CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Estate Planning Final Review Questions Class 17 ©2015, College for Financial Planning, all rights reserved. Class 17 Question 1 Belinda Carr, a widow, wants to make 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 Class 17 Question 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. Class 17 Question 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 gift tax applicable credit amount does Mary have available to offset gifts in 2015? a. b. c. d. $ 1,327,600 $1,342,600 $1,995,800 $ 2,114,600 Class 17 Question 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. Class 17 Question 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. Class 17 Question 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 Class 17 Question 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 have owed $428,000 in estate tax (assuming no adjusted taxable gifts). The Hampsteads might title 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 estates of $6.5 million, assuming that Bryan and Teresa both died in 2015? a. $0 b. $157,500 c. $428,000 d. $780,800 Class 17 Question 8 Pam Trucker and her brother, Mac, purchased and own a small 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 building. Pam is contemplating gifting 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 before making the gifts to the children, 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. If Pam made the gifts to her children, they would be taxable gifts that she must report. d. If Pam were to die before making the gifts to the children, the full value of the rental property would have to be included in Pam’s gross estate, unless her personal representative could show that her proportional contribution was less than 100%. Class 17 Question 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 Class 17 Question 10 During his lifetime, Basil Boast has made the following transfers: $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 Class 17 Question 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 incomeproducing 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. Class 17 Question 12 Ernie Green, a married individual, died in the current year with a gross estate valued at $12.6 million. 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. Which one of the following is a postmortem election that can 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 Class 17 Question 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, the most appropriate gifting strategy for Robin is to 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 give Chelsey a Crummey power to withdraw limited to the greater of 5% of each contribution or $5,000 Class 17 Question 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. Class 17 Question 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 Class 17 Question 15 Solution GE Sole Property TBE Property GPOA Property JTWROS Property Total Deductions Debt TBE Property Debt JTWROS Prop. F&A and State Taxes Charitable Deduction Marital Deduction Total Deductions Taxable Estate $4,800,000 $ 500,000 $ 300,000 $ 2,000,000 $7,600,000 $ 100,000 $ 500,000 $ 300,000 $ 500,000 $ 500,000 ($1,900,000) $5,700,000 Class 17 Question 15 Solution Adjusted Taxable Gifts Tax Base Tentative Tax Lower Bracket Amt. Tax on Lower Amt. Excess Amt. Tax Rate on Excess Tax on Excess Amt. Total Tentative Credit Net ET Due $ 0000 $5,700,000 $ 1,000,000 $4,700,000 40% Tax $ 345,800 $1,880,000 $2,225,800 ($2,117,800) $ 108,000 Class 17 Question 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. Class 17 Question 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. Class 17 Question 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. Class 17 Question 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 a marital deduction if an estate tax is in effect at her death • 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 Class 17 Question 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 Chart for Question 20 Daughter Son Wife Charity Total Cumulative Taxable Gifts 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 Cumulative Tax Class 17 Question 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. b. c. d. a a a a charitable charitable charitable charitable pooled income fund remainder annuity trust lead unitrust remainder unitrust Class 17 Question 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. Class 17 Question 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 use his gift tax applicable credit amount on any transfer • to avoid probate • to share income with any co-owner(s) 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 Class 17 Question 24 Your client has the following goals: • to eliminate inclusion of any value of a life insurance policy on his life from his or his wife’s estates • 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 CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Estate Planning Final Review Questions Class 17 End of Slides ©2015, College for Financial Planning, all rights reserved.