Deck 19: Family Tax Planning

Question 1

A farm has a best-use valuation of $3 million and a current use valuation of $1.2 million. If death occurs in 2019 and
§ 2032A is elected, the farm can be valued in the deceased owner's gross estate at $1.2 million.

Answer 1

False

Question 2

At the time of his death, Fred held some notes receivable for loans he made to his two daughters, 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

Noncommercial annuity contracts should be valued using the tables issued by the IRS.

Answer 3

True

Question 4

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

Question 5

Doug inherited his mother's bedroom furniture worth $3,000. For sentimental reasons, Martha, the daughter, pays
Doug $3,500 for the furniture. The furniture should be included in the mother's gross estate at $3,500.

Question 6

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 7

A farm has a best-use valuation of $2.9 million and a current use valuation of $2 million. If § 2032A is elected, the farm can be valued in the deceased owner's gross estate at $2 million.

Question 8

Natalie creates a trust, income payable to Ava age 12) for 10 years, remainder to Samantha age 32). In determining the value of these two gifts i.e., income interest for a term certain and a remainder interest), use of more than one IRS valuation table will be necessary.

Question 9

Funding an entity type of buy-sell agreement with life insurance requires fewer policies than in the case of the cross- purchase type.

Question 10

Any recapture of special use valuation estate tax savings is imposed on the executor of the estate.

Question 11

Eight months after Noah died, Audrey sold stock that she inherited from him. If the stock was sold for less than its value on the date of Noah's death, Audrey has a short-term capital loss.

Question 12

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 13

The election of special use valuation estate tax savings has income tax implications.

Question 14

Buy-sell agreements can be used to help solve the estate tax valuation and liquidity problems involved in the transfer by death of an interest in a small business.

Question 15

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 16

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

Question 17

Application of the blockage rule has not been limited to just the valuation of stocks and securities; it has been applied to other assets.

Question 18

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 19

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

Question 20

As to property received as a gift, a donee's income tax basis for gain or loss may not be the same.

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 does not change.

Question 22

Taj leaves one-half of his estate to his wife, Ramona, and the remainder to a qualified charity. Taj's estate taxes are not reduced if Ramona disclaims her interest in favor of the charity.

Question 23

The special use valuation method of § 2032A is available for valuing transfers by gift.

Question 24

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 25

In satisfying the more-than-35% test for qualification, 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 26

Jacob makes a gift of property basis of $100,000; fair market value of $500,000) to his aunt, Mary. Ten months later and when the property is worth $550,000, Mary dies. Under Mary's will, the property passes to Isabella Jacob's wife). Isabella's basis in the property is $550,000.

Question 27

For deaths in 2019, it is possible for a surviving spouse to receive an additional bypass amount of as much as $11.4 million.

Question 28

By maximizing the marital deduction, any estate tax is postponed until the death of the surviving spouse, an advantage in present value terms.

Question 29

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 a change in her income tax basis in her half of the community property.

Question 30

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

Question 31

Rick and Gail are equal tenants in common in real estate. Upon Gail's prior death, Rick's basis in the real estate does not change.

Question 32

The election by an estate of special use valuation as to real estate or the alternate valuation date will have no effect on the income tax basis of the property received by the heirs.

Question 33

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 34

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

Question 35

A disclaimer by a surviving spouse will generate additional estate tax because it reduces the amount of marital deduction allowed.

Question 36

Passing installment notes by death will not avoid any income tax on the deferred gain.

Question 37

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

Question 38

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

Question 39

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

Question 40

A decedent owned 25% of the voting stock of Siskin Corporation, which has 53 shareholders. The decedent's estate cannot elect the deferral of estate tax payments.

Question 41

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

A) Amounts listed in the classified section of the newspaper are not representative of the value of tangible personalty.
B) The value of a note receivable is its face amount.
C) Sentimental value should not be considered.
D) The geographical location of the property is not relevant.

Question 42

Which, if any, of the following statements correctly reflects the operational rules under "special use" valuation?

A) The election is available for gift tax situations.
B) The election permits the valuation of qualifying property at its "most suitable" use value.
C) In meeting the 50% test, the qualifying property is considered at its "special" use value.
D) If the election is made, a sale of the qualifying property within the next 10 years will cause recapture.

Question 43

Mia, a resident of New Jersey, purchases realty for $600,000 listing title as "Mia and Ella, joint tenants with right of survivorship." Mia predeceases Ella when the realty is worth $3,000,000. Ella's income tax basis in the property is:

A) $-0-.
B) $300,000.
C) $1,800,000.
D) $3,000,000.
E) $3,300,000.

Question 44

At the time of Elijah's death, he owned stock in Grey Corporation. The stock is traded on a local exchange with the most recent selling prices as follows.
Per Share
Price
Four trading days prior to Elijah's death $120
Six trading days after Elijah's death 100
Presuming no alternate valuation date election, Elijah's gross estate should include a per share value of:
a. $108.
b. $110.
c. $112.
d. $120.

Question 45

A cross-purchase type of buy-sell agreement is suggested when:

A) The business is a partnership.
B) The business is a corporation.
C) The business has relatively few owners.
D) The business has a large number of owners.

Question 46

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

A) Average net profit figures include large gains from unrelated investments.
B) The rate of return used by the IRS for the type of business involved is too high.
C) Jye was not an employee of Grebe but was merely a passive investor.
D) To provide financing, Grebe has been obtaining its working capital from banks at a market rate of interest.

Question 47

With respect to a stock interest in a closely held corporation, which, if any, of the following works 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.

Question 48

In 2019, 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 special use valuation election is made, the farm should be included in the father's gross estate at a value of:

A) $1,140,000.
B) $2,840,000 $4,000,000 - $1,160,000).
C) $3,340,000 $4,500,000 - $1,160,000).
D) $4,000,000.

Question 49

A special-use valuation election offers the estate:

A) An advantage in terms of the time value of money.
B) A disadvantage in terms of the time value of money.
C) An extension of the due date of the Form 706.
D) A means to deduct a realized loss on real estate.

Question 50

Liam and Isla are husband and wife and have always lived in a community property state. At the time of Isla's prior death, part of their community property includes: $$\begin{array} { c c } &\text { Adjusted } & \text { Fair Market } \\&\text { Basis } & \text { Value } \\\text { Stock in Scarlet Corporation }&\$ 2,000,000 & \$ 1,000,000 \\\text { Apartment building }&3,000,000 & 6,000,000\end{array}$$ Under Isla's will, all of her property passes to Liam. After Isla's death, Liam's income tax basis in these properties is:

A) $2,500,000.
B) $3,500,000.
C) $7,000,000.
D) $8,000,000.

Question 51

At the time of Addison'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 typical after-tax 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 Addison's gross estate?

A) $310,000
B) $1,550,000
C) $1,785,000
D) $2,550,000

Question 52

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

A) In valuing an annuity issued by Prospective Insurance Company, use the tables issued by the IRS.
B) In valuing an unmatured life insurance policy on which further premiums need to be paid, use the policy's replacement value.
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.

Question 53

Concerning the estate tax valuation of a closely held business:

A) Good tax planning argues against any lifetime gifts of ownership interests to other parties.
B) Good tax planning strives for a measure of certainty in the valuation if an IRS audit occurs.
C) IRS appraisers will determine the estate tax valuation.
D) Appraisers for the decedent will determine the estate tax valuation.

Question 54

Eric, age 80, has accumulated about $6 million in net assets. Among his assets are the following marketable securities held as investments. $$\begin{array} { l c c } & \text { Basis } & \text { FMV } \\\text { Cardinal Corporation stock } & \$ 200,000 & \$ 250,000 \\\text { Crane Corporation stock } & 300,000 & 250,000 \\\text { Hawk Corporation stock } & 50,000 & 250,000\end{array}$$ Eric would like to donate either by lifetime or testamentary transfer) $250,000 in value to his church. In addition, to consummate a land deal, he needs $250,000 in cash. Looking solely at tax considerations and using only the assets described above, Eric's best choice is to:

A) Donate the Crane stock by gift to the church and sell the Hawk stock now.
B) Donate the Hawk stock by death to the church and sell the Cardinal stock now.
C) Donate the Hawk stock by gift to the church and sell the Crane stock now.
D) Donate the Cardinal stock by gift to the church and sell the Hawk stock now.

Question 55

Jude, a resident of New York, purchases realty for $500,000 listing title as "Jude and Tony, joint tenants with right of survivorship." Tony predeceases Jude when the realty is worth $2,000,000. Tony's heirs have an income tax basis in the property of:

A) $-0-.
B) $250,000.
C) $1,000,000.
D) $1,250,000.
E) $2,250,000.

Question 56

An individual's lifetime gifts tend to:

A) Increase the present value of gift and estate tax liabilities.
B) Decrease the present value of gift and estate tax liabilities.
C) Increase the chances of an IRS audit.
D) Increase the frequency of gifts between spouses.

Question 57

Concerning the factors) utilized in valuing the stock in a closely held corporation, which of the following choice is correct?

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 these factors can be utilized.

Question 58

Which, if any, of the following statements properly characterizes buy-sell agreements?

A) If properly structured, the agreements can control valuation for estate tax purposes.
B) If the number of owners is large, utilize a cross-purchase type.
C) Agreements cannot be used to control disposition of partnership interests.
D) Arrangements work best when the interest to be transferred involves publicly traded securities.

Question 59

Curt has owned the following assets for a number of years which he gives to his daughter Carla. No gift tax results. Fair Market
$\begin{array} { c c } &\text { Basis } & \text { Value } \\ \text { Land }&\$ 200,000 & \$ 400,000 \\ \text { Securities }&800,000 & 600,000 \end{array}$ If Carla immediately sells these assets for $1 million $400,000 + $600,000), she recognizes:

A) No gain or loss.
B) A $200,000 LTCG and no loss.
C) A $200,000 STCG and $200,000 STCL.
D) A $200,000 STCG and no loss.
E) A $200,000 LTCG and $200,000 LTCL.

Question 60

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 mid-term interest rate for the month of the transfer must be known.

Question 61

Match each statement with the correct choice. Some choices may be used more than once or not used at all.
a. Use IRS valuation tables b. Blockage rule
c. Special use value
d. Best or most suitable use value e. Cost of going public
f. Replacement cost of a comparable contract
g. Portion of a deceased spouse's share of community property that passes to a surviving spouse h. Cross-purchase buy-sell agreement
i. Entity buy-sell agreement j. Bypass amount
k. No correct choice is given
Valuation of a commercial annuity contract.

Question 62

Match each statement with the correct choice. Some choices may be used more than once or not used at all.
a. Use IRS valuation tables b. Blockage rule
c. Special use value
d. Best or most suitable use value e. Cost of going public
f. Replacement cost of a comparable contract
g. Portion of a deceased spouse's share of community property that passes to a surviving spouse h. Cross-purchase buy-sell agreement
i. Entity buy-sell agreement j. Bypass amount
k. No correct choice is given
Valuation of a life insurance policy that is not paid up.

Question 63

For purposes of the election to defer Federal estate tax payments relative to an interest in a closely held business, an interest in a closely held business does not include:

A) A 16% interest in a partnership that has 36 partners.
B) A 22% interest in a partnership that has 50 partners.
C) A 10% interest in a partnership that has 48 partners.
D) A sole proprietorship.

Question 64

Match each statement with the correct choice. Some choices may be used more than once or not used at all.
a. Use IRS valuation tables b. Blockage rule
c. Special use value
d. Best or most suitable use value e. Cost of going public
f. Replacement cost of a comparable contract
g. Portion of a deceased spouse's share of community property that passes to a surviving spouse h. Cross-purchase buy-sell agreement
i. Entity buy-sell agreement j. Bypass amount
k. No correct choice is given
Discount for lack of marketability as to stock.

Question 65

Charlotte dies with a gross estate of $20 million. Her estate plan probably should:

A) Transfer all of her assets to her husband Trevor, who was one year older than Charlotte.
B) Make asset transfers to the children of Charlotte and Trevor equal to her bypass amount and the remainder to Trevor.
C) Transfer all of Charlotte's assets by will to Local Symphony, Charlotte's favorite charity.
D) Transfer Charlotte's bypass amount to Local Symphony and the rest to the children.

Question 66

Match each statement with the correct choice. Some choices may be used more than once or not used at all.
a. Step-up in basis
b. Step-down in basis
c. Gift of installment notes receivable
d. Gift of property that has potential for recapture of depreciation
e. Donor's basis on date of gift appreciated property given, no gift tax due)
f. The amount of the deceased spouse's taxable estate does not change g. Fair market value on date of gift
h. Expected surviving spouse is in good health and 10 years younger i. No income tax consequences to the beneficiary
j. Income in respect of a decedent IRD)
k. No correct choice is given
A gift will cause income tax consequences to the recipient.

Question 67

Lisa has been widowed three times. Her first husband died in 2011, leaving an unused exclusion amount of $3.5 million. The second husband died in 2013, leaving the entire $5.25 million exclusion amount unused. Lisa's third husband died in 2018 with an unused exclusion amount of $4 million. Lisa's DSUE amount is:

A) $3.5 million.
B) $4 million.
C) $5.25 million.
D) $12.5 million.

Question 68

Which, if any, of the following items characterizes the election to defer Federal estate tax payments relative to an interest in a closely held business?

A) No estate tax due need be paid for the first 5 years.
B) No interest needs to be paid for the first 5 years.
C) In satisfying the more-than-35% test for qualification, all interests in closely held businesses can be aggregated.
D) The 2% rate of interest applies to the total amount of estate tax value.

Question 69

Match each statement with the correct choice. Some choices may be used more than once or not used at all.
a. Use IRS valuation tables b. Blockage rule
c. Special use value
d. Best or most suitable use value e. Cost of going public
f. Replacement cost of a comparable contract
g. Portion of a deceased spouse's share of community property that passes to a surviving spouse h. Cross-purchase buy-sell agreement
i. Entity buy-sell agreement j. Bypass amount
k. No correct choice is given
Valuation of life estate interest created by transfer in trust.

Question 70

Match each statement with the correct choice. Some choices may be used more than once or not used at all.
a. Use IRS valuation tables b. Blockage rule
c. Special use value
d. Best or most suitable use value e. Cost of going public
f. Replacement cost of a comparable contract
g. Portion of a deceased spouse's share of community property that passes to a surviving spouse h. Cross-purchase buy-sell agreement
i. Entity buy-sell agreement j. Bypass amount
k. No correct choice is given
Marital deduction allowed.

Question 71

Match each statement with the correct choice. Some choices may be used more than once or not used at all.
a. Step-up in basis
b. Step-down in basis
c. Gift of installment notes receivable
d. Gift of property that has potential for recapture of depreciation
e. Donor's basis on date of gift appreciated property given, no gift tax due)
f. The amount of the deceased spouse's taxable estate does not change g. Fair market value on date of gift
h. Expected surviving spouse is in good health and 10 years younger i. No income tax consequences to the beneficiary
j. Income in respect of a decedent IRD)
k. No correct choice is given
Decedent owned Roth IRA that has appreciated.

Question 72

Match each statement with the correct choice. Some choices may be used more than once or not used at all.
a. Use IRS valuation tables b. Blockage rule
c. Special use value
d. Best or most suitable use value e. Cost of going public
f. Replacement cost of a comparable contract
g. Portion of a deceased spouse's share of community property that passes to a surviving spouse h. Cross-purchase buy-sell agreement
i. Entity buy-sell agreement j. Bypass amount
k. No correct choice is given
Current use valuation as to certain realty.

Question 73

Match each statement with the correct choice. Some choices may be used more than once or not used at all.
a. Use IRS valuation tables b. Blockage rule
c. Special use value
d. Best or most suitable use value e. Cost of going public
f. Replacement cost of a comparable contract
g. Portion of a deceased spouse's share of community property that passes to a surviving spouse h. Cross-purchase buy-sell agreement
i. Entity buy-sell agreement j. Bypass amount
k. No correct choice is given
Corporation agrees to redeem withdrawing shareholder's stock.

Question 74

Match each statement with the correct choice. Some choices may be used more than once or not used at all.
a. Use IRS valuation tables b. Blockage rule
c. Special use value
d. Best or most suitable use value e. Cost of going public
f. Replacement cost of a comparable contract
g. Portion of a deceased spouse's share of community property that passes to a surviving spouse h. Cross-purchase buy-sell agreement
i. Entity buy-sell agreement j. Bypass amount
k. No correct choice is given
Exemption equivalent.

Question 75

Match each statement with the correct choice. Some choices may be used more than once or not used at all.
a. Step-up in basis
b. Step-down in basis
c. Gift of installment notes receivable
d. Gift of property that has potential for recapture of depreciation
e. Donor's basis on date of gift appreciated property given, no gift tax due)
f. The amount of the deceased spouse's taxable estate does not change g. Fair market value on date of gift
h. Expected surviving spouse is in good health and 10 years younger i. No income tax consequences to the beneficiary
j. Income in respect of a decedent IRD)
k. No correct choice is given
Donee's basis for loss.

Question 76

Match each statement with the correct choice. Some choices may be used more than once or not used at all.
a. Use IRS valuation tables b. Blockage rule
c. Special use value
d. Best or most suitable use value e. Cost of going public
f. Replacement cost of a comparable contract
g. Portion of a deceased spouse's share of community property that passes to a surviving spouse h. Cross-purchase buy-sell agreement
i. Entity buy-sell agreement j. Bypass amount
k. No correct choice is given
Discount attributable to a large number of shares.

Question 77

Match each statement with the correct choice. Some choices may be used more than once or not used at all.
a. Use IRS valuation tables b. Blockage rule
c. Special use value
d. Best or most suitable use value e. Cost of going public
f. Replacement cost of a comparable contract
g. Portion of a deceased spouse's share of community property that passes to a surviving spouse h. Cross-purchase buy-sell agreement
i. Entity buy-sell agreement j. Bypass amount
k. No correct choice is given
Surviving owners agree to purchase withdrawing owner's interest.

Question 78

Match each statement with the correct choice. Some choices may be used more than once or not used at all.
a. Step-up in basis
b. Step-down in basis
c. Gift of installment notes receivable
d. Gift of property that has potential for recapture of depreciation
e. Donor's basis on date of gift appreciated property given, no gift tax due)
f. The amount of the deceased spouse's taxable estate does not change g. Fair market value on date of gift
h. Expected surviving spouse is in good health and 10 years younger i. No income tax consequences to the beneficiary
j. Income in respect of a decedent IRD)
k. No correct choice is given
Maximize marital deduction.

Question 79

For most individuals, an estate plan should prefer:

A) Disclaimers of all inheritances by the surviving spouse.
B) Disclaimers of all inheritances by the surviving children.
C) Lifetime gifts to charity rather than such gifts only at death.
D) Gifts to charity through the will rather than during lifetime.

Question 80

Match each statement with the correct choice. Some choices may be used more than once or not used at all.
a. Step-up in basis
b. Step-down in basis
c. Gift of installment notes receivable
d. Gift of property that has potential for recapture of depreciation
e. Donor's basis on date of gift appreciated property given, no gift tax due)
f. The amount of the deceased spouse's taxable estate does not change g. Fair market value on date of gift
h. Expected surviving spouse is in good health and 10 years younger i. No income tax consequences to the beneficiary
j. Income in respect of a decedent IRD)
k. No correct choice is given
Donee's basis for gain.