Deck 19: Family Tax Planning

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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 5

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 6

In valuing a life insurance policy that has not matured (i.e., the insured is still alive), it makes no difference whether the policy is paid up.

Question 7

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 8

A farm has a best use valuation of $3 million and a current use valuation of $1.2 million. If death occurs in 2015 and § 2032A is elected, the farm can be valued in the deceased owner's gross estate at $1.2 million.

Question 9

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

Question 10

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

Question 11

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 12

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

Question 13

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 14

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.

Question 15

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

Question 16

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

Question 17

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

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

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 22

Neither the transfer by gift or by death avoids the recognition (for income tax purposes) of any deferred interest on U.S. savings bonds.

Question 23

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 24

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

Question 25

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

Question 26

If a stock redemption is to be carried out, a cross-purchase type of buy and sell agreement cannot be involved.

Question 27

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

Question 28

Eight months after Noah died, Audrey sells 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 29

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 30

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

Question 31

The Nelsons 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 apply to tax the gain at the parents' tax rate.

Question 32

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

Question 33

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

Question 34

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

Question 35

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 36

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

Question 37

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

Question 38

The election by an estate of § 2032A (special use valuation as to real estate) or § 2032 (the alternate valuation date) will have no effect on the income tax basis of the property received by the heirs.

Question 39

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 40

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 Heather's income tax basis in her half of the community property.

Question 41

Violet sells a parcel of land (basis of $100,000; fair market value of $300,000) to her church for $100,000. Violet is allowed a charitable income tax deduction of $200,000.

Question 42

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

Question 43

Walt owns an insurance policy on his life with Doris as the designated beneficiary. On Walt's prior death, the proceeds of the policy are not part of his probate estate.

Question 44

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

Question 45

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 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 and her probate estate.

Question 47

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

Question 48

By maximizing the marital deduction, any estate tax is postponed until the death of the surviving spouse.

Question 49

Under Cindy's will, her share of their community property passes to Van, her surviving spouse. Cindy's property is subject to probate.

Question 50

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

Question 51

Five years ago, Emma purchased a residence and listed ownership as tenants by the entirety with her husband, Lucas. In the current year, Lucas predeceases Emma. Nothing is included in either the gross estate or probate estate of Lucas.

Question 52

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 53

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 54

Whether an organization is a qualified charity for estate tax purposes depends on its status on the date the will is executed and not when the transfer takes place.

Question 55

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

Question 56

During 2015, it is possible for a surviving spouse to have an exclusion amount of as much as $10.86 million.

Question 57

Two years ago, Ellen created a revocable trust-life estate to her children, remainder to her grandchildren. When Ellen dies in the current year, none of the trust is included in her gross estate or her probate estate.

Question 58

Several years ago, Tad purchased land listing ownership as "Tad, Ellen, and Kay, equal tenants in common." In the current year, Kay dies first. One-third of the value of the land is included in Kay's probate estate.

Question 59

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 60

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

Question 61

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 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 Addison's gross estate?

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

Question 62

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 63

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 64

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. 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.
E) None of the above.

Question 65

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), prior gifts the decedent has made may have to be considered.

Question 66

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 12%.
B) The note is not supported by collateral.
C) The note is payable on demand.
D) The note is forgiven by the decedent's will.
E) None of the above.

Question 67

In 2013, Valerie made a gift of stock (basis of $114,000; fair market value of $414,000) 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) $114,000 for gain or loss.
B) $129,000 for gain and $114,000 for loss.
C) $129,000 for gain or loss.
D) $134,000 for gain or loss.
E) None of the above.

Question 68

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.
E) None of the above.

Question 69

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

A) The § 2032A election is 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, the qualifying property is considered at its "special" 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 70

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 71

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 72

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) 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) Harvey 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.
E) None of the above.

Question 73

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

A) If properly structured, the agreements can control valuation for estate tax purposes.
B) If a stock redemption is proposed, 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.
E) None of the above.

Question 74

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.
E) None of the above.

Question 75

In a typical "estate freeze" involving stock:

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

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

In 2015, 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) $1,100,000.
B) $2,900,000 ($4,000,000 - $1,100,000).
C) $3,400,000 ($4,500,000 - $1,100,000).
D) $4,000,000.
E) None of the above.

Question 78

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 further premiums need to 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 79

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 80

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 2015 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 $3,400,000 in 1995.
E) None of the above is correct.