AIP Tax Planning & Estate Strategies Flashcards

Which type of account allows US investors to make after-tax contributions and enjoy tax-free qualified withdrawals in retirement?

Answer: Roth IRA

Roth IRA contributions are made with after-tax dollars, but qualified distributions in retirement — including earnings — are completely tax-free.

The federal estate tax exemption allows estates below a certain threshold to pass assets to heirs:

Answer: Free from federal estate tax

Estates valued below the federal exemption amount (over $13 million per individual as of recent years) owe no federal estate tax.

Tax-loss harvesting involves:

Answer: Selling losing investments to offset realized capital gains and reduce tax liability

By strategically selling positions at a loss, investors can offset capital gains realized elsewhere in the portfolio, reducing the current year's tax bill.

A charitable remainder trust (CRT) provides which primary benefit to the donor?

Answer: An income stream during the donor's lifetime plus a charitable deduction at trust creation

A CRT pays income to the donor (or named beneficiaries) for a specified term, after which the remaining assets pass to the designated charity, and the donor receives a partial charitable deduction upfront.

Which of the following correctly describes the 'step-up in basis' rule?

Answer: Inherited assets receive a new cost basis equal to fair market value at the date of the decedent's death

When a beneficiary inherits an asset, the cost basis is reset to the asset's fair market value on the date of death, eliminating capital gains tax on appreciation during the decedent's lifetime.

For high-income investors, investing in municipal bonds is attractive primarily because:

Answer: Interest income from most municipal bonds is exempt from federal income tax

Municipal bond interest is generally exempt from federal income tax, making it especially valuable to investors in high marginal tax brackets.