CAP CAP Estate Planning & Wealth Transfer 2 — Questions and Answers
Question 1: Which of the following best describes 'portability' in the context of federal estate planning?
- The ability to move assets between states without tax consequence
- A surviving spouse's ability to use the deceased spouse's unused estate tax exemption (Correct answer)
- Transferring IRA assets to a charity without income tax
- Carrying forward unused charitable deduction amounts
Correct answer: A surviving spouse's ability to use the deceased spouse's unused estate tax exemption
Portability allows a surviving spouse to elect to use any unused federal estate tax exemption from the deceased spouse, effectively doubling the shelter available.
Question 2: A donor transfers appreciated farmland to a Charitable Remainder Trust. What is a key income tax benefit at the time of transfer?
- The donor avoids all capital gains tax on future sales permanently
- The donor receives a charitable deduction equal to the full fair market value
- The donor receives a partial charitable deduction for the present value of the remainder interest (Correct answer)
- The donor's estate is immediately reduced by the full fair market value
Correct answer: The donor receives a partial charitable deduction for the present value of the remainder interest
When funding a CRT, the donor receives an income tax deduction equal to the IRS-calculated present value of the remainder interest passing to charity.
Question 3: In estate planning, what does 'step-up in basis' mean for inherited assets?
- The heir pays capital gains on all appreciation since the original purchase
- The heir's cost basis is reset to the fair market value at the decedent's date of death (Correct answer)
- The estate pays capital gains tax before distributing to heirs
- The charity receives assets at the original cost basis
Correct answer: The heir's cost basis is reset to the fair market value at the decedent's date of death
Inherited assets receive a stepped-up basis equal to the fair market value on the date of death, eliminating capital gains tax on pre-death appreciation.
Question 4: A philanthropic advisor suggests using IRD (Income in Respect of a Decedent) assets for charitable bequests. What is the primary reason for this strategy?
- IRD assets receive a step-up in basis, making them ideal for heirs
- IRD assets such as traditional IRAs are subject to both estate and income tax, making them most tax-efficient to leave to charity (Correct answer)
- Charities can convert IRD assets to tax-exempt status immediately
- IRD assets cannot be transferred to individuals without penalty
Correct answer: IRD assets such as traditional IRAs are subject to both estate and income tax, making them most tax-efficient to leave to charity
IRD assets like traditional IRAs are taxable as ordinary income when received by individual heirs but are income-tax-free when paid to a qualifying charity.
Question 5: Which of the following is NOT a characteristic of a Grantor Retained Unitrust (GRUT)?
- The grantor receives a fixed percentage of the trust's value annually
- The payout amount fluctuates as the trust value changes each year
- Remaining assets pass to heirs at the end of the trust term
- The grantor receives a fixed dollar annuity regardless of trust performance (Correct answer)
Correct answer: The grantor receives a fixed dollar annuity regardless of trust performance
A GRUT pays a fixed percentage of the trust's annually revalued assets, so payouts vary with performance—unlike a GRAT, which pays a fixed dollar annuity.
Question 6: What is the annual federal gift tax exclusion amount per recipient for 2024?
- $15,000
- $16,000
- $17,000
- $18,000 (Correct answer)
Correct answer: $18,000
For 2024, the annual gift tax exclusion is $18,000 per donor per recipient, allowing tax-free transfers up to that amount without reducing the lifetime exemption.
CAP CAP Estate Planning & Wealth Transfer 2
Which of the following best describes 'portability' in the context of federal estate planning?