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CFP 5 True/False Questions

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1 CFP 5 True/False Questions

2 Video Play Video Open-ended & True/False Questions 7 minutes
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3 Module 1 Estate Planning Process & Goals

4  Module 1 True/False Play Jeopardy music
Estate planning is the process of planning for the accumulation, conservation, and distribution of an estate to most efficiently and effectively accomplish tax and nontax objectives. Your answer Play Jeopardy music

5 Module 1 True/False Power of appointment” is another term for a power of attorney. One method of estate transfer during life is by right of survivorship. A nontax characteristic of the sole ownership form of property ownership is that it goes through probate. A nontax characteristic of the tenancy by the entirety form of property ownership is the survivorship rights. The tenancy in common form of property ownership may serve as an income-splitting device.

6 Module 1 True/False The joint tenancy with right of survivorship form of property ownership allows tenants to own unequal shares of an asset. Ron and Marie Woods, husband and wife, want to own their home so that neither spouse could convey his or her interest in the property without the consent of the other. The tenancy in common form of property ownership would accomplish this goal. Because David Norwood and his brother, George, are planning to buy a duplex in which each wants to be assured that his children eventually will inherit ownership interests, the most appropriate form of property ownership for them is tenancy in common.

7 Module 1 True/False In a community property state, income earned by each of the spouses after marriage is considered community property. In a community property state, property acquired after marriage and classified as separate pursuant to a spousal agreement is considered community property. Reinhard and Beverly Schultz invested the proceeds from the sale of their home in a community property state into a home in a common law state; thus, for estate purposes, the new home will be treated as a community property asset.

8 Module 1 True/False Before their recent move to California, Joseph and Rose Derby, while married, lived in a common law state, where they accumulated substantial assets that they titled in Joseph’s name; for federal estate tax purposes, the property will be treated as belonging solely to Joseph. Reducing or freezing the value of assets is not a method that is commonly used to achieve the goal of reducing estate taxes. Placing title to property in joint tenancy with right of survivorship with one’s spouse can accomplish the goals of avoiding probate and delaying payment of transfer taxes.

9 Module 1 True/False It is an estate planning mistake not to recommend that a client who has established a revocable living trust also make a will. Gathering client data is the first step in the estate planning process.

10 Module 2 Methods of Estate Transfer at Death
CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Estate Planning Module 2 Methods of Estate Transfer at Death © 2011, College for Financial Planning, all rights reserved.

11 Module 2 True/False Federal tax law defines what property interests are included in a decedent’s probate estate. Owning property in joint tenancy with right of survivorship (JTWROS) is not a will substitute since the property passes outside of probate. The surviving spouse’s elective share can alter a decedent’s estate distribution plan. Probate of the decedent’s real property, regardless of where it is located, must be conducted in the state in which the decedent was a resident at the time of death. Probate is generally more costly than using will substitutes.

12 Module 2 True/False An executor is the person who executes a will.
Any person can make a valid will. A codicil is an amendment to a will that is executed separately and that leaves the will otherwise intact. If a decedent’s property does not pass to someone else by will substitute or under a provision in the decedent’s will and there are no legal heirs under the applicable state intestate succession statute, the property escheats to the state.

13 Module 2 True/False Failing to name contingent beneficiaries for specific bequests in a will can cause partial intestacy if the will does not have a residuary clause. The phrase “operation of law” is used to describe a method of estate transfer in which a contractual provision, such as that in a pension plan, indicates who is entitled to receive the asset at another person’s death. One advantage of all will substitutes is that they are revocable. Assets transferred by will substitute cannot receive a stepped-up basis.

14 Module 2 True/False A revocable living trust is the best will substitute for a person who does not want to make a will, but who would like to leave all of their assets to multiple beneficiaries at death. Placing assets in a revocable trust will protect them from the claims of the grantor’s creditors. Placing assets in joint tenancy with right of survivorship with a spouse will assure the original owner that such assets will be available for current living expenses, if necessary.

15 Module 3 The Federal Estate Tax

16 Module 3 True/False The purpose of the federal transfer tax system is to tax the gratuitous transfer of wealth at least once each generation The terms “exemption equivalent” and “applicable credit amount” mean the same thing. The general valuation principle for the federal estate tax is the fair market value of the asset as of the valuation date. Applicable zoning restrictions are a factor to be considered in valuing real estate for the federal estate tax.

17 Module 3 True/False A minority discount for estate tax purposes is applicable only when the decedent owned less than 50% of the stock of a publicly held corporation. The value of a life insurance policy owned by a decedent when the insured has not yet died is the face amount of the policy. If property is owned as tenants by the entirety, a deceased spouse’s share of the asset is equal to 50% of its fair market value. Only spouses can own property as tenants by the entirety and each is deemed to own one-half of the property.

18 Module 3 True/False If special use valuation is applicable, all assets in an estate will be valued at their current use rather than at their fair market value. A federal estate tax return is due if the value of the decedent’s gross estate exceeds the applicable exclusion amount for the year of death. If the alternate valuation date is used, all estate assets, except those that naturally decline in value with the passage of time, must be valued as of the alternate valuation date. The applicable estate tax rate is based in part on a person’s cumulative lifetime taxable transfers.

19 Module 3 True/False Lifetime taxable transfers are cumulated to ensure that a decedent’s taxable estate is taxed at the highest possible marginal rate. A decedent’s gross estate does not include income earned but not received prior to death. If a decedent owned property only with his spouse as joint tenants with right of survivorship, the amount of such property included in the decedent’s gross estate is determined by the amount each spouse contributed to its initial purchase.

20 Module 3 True/False If the decedent held a general power of appointment at death, her gross estate must include the value of any property subject to the power at death. The value of property excluded from the gross estate because it is subject to a qualified conservation easement also can be deducted from the gross estate to arrive at the taxable estate. If a decedent irrevocably transferred title to an asset prior to death, such asset never can be included in his gross estate.

21 Module 3 True/False Property placed in an irrevocable trust during the lifetime of the grantor will be included in her gross estate if the grantor retains a right to trust income. Property owned by a decedent at death that has an encumbrance for which the decedent is not personally liable, is included in the decedent’s gross estate at the property’s fair market value less the encumbrance’s outstanding balance as of the date of death. For property in the gross estate to qualify for the estate tax marital deduction, it must go to the decedent’s surviving spouse by a bequest in the decedent’s will.

22 Module 3 True/False The unlimited marital deduction has abolished the terminable interest rule. The estate tax charitable deduction is allowed only when the decedent transfers cash or property to a qualified charity in a qualifying form. A decedent’s adjusted taxable gifts are added to his taxable estate to determine his estate’s tax base. The gift-taxes-payable credit is allowed for gift taxes paid out of pocket by the decedent since 1932.

23 Module 3 True/False The deduction allowed against the federal estate tax for state death taxes paid by a decedent who died after 2004 is limited to the lesser of the state death taxes actually paid or 10% of the taxable estate. The prior transfer credit may be allowed to the estate of a decedent who dies within 10 years of receiving property from another decedent. Through an outright gift, a person can reduce his potential gross estate by more than the value of the gifted asset.

24 Module 3 True/False A decedent’s gross estate does not include property passing to the surviving spouse. For federal estate tax purposes, the taxable estate consists of the gross estate less available deductions, plus adjusted taxable gifts made after 1976. For federal estate tax purposes, only one-half of the value of property owned jointly with the surviving spouse is included in the gross estate of a decedent. The three most powerful tools in dealing with estate taxes are the marital deduction, the charitable deduction, and the applicable credit amount.

25 Module 3 True/False The marital deduction prevents the property to which it is applied from being subject to transfer taxation when the recipient spouse disposes of the property. The surviving spouse is given power to name the remaindermen of a power of appointment trust. The surviving spouse must be one of several income beneficiaries of a QTIP trust. An outright bequest to children is an example of bypass planning.

26 Module 3 True/False If a decedent leaves a remainder interest in a farm or personal residence to a qualified charity, the bequest will always receive an estate tax charitable deduction. For estate tax deduction purposes, in a charitable lead trust the qualified charity must receive either an annuity amount or a unitrust amount. Pooled income funds (PIFs) cannot be for a term certain.

27 Module 3 True/False If one spouse has a gross estate of $10.5 million and the other a gross estate of $50,000, transfers from the richer spouse to the poorer that qualify for the marital deduction can be used to reduce the overall estate tax on both estates if the DSUEA of the poorer spouse is not available to the richer spouse. The estate of a decedent who establishes a testamentary charitable lead trust with his spouse as the sole remainder beneficiary will be entitled to both a charitable and a marital estate tax deduction.

28 Module 3 True/False The best testamentary transfer technique to use when a decedent wants to give a specific asset to a specific individual, but retain total control of the asset until death, is either a bequest in a will or a revocable will substitute.

29 Module 4 The Federal Gift Tax

30 Module 4 True/False The federal gift tax and federal estate tax are described as a “unified” tax system because both are administered by the Internal Revenue Service. A gift may be valued at the date of gift or six months later. When a donor transfers a partial interest in an asset, the gift tax value may be the full fair market value of the entire asset. To receive favorable tax treatment under IRC sections and 2702 (Chapter 14 rules), any interest retained by a donor must be a “qualified” interest.

31 Module 4 True/False Only direct transfers of present interests are completed transfers that are taxable for federal gift tax purposes. If a donor reserves certain powers over property that has been irrevocably transferred to a donee, what would otherwise be a completed transfer will be treated as an incomplete transfer. An important factor in determining the value of gifted property is the kind of property gifted.

32 Module 4 True/False Although some financial advisors recommend hiring an appraiser and filing an informational gift tax return for gifts of certain property, this is a waste of time and money if a donor reasonably believes that the property has a value that is less than the allowable annual exclusion amount. The Internal Revenue Code definition of a gift is narrower than the common law definition of a gift. When a donee chooses not to accept a gift, he or she may incur a gift tax liability that is apart and separate from the gift tax liability incurred by the donor.

33 Module 4 True/False If Eileen writes a $9,900 check payable to her grandson so he can pay his tuition to Regional College, the gratuitous transfer will not be considered a gift for federal gift tax purposes. Expenses incurred for prevention of disease are not medical care payments to a provider that are exempted from federal gift tax. Gift splitting is an advantage only if the gift is of a present interest, which would entitle the spouses to reduce the gift value by up to twice the annual exclusion amount.

34 Module 4 True/False If Wes creates an irrevocable trust funded with securities valued at $90,000 that gives his mother a mandatory income interest with a present value of $8,000 and gives his daughter a remainder interest with a present value of $82,000, his taxable gifts on these transfers will be $90,000 minus two maximum annual exclusions. If a gift is taxable, it will decrease the applicable credit amount available to offset tax on transfers at death. A taxable gift can cause an increase in the amount of tax paid on each dollar for future taxable gifts.

35 Module 4 True/False A completed gift to a donee spouse that qualifies for the marital deduction eliminates the estate tax on that property when it passes to a third party at the donee spouse’s death. The full date-of-death fair market value of the assets in a qualified terminable interest property (QTIP) trust for which the QTIP election has been made is includible in the donee spouse’s gross estate even though the donee spouse receives only a life income interest and cannot control who will receive the assets at his or her death.

Module 5 Estate Planning Issues Related to Generation- Skipping Transfer Tax & Income Tax

37 Module 5 True/False The GSTT achieves the goal of replacing all lost revenue when wealth is not transferred at each generational level. The GSTT is not solely dependent upon the transfer being to a lineal descendant of a grandparent of the transferor or the transferor’s spouse or former spouse who is two generations younger than the transferor (or the transferor’s spouse or former spouse where applicable). The time at which the generation-skipping transfer tax is due can be at the time the donor makes the transfer or later.

38 Module 5 True/False The generation-skipping transfer tax is integrated with the federal estate and gift taxes so as to avoid double taxation. The deceased ancestor skip rule can prevent application of the GSTT to a transfer. The generation-skipping transfer tax provides an exemption for each donee. The use of the exemption in the generation-skipping transfer tax is elective. For an indirect generation-skipping transfer, the return computing GSTT due will be filed by either a skip party or a trustee.

39 Module 5 True/False An example of a generation-skipping transfer is when the transferor makes an outright gift to her niece. An indirect generation-skipping transfer occurs when the only transferees with an interest in the transferred asset are nonskip parties. An example of a direct generation-skipping transfer is when the transferor establishes and funds a revocable trust whose only beneficiary is the transferor’s grandchild. No annual exclusions are allowed in the computation of the generation-skipping transfer tax.

40 Module 5 True/False Income tax issues related to estate planning can affect either gain or ordinary income. When gain is realized, it must be recognized immediately. Common estate planning goals in regard to income tax are the deferment of the realization and/or recognition of gain if possible and, if not possible, the taxation of such gain as long-term versus short-term, and at as low a rate as possible. Altering the receipt and/or taxation of ordinary income can have estate as well as income tax consequences.

41 Module 5 True/False The donee of appreciated property that is acquired by gift has an income tax basis equal to the fair market value of the property at the time of the gift. There may be no step-up in basis in a reverse gift situation. Installment reporting of gain is never available if the installment payments are unsecured. Assets owned by a decedent at death that are subsequently received as the beneficiary of an estate are not reportable as ordinary income unless it constitutes income in respect of a decedent.

42 Module 5 True/False The transfer for value rule applies when assets are purchased from an estate. An employer that provides group term life insurance to its employees cannot deduct the premiums paid. A person who holds a general power of appointment over trust assets may be taxable on trust income. If trust income is or may be used to pay premiums on insurance on the life of the grantor or the grantor’s spouse, trust income will be taxed to the trustee.

43 Module 5 True/False The charitable income tax deduction is available only for taxpayers who itemize deductions and who give an inter vivos gift of cash or property to a qualified charity in a qualified form.

44 Module 6 Methods of Estate Transfer During Life

45 Module 6 True/False An advantage of giving property away during life rather than at death is that during life the donor can use the annual exclusion. A disadvantage of giving property away during life rather than at death is that a gift during life is more private. The donor cannot make a completed gift and still maintain an interest in or control over the gifted property. A donor may initiate a reverse gift transaction in an attempt to get a stepped-up basis on highly appreciated property.

46 Module 6 True/False The grantor of a trust holds legal title to trust assets. Gifts to a Section 2503(c) trust do not entitle the grantor to a gift tax annual exclusion. A GRIT and a GRAT are treated differently for gift tax purposes if the grantor and the remaindermen are related. One of the primary goals of an ILIT is to keep the life insurance death benefit from being included in the grantor’s gross estate. The payments to be made in an installment sale cannot be secured without losing the right to report gain on the installment basis.

47 Module 6 True/False The payments to be made in a private annuity will contain an ordinary income element. One advantage of a sale-leaseback transaction is that the seller (or a business entity controlled by the seller) will get an income tax deduction if the property sold is used in a trade or business. Custodial gifts can be made only to minors. Since the seller in a remainder interest transaction (RIT) has sold an interest in the asset to another, he cannot continue to receive all income from the asset.

48 Module 6 True/False One advantage of a Section 2503(c) minor’s trust is that it allows the grantor to receive an annual exclusion without having to distribute income or give the minor a Crummey power. The annuitant in a private annuity transaction will never have to include any part of the annuity in his or her gross estate. A sale or gift of out-of-state real property owned solely by the donor will allow the donor to avoid ancillary probate of this asset. A sale of income-producing property can be used to reduce the seller’s gross estate.

49 Module 6 True/False A major problem with closely held businesses is realizing their “paper value.” In a cross-purchase buy-sell agreement, the business entity is obligated to purchase a deceased shareholder’s interest. Realizing the value of a solely owned business may require changing the form of the business entity. Use of a buy-sell agreement requires an immediate transfer of an interest in the business to a third party.

50 Module 6 True/False The tax consequences of a buy-sell agreement always will be based on the purchase price called for by the agreement. IRC Section 2701 can be applicable to the transfer of a closely held business interest when the transferor and transferee are related. Freezing the value of a business entity for estate tax purposes is achieved in a preferred stock recapitalization by retaining an ownership interest that has a fixed liquidation value. One common use of life insurance is as a source of income replacement when the insured dies.

51 Module 6 True/False Some life insurance policies pay benefits only when the insured dies, while others allow access to benefits before the insured dies. In a split-dollar life insurance plan, the employer can deduct the premium payments it makes. The value of a life insurance policy for gift tax purposes is its replacement cost. An advantage of second-to-die life insurance is that it allows the first spouse to die to leave everything to his or her surviving spouse without creating a liquidity problem in the surviving spouse’s estate.

52 Module 6 True/False If a client purchases life insurance on his own life primarily for estate liquidity purposes, the client’s estate should be made the beneficiary of the policy.

53 Module 7 Estate Liquidity & Postmortem Actions

54 Module 7 True/False Insufficient liquidity can cause an estate to be smaller after a decedent’s death than it was immediately before his or her death. A commonly recommended estate liquidity planning strategy is to take steps to eliminate all estate administrative expenses. To determine an estate’s liquidity requires an analysis of the estate’s current or future potential to meet its cash requirements. Generally, there is no direct relationship between the size of an estate and the need for liquidity. Premortem planning has only a negligible, minor role in liquidity planning.

55 Module 7 True/False Premortem planning focuses primarily on finding techniques to reduce the cash needs of a deceased’s estate. One premortem technique for reducing the possible cash needs of an estate is to make sure that the decedent’s will has a nonexoneration clause. Often, reducing or eliminating assets—such as collectibles, rental property, or closely held business interests—prior to death can enhance an estate’s liquidity position.

56 Module 7 True/False The best way to use life insurance to increase the cash available to an estate is to make the estate the beneficiary of the life insurance policy. Selling illiquid assets during life can enhance the liquidity position of an estate in three different ways. If a client has real estate in a state other than his state of domicile, making sure that this asset is specifically devised in the client’s will is the best way to enhance estate liquidity. Qualifying estate assets for the estate tax marital or charitable deduction can help estate liquidity.

57 Module 7 True/False For estate liquidity purposes, as clients age, they should be encouraged to move into investments such as growth stocks that tend to produce a greater return on their investment because this should increase the amount of cash available to their estate at their death. An estate’s personal representative (PR) can enhance liquidity by diligently carrying out his or her duties under the probate code. Special-use valuation of property in an estate may decrease the estate tax and requires only that, at the time of the decedent’s death, the property be held in a qualified use and pass to a qualified heir.

58 Module 7 True/False When the marginal estate tax rate is lower than the marginal fiduciary income tax rate, a PR may minimize the total tax paid by electing to deduct the decedent’s unreimbursed medical expenses on the estate’s fiduciary income tax return (Form 1041) rather than on the estate tax return (Form 760). A personal representative must select the calendar year in which to report estate income.

59 Module 7 True/False Qualifying for the installment method of paying estate tax under Section 6166 can reduce the immediate need for cash but requires that a decedent’s business be a going concern at the time of the decedent’s death and organized as a partnership or corporation. If the obligation to pay transfer taxes falls to a beneficiary receiving any closely held business interest, the beneficiary may sell all or part of the business interest received back to the business and avoid having the amount received from the business treated as a dividend (that is, as ordinary income).

60 Module 7 True/False The election to report accrued interest on EE or HH savings bonds on the decedent’s final income tax return (Form 1040), rather than over time on the estate’s income tax return (Form 1041), may minimize the total tax liability of the estate and its beneficiaries. A disclaimer by a surviving spouse within nine months of the decedent spouse’s death, on the condition that the surviving spouse retains an income interest in the property, will not be subject to the federal gift tax.

61 Module 7 True/False Having family members agree to distribute a decedent’s assets in a way other than according to the decedent’s will provisions is preferable to a will contest because it will not adversely affect the estate’s liquidity position. If a surviving spouse, who is dissatisfied with his or her share of the estate, elects against the will to take a statutory percentage of the estate rather than the amount given under the will, it can have a profound effect on both the distribution and liquidity of the estate.

62 Module 7 True/False Claiming statutory rights, such as the homestead and exempt property allowances or the family allowance, can have an adverse affect on estate liquidity. An estate that has a closely held partnership business interest with a value that exceeds 35% of the decedent’s adjusted gross estate is eligible for a Section 303 stock redemption. The PR of an estate that is placed in a QTIP trust should never make the QTIP election for trust assets that are necessary to allow the decedent to fully use his or her applicable credit amount.

Module 8 Estate Planning for Special Situations: Incapacity, Family Arrangements & Selecting Fiduciaries

64 Module 8 True/False A person can be legally and/or mentally incompetent. In states that have adopted the Uniform Probate Code (UPC), a conservator has only equitable title to the ward’s property. With a durable power of attorney, the authority of the attorney-in-fact will survive the principal’s death. A revocable living trust is funded only when the grantor becomes incompetent. If a patient’s desires concerning medical treatment in a specific situation are known, they generally will be enforced by courts.

65 Module 8 True/False A living will must be executed according to state statutes. A person can preplan his or her own funeral. One requirement to qualify for Medicaid nursing home benefits is that the applicant must require significant assistance with two or more activities of daily living or have a very significant need for supervision. A qualified domestic relations order (QDRO) can identify the nonparticipant spouse as an alternate payee.

66 Module 8 True/False Minor children may be eligible for a Social Security death benefit if a parent obligated to pay child support dies. A sprinkle trust requires distribution of trust assets to beneficiaries in equal amounts. An adopted child cannot be intentionally disinherited. If the donor or decedent is not a U.S. citizen, he or she is subject to estate and gift taxation on the same basis as a U.S. citizen only if he or she is a U.S. resident.

67 Module 8 True/False Gift splitting is allowed if one spouse is a nonresident alien, and the other spouse is a resident alien. A person in a nontraditional family arrangement must be particularly careful not to let the laws of intestate succession govern the distribution of his or her estate. It is more important for unmarried cohabitants to enter into a property agreement than for a married couple. A valid will can give property to someone to whom the testator is neither married nor related.

68 Module 8 True/False In certain states, common law marriages are recognized between same-sex cohabitants. Joint tenancy with right of survivorship may not be as useful as tenancy in common as a way to minimize the estate taxes of unmarried cohabitants. It may be difficult for an unmarried cohabitant to obtain a life insurance policy on the other cohabitant. An unmarried cohabitant may be refused the right to visit the other cohabitant who is a patient in a hospital.

69 Module 8 True/False A fiduciary can have only such powers as are prescribed in applicable state statutes.

70 CFP 5 True/False Questions End of Slides

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