Midterm questions and answers


                                                                                                                                                    

MIDTERM EXAM
40 Questions
Chapters 1 – 13

Directions: Each of the questions or incomplete statements below is followed by four suggested answers or completions. Select the one that is best in each case and circle the corresponding letter.

1) Tax planning objectives should be subordinate to the primary objectives of estate planning because:
a)    Reducing the client’s tax liability is the primary objective of every estate planning client
b)    Reducing the client’s tax liability to zero without meeting their objectives is a disservice to the client.
c)     Leaving estate for heirs is the primary objective and tax minimization should come after the primary objective
d)    All of the above

2) Medical expense insurance and disability income insurance are important concerns in estate planning because:
a)    The costs of a protracted period of disability or prolonged illness may erode an estate to the point that there will be nothing-except debt-to leave beneficiaries.
b)    The time and energy spent in making medical claim reimbursements can deplete the estate.
c)     Medical expense insurance and disability income insurance are not a concern because most clients have enough assets not to worry about such issues
d)    All of the above

3) What guidelines are available to the estate planner in determining whether an activity may constitute the unauthorized practice of law?
a)    If the advice is given on a settled area of the law that is common knowledge in estate planning.
b)    If the advice is given in a jurisdiction where only attorneys give such advice.
c)     If the estate planner produces a document for the client to sign.
d)    All of the above

4) Which of the following are characteristics of a professional?
a)    Dressing like a professional.
b)    Receiving payment for work performed.
c)     A spirit of loyalty to fellow practitioners, of helpfulness to the common cause they all profess and should not allow any unprofessional acts to bring shame upon the entire profession.
d)    All of the above

5) What is the difference between an ethical temptation and an ethical dilemma?
a)    Conflict between the planner’s interest and the client’s interest is a temptation, whereas an ethical dilemma there is a conflict between the planner and the client’s interest, as well as a situation in which there are good reasons for both acting and not acting in a certain way.
b)    Conflict between the planner’s interest and the client’s interest is a temptation, whereas an ethical dilemma there is a conflict other than between the planner and the client’s interest, as well as a situation in which there are good reasons for both acting and not acting in a certain way.
c)     Conflict between the planner’s interest and the client’s interest is an ethical dilemma, whereas an ethical temptation is a conflict other than between the planner and the client’s interest, as well as a situation in which there are good reasons for both acting and not acting in a certain way.
d)    All of the above
6) The common areas where ethical issues might arise in estate planning are:
a)    How a client chooses to provide for their beneficiaries
b)    A client who chooses to leave money to the estate planner.
c)     Compensation, confidentiality and conflicts of interest
d)    All of the above

7) In the following instances which statement states the type of estate or interest in real property that is created:
·         Alex grants land to Ben and his heirs forever.
·         Alex grants land to Ben for life and, upon Ben’s death, to Chris and his heirs forever.
·         Alex gives Ben the right to use his land for ten years.

a)    Fee simple estate; a life estate with a vested remainder interest and an interest for a term of years.
b)    A life estate with a vested remainder interest; fee simple estate and an interest for a term of years.
c)     An interest for a term of years; fee simple and a life estate with a vested remainder interest.
d)    All of the above

8) The steps an individual can take to establish domicile are:
a)    Move to a new location, obtain a driver’s license from the new state and payment of utility expenses
b)    Change address, receive mail and driver’s license from new location
c)     Voter registration, address listed with the Social Security Administration and payment of property and income tax
d)    All of the above

9) Jointly owned property with rights of survivorship differ from a tenancy by the entirety with regard to the following
·         A sale of the property during lifetime
·         A gift to a third person
·         A transfer on the death of one of the tenants

a)    Joint tenants require the consent of the cotenant to transfer their interest and tenants by the entirety can sell their interests during their lifetime to a third party.
b)    Joint tenants can sell their interests during their lifetime to a third party, tenants by the entirety require the consent of the cotenant to transfer their interest. Property transfers by right of survivorship to the survivor at the death of one of the tenants in both cases.
c)     Either joint tenants or tenants by the entirety can transfer their interest during their lifetime without consent.
d)    Both joint tenants and tenants by the entirety require the consent of the cotenant to transfer their interest.

10) Which of the following provisions will result in the inclusion of an irrevocable life insurance trust in the insured’s gross estate?

I. the direction for the trustee to pay the insured’s debts if all other sources of payment are exhausted
II. the trust beneficiaries’ power to withdraw contributions to the trust

a)    I only
b)    II only
c)    Both I and II
d)    Neither I nor II

11) On April 1, 2005, a mother gave her daughter a $150,000 straight (ordinary) life insurance policy on her husband’s life. Premiums are paid annually. The pertinent facts about the policy are as follows:

Date of Issue: July 1, 1992
Premium paid on July 1, 2004 $ 2,200
Terminal reserve on July 1, 2004 $14,000
Terminal reserve on July 1, 2005 $18,000

What is the value of the policy for federal gift tax purposes?
a)    $17,550
b)    $15,500
c)    $14,550
d)    $150,000

12) A widower made the following cash gifts in one tax year:

Donee                                                                    Amount of Gift
A qualified charity                                              $30,000
His best friend                                                      $50,000
His brother                                                            $10,000
His nephew                                                           $15,000
His daughter                                                         $25,000

The widower’s total amount of taxable gifts made was:

a)    $48,000
b)    $61,000
c)     $72,000
d)    $130,000

13) The principal duties common to all fiduciary relationships are:
a)    Owe an allegiance to the grantor of the trust, invest assets wisely and don’t do anything foolish.
b)    Maximize growth of assets, be loyal to beneficiaries and be impartial towards beneficiaries.
c)     Be loyal to the beneficiaries; preserve and protect property to make it productive; be impartial toward beneficiaries.
d)    All of the above

14) “A trustee has a duty to deal impartially as among the beneficiaries”, means
a)    The trustee must invest the funds so as to equalize each beneficiary’s share.
b)    The trustee must not invest or manage trust property so that it increases one beneficiary’s share at the expense of another.
c)     The trustee must consider the grantor’s wishes and carry them out towards each beneficiary regardless of his own wishes.
d)    All of the above

15) The potential reasons for including trust provisions concerning the removal of trustees would be:
a)    Over time there must be a mechanism to ensure that trustees are not enriching themselves at the beneficiary’s expense.
b)    Changes in trust law or lawsuits may require a quick change in trustees to avoid litigation.
c)     Significant incompatibility of trustee and beneficiary, future changes in trust and/or tax law, geographic inconvenience.
d)    All of the above

16) Steven agrees to give his wife, Ellen, $100,000 as a lump-sum settlement upon their divorce. In turn, she agrees to give up all the marital rights she may have had in his estate. Which of the following are the requirements which must be met for Steven’s transfer to escape gift tax liability?

a)    The transfer must be pursuant to a written agreement between Steven and Ellen in settlement of marital rights and the divorce must occur within a period beginning one year prior to and ending 2 years after the agreement.
b)    Nothing since Ellen is his wife and transfers between spouses is not subject to taxation.
c)     Steven must file a gift tax return and the entire gift in excess of $14,000 is subject to gift taxation.
d)    All of the above

17) Mr. John Powers lends his adult son, Eric, $15,000 with interest at the rate of 10 percent. Mr. Powers cancels the note his son gave him. The following are the gift tax implications in this transaction:
a)    $3,000 of the cancellation of the debt is subject to gift is subject to
b)    Because this is a non-business situation, forgiving the debt constitutes a gift if Mr. Powers ignores the annual exclusion.
c)     If Mr. Powers files a gift tax return he can gift split with his wife and all of the forgiveness of debt would be excluded from gift taxation.
d)    All of the above

18) Steve is the sole proprietor of a small firm with a net worth of $300,000. He makes his 12-year-old daughter, Lara, a one-third partner.
·         Has a gift been made in this transaction?
·         Has a gift been made to Lara if she is an adult and performs bookkeeping services for the firm without a salary?
a)    A gift has been made because Lara is performing no services for the partnership and has contributed no capital to its formation. A gift is also likely to exist in the second case because the bookkeeping services would have a value of less than $100,000.
b)    A gift has been made because Lara is performing no services for the partnership and has contributed no capital to its formation. A gift has not been made in the second case because the bookkeeping services are highly valuable.
c)     A gift has been made because Lara is performing no services for the partnership and has contributed no capital to its formation. A gift has not been made because under the thirteenth Amendment to the United States Constitution indenture servitude as well as slavery was abolished.
d)    All of the above

19) Which of the following statement(s) describe the nature of the gift tax and its objective?
a)    The gift tax was created to capture taxes that taxpayer’s avoided by making gifts just prior to their deaths.
b)    The gift tax is a social tax designed to decrease the wealth of the rich and redistribute to the poor.
c)     The gift tax is an excise tax levied on an individual’s right to transfer property to another for less than full consideration. It’s purpose was to equalize the transfer tax treatment between taxpayers who make lifetime gifts and those who transfer their assets at death.
d)    All of the above

20) Larry and Louise Longfellow are considering giving $15,000 to each of their three children this year The following statement(s) answer:
·         Whether Louise can make the entire gift from her own funds and still split the gift with Larry.
·         .How much each spouse is deemed to be giving after the split
·         Whether the consent for the split gift can be made after Larry’s death.
a)    Louise can make the entire gift herself and split the gift with Larry if he consents to gift splitting, whereby each spouse is deemed to have given less than $14,001 per child. The consent for the split gift cannot be made after Larry’s death.
b)    Louise must give at least $3,000 to Larry for each of their three children before he dies whereupon he can make a gift with his wife Louise to each of their children.
c)     Louise can make the entire gift herself and split the gift with Larry if he consents to gift splitting, whereby each spouse is deemed to have given $7,500. The consent for the split gift can be made after Larry’s death.
d)    All of the above

21) The following statement(s) are accurate regarding a Sec. 2503 (c) trust and the issues listed below:
·         Distribution of income
·         Discretion of trustee in accumulating income
·         Time by which trust principal is required to be distributed
·         Payment of trust assets if minor dies
a)    The Sec. 2503 (c) trust does require income to be distributed currently. The trustee is given broad discretion regarding accumulating income. The principal must be distributed when the donee reaches age 21 (or later if the donor so stipulates). In the event of the death of the minor, the trust, income and principal go to the beneficiary’s estate or appointees.
b)    The Sec. 2503 (c) trust does not require income to be distributed currently. The trustee is given broad discretion regarding accumulating income. The principal must be distributed when the donee reaches age 21 (or later if the donor so stipulates). In the event of the death of the minor, the trust, income and principal go to the beneficiary’s estate or appointees.
c)     The Sec. 2503 (c) trust does require income to be distributed currently. The trustee is given broad discretion regarding accumulating income. The principal must be distributed when the donee reaches age 18. In the event of the death of the minor, the trust, income and principal go to the beneficiary’s estate or appointees.
d)    All of the above

22) The following are requirements for a valid will:
a)    The will must be signed at the end and dated and competent witnesses must be able to swear that the signature on the will is the testator’s when the will is admitted to probate.
b)    The will must be signed at the end and dated when the will is admitted to probate.
c)     The will must be signed at the end, dated and initialed on each page. Competent must also sign the will and be willing to attest that the signature on the will is the testator’s when the will is admitted to probate.
d)    All of the above

23) A person may revoke or amend his or her will by:
a)    A codicil may specifically invalidate a will.
b)    Making a more recent will declaring all prior wills are revoked.
c)     A will can be revoked if the maker of the will intentionally destroys or mutilates it.
d)    All of the above

24) Life Insurance proceeds would be distributed under the provisions of a will when:
a)    When the stated beneficiary predeceases the insured or the policy is made payable to the estate.
b)    Only when the policy is made payable to the estate because no life insurance company will issue a policy without a named beneficiary.
c)     No designated beneficiary is named or the policy is made payable to the estate.
d)    All of the above

25) A person is considered to die intestate under these circumstances:
a)    If they die and the will cannot be found even though the person who died was known to have had a properly executed estate document.
b)    If they die without a will or with a will that has been revoked or declared invalid.
c)     If they die and the will was improperly executed making it invalid.
d)    All of the above

26) An Executor would not price an asset at the lowest possible valuation for federal income tax purposes because:
a)    In a buy-sell agreement the higher valuation would be provide more cash for the decedent’s survivors rather than to establish a formula that provides a lower estate tax value yielding a lower price for decedent’s business interest.
b)    An Executor always would value the estate at the lowest possible valuation for federal income tax purposes which does not have to match a buy-sell agreement because the agreement may be more or less than a willing arms length buyer would pay for the decedent’s interest.
c)     In a buy-sell agreement the lower valuation would be provide more cash for the decedent’s survivors rather than to hire an appraiser that provides a lower estate tax value and could be challenged by the Internal Revenue Service.
d)    All of the above

27) George Smith dies this year, and his estate consists primarily of a 1,000-acre family farm. Farms of this size rent for $84,000 annually in the area near the Smith farm. Local real estate taxes are $8,000 and the average federal land bank loan interest rate is 8 percent. Under the farm-method valuation formula, what is the special-use valuation of the Smith farm?
a)    $765,000
b)    $880,000
c)     $950,000
d)    None of the above

28) In the Hilton family: If Richard gives Kathy a special power of appointment in favor of Paris Hilton than what are each of these people called. :
a)    Donor, donee & recipient.
b)    Grantor, power holder & beneficiary.
c)     Fool, sucker and lucky.
d)    All of the above

29) The valuation of an estate occurs when?
a)    When the decedent dies.
b)    When the decedent died or six months later whichever is lower.
c)     When the decedent died or six months later whichever the estate chooses..
d)    All of the above

30) When Charles Kuralt died his Montana property was worth $20 million; when he bought it originally he contributed $150,000 and Patricia Shannon contributed $50,000. What was the step up in basis on Charles’ death?:
a)    $150,000.
b)    $15 million
c)     $20 million.
d)    All of the above

31) The term gross estate is defined as:
a)    The property or interests a decedent actually owned at death and the property or interests a decedent is deemed to own at date of death.
b)    The property or interests a decedent actually probates at death and the property or interests a decedent is deemed to have probated at date of death.
c)     The property or interests a decedent actually owned at death.
d)    All of the above

32) Which of the following items an individual owned at the time of his death will be included in his gross estate for federal estate tax purposes:
A. Real estate in Atlantic City valued at $200,000 where the decedent had a right to live rent free for life. The property had been given to the decedent by his father for his life, after which it was to pass to his son under the terms of his father’s will.
B. $160,000 par value of municipal bonds due the year after the decedent’s death
C. 10 acres of undeveloped land in Arizona owned by the decedent and his two brothers as tenants in common.
D. IBM stock valued at $30,000 owned by the decedent individually.
E. Proceeds of a wrongful death claim brought by the decedent’s personal representative after his death in an automobile accident.
F. $5,000 in dividends declared and of record but not paid at the time of the decedent’s death
G. A claim for damages arising from a car accident in which the decedent was involved prior to his death
H. Commission income that the decedent had earned for the month prior to his death but that had not yet been paid to him
I. A Matisse painting hanging in his home
J. Property in a trust established by his brother for the benefit of his brother’s son of which the decedent was the sole trustee. The property in the trust is valued at $50,000.
a)    A, B, C, E, H and J.
b)    B, Part of C, D, F, G, H and possibly I
c)     A, B, C, D, G, H and possibly I and J.
d)    A,B,C,D,E, F, G, H, I, J

33) John Jamison transferred $200,00 of tax exempt bonds to a trust for the benefit of his grandchildren 2 years ago. He died this year. Assume the gift tax paid was approximately $60,000. What amount is includible in his gross estate. If the transfer was made to his spouse what amount would be includible in his gross estate?
a)    The $60,000 gift tax; however, nothing would have been includible if he had transferred the bonds to his spouse as no gift tax would be due.
b)    The $200,000 in tax exempt bonds less the $60,000 gift tax; however, nothing would have been includible if he had transferred the bonds to his spouse as no gift tax would be due.
c)     The $200,000 in tax exempt bonds less the $60,000 gift tax; however, nothing would have been includible if he had transferred the bonds to his spouse $200,000 in tax exempt bonds less the $60,000 gift tax would be due.
d)    The $60,000 gift tax; however, nothing would have been includible if he had transferred the bonds to his spouse the $60,000 gift tax would be due.

34) Under which of the following conditions and to what extent are benefits from a qualified retirement plan included in a decedent’s gross estate?
a)    The benefits are included in the gross estate.
b)    The benefits are included in the gross estate unless a non-employee spouse’s interest in plan proceeds arising solely because of the application of community property laws is completely excluded from his or her estate if the non-employee-spouse predeceases the plan participant or plan proceeds were in pay status on December 31, 1984 and prior to the enactment of the Deficit Reduction Act of 1984, the participant had irrevocably elected a beneficiary designation that would have qualified the plan proceeds for estate tax exclusion.
c)     The benefits are never included in the gross estate because spousal interests are not subject to estate tax unless a non-employee spouse’s interest in plan proceeds arising solely because of the application of community property laws is completely excluded from his or her estate if the non-employee-spouse predeceases the plan participant or plan proceeds were not in pay status on December 31, 1984 and prior to the enactment of the Deficit Reduction Act of 1984, the participant had irrevocably elected a beneficiary designation that would have qualified the plan proceeds for estate tax exclusion.
d)    All of the above

35) Tom and Mary Taylor acquired their personal residence 20 years ago for $150,000. Tom furnished all the consideration for the property. Assume Mary dies this year when the house is worth $310,000. How much of the value of the house is included in her gross estate for federal tax purposes. Two years after Mary’s death, Tom sold the property. Assuming the house was worth $320,000when he sold it, how much gain would he have to pay tax on?
a)    One half the value of the house ($155,000) will be included in Mary’s gross estate for estate tax purposes. Tom’s gain would be tax free.
b)    None of the value of the house ($310,000) will be included in Mary’s gross estate for estate tax purposes because Tom is Mary’s spouse.
c)     All of the value of the house ($310,000) will be included in Mary’s gross estate for estate tax purposes. As Mary’s spouse Tom would not have to pay estate taxes on the value.
d)    All of the above

36) Michael Jackson’s estate included a yacht valued at $150,000 on the federal estate tax return. During the period of estate administration, it was severely damaged by fire. It cost $80,000 to repair the yacht. The estate received $55,000 under its insurance claim. What amount may the estate deduct on the decedent’s estate tax return? Would it be possible to and/or preferable to deduct this casualty loss on the decedent’s final income tax return instead?
a)    The estate may deduct $80,000 as a casualty loss. It may not be deducted from the decedent’s final income tax return.
b)    The estate may deduct $0 as a casualty loss. It may deduct $80,000 from the decedent’s final income tax return.
c)     The estate may deduct $25,000 as a casualty loss. It may not be deducted from the decedent’s final income tax return.
d)    The estate may deduct $0 as a casualty loss. It may deduct $25,000 from the decedent’s final income tax return.

37) Gift and Estate Planning applies to all US Citizens, resident aliens and some Non resident aliens. What percentage of the population pays an estate tax when the estate tax applies.
a)    approximately 50% of the population
b)    approximately 75% of the population
c)     approximately 5% of the population
d)    approximately 25% of the population

38) In 2014, what is the maximum exemption amount for an estate (excluding non-resident aliens)?
a)    $780,000
b)    $4.5 million
c)     $7.8 million
d)    $5.34 million

39) Mitchell Anthony went to jail in relationship to the Estate of Brookes Astor. What did Mitchell Anthony violate.
a)    He practiced law without a license.
b)    He violated his fiduciary responsibility.
c)     He cheated on his income tax.
d)    He did not exercise his dower rights.

40) If Richard Hilton wants to set up a trust for Paris, what must he make certain so that the trust is not taxable in his estate.
a)    Richard cannot be a beneficiary of the trust, the trust must be irrevocable and the trust cannot make payments to his estate or creditors of his estate.
b)    Richard cannot be a beneficiary of the trust, the trust must be revocable and the trust cannot make payments to his estate or creditors of his estate.
c)     Richard can be a beneficiary of the trust, the trust must be irrevocable and the trust cannot make payments to his estate or creditors of his estate.

d)    Richard can be a beneficiary of the trust, the trust must be revocable and the trust cannot make payments to his estate or creditors of his estate.


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