- Which of the following statements regarding a joint tenancy with right of survivorship is true?
Answer: A joint tenant may transfer his or her interest to an outside third party without the other joint tenants' consent, and the transferee then holds that share as a tenant in common with the remaining joint tenants.
Governing principle: the common-law rule of joint tenancy and the four unities (time, title, interest, and possession). A joint tenant may unilaterally convey his or her interest to an outsider; the conveyance severs the joint tenancy as to that share, and the transferee holds as a tenant in common with the remaining joint tenants, who continue to hold as joint tenants with each other. The statement that the deceased tenant's interest passes under the will and through probate is wrong: a right of survivorship transfers the account directly to the surviving joint tenants outside probate, and a will cannot override that result. The statement that a judgment creditor cannot attach the debtor-tenant's interest is wrong: a creditor may levy on the debtor's share, and the forced sale severs the joint tenancy as to that share just as a voluntary conveyance would. The statement that an equal, undivided interest is required but that a transfer needs every other tenant's written consent is half right: the equal-interest and undivided-interest requirements are correct, but a joint tenant is not required to obtain the other tenants' consent to convey.
A participant in an ERISA-covered 401(k) plan is married and wants to name his adult daughter as the beneficiary of his plan account. He and his wife complete the beneficiary designation form. The wife signs the form in the participant's presence, but her signature is neither notarized nor witnessed by a plan representative.
Which statement is correct? Answer: The designation is ineffective because spousal consent must be in writing, acknowledge the effect of the waiver, and be notarized or witnessed by a plan representative.
Under ERISA § 205 and IRC § 401(a)(11), a married participant's spouse is protected as the automatic beneficiary of an ERISA-covered 401(k) account. To name a non-spouse beneficiary, the spouse must consent in writing, the consent must acknowledge the effect of the waiver, and the consent must be notarized or witnessed by a plan representative. Here, the wife signed the form, but the signature was not notarized and no plan representative witnessed it, so the designation is ineffective. A non-spouse beneficiary may be named with valid spousal consent; the defect is the missing formalities, not the relationship. ERISA does not permit a participant to bypass the spouse without proper consent.
A client, age 57, owns a vacation home with his wife as joint tenants with right of survivorship. His will leaves his entire estate to his two adult children from a prior marriage. He wants his children, not his wife, to receive his interest in the vacation home at his death, and he does not want to make a completed gift of the property now.
Which action is most appropriate? Answer: Retitle the property as tenants in common so that his interest passes under the existing will.
State property law governing joint tenancy and tenancy in common controls. A joint tenancy with right of survivorship passes the property automatically to the surviving joint tenant, so the will cannot control it. Retitling as tenants in common severs the survivorship element; the client's interest becomes a probate asset distributable under his existing will. A codicil cannot override the survivorship feature. An irrevocable trust would be a completed gift of the remainder and is not needed if no current gift is desired. Adding the children as joint tenants creates a current gift and leaves survivorship interests that do not achieve the client's precise objective.
An insured names his daughter as the primary beneficiary of a life insurance policy and names no contingent beneficiary. The insured's will leaves his entire estate to his two grandchildren. The daughter dies before the insured, and the insured does not change the policy's beneficiary designation.
At the insured's death, what happens to the policy proceeds? Answer: They are paid to the insured's estate and distributed to the grandchildren under the will.
When the only named primary beneficiary predeceases the insured and no contingent beneficiary is designated, the death benefit is payable to the insured's estate. The estate then passes under the insured's will, which here leaves everything to the grandchildren. The grandchildren do not take directly as policy beneficiaries; intestacy applies only if there is no valid will; and the insurer does not hold the proceeds indefinitely.
A woman and her sister own an investment property as joint tenants with right of survivorship. Each originally contributed $60,000 toward the $120,000 purchase price. At the woman's death, the property is valued at $400,000, and the sister is the sole surviving joint tenant.
What is the sister's income tax basis in the property immediately after the woman's death? Answer: $260,000
IRC § 1014 provides a fair-market-value step-up for property included in a decedent's estate. In a joint tenancy with right of survivorship, the decedent's half receives the step-up; the surviving joint tenant retains her original basis in her own half. The decedent's half is $200,000 of value, and the sister's carryover basis in her half is $60,000, for a total basis of $260,000. $400,000 would be the result for community property receiving a full step-up. $200,000 ignores the sister's retained basis, and $120,000 ignores the step-up entirely.
A 68-year-old client has a taxable brokerage account worth $900,000. She wants the account to pass outside probate to her three adult children, with 50% to the oldest child and 25% to each of the twins. She does not want to make a current gift and wants to be able to change the shares until her death.
Which ownership or beneficiary arrangement is most suitable? Answer: Complete a transfer-on-death designation on the account specifying the desired percentages and keep sole ownership during life.
A transfer-on-death beneficiary designation is revocable until death, requires no current transfer, avoids probate, and can specify unequal percentage shares. Joint tenancy requires equal ownership interests and creates survivorship and gift issues. A tenancy in common transfer now is a completed gift and forfeits control. An irrevocable trust also is a completed gift and cannot be changed after funding. The TOD designation meets all three stated goals.
An IRA owner designates her three children as primary beneficiaries "per stirpes" and lists no contingent beneficiaries. One child dies before the owner, leaving two children who survive the owner. The IRA owner then dies.
How is the IRA divided? Answer: Each surviving child receives one-third, and each of the deceased child's children receives one-sixth.
A per stirpes beneficiary designation divides by family branches at the generation of the named children. Each child's branch receives an equal one-third share; because the deceased child's branch is represented by two grandchildren, each grandchild takes one-sixth. Equal division among four individuals describes per capita, not per stirpes. A lapse to the estate is not triggered by a per stirpes designation, and paying only the surviving children ignores the descendants of the predeceased child.
- Which statement concerning community property is true?
Answer: Without the surviving spouse's consent, a beneficiary designation cannot transfer that spouse's half of a community property account.
Under community property law, each spouse owns a present, equal one-half interest in property acquired with community earnings. A beneficiary designation is a disposition of the decedent's interest only, so without the surviving spouse's consent it cannot give the surviving spouse's half to a non-spouse beneficiary. Gifts and inheritances are separate property even if the other spouse helps manage them; ordinary community property has no right of survivorship (community property with right of survivorship is a distinct form); and the decedent's one-half community interest is included in the gross estate regardless of title.
- Which of the following statements regarding a per stirpes beneficiary designation is true?
Answer: If a named beneficiary who is one of the owner's three children predeceases the owner and is survived by two children of her own, the deceased child's one-third share is split equally between her two children, and each surviving child still receives one-third.
Governing principle: a per stirpes (by representation) beneficiary designation. The account is divided into equal branches at the generation of the named beneficiaries; if one of the owner's three children predeceases the owner leaving two children of her own, the deceased child's one-third share is divided equally between those two grandchildren (one-sixth each), while the two surviving children each keep their own one-third shares. The statement that the share is divided among the other same-generation beneficiaries, regardless of descendants, describes a per capita distribution and is wrong for per stirpes. The statement that the share passes to the deceased beneficiary's estate and is distributed under that beneficiary's will or by intestacy is wrong: the designation controls the disposition, so the share goes directly to the descendants and bypasses the deceased beneficiary's estate, creditors, and will. The statement that the spouse shares in the division is wrong: per stirpes carries the share down to descendants, not to a surviving spouse, and a will cannot alter the designation's effect.
An unmarried client has three adult children. His traditional IRA beneficiary designation states: "Primary beneficiary: my children, per stirpes." One of his children predeceases him, leaving two children of her own. The client dies without changing the beneficiary designation. The two surviving children and the two grandchildren are alive at his death.
Which statement correctly describes how the traditional IRA proceeds are distributed? Answer: The two surviving children each receive one-third, and the two grandchildren equally split the remaining one-third, giving each grandchild one-sixth.
The traditional IRA is a non-probate contract asset, so its distribution is controlled by the terms of the beneficiary designation. A per stirpes designation divides the account by branch at the first generation of named beneficiaries, here the client's three children; each child's branch receives an equal one-third share. Because one child predeceased the client and left two children, that child's one-third share passes to her descendants by representation and is split equally, one-sixth to each grandchild. Dividing the account equally among all four survivors is a flat per-capita misreading, payment of the deceased child's share to the estate would ignore the per stirpes representation language, and dividing the account only between the surviving children would treat the IRA as if it were controlled by survival alone rather than by the beneficiary designation.
- Which of the following statements regarding community property is true?
Answer: Each spouse owns an undivided one-half interest in community property, and the deceased spouse's half is disposed of by that spouse's will or by intestacy rather than by survivorship.
Governing principle: community property ownership in community property states. Each spouse owns a present, undivided one-half interest in property acquired with either spouse's earnings during the marriage; community property carries no right of survivorship, so the deceased spouse's half is governed by that spouse's will or by intestacy, and the surviving spouse's own half never enters the deceased spouse's probate estate. The statement that the entire estate passes automatically by right of survivorship is the joint-tenancy rule, not the community property rule. The statement that gifts and inheritances received during marriage are community property and that earnings are separate property reverses the rule: gifts and inheritances to one spouse are separate property, while earnings during marriage are community property. The statement that the marital community owns the property as a single entity is wrong because each spouse holds an individual one-half interest that may be devised by will.
- Which of the following statements regarding beneficiary designations on an individual retirement account (IRA) is true?
Answer: A beneficiary designation on an IRA controls over a contrary provision in the owner's will, and an IRA with no designated beneficiary passes through the owner's probate estate.
Governing authority: IRC § 408 (IRAs), with required minimum distributions applied through § 408(a)(6) and § 401(a)(9). An IRA is paid according to its beneficiary designation, which controls over any will; when no beneficiary is designated, the IRA is payable to the owner's estate and becomes a probate asset. The statement that a non-spouse beneficiary may roll the inherited IRA into his or her own IRA is wrong: under IRC § 408(d)(3)(C), only a surviving spouse may treat an inherited IRA as his or her own; a non-spouse beneficiary must take under the inherited-IRA distribution rules. The statement that a married owner must obtain the spouse's notarized consent or the designation is void applies to certain qualified plan benefits under ERISA, not to IRAs, which may name any beneficiary. The statement that a spouse who treats the IRA as his or her own is still bound by the deceased owner's age-73 schedule is wrong: once the spouse makes that election, RMDs are measured by the spouse's own required beginning date.
- Which of the following statements regarding a tenancy by the entirety is true?
Answer: Only married couples may hold property as tenants by the entirety, and neither spouse alone may convey or encumber the property without the other spouse's consent.
Governing principle: the common-law estate of tenancy by the entirety. It is available only to married couples, carries a right of survivorship, and neither spouse alone may convey or encumber the property without the other's consent. The statement that either spouse may convey an interest without consent and thereby create a tenancy in common describes the severance rule for a joint tenancy, not tenancy by the entirety. The statement that the deceased spouse's half passes through probate under the will is wrong: like a joint tenancy, tenancy by the entirety passes the whole property to the surviving spouse outside probate. The statement that two unmarried individuals may create the tenancy by acquiring equal interests at the same time and signing the same instrument is wrong because the spousal relationship is a required element of the estate.
- Which of the following statements regarding a transfer-on-death (TOD) designation on a securities account is true?
Answer: If the account is held as joint tenants with right of survivorship and carries a TOD designation, the beneficiary receives the account only after the last surviving joint owner dies, not upon the first owner's death.
Governing authority: state transfer-on-death registration statutes, patterned on the Uniform TOD Security Registration Act. A TOD designation is revocable and creates only an expectancy in the beneficiary; when an account is held as joint tenants with right of survivorship, the TOD designation does not defeat the survivorship right, so the beneficiary takes the account only after the last surviving joint owner dies. The statement that the beneficiary's interest vests when the designation is signed is wrong: the designation gives the beneficiary no current interest and no veto over the owner's transactions, and the owner may revoke or change it without the beneficiary's consent. The statement that the designation must be confirmed in the will is wrong: the TOD designation controls and the account passes outside probate. The statement that a TOD beneficiary who predeceases the owner sends the account to the beneficiary's estate is wrong: the beneficiary must survive the owner, and the failed designation leaves the account to any contingent beneficiary or, if none is named, to the owner's estate—not to the deceased beneficiary's estate.
A client owns a $2,000,000 life insurance policy on his own life and names his son as the beneficiary. The client's will leaves his residuary estate to his daughter.
At the client's death, which statement about the death benefit is correct? Answer: The proceeds are included in the client's gross estate but are not part of his probate estate.
IRC § 2042 includes life insurance proceeds in the insured's gross estate if the insured possessed incidents of ownership at death; as the owner of the policy, the client possessed incidents of ownership. Because the son is the named beneficiary, the proceeds are paid by contract directly to the son and are not part of the probate estate, so the daughter's residuary bequest does not reach them. Any option stating the proceeds are not included in the gross estate is wrong because § 2042 applies; any option stating the proceeds pass through probate to the daughter is wrong because the beneficiary designation controls.
