AFC Retirement and Estate Planning 3 — Questions and Answers
Question 1: A client age 73 fails to take their Required Minimum Distribution (RMD) for the year. What is the penalty for the missed RMD under current law (post-SECURE 2.0)?
- 50% of the amount not withdrawn
- 25% of the amount not withdrawn, reducible to 10% if corrected timely (Correct answer)
- 10% of the amount not withdrawn
- No penalty if corrected within 60 days
Correct answer: 25% of the amount not withdrawn, reducible to 10% if corrected timely
SECURE 2.0 reduced the RMD failure penalty from 50% to 25%, further reducible to 10% if the error is corrected within the correction window.
Question 2: Which type of trust is specifically designed to provide income to a surviving spouse and ultimately pass assets to children from a prior marriage?
- Revocable living trust
- QTIP trust (Correct answer)
- Bypass trust
- Spendthrift trust
Correct answer: QTIP trust
A Qualified Terminable Interest Property (QTIP) trust provides income to a surviving spouse while preserving principal to pass to designated remainder beneficiaries such as children from a prior marriage.
Question 3: What is the primary purpose of a 'stretch IRA' strategy for non-spouse beneficiaries under the SECURE Act?
- It is no longer available; non-spouse beneficiaries must deplete inherited IRAs within 10 years (Correct answer)
- It allows non-spouse beneficiaries to take RMDs over their own life expectancy indefinitely
- It allows non-spouse beneficiaries to convert inherited traditional IRAs to Roth IRAs
- It eliminates RMDs for non-spouse beneficiaries entirely
Correct answer: It is no longer available; non-spouse beneficiaries must deplete inherited IRAs within 10 years
The SECURE Act (2019) eliminated the stretch IRA for most non-spouse beneficiaries, requiring them to deplete inherited IRAs within 10 years of the account owner's death.
Question 4: A client wants to transfer wealth to grandchildren while minimizing transfer taxes. Which tax is specifically designed to prevent skipping a generation of estate taxation?
- Gift tax
- Estate tax
- Generation-Skipping Transfer (GST) tax (Correct answer)
- Alternative Minimum Tax
Correct answer: Generation-Skipping Transfer (GST) tax
The Generation-Skipping Transfer (GST) tax is imposed on transfers to 'skip persons' (typically grandchildren) to prevent avoiding estate tax for a generation.
Question 5: Which Social Security claiming strategy involves one spouse claiming spousal benefits while the other delays to earn delayed retirement credits?
- File and suspend
- Restricted application for spousal benefits (Correct answer)
- Voluntary suspension
- Coordinated filing
Correct answer: Restricted application for spousal benefits
The restricted application strategy (still available for those born before January 2, 1954) allows a spouse at full retirement age to claim only spousal benefits while their own benefit continues to grow.
Question 6: What is a 'step-up in basis' and how does it benefit heirs receiving inherited assets?
- It increases the cost basis of inherited assets to fair market value at the decedent's death, reducing capital gains taxes (Correct answer)
- It allows heirs to deduct the purchase price from estate taxes owed
- It steps up the RMD schedule for inherited retirement accounts
- It increases the annual gift tax exclusion for transfers to heirs
Correct answer: It increases the cost basis of inherited assets to fair market value at the decedent's death, reducing capital gains taxes
A step-up in basis resets the cost basis of inherited assets to their fair market value at the date of the decedent's death, minimizing capital gains tax when heirs sell.
Question 7: Which retirement income strategy involves purchasing an annuity to cover essential expenses, ensuring guaranteed income for life?
- Systematic withdrawal strategy
- Bucket strategy
- Floor-and-upside approach (Correct answer)
- Monte Carlo simulation
Correct answer: Floor-and-upside approach
The floor-and-upside approach uses guaranteed income sources (like annuities or Social Security) to cover essential expenses, with remaining assets invested for growth.
AFC Retirement and Estate Planning 3
A client age 73 fails to take their Required Minimum Distribution (RMD) for the year.
What is the penalty for the missed RMD under current law (post-SECURE 2.0)?