AEP Estate Planning Fundamentals 3 — Questions and Answers
Question 1: What is the primary purpose of a spendthrift clause in a trust?
- To reduce the trustee's fiduciary duties
- To prevent beneficiaries from assigning their interest and protect it from creditors (Correct answer)
- To allow early termination of the trust
- To minimize estate taxes on trust assets
Correct answer: To prevent beneficiaries from assigning their interest and protect it from creditors
A spendthrift clause restricts a beneficiary's ability to transfer their interest and shields trust assets from the beneficiary's creditors.
Question 2: Under the Uniform Disposition of Community Property Act, how is community property treated when a couple moves from a community property state to a common law state?
- It automatically converts to joint tenancy
- It retains its community property character (Correct answer)
- It becomes the separate property of each spouse
- It must be retitled within one year
Correct answer: It retains its community property character
The UDCPA, adopted by some common law states, preserves the community property character of assets acquired in a community property state.
Question 3: Which federal tax provision allows a surviving spouse to use any unused estate tax exemption of the deceased spouse?
- Step-up in basis
- Marital deduction
- Portability (Correct answer)
- Generation-skipping exemption
Correct answer: Portability
Portability, introduced in 2010, allows a surviving spouse to elect to use the deceased spouse's unused estate tax exemption (DSUE).
Question 4: A grantor creates an irrevocable life insurance trust (ILIT) and transfers a policy into it. What must occur to exclude the death proceeds from the grantor's gross estate?
- The grantor must survive the transfer by 3 years (Correct answer)
- The trust must be a domestic trust
- The grantor must survive the transfer by 2 years
- The grantor must survive the transfer by 5 years
Correct answer: The grantor must survive the transfer by 3 years
Under IRC §2035, if the grantor transfers a life insurance policy to an ILIT and dies within 3 years, the proceeds are included in the gross estate.
Question 5: What distinguishes a per stirpes distribution from a per capita distribution among beneficiaries?
- Per stirpes distributes equally among all living descendants; per capita distributes by bloodline branches
- Per stirpes distributes by bloodline branches; per capita distributes equally among all living descendants at the same generation level (Correct answer)
- Per stirpes excludes adopted children; per capita includes them
- Per stirpes applies only to real property; per capita applies to all property
Correct answer: Per stirpes distributes by bloodline branches; per capita distributes equally among all living descendants at the same generation level
Per stirpes divides an estate by family branches so descendants of a deceased heir step into their parent's share; per capita distributes equally among all living members of a generation.
Question 6: Which estate planning document specifically designates an individual to make medical decisions for an incapacitated person?
- Living will
- POLST form
- Healthcare proxy (healthcare power of attorney) (Correct answer)
- Do-not-resuscitate order
Correct answer: Healthcare proxy (healthcare power of attorney)
A healthcare proxy or healthcare power of attorney designates an agent to make medical decisions when the principal cannot do so.
Question 7: What is the generation-skipping transfer (GST) tax designed to prevent?
- Transfers to non-citizen spouses
- Avoiding estate tax by skipping generations and transferring wealth directly to grandchildren or lower (Correct answer)
- Charitable deductions from reducing estate tax liability
- Multiple step-up in basis events on the same asset
Correct answer: Avoiding estate tax by skipping generations and transferring wealth directly to grandchildren or lower
The GST tax imposes a separate tax on transfers to beneficiaries two or more generations below the transferor, preventing families from avoiding estate taxes by skipping a generation.
AEP Estate Planning Fundamentals 3
What is the primary purpose of a spendthrift clause in a trust?