AEP Taxation in Estate Planning 3 — Questions and Answers
Question 1: Which of the following best describes the concept of 'portability' under federal estate tax law?
- Transferring assets across state lines tax-free
- Allowing a surviving spouse to use the deceased spouse's unused estate tax exemption (Correct answer)
- Moving assets into an irrevocable trust to preserve exemption
- Carrying forward unused gift tax annual exclusions
Correct answer: Allowing a surviving spouse to use the deceased spouse's unused estate tax exemption
Portability allows a surviving spouse to elect to use any unused federal estate tax exemption of the first deceased spouse by filing a timely estate tax return.
Question 2: Under the special use valuation rules of IRC §2032A, qualifying real property used in a farm or closely held business can be reduced in value by a maximum of:
- $500,000
- $750,000
- $1,390,000 (2024 indexed amount) (Correct answer)
- $2,000,000
Correct answer: $1,390,000 (2024 indexed amount)
IRC §2032A permits qualifying real property to be valued at its actual use rather than highest-and-best use, with the reduction capped at an annually indexed amount (approximately $1,390,000 in 2024).
Question 3: A Qualified Personal Residence Trust (QPRT) removes the value of a home from a grantor's taxable estate by:
- Donating the home to charity after the trust term
- Transferring the remainder interest to heirs at a discounted gift tax value (Correct answer)
- Allowing the IRS a first lien on the property
- Converting the home into a rental property
Correct answer: Transferring the remainder interest to heirs at a discounted gift tax value
A QPRT transfers a discounted remainder interest to heirs gift-tax-efficiently because the present value of the future remainder is less than the current fair market value of the home.
Question 4: For gift tax purposes, which of the following transfers qualifies for the annual exclusion under IRC §2503(b)?
- A gift of a future interest in property
- A gift of a present interest in property (Correct answer)
- A gift to a trust with no current distribution rights
- A contribution to a 529 plan exceeding five-year election limits
Correct answer: A gift of a present interest in property
The annual gift tax exclusion applies only to gifts of present interests—those where the donee has an immediate right to use, possess, or enjoy the property.
Question 5: An irrevocable life insurance trust (ILIT) keeps life insurance proceeds out of the insured's gross estate primarily because:
- Life insurance proceeds are always income-tax-free
- The insured holds no incidents of ownership in the policy (Correct answer)
- The trust files its own estate tax return
- State law exempts life insurance from probate
Correct answer: The insured holds no incidents of ownership in the policy
Under IRC §2042, life insurance is included in the gross estate if the decedent held any incident of ownership; an ILIT ensures the trust, not the insured, owns the policy.
Question 6: Which of the following is a primary benefit of a Spousal Lifetime Access Trust (SLAT) in estate planning?
- It eliminates capital gains tax on appreciated assets
- It allows a spouse to benefit from assets while removing them from the taxable estate (Correct answer)
- It qualifies for the unlimited marital deduction
- It converts ordinary income to capital gains
Correct answer: It allows a spouse to benefit from assets while removing them from the taxable estate
A SLAT allows the grantor to remove assets from their taxable estate while the beneficiary spouse retains indirect access to trust assets during life.
Question 7: Which tax form is used by the executor of an estate to report the federal estate tax?
- Form 1041
- Form 709
- Form 706 (Correct answer)
- Form 1040
Correct answer: Form 706
Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, is filed by the executor within nine months of the decedent's death (with extensions available).
AEP Taxation in Estate Planning 3
Which of the following best describes the concept of 'portability' under federal estate tax law?