AFC - Accredited Financial Counselor Accredited Financial Counselor Retirement and Estate Planning 1

Question 1

Which of the following best describes the 'stretch IRA' strategy that was significantly curtailed by the SECURE Act of 2019?

Accepted Answer

Allowing non-spouse beneficiaries to take RMDs over their own life expectancy, deferring taxes for decades

Answer

Prior to the SECURE Act, non-spouse beneficiaries could 'stretch' distributions from an inherited IRA over their own life expectancy, maximizing tax-deferred growth. The SECURE Act replaced this with the 10-year rule for most non-spouse beneficiaries, requiring full distribution within 10 years of the original owner's death.

Question 2

A married couple has a combined estate of $28 million. Which estate planning tool allows both spouses' federal estate tax exemptions to be fully utilized even if one spouse leaves everything to the other?

Accepted Answer

A portability election filed on the deceased spouse's estate tax return

Answer

The portability election, made available under current law, allows a surviving spouse to use any unused portion of their deceased spouse's federal estate tax exemption (DSUE). By filing a timely estate tax return even when no tax is owed, the surviving spouse can effectively double their estate tax exemption.

Question 3

What is the primary purpose of a durable power of attorney for finances in estate planning?

Accepted Answer

To authorize a named agent to manage financial affairs if the principal becomes incapacitated

Answer

A durable power of attorney for finances allows a designated agent to manage financial matters—paying bills, managing investments, filing taxes—if the principal becomes mentally or physically incapacitated. The 'durable' designation means it remains effective even after incapacity, unlike a standard power of attorney.

Question 4

A client converts $50,000 from a traditional IRA to a Roth IRA. Which of the following statements about this conversion is correct?

Accepted Answer

The converted amount is added to ordinary income in the year of conversion and taxed at the client's marginal rate

Answer

A Roth conversion is treated as a taxable distribution from the traditional IRA; the converted amount is included in the client's gross income for that year and taxed at ordinary income rates. There is no early withdrawal penalty on conversions, though the 10% penalty may apply to any amounts withheld for taxes unless replaced within 60 days.

Question 5

Which type of trust is specifically designed to reduce estate taxes by allowing a grantor to transfer assets to heirs at a discounted gift tax value, typically using assets expected to appreciate significantly?

Accepted Answer

Grantor retained annuity trust (GRAT)

Answer

A GRAT allows the grantor to transfer assets into an irrevocable trust while retaining an annuity payment for a fixed term. If the assets grow faster than the IRS hurdle rate (Section 7520 rate), the excess appreciation passes to heirs free of gift and estate tax. GRATs are especially effective with low interest rates and appreciating assets.

AFC - Accredited Financial Counselor Practice Test

AFC - Accredited Financial Counselor Practice Test

AFC - Accredited Financial Counselor Accredited Financial Counselor Retirement and Estate Planning 1