AAFM Estate Planning and Trusts 1 — Questions and Answers
Question 1: Which document directs how a deceased person's assets are to be distributed and names an executor to administer the estate?
- Living trust
- Power of attorney
- Last will and testament (Correct answer)
- Beneficiary designation form
Correct answer: Last will and testament
A last will and testament is a legal document specifying how a decedent's probate assets will be distributed and naming an executor responsible for administering the estate through probate.
Question 2: Which type of trust allows the grantor to retain control and revoke the trust during their lifetime while avoiding probate at death?
- Irrevocable life insurance trust
- Charitable remainder trust
- Revocable living trust (Correct answer)
- Qualified personal residence trust
Correct answer: Revocable living trust
A revocable living trust holds assets during the grantor's lifetime and distributes them at death without going through probate, providing privacy and continuity of management.
Question 3: An irrevocable life insurance trust (ILIT) is primarily used to exclude life insurance proceeds from which tax?
- Income tax
- Generation-skipping transfer tax
- Federal estate tax (Correct answer)
- State inheritance tax
Correct answer: Federal estate tax
An ILIT owns the life insurance policy outside the insured's estate, so death benefit proceeds are excluded from the gross estate and avoid federal estate tax.
Question 4: The federal estate tax exemption in 2024 allows an individual to transfer up to approximately how much without incurring federal estate tax?
- $3.5 million
- $7.0 million
- $13.61 million (Correct answer)
- $25 million
Correct answer: $13.61 million
The federal estate and gift tax exemption for 2024 is $13.61 million per individual (indexed for inflation), scheduled to sunset to approximately $7 million at end of 2025 without legislative action.
Question 5: Which trust strategy transfers appreciating assets out of an estate by requiring the trust to pay the grantor a fixed annuity for a set term?
- IDGT
- GRAT (Correct answer)
- CLAT
- SLAT
Correct answer: GRAT
A grantor retained annuity trust (GRAT) transfers the appreciation of assets in excess of the IRS hurdle rate (Section 7520 rate) to beneficiaries gift-tax free at the end of the trust term.
Question 6: Probate is a legal process that validates a will and distributes estate assets under court supervision, which is typically known for being what?
- Fast and private
- Costly, time-consuming, and public (Correct answer)
- Completely tax-free
- Only applicable to large estates
Correct answer: Costly, time-consuming, and public
Probate proceedings are often lengthy, can be expensive due to court and attorney fees, and create a public record of estate assets and beneficiaries.
AAFM Estate Planning and Trusts 1
Which document directs how a deceased person's assets are to be distributed and names an executor to administer the estate?