irrevocable, the retained right to the income is sufficient to cause income taxation to Alvin for the full amount of income earned, whether received or not, and to cause the date-of-death fair market value of the trust to be included in his gross estate if he dies before the trust term expires. Because the gift to the children is a future interest, Alvin is not entitled to annual exclusions. Furthermore, since the trust was created as an irrevocable trust (not a revocable trust that was later made irrevocable) the three-year inclusionary rule is irrelevant for analyzing this problem unless Alvin had given up the income right before the expiration of the income interest at the end of 10 years. Estate Planning Final Review 143

5. a. When Rudi made his son an equal joint tenant in the parcel, half of his basis transferred to the son, since this is not loss property. Therefore, $70,000 is the son s basis. 6. d. Rudi s death will permit a step-up in Rudi s basis in the property to the fair market value of whatever portion of this property must be included in Rudi s gross estate. When a decedent dies owning property held as JTWROS with a nonspouse, the decedent s estate must include 100% of the asset unless the estate can prove that the surviving joint tenant(s) contributed to its purchase. Such contribution does not exist in this case, and, therefore, Rudi s gross estate must include the entire value of the asset. Therefore the basis of Rudi s estate, and Rudi s son, in the property can be stepped up to its fair market value: $190,000. This increase in basis will allow Rudi s son to sell the asset at no gain. 7. b. is the correct answer because I and IV are false statements. Installment recognition of gain from a private annuity sale is no longer available; all gain must be recognized in the year of sale whether the payments are secured or not. Since the annuity is for Mary s life only, the payments cease and nothing is includible in her estate. 8. a. is the correct answer. Advising a client to rescind a will (I) can cause the client to take an action that could leave the client intestate if the client dies prior to making some other desired distribution of property at death. Advising someone regarding the federal income tax implications of making a charitable gift (III) is not considered the unauthorized practice of law. Giving someone a brochure (especially pertaining to a situation that the client does not currently face) does not constitute the unauthorized practice of law (II). Drafting legal documents (IV) for another even if not done for compensation is considered the unauthorized practice of law. 9. c. Because this is not loss property, a portion of the gift tax paid out of pocket by the donor can be added to the donor s basis of $45,000 to compute the basis in the hands of the donee. The percentage of the gift tax paid that can be added to the basis is the unrealized appreciation divided by the fair market value of the asset at the time of gift reduced by the gift tax exclusion taken. This percentage is multiplied by the gift tax paid out of pocket. In this situation, the appreciation of $55,000 is divided by the taxable value of the gift ($86,000) to give us 64%. This percentage is multiplied by the gift tax paid of $40,000 to equal $25,581. This is added to the original basis of $45,000 to give us $70,581. The following formula shows you how to account for the annual exclusion when making this calculation: 144 Estate Planning

Appreciation Donor' s basis + Gift tax paid = Taxable Gift Donee' s basis 10. b. is the correct answer because II and III do not apply. A minority discount (II) would apply only if the decedent has a sufficiently small number of shares that she could not influence corporate policy (the decedent owns 67% of the shares). A blockage discount (III) does not apply to closely held stock; it applies to publicly traded stock in which the block of stock to be valued is large in relation to the daily trading volume. 11. d. is the correct answer as all statements are correct. The QTIP election, which permits the grantor s estate to take a marital deduction, can be made for all, part, or none of the assets placed in such a trust. 12. b. is the correct answer because I and III are incorrect statements. The insured in a split-dollar plan (I) has the right to name the beneficiary of the death benefits granted to the employee by the split dollar agreement, and therefore at least part of the proceeds are includible in the employee s gross estate. Key person life insurance (III) is not obtained to benefit the employee, but to provide funds to a business to cushion the impact of the death of someone whose loss would have a significant impact on the earnings and profits of the business; what is described in III is a salary increase or selective pension plan. 13. a. is the correct answer. Assets in a revocable trust are still included in the grantor s gross estate because of the grantor s retained right to revoke, which causes application of one of the transfer sections of the IRC (2038). Property included in the gross estate is always valued as of the date of death, or six months after the date of death. One of the reasons people establish and fund revocable trusts is to avoid probate of the assets placed in the trust. a. is the correct answer. Assets in a revocable trust are still included in the grantor s gross estate because of the grantor s retained right to revoke, which causes application of one of the transfer sections of the IRC (2038). Property included in the gross estate is always valued as of the date of death, or six months after the date of death. One of the reasons people establish and fund revocable trusts is to avoid probate of the assets placed in the trust. 14. c. is the correct answer because III is incorrect. The charitable gift tax deduction is unlimited for qualifying transfers (only for income tax purposes is the charitable deduction limited). Estate Planning Final Review 145

15. c. Jack has acquired his basis in the property at two different times. He acquired a basis in the property when he purchased a 25% interest for $50,000 (25% of $200,000). He acquired a basis in the remaining 75% of the property when it was left to him in Jill s will with a stepped up basis. Jill s gross estate included 75% of the FMV of the property at her death ($280,000) or $210,000. Therefore, Jack s basis in what he got from Jill is $210,000. Thus, Jack has a combined basis in the property of $260,000 ($50,000 + $210,000). 16. a. is the correct answer. A standby trust is essentially an empty shell because it is only minimally or nominally funded until the grantor becomes incapacitated, at which time, the attorney-in-fact (agent) transfers the grantor s property interests to the trust under the authority granted in the durable springing power of attorney. A support trust is created to discharge the grantor s legal obligation of support for one or more beneficiaries. A pourover trust is created to receive numerous small assets that are to be distributed to a large number of beneficiaries. 17. c. is the correct answer. Although I and II qualify as deductions, they are subtracted from the adjusted gross estate to determine the taxable estate. The personal representative s fee is deductible as an expense of administration (if reasonable), as is any debt of the decedent. 18. c. is the correct answer because III is a false statement. Under a stock redemption plan, the premiums are paid by the corporation with after-tax dollars (i.e., premiums are not deductible to the corporation) and are not taxable income to the shareholders. 19. b. is the correct answer because it is the false statement. Rick s wife will receive all the UMT shares because the disclaimer causes them to pass to her under the residuary clause the intestate statute is irrelevant. 20. c. is the correct answer because only I is a false statement only a charitable remainder annuity trust is required to mandate an invasion of the principal to guarantee the fixed dollar amount payable to the beneficiary (this is a source of security for the non-charitable income beneficiary, but it reduces the size of the charitable gift tax deduction allowed by the Internal Revenue Code as compared to a CRUT or a pooled income fund). If the income of a CRUT is insufficient to pay the specified percentage, the trust may specify that (1) only the income actually earned is paid; (2) the income actually earned is paid plus a make-up provision; or (3) the principal may be invaded to pay the specified percentage. (All charitable lead trusts also mandate the invasion of principal.) 146 Estate Planning

21. d. is the correct answer because III would not get Marie any extra money. Ademption statutes state how the beneficiary of a specific bequest is to be treated if the specific property given is no longer available or has been diminished in value. If the right to a community property interest can be established, it would entitle Marie to one-half of any assets acquired while married and living in a community property state (or any assets purchased with money from the sale of a community asset) even though her name is not on the title. Family allowance statutes would pay Marie a statutory stipend during the period of estate administration. A will contest might be successfully prosecuted on a claim of undue influence by the attorney on her husband. If successful, her husband s estate would become either partially or totally subject to her state s intestate succession laws, and her intestate share would probably be greater than the bequest she was given. 22. d. is the correct answer. Direct gratuitous payments of tuition and/or medical expenses in any amount (I) on behalf of another are not considered gifts. Therefore, filing of a federal gift tax return is not required, if those were the only transfers in a tax year. Whenever gifts are split (III), even when nothing remains taxable after the split, a gift tax return must be filed. Regarding the property placed in the QTIP trust (IV), the transfer will be taxable (thus requiring a return) if the QTIP election is not made. Similarly, even if the election is made for all of the property placed in the trust, a return must be filed to evidence the election. Transfer of a future interest in any amount (II) requires a return to be filed. 23. b. is the correct answer. Of a taxpayer s AGI, 50% is the maximum amount that can be deducted because of charitable contributions in any one year (I). Contributions of intangible personal property to a public charity entitle the donor to deduct up to 50% of their AGI in any one year if basis is used, but only 30% if fair market value is used (IV). Contributions to a public charity entitle the donor to a larger yearly deduction than would be true if the same contribution were made to a private charity (II). The use-related/useunrelated distinction (III) applies only to tangible personal property stock is intangible personal property. 24. b. is the correct answer because II is an example of the gross up rule and III is also included by the three year rule. I and IV are false. Since the remainder in the farm gifted to the charity qualifies for the charitable deduction, there is no taxable gift (I). Therefore, it does not increase the adjusted taxable gifts. Finally, since the life insurance policy transferred within three years of the deceased s death is on the life of someone other than the deceased, the death benefit is not included in his gross estate (IV). Estate Planning Final Review 147

25. a. is the correct answer. This trust is an example of an indirect skip (I.) since the trust beneficiaries include both skip parties (grandchildren and great grandchildren) and non-skip parties (the children). The recipient skip party of a taxable distribution is responsible for filing the required return and paying any tax due (III). GSTT liability cannot be paid by application of the estate tax credit, nor can estate tax liability be avoided by means of the GSTT exemption (II). Since this is an indirect skip, any GSTT liability would be due only when there is a taxable termination or distribution (IV). 26. b. is the correct answer. Even if this had been a gift of an in-kind asset rather than cash (which has no basis), Bill will not get a stepped-up basis (II) regardless of how long he holds it because he received it by gift and not from an estate. In a net gift transaction, the donor s applicable credit situation is used even though the donee is paying the tax (III). Because this is a gift of a present interest, Bill will be able to take one annual exclusion (IV). 148 Estate Planning