AEP Taxation in Estate Planning 2 — Questions and Answers
Question 1: Which valuation discount is most commonly applied when transferring minority interests in a family limited partnership (FLP) for estate tax purposes?
- Blockage discount
- Minority interest discount (Correct answer)
- Key person discount
- Marketability discount only
Correct answer: Minority interest discount
A minority interest discount reflects the lack of control a minority owner has, and it is the most frequently applied discount in FLP transfers.
Question 2: A grantor retained annuity trust (GRAT) is most effective when the assets transferred into it are expected to:
- Decline in value during the annuity term
- Appreciate at a rate exceeding the IRS Section 7520 rate (Correct answer)
- Generate stable income equal to the annuity payment
- Be distributed to charity at the end of the term
Correct answer: Appreciate at a rate exceeding the IRS Section 7520 rate
A GRAT succeeds when trust assets outperform the Section 7520 hurdle rate, passing the excess appreciation to heirs gift-tax-free.
Question 3: For federal estate tax purposes, the alternate valuation date allows an executor to value estate assets as of:
- The date of the decedent's birth
- Six months after the date of death (Correct answer)
- One year after the date of death
- The date the estate tax return is filed
Correct answer: Six months after the date of death
IRC §2032 permits the executor to elect alternate valuation using asset values six months after death, but only if doing so reduces both the gross estate and the estate tax.
Question 4: Under IRC §2056A, a Qualified Domestic Trust (QDOT) is used to defer estate taxes when:
- The surviving spouse is a U.S. citizen
- The surviving spouse is not a U.S. citizen (Correct answer)
- The decedent owned foreign real property
- The estate exceeds $20 million
Correct answer: The surviving spouse is not a U.S. citizen
A QDOT defers the estate tax marital deduction for a non-citizen surviving spouse, ensuring U.S. tax is collected before assets leave U.S. jurisdiction.
Question 5: Which IRC section governs the inclusion of assets in a decedent's gross estate when the decedent retained a life interest in transferred property?
- IRC §2035
- IRC §2036 (Correct answer)
- IRC §2038
- IRC §2042
Correct answer: IRC §2036
IRC §2036 requires inclusion of transferred property in the gross estate when the decedent retained the right to income or possession for life.
Question 6: A charitable lead annuity trust (CLAT) provides an income stream to charity first and then passes remaining assets to:
- The grantor's estate
- Non-charitable beneficiaries such as family members (Correct answer)
- A donor-advised fund
- A private foundation exclusively
Correct answer: Non-charitable beneficiaries such as family members
In a CLAT, charity receives annuity payments for the trust term, and the remainder passes to non-charitable beneficiaries, potentially with significant estate and gift tax savings.
Question 7: The generation-skipping transfer (GST) tax exemption in 2024 is indexed for inflation and applies to transfers that skip how many generations?
- One generation
- At least one generation below the transferor (Correct answer)
- Two or more generations below the transferor
- Any transfer to a minor
Correct answer: At least one generation below the transferor
The GST tax applies when assets pass to a 'skip person,' generally a beneficiary at least one generation below the transferor, such as a grandchild.
AEP Taxation in Estate Planning 2
Which valuation discount is most commonly applied when transferring minority interests in a family limited partnership (FLP) for estate tax purposes?