NAB Estate and Tax Planning 3 — Questions and Answers
Question 1: What does the 'step-up in basis' rule provide to an heir who inherits an appreciated asset?
- The original purchase price carries over to the heir
- The heir's basis is adjusted to the asset's fair market value at the date of death (Correct answer)
- The heir pays capital gains tax on the full appreciation immediately
- The asset is valued at the lower of cost or market
Correct answer: The heir's basis is adjusted to the asset's fair market value at the date of death
IRC Section 1014 resets the heir's cost basis to the fair market value on the decedent's date of death, eliminating capital gains tax on pre-death appreciation.
Question 2: Which of the following assets typically passes directly to a named beneficiary outside of the probate process?
- Real estate titled solely to the decedent
- Assets held in a testamentary trust
- Life insurance policies with a named beneficiary (Correct answer)
- Vehicles titled solely to the decedent
Correct answer: Life insurance policies with a named beneficiary
Life insurance proceeds with a named beneficiary pass by contract directly to that beneficiary, bypassing the decedent's probate estate.
Question 3: A decedent's gross estate is $15 million and the applicable exclusion amount is $13.61 million. What is the amount subject to federal estate tax?
- $15,000,000
- $13,610,000
- $1,390,000 (Correct answer)
- $28,610,000
Correct answer: $1,390,000
The taxable estate equals the gross estate minus the applicable exclusion: $15M − $13.61M = $1.39M.
Question 4: What is the primary purpose of a pour-over will used alongside a revocable living trust?
- Disinherit specific heirs without court involvement
- Transfer any probate assets into the living trust at death (Correct answer)
- Avoid estate taxes on all assets
- Name a guardian for minor children only
Correct answer: Transfer any probate assets into the living trust at death
A pour-over will acts as a safety net, directing any assets not already in the trust to flow into it upon the testator's death.
Question 5: Under IRC Section 2032A, which valuation method permits a family farm or closely held business to be valued at current use rather than highest and best use?
- Fair market value
- Special use valuation (Correct answer)
- Alternate valuation date
- Blockage discount
Correct answer: Special use valuation
Section 2032A special use valuation can reduce the estate value of qualifying real property used in farming or a trade or business.
Question 6: If a named beneficiary predeceases the account owner and no contingent beneficiary is named, what typically happens to the account balance?
- It automatically passes to the account owner's spouse
- It becomes part of the probate estate (Correct answer)
- It is transferred to the state under escheat laws
- It is distributed equally among surviving siblings
Correct answer: It becomes part of the probate estate
Without a valid beneficiary designation, the account defaults to the probate estate and is distributed according to the decedent's will or intestacy laws.
Question 7: The alternate valuation date election for federal estate tax purposes allows an estate to use asset values as of how many months after the date of death?
- 3 months
- 6 months (Correct answer)
- 12 months
- 18 months
Correct answer: 6 months
Under IRC Section 2032, the executor may elect to value estate assets six months after death if doing so reduces both the gross estate and the estate tax liability.
NAB Estate and Tax Planning 3
What does the 'step-up in basis' rule provide to an heir who inherits an appreciated asset?