Question 1

Explain the manner in which stepped-up basis rules are used in estate planning.

Accepted Answer

The basis-or cost-of property acquired from a decedent is the fair market value of the property at the date of the decedent's death or, if elected by the personal representative, the alternative valuation date. This rule, known as the stepped-up basis rule (not available for gifting), offers an extremely valuable estate planning tool. Here is a simplified example to illustrate this point.
Several years ago Steve Stahl purchased 1,000 shares of a NASDAQ stock for $10 a share which has now appreciated to $110 a share. Assuming his marginal income tax bracket is 28 percent, if Steve were to sell the stock now he would realize an after-tax profit of $72 per share, plus the $10,000 ($10 x 1,000 shares) by way of cost recovery, or a total sum of $82,000. Assuming an estate tax rate of 35 percent, Steve's heirs will ultimately receive $53,300 (65 percent of $82,000). If, however, Steve keeps the stock until death, the stepped-up basis for that stock will be $110 per share. Estate taxes of 35 percent will consume 35 percent of the total value of $110, so the beneficiaries will receive the net amount of $71,500. Hence, the net savings on this transaction will be $18,200 ($71,500 minus $53,300).

Question 2

John and Betty Clark have been married for six years. This is a second marriage for both. John has a marital trust but is fearful that after his death his assets will not reach his children. John is asking you to help him.

Accepted Answer

John needs a QTIP Trust which will permit John (through the trust agreement) to control the distribution of assets.

Question 3

What is a Crummey Trust, and how does it function?

Accepted Answer

The Crummey Trust is a popular device used in making gifts that qualify for the $14,000/$28,000 (2016) annual exclusion from gift tax. The Crummey Trust takes its name from a court case upholding this type of trust and supporting its tax benefits. Each time a contribution is made into a Crummey Trust, the temporary right to withdraw from the trust is made available to the beneficiaries. If the demand right is not exercised, the annual transfer for that year remains in the trust for management by the trustee. Because the right of withdrawal is not usually exercised, a Crummey Trust may be used to have the trustee use the funds for some special purpose desired by both the trust grantor and the beneficiaries. Paying premiums on life insurance on the life of the grantor is its typical use. When the grantor (insured) dies, the insurance proceeds are used to provide benefits to the surviving spouse, the children, and the grandchildren. When both spouses have died, the insurance proceeds can then be used to pay the federal estate taxes that might be due at that time.

Question 4

Drew and Jan Peterson firmly believe that because of several disadvantages associated with joint ownership, they should avoid joint ownership entirely. How can you convince them that their thinking needs revision?

Accepted Answer

The answer of Drew and Jan Peterson firmly believe that...

Question 5

What are the key advantages of joint ownership?

Accepted Answer

The answer of What are the key advantages of joint...

Question 6

What is a marital trust? How is it used in estate planning?

Accepted Answer

The answer of What is a marital trust? How is...

Question 7

Ken Grange has asked you to explain some planning ideas involving gifts. What ideas would you explain in this context?

Accepted Answer

The answer of Ken Grange has asked you to explain...

Question 8

Summarize the rules governing lifetime gifts.

Accepted Answer

The answer of Summarize the rules governing lifetime gifts....

Question 9

What is a bypass trust? How is it used in estate planning?

Accepted Answer

The answer of What is a bypass trust? How is...

Question 10

Explain the purpose and method of establishing a wealth replacement trust.

Accepted Answer

The answer of Explain the purpose and method of establishing...

Question 11

Tony Quinn has just received a sophisticated estate plan from his attorney. Tony wants you to review the plan because he has an uneasy feeling about the lack of liquidity of his estate. Can you help?

Accepted Answer

The answer of Tony Quinn has just received a sophisticated...

Question 12

What is a revocable trust? How is it used in estate planning?

Accepted Answer

The answer of What is a revocable trust? How is...

Question 13

What are the key disadvantages of joint ownership?

Accepted Answer

The answer of What are the key disadvantages of joint...

Question 14

Explain the essential features of a QTIP Trust.

Accepted Answer

The answer of Explain the essential features of a QTIP...

Question 15

What is an irrevocable living trust? Are there advantages in creating such a trust?

Accepted Answer

The answer of What is an irrevocable living trust? Are...

Question 16

Robert Redman is a person of modest means. Upon his death, including life insurance proceeds and pension distribution, his estate will approximate a little over $400,000. An estate planning attorney has recommended a sophisticated estate plan for him at a cost of $3,000. Robert wonders if the attorney's advice is sound. What do you think?

Accepted Answer

The answer of Robert Redman is a person of modest...

Question 17

What is a family limited partnership? Describe some advantages and disadvantages of such a partnership.

Accepted Answer

The answer of What is a family limited partnership? Describe...

Question 18

The unified credit and unlimited marital deduction:

Accepted Answer

The answer of The unified credit and unlimited marital deduction:
...

Question 19

Describe the term "Power of Attorney." Explain some of its uses in financial planning.

Accepted Answer

The answer of Describe the term "Power of Attorney." Explain...

Question 20

Explain the use of marital deduction in estate planning.

Accepted Answer

The answer of Explain the use of marital deduction in...

Quiz 16: Estate Planning: Concepts and Strategies