Assignment - POWERS OF APPOINTMENT
Project - You, an experienced and knowledgeable CFP, are going to be teaching a group of young finance majors the nuts and bolts of powers of appointment. Prepare a separate vignette illustrating each of the following principals:
1. A permissible express power of appointment under a QTIP Trust.
2. An express limited power of appointment.
3. An express general power of appointment.
4. An indirect general power of appointment.
Each vignette should be followed by a brief explanation as to how the facts illustrate the target principal. In addition, each explanation should be followed by an additional illustration showing one factor that, if changed, would result in a different principal.
Parameters - Your summary with vignettes may not exceed 1 page. The summary must be typed in calibri 12 point font, with 1 inch margins.
Estate Planning Assignment -
Answer all of these questions and provide the calculations.
1. Mayor McDaniels believes she will have a taxable estate and wishes to make a lifetime gift to an irrevocable trust. In addition, she would like to transfer additional amounts out of her taxable estate by continuing to pay taxes on any income generated by such trust. Mayor McDaniels should create the following:
A. Granter Retained Annuity Trust
B. Gift Trust
C. Intentionally Defective Grantor Trust
D. Blind Trust
E. Qualified Personal Residence Trust
2. Smoochie Pooch Inc. is a wedding planning company specializing in high-end dog weddings. Smoochie Pooch uses the accrual method of accounting and a calendar year accounting period. On December 1, 2013, Smoochie Pooch completes extensive planning work for the Fluffy and Buster wedding calendared for February 14, 2014, and sends an invoice on December 31, 2013. Smoochie Pooch received payment on such invoice on January 3, 2014. Smoochie Pooch recognizes taxable income on:
A. December 1, 2013
B. December 31, 2013
C. January 1, 2014
D. January 3, 2014
E. February 14, 2014
3. Which of the following are valid income tax filing statuses:
A. 1 and 2 1. Married filing separately
B. 1, 2 and 3 2. Head of household
C. 1, 2, 4 and 5 3. Qualified dependent child
D. 1, 3 and 5 4. Engaged
E. 1, 2, and 4 5. Elderly
4. A joint tenant can unilaterally sever a joint tenancy interest by:
A. Publishing an announcement in the local newspaper
B. Recording a deed which takes title out of joint tenancy
C. Destroying the deed
D. Sending a notice to the other joint tenant(s)
E. What are you talking about? A joint tenant cannot unilaterally sever.
5. Amanda and Lynn are currently engaged and are purchasing a home, for which they will pay all cash. Each will be contributing 50% to the purchase price. It is their desire that should one of them pass, the decedent's property be distributed to the other. Amanda and Lynn should take title as follows:
A. Community property
B. Community property with right of survivorship
C. Joint tenants
D. Tenants in common
E. Sole ownership
6. To be valid, a holographic Will requires:
A. Attestation clause
B. Signature of two witnesses
C. Signature of three witnesses
D. Notarization
E. Material provisions to be written in the Testator's handwriting
7. A federal gift tax return is referred to as a Form ______:
A. 1040
B. 706
C. 709
D. 540
E. 6166
8. In 2014, the annual gift tax exemption for a gift to a non-citizen spouse is:
A. $14,000
B. $100,000
C. $28,000
D. $122,000
E. $143,000
9. Stanley Randall Marsh attended Harvard University for 4 years. As a generous graduation gift, Stan's grandfather, Marvin, paid off Stan's outstanding student loans of $140,000. Which of the following is true:
A. Such payment is not a taxable gift
B. Stan will recognize such payment as income for income tax purposes
C. Marvin will need to report the payment of such loans as a gift for gift tax purposes
D. Stan will need to report the payment of such loans as a gift for gift tax purposes
E. Harvard will need to report the payment of such loans as a gift for gift tax purposes
10. Eric Cartman (an adult) is severely obese due to his addiction to Cheesy Poofs. Eric's mother, Liane, has offered to pay for gastric bypass surgery. Liane will report all of the following as taxable gifts except:
A. The amount Liane pays directly to J Crew for new clothes that Eric will need for his trimmer figure
B. The amount Liane pays directly to the pharmacy for Eric's prescriptions
C. The amount Liane pays to reimburse Eric for his hospital expenses
D. The amount Liane pays to Whole Foods for groceries to address Eric's dietary needs
E. The amount Liane pays to Eric's attorney to sue the manufacturer of Cheesy Poofs for making Eric fat in the first place
11. Timmy Burch is a beneficiary of an irrevocable trust established by his mother. Timmy is the Trustee of such Trust. Timmy, as Trustee, has the power to distribute as much income and principal as he needs for his health, education, maintenance and support. Upon Timmy's death, the assets of such irrevocable trust will be included in Timmy's taxable estate
A. True
B. False
12. Randy and Sharon Marsh have been married for 10 years, but have not created an estate plan. While hanging holiday lights, Randy slips and falls, sustaining a massive head injury. Randy is now in a permanent vegetative state. Sharon needs to sell their home in order to pay medical bills. Randy and Sharon hold title to the home as community property with rights of survivorship. To act on Randy's behalf to sell the home, Sharon must:
A. Present a copy of their marriage certificate to the title company to show she is his legal spouse and has the legal right to act on his behalf
B. Be appointed as Guardian of Randy's Estate by the Court
C. Be appointed as Guardian of Randy's Person by the Court
D. Be appointed as Conservator of Randy's Estate by the Court
E. Be appointed as Conservator of Randy's Person by the Court
13. All of the following are concerns with probate except:
A. Delays
B. Lack of privacy
C. Creditors' rights are lost
D. Fees
E. Hassle
In 2014, Stephen and Linda Stotch, a married couple with one child, Butters, have combined ordinary taxable income of $272, 000 (after taking into account any and all applicable exclusions and deductions). Stephen and Linda file taxes jointly.
14. Assuming there are no applicable credits, what is the amount of tax Stephen and Linda will pay for their 2014 income?
A. $89,760.00
B. $65,664.50
C. $73,890.75
D. $109,587.50
E. $63,407
15. Stephen and Linda's 2014 marginal tax rate will be:
A. 10%
B. 35%
C. 29%
D. 33%
E. 39.6%
16. Stephen and Linda's 2014 effective tax rate will be:
A. 24%
B. 33%
C. 27%
D. 29%
E. 39.6%
17. Which of the following are excluded from gross income:
A. 2, 4 and 5 1. Dividend income
B. 1, 4 and 5 2. Gift
C. 2, 3 and 4 3. Scholarship funds used for room and board
D. 2 and 4 4. Child support received
E. 2 and 3 5. Alimony received
In 2014, Bebe Stevens, 16 years old, is claimed as a dependent by her parents. Bebe earned $5, 100 in wages working at Smoochie Pooch Pet Boutique. In addition, Bebe earned $3,400 of interest income (interest on a large gift given to Bebe by her uncle, Mr. Garrison).
18. What does "NUI" stand for?
A. Net Unfunded Income
B. Nullified Understood Income
C. Net Understated Income
D. Not Understanding Inquiry
E. Net Unearned Income
19. Assuming there are no deductible expenses, the following is Bebe's NUI:
A. $1,400
B. $2,000
C. $1,650
D. $8,500
E. $3,050
20. Bebe's Taxable Income is:
A. $1,400
B. $2,000
C. $1,650
D. $8,500
E. $3,050
21. The portion of Bebe's income subject to her own marginal rate is:
A. $1,400
B. $2,000
C. $1,650
D. $8,500
E. $3,050
22. Officer Barbrady's employer pays for a disability insurance policy as a fringe benefit. If Officer Barbrady becomes disabled, benefits from the disability policy:
A. Will be taxable income to Officer Barbrady
B. Will not be taxable income to Officer Barbrady
23. In calculating the AMT for 2014, a taxpayer who is 65 or older can take which of the following deductions, as applicable:
A. 1,2 and 5 1. Medical expenses subject to a 10% floor
B. 1, 3 and 4 2. HSA contribution made by a taxpayer
C. 1 only 3. 401K contribution made by an employer
D. 2 and 5 4. State income tax paid
E. 1, 2 and 4 5. Home mortgage interest (original, not refinanced)
24. The basis of a gifted asset is:
A. The fair market value at date of gift
B. The donor's adjusted basis at date of gift
C. The donor's cost basis
D. The fair market value of the asset at the donor's date of death
E. The interpolated terminal reserve value
25. Which of the following is false with respect to a Qualified Disclaimer:
A. The beneficiary cannot direct where the disclaimed assets are distributed
B. The beneficiary can elect to disclaim only a portion of the assets
C. The beneficiary cannot have the benefit of a disclaimed asset prior to the disclaimer
D. The disclaimer must be executed by the beneficiary within 6 months of the decedent's death
E. A spouse cannot have a limited power of appointment over a Disclaimer Trust
26. Chef dies tragically when he comes in contact with a bad batch of beets. At his death, Chef has a Will which states "to Cartman, I leave my 1962 Ferrari." However, it appears that Chef sold the car during his lifetime and deposited the proceeds in a brokerage account. Unfortunately, Cartman will not receive the car or the proceeds from the sale of the car due to the rule of:
A. Rule Against Perpetuities
B. Intestacy
C. Abatement
D. Spendthrift
E. Ademption
Wendy Testaburger's grandmother, Tess Testaburger, wishes to gift $200,000 for Wendy's benefit. It is Tess' desire that Wendy's mother controls such funds for Wendy's benefit until Wendy "is responsible enough to manage the money on her own." Wendy is 17 years old.
27. If Tess elects to make the gift to an account governed under the California Uniform Transfers to Minor's Act (CUTMA), what is the maximum age that can be set until Wendy is entitled to full access to such funds:
A. 25
B. 18
C. 21
D. 15
E. 30
28. If instead Tess elects to use a Minor's Trust (also known as a 2503(c) Trust), then the maximum age that can be set until Wendy is entitled to full access to such funds is:
A. 25
B. 18
C. 21
D. 15
E. 30
29. Assume Tess elects to use a regular gift trust (not a grantor trust) as a vehicle for making the gift. In 2014 there are no distributions to Wendy or for her benefit. In 2014 the trust has $23,000 of net income. Who recognizes the income:
A. The gift trust
B. Wendy
C. Tess
D. Wendy's mother, because Wendy is a minor
E. Wendy's mother, because she is the Trustee of the gift trust
30. With respect to the Generation-Skipping Transfer (GST) Tax, which of the following is true:
A. This gift is not subject to the GST Tax because it is a transfer between family members
B. This gift is subject to the GST Tax
C. This gift is not subject to the GST Tax if it is not being distributed outright to Wendy
D. This gift is not subject to the GST Tax because only bequests (assets passing upon death) are subject to GST, not lifetime gifts
31. A sale of a life insurance policy from the Grantor of an Irrevocable Life Insurance Trust (ILIT) to the ILIT will make the proceeds of the life insurance policy subject to income tax under the transfer for value rule:
A. True
B. False
32. Real property used for residential rental purposes can be depreciated over a ____ year period using the straight line method:
A. 12
B. 42
C. 39
D. 27.5
E. 7
33. Terrance sold a commercial building with an adjusted basis of $200,000 to Phillip for $500,000. In addition, Phillip agreed to assume the note on the building, which had a remaining balance of $250,000. Not taking into account any potential depreciation recapture, Terrance's amount realized is:
A. $500,000
B. $200,000
C. $450,000
D. $300,000
E. $750,000
34. If a gift trust has $30,000 of net income in a given year, and such income is properly taxed to the gift trust, the trust's marginal tax rate is:
A. 15%
B. 25%
C. 28%
D. 33%
E. 39.6%
35. Kenny McCormick is walking along the road one day, minding his own business, when out of nowhere a meteorite strikes him, pulverizing his body upon impact (yes, we killed Kenny). Kenny had a trust that provided that Kenny's collection of orange hoodies be distributed to his friend Kyle, and the balance of his trust be distributed in equal shares to Kyle, Stan and Cartman. The gift of the orange hoodie collection is a:
A. Specific bequest
B. Residuary bequest
36. Which of the following are business entities that provide "liability insulation" to an owner:
A. 1, 3 and 6 1. Limited Liability Company
B. 1, 3, 4 and 6 2. Sole Proprietorship
C. 2, 3 and 5 3. S Corporation
D. 1, 3 and 4 4. C Corporation
E. 1, 4, 5 and 6 5. General Partnership interest
6. Limited Partnership interest
37. Sadly, Ned Gerblansky passed away when his voice-box malfunctioned and exploded. Ned's gross estate is valued at $2M. Ned's Trust provides that $100,000 be distributed to his best friend, Jimbo Kern, and the remaining balance remain in trust for the benefit of his wife, Lulu. Given these facts, all of the following are true about portability, except:
A. Jimbo can elect portability so that he can use Ned's remaining (and unused) estate tax exemption amount (Jimbo believes he will have a taxable estate when he dies)
B. If Lulu elects portability, subsequently remarries, and her next husband dies, then she will lose Ned's portability (but may be able to elect for her newly deceased hubby)
C. The amount ported will be Ned's remaining, unused exemption, which will not be subject to appreciation or an inflation adjustment
D. There is a time limit to making the portability election
E. To elect portability, an estate tax return must be filed for Ned even though the value of his taxable estate is less than his remaining estate tax exemption
Pip Pirrup is a 60 year old single man with a big heart. Pip is extremely charitable and supports his favorite charity, Brit Teeth, a British public charity offering dental implants and orthodontic services to low income families in Britain.
38. In 2014, Pip is considering gifting short-term appreciated stock to Brit Teeth. For income tax purposes, Pip can expect the following:
A. a charitable deduction up to 20% of his AGI
B. a charitable deduction up to 50% of his AGI
C. a charitable deduction up to 30% of his AGI
D. a charitable deduction up to 50% of his Gross Income
E. no charitable deduction
39. Pip has made Brit Teeth the sole beneficiary of his $8M estate (most of which consists of long-term stock/properties). Upon Pip's death, Pip's estate will be entitled to:
A. a charitable deduction for 30% of the Taxable Estate Value
B. a charitable deduction for 50% of the Taxable Estate Value
C. a charitable deduction for 50% of the Gross Estate Value
D. a charitable deduction for the entire estate
E. no charitable deduction
40. Mr. Hankey drowns in a toilet. Mr. Hankey is survived by his wife, Lola, and their 3 children. The Hankeys have a revocable trust with ABC trust provisions. With respect to the Marital Trust, which of the following is true:
A. Lola cannot be named as a Trustee of the Marital Trust
B. Lola can be given the power to direct distributions to the children during her lifetime
C. The trust assets are required be invested in income-producing assets
D. The assets in the Marital Trust will not be subject to estate tax upon Lola's death
E. Lola can have a general power of appointment over the Marital Trust