ALU 202 COMPREHENSIVE QUESTIONS AND
ANSWERS SET A+
✔✔Arguments Against the Estate Tax - ✔✔1. The tax disproportionately affects
society's most successful and productive citizens. It also penalizes business
entrepreneurs looking to safeguard their life's work and pass it intact to their heirs.
2. Money and financial resources removed from the general economy via the estate tax
cause a loss of jobs.
3. Tax-supported government institutions are generally less effective at promoting
economic prosperity than a free-market economy.
✔✔Net worth - ✔✔- often used as the basis for which to estimate whether an individual
is subject to the estate tax.
- The estate tax is computed on the taxable estate, which is an amount determined by
subtracting certain allowable deductions from gross estate.
✔✔The gross estate - ✔✔- the true starting point for the computation of the estate tax.
- defined by the Internal Revenue Service as the value of all property interests, real or
personal, tangible or intangible, of an individual on the date of death to the extent of his
or her interest in the property.
✔✔Most property is valued at - ✔✔valued at fair market value (FMV)
✔✔Fair Market Value is - ✔✔the price at which the property would change hands
between a willing buyer and a willing seller, neither being under any compulsion to buy
or to sell and both having reasonable knowledge of relevant facts.
✔✔Real property (land and permanent attachments) - ✔✔- may not always have a
ready market from which to estimate a fair market value.
- can be valued at the higher of the highest price available or its salvage value (the
disposal value of property at the end of its useful life).
,✔✔Example of real properties that are subject to a special use valuation - ✔✔Example
if a family farm were valued as a property fit for a new mall, the land value might be
assessed much higher than that of a farm.
✔✔Other special valuation situations - ✔✔1. Publicly traded stock and corporate bonds
are valued on the date of death or an alternate valuation date.
2. US government bonds are valued at the date of death redemption price.
3. Closely held corporation stock not subject to special use valuation is valued
according to either the adjusted book value method or the capitalization of adjusted
earnings method.
4. Life insurance proceeds set aside for the benefit of the decedent's estate or proceeds
from policies owned by the decedent are taxed as part of the estate.
✔✔The Adjusted Gross Estate has certain allowable deductions including - ✔✔-
Allowable debts (such as mortgages)
- Funeral expenses
- Medical expenses
- Administrative expenses
- Losses during estate administration
✔✔Marital and Charitable Deductions - ✔✔- are subtracted from the adjusted gross
estate to arrive at the taxable estate.
Property that is passing to the spouse of the decedent can be deducted completely from
the adjusted gross estate.
- this is a marital deduction and it acts to postpone the imposition of any estate tax until
the death of the surviving spouse.
✔✔The use of the marital deduction depends on - ✔✔1. The value of property rights,
known as the power of appointment.
2. Partial interests in property, in which a property is owned or controlled by two or more
individuals.
3. Charitable remainder trusts.
4. Guaranteed annuity interests, in which the charity gets income for a specific term,
then the property passes to a beneficiary.
5. Split gifts, in which a partial gift goes to a charity and the remainder goes to a
beneficiary.
✔✔Estate Taxation - Canada - ✔✔Canada has no estate tax.
✔✔Canadian Income Tax Act - ✔✔- provides that a deceased taxpayer is considered to
have "sold" all capital property at fair market value immediately before death.
- Any capital gains thus realized will be subject to tax on the terminal income tax return
of the deceased.
,✔✔Capital Property - ✔✔1. Depreciable property, the value of which declines over time,
such as buildings, furniture, and machinery.
2. Non-depreciable property, such as land, stock, and mutual funds.
✔✔A capital gains tax will be incurred in situations where - ✔✔in situations where the
fair market value exceeds the owner's adjusted cost basis of the property (basically the
original cost of the property)
✔✔Three jurisdictional premises employed by the IRS which can trigger the imposition
of the estate tax - ✔✔US citizenship, residency or domicile, and the situs or location of
estate assets.
✔✔Citizenship - ✔✔- US citizens are taxed on the value of their estate assets
worldwide, regardless of where those assets are located.
✔✔Definition of citizen: - ✔✔1. All native born citizens, including kids born in the US of
non-US parents who might be visiting the country temporarily or staying illegally.
2. All naturalized citizens
3. All citizens living abroad.
There is no requirement that a US citizen living abroad must spend any time in the US
in order to qualify for the estate tax.
A US citizen who has never set foot in the US still is liable for the estate tax.
4. All individuals who have multiple citizenship status, as long as one of those
citizenships is that of the US
5. Former citizens and expatriates
✔✔Residency or Domicile - ✔✔- a resident decedent is a decedent who, at the time of
their death had their domicile in the US.
- A person acquires a domicile by living there, even for a brief time with no definite
intention of later removing therefrom.
✔✔Residence without the intention to remain indefinitely - ✔✔will not constitute
domicile, nor will intention to change domicile effect such a change unless accompanied
by actual removal
✔✔Residency or domicile is proven by two factors - ✔✔-Physical presence
-Intention to remain in the country
✔✔Situs of Estate Assets - ✔✔Assets owned in the US by foreign decedents are
subject to estate tax, even if the decedent has never been to the US and has no
residence in the US.
✔✔Special Tax Treatment for Foreigners Subject to the US Estate Tax - ✔✔- The
estate tax exclusion amount for non-resident aliens is $60,000. Estate tax is due when a
non-resident alien's estate transfers US situs assets about 60k.
, - The charitable deduction applies, but only to US charities.
- There is no marital deduction if the spouse is not a US citizen.
✔✔Income with Respect of a Decedent (IRD) - ✔✔is the income the decedent earned
but did not receive before their death.
✔✔Examples of Income with Respect of a Decedent - ✔✔- Uncollected salaries, wages,
bonuses, commissions, vacation and sick pay
- Interest and dividends accrued by unpaid at time of death
- Uncollected lottery winnings
- Assets held in deferred compensation benefits such as qualified pension plans, profit
sharing plans, SEP, Keogh and IRAs.
- Outstanding stock dividends still owed to the decedent
- Accounts receivable of a cash basis sole proprietor
- Rents and royalties accrued but not paid before death
- Unreceived gain from the sale of property
✔✔IRD is taxed how many times? - ✔✔is taxed twice. It is subject to income tax and
estate tax.
✔✔Trust - ✔✔- a legal arrangement whereby property is held and managed for the
welfare of a beneficiary.
- The principal advantage is that it provides an opportunity for competent asset
management.
- It will also act as an independent taxpayer, often paying taxes at a lower rate than the
grantor.
✔✔Why life insurance is a particularly desirable asset to have in a trust - ✔✔- The
internal value of a life insurance policy accumulates in a tax-free manner and creates no
income tax liability to the trust.
- The cash value can be made available to beneficiaries before the death of the insured
or the death benefit itself can be the primary funding vehicle for the trust.
✔✔Revocable Trist or inter vivos trust - ✔✔- is a type of living trust and is set up before
the death of the grantor.
- provides several advantages to the grantor but no estate tax savings.
- The grantor is liable for any income tax due on income generated within the trust and
trust assets are vulnerable to the grantor's creditors.
- The grantor can undo the trust any time before death. - They never completely give up
the assets so they remain part of the estate.
✔✔Irrevocable Trust - ✔✔- provide significant opportunities for tax savings as well as
wealth and income shifting.
- Require that the trust assets be removed completely from the grantor's control.
ANSWERS SET A+
✔✔Arguments Against the Estate Tax - ✔✔1. The tax disproportionately affects
society's most successful and productive citizens. It also penalizes business
entrepreneurs looking to safeguard their life's work and pass it intact to their heirs.
2. Money and financial resources removed from the general economy via the estate tax
cause a loss of jobs.
3. Tax-supported government institutions are generally less effective at promoting
economic prosperity than a free-market economy.
✔✔Net worth - ✔✔- often used as the basis for which to estimate whether an individual
is subject to the estate tax.
- The estate tax is computed on the taxable estate, which is an amount determined by
subtracting certain allowable deductions from gross estate.
✔✔The gross estate - ✔✔- the true starting point for the computation of the estate tax.
- defined by the Internal Revenue Service as the value of all property interests, real or
personal, tangible or intangible, of an individual on the date of death to the extent of his
or her interest in the property.
✔✔Most property is valued at - ✔✔valued at fair market value (FMV)
✔✔Fair Market Value is - ✔✔the price at which the property would change hands
between a willing buyer and a willing seller, neither being under any compulsion to buy
or to sell and both having reasonable knowledge of relevant facts.
✔✔Real property (land and permanent attachments) - ✔✔- may not always have a
ready market from which to estimate a fair market value.
- can be valued at the higher of the highest price available or its salvage value (the
disposal value of property at the end of its useful life).
,✔✔Example of real properties that are subject to a special use valuation - ✔✔Example
if a family farm were valued as a property fit for a new mall, the land value might be
assessed much higher than that of a farm.
✔✔Other special valuation situations - ✔✔1. Publicly traded stock and corporate bonds
are valued on the date of death or an alternate valuation date.
2. US government bonds are valued at the date of death redemption price.
3. Closely held corporation stock not subject to special use valuation is valued
according to either the adjusted book value method or the capitalization of adjusted
earnings method.
4. Life insurance proceeds set aside for the benefit of the decedent's estate or proceeds
from policies owned by the decedent are taxed as part of the estate.
✔✔The Adjusted Gross Estate has certain allowable deductions including - ✔✔-
Allowable debts (such as mortgages)
- Funeral expenses
- Medical expenses
- Administrative expenses
- Losses during estate administration
✔✔Marital and Charitable Deductions - ✔✔- are subtracted from the adjusted gross
estate to arrive at the taxable estate.
Property that is passing to the spouse of the decedent can be deducted completely from
the adjusted gross estate.
- this is a marital deduction and it acts to postpone the imposition of any estate tax until
the death of the surviving spouse.
✔✔The use of the marital deduction depends on - ✔✔1. The value of property rights,
known as the power of appointment.
2. Partial interests in property, in which a property is owned or controlled by two or more
individuals.
3. Charitable remainder trusts.
4. Guaranteed annuity interests, in which the charity gets income for a specific term,
then the property passes to a beneficiary.
5. Split gifts, in which a partial gift goes to a charity and the remainder goes to a
beneficiary.
✔✔Estate Taxation - Canada - ✔✔Canada has no estate tax.
✔✔Canadian Income Tax Act - ✔✔- provides that a deceased taxpayer is considered to
have "sold" all capital property at fair market value immediately before death.
- Any capital gains thus realized will be subject to tax on the terminal income tax return
of the deceased.
,✔✔Capital Property - ✔✔1. Depreciable property, the value of which declines over time,
such as buildings, furniture, and machinery.
2. Non-depreciable property, such as land, stock, and mutual funds.
✔✔A capital gains tax will be incurred in situations where - ✔✔in situations where the
fair market value exceeds the owner's adjusted cost basis of the property (basically the
original cost of the property)
✔✔Three jurisdictional premises employed by the IRS which can trigger the imposition
of the estate tax - ✔✔US citizenship, residency or domicile, and the situs or location of
estate assets.
✔✔Citizenship - ✔✔- US citizens are taxed on the value of their estate assets
worldwide, regardless of where those assets are located.
✔✔Definition of citizen: - ✔✔1. All native born citizens, including kids born in the US of
non-US parents who might be visiting the country temporarily or staying illegally.
2. All naturalized citizens
3. All citizens living abroad.
There is no requirement that a US citizen living abroad must spend any time in the US
in order to qualify for the estate tax.
A US citizen who has never set foot in the US still is liable for the estate tax.
4. All individuals who have multiple citizenship status, as long as one of those
citizenships is that of the US
5. Former citizens and expatriates
✔✔Residency or Domicile - ✔✔- a resident decedent is a decedent who, at the time of
their death had their domicile in the US.
- A person acquires a domicile by living there, even for a brief time with no definite
intention of later removing therefrom.
✔✔Residence without the intention to remain indefinitely - ✔✔will not constitute
domicile, nor will intention to change domicile effect such a change unless accompanied
by actual removal
✔✔Residency or domicile is proven by two factors - ✔✔-Physical presence
-Intention to remain in the country
✔✔Situs of Estate Assets - ✔✔Assets owned in the US by foreign decedents are
subject to estate tax, even if the decedent has never been to the US and has no
residence in the US.
✔✔Special Tax Treatment for Foreigners Subject to the US Estate Tax - ✔✔- The
estate tax exclusion amount for non-resident aliens is $60,000. Estate tax is due when a
non-resident alien's estate transfers US situs assets about 60k.
, - The charitable deduction applies, but only to US charities.
- There is no marital deduction if the spouse is not a US citizen.
✔✔Income with Respect of a Decedent (IRD) - ✔✔is the income the decedent earned
but did not receive before their death.
✔✔Examples of Income with Respect of a Decedent - ✔✔- Uncollected salaries, wages,
bonuses, commissions, vacation and sick pay
- Interest and dividends accrued by unpaid at time of death
- Uncollected lottery winnings
- Assets held in deferred compensation benefits such as qualified pension plans, profit
sharing plans, SEP, Keogh and IRAs.
- Outstanding stock dividends still owed to the decedent
- Accounts receivable of a cash basis sole proprietor
- Rents and royalties accrued but not paid before death
- Unreceived gain from the sale of property
✔✔IRD is taxed how many times? - ✔✔is taxed twice. It is subject to income tax and
estate tax.
✔✔Trust - ✔✔- a legal arrangement whereby property is held and managed for the
welfare of a beneficiary.
- The principal advantage is that it provides an opportunity for competent asset
management.
- It will also act as an independent taxpayer, often paying taxes at a lower rate than the
grantor.
✔✔Why life insurance is a particularly desirable asset to have in a trust - ✔✔- The
internal value of a life insurance policy accumulates in a tax-free manner and creates no
income tax liability to the trust.
- The cash value can be made available to beneficiaries before the death of the insured
or the death benefit itself can be the primary funding vehicle for the trust.
✔✔Revocable Trist or inter vivos trust - ✔✔- is a type of living trust and is set up before
the death of the grantor.
- provides several advantages to the grantor but no estate tax savings.
- The grantor is liable for any income tax due on income generated within the trust and
trust assets are vulnerable to the grantor's creditors.
- The grantor can undo the trust any time before death. - They never completely give up
the assets so they remain part of the estate.
✔✔Irrevocable Trust - ✔✔- provide significant opportunities for tax savings as well as
wealth and income shifting.
- Require that the trust assets be removed completely from the grantor's control.
