Taxation & Legal Considerations Flashcards

A decedent's estate includes farmland worth $3 million at its highest-and-best-use value but only $1.5 million as a working farm. Under IRC § 2032A, the executor may elect to value the farmland at:

Answer: Its special-use value of $1.5 million, subject to statutory limits

IRC § 2032A allows qualifying real property used in farming or a closely-held business to be valued at its special-use value, reducing the gross estate, subject to a maximum reduction limit.

A decedent's will leaves 'all residuary assets to charity.' What marital or charitable deduction applies to reduce the taxable estate?

Answer: Charitable deduction, unlimited in amount for qualifying organizations

IRC § 2055 allows an unlimited estate tax charitable deduction for bequests to qualifying § 501(c)(3) organizations.

Which installment payment election under IRC § 6166 allows an estate to defer and pay estate taxes attributable to a closely-held business interest over an extended period?

Answer: Up to 5 years deferral then 10 annual installments

IRC § 6166 allows an estate to defer paying the portion of estate tax attributable to a qualifying closely-held business for up to 5 years (interest only), then pay in up to 10 annual installments.

For state estate or inheritance tax planning, which statement is most accurate?

Answer: Some states have lower exemption thresholds than the federal exemption, requiring separate state-level planning

A number of states have their own estate or inheritance taxes with exemptions well below the federal threshold, making state-specific planning essential.

An irrevocable trust distributes $20,000 of ordinary income to a beneficiary. The trust's distributable net income (DNI) is $15,000. How much income is the beneficiary required to include in gross income?

Answer: $15,000, limited to the trust's DNI

Under the conduit rules, a beneficiary's inclusion is limited to the lesser of the distribution or DNI; here DNI of $15,000 caps the taxable amount.

A couple with combined wealth of $30 million wants to use a credit shelter (bypass) trust to preserve both spouses' exemptions. After the first spouse dies, the bypass trust is funded with assets up to the first spouse's exemption amount. The primary benefit of this structure is that:

Answer: Assets in the bypass trust, plus any appreciation, pass to heirs free of estate tax at the second spouse's death

Assets placed in a bypass trust at the first death are exempt from estate tax at the second death, including all post-death appreciation, effectively doubling the couple's estate-tax-free transfer.

A client gifts a closely-held business interest worth $500,000 to a child but claims a combined 35% valuation discount, reporting a taxable gift of $325,000. The IRS may challenge this discount under which doctrine?

Answer: Substance-over-form doctrine

The IRS frequently invokes the substance-over-form doctrine (and related rules) to collapse artificially structured FLP or LLC transfers that lack business purpose beyond tax savings.