Case Studies & Practical Application Flashcards

A client is executor of her parent's estate. The estate includes 1,000 shares of Apple stock purchased for $40/share and worth $180/share at death. The estate sells the shares 6 months later at $190/share. What is the tax treatment of the $10/share gain?

Answer: Long-term capital gain of $10/share due to the stepped-up basis at death

Inherited assets receive a stepped-up basis to fair market value at date of death; any subsequent gain is long-term regardless of how long the estate holds the asset.

A 45-year-old executive receives NSOs (non-qualified stock options) to buy 5,000 shares at $20/share. The stock is now $60/share. He exercises all options. What is the income tax consequence at exercise?

Answer: $200,000 ordinary income recognized at exercise, subject to payroll taxes

NSOs trigger ordinary income (and FICA taxes) at exercise equal to the spread: (FMV − exercise price) × shares = ($60 − $20) × 5,000 = $200,000.

A couple age 65 has $2.5M in assets and wants $120,000/year in retirement income (inflation-adjusted). Their financial plan uses a 4% withdrawal rate. They also receive $42,000/year in combined Social Security. What annual portfolio withdrawal is needed?

Answer: $78,000

Social Security provides $42,000, so the portfolio only needs to fund the $120,000 − $42,000 = $78,000 gap.

A client with a $4M estate wants to make annual gifts to reduce her estate. She has three children and six grandchildren. What is the maximum she can gift annually without using any lifetime exemption?

Answer: $162,000 (9 recipients × $18,000)

The annual exclusion in 2024 is $18,000 per recipient; with 9 recipients (3 children + 6 grandchildren), she can gift 9 × $18,000 = $162,000 annually gift-tax-free.

A client holds a variable annuity with a $200,000 account value and a $130,000 cost basis. She is 65 and wants to annuitize. What portion of each payment is taxable?

Answer: Only the gain portion using the exclusion ratio

The exclusion ratio (cost basis / expected return) determines what fraction of each annuity payment is a tax-free return of basis; the remainder is ordinary income.

A business owner wants to fund a buy-sell agreement for a two-person partnership. Each partner is age 50 and the business is valued at $3M. Which structure avoids estate inclusion for the deceased partner's heirs?

Answer: Cross-purchase agreement funded with life insurance on each partner

In a cross-purchase agreement, each partner owns and is beneficiary of life insurance on the other, so death proceeds are received income-tax-free and are not owned by the insured's estate.

A client is evaluating long-term care insurance at age 55. The policy has a 90-day elimination period, a $5,000/month benefit, 3-year benefit period, and 3% compound inflation rider. She is in good health. What is the primary planning concern for her CFP to address?

Answer: Whether the 3-year benefit period is adequate given average LTC stays can exceed 4 years for women

Average LTC duration for women exceeds 4 years; a 3-year benefit period could leave a significant coverage gap, especially for cognitive conditions that often last longer.