Finance Chapter 15 Assume Was Million Stocks Held Personal Account

ANSWERS TO CHAPTER QUESTIONS

Chapter 15 Estate Planning

1) In the event of death:

a) You may not have your wishes carried out as to how much to give to your

spouse or other heirs.

2) An executor has control over distribution of your assets. A guardian takes care of

your children, or others who are incapacitated.

3) A letter of instruction is a non legal document which helps people understand your

4) The advantages and disadvantages of a probate are:

a) Advantages

i) Eliminates estate liabilities that may arise after probate closes.

b) Disadvantages:

5) The alternative ways of titling and their differences are:

a) Joint tenancy with right of survivorship (JTWROS) – Automatically entitled to

property on death of co-owner.

6) Inherited money would not normally be considered as joint assets for divorce

purposes. On the other hand, if Shelly placed the money in a joint account it would.

7) Howard needs to differentiate between income taxes and estate taxes. The $5.34

8) Basis is the cost or other amount used as the item deducted from the selling price to

arrive at the gain subject to income taxation. When a person dies investable assets are

9) A gift is an irrevocable transfer with the giftor receiving no residual rights. In this

10) No. Samantha can give $6,000 to an unlimited number of people, subject only to the

11) The donation of appreciated property instead of cash will allow the donor to escape

12) The advantages and disadvantages of setting up a trust are:

a) Advantages:

i) Professional management

b) Disadvantages:

i) Cost to set up and operate

13) An irrevocable trust is the only type generally available for estate tax benefits.

14) Generally, no. Shane’s husband has and could receive the income from the trust, any

medical expenses and generally any sums needed to maintain his normal living

15) It is true that under the rule that unlimited sums can be transferred to a spouse, the

spouse would not have to pay any taxes. However, his $5.34 million exemption

16) Holding aside state taxes, they might place the money in a joint account. In that way

the money would bypass probate and its expense, and be available very quickly.

17) Life insurance is not normally subject to income taxes but is subject to estate taxes.

18) The advantages and disadvantages of a durable power of attorney are:

a) Advantages:

i) Can get help recognized by outsiders when needed.

b) Disadvantages:

19) The three major ways of receiving non work-related funds from acquaintances are:

a) Gift – Transfer prior to death

b) Bequest – Arising from will at death

c) Trust – Receiving income or other sums according to trust document.

In each case the amount received will generally not be subject to taxation.

ANSWERS TO CHAPTER PROBLEMS

Chapter 15 Estate planning

1) John inherited $1 million in an IRA, which comprised the entire estate from his

father, who had recently died. He promptly withdrew the funds. The appropriate

marginal tax rate was 39.6 percent. Was there any tax due? If so, how much? Assume

it was $1 million in stocks held in a personal account. Would your answer be the

same? Explain.

Solution

John would not pay estate taxes on the $1 million inheritance because the amount is

If the inheritance comes from a personal account John gets step up in basis to the value of

2) Sophia inherited 1,000 shares of IBM that her father’s parents bought for her when

she was a child. The father’s cost was $2 per share at the time of purchase and $84

per share at the time of his death. Sophia sold them at $86 per share. Calculate the

total amount of her capital gain.

Solution

Sophia would get the benefit of step up in basis. Her cost for the IBM shares would be

3) Henry will be giving $50,000 to each of his five children. Indicate how much of his

assumed $5.34 million gift tax exemption will remain.

Solution

4) Hilda wanted to know how much her children would be saving if she set up a bypass

trust for $300,000 rather than giving it directly to her husband. She had an illness that

made it likely that she would be the first to die. Assume she and her husband each had

over $6 million in assets and no change in the amount over time, as well as an estate

tax of 40 percent. What would her savings be?

5) Maurice gave $20,000 to charity each year. He had $20,000 in stock that cost him

$14,000 to buy. Assuming he is in the 23 percent marginal tax bracket for capital

gains, how much will he save by donating the stock directly to charity?

Solution

Maurice would not have to pay capital gains taxes on the appreciated stock if she donates

the shares.

ANSWERS TO CASE APPLICATION QUESTIONS

Chapter 15 Estate Planning

1) A written will reflects their particular wishes. The state’s intestate will is rigid. In the

event of Richard’s death, Monica would receive all, half or some other fraction of the

2) There is no correct answer for equal versus unequal division of assets. If human

behavior were not involved a case could be made for merit based on such factors as

closeness to the person, their effort on your behalf, their need based on assets and

income. On the other hand many people’s need is based on conscious choice of career

and savings. Why favor that person because they chose a less rewarding path?

3) They are well below the threshold of $5.34 million per person. They could consider it

4) If she had all assets in her name she could ensure that Richard does not engage in

another speculative investment. Even if he continued to supervise investments he

5) Recommendations may include:

a) Get a power of attorney in case of incapacitation. If Richard is Monica’s choice

she might try a springing power so that Richard would only be given the power in

Answers to CFP® Questions

Question

Answer

Question 15.1

B

Question 15.2

C

Question 15.3

D

Question 15.4

B

Question 15.5

E

Question 15.6

E

Question 15.7.1

B

Question 15.7.2

B

Question 15.8

B

Question 15.9

E

Question 15.10

A

SOLUTIONS TO SELECTED CFP® CERTIFICATION EXAMINATION

PROBLEMS

1

15.1

Before her death, LaDonna Kiniston, age 74, gave her three grandchildren some money

for their private school education. She paid $12,000 to the school for Jake’s tuition and

gave a like amount to Sarah and Nicole. What would be the adjusted taxable gifts

calculated in her estate taxes?

a. $0

b. $2,000

c. $6,000

d. $16,000

e. $36,000

Solution:

There is an unlimited gift tax exemption for tuition. Other gifts over $11,000 annually are

1

The solutions supplied are those of the author and not of the CFP Board.