AIP AIP Tax Planning & Estate Strategies 2 — Questions and Answers
Question 1: A 'qualified opportunity zone' investment allows investors to defer or reduce capital gains taxes by:
- Rolling gains into a Roth IRA within 60 days
- Investing realized gains in designated economically distressed areas within 180 days (Correct answer)
- Donating appreciated assets directly to a donor-advised fund
- Holding the original asset for an additional three years
Correct answer: Investing realized gains in designated economically distressed areas within 180 days
Under the Opportunity Zone program, investors who reinvest capital gains into a Qualified Opportunity Fund within 180 days can defer taxes and potentially eliminate gains on the new investment if held 10+ years.
Question 2: Which estate planning tool allows a person to specify how assets are distributed at death while avoiding the probate process?
- A holographic will
- A revocable living trust (Correct answer)
- A durable power of attorney
- A pour-over will only
Correct answer: A revocable living trust
Assets held in a revocable living trust transfer directly to beneficiaries upon death without going through the public and time-consuming probate process.
Question 3: The annual gift tax exclusion allows an individual to give up to a set amount per recipient per year:
- Free from gift tax, with no impact on the lifetime exemption (Correct answer)
- Only if the recipient is a spouse or direct descendant
- Subject to a 10% donor withholding tax reported on Form 1040
- Only when gifting cash, not securities or real estate
Correct answer: Free from gift tax, with no impact on the lifetime exemption
Gifts within the annual exclusion ($18,000 per recipient in 2024) are completely free of gift tax and do not reduce the donor's lifetime gift and estate tax exemption.
Question 4: What is the primary purpose of a 529 college savings plan?
- To provide a tax deduction on federal returns for retirement contributions
- To allow tax-free growth and tax-free withdrawals for qualified education expenses (Correct answer)
- To shelter investment income from state and local taxes only
- To fund health savings accounts for dependent children
Correct answer: To allow tax-free growth and tax-free withdrawals for qualified education expenses
529 plans grow tax-deferred and distributions used for qualified education expenses — tuition, books, room and board — are entirely tax-free at the federal level.
Question 5: In tax planning, 'income shifting' refers to:
- Deferring income to reduce current-year adjusted gross income
- Moving income to a family member in a lower tax bracket to reduce the overall tax burden (Correct answer)
- Converting ordinary income to long-term capital gains rates
- Claiming deductions in a year when the marginal tax rate is higher
Correct answer: Moving income to a family member in a lower tax bracket to reduce the overall tax burden
Income shifting strategies legally transfer income-producing assets or business income to relatives in lower brackets, reducing the family's total tax liability.
Question 6: A donor-advised fund (DAF) allows an investor to:
- Receive immediate charitable deductions while retaining advisory control over grant timing (Correct answer)
- Receive recurring income from donated assets throughout their lifetime
- Avoid all state and federal income taxes permanently
- Transfer assets directly to heirs while claiming a charitable deduction
Correct answer: Receive immediate charitable deductions while retaining advisory control over grant timing
With a DAF, the donor contributes assets, claims an immediate tax deduction, and then recommends grants to charities over time, all while the fund grows tax-free.
AIP AIP Tax Planning & Estate Strategies 2
A 'qualified opportunity zone' investment allows investors to defer or reduce capital gains taxes by: