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12 Cards in this Set

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Joyce's gross estate was $1,000,000. Her funeral costs were $16,000. She left $20,000 to charity and $14,000 to a community hospital. Total amount of home mortgage (owned in JTWROS with her spouse) was $100,000. The home was valued at $200,000. She had personal consumer debt of $15,000. Her spouse was her personal representative and waived his fees. She left $260,000 in cash outright to her spouse. What is her taxable estate?



A. $525,000


B. $539,000


C. $575,000


D. $589,000

The correct answer is "C."



AGE: $1,000,000 - $16,000 (admin cost) - $50,000 (1/2 debt from the mortgage) - $15,000 (credit card debt) = $919,000Taxable Estate: $919,000 - $310,000 (marital deduction) - $34,000 (charitable deduction) = $575,000The maritable deduction is calculated as follows:The total amount of the home is $200,000 therefore her portion would be $100,000. If the debt is $100,000 then her portion is $50,000. So she would be leaving $100,000 - $50,000 = $50,000 to the spouse for the home. So total marital deduction is $260,000 + $50,000 = $310,000.

Before her death, Karston Williams, age 74 gave her three grandchildren some money for their private school education. She paid $15,000 to the school for Jack's tuition and gave the same amount of money to Sienna and Nancy. What would be the adjusted taxable gifts calculated in her estate assuming she had made no previous taxable gifts and that she died this year?



A. $0


B. $2,000


C. $3,000


D. $28,000

The correct answer is "B."



The amount of tuition paid directly to the institution is a qualified transfer not subject to the gift tax regime, but the $15,000 given directly to each of her other two grandchildren represents an excess of $1,000 each above the $14,000 per person annual exclusion allowance.

Harry died this year. Which of the following property items are included in his gross estate?

I. His rings and watches, valued at more than $45,000.


II. Cash of $250,000 that he gave to a friend in 2008. No gift tax was paid on this transfer.


III. Stock that Harry purchased and held with his brother in a joint tenancy with right of survivorship.




A. I and III only.


B. II and III only.


C. I only.


D. I, II and III.

The correct answer is "A."



Both statements "I" and "III" are includible in the gross estate. Statement "II" is not included in the gross estate because it was a completed gift, but to the extent it was a taxable gift it would be included in the adjusted taxable estate.

Horatio dies during the current year while holding a note receivable from Bill for $250,000. All of the following items surrounding the note could directly impact the valuation of his estate with the exception of which one?



A. The maturity date of the note.


B. The note is forgiven in Horatio's will.


C. The interest rate of the note.


D. Bill's financial health.

The correct answer is "B."



The note must be included in the gross estate at the fair value of the note. A long time to maturity, accrued interest, and a rate below market affect note valuation for estate purposes, thus estate valuation. Also, if Bill is in poor financial health the note may be discounted, directly impacting the value of Horatio’s estate. Forgiveness of the note itself, however, does not impact the value of the note to the estate. The note will be included for estate tax purposes even if it is forgiven at death.

Which of the following functional roles may be commonly simultaneously filled by the same person(s) in respect to a grantor trust.



I. Grantor.


II. Trustee.


III. Successor Trustee.


IV. Beneficiary.




A. I, II and IV only.


B. I and IV only.


C. I, II, III, and IV.


D. I and II only.

The correct answer is "A."



A grantor trust provides inclusion of trust assets in grantor's estate; therefore, a trust grantor (Statement "I") can also be the beneficiary (Statement "IV") of the trust, as well as the trustee. If the grantor is the trustee, he or she cannot be the successor trustee, a successor trustee only operates after original trustee can no longer serve.

Devon Wright asked if you could help him structure an irrevocable trust. His ultimate goal is to remove the trust corpus from his gross estate while still reporting the income taxes on any income generated by the trust during his life. His best choice of trust to accomplish this is?



A. A Chapter 14 Trust.


B. A Defective Grantor Trust.


C. A Crummey Trust.


D. A Bypass Trust.


E. A GRAT.

The correct answer is "B."



There is no such thing as a Chapter 14 Trust. Crummey is a provision or power to withdraw from a trust. A Bypass trust is used in marital estate planning. A grantor trust is subject to income tax to the grantor. A defective grantor trust is treated as a grantor trust for income tax purposes but as a completed gift for gift and estate tax purposes.

Which of the following statement(s) concerning the choice of a stock redemption (entity agreement) versus a cross-purchase partnership buy-sell agreement funded with insurance is FALSE?



A. The use of existing insurance to fund the agreement causes a transfer-for-value problem if an entity agreement is selected, but does NOT cause this problem if a cross-purchase approach is used.


B. A cross-purchase should be selected if the surviving partners expect to sell their business interest during their lifetimes.


C. An entity approach may solve the affordability problem if one partner is significantly older than the others.


D. An entity agreement becomes more desirable as the number of partners included in the agreement increases.

The correct answer is "A."



Transfer-for-value problems can be created if existing policies are transferred between shareholders of a corporation in a cross-purchase agreement.

Which of the following does NOT relate to a will?



A. A Codicil.


B. A Devisee.


C. A Legatee.


D. None of the choices.

The correct answer is "D."



A Codicil is a document used to alter a will. A Devisee is a gift of real property through a will. A Legatee is a person who inherits property under the will.

Suzanne York has a personal residence that she wants to pass to her children upon her death. Rather than waiting, she gives the children the home with the stipulation that she can continue to live in the home for the rest of her life. What best describes the transaction?



A. A reversionary interest.


B. A life interest.


C. A term interest.


D. A remainder interest.

The correct answer is "D."



She has made a gift with a remainder interest. Reversionary interest would have the home ownership returning to her. A life interest would be a controlling interest for life, and term interest would be a limited time.

Your client, Dennis and Daughter, Inc. (often referred to as DAD by the assuming owners) is a C corporation with gross receipts of $3,000,000 for the past four years. The net earnings to the firm for the most recent fiscal year were $120,000. There are two shareholders, Dennis and his daughter, Denise. They have recently had an outside consultant perform a valuation of the firm using the capitalization method and a .10 capitalization rate. Based on this information, Dennis and Denise have decided to implement a buy-sell agreement. Using the above information, answer the following question.Which of the following is true for Dennis and Daughter, Inc. (DAD) as it applies to a stock redemption plan, assuming Denise passes away first?

I. DAD does not qualify for the "small corporation" exemption.


II. When DAD redeems the stock from Denise's estate, there is potential dividend treatment because Dennis is a beneficiary of Denise's estate.


III. DAD shares owned by Denise are considered owned by Dennis, as well, under the rules of attribution.


IV. The life insurance purchased to fund the buy-sell agreement will trigger the Alternative Minimum Tax (AMT) for DAD.


V. The life insurance policy owned by DAD on Dennis' life no longer needs to fund a stock redemption due to Denise's passing, and can be purchased by Dennis without negative income tax implications under the transfer for value rule.




A. I, III and IV only.


B. II, III and IV only.


C. II and V only.


D. II, III and V only.

The correct answer is "D."
DAD does qualify for the small business exemption to AMT, so the life insurance won't trigger AMT.
Your client has asked you to assist her in structuring her estate plan. You tell her that though you are not an attorney, you will do what you can. Which parts of the process are appropriate actions that can be completed without the aid of an attorney?



I. Advising the client to make her revocable trust irrevocable.


II. Calculating the value of the client’s probate estate.


III. Advising the client on the need for diversification in her investment portfolio.


IV. Advising the client that title of assets would be better as community property.


V. Explaining the strategic use of the annual gift tax exclusion.




A. I, III and V only.


B. II, III and V only.


C. III and IV only.


D. III only.


E. I, II, III, IV and V.

The correct answer is "B."



The client is looking for advice in areas that involve the practice of law. This would include "selecting the type of trust," especially in a case when ownership is surrendered and in a case where property titling is involved. Advising on investments, estimating values and explaining the working of a tax do not constitute the unauthorized practice of law.

Your client, Dennis and Daughter, Inc. (often referred to as DAD by the owners) is a C corporation with gross receipts of $3,000,000 for the past four years. The net earnings to the firm for the most recent fiscal year were $120,000. There are two shareholders, Dennis and his daughter, Denise. They have recently had an outside consultant perform a valuation of the firm using the capitalization method and a .10 capitalization rate. Based on this information, Dennis and Denise have decided to execute a buy-sell agreement. Using the above information, answer the following question.All the following would be true in a cross-purchase plan, if Dennis passed away first, EXCEPT:



A. Life insurance owned by Denise will not be included in Dennis' probate estate.


B. Life insurance and/or disability insurance premiums to fund the agreement are tax deductible as an ordinary business expense.


C. Denise would receive an increased cost basis in Dennis' stock equal to the amount paid to redeem the shares from Dennis' estate.


D. The transaction side-steps the entity and thus avoids constructive dividend concerns.

The correct answer is "B."



Insurance premiums to fund buy-sell agreements in a cross-purchase plan are not tax deductible. In the case of an entity agreement, where the firm owns the policies, the premium would also NOT be tax deductible.