Deck 16: Estate Planning: Concepts and Strategies

Question 1

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

Answer 1

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.

Answer 2

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?

Answer 3

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?

Question 5

What are the key advantages of joint ownership?

Question 6

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

Question 7

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

Question 8

Summarize the rules governing lifetime gifts.

Question 9

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

Question 10

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

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?

Question 12

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

Question 13

What are the key disadvantages of joint ownership?

Question 14

Explain the essential features of a QTIP Trust.

Question 15

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

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?

Question 17

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

Question 18

Question 1. The unified credit and unlimited marital deduction:

A) Make estate planning unnecessary
B) Are helpful in reducing estate taxes of the first spouse, but do little to reduce the estate tax of the second spouse
C) Together offer up to $5.45 million in the estate tax reduction upon the death of the first spouse
D) B and C
E) A, B, and C

Question 19

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

Question 20

Explain the use of marital deduction in estate planning.

Question 21

Question 15. Suppose John and Jane are married and jointly own assets worth $100,000. In addition to the jointly-held assets, John owns a home which he purchased for $20,000 but has a current market value of $120,000. How much of the value of the house would be taxed, if Jane were to die today?

A) $20,000
B) $50,000
C) $60,000
D) $120,000
E) $0

Question 22

Question 4. Which of the following are characteristics of a QTIP trust?

A) The trust agreement, and not the surviving spouse, controls the distribution of the trust assets
B) Assets transferred into the trust qualify for the marital deduction, if spouse receives income from trust at least annually
C) If assets qualify for marital deduction, then they must be included in the estate of the surviving spouse
D) A and B
E) A, B, and C

Question 23

Question 2. Which of the following could be a potential disadvantage of gift giving?

A) A person could gift away too much and consequently might experience financial strains
B) If one spouse gives the other substantial gifts and then decides to get divorced, that could pose a serious problem
C) Generation skipping tax may be imposed on the gift
D) B and C
E) A, B, and C

Question 24

Question 13. The generation skipping transfer tax

A) Entitles one to make a lifetime gift of up to $600,000 without paying generation skipping transfer tax
B) Is a flat tax of 40%
C) Was established in 1986
D) Is explained by none of the above
E) Is an excellent technique for tax evasion

Question 25

Question 3. Which of the following trusts allows the grantor to receive a material deduction immediately and allows the beneficiary to dispose of the assets in any manner he/she chooses?

A) QTIP
B) Bypass
C) Marital
D) Estate
E) None of the above

Question 26

Question 12. A Crummy Trust

A) Derives its name from the shoddy work which some lawyers do
B) Derives its name from the fact that it is a crummy idea to deceive the IRS
C) Refers to the illegal gifting of taxable estate
D) Takes its name from a court case upholding this type of trust
E) Is a popular device used in making gifts that qualify for the $600,000 estate tax exclusion

Question 27

Question 8. If a survivorship policy is purchased in the name of an irrevocable life insurance trust, then

A) The proceeds are exempt from both estate and income tax
B) The proceeds are exempt from income tax only
C) The proceeds are exempt from estate tax but not from income tax
D) The proceeds are fully taxable
E) The proceeds are taxed in a manner all nonprobate assets are taxed

Question 28

Question 7. An individual would create an irrevocable life insurance trust because:

A) Without such a trust a large life insurance policy could push the estate beyond the applicable exclusion amount
B) It would prevent the possibility of having to include the insurance proceeds in the estate if the policy was transferred within three years of death
C) An individual wants to borrow against a policy
D) A and B
E) A, B, and C

Question 29

Question 6. Which of the following are characteristics of an estate trust?

A) It terminates upon the death of the first spouse
B) When the surviving spouse dies, the estate trust terminates, and assets and income are paid to the probate estate
C) The trust is not required to distribute income
D) B and C
E) A, B, and C

Question 30

Question 11. Which of the following is not a valid reason for creating an irrevocable gift trust?

A) An irrevocable living trust can be used to pass assets free from federal income taxes
B) An irrevocable living trust can be used to pass assets free from federal estate taxes
C) The individual can have the income distributed from the trust to one or more selected beneficiaries
D) The person can specify who will inherit the principal upon death
E) All of the above are valid reasons

Question 31

Question 10. Which of the following trusts allow the designated beneficiary to receive variable annuity income?

A) Charitable reminder
B) Charitable lead
C) Charitable reminder unitrust
D) Charitable fixed income
E) None of the above

Question 32

Question 14. Which type of trust would you recommend to a healthy person who does not feel it necessary to go through the hassle of transferring all assets into a trust?

A) Irrevocable
B) Revocable
C) Standby
D) Minor's
E) Generation skipping

Question 33

Question 5. John Rogers, who has two children from a previous marriage, has remarried Jane who has three children. John wants to ensure that his two children from his previous marriage receive their fair share of the estate. Which of the following trusts would you recommend for John?

A) QTIP
B) Estate
C) Marital
D) Bypass
E) Revocable

Question 34

Question 9. If death occurs within three years of a lifetime gift of a life insurance policy, the insurance proceeds:

A) Cannot be paid to the beneficiary
B) Are never subject to estate taxes
C) Are added back in the estate of the donor insured
D) Must be returned to the insurance company
E) Are paid to the surviving spouse, even if the spouse is not the named beneficiary