AIP AIP Tax Planning & Estate Strategies 1 — Questions and Answers
Question 1: Which type of account allows US investors to make after-tax contributions and enjoy tax-free qualified withdrawals in retirement?
- Traditional IRA
- Roth IRA (Correct answer)
- SEP-IRA
- 403(b) plan
Correct answer: Roth IRA
Roth IRA contributions are made with after-tax dollars, but qualified distributions in retirement — including earnings — are completely tax-free.
Question 2: The federal estate tax exemption allows estates below a certain threshold to pass assets to heirs:
- Subject to a flat 15% capital gains rate
- Free from federal estate tax (Correct answer)
- Only after a mandatory five-year holding period
- Through a court-supervised probate process exclusively
Correct 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.
Question 3: Tax-loss harvesting involves:
- Deferring all realized gains to the next tax year
- Selling losing investments to offset realized capital gains and reduce tax liability (Correct answer)
- Investing exclusively in tax-exempt municipal bonds
- Converting traditional retirement accounts to Roth accounts
Correct 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.
Question 4: A charitable remainder trust (CRT) provides which primary benefit to the donor?
- Complete elimination of all estate and income taxes
- An income stream during the donor's lifetime plus a charitable deduction at trust creation (Correct answer)
- Immediate lump-sum payment equal to the donated asset's fair market value
- Protection of assets from all creditors indefinitely
Correct 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.
Question 5: Which of the following correctly describes the 'step-up in basis' rule?
- Inherited assets receive a new cost basis equal to fair market value at the date of the decedent's death (Correct answer)
- Assets held over 10 years automatically receive a higher cost basis
- The IRS increases cost basis annually by the inflation rate
- Step-up in basis applies only to assets held in retirement accounts
Correct 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.
Question 6: For high-income investors, investing in municipal bonds is attractive primarily because:
- Municipal bonds offer higher yields than equivalent corporate bonds
- Interest income from most municipal bonds is exempt from federal income tax (Correct answer)
- Municipal bonds are guaranteed by the US federal government
- Municipal bonds are not subject to market price fluctuations
Correct 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.
AIP AIP Tax Planning & Estate Strategies 1
Which type of account allows US investors to make after-tax contributions and enjoy tax-free qualified withdrawals in retirement?