CEA Asset Management & Wealth Transfer 2 — Questions and Answers
Question 1: A client wants to transfer a family vacation home to their children while retaining the right to use it for life. Which strategy is most appropriate?
- Qualified Personal Residence Trust (QPRT) (Correct answer)
- Charitable Remainder Trust (CRT)
- Grantor Retained Annuity Trust (GRAT)
- Spendthrift Trust
Correct answer: Qualified Personal Residence Trust (QPRT)
A QPRT allows the grantor to transfer a personal residence at a reduced gift tax value while retaining the right to live there for a specified term.
Question 2: Which valuation discount is commonly applied when transferring a minority interest in a closely held family business?
- Blockage discount
- Lack of marketability and minority interest discount (Correct answer)
- Portfolio discount
- Key person discount
Correct answer: Lack of marketability and minority interest discount
Minority interest and lack of marketability discounts together can reduce the taxable value of closely held business interests by 20–40% or more.
Question 3: Under IRC Section 1014, what is the income tax basis of an asset received through inheritance?
- The decedent's original purchase price
- Fair market value at the date of death (Correct answer)
- The lower of cost or fair market value
- Zero basis
Correct answer: Fair market value at the date of death
IRC §1014 provides a stepped-up (or stepped-down) basis equal to the asset's fair market value on the date of the decedent's death.
Question 4: A Grantor Retained Annuity Trust (GRAT) is most effective for wealth transfer when:
- Interest rates are high and assets are expected to decline
- Interest rates are low and assets are expected to appreciate rapidly (Correct answer)
- The grantor has no other estate planning tools available
- Assets inside the trust generate tax-exempt income
Correct answer: Interest rates are low and assets are expected to appreciate rapidly
A GRAT transfers appreciation above the IRS §7520 hurdle rate to beneficiaries gift-tax free, so low rates and high asset growth maximize the benefit.
Question 5: Which asset class is generally considered most suitable for a dynasty trust designed to last multiple generations?
- Short-term Treasury bills
- Long-term growth-oriented equities and alternative investments (Correct answer)
- Money market funds
- Single-maturity certificates of deposit
Correct answer: Long-term growth-oriented equities and alternative investments
Dynasty trusts benefit from long time horizons, so growth-oriented assets that compound over decades are preferred over low-yield cash equivalents.
Question 6: What is the primary benefit of a Spousal Lifetime Access Trust (SLAT) in estate planning?
- It qualifies for the unlimited marital deduction
- It removes assets from the taxable estate while allowing the donor's spouse to access trust benefits (Correct answer)
- It guarantees a stepped-up basis at the surviving spouse's death
- It avoids the need for a trustee
Correct answer: It removes assets from the taxable estate while allowing the donor's spouse to access trust benefits
A SLAT lets the grantor use the gift tax exemption to shift assets out of their estate while the beneficiary spouse can still receive distributions.
Question 7: For federal estate tax purposes, the alternate valuation date allows an estate to value assets as of:
- Six months after the date of death, if it reduces both the gross estate and the estate tax (Correct answer)
- One year after the date of death
- The date the estate tax return is filed
- The date assets are distributed to heirs
Correct answer: Six months after the date of death, if it reduces both the gross estate and the estate tax
IRC §2032 permits use of the alternate valuation date (six months post-death) only when doing so reduces both the gross estate value and the resulting estate tax.
CEA Asset Management & Wealth Transfer 2
A client wants to transfer a family vacation home to their children while retaining the right to use it for life.
Which strategy is most appropriate?