chapter c13

Prentice Hall's Federal Taxation 2016: Corporations, 29e (Pope)Chapter C13: The Estate Tax

LO1: Estate Tax Formula

1) The estate tax is a wealth transfer tax.Answer: TRUEPage Ref.: C:13-2Objective: 1

2) The tax base for the federal estate tax is the total of the decedent's taxable estate and post-1986 taxable gifts if the decedent made gifts in 1981.Answer: FALSEPage Ref.: C:13-3Objective: 1

3) In 2014, the unified credit enables an estate valued at $5.34 million or less to not be subject to the estate tax.Answer: TRUEPage Ref.: C:13-5Objective: 1

4) Identify which of the following statements is true.A) The tax base for the federal estate tax is the total of the decedent's taxable estate and post-1976 taxable gifts.B) Property included in a decedent's gross estate consists of only that property to which the decedent held title.C) Funeral expenses are not deductible from the gross estate.D) All of the above are false.Answer: APage Ref.: C:13-2Objective: 1

5) Martin transfers stock to an irrevocable trust and names himself to receive the trust income for life with the remainder interest gifted to his son. When Martin dies,A) none of the stock will be included in Martin's estate.B) the stock's value at the time of transfer to the trust will be included in Martin's estate.C) the value of the stock less the present value of the income receivable by Martin will be included in Martin's estate.D) the value of the stock at death will be included in Martin's estate.Answer: DPage Ref.: C:13-3Objective: 1

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6) Which of the following is deductible in arriving at the amount of the taxable estate?A) expenses incurred in administering the estateB) casualty losses that occurred while administering the estateC) charitable contributionsD) All of the above are deductible.Answer: DPage Ref.: C:13-3 and C:13:4Objective: 1

7) For 2014, the unified credit is equivalent to a statutory exemption ofA) $1,000,000.B) $1,500,000.C) $780,800.D) $5,340,000.Answer: DPage Ref.: C:13-5Objective: 1

8) Identify which of the following statements is true.A) The unified credit is the only credit common to both the gift and estate tax computation.B) For estate tax purposes, publicly traded stocks are valued at their closing price on the date of death.C) Stocks traded on a stock exchange are valued at the closing price for the date of death unless the alternate valuation date is elected.D) All of the above are false.Answer: APage Ref.: C:13-5Objective: 1

9) In 2001, Clara made taxable gifts of $2 million. This year, Clara dies with a taxable estate of $4 million. At the time of her death, the FMV of the property Clara gifted in 2001 is $8 million. What is the amount of the estate tax base?Answer: $2,000,000 + $4,000,000 = $6,000,000Page Ref.: C:13-2Objective: 1

10) In 2002, Gert made a $5,000,000 taxable gift. The 2002 gift tax on $5,000,000 was $2,275.800. Gert was entitled to a unified credit of $345,800, resulting in a gift tax of $1,193,000. The marginal tax rate in 2002 is 50%. Assume Gert dies in 2013 when the credit is $2,045.800 and the marginal rate is 40%, the tax on $5,000,000 would equal $1,945,800 before subtracting any credit. In arriving at Gert's estate tax liability, what is the amount subtracted for 1992 gift taxes paid?Answer: $1,600,000 = $1,945,800 ($5,000,000 taxable transfer at current year rates) - $345,800 (where $1 million is the exemption equivalent for 2002).Page Ref.: C:13-5; Example C:13-4Objective: 1


11) Outline and briefly describe the estate tax computation, beginning with the gross estate.Answer: Sum of: Property titled to decedent and property gifted if decedent had right to the income or

control. Includes gift tax paid on gifts in past three years.Equals: Gross estateMinus: Deductions: expenses, debts, losses, transfers to spouse, state death taxes and

charitable contributionsEquals: Taxable estatePlus: Adjusted taxable gifts (post-1976 taxable gifts)Equals: Estate tax baseTimes: Tax rate(s)Equals: Tentative tax on estate tax baseMinus: Post-1976 gift taxes (using current year's unified transfer tax rate schedules)

Unified creditPre-1977 gift tax creditCredit for estate taxes paid on prior transfersForeign death tax credit

Equals: Estate tax payablePage Ref.: C:13-3Objective: 1

LO2: The Gross Estate: Valuation

1) Listed stocks are valued at their closing price on the date of death.Answer: FALSEPage Ref.: C:13-5; Example C:13-4Objective: 1

2) An executor can value each asset in an estate at the lower of its FMV at death or the alternate valuation date.Answer: FALSEPage Ref.: C:13-7Objective: 2

3) The FMV of an asset for gift or estate tax purposes is the same except forA) marketable securities.B) land.C) life insurance policies.D) patents.Answer: CPage Ref.: C:13-6Objective: 2


4) Brent, who died on January 10, owned 10 shares of Potts Corporation stock. The closest trading dates to January 10 are January 8 (two working days before the date of death) and January 11 (one working day after the date of death). On January 8, the stock traded at a high of 101 and a low of 97, while on January 11, the high was 90 and the low was 86. The date-of-death per-share value isA) $99.00.B) $95.33.C) $93.50.D) $91.67.Answer: DExplanation: (101 + 97) × 0.50 = 99; (90 + 86) × 0.50 = 88

= $91.67

Page Ref.: C:13-6Objective: 2

5) The value of stock that is not publicly traded may be determined by consideringA) the nature and history of the business.B) earning capacity.C) dividend-paying capacity.D) all of the aboveAnswer: DPage Ref.: C:13-7Objective: 2

6) Appraisal methods used to value real estate for estate tax purposes may includeA) comparable sales.B) reproduction cost.C) capitalization of earnings.D) all of the aboveAnswer: DPage Ref.: C:13-7Objective: 2

7) Reversionary interests in publicly traded stocks included in a gross estate must be valuedA) by an independent actuary.B) by an appraiser.C) by considering the fact that the transferor has died.D) using actuarial tables.Answer: DPage Ref.: C:13-7Objective: 2


8) The alternate valuation date is generallyA) 3 months after the date of death.B) 6 months after the date of death.C) 9 months after the date of death.D) 12 months after the date of death.Answer: BPage Ref.: C:13-7Objective: 2

9) Identify which of the following statements is false.A) The "blockage" regulations allow the IRS to prevent the estate's executor from electing the alternate valuation date.B) If the alternate valuation date is elected, changes in value that occur solely because of a "mere lapse of time" usually are to be ignored.C) The alternate valuation date can be elected for estate tax purposes only if the election decreases the value of the gross estate and estate tax liability (after reduction for credits).D) If property is sold within 6 months of the date of death, the alternative valuation date is the date of sale.Answer: APage Ref.: C:13-7 and C:13-8Objective: 2

10) The alternate valuation date can be elected for estate tax purposes only if the electionA) increases the value of the gross estate.B) decreases the value of the gross estate.C) decreases the estate tax liability (after reduction for tax credits).D) Both B and C are required.Answer: DPage Ref.: C:13-7Objective: 2

11) Identify which of the following statements is true.A) The alternate valuation date can be used for estate tax purposes only if the election increases the value of the gross estate.B) If the alternative valuation date is elected, changes in value that occur solely because of "mere lapse of time" usually are to be ignored.C) The gross estate, a federal law concept, is generally smaller than the probate estate, a state law concept.D) All of the above are false.Answer: BPage Ref.: C:13-7Objective: 2

12) Wally died on November 15. His gross estate includes 100 shares of ABC Corporation stock. On November 15, ABC's stock trades at a high of $100, a low of $92, and a close of $94. What is the per-share value of the stock in Wally's estate?Answer: ($100 + $92) × 0.50 = $96Page Ref.: C:13-6Objective: 2

13) Julian died on November 1 and owned 100 shares of a New York Stock Exchange stock. The stock traded at a high of 100 and a low of 98 on November 1. It opened at 98 and closed at 100. On Julian's estate tax return, what will the per-share and total value of the stock be?Answer: ($100 + 98)/2 = $99 per share × 100 shares = $9,900Page Ref.: C:13-6Objective: 2


14) Ray died on March 4. His estate includes some stock and a parcel of land. The stock is still owned by the estate on September 4, but the land is sold on August 30. If Ray's executor elects the alternate valuation date, what values would be used for estate tax purposes for the stock and the land?Answer: Stock value on September 4.; land value on August 30.Page Ref.: C:13-7Objective: 2

15) In 2000, Mike transfers $100,000 of leased land to a trust. The trust income is payable to Mike's son for 13 years, after which time the land is to revert to Mike. This year, Mike dies when the land is valued at $210,000. The applicable federal rate is 10%, and the reversionary actuarial factor is 0.30. How much of the trust value must be included in Mike's estate?Answer: 0.30 × $210,000 = $63,000Page Ref.: C:13-7; Example C:13-8Objective: 2

16) Explain how shares of stock traded on a stock exchange are valued. What is the blockage rule?Answer: Shares traded on a stock exchange are valued at the average of their high and low selling prices as of the applicable valuation date. The blockage rule allows a reduction from the average value where the decedent owned a large block of shares that would be difficult to dispose of at one time without using an underwriter and/or accepting a lower price.Page Ref.: C:13-6Objective: 2

LO3: The Gross Estate: Inclusions

1) The probate estate includes property that passes by will or an intestacy statute and does not include property that passes due to a beneficiary designation.Answer: TRUEPage Ref.: C:13-9Objective: 3

2) Taxpayers can avoid the estate tax by making gifts at least a year prior to death.Answer: FALSEPage Ref.: C:13-10Objective: 3

3) A special power of appointment exists if the holder can exercise the power in favor of himself or herself, his or her creditors, or the creditors of his or her estate.Answer: FALSEPage Ref.: C:13-15Objective: 3


4) Denise died April 1 and owned several bonds that paid interest March 31 and September 30. Also, she owned stock that paid dividends quarterly on March 31, June 30, September 30, and December 31. Denise's estate received the interest and dividends on the payment dates. What should be included in Denise's gross estate?A) all interest and dividends received in the year of deathB) only interest and dividends received prior to the date of deathC) only interest and dividends received after the date of deathD) none of the interest and dividends receivedAnswer: BPage Ref.: C:13-8Objective: 3

5) Identify which of the following statements is true.A) A courtesy interest is a widower's interest in his deceased wife's property.B) All gifts made within three years of the date of death must be included in the gross estate.C) Dower rights are not the same as courtesy rights.D) All of the above are false.Answer: APage Ref.: C:13-10Objective: 3

6) On March 1, Bart transfers ownership of a $700,000 life insurance policy on his life that he purchased in 2011. How long must Bart live to avoid inclusion of the $700,000 death benefit in his estate?A) six monthsB) one yearC) three yearsD) No minimum time period exists.Answer: CPage Ref.: C:13-10Objective: 3

7) Four years ago, Roper transferred to his son ownership of a $100,000 life insurance policy that Roper purchased on his own life in 2000. The cash value of the policy on the transfer date was $25,000. Roper died on March 1st of this year. The amount included in Roper's gross estate due to the life insurance policy isA) $0.B) $25,000.C) $35,000.D) $100,000.Answer: APage Ref.: C:13-10Objective: 3


8) On March 1, Sue transfers stock worth $20,000 to Frank. How long must Sue live to avoid inclusion of the $20,000 of stock in her gross estate?A) six monthsB) one yearC) three yearsD) No minimum time period exists, but she must be alive at transfer of ownership.Answer: DPage Ref.: C:13-8Objective: 3

9) The gross-up rule requiresA) all beneficial interests be included in the decedent's estate.B) post-1976 gifts by the decedent be included in the decedent's estate.C) certain gifts made by the decedent within three years of the date of death are included in the decedent's gross estate.D) gift taxes on gifts made by the decedent or the decedent's spouse that are paid by the decedent or his estate during the three-year period ending with the decedent's date of death must be included in the decedent's gross estate.Answer: DPage Ref.: C:13-11Objective: 3

10) In February of the current year, Tom dies. Two years and nine months before the date of death, Tom made a gift of stock valued at $2 million. Gift taxes paid on the transfer by Tom were $435,000 after reduction for a $345,800 unified credit ($780,800 - $345,800). At the time of his death, the gifted stock was valued at $2.3 million. The amount included in Tom's gross estate from this transfer isA) $2,000,000.B) $2,300,000.C) $435,000.D) none of the aboveAnswer: CPage Ref.: C:13-11Objective: 3

11) In 2012, Paul transfers $1,000,000 to a trust benefiting his three children. As trustee, he has the power to determine the amount of distributions each year. Paul dies in the current year when the trust has a value of $1,200,000. How much of the trust's value is included in Paul's estate?A) $0B) $400,000C) $1,000,000D) $1,200,000Answer: DPage Ref.: C:13-13Objective: 3


12) Identify which of the following statements is true.A) The gross-up rule applies to the gift tax triggered by a gift during a three-year look-forward period.B) All gift taxes paid by the decedent on gifts made within five years of the date of death must be included in the gross estate.C) If a transferor retains voting rights in stock of a controlled corporation for the transferor's lifetime, the stock is included in the transferor's gross estate.D) All of the above are false.Answer: CPage Ref.: C:13-11 and C:13-12Objective: 3

13) Identify which of the following statements is true.A) Reversionary interests of less than 5% are includible in the gross estate.B) A reversionary interest means a chance exists that the property may pass back to the transferor under the terms of the transfer.C) If a reversionary interest exceeds 3% of the property's value, the amount that is included in the estate is not the value of the reversionary interest, but rather the date-of-death value of the gifted property less the value of intervening life estates.D) All of the above are false.Answer: BPage Ref.: C:13-12Objective: 3

14) Dan transfers an apartment building to Grace but retains the right to the rental income for 10 years. Dan dies nine years after the transfer when the building is worth $600,000. The applicable federal rate is 10% and the reversionary actuarial factor is 0.30. How much would be included in Dan's estate?A) $0B) $150,000C) $350,000D) $600,000Answer: DPage Ref.: C:13-12; Example C:13-18Objective: 3

15) In 2001, Alejandro buys an annuity for $100,000 that will pay Alejandro an annual amount for life with survivor benefits to his wife. When Alejandro dies in the current year, a comparable contract would have cost $81,000. What amount is included in Alejandro's gross estate?A) $0B) $81,000C) $100,000D) $181,000Answer: BPage Ref.: C:13-13Objective: 3


16) Identify which of the following statements is false.A) Annuities not related to employment are valued in the gross estate at the cost of a comparable contract multiplied by a fraction that represents the portion of the purchase price that the decedent has contributed.B) If an annuity ceases payments with the death of the decedent and nothing is to be received by any other party, the annuity is included in the gross estate.C) When persons other than spouses own property jointly, the amount included in the joint owner's gross estate is measured in accordance with the consideration the decedent furnished to purchase the property.D) Statements A and C are true.Answer: BPage Ref.: C:13-13Objective: 3

17) Yoyo Corporation maintains a retirement plan for its employees to which it makes 70% of the contributions and the employees make 30%. Gary dies this year and is employed at the time of his death. Gary's spouse will receive an annuity valued at $600,000 from the retirement plan. How much of the annuity will be included in Gary's gross estate?A) $600,000B) $420,000C) $180,000D) $0Answer: APage Ref.: C:13-14Objective: 3

18) In 2001, Polly and Fred, brother and sister, purchased a condominium at a golf resort. Polly contributed 60% of the $200,000 cost; Fred contributed 40%. Polly dies in the current year when the condominium has a $300,000 value. How much is included in Polly's estate?A) $120,000B) $180,000C) $200,000D) $300,000Answer: BPage Ref.: C:13-14Objective: 3


19) Following are the fair market values of Wilma's assets at her date of death:

Personal effects and jewelry $150,000Land which Wilma bought and held as a jointtenant with right of survivorship with her sister 800,000

The executor of Wilma's estate did not elect the alternate valuation date. The amount includible in Wilma's gross estate isA) $150,000.B) $550,000.C) $800,000.D) $950,000.Answer: DPage Ref.: C:13-14Objective: 3

20) Four years ago, David gave land to Mike that he purchased for $70,000, which is presently worth $100,000. Three years ago, Mike exchanged the land (then worth $150,000) along with a $100,000 cash contribution made by David for a new piece of land worth $250,000. The new land is titled with David and Mike as joint tenants with the right of survivorship. When Mike dies this year, the land is worth $300,000. Mike's estate will includeA) $0.B) $150,000.C) $180,000.D) $300,000.Answer: AExplanation: Mike is treated as giving no consideration; thus his estate will not include the realty.Page Ref.: C:13-14Objective: 3

21) In 2006, Roger gives stock valued at $100,000 to Martha. Roger and Martha are not related. In 2008, Martha uses the stock then valued at $110,000 as partial consideration to acquire realty costing $220,000. Pat (her brother) furnishes the remaining $110,000 of consideration. The realty is titled in the names of Martha and Pat as joint tenants with right of survivorship. This year, Martha dies and Pat survives. The realty is valued at $300,000 at Martha's death. How much, if any, of the realty's value will be included in Martha's estate?A) $0B) $110,000C) $150,000D) $300,000Answer: CExplanation: Because Roger is not an owner of the realty, the fact that he gave the stock to Martha does not affect the consideration Martha is deemed to have furnished one-half the consideration.Page Ref.: C:13-15Objective: 3


22) Identify which of the following statements is true.A) If spouses are the only joint owners, only one-half of the value of the jointly owned property is included in the gross estate, regardless of the relative amount of consideration provided by either spouse.B) Special powers of appointment give the power holder less restricted powers than a general power of appointment.C) The gross estate does not include the value of life insurance policies on the decedent if the proceeds are receivable by the executor or for the benefit of the estate.D) All of the above are false.Answer: APage Ref.: C:13-15Objective: 3

23) Proceeds of a life insurance policy payable to the estate's executor, as the estate's representative, areA) includible in the decedent's gross estate only if the premiums had been paid by the insured.B) includible in the decedent's gross estate only if the policy was taken out within three years of the insured's death.C) never includible in the decedent's gross estate.D) always includible in the decedent's gross estate.Answer: DPage Ref.: C:13-16Objective: 3

24) Two years ago, Nils transfers a $200,000 life insurance policy on his life to his daughter, Gail. The policy is worth $60,000 at the time of transfer and Gail pays Nils $50,000. When Nils dies this year, the $50,000 cash is still in a savings account. The consideration offset when computing Nils's gross estate isA) $0.B) $50,000.C) $150,000.D) $166,667.Answer: BPage Ref.: C:13-17; Example C:13-33Objective: 3

25) Ernie died this year. His will creates a $2,000,000 QTIP trust for his widow. Ernie's executor elects to claim the marital deduction for the QTIP transfer. At the time of the surviving spouse's death, the value of the QTIP trust is $3.6 million. The amount of the QTIP trust included in the surviving spouse's gross estate isA) $3,600,000.B) $2,000,000.C) $1,800,000.D) $0.Answer: APage Ref.: C:13-17 and C:13-18Objective: 3


26) Betty dies on February 20, 2013. Her estate consisted of the following assets, all valued as of her date of death:

Stock with a basis of $40,000 and a fair market value of $200,000Home valued at $1,500,000 and a basis of $490,000Cash of $70,000Life insurance on Betty's life owned by her daughter with a $500,000 face value

What is Betty's gross estate?A) $600,000B) $1,100,000C) $1,770,000D) $2,270,000Answer: CExplanation: (200,000 + 1,500,000 + 70,000). The life insurance policy is excluded since Betty is not the owner.Page Ref.: C:13-16Objective: 3

27) Which of the following circumstances would cause the gifted property to be included in the donor's gross estate?I. Donor retains a life estate in the gift property.II. Donor retains the power to revoke or amend the gift.III. Donor gives more than $14,000 to one donee in one year.IV. Donor dies within three years of gifting land.A) I, II and IIIB) I, IIC) II, IVD) III, IVAnswer: APage Ref.: C:13-9Objective: 3

28) Identify which of the following statements is false.A) Life insurance can help provide liquidity for paying estate taxes.B) Life insurance has the potential for large appreciation.C) The insured does not have to be the owner of the policy.D) Life insurance is always part of the estate of the insured.Answer: DPage Ref.: C:13-33Objective: 3

29) Melissa transferred $650,000 in trust in 2006: income for life to herself, the remainder to her son. What part, if any, of the value of the trust's assets will be included in Melissa's estate?Answer: The entire trust will be included since she retained the income from the trust until her death.Page Ref.: C:13-11 and C:13-12Objective: 3


30) Donna died on June 1 of the current year. The executor considers the following information when preparing her estate tax return:• In 1997, Donna transfers title to her personal residence to her son. The residence is worth $60,000 on the transfer date. Donna continued to live alone in the residence until her death. She did not pay any rent. At her death, the residence is worth $100,000.• In 1998,Donna created an irrevocable trust and funded it with $300,000 of assets. Donna names a bank as trustee. According to the trust agreement, all the trust income is to be paid out annually for 25 years. The trustee, however, is to decide how much income to pay each year to Donna's son and daughter. Upon termination of the trust, the assets are to be distributed equally among her two children or their estates. The trust's assets are worth $320,000 when Donna dies.• In 1998, Donna created a revocable trust with a bank named as trustee. She named her grandchild Joe as the beneficiary for life. Upon Joe's death, the property is to be distributed equally among Joe's descendants. The trust assets are worth $300,000 when Donna dies. How much would be included in Donna's gross estate?Answer: $100,000 (residence) + 0 (irrevocable trust) + $300,000 (revocable trust) = $400,000Page Ref.: C:13-9Objective: 3

31) Mary creates and funds a revocable trust. Mary names her son to receive the income for life and her grandson to receive the property upon the son's death. What are Mary's powers with respect to the trust, and how will the trust be treated in her estate?Answer: Since the trust is revocable, Mary may change the terms during her lifetime. Mary's gross estate will include the date-of-death value of the entire trust.Page Ref.: C:13-13Objective: 3

32) In 1997, Barry and Fred provide $20,000 and $60,000 of consideration, respectively, to purchase a beach house titled in both their names as joint tenants with right of survivorship. Barry dies in the current year and is survived by Fred. The beach house is valued at $100,000. What amount must be included in Barry's gross estate for the beach house?

Answer: × $100,000 = $25,000


33) Five years ago, George and Jerry (his brother) provide $40,000 and $60,000, respectively, to purchase realty titled in the names of George and Jerry as joint tenants with right of survivorship. George dies in the current year and is survived by Jerry. At the time of George's death, the realty is valued at $300,000. What is the value of the realty in George's gross estate?Answer: $300,000 × ($40,000 ÷ ($40,000 + $60,000)) = $120,000Page Ref.: C:13-15; Example C:13-25Objective: 3


34) The following items were discovered in reviewing materials for John's estate tax return:(1) Two years ago, John sold stock to his son, Patrick, for $30,000. At the date of sale, the stock had a value of $65,000. The value of the stocks at John's death was $90,000.(2) John owned a beach house, worth $500,000, with his sister, Amber, who paid for it.(3) John's home was held in a tenancy by the entirety with his wife, Julia. Julia paid for the house, which had a value of $300,000 on the date of his death.(4) John's clothing and other personal belongings are worth $3,700 on the date of his death.What amount is included in John's estate?Answer: Home $150,000Clothing and personal belongings 3,700

$153,700

Items (1) and (2) are not included in the estate.Page Ref.: C:13-15Objective: 3

35) Karen died on May 5 of the current year. Her executor elects date-of-death valuation. Karen's gross estate possibly includes the following items:• Joint checking account (with her husband), which has a balance of $10,000. Her husband did not contribute to the account.• Joint savings account (with her daughter), which has a balance of $50,000. Her daughter did not contribute to the account.• Life insurance policy on the life of Karen, having a face value of $400,000. The cost of a comparable policy immediately before Karen's death is $150,000. Karen's estate is the beneficiary.• Life insurance policy on the life of Karen's daughter, having a face value of $100,000 with an interpolated terminal reserve immediately before Karen's death of $30,000.Unexpired premiums are $5,000. Karen is the beneficiary. How much, if any, of these items are included in Karen's estate?Answer: $490,000 = $5,000 (one-half of joint checking account) + $50,000 (savings account) + $400,000 (Karen's life insurance) + $30,000 (interpolated terminal reserve on daughter's life insurance) + $5,000 (unexpired premiums on daughter's life insurance).Page Ref.: C:13-14 and C:13-15Objective: 3


36) Discuss the transferor provisions relating to the estate tax, and provide three examples of transactions governed by the transferor provisions.Answer: They apply if the decedent earlier made a transfer of a type specified in the Code and the decedent did not receive adequate consideration for the transferred interest. If one of the transferor provisions applies, the transferred property is included in the gross estate at its date-of-death or alternate valuation date value.

One specified transfer is the gifting within three years prior to death of a life insurance policy on the decedent's life that would have been included in the gross estate. Also included are transfers with a retained life estate, transfers taking effect at death, and revocable transfers.

Also, the donor-decedent's gross estate is increased by any gift tax that is paid by the decedent or his estate on any gift that the donor or the donor's spouse makes during the three-year period ending with the decedent's death. This provision is known as the gross-up rule.

The gross estate also includes earlier transferred property if the decedent stipulates that another person must survive the decedent to own the property and the value of the decedent's reversionary interest exceeds 5% of the value of the transferred property.Page Ref.: C:13-10 through C:13-13Objective: 3

37) Explain why living trusts are popular tax-planning vehicles.Answer: Revocable trusts, sometimes called living trusts, are popular arrangements from a nontax standpoint because assets held by a revocable trust pass outside of probate. Advantages of avoiding probate include lower probate costs and easier administration for real property owned in a state that is not the decedent's state of domicile. In addition, unlike a will, a revocable trust is not a matter of public record.Page Ref.: C:13-13Objective: 3


38) Michael Moriarty, a widower, is quite elderly and is beginning to do some estate planning. His goal is to reduce his transfer taxes. He is considering purchasing land with a high potential for appreciation and owning it with his grandson as joint tenants with rights of survivorship. Michael would provide all of the consideration, estimated to be about 11.5 million. What tax issues should Michael Moriarty consider with respect to the purchase of the land?Answer: • Does Michael make a gift when he purchases the land?• What portion of the land will be in Michael's gross estate? (Stated differently, will using this form of ownership reduce his estate taxes?)• Are there any other estate tax implications?• What are the generation-skipping transfer tax implications?

At the time of purchase, Michael will make a gift to his grandson of half the land's cost. Because Michael provided all the consideration, under the consideration-furnished test of Sec. 2040, Michael's gross estate will include 100% of the land's date of death value. This strategy will not reduce his estate tax liability.

In addition, his estate tax base will include as an adjusted taxable gift, the taxable gift made upon the purchase of the land as joint tenancy property. The gift will be so large that gift taxes will be owed. Thus, if Michael dies within three years of acquiring the land, there will be a gross-up under Sec. 2035 for the gift taxes he paid. Fortunately, such gift taxes will be subtracted to determine his estate tax payable regardless of how long he survives.

The grandchild is two generations younger than Michael and is a skip person. Generation-skipping transfer taxes will be owed in addition to the gift and estate taxes. The amount of the transfer exceeds the GSTT exemption amount of $5.12 million in 2012.Page Ref.: C:13-14 and C:13-15Objective: 3

LO4: Deductions

1) Administrative expenses are not deductible on the estate's income tax return.Answer: FALSEPage Ref.: C:13-19Objective: 4

2) A terminable interest is one that ceases upon the passage of time or the occurrence of some event.Answer: TRUEPage Ref.: C:13-21Objective: 4


3) Ted died on May 3. At the time of his death, he owned a beach house valued at $250,000. On June 10, the beach house was completely destroyed by a hurricane and there was no insurance coverage. If the executor elects to use the alternate valuation date, the executor willA) include the beach house in the gross estate at $250,000.B) take a casualty loss of $250,000 on the estate tax return.C) take a casualty loss of $250,000 on the estate's income tax return.D) include the beach house in the gross estate at $0.Answer: DPage Ref.: C:13-19Objective: 4

4) Identify which of the following statements is true.A) Administrative expenses are not deductible on the estate's income tax return.B) Casualty or theft losses incurred during the administration of the estate are not deductible on the estate tax return.C) There is a limitation of $100,000 on the charitable contribution deduction for estate tax purposes.D) All of the above are false.Answer: DPage Ref.: C:13-18 through C:13-22Objective: 4

5) Identify which of the following statements is true.A) Regardless of how large the gross estate is, the estate tax liability can be completely eliminated if the estate is willed to a charitable organization.B) There is a ceiling on the marital deduction.C) All transfers to the surviving spouse are eligible for the marital deduction.D) All of the above are false.Answer: APage Ref.: C:13-19Objective: 4

6) Identify which of the following statements is false.A) To qualify for the marital deduction, property must be includible in the decedent's gross estate.B) Property is not eligible for the marital deduction if it passes to the spouse under the individual's dower rights.C) A terminable interest is one that ceases upon the passage of time or the occurrence of some event.D) Some, but not all, terminal interests qualify for the marital deduction.Answer: BPage Ref.: C:13-21Objective: 4

7) Which of the following is not a test for an interest to qualify for the marital deduction?A) The property must be included in the decedent's gross estate.B) If a QTIP transfer is made, the spouse must be entitled to all of the income at least annually for life.C) The interest conveyed must not be a nondeductible terminable interest.D) All of the above are required.Answer: DPage Ref.: C:13-21Objective: 4

8) At Mark's death, Mark owed a debt of $40,000 plus $2,000 of accrued interest. Mark's funeral expenses were $5,000, and Mark's charge card had a balance due of $400. The


expected administration costs for the estate are $2,000. Assume the estate will owe no income taxes in the next few years and that the taxable estate is expected to be in excess of $1 million. What amount should the estate deduct?Answer: All the expenses are deductible: $40,000 + $2,000 + $5,000 + $400 + $2,000 = $49,400. The administration expenses can be deducted by the estate or allocated in whole or in part to the estate's income tax return. It is best to deduct them where they can provide the greatest tax savings. In this case, since no income taxes are expected to be owed, it would be best to claim the deduction against the gross estate.Page Ref.: C:13-18Objective: 4

9) List the various categories of estate tax deductions, and compare them with the categories of gift tax deductions. What differences exist?Answer: Estate tax deductions are as follows: marital, charitable contribution, funeral and administration expenses, debts, casualty and theft losses, and state death taxes. Gift tax deductions consist of only the marital deduction and the charitable contribution deduction.Page Ref.: C:13-18Objective: 4

10) Mr. Howell died this year. He willed a copyright with a 10-year remaining life to Mrs. Howell. His will also sets up a trust for the benefit of Mrs. Howell whom he entitles to receive all of the income semiannually until the earlier of her remarriage or her death. Upon her remarriage or death, the trust property is to be distributed to their children. Do the copyright and trust transfers qualify for the marital deduction? Explain.Answer: The copyright is a terminable interest; however, it qualifies for the marital deduction because no one other than Mrs. Howell receives an interest in the copyright. The trust is also a terminable interest, but it does not qualify for the marital deduction. The trust should be examined under the QTIP rules. Mrs. Howell is entitled to all of the income from the property payable at least annually, and no person has a power to appoint any portion of the property to anyone other than her. However, Mrs. Howell does not have a qualifying income interest for life because her trust interest terminates if she remarries, whereupon the children receive their interests without paying adequate consideration.Page Ref.: C:13-21 and C:13-22Objective: 4

LO5: Computation of Tax Liability

1) When computing the federal estate tax liability in 2014, the maximum amount for a taxable estate (not tentative tax) that the unified credit for the current year will eliminate all of the tax isA) $555,800.B) $780,800.C) $5,340,000.D) $2,000,000.Answer: CPage Ref.: C:13-23Objective: 5


2) Which of the following credits is available for estate tax purposes?A) investment tax creditB) credit for income taxes paid on decedent's final returnC) credit for estate taxes paid on certain prior transfersD) All of the above are available.Answer: CPage Ref.: C:13-24Objective: 5

3) Which of the following is not a credit for purposes of computing the federal estate tax liability?A) credit for gift tax paid on pre-1977 giftsB) credit for estate taxes paid on certain prior transfersC) a credit for foreign death taxesD) All of the above are credits for the federal estate tax.Answer: DPage Ref.: C:13-24Objective: 5

4) Identify which of the following statements is true.A) If a marital deduction is elected on a QTIP trust transfer, property remaining in the QTIP trust is not included in the estate of the surviving spouse.B) The credit for state death taxes has been replaced with a deduction for state estate taxes.C) The unified credit is the only credit allowed against the estate tax.D) All of the above are false.Answer: BPage Ref.: C:13-24Objective: 5

5) Identify which of the following statements is true.A) The credit for taxes paid on prior transfers does not reduce the impact of property being taxed in more than one estate in quick succession.B) The deduction for state death taxes is not limited.C) An estate is not entitled to a credit for foreign death taxes paid on property located in a foreign country and included in the gross estate.D) All of the above are false.Answer: BPage Ref.: C:13-24Objective: 5

6) Lou dies on April 12, 2011. All of Lou's property passed to Paula, his daughter. Paula dies on January 15, 2013. Both Lou's and Paula's estates pay federal estate taxes. Lou's estate tax was $350,000. How much can Paula's estate claim for a credit for tax on prior transfers?A) $350,000B) $280,000C) $210,000D) $140,000Answer: APage Ref.: C:13-25Objective: 5

7) Joe dies late in 2011 and his estate is subject to an estate tax of $2 million. He leaves all of his assets to his daughter, Claudia. Claudia dies in early 2013. Which of the following statements is correct?A) Claudia's estate receives no credit or deduction for the tax paid by Joe's estate.


B) Claudia's estate receives a credit for $1,000,000 of Joe's estate tax.C) Claudia's estate receives a credit for $2,000,000 of Joe's estate tax.D) Claudia's estate receives a deduction for $2,000,000 of Joe's estate tax.Answer: CPage Ref.: C:13-25Objective: 5

8) Yee made $3 million of taxable gifts in 1993 and paid gift taxes (less the unified credit) of $1,098,000. Yee died in 2013 with a taxable estate of $10,000,000. At current rates, the gift taxes payable on $3 million would be $1,145,800. Yee died in a year when the unified credit was $2,045,800. Determine her estate tax liability. Answer: Unified transfer tax base $13,000,000Current tax $5,145,800Less unified credit ($2,045,800)Less credit for gift taxes paid ($1,145,800)Tax liability $ 1,954,200Page Ref.: C:13-25 through C:13-27Objective: 5

9) On December 1, 1976, Bart made a gift and claimed a $30,000 specific exemption. When Bart died in 2008, his tax base was $2,000,000. Assuming the maximum unified credit is $780,800, what is the credit available when computing Bart's estate tax is what?Answer: $780,800 - ($30,000 × 0.20) = $774,800. The unified exemption must be reduced by 20% of any of the old $30,000 exemption used between September 8, 1976, and January 1, 1977.Page Ref.: C:13-23Objective: 5

10) Compare the credits available for estate tax purposes with the credits available for gift tax purposes. What differences exist?Answer: The four credits available for estate tax purposes and illustrations of each are as follows:

• Gift tax credit — prior to 1977, the decedent made a gift of a remainder interest in property in which he kept a life estate and paid gift tax. The gifted property is in the donor's gross estate.• Previously taxed property credit — the decedent received property that was taxed in the estate of a person who predeceased the decedent by not more than ten years.• Foreign death tax credit — the decedent owned real property in a foreign country and paid death taxes to that country.• Unified credit — $2,045,800 for 2013 for estate tax and gift tax purposes.

The only credit available for gift tax purposes is the unified credit.Page Ref.: C:13-24 and C:13-25Objective: 5


LO6: Liquidity Concerns

1) An executor may elect to postpone payment of the estate tax attributable to a remainder or reversionary interest until 6 months after the interests of the other person(s) terminate.Answer: TRUEPage Ref.: C:13-28Objective: 6

2) One of the major problems facing executors in managing the estate isA) identifying deductions.B) liquidity.C) the unified credit computation.D) determining the method to value assets.Answer: BPage Ref.: C:13-28Objective: 6

3) The payment date for estate taxes may be extended by the IRS for all of the following reasons exceptA) the estate includes a 40% interest in a closely held business.B) the estate includes a relatively large remainder or reversionary interest.C) the executor of the estate shows reasonable cause.D) All are valid reasons.Answer: DPage Ref.: C:13-28Objective: 6

4) Identify which of the following statements is true.A) The period for payment of estate taxes may be extended if the executor shows "reasonable cause" for not being able to pay some, or all, of the estate tax liability on the regular due date.B) The estate tax on interests in certain closely held businesses may be paid in installments over a 15-year period if elected.C) An executor may elect to postpone payment of the estate tax attributable to a remainder or reversionary interest until eight months after the interests of the other person(s) terminate.D) All of the above are false.Answer: APage Ref.: C:13-28Objective: 6

5) Identify which of the following statements is true.A) The estate tax on interests in certain closely held businesses may be paid in installments over a 15-year period if elected.B) An executor may elect to postpone payment of the estate tax attributable to a remainder or reversionary interest until six months after the interests of the other person(s) terminate.C) A corporation with 25 owners can be classified as a closely held business if the decedent's gross estate holds 10% of the stock.D) All of the above are false.Answer: BPage Ref.: C:13-28Objective: 6

6) A stock redemption to pay death taxes under Sec. 303 is generally treated asA) a sale or exchange of property.B) a dividend.


C) a return of capital.D) ordinary income.Answer: APage Ref.: C:13-29Objective: 6

7) The maximum amount of the stock redemption proceeds under Sec. 303 is determined by summing all of the following exceptA) the estate's death taxes.B) the estate's funeral expenses.C) the estate's administrative expenses.D) All are allowable.Answer: DPage Ref.: C:13-29Objective: 6

8) Identify which of the following statements is true.A) The transferee is liable for the generation-skipping transfer tax (GSTT) in the case of a direct skip.B) Special use valuation is available for farmland to help alleviate liquidity problems.C) Qualified disclaimers are not available for estate planning purposes.D) All of the above are false.Answer: BPage Ref.: C:13-29Objective: 6

LO7: Generation-Skipping Transfer Tax

1) Identify which of the following statements is false.A) Special use valuation is available for farmland to help alleviate liquidity problems.B) The transferee is liable for the generation-skipping transfer tax (GSTT) in the case of a direct skip.C) The generation-skipping transfer tax (GSTT) is imposed to assure that some form of transfer taxation is imposed once a generation.D) A direct skip skips one or more generations.Answer: BPage Ref.: C:13-31; Example C:13-52Objective: 7

2) The GSTT's (generation-skipping transfer tax) purpose isA) to impose a graduated transfer tax one time a generation.B) to impose some form of transfer tax one time a generation.C) to impose a graduated transfer tax every other generation.D) to impose some form of transfer tax every other generation.Answer: BPage Ref.: C:13-30Objective: 7

3) Identify which of the following statements is false.A) Every grantor is entitled to a $5.25 million exemption from the GSTT in 2011.B) If Greg transfers assets directly to his grandson, this transaction would be an example of a direct skip.C) If Shaad transfers property in trust to his son, with the remainder to his grandson, at the death of the son a taxable termination will result.D) The GSTT is levied at a flat rate, which is higher than the top rate under the estate tax rate schedule.Answer: D



4) Sasha gives $1,000,000 to her granddaughter. Sasha has used all of her unified credit and is in the 40% marginal gift tax bracket; ignore the annual exclusion and exemption. What is the amount of her tax on this transfer?A) $450,000B) $400,000C) $1,450,000D) $652,500Answer: BPage Ref.: C:13-30Objective: 7

LO8: Tax Planning Considerations

1) A qualified disclaimer is a valuable estate planning tool becauseA) it establishes the value of the disclaimed assets.B) it qualifies the assets for the alternative valuation date.C) it is not treated as a gift made by the person who disclaims.D) it allows the person making the disclaimer to determine the recipient.Answer: CPage Ref.: C:13-33Objective: 8

2) Guy died this year. His estate includes a closely held business interest valued at $400,000 and other property valued at $675,000. Guy's allowable Sec. 2053 and 2054 deductions total $75,000. Within three years of death, partly in hopes of qualifying his estate for the installment payment allowed under Sec. 6166 treatment, Guy made gifts of listed securities of $350,000 (at 2002 valuations) and paid no gift tax on the gift. Is Guy's estate eligible for Sec. 6166 treatment?Answer: No, it fails the 35% test in one of the calculations.Excluding gifts: $400,000 / $1,000,000 = 40%Including gifts: $400,000 / $1,350,000 = 29.63%Page Ref.: C:13-34; Example C:13-53Objective: 8


3) Compare the tax treatment of administration expenses with that of the decedent's debts.Answer: Administration expenses may be deducted on either the estate tax return or the estate's income tax return or some in each place. The executor should deduct them on the return where they will be the same since the top estate tax rate and income tax rate are the same. If there is no estate tax liability then administrative expenses should be deducted on the income tax return if at all possible. Page Ref.: C:13-34Objective: 8

4) Briefly discuss how inter vivos gifts can be used to reduce the size of the estate tax base.Answer: The $14,000 per-donee per-year exclusion allows property to be transferred free of any transfer tax consequences. Postgift appreciation is removed from the estate tax base because adjusted taxable gifts are valued at the date of gift values. If the donor lives for more than three years after making a taxable gift, the gift tax paid is removed from the gross estate.Page Ref.: C:13-32Objective: 8

5) Discuss some of the factors to be considered in determining the amount of property that should pass under the marital deduction.Answer: Except in small estates, an amount equal to the exemption equivalent should pass to someone other than the surviving spouse. Some property should be taxed in the estate of the first decedent to die if the surviving spouse already has a sizable estate and a relatively short life expectancy. The marginal estate tax rates should not be allowed to be appreciably different. In addition, one needs to consider nontax factors such as the cash needs of the surviving spouse and/or children. This last item may be more important to some individuals than the tax factors. For 2013, portability allows any unused credit from the first spouse to die, if elected by the executor, to be used in the estate of the surviving spouse eliminating some of the importance in planning to equalize the estates of both spouses.Page Ref.: C:13-33Objective: 8


6) Praneh Patel, a widower, died in March of the current year. His gross estate is $5,325,000, and at the time of his death, he owed debts of $40,000. His will made a charitable bequest of $280,000 and left the rest of his property to his children. His administrative expenses are estimated to be about $55,000. What tax issues should the estate's CPA consider when preparing Praneh's estate tax return and his estate's income tax return?Answer: • What deductions will Praneh's estate receive?• Where should the administrative expenses be deducted?• What is the amount of his taxable estate and estate tax base?• Has Praneh made any prior taxable gifts?

Praneh's estate will receive a $40,000 deduction for the debts, a $280,000 deduction for the charitable contribution, and up to a $55,000 deduction for the administration expenses.

After deducting the debts and the charitable contribution, Praneh's taxable estate is $5,005,000 ($5,325,000 - $320,000). Thus, none of the administrative expenses should be deducted on the estate tax return.

Praneh's taxable estate and estate tax base will be less than the unified credit equivalent meaning no estate tax will have to be paid.

The facts do not indicate whether Praneh has made any taxable gifts. Bonus credit could be given to students who spot that such information is missing and recognize the implications of the missing information. The above answers were prepared on the basis that Praneh made no taxable gifts. If Praneh made some, however, some amount of administrative expenses should be deducted on the estate tax return.Page Ref.: C:13-34Objective: 8

7) Mary Johnson dies early in the current year. All her property passes subject to her will, which states that all of her property is to go to a QTIP trust for Dan for life with the remainder to their children. Mary's gross estate is about $5 million, and her Sec. 2053 deductions are very small. Dan, who is in poor health, already owns about $3 million of property. What tax issues should Dan Johnson and the estate's executor consider with respect to the property that passes to the QTIP trust?Answer: • The issue is what marital deduction (if any) should be claimed on the trust?

The executor could elect to forgo the marital deduction on all or a portion of the QTIP trust. The QTIP trust is a more flexible arrangement because the executor can affect the size of the marital deduction whereas with an outright bequest the amount of the marital deduction will be altered only if Dan is willing to make a disclaimer. In 2012, portability of the unused unified credit between spouses makes this planning problem less difficult. Page Ref.: C:13-33Objective: 8


8) Lily dies early in the current year. All her property passes subject to her will, which provides that her surviving husband, Rick, is to receive all the property outright. Her will further states that any property Rick disclaims will pass instead to their children in equal shares. Lily's gross estate is about $5 million, and her Sec. 2053 deductions are very small. Rick, who is in poor health, already owns about $3 million of property. What tax issues should Rick consider with respect to the property bequeathed to him by his wife?Answer: • Should Rick consider making a disclaimer? If so, of how much?

Unless Rick makes a disclaimer, Lily's estate will waste its exemption equivalent. Rick should disclaim at least $5,000,000 to allow Mary's estate to make use of the full unified credit. Portability of the unified credit between spouses makes this problem less difficult in 2012.Page Ref.: C:13-33Objective: 8

LO9: Compliance and Procedural Considerations

1) The estate tax return is due, ignoring extensions, 3-1/2 months after the decedent's date of death.Answer: FALSEPage Ref.: C:13-35Objective: 9

2) Identify which of the following statements is true.A) In general, an estate tax return is not required to be filed unless the value of the gross estate and adjusted taxable gifts exceeds the exemption equivalent.B) Estate taxes must be paid when the return is filed, including any extensions.C) The estate tax return is due, ignoring extensions, 12 months after the decedent's date of death.D) All of the above are false.Answer: APage Ref.: C:13-35Objective: 9


chapter c13

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