Sample Questions
Question 1
Easy
In estate planning, "probate" refers to the legal process of:
Solution
A is correct.
Probate is the court-supervised process of: (1) validating the deceased person's will (confirming it is legally valid and was the decedent's last will); (2) appointing an executor or personal representative to administer the estate; (3) identifying, inventorying, and appraising estate assets; (4) paying debts, taxes, and administrative expenses; and (5) distributing remaining assets to beneficiaries as directed by the will (or by state intestacy laws if there is no will). Probate is typically public, can be time-consuming (months to years), and may involve significant costs.
Probate is the court-supervised process of: (1) validating the deceased person's will (confirming it is legally valid and was the decedent's last will); (2) appointing an executor or personal representative to administer the estate; (3) identifying, inventorying, and appraising estate assets; (4) paying debts, taxes, and administrative expenses; and (5) distributing remaining assets to beneficiaries as directed by the will (or by state intestacy laws if there is no will). Probate is typically public, can be time-consuming (months to years), and may involve significant costs.
Question 2
Medium
Under Proposal 1, the value of the gift to Camille relative to a bequest of the same securities in 20 years is closest to:
Solution
C is correct. The gift is sheltered by the remaining lifetime exemption, so it is a tax-free gift: Camille invests the full $5,000,000 and compounds it at her own 5.5% after-tax return, while a bequest compounds at Delacroix-Hall's 4.2% after-tax return and is then reduced by the 40% estate tax.
In currency terms, the gift grows to , while the bequest delivers , a ratio of about 2.14. Two forces drive the result: the 40% estate tax avoided on assets removed from the estate, and 20 years of compounding at a rate 130 basis points higher in Camille's hands.
In currency terms, the gift grows to , while the bequest delivers , a ratio of about 2.14. Two forces drive the result: the 40% estate tax avoided on assets removed from the estate, and 20 years of compounding at a rate 130 basis points higher in Camille's hands.
Question 3
Hard
Based on Exhibit 1, the excess capital the Hollands could commit to a lifetime gifting program is closest to:
Solution
A is correct. Core capital is the present value of the spending the Hollands must fund plus the safety reserve Aguirre attaches to it. Discounting the level real after-tax spending need of $700,000 for 25 years at 3.0%:
Adding the safety reserve gives core capital:
Only the investable portfolio is capital available to fund spending, so excess capital is:
Adding the safety reserve gives core capital:
Only the investable portfolio is capital available to fund spending, so excess capital is:
