Bost estate planning Mock Exam 6-7a Name roll#
1[.] In 2004, Mark made a gift of XYZ stock worth $2,533,000 to his three children and he paid $675,000 in gift taxes. He died in 2006, leaving a large taxable estate to his children. The XYZ stock had significantly increased in value. His state of domicile collected an inheritance tax of $300,000. Which of the following statements are correct?
1. The gross estate includes the date of death value of the stock.
2. The gift tax payable credit will be less than the gift taxes paid.
3. The state death taxes decrease the amount available for distribution to the beneficiaries by exactly $300,000.
4. The gift taxes paid on the 2004 gifts must be included in the gross estate.
a. / (1), (2), and (4) only are correct. / d. / (4) only is correct.b. / (2) and (4) only are correct. / e. / All are correct.
c. / (1) and (3) only are correct.
2[.] In 2005, Verne made four equal gifts $361,000 (total $1,444,000) to his children and he paid $185,920 in gift taxes. Verne died in 2007 owning property worth $4,800,000 that was left to his children. The debts and expenses were $300,000. Verne made no other taxable gifts. Verne was domicile in a state that did not have an estate or inheritance tax. What is the federal estate tax?
a. / $1,125,000 / b. / $1,588,880 / c. / $1,672,544 / d. / $2,369,680Facts for 3 - 4: Terry gave Sandra stock worth $120,000. Terry’s basis in the stock was $90,000. Terry filed a gift tax return showing this gift. Keep in mind the annual exclusion (use $10,000 as the maximum rather than the indexed amount) as you answer.
3[.] The adjusted taxable gift shown on the return is:
a. / $80,000 / b. / $90,000 / c. / $110,000 / d. / $120,000 / e. / other amount4[.] Sandra’s basis in the stock (assuming no gift tax was paid) is:
a. / $0 / b. / $80,000 / c. / $90,000 / d. / $120,000
Facts for 5 - 7: Select the letter corresponding to the IRC section which causes all or a portion of the property, or of the gift tax paid, to be included in the decedent’s gross estate. If both 2035(a) and 2036 &/or 2038 apply, select 2035(a). Note, IRC 2036 &/or 2038 are listed together because they often overlap.
a. IRC section 2035(a) which requires inclusion of certain gifts made within three years of death.
b. IRC section 2035(b) which requires grossing up of certain gift taxes.
c. IRC section 2036 which requires inclusion of transfers with retained life estate, etc. or IRC section 2038 which requires inclusion of revocable transfers, etc.
d. IRC section 2041 which requires inclusion of property over which one has a general power of appointment.
e. None of the above apply and the property is not part of the decedent’s gross estate.
5[.] For the benefit of their two children, Mom and Dad transferred what had been their community property land (a vacation home) from themselves to Dad as custodian under the Uniform Transfers to Minors Act. Ten years after the transfer, while still acting as custodian, Dad died.
a. / IRC 2035(a) / b. / IRC 2035(b) / c. / IRC 2036 &/or 2038d. / IRC 2041 / e. / Not part of gross estate
6[.] One year before she died, D transferred stock in a research company to Y. It was worth $2,000,000 at the time of the transfer, and she paid gift taxes of $555,750. Newspaper reports about deaths caused by one of the companies products caused the stock to drop in value to a mere $400,000 at the time of D’s death.
a. / IRC 2035(a) / b. / IRC 2035(b) / c. / IRC 2036 &/or 2038d. / IRC 2041 / e. / Not part of gross estate
7[.] D created an irrevocable trust 15 years ago, funding it with stock and bonds worth $1,000,000. D paid the $153,000 in gift taxes. The trust terms give the independent trustee the right to decide each year how much income to allocate to Betty and Bob, once one of them dies, the income will go to the survivor. Bob’s issue are the remaindermen. When D died this year, Betty and Bob were still alive.
a. / IRC 2035(a) / b. / IRC 2035(b) / c. / IRC 2036 &/or 2038d. / IRC 2041 / e. / Not part of gross estate
Facts for 8 - 9: D made a gift of property worth $1,512,000 to Y. D paid gift taxes of $210,000. D died two years after making the gift, the property was worth $1,750,000.
8[.] If the property in question was land on which oil was found after the gift but before D’s death, the amount included in D’s gross estate is:
a. / $0 / b. / $210,000 / c. / $1,710,000 / d. / $1,722,000 / e. / $1,960,0009[.] If the property in question was cash value life insurance (that he had been paying into for a long time, hence the high gift value) that paid proceeds of $1,750,000 at his death, the amount that must be included in D’s gross estate is:
a. / $0 / b. / $210,000 / c. / $1,710,000 / d. / $1,722,000 / e. / $1,960,000Facts for 10 - 12: Several years ago, Mary Ann made a gift of ABC common stock to her sister, Laura. The value of the stock at the time of the gift was $300,000. Mary Ann had paid $400,000 for the stock five years before she made the gift.
10[.] What is Laura’s gain or loss when she sells the stock for $250,000?
a. / ($150,000) / b. / ($50,000) / c. / $0 / d. / $150,00011[.] What is Laura’s gain or loss when she sells the stock for $375,000?
a. / ($25,000) / b. / $0 / c. / $75,000 / d. / $375,00012[.] What is Laura’s gain or loss when she sells the stock for $500,000?
a. / $100,000 / b. / $200,000 / c. / $250,000 / d. / $500,000NO full PTC on an exam (except as take home)
Facts for 13 - 15: When D1 died in June of 2005, he left his estate in equal shares to his three children. His estate was worth $4,700,000 and it paid federal estate taxes of $1,494,000. His oldest son, D2, died in August of 2007. His taxable estate was valued at $4,000,000 and would have paid federal estate taxes of $900,000 but for the PTC.
13[.] What is the PTC limit one amount?
a. / $0 / b. / $345,800 / c. / $498,000 / d. / $560,00014[.] What is the PTC limit two amount?
a. / $108,300 / b. / $900,000 / c. / $360,000 / d. / $480,90015[.] What time factor is applicable to this PTC?
a. / 20% / b. / 40% / c. / 60% / d. / 80% / e. / 100%
Solutions
4
[.]1. b 1) not true, the stock is not included in the gross estate, there is no three year rule that covers stock; 2) is true since the taxable gifts were over $2 million, hence went into higher marginal rates than are in effect in 2006; 3) not true, although there is no credit, the state death taxes are a $300,000 deduction, hence would reduce the federal tax somewhat; 4) gift taxes paid on gifts made within three years of death are included in the gross estate
[.]2. c use ETAX program to verify the result, make sure you use adjusted gifts ($1,400,000); add back the gift taxes paid on gifts within three years; use payable credit of $185,920, not the tentative tax; and full $780,800 unified credit. Note, payable credit is the same as paid since gifts were under $2 million.
[.]3. c $120,000 - $10,000 annual exclusion
[.]4. c carry over basis (COB)
[.]5. c The power to control enjoyment, when it is a retained power, is enough. Note, because it was community property that was transferred, only half the value will be included in Dad’s estate.
[.]6. b again, garden variety transfer so the stock is not in the gross estate, only the gift taxes paid.
[.]7. e D had no retained interests whatsoever. The adjusted taxable gift would be $1,00,000 and the gift taxes payable credit would be $153,000, but none of this would be in the gross estate. The gift tax would have been had D died within 3 years of funding this trust.
[.]8. b garden variety transfer so only the gift taxes, not the gift, come into the GE.
[.]9. e LI special case (20335(a)) and the gift taxes: $210,000 + $1,750,000.
[.]10. b B>FMV, use lower for determining loss: $250,000 - $300,000 = $ -50,000
[.]11. b B>FMV, no G/L with a sale in between
[.]12. a B>FMV, use higher for gain, $500,000 - $400,000 = $100,000
[.]13. c D1’s federal estate tax/number of shares (if equal) = limit one, here $1,494,000/3 = $498,000.
[.]14. d D2’s reduced taxable estate is: $4,000,000 - 1/3 * ($4,700,000 - $1,494,000) = $2,931,333. The federal tax on that is $419,100. Limit two is $900,000 - $419,100 = $480,900.
[.]15. d Draw a time line showing D1’s death and D2’s death, place markers every two years, starting with D1’s death. For the first two years the factor is 100%, then 80%, then 60%, etc. This one is in the third year, so 80% is the correct factor.