Question

1. Identify whether the power of appointment described is a general power of appointment or a special power of appointment.

A.    A holder can exercise the power to appoint property to himself with the consent of the other trust beneficiary.

B.    A holder can exercise the power in favor of her creditors.

C.    A holder was given a testamentary power to exercise the power in favor of his children.

D.    A holder can exercise the power for her comfort and support.

2. Paul established a trust for Elaine that gave her a life estate with a general power to appoint the greater of $5,000 or 5% of the trust corpus to herself each year. When Elaine died, the trust was valued at $700,000 and she had not yet withdrawn money from the trust that year. What amount was included in Elaine’s estate from this trust?

A.    $700,000

B.    $35,000

C.    $5,000

D.    $0

3. Adele established an irrevocable trust and funded it with $1.5 million in securities. Her three married children are the beneficiaries of the trust, and each child can withdraw $50,000 of the trust corpus each year. Her daughter Liz did not withdraw money from the trust this year. Did Liz make a taxable gift to her brother and sister who are the other beneficiaries of the trust?

A.    No, because the amount of the power that lapsed was less than 5% of the trust corpus.

B.    Yes, because Liz allowed her general power of appointment over the trust property to lapse.

C.    No, because Liz had a limited power of appointment over the trust corpus, which is not taxable.

D.    Yes, because the right to make a withdrawal is considered a taxable gift to the other beneficiaries when the withdrawal right is not exercised.

4. Charlie created a trust for his daughter Chelsea and his son Jonathan. A POA clause gives each child a noncumulative right to withdraw the greater of $5,000 or 5% of the value of the trust each year. Charlie transferred $120,000 into the trust this year; how much of his annual exclusion can be used to offset the taxable gift for each donee?

A.    $5,000 per donee

B.    $6,000 per donee

C.    $15,000 per donee

D.    $30,000 per donee

5. Spiros and Nicki have established a trust to benefit their two children and five grandchildren. Spiros transferred a $2 million single premium insurance policy on his life into the trust, which had a gift tax value of $340,000. The beneficiaries of the trust can withdraw the greater of $5,000 or 5% of the trust corpus each year. Which of the following statements are correct?

A.    With gift splitting, each parent can take seven annual exclusions to reduce the taxable gifts by $105,000.

B.    For GST tax purposes, Spiros and Nicki can take five annual exclusions for their grandchildren because this is a direct skip trust.

C.    The beneficiaries of the trust were given an ascertainable standard to make withdrawals from the trust corpus.

D.    Spiros and Nicki can each use a portion of their unified credit to offset the gift tax when the policy is transferred into the trust, and they can allocate a portion of their GST tax exemption on their individual gift tax return to shelter any future GST taxes whenever distributions are made to the grandchildren.

6. Pam has a general POA over her mother’s assets. Which of the following statements are correct regarding the power? 1.    Pam can appoint her mother’s money to pay for her children’s education. 2.    Pam can appoint her mother’s money to pay her bills. 3.    Pam must only appoint money using an ascertainable standard (health, education, maintenance, support). 4.    If Pam were to die before her mother, Pam’s gross estate would include her mother’s assets although not previously appointed by Pam.

A.    1 only

B.    1 and 3

C.    1, 2 and 4

D.    1, 2 and 3 E.    1, 2, 3 and 4

Answer 1

1. A,B,D = general power of appointment ; C = special power of appointment

2. If power of appointment is not exercised, the default provision takes over. Hence, $35,000

3. B. Yes, because Liz allowed her general power of appointment over the trust property to lapse.

5. D.    Spiros and Nicki can each use a portion of their unified credit to offset the gift tax when the policy is transferred into the trust, and they can allocate a portion of their GST tax exemption on their individual gift tax return to shelter any future GST taxes whenever distributions are made to the grandchildren.

6. All statements are correct. Hence, E.