Deck 19: Family Tax Planning

Question 1

In arriving at the valuation of assets for estate tax purposes,the location of the property is disregarded.

Answer 1

False

Question 2

At the time of his death,Fred held some notes receivable for loans he made to his two daughters and the payment of which he forgives in his will.The amount to be included in Fred's gross estate as to these notes is not affected by his forgiveness.

Answer 2

True

Question 3

The recapture of special use valuation estate tax savings could have income tax implications.

Answer 3

True

Question 4

A recapture of special use valuation will not occur if a qualified heir ceases to use the property for farming purposes but does not otherwise dispose of it.

Question 5

Al creates a trust,income payable to John (age 18)for 8 years,remainder to Carol (age 36).In determining the value of Carol's interest,use the multiple provided in the tables for an 8-year term certain income interest.

Question 6

One of the objectives of family tax planning is to minimize gift and estate taxes on transfers of property within the family unit.

Question 7

If a decedent's household goods are sold through public auction,the price received should be the valuation used for Federal estate tax purposes.

Question 8

A farm has a best use valuation of $1.5 million and a current use valuation of $1 million.If § 2032A is elected,the farm can be valued in the deceased owner's gross estate at $1 million.

Question 9

One way to dispute the existence of large goodwill is to argue that the decedent was not a key person in the operation of the business.

Question 10

Any recapture of special use valuation estate tax savings will be imposed on the qualified heir.

Question 11

If a stock redemption is to be carried out,an entity type of buy and sell agreement must be involved.

Question 12

One of the advantages of an estate freeze is that the common stock is not included in the gross estate of the donor.

Question 13

In valuing a life insurance policy that has not matured (i.e. ,the insured is still alive),it makes a difference whether the policy is paid up.

Question 14

At the time of his death,Rex owned an RV.For valuation purposes,the RV should be included in his gross estate at the price a dealer in RVs would pay for the property.

Question 15

Application of the blockage rule has not been limited to just the valuation of stocks and bonds.

Question 16

Commercial annuity contracts must be valued using the tables issued by the IRS.

Question 17

When stock in a corporation is not traded,a discount for lack of marketability may be available.

Question 18

A discount for valuation purposes is allowed when the stock involved represents a minority interest.

Question 19

A qualifying heir can make the § 2032A special valuation election even if he is not sure that he will keep the property for the full 10 years.

Question 20

Edgar creates a trust,life estate to Connie (age 46),remainder to Gene (age 18).In determining the value of the life estate,use the multiple given in the IRS valuation table for a person age 18.

Question 21

Richard and Marie are joint tenants in a tract of land.Upon Richard's prior death,Marie's income tax basis in the land will not change.

Question 22

The Hunters make gifts of appreciated securities to their dependent daughter (age 20)and son (age 21),neither of which is a student.If the children sell the securities shortly thereafter,the kiddie tax will not apply to tax the gain at the parents' tax rate.

Question 23

Leonard inherits a traditional IRA from his father.Leonard may roll over the IRA into his own and defer any distribution from it until age 70 1/2.

Question 24

Brad and Heather are husband and wife and live in New Mexico.Under Brad's will,his share of the community property passes to the children.Upon Brad's prior death,there will be no change in Heather's income tax basis in her half of the community property.

Question 25

Passing installment notes by death will avoid any income tax on the deferred gain.

Question 26

Jim makes a gift of property (basis of $800,000;fair market value of $600,000)to his wife,Molly.Six months later Molly dies,and under her will,the property (now worth $700,000)returns to Jim.Jim's income tax basis in the property now is $800,000.

Question 27

If depreciable property is passed by death,recapture potential carries over to the heir.

Question 28

In an estate freeze,the preferred stock is taxed twice-first upon the gift,and second when the donor dies.

Question 29

If depreciable property is transferred by gift,any recapture potential carries over to the donee.

Question 30

Under Cindy's will,her share of their community property passes to Van,her surviving spouse.Cindy's property is not subject to probate.

Question 31

When carrying out an estate freeze with family limited partnerships,the donors make gifts of the general partnership interests but retain the limited partnership interests.

Question 32

The special use valuation method of § 2032A is not available for valuing transfers by gift.

Question 33

Harvey owns a certificate of deposit listed as: "Harvey,payable on proof of death to April." On Harvey's prior death,the CD is not subject to probate.

Question 34

A gift of installment notes causes any deferred gross profit on the notes to be taxed to the donees.

Question 35

If a traditional IRA is subject to both estate and income taxes,a withdrawal by the heir constitutes income in respect of a decedent (IRD).

Question 36

As to property received as a gift,a donee's income tax basis for gain or loss is the same.

Question 37

The election by an estate of § 2032A (special use valuation as to real estate)or § 2032 (the alternate valuation date)will have an effect on the income tax basis of the property received by the heirs.

Question 38

Two years prior to death,a decedent makes a gift of an insurance policy on his life.In testing for the percentage requirements of the special use valuation method (i.e. ,§ 2032A),the life insurance policy is considered.

Question 39

A donee's income tax basis in property received as a gift will include any gift tax paid by the donor.

Question 40

Audrey made taxable gifts of cash in 2005 and 2008 and paid a gift tax for each transfer.If she dies in 2009,only the gift tax on the 2008 gift is included in her gross estate.

Question 41

The deferral approach to the estate tax marital deduction (as opposed to the equalization approach)is advisable if the surviving spouse is in good health and has few assets.

Question 42

A decedent owned 25% of the voting stock of Siskin Corporation.Siskin has 53 shareholders.The decedent's estate cannot qualify for the § 6166 election.

Question 43

At the time of her death in 2009,Corinne owned stock in Gray Corporation.The stock is traded on a local exchange with the most recent selling prices as follows.

Presuming no alternate valuation date election,Corinne's gross estate should include a per share value of:

A)$108.
B)$110.
C)$112.
D)$120.
E)None of the above.

Question 44

Because of the estate tax deduction,a testamentary bequest to charity is preferable to a lifetime transfer.

Question 45

Which,if any,of the following statements reflects the correct tax valuation rules?

A)The value of a note receivable is its face amount.
B)The geographical location of the property is relevant.
C)Sentimental value should be considered.
D)Values listed in the classified section of the newspaper are not representative.
E)None of the above.

Question 46

Paula owns an insurance policy on her life payable to her estate.On Paula's death,the insurance proceeds are included in her gross estate but not her probate estate.

Question 47

Which of the following independent statements correctly reflects the valuation rules applicable to estate and gift taxes?

A)In valuing an annuity issued by Prudential Insurance Company,use the tables issued by the IRS.
B)In valuing an unmatured life insurance policy on which no further premiums need be paid,use the policy's interpolated terminal reserve amount.
C)In valuing a note receivable,the issuer's bankruptcy should not be taken into account.
D)In valuing a used car,use the trade-in value offered by a dealership as a down payment on a new model.
E)None of the above statements is correct.

Question 48

Which,if any,of the following factors should reduce the value of a note receivable included in the gross estate of the holder?

A)The interest rate provided for is 9%.
B)The note is payable on demand.
C)The note is not supported by collateral.
D)The note is forgiven by the decedent's will.
E)None of the above.

Question 49

Herbert leaves one-half of his estate to his wife,Ramona,and the remainder to a qualified charity.Herbert's estate taxes would be reduced if Ramona disclaims her interest in favor of the charity.

Question 50

Cost and time are usually saved by passing ownership to out-of-state real estate by gift rather than by death.

Question 51

In satisfying the more-than-35% test for qualification under § 6166,interests in multiple closely held businesses are aggregated when the decedent's gross estate includes 20% or more of the value of each such business.

Question 52

Ramon sells a parcel of land (basis of $100,000;fair market value of $300,000)to his church.As long as the selling price does not exceed $100,000,Ramon recognizes no gain on the sale.

Question 53

Derrick dies,and under the terms of his will,all of his property passes outright to Dion (Derrick's surviving wife).Under these circumstances,there is no need for Derrick's executor to make a QTIP election.

Question 54

Under proper circumstances,a disclaimer by an heir may increase the charitable deduction allowed a decedent.

Question 55

A disclaimer by a surviving spouse may not generate additional estate tax even though it reduces the amount of marital deduction allowed.

Question 56

In satisfying the more-than-35% test of § 6166 (i.e. ,extended estate tax payment schedule relative to an interest in a closely held business),some prior gifts the decedent may have made must be considered.

Question 57

Several years ago,Tad purchased land listing ownership as "Tad,Ellen,and Kay,equal tenants in common." In the current year,Kay dies first.None of the value of the land is included in Kay's probate estate.

Question 58

Mitzi dies in 2009 owning assets of $7 million.Under her will,$3.5 million passes to her children and the balance to her husband.Presuming Mitzi never made any taxable gifts during her lifetime,no estate tax results from Mitzi's death.

Question 59

If § 6166 applies,a 2% rate of interest applies to the full amount of the estate tax value as to which the estate tax is deferred.

Question 60

For the IRS to grant a discretionary extension of time to pay estate taxes (under § 6161),the executor must show that the estate would otherwise undergo undue hardship.

Question 61

Sam and Lucinda are husband and wife and have always lived in a community property state.At the time of Lucinda's prior death,part of their community property includes:

Under Lucinda's will,all of her property passes to Sam.After Lucinda's death,Sam's income tax basis in this property is:

A)$3,500,000.
B)$4,000,000.
C)$5,000,000.
D)$7,000,000.
E)$8,000,000.

Question 62

At the time of his death,Harvey was a shareholder in Grebe Corporation.In valuing the Grebe stock included in Harvey's gross estate,the IRS contends that the corporation possessed considerable goodwill.In disputing this contention,which of the following point(s)is/are relevant?

A)To provide financing,Grebe has been obtaining its working capital from the shareholders at a below market rate of interest.
B)The rate of return used by the IRS for the type of business involved is too high.
C)Average net profit figures do not include large losses from unrelated investments.
D)Harvey was not an employee of Grebe but was merely a passive investor.
E)None of the above.

Question 63

Which,if any,of the following statements correctly reflects the operational rules under § 2032A ("special use" valuation)?

A)The § 2032A election is not available for gift tax situations.
B)The § 2032A election permits the valuation of qualifying property at its "most suitable" use value.
C)In meeting the 50% test and 25% test,the qualifying property is considered at its "current" use value.
D)If § 2032A is elected,only a sale of the qualifying property within the next 10 years will cause recapture.
E)None of the above.

Question 64

In a typical estate freeze involving family limited partnerships established by parents for their children:

A)By gift,the parents transfer interests as general partners,retaining the limited partnership interests.
B)By gift,the parents transfer limited partnership interests,retaining the general partner interests.
C)The interests transferred to the children involve the control of the business.
D)As to the interests passing to the children,large discounts are claimed due to the blockage factor.
E)None of the above.

Question 65

In 1986,Jude,a resident of New Jersey,purchases realty for $500,000 listing title as "Jude and Ben,joint tenants with right of survivorship." In 2009,Jude predeceases Ben when the realty is worth $2,000,000.Ben's income tax basis in the property is:

A)$250,000.
B)$1,000,000.
C)$1,250,000.
D)$2,250,000.
E)None of the above.

Question 66

Which statement is correct concerning the rules governing the application of § 2032A ("special use" valuation)?

A)The qualifying property subject to the election must include only real property.
B)The qualifying heir of the property need not be a family member of the decedent.
C)The election is available to the qualifying heir even if the decedent merely held the farm as an investment.
D)In the event of recapture,the additional estate taxes are imposed on the qualifyng heir.
E)No correct answer is given above.

Question 67

Which,if any,are characteristics of the valuation tables issued by the IRS?

A)The IRS must issue new updated tables once a year.
B)To determine the factor for a remainder interest,subtract the life estate factor provided in the table from one.
C)The same table that provides the factor for a life estate can be used to determine the value of an income interest for a term certain.
D)To use the tables,the Federal interest rate for the month of the transfer must be known.
E)None of the above.

Question 68

In 2009,Valerie made a gift of stock (basis of $113,000;fair market value of $413,000)to her grandson,Ryan.As a result of the transfer,Valerie paid a gift tax of $20,000.Ryan's income tax basis in the stock is:

A)$118,000 for gain or loss.
B)$128,000 for gain and $113,000 for loss.
C)$128,000 for gain or loss.
D)$133,000 for gain or loss.
E)None of the above.

Question 69

To prove successful in freezing the value of an interest in a family limited partnership (FLP),which,if any,of the following techniques is desirable?

A)The FLP should be created just prior to death to avoid the appearance of being tax motivated.
B)The FLP should be largely funded with personal assets (e.g. ,personal residence).
C)When valuing the FLP interest,apply a large discount,to provide a safety zone for later bargaining with the IRS.
D)Appraisals of the assets transferred to the FLP should be avoided,as they tend to limit the size of any discount claimed.
E)None of the above.

Question 70

Which factor does not decrease the value of a gross estate?

A)The election of § 2032 (alternate valuation date).
B)The election of § 2032A (special use valuation).
C)Stock involved represented a minority interest in a closely held corporation.
D)Stock owned by the decedent who was the founder and key executive of a closely held corporation.
E)None of the above.

Question 71

Pam makes a gift of land (basis of $313,000;fair market value of $913,000)to her granddaughter,Tracy.As a result of the transfer,Pam paid a gift tax of $45,000.Tracy's income tax basis in the land is:

A)$343,000 if the gift was made after 1976.
B)$358,000 if the gift was made after 1976.
C)$328,000 if the gift was made after 1976.
D)$313,000 if the gift was made before 1977.
E)None of the above.

Question 72

In 2009,Arlene makes a gift of stock (basis of $813,000;fair market value of $413,000)to her mother,Elizabeth.As a result of the transfer,Arlene paid a gift tax of $60,000.Elizabeth's income tax basis in the stock is:

A)$413,000 basis for gain and loss.
B)$443,000 basis for gain and loss.
C)$813,000 basis for gain and loss.
D)$843,000 basis for gain and loss.
E)None of the above.

Question 73

Which,if any,of the following statements properly characterize features involving buy-sell agreements?

A)Agreements cannot be used to control disposition of partnership interests.
B)If properly structured,the agreements can control valuation for estate tax purposes.
C)If a stock redemption is proposed,utilize a cross-purchase type.
D)Arrangements work best when the interest to be transferred involves publicly traded securities.
E)None of the above.

Question 74

At the time of Rick's death,he owned 70% of the stock in Robin Corporation,a closely held family business.Over the past five years,Robin has averaged annual profits of $400,000 in an industry where the usual rate of return is 9%.If the book value of the corporation's assets is $1,000,000 and goodwill exists,what might be a realistic value of the stock in Rick's gross estate?

A)$1,785,000.
B)$2,550,000.
C)$1,550,000.
D)$310,000.
E)None of the above.

Question 75

The election of § 2032 (alternate valuation date)for estate tax purposes:

A)Reduces the basis of all assets included in the decedent's estate.
B)Has no effect on the basis of the assets belonging to the surviving spouse's share of the community property.
C)Means that some assets may end up having a higher income tax basis than their date of death value.
D)Has no effect on income tax basis if the executor chooses not to make the election.
E)Choices c.and d.but not choices a.and b.

Question 76

With respect to a stock interest in a closely held corporation,which,if any,of the following factors work to increase the gross estate value of the interest?

A)The stock is not marketable.
B)A majority interest is involved.
C)The profits of the business are less than the industry average.
D)The blockage rule applies.
E)None of the above.

Question 77

Dustin owns all of the stock of Gold Corporation which includes both common and preferred shares.The preferred stock is noncumulative,has no redemption date,and possesses no liquidation preference.In 1995,Dustin makes a gift to his adult children of all of the common stock.He dies in 2009 still owning the preferred stock.The value of the Gold stock on the relevant dates is:

One of the tax consequences of this estate freeze is:

A)Dustin's gross estate includes $0 as to the stock.
B)Dustin's gross estate includes $5,000,000 as to the stock.
C)Dustin made a gift of $400,000 in 1995.
D)Dustin made a gift of $3,000,000 in 1995.
E)None of the above is correct.

Question 78

Which,if any,of the items listed below are valid factors utilized in valuing the stock in a closely held corporation?

A)The company's dividend-paying capacity.
B)The nature of the business.
C)The history of the company since its inception.
D)The book value of the stock.
E)All of the above.

Question 79

In 2009,Donna's father dies and leaves her the family farm.The farm has a current use value of $4,000,000 and a best use value of $4,500,000.If the § 2032A election is made,the farm should be included in the father's gross estate at a value of:

A)$1,000,000.
B)$3,000,000 ($4,000,000 - $1,000,000).
C)$3,500,000 ($4,500,000 - $1,000,000).
D)$4,000,000.
E)None of the above.

Question 80

In a typical "estate freeze" involving stock:

A)The owner makes a gift of both common and preferred stock.
B)The common stock is subject to the gift tax but not to the estate tax.
C)The preferred stock is subject to the gift tax but not to the estate tax.
D)The common stock is subject to both the gift tax and the estate tax.
E)None of the above.