FINANCE 422

December 2016

FINAL EXAM

80 QUESTIONS

Chapter 1 – 23

Directions: Each of the questions or incomplete statements below on the examination is followed by four suggested answers or completions. Select the one that is best in each case and

circle the corresponding letter.

1) Which of the following terms refers to the property of a decedent reverting to his or her state

of domicile?

a) Intestate

b) Succession

c) Apportionment

d) Escheat

2) which of the following interests in real property gives the owner of the interest the most

control over the property?

a) A life estate

b) A remainder interest

c) A retained interest

d) A fee simple estate

3) A wife makes outright gifts of $96,000 to her son, and her husband agrees to split the gifts

with her. Which of the following correctly states the amount of the taxable gifts?

a) Wife – $26,000, husband – $46,000

b) Wife – $34,000, husband – $34,000

c) Wife – $46,000, husband – $46,000

d) Wife – $72,000, husband – $0

4) Which of the following items is a deduction from a decedent’s gross estate in determining the

adjusted gross estate?

a) Foreign death taxes

b) State excise taxes

c) Claims against the estate

d) The marital deduction

5) Income earned but unpaid at the time of a decedent’s death is deemed to be income in

respect of a decedent (IRD). Which of the following statements concerning IRD is correct?

a) The income must be reported on the decedent’s final federal income tax return.

b) The income is taxable to the person or entity receiving it.

c) IRD includes income earned by the executor on estate assets.

d) The character of the income as taxable or nontaxable is changed when passed to the

recipient.

6) The federal estate tax is

a) A tax on the right of a decedent to transfer property

b) A tax on the right of a beneficiary to inherit property

c) A tax levied only on a decedent’s probate property

d) An excise tax levied on the privilege of accumulating wealth.

7) The owner of a successful business wishes to retire and sell the business to her daughter.

The business is worth substantially more than the owner’s basis. The owner and her

daughter have agreed to an installment sale. Which of the following statements concerning

this sale is correct?

a) The sale price should be lower than the fair market value of the business to avoid estate or gift tax complications.

b) The installment period must be limited to 10 years or less to avoid adverse estate tax

consequences.

c) The principal payments payable after the seller’s death avoid estate inclusion.

d) The interest rate specified should be reasonable to avoid adverse gift or income tax

consequences.

8) Which of the following statements concerning guardians is correct?

a) A guardian for personal care is called a guardian ad litem

b) A special guardian can be appointed by the court to protect a minor’s rights in a legal

proceeding.

c) A guardian named in a deceased parent’s will is binding on the court.

d) A guardian receives the legal authority to act from the deceased parent’s will.

9) Which of the following examples of a terminable interest left to a surviving spouse qualifies

for the federal estate tax marital deduction?

a) A property interest that passes to someone else if the surviving spouse remarries

b) A life estate in property

c) A life interest in a trust over which the surviving spouse has special power of appointment

d) A property interest that passes to the surviving spouse only if the spouse actually

survives the decedent by 3 months.

10) Which of the following statements concerning the qualification of property for the federal

estate tax marital deduction is correct?

a) If a decedent is a resident of a community-property state, only separate property can

qualify.

b) Property received by a surviving spouse as the result of a disclaimer will not qualify.

c) Property can qualify even if the surviving spouse receives it as trustee for someone else.

d) The property interest must be includible in the surviving spouse’s estate at death unless

consumed or given away.

11) Which of the following statements concerning federal estate tax is correct?

a) All transfers made within 3 years of death must be brought back into the gross estate for federal estate tax purposes.

b) Jointly held property is not subject to federal estate tax.

c) Property passing outside the probate estate is not subject to federal estate tax.

d) For all estates required to file a return, a federal estate tax return must be filed within 9

months of death unless an extension is granted.

12) A woman is the income beneficiary of an irrevocable trust created by her mother. Which of

the following powers given to her by the trust will cause all the assets in the trust to be

includible in her gross estate for federal estate tax purposes?

a) The testamentary power to direct the trustee to use trust assets to pay her estate taxes.

b) the power to direct the trustee to pay her trust assets limited in amount to an

ascertainable standard relating to her health and education

c) the power each year to direct the trustee to pay her an amount of trust assets not

exceeding the greater of $5,000 or 5 percent of the assets held by the trust

d) the testamentary special or limited power to direct the trustee to distribute trust assets to her children

13) Which of the following statements concerning executors is correct?

a) An executor can be given broad and discretionary powers with respect to the management of estate assets.

b) An executor is chosen by the beneficiary of a will shortly after the decedent’s death.

c) An executor must be an individual rather than an entity or institution

d) An executor is answerable only to the beneficiary and not to the court having jurisdiction over the probate of the estate.

14) Charles Kuralt purchased a joint life annuity for himself and his paramour from an insurance

company. Assuming Charles contributed the entire purchase price, how will the annuity be

valued at his death for purposes of determining his gross estate?

a) at the original cost of the joint life annuity

b) at the cost of a single life annuity on Charles’s life at the date of his death

c) at the cost of a single life annuity for his paramour at the time the original annuity was

purchased

d) at the cost of a single life annuity for his paramour at the time of his death

15) Which of the following powers would result in the property subject to the power being

included in a decedent’s estate?

a) the power to add to the corpus

b) the power to change beneficiaries

c) the power to direct issuance of voting proxies

d) the power to direct the reinvestment of funds

16) Which of the following is a gift for federal gift tax purposes?

a) Without compensation a carpenter builds a chicken shed for a neighbor

b) A valuable oil painting owned by a father is delivered to his son to be displayed at the

son’s residence with a provision that the painting is to be returned to the father on

demand.

c) A father tells his son that he need not pay interest on a $50,000 interest-bearing note

evidencing a loan that the father made to his son.

d) A mother promises to give her son her new car as soon as the odometer reads 50,000

miles

17) Which of the following statements concerning income taxation of trusts and estates is

correct

a) A simple trust is allowed an exemption of $500.

b) A complex trust is allowed an exemption of $1,000

c) An estate is taxed the same as a grantor trust.

d) An estate is allowed an exemption of $600

18) Which of the following statements concerning the federal estate tax charitable deduction is

correct?

a) In order to be allowed as a charitable deduction, the bequest must first be includible in

the donor’s gross estate.

b) The amount of the deduction is limited to a percentage of the adjusted gross estate.

c) For the deduction to be obtained, the bequest must be in the form of an outright gift.

d) The amount of the deduction will be increased by the amount of any estate taxes paid

from the charitable bequest.

19) Which of the following statements concerning installment sales of property is correct?

a) Payments must occur in more than 2 tax years before installment reporting is permitted.

b) Installment notes must be unsecured or adverse income tax consequences will result.

c) Installment sales follow installment reporting for tax accounting purposes unless the

seller elects normal tax reporting.

d) The seller first recovers all federal income tax basis tax free before recognizing any

capital gain.

20) Which of the following items would be included in a decedent’s gross estate for federal estate tax purposes?

a) a life insurance policy on the decedent’s life that was transferred by the decedent 2 years earlier to an irrevocable trust for the benefit of her children

b) proceeds of a wrongful death suit brought by the decedent’s executor against the drunk

driver who caused the decedent’s death

c) real estate given to the decedent by an aunt that, in accordance with the aunt’s will,

passes to the decedent’s sister at the decedent’s death.

d) Property in a trust established by the decedent’s father for his grandchildren with the

decedent and the decedent’s sister as co-trustees of the trust.

21) Mary Bennett and her husband purchased property in 1992 for $100,000 and titled it in joint

names with the right of survivorship. However, the entire contribution for the property came

from funds that Mary had inherited from her father. When Mary died last year, the property

was worth $800,000. What is her husband’s basis in the property?

a) $100,000

b) $400,000

c) $450,000

d) $800,000

22) Anna Nicole Smith, a widow, made the following gifts last year:

• $50,000 in cash to her son

• $15,000 in cash to the American Cancer Society

• Stock worth $20,000 to her new friend. (The stock was originally purchased for

$10,000)

• Bonds worth $90,000 to the University of Pennsylvania development fund (The

bonds were originally purchased for $100,000.)

What is the total amount of taxable gifts made by Anna?

a) $37,000

b) $42,000

c) $129,000

d) $163,000

23) Which of the following statements concerning a testamentary trust is correct?

a) It is an inter vivos trust

b) It is created by will

c) It cannot exist for more than 5 years

d) At its termination the trust property must revert to the grantor

24) Allen died last month and was survived by his spouse, Ellen. Among the items of family

property are the following:

• A $400,000 life insurance policy on Allen’s life with Ellen designated as beneficiary 

(Ellen has been the owner of the policy ever since it was issued 4 years ago).

• The family residence with a fair market value of $200,000 (Allen and Ellen own the

residence jointly with the right of survivorship even though Allen purchased it in 1978

with his separate funds)

• A $10,000 bank account (Allen and Ellen own the account jointly with the right of

survivorship even though Ellen made all the deposits)

What amount of the family property will be included in Allen’s gross estate for federal estate

tax purposes?

a) $105,000

b) $200,000

c) $500,000

d) $505,000

25) A decedent died on January 1 of this year. The facts concerning the decedent’s estate are as follows;

Estate tax payable before credits     $2,765,000

Funeral and administrative expenses     $ 75,000

Applicable credit amount     $ 2,045,800

State death taxes paid     $ 15,900

Based on the above information, the net federal estate tax payable is

a) $0

b) $593,200

c) $668,300

d) $719,200

26) which of the following statements concerning estates is (are) correct?

I. The administration of a decedent’s estate should generally exist for an unlimited

period of time.

II. An estate is considered a separate tax entity for federal income tax purposes.

a) I only

b) II only

c) Both I and II

d) Neither I nor II

27) which of the following statements concerning state death taxes is (are) correct?

I. When no federal estate tax is due, no state death tax is payable.

II. In inheritance tax states, the amount of state death taxes applied to property passing to beneficiaries varies with the beneficiary’s relationship to the decedent.

a) I only

b) II only

c) Both I and II

d) Neither I nor II

28) Which of the following statements concerning estate planning using life insurance is (are)

correct?

I. Non-employed spouse life insurance coverage is generally most recommended when the non-employed spouse is wealthy and has a large estate.

II. Am advantage pf grandparent-grandchild trust using life insurance is that it serves to reduce the amount of insurance the grandparent’s adult child might own.

a) I only

b) II only

c) Both I and II

d) Neither I nor II

29) which of the following statements concerning qualified disclaimers of gifted property is (are) correct?

I. The disclaimer must be in writing.

II. The person making the disclaimer may direct who is to be the recipient of the gifted property.

a) I only

b) II only

c) Both I and II

d) Neither I nor II

30) Which of the following statements concerning grantor-retained annuity trusts (GRATs) is

(are) correct?

I. These trusts provide the grantor with a fixed annual annuity for a term of years or

life

II. A goal in establishing a GRAT is to transfer property at a reduced transfer tax

cost.

a) I only

b) II only

c) Both I and II

d) Neither I nor II

31) which of the following statements concerning valuation for gift tax purposes is (are) correct?

I. The value of a life insurance contract is equal to the aggregate gross premium paid, regardless of when the contract was gifted.

II. If blockage exists, a lower gift value is permitted for shares of stock because of

the effect of dumping a large number of shares on the market at one time.

a) I only

b) II only

c) Both I and II

d) Neither I nor II

32) Which of the following statements concerning wills is (are) correct?

I. A will may be revoked by the testator prior to his or her death.

II. An adult child may be disinherited entirely by a parent in most states.

a) I only

b) II only

c) Both I and II

d) Neither I nor II

33) Which of the following statements concerning tax apportionment issues in a will is (are)

correct?

I. Most state statures provide for equitable apportionment of taxes, whereby each

bequest bears the amount of tax it generates.

II. Planners should make certain that clients carefully consider the sources from

which tax payments will be made at death.

a) I only

b) II only

c) Both I and II

d) Neither I nor II

34) Which of the following statements concerning the federal estate tax marital deductions is

(are) correct?

I. Property passing outside the probate estate cannot qualify for the marital deduction.

II. The marital deduction is limited to the greater of one-half of the adjusted gross

estate of $2 million.

a) I only

b) II only

c) Both I and II

d) Neither I nor II

35) Which of the following powers held by the income beneficiary is (are) considered to be a

general power of appointment, thus causing all or a portion of the trust corpus to be includible

in the beneficiary’s gross estate for federal estate tax purposes?

I. The power to withdraw the greater of $5,000 or 5 percent of the trust corpus in any one year.

II. The power to direct the trustee to pay the beneficiary’s personal debts

a) I only

b) II only

c) Both I and II

d) Neither I nor II

36) which of the following statements concerning valuation of assets for federal estate tax

purposes is (are) correct?

I. The date of valuation of an estate is the date of the decedent’s death or, if applicable, the alternate valuation date, which is 6 months later.

II. All estate assets are valued at fair market value, which is the value placed on the

estate assets by the executor with the advice of the attorney for the estate.

a) I only

b) II only

c) Both I and II

d) Neither I nor II

37) which of the following statements concerning ownership rights is (are) correct?

I. If one is the legal owner of property, he or she must also be the equitable owner.

II. A trustee has beneficial ownership of property in his or her care.

a) I only

b) II only

c) Both I and II

d) Neither I nor II

38) Which of the following statements concerning the generation-skipping transfer tax (GSTT) is

(are) correct?

I. The tax rate applied is the top federal estate tax rate.

II. Direct-skip transfers are exempt from the tax

a) I only

b) II only

c) Both I and II

d) Neither I nor II

39) which of the following statements concerning a revocable trust is (are) correct?

I. It avoids probate

II. It enables the grantor to save income taxes.

a) I only

b) II only

c) Both I and II

d) Neither I nor II

40) which of the following statements concerning the marital deduction is (are) correct?

I. Federal estate tax and state death taxes may be payable from a surviving spouse’s share of the estate.

II. Subject to certain qualifying provisions, terminable interests passing to a surviving spouse can qualify for the marital deduction.

a) I only

b) II only

c) Both I and II

d) Neither I nor II

41) The failure of an individual to have a will can result in which of the following?

I. Favorite relatives may be disinherited

II. Testamentary gifts to charity cannot be made.

a) I only

b) II only

c) Both I and II

d) Neither I nor II

42) which of the following statements concerning a valid written will is (are) correct?

I. A testator’s signature must be notarized when the will is executed

II. A testator must have testamentary capacity at the time of death

a) I only

b) II only

c) Both I and II

d) Neither I nor II

43) Which of the following statements concerning the installment sale of property is (are)

correct?

I. The interest rate agreed to by the parties to the sale is conclusive for tax

purposes.

II. The gain on the sale is recognized by the seller ratably as the installment payments are received.

a) I only

b) II only

c) Both I and II

d) Neither I nor II

44) An executor may value assets as of the date of death or the alternate valuation date 6 months after death. Assuming the executor elects the alternate valuation date, which of the following statements is (are) correct?

I. Property sold by the executor before the alternate valuation date is valued at its arm’s-length sale price.

II. Property that has increased in value since the date of death is valued at the alternate valuation date.

a) I only

b) II only

c) Both I and II

d) Neither I nor II

45) which of the following statements concerning federal gift and estate taxes is (are) correct?

I. The donor’s gross estate includes the amount of any gift taxes paid by the donor on gifts made within 3 years of death.

II. Gifts made within 3 years of death are brought back into the donor’s gross estate.

a) I only

b) II only

c) Both I and II

d) Neither I nor II

46) which of the following statements concerning state death taxes is (are) correct?

I. The federal state death tax deduction is allowed only if a federal estate tax Form 706 return must be filed.

II. State estate and inheritance taxes are generally imposed at the same rate regardless of the relationship of the deceased to the beneficiary.

a) I only

b) II only

c) Both I and II

d) Neither I nor II

47) Important factors in assessing liquidity needs in estate planning include which of the

following?

I. the amount and terms of debt of the estate owner

II. the marital status of the testator

a) I only

b) II only

c) Both I and II

d) Neither I nor II

48) Non-tax benefits of lifetime gifts include which of the following?

I. obtaining privacy that is not possible when testamentary transfers are made

II. Reducing probate and administrative costs

a) I only

b) II only

c) Both I and II

d) Neither I nor II

49) Which of the following statements concerning an irrevocable trust is (are) correct?

I. A transfer of property to an irrevocable trust is ineffective for the purpose of

reducing the grantor’s gross estate

II. An irrevocable trust is treated as a completed gift for tax purposes at the time of

the transfer.

a) I only

b) II only

c) Both I and II

d) Neither I nor II

50) A person dying without a valid will generally lose which of the following capabilities?

I. the right to name guardians of minor children

II. The right to name a personal representative

a) I only

b) II only

c) Both I and II

d) Neither I nor II.

51) Mrs. Jones would like to buy more life insurance but wants to avoid inclusion of the insurance in her gross estate at death. If Mrs. Jones creates an irrevocable trust to apply for

the life insurance policy, which of the following trust terms is (are) recommended?

I. a provision for Mrs. Jones to replace the trustee

II. a provision directing the trustee to pay Mrs. Jones’s estate taxes

a) I only

b) II only

c) Both I and II

d) Neither I nor II

52) A husband and wife own an office building as joint tenants with the right of survivorship. The building has an estate tax value of $11.5 million. If they dissolve the joint tenancy and retitle

the property in the name of the husband as sole owner, which of the following statements is

(are) correct?

I. If the husband dies first and leaves the office building outright to his wife, there will be no federal estate tax attributed to its inclusion in his gross estate.

II. If the wife dies first, their children, as sole heirs, will get a stepped-up tax basis for the property at their father’s subsequent death.

a) I only

b) II only

c) Both I and II

d) Neither I nor II

53) Which of the following gratuitous property transfers will be included in a donor’s gross estate at its date-of-death value for federal estate tax purposes?

I. a lifetime transfer in which the donor retained the power to change the donees’ shares of the transferred property

II. A lifetime transfer in which the donor retained a reversionary interest on the date of death equivalent to 3 percent of the value of the property.

a) I only

b) II only

c) Both I and II

d) Neither I nor II

54) Which of the following statements concerning community-property law is (are) correct?

I. Transmutation is the voluntary change of separate property and community property characterization by the community owners.

II. There is no single uniform community-property system among community property states.

a) I only

b) II only

c) Both I and II

d) Neither I nor II

READ THE FOLLOWING DIRECTIONS BEFORE CONTINUING

The questions below differ from the preceding questions in that they all contain the word

EXCEPT. So that you understand fully the basis used in selecting each answer, be sure to

read each question carefully.

55) All the following statements concerning the computation of federal estate tax are correct

EXCEPT

a) A deduction and a credit are interchangeable terms when used in federal estate tax

computations.

b) The estate and gift tax system is used for transfers made during lifetime and at death.

c) The credit for tax on prior transfers avoids double taxation on the same assets

transferred through two estates within a short time period.

d) Gift taxes paid on post-1976 gifts made by a decedent within 3 years of death become

part of the gross estate.

56) All the following statements concerning the grantor-trust rules are correct EXCEPT

a) The taxable income of a grantor trust is taxed to the grantor

b) The grantor-trust rules are avoided if the grantor’s spouse has the power to revoke the

trust.

c) The grantor who possesses a reversionary interest valued at 25 percent of the trust must

pay the tax on the trust’s income.

d) A grantor trust may be created for non-tax advantages.

57) All the following are principles common to fiduciary relationships EXCEPT

a) The fiduciary is under a duty to act for the benefit of the other party to the relationship as to matters within the scope of the relationship.

b) Traditionally, under common law, a fiduciary is under a duty not to delegate the

performance of his or her own duties as fiduciary to a third person.

c) As to matters within the scope of the relationship, the fiduciary is under a duty not to profit at the expense of the other party to the relationship.

d) Once a person has been nominated to be a fiduciary, the person must act in a fiduciary

capacity until discharged by the court.

58) All the following statements concerning a will are correct EXCEPT

a) It is irrevocable once executed.

b) It is a legal instrument.

c) It provides for the disposition of property at death.

d) It takes effect after death.

59) All the following statements concerning income taxation of estates and trusts are correct EXCEPT

a) An estate is a separate tax-paying entity.

b) A complex trust is a separate tax-paying entity.

c) Income distributed by a trust to an income beneficiary of the trust is taxable to the trust.

d) The executor or administrator of an estate is responsible for filing an income tax return.

60) All the following are types of interests in property EXCEPT

a) Tenancies in common

b) deeds

c) life estates

d) joint tenancies

61) All the following statements concerning a testamentary trust are correct EXCEPT

a) Its provisions are included in a decedent’s will.

b) It save probate costs.

c) It is revocable until the death of the testator.

d) It becomes irrevocable once it is operative.

62) All the following statements concerning estate planning for a resident-alien spouse are

correct EXCEPT

a) A qualified domestic trust (QDOT) can be used for marital-deduction transfers to a

surviving resident-alien spouse.

b) The QDOT rules include a new type of transfer tax

c) For the unlimited marital deduction to apply, a resident-alien spouse is required to obtain U.S. citizenship prior to the U.S. citizen spouse’s death.

d) The general rule is that transfers to a resident-alien spouse do not qualify for the

unlimited federal estate or gift tax marital deduction.

63) All the following statements concerning powers of appointment are correct EXCEPT

a) They must be created by will.

b) The donor is generally the original owner of the property

c) Exercise may be immediate or may be delayed by design.

d) Appointees may include the donee.

64) All the following are considered real property EXCEPT

a) Waste dump

b) large desert cactus

c) vacant storage warehouse

d) residence rental lease

65) All the following constitute basic elements of a gift for gift tax purposes EXCEPT

a) a transfer for less than adequate consideration

b) valuation on a fair-market-value basis

c) delivery of the subject matter of the gift to the donee

d) acceptance of the gift by the donee

66) All the following are advantages of the probate process EXCEPT

a) Court supervision of executor’s activities

b) inventory of estate assets

c) privacy of decedent’s will

d) validation of decedent’s will

67) All the following statements concerning property are correct EXCEPT

a) A mortgage on real estate is real property.

b) Crops growing on land are real property.

c) Any property that is not real property is personal property.

d) A bond issue secured solely by the assets of a corporation is intangible personal

property.

68) All the following statements concerning estates and trusts are correct EXCEPT

a) The personal representative of an estate and a trustee have similar fiduciary

responsibilities.

b) Both estates and trusts come into being by operation of law.

c) Both estates and complex trusts are separate tax-paying entities.

d) A corporate entity may act as an executor of an estate and as a trustee.

69) All the following statements concerning the unlimited estate tax marital deduction are correct

EXCEPT

a) The marital deduction was designed to equalize the federal estate tax treatment of

decedents in common-law states with those in community-property states.

b) The marital deduction is available against all death taxes imposed by state law.

c) The marital deduction only applies to property interests that are included in a decedent’s gross estate for federal estate tax purposes.

d) The marital deduction available to a decedent in a common-law state is equal to the net

amount of qualifying property passing to the surviving spouse.

70) A man has established a revocable inter vivos trust and has named the trustee the

beneficiary of all his life insurance policies. His will provides that all of his residuary estate

will “pour over” to the trust. All the following statements concerning this arrangement are

correct EXCEPT

a) Probate costs will be eliminated in the administration of the man’s estate.

b) Flexibility and discretion in the administration of trust assets can be attained.

c) The trust must be in existence prior to the date the man’s will is executed.

d) The trust can provide liquidity in the man’s estate.

71) All the following statements concerning the inclusion and valuation of all or part of a

commercial annuity in the estate of an annuitant are correct EXCEPT

a) A joint and survivor annuity is includible in proportion to the amount of the total premium paid by the decedent.

b) An annuity is includible at its date-of-death value even if the executor elects the alternate valuation date.

c) A life annuity with a period certain is includible to the extent of the pres