CEA Estate Planning Principles & Strategies 3 — Questions and Answers
Question 1: A grantor creates a Grantor Retained Annuity Trust (GRAT). Which of the following best describes the estate planning benefit?
- All trust assets pass free of estate tax regardless of investment performance
- If trust assets outperform the IRS Section 7520 rate, the excess passes gift-tax-free to heirs (Correct answer)
- The grantor receives an income tax deduction equal to the present value of the remainder interest
- The trust corpus receives a step-up in basis at the grantor's death
Correct answer: If trust assets outperform the IRS Section 7520 rate, the excess passes gift-tax-free to heirs
A GRAT transfers appreciation above the § 7520 hurdle rate to remainder beneficiaries gift-tax-free; if the grantor dies during the GRAT term, assets revert to the estate.
Question 2: Which type of power of appointment, if held at death, causes the property subject to it to be included in the holder's gross estate?
- Special (limited) power of appointment
- Testamentary special power of appointment
- General power of appointment (Correct answer)
- Ascertainable standard power of appointment
Correct answer: General power of appointment
A general power of appointment — exercisable in favor of the holder, their estate, or creditors — causes inclusion in the gross estate under IRC § 2041.
Question 3: For a Charitable Remainder Unitrust (CRUT), what percentage of the trust's fair market value must be paid to income beneficiaries each year?
- At least 5% but not more than 50% (Correct answer)
- Exactly 6% of the initial contribution
- At least 10% of the net income
- Any percentage chosen by the trustee annually
Correct answer: At least 5% but not more than 50%
A CRUT must pay a fixed percentage between 5% and 50% of the trust's annually revalued net assets to the income beneficiaries.
Question 4: Under the unlimited marital deduction, which of the following transfers would NOT qualify?
- Outright bequest to a U.S. citizen spouse
- Transfer to a QTIP trust for a U.S. citizen spouse
- Outright bequest to a non-citizen resident alien spouse (Correct answer)
- Transfer to a Qualified Domestic Trust (QDOT) for a non-citizen spouse
Correct answer: Outright bequest to a non-citizen resident alien spouse
The unlimited marital deduction does not apply to outright transfers to non-citizen spouses; a QDOT is required to defer estate tax for non-citizen surviving spouses.
Question 5: A decedent's estate consists primarily of a closely held business worth $8 million. Which provision allows the estate to pay federal estate taxes in installments over up to 14 years?
- IRC § 6161 — Extension for reasonable cause
- IRC § 303 — Stock redemption
- IRC § 6166 — Installment payment of estate taxes (Correct answer)
- IRC § 2032A — Special use valuation
Correct answer: IRC § 6166 — Installment payment of estate taxes
IRC § 6166 allows estates with qualifying closely held business interests exceeding 35% of the adjusted gross estate to elect installment payments of estate tax over up to 14 years.
Question 6: A Spousal Lifetime Access Trust (SLAT) is designed to:
- Hold assets for minor children with the spouse as guardian
- Remove assets from the taxable estate while allowing the donor's spouse indirect access to benefits (Correct answer)
- Provide the donor spouse a retained annuity payment for life
- Qualify for the unlimited marital deduction by providing mandatory income to the spouse
Correct answer: Remove assets from the taxable estate while allowing the donor's spouse indirect access to benefits
A SLAT is an irrevocable trust where one spouse gifts assets to an irrevocable trust for the other spouse's benefit, removing assets from the donor's estate while the beneficiary spouse retains access.
Question 7: Which estate planning technique is most effective for transferring a life insurance policy outside the insured's estate?
- Naming the estate as beneficiary
- Transferring the policy to an Irrevocable Life Insurance Trust (ILIT) more than three years before death (Correct answer)
- Placing the policy in a revocable living trust
- Assigning the policy to a charitable remainder trust
Correct answer: Transferring the policy to an Irrevocable Life Insurance Trust (ILIT) more than three years before death
Transferring a life insurance policy to an ILIT removes the death benefit from the insured's gross estate, provided the transfer occurs more than three years before death under IRC § 2035.
CEA Estate Planning Principles & Strategies 3
A grantor creates a Grantor Retained Annuity Trust (GRAT).
Which of the following best describes the estate planning benefit?