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Family Governance & Wealth Transfer Flashcards

7 cards from real CEA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

Read the first 7 Family Governance & Wealth Transfer flashcards as text

  1. An intentionally defective grantor trust (IDGT) is considered 'defective' because:

    Answer: It is treated as a grantor trust for income tax but not for estate tax purposes

    An IDGT is 'defective' for income tax purposes only — the grantor pays income tax on trust earnings, which is itself a tax-free gift, while the assets remain outside the taxable estate.

  2. Which of the following best describes the role of a family office in wealth transfer planning?

    Answer: A private entity that coordinates investment, tax, legal, and philanthropic services for ultra-high-net-worth families

    A family office provides centralized, customized financial and administrative services for families with substantial wealth.

  3. A grantor retained annuity trust (GRAT) is most effective when:

    Answer: Interest rates are low and the transferred assets are expected to outperform the IRS hurdle rate (7520 rate)

    GRATs work best when assets appreciate beyond the IRS Section 7520 rate, transferring the excess appreciation to heirs gift-tax free.

  4. In a family governance structure, a family bank (or private trust company) is primarily used to:

    Answer: Provide intra-family loans, financial education, and entrepreneurial seed funding governed by family rules

    A family bank is a governance tool that pools family capital to offer loans and grants to family members, promoting financial education and entrepreneurship.

  5. Which estate planning technique involves selling highly appreciated assets to a grantor trust in exchange for a promissory note, effectively freezing the estate value?

    Answer: Installment sale to an intentionally defective grantor trust (IDGT)

    Selling assets to an IDGT for a promissory note freezes the seller's estate at the note's value while future appreciation passes to trust beneficiaries outside the taxable estate.

  6. The primary risk associated with a spousal lifetime access trust (SLAT) is known as the 'Unhappy SLAT' scenario, which occurs when:

    Answer: The couple divorces, leaving the grantor without indirect access to trust assets

    If the couple divorces, the grantor loses any indirect benefit from the SLAT since the spouse-beneficiary is no longer their partner.

  7. A qualified personal residence trust (QPRT) transfers a home to heirs at a reduced gift tax value because:

    Answer: The grantor retains the right to live in the home for a term of years, reducing the present value of the gift

    The retained right to use the home for a specified term reduces the present value of the gift to heirs, lowering the taxable gift amount.