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1. Assuming Kenny died today, calculate his gross estate. A) $5,000,000 B) $5,500,000 C) $2,140,000 D) $6,731,600 2. Assuming Kenny died today, calculate his probate estate. A) $2,140,000 B) $2,260,000 C) $4,940,000 D) $6,731,600 3. Assuming Kenny died today, calculate the Marital Deduction available for estate transfers to Melissa. A) $0 B) $1,000,000 C) $2,000,000 D) $2,140,000 4. Assume Kenny died today, and Kati is appointed executor. Unfortunately, Kati forgot to file an Estate Tax Return (Form 706) and pay the remaining estate tax due of $726,453 until 68 days after the return's due date. How much is the failure-to-file penalty (reduced for any concurrently running penalties if applicable)? A) $11,527 B) $69,161 C) $98,071 D) $115,268 5. Assume Melissa and Kenny had their baby today and named him Kole. Which of the following individuals is a skip person in relation to Kenny? 1. Riley 2. Kole 3. Melissa A) 1 only B) 1 and 3 C) 2 and 3 D) 1, 2, and 3 6. Regarding gifts made by Kenny, what is the total annual exclusion available for the Generation Skipping Transfers made in the current year? A) $14,000 B) $18,000 C) $26,000 D) $31,000 7. Which of the following is true with regard to Kenny's transfer to the trust benefiting the grandchildren? A) When distributions are made from the trust, the distributions will be taxable distributions. B) The transfer is a direct skip. C) When the trust expires and the assets are distributed to a charitable organization, then the distribution will be a taxable termination. D) The trust is not subject to GSTT because of the charitable beneficiary. 8. Kenny is thinking about transferring his Investment Portfolio and the Bungalow to a dynasty trust for the benefit of his natural heirs. Which of the following statements is correct? A) Kenny cannot transfer the investment portfolio without Kati and Karli's consent. B) Kati and Karli would be appropriate trust protectors. C) Kenny can name himself as the trustee and continue to make all of the business decisions for the Bungalow during his life while removing the assets from his gross estate. D) Because of the blended family, generational subtrusts may be appropriate. 9.Assume for this question only, Kole was born today and Kenny was so excited after the delivery that he had a heart attack and died. Who would receive his probate assets under the will? A) Liz B) Melissa C) Kati, Karli and Kole D) It is unclear who would inherit the assets. 10.Assume, for this question only, that Kenny and Melissa were married today. They went straight to Kenny's lawyer's office to execute new wills. On the way home from executing a valid will leaving all assets to Melissa, Kenny and Melissa were in a serious car accident. Kenny was comatose for several days before dying. His unpaid medical expenses were $150,000. The day after Kenny died, Melissa gave Kenny's children and grandchildren each $22,000 then left for France to stay with her mother. Would a QTIP election for the assets transferred to Melissa be available? A) Yes, this election would be available. B) No, this election would not be available. 11. Assume, for this question only, that Kenny and Melissa were married today. They went straight to Kenny's lawyer's office to execute new wills. On the way home from executing a valid will leaving all assets to Melissa, Kenny and Melissa were in a serious car accident. Kenny was comatose for several days before dying. His unpaid medical expenses were $150,000. The day after Kenny died, Melissa gave Kenny's children and grandchildren each $22,000 then left for France to stay with her mother. Would a deduction on Kenny's final income tax return for the unpaid medical expenses be available? A) Yes, this election would be available. B) No, this election would not be available. 12. Assume, for this question only, that Kenny and Melissa were married today. They went straight to Kenny's lawyer's office to execute new wills. On the way home from executing a valid will leaving all assets to Melissa, Kenny and Melissa were in a serious car accident. Kenny was comatose for several days before dying. His unpaid medical expenses were $150,000. The day after Kenny died, Melissa gave Kenny's children and grandchildren each $22,000 then left for France to stay with her mother. Would a split gift election for gifts Melissa made to Kenny's children the day after Kenny's death be available? A) Yes, this election would be available. B) No, this election would not be available. 13. Assume, for this question only, that Kenny and Melissa were married today. They went straight to Kenny's lawyer's office to execute new wills. On the way home from executing a valid will leaving all assets to Melissa, Kenny and Melissa were in a serious car accident. Kenny was comatose for several days before dying. His unpaid medical expenses were $150,000. The day after Kenny died, Melissa gave Kenny's children and grandchildren each $22,000 then left for France to stay with her mother. Would special use valuation for the Bungalow be available on the estate tax return? A) Yes, this election would be available. B) No, this election would not be available. 14. Kenny is considering transferring his life insurance policy to an ILIT. Which of the following statements is true? A) If Kenny included a clause that said, \"Kenny can change the beneficiary of the trust at any time to any person other than himself\" then the assets would be included in Kenny's gross estate when he died. B) If the trust allows the trustee to lend money to the Kenny's estate at Kenny's death, then the proceeds of the life insurance policy will be included in Kenny's gross estate. C) Transferring the policy to the ILIT will eliminate the chance that the proceeds will be included in Kenny's gross estate at Kenny's death D) If Kenny continues to pay the trustee an amount needed to pay the premiums on the policy, the proceeds will be included in his gross estate when he dies. 15. Carrie would like to spend the few years she has left enjoying her life. She would like to use her life insurance policy to fund the remainder of her life. Which of the following statements is correct? A) If Carrie surrenders her policy for accelerated death benefits, she will be subject to income tax on the gain because she is not terminally ill. B) Carrie could exchange the policy in a 1035 exchange for an annuity without being subject to income tax on the transfer. C) If Carrie borrows from the policy, then the loan will be considered a taxable distribution. D) If Kenny purchases the policy from Carrie at the fair market value, he will receive the insurance proceeds income tax free at Carrie's death. 16. f Kenny decided to sell the vacation property today for the Fair Market Value, what would his gain or loss be? A) $40,000 B) $70,000 C) $75,300 D) $80,200 17. Assume for this question only that Melissa has a healthy baby boy and they name him Kole. The stress of the new baby deteriorates their relationship and Kenny and Melissa break up 6 months later. Kenny is ordered by the court to pay $2,000 a month in child support to Melissa which includes $4,000 a year for day care costs. What is Kenny's yearly taxable gift to Melissa and how much is deductible for income tax? A) Gift: $0 Deductible: $0 B) Gift: $0 Deductible: $4,000 C) Gift: $24,000 Deductible: $0 D) Gift: $24,000 Deductible: $4,000 18. Assume Kenny had charitable inclinations and decided he wanted to bequeath something to charity. Which of the following assets would be the most advantageous to leave to the charity considering the tax effects on other non charitable beneficiaries? A) $60,000 in cash B) $60,000 in qualified plan assets C) $60,000 in portfolio assets. D) The boat 19. Assume for this question only that Kenny and Melissa had the baby today. When Kenny returned home, Kenny's neighbor, Stue Farm, came over. Stue is the local insurance salesman and he immediately convinced Kenny he needed to buy a new life insurance policy on the baby's life. The policy has a $10,000 death benefit. Kenny is the owner, the policy is on Kole's life, and Melissa is the beneficiary. Kenny paid his first premium payment then had a heart attack and died. Which of the following statements is correct? A) The interpolated terminal reserve plus any unearned premium will be included in Kenny's gross estate. B) The death benefit will be included in Kenny's gross estate. C) The replacement cost will be included in Kenny's gross estate. D) The policy will not be included in Kenny's gross estate because Kenny is not the beneficiary. 20. Assume Kenny and Melissa had Kole today and Kenny wanted to create a trust for Kole's future benefit. Kenny would like to create a trust that allows him to make use of the annual exclusion. He wants the trust to accumulate income until Kole reaches age 21, at which point the entire trust will be distributed to Kole. Which of the following devices would be appropriate to accomplish Kenny's goals? A) An UGMA device B) An UTMA device C) A section 2503(b) device D) A section 2503(c) device 21. Kenny is considering running for governor but is concerned that managing the Bungalow and his portfolio will cause a conflict of interest. Which of the following trusts would be an appropriate device to mitigate against the conflict of interest? A) A Totten trust B) A political trust C) A blind trust D) A standby trust 22.Kenny is considering changing his will today. He wants the new will to leave everything to Melissa. Which of the following statements is true. A) A no-contest clause could be added to discourage Kati and Karli from contesting the will. B) A simultaneous death clause could be used to require Melissa to survive six months. C) A guardianship clause can be used to identify Kenny's preferred legal guardian of Kole. D) A disclaimer clause allowing Melissa to disclaim the property in favor of Kenny's children could be used to prevent overqualification of the estate. 23. At Melissa's urging, Kenny contributed $25,000 in cash to a foreign charitable organization. At the time of the contribution, the organization told Kenny that his contribution was tax deductible for income tax purposes. Ignoring any income limitations, how much of the $25,000 contribution is deductible? A) $0 B) $12,500 C) $21,000 D) $25,000 24. Kenny is confused about the rules relating to charitable contributions. He has asked you, his advisor, for more clarification regarding the issues to consider when making a contribution. Of the following, which is not an issue when considering whether to deduct the adjusted basis or the fair market value of property contributed to a charitable organization? A) The current market rate of interest. B) The donor's current and projected adjusted gross income for the 5 years after the contribution. C) The fair market value of the donated property. D) The capital gains rate in effect at the time of the transfer. 25. Kenny is considering transferring the vacation property to a QPRT next year naming his two daughters as the remainder beneficiaries. The value of his retained interest is valued at $48,000. What would Kenny's total taxable gift be for this transfer? A) $38,000 B) $48,000 C) $52,000 D) $100,000 26. Kenny is considering creating a testamentary trust. Which of the following is not a feature of a testamentary trust? A) Creation under a last will and testament B) Shifts an income tax burden to a lower-bracket taxpayer C) Results in the inclusion of assets in the gross estate D) Does not avoid probate 27. Kati has decided that any inheritance she receives from her father will be used to establish a charitable remainder trust. Kati would like to have the flexibility to make additional contributions to the charitable remainder trust in the future. Which of the following would you recommend for Kati? A) CRAT B) CRUT C) CLUT D) CLAT 28. This year, Karli donated $30,000 in cash and provided services to the Red Cross valued at $10,000. Karli's AGI for this year is $50,000. What is Karli's charitable contribution deduction for the year assuming both are qualified charities? A) $15,000 B) $25,000 C) $30,000 D) $40,000 29. Kenny is concerned about protecting his assets in the event he decides to marry Melissa. He has asked you for more information on QTIP trusts. Which of the following accurately describes a QTIP Trust? A) A QTIP is sometimes called a \"B\" or \"Q\" Trust. B) Trust income must be paid to the spouse or other designated beneficiary at least annually. C) The trust assets will be included in the gross estate of the surviving spouse. D) The surviving spouse designates the remainder beneficiaries of the QTIP. 30.Which of the following is not a requirement of the unlimited marital deduction? A) In order to claim a marital deduction on the 706, the decedent must have been married as of the date of his death. B) The surviving spouse must receive property through the estate. C) The surviving spouse must be a U.S. citizen. D) The gross value of qualifying property left to the surviving spouse is included in the marital deduction. 31. Assume Carrie decided to transfer her life insurance policy to an Irrevocable Life Insurance Trust (ILIT) today for the benefit of Kati and Karli. She is concerned that the girls may not receive their fair share of Kenny's estate now that Kole and Melissa have come along. The ILIT contained a Crummey provision for the benefit of each child. At the time of the transfer, the whole life insurance policy was valued at $50,000, and since Carrie had not made any other taxable gifts during her lifetime, she did not owe any gift tax. If Carrie died 6 months later how much is included in her gross estate at her death? A) $0 B) $50,000 C) $76,000 D) $100,000 32. Kenny is considering selling the Bungalow so he can spend more time with Melissa. Allen, a customer of the Bungalow, has offered to buy the business for a price Kenny considers reasonable, but Allen does not have all of the funds necessary to pay for the business at the current time. Allen has good credit. Given these facts, which transfer method should be used to transfer the business to Allen? A) Grantor Retained Annuity Trust B) Self-Cancelling Installment Note C) Private Annuity D) Installment Sale 33. Which of the following is a principal reason for establishing a revocable living trust? A) Reducing the grantor's gross estate B) Temporal Discounts C) Probate Avoidance D) Avoidance of the Rule Against Perpetuities 34. Of the following statements, which is false? A) The availability of the unlimited marital deduction merely postpones the potential estate tax due. B) Property that is not included in the decedent's gross estate cannot qualify for the unlimited marital deduction. C) The death benefit of a life insurance policy included in a decedent's gross estate is not eligible for the unlimited marital deduction, even if the surviving spouse is the listed beneficiary and receives the proceeds. D) An individual can use the unlimited marital deduction during life to fund the surviving spouse's applicable estate tax credit. The best property to transfer in this method is the property that is expected to appreciate in value after the transfer to the surviving spouse. 35. Assume Kenny dies and the estate does not have sufficient cash to pay the required taxes or expenses. Of the following statements, which is not true regarding selling an estate's assets to generate cash? A) The estate may have income tax consequences. B) The assets may not be sold at full, realizable fair market value. C) Any losses on the sale of the assets are deductible as losses on the estate tax return (Form 706). D) Any selling expenses are deductible on the estate tax return. Read the case carefully before beginning the exam. Then answer the questions relating to the fact pattern. Some questions require you to assume additional facts - these additional facts only apply to the particular question. Assume today is December 15th. KENNY AND MELISSA BACKGROUND Kenny, age 62, and Melissa, age 23, have been dating for about a year and a half. Kenny and Melissa met when Kenny was on a vacation in the south of France. Melissa was a beautiful French artist selling paintings at the market by Kenny's hotel. After a month-long romance, Kenny asked Melissa to return to the United States with him. Although not a United States citizen, she has maintained residence in the United States for 15 months. While they have no current plans to marry, they recently found out that Melissa is expecting her first child. Although no paternity tests have been conducted, both Kenny and Melissa are confident the child is Kenny's. When they found out Melissa was pregnant, Melissa moved into the 4 bedroom home Kenny owns so they could prepare for the baby, whom they plan to name Kole. To prove to Melissa that he was serious about them being a family, Kenny gave Melissa $2,000,000 in cash last month. This is the only asset Melissa owns. Kenny also purchased a $1,000,000 life insurance policy on his life and designated Melissa as the beneficiary. Kenny was married before and has two children from that marriage, Kati, age 38, and Karli, age 28. Both girls are happily married and have children of their own. Kati has two children, Cody, age 3, and Kali, age 13. Karli was unable to have children of her own; therefore, she adopted a little girl, Riley, age 2, from Russia last year. Kenny and his first wife, Liz, have been divorced for ten years and are not on speaking terms. After their marriage, Kenny was required to pay Liz alimony in the amount of $1,000 per month for 5 years. When the court order expired, Kenny felt bad so he continues to give Liz $1,000 per month on the first of each month. Although Kenny has high blood pressure, he is otherwise healthy. Melissa has never been married. She is in excellent health, and learned just a few days ago that they are having a boy and he is expected to be healthy. Kenny is retired and owns The Bungalow, a local bar and grill. Melissa is currently unemployed. Kenny and Melissa live in a community property state. Kenny's mother, Carrie, also lives with him. Carrie is 82 and in failing health. She was recently diagnosed with Parkinson's Disease. While she is unable to feed or bathe herself, she is expected to live for several more years. Carrie has already spent all of her retirement assets and relies solely on Social Security. The only substantial asset she still owns is a life insurance policy covering her life. The policy has a $100,000 death benefit and is not considered a MEC. The policy does not have a named beneficiary. For estate planning purposes, Kenny estimates the following expenses at his death: The last illness and funeral expenses are expected to be $100,000. Estate administration expenses are estimated at $180,000. WILL Melissa does not have a will. Kenny has written two wills in his lifetime. The first will was a statutory will executed during his marriage to Liz, and dated September 1, 1990. The second will is a handwritten will he wrote right after his divorce, but it is not dated. For the second will, Kenny did not want to seek advice from an attorney so he basically copied the first will and replaced the names. The second will is only signed by him and was not witnessed. Liz still has an executed copy of the first will and the second will is in the bottom of Kenny's sock drawer. No one, other than Kenny, knows the second will exists. Kenny's Last Will and Testament written during his marriage to Liz. I, Kenny, being of sound mind and wishing to make proper disposition of my property in the event of my death, do declare this to be my Last Will and Testament. 1. 2. 3. 4. 5. 6. I have been married but once, and only to Liz with whom I am presently living. Out of my marriage to Liz, two children were born, namely Kati and Karli. I have adopted no one nor has anyone adopted me. I leave all assets to my wife Liz. In the event that Liz predeceases me or fails to survive me for more than six (6) months from the date of my death, disclaims, or otherwise fails to accept any property bequeathed to her, I give my estate to my children. In the event that any of my children should predecease me, die within six months from the date of my death, disclaim, or otherwise fail to accept any property bequeathed to him or her, then such interest will pass to the said legatee's descendents, otherwise his or her share of all of my property of which I die possessed shall be paid equally among my surviving children. I name my wife, Liz, to serve as the executor of my estate with full seizin and without bond. I direct that the expenses of my last illness, funeral, and the administration of my estate shall be paid by my executor as soon as practicable after my death and allocated against the residual estate. Kenny's Last Will and Testament handwritten after his divorce. I, Kenny, being of sound mind and wishing to make proper disposition of my property in the event of my death, do declare this to be my Last Will and Testament. 1. 2. 3. 4. 5. I have two children, namely Kati and Karli. I have adopted no one nor has anyone adopted me. I leave all assets to my children. In the event that any of my children should predecease me, die within six months from the date of my death, disclaim, or otherwise fail to accept any property bequeathed to him or her, then such interest will pass to the said legatee's descendents, otherwise his or her share of all of my property of which I die possessed shall be paid equally among my surviving children. I name my daughter Kati, to serve as the executor of my estate with full seizin and without bond. I direct that the expenses of my last illness, funeral, and the administration of my estate shall be paid by my executor as soon as practicable after my death and allocated against the residual estate. CURRENT YEAR GIFTS TO GRANDCHILDREN Kenny made the following gifts to his grandchildren during the current year: Seeing how Kenny's mom out lived her assets, Kenny is afraid his grandchildren may have the same fate. To assist them with their retirement income, Kenny decided to establish a trust for the grandchildren. The trust is an irrevocable trust and he funded it in the current year with $400,000. The trust will accumulate income until each grandchild reaches age 50. When a grandchild reaches age 50, he/she will begin receiving an annuity for their life. When all of the grandchildren die, if there is any remaining assets then the trustee may distribute those assets to a charitable organization of his choosing. Kenny sent a check in the amount of $6,000 to Kali's private school to pay her tuition. Kenny also gave both Cody and Riley $6,000 each. Due to prior transfers, Kenny paid GSTT of $165,600 and gift tax of $231,600. KENNY'S STATEMENT OF FINANCIAL POSITION ASSETS LIABILITIES & NET WORTH Cash/Cash Equivalents Liabilities Cash Total Cash/Cash Equiv. $120,000 Primary Residence $120,000 Auto $200,000 $10,000 Total Liabilities $210,000 Invested Assets The Bungalow $1,500,000 Net Worth $5,290,000 Total Liabilities & Net Worth $5,500,000 Investment $2,800,000 Portfolio Qualified Plan Total Investments $500,000 $4,800,000 Personal Use Assets Primary Residence $400,000 Vacation Property $100,000 Auto $20,000 Boat $60,000 Total Personal Use Total Assets $580,000 $5,500,000 Notes to Financial Statements: 1. 2. 3. 4. 5. 6. 7. 8. Assets are stated at fair market value (rounded to even dollars). Liabilities are stated at principal only (rounded to even dollars). The Bungalow was valued last week for insurance purposes. The valuation includes $100,000 for the land and $1,400,000 for the business. The qualified plan has Liz listed as the designated beneficiary. The Investment Portfolio is a Transfer on Death (TOD) account with Kati and Karli as the listed beneficiaries. The adjusted basis of the personal residence is $200,000. Kenny received the vacation property as a gift from his grandfather, Grover. Grover purchased the vacation property for $10,000 and the FMV of the property at the date of transfer was $30,000. The FMV when Grover died was $60,000. The annual exclusion did not apply to the transfer and the gift tax paid was $14,700. The boat is owned joint tenancy with rights of survivorship with Liz. They each contributed 50% of the pur-chase price. The Statement of Financial Position only reflects Kenny's interest. Kenny's state does not have any statutes that invalidate bequests or beneficiary designations to prior spouses