AAMS AAMS Tax Planning & Wealth Transfer 1 — Questions and Answers
Question 1: Which account type allows investment gains to grow tax-deferred and be withdrawn tax-free in retirement, provided certain conditions are met?
- Traditional IRA
- Roth IRA (Correct answer)
- SEP-IRA
- Taxable brokerage account
Correct answer: Roth IRA
Roth IRA contributions are made with after-tax dollars, and qualified withdrawals of both principal and earnings are tax-free in retirement.
Question 2: The annual gift tax exclusion for 2024 allows an individual to give up to what amount per recipient without triggering a gift tax return?
- $10,000
- $15,000
- $18,000 (Correct answer)
- $25,000
Correct answer: $18,000
The 2024 annual gift tax exclusion is $18,000 per recipient, allowing tax-free gifting up to that amount without filing a Form 709.
Question 3: Which estate planning tool allows assets to pass directly to beneficiaries outside of probate while retaining the grantor's control during their lifetime?
- Irrevocable life insurance trust
- Revocable living trust (Correct answer)
- Testamentary trust
- Charitable remainder trust
Correct answer: Revocable living trust
A revocable living trust allows the grantor to maintain control over assets during their lifetime while ensuring a smooth, probate-free transfer to beneficiaries at death.
Question 4: Tax-loss harvesting is a strategy that involves:
- Selling appreciated assets to lock in gains before year-end
- Selling depreciated assets to offset capital gains and reduce tax liability (Correct answer)
- Converting traditional IRA assets to Roth to reduce future taxes
- Reinvesting dividends in tax-deferred accounts
Correct answer: Selling depreciated assets to offset capital gains and reduce tax liability
Tax-loss harvesting involves selling securities at a loss to offset capital gains realized elsewhere in the portfolio, thereby reducing current tax liability.
Question 5: The 'step-up in cost basis' at death means that:
- The estate pays capital gains tax on all unrealized appreciation
- Inherited assets receive a new basis equal to fair market value at the date of death (Correct answer)
- The heir must pay ordinary income tax on inherited assets
- The decedent's original purchase price is carried over to the heir
Correct answer: Inherited assets receive a new basis equal to fair market value at the date of death
A stepped-up basis resets the cost basis of inherited assets to their fair market value at the date of death, eliminating capital gains tax on pre-death appreciation.
Question 6: Which strategy involves converting a portion of a traditional IRA to a Roth IRA during a year when the client is in a temporarily lower tax bracket?
- Roth contribution strategy
- Roth conversion strategy (Correct answer)
- IRA rollover
- Backdoor Roth IRA
Correct answer: Roth conversion strategy
A Roth conversion strategy leverages low-income years to convert traditional IRA funds to Roth at a lower tax rate, reducing future required minimum distributions.
AAMS AAMS Tax Planning & Wealth Transfer 1
Which account type allows investment gains to grow tax-deferred and be withdrawn tax-free in retirement, provided certain conditions are met?