CEA Estate Planning Principles & Strategies 4 — Questions and Answers
Question 1: When using the annual gift tax exclusion, which type of gift does NOT qualify for the present interest requirement?
- Cash gift to an adult child
- Payment of tuition directly to an educational institution
- Gift of a future interest in a trust (Correct answer)
- Gift of publicly traded stock
Correct answer: Gift of a future interest in a trust
The annual exclusion applies only to gifts of present interests; future interests — such as a remainder interest in a trust — do not qualify for the annual exclusion.
Question 2: What is the primary purpose of a pour-over will in an estate plan that includes a revocable living trust?
- To avoid probate for all assets
- To transfer any assets not titled in the trust at death into the trust through probate (Correct answer)
- To fund the trust during the grantor's lifetime
- To name the trustee for the revocable living trust
Correct answer: To transfer any assets not titled in the trust at death into the trust through probate
A pour-over will directs assets not previously titled in the revocable trust to 'pour over' into the trust at death, though those assets still pass through probate.
Question 3: A family limited partnership (FLP) is commonly used in estate planning primarily to:
- Eliminate estate taxes entirely on business assets
- Transfer business interests at a discounted value while retaining management control (Correct answer)
- Avoid the generation-skipping transfer tax on gifts to grandchildren
- Provide a stepped-up basis to all partnership assets at death
Correct answer: Transfer business interests at a discounted value while retaining management control
FLPs allow senior family members to transfer limited partnership interests at valuation discounts (lack of control, lack of marketability) while retaining management control as general partners.
Question 4: Which of the following is an advantage of holding assets as community property rather than joint tenancy in states that allow both?
- Community property avoids probate automatically at the first death
- Both halves of community property receive a step-up in basis at the first spouse's death (Correct answer)
- Community property passes by survivorship without a will
- Community property is exempt from the federal estate tax
Correct answer: Both halves of community property receive a step-up in basis at the first spouse's death
Under IRC § 1014(b)(6), both halves of community property receive a step-up in basis to FMV at the first spouse's death, reducing capital gains on a subsequent sale.
Question 5: A client with a large IRA wants to reduce the income tax burden on heirs. Which strategy allows a charity to receive the IRA (avoiding income tax) while heirs receive other assets?
- Naming heirs as IRA beneficiaries and donating appreciated stock to charity
- Qualified Charitable Distribution (QCD) from the IRA
- Designating the charity as IRA beneficiary and using life insurance to replace wealth for heirs (Correct answer)
- Rolling the IRA into a Roth IRA and then donating it
Correct answer: Designating the charity as IRA beneficiary and using life insurance to replace wealth for heirs
Naming a charity as the IRA beneficiary avoids income tax on distributions (charities are tax-exempt), while a life insurance policy funded with premium savings replaces the wealth for heirs income-tax-free.
Question 6: The estate tax marital deduction is an example of which type of estate tax planning strategy?
- Estate freeze technique
- Deferral technique (Correct answer)
- Valuation discount technique
- Charitable giving technique
Correct answer: Deferral technique
The marital deduction defers — not eliminates — federal estate tax; tax is postponed until the surviving spouse's death, when the combined estate may be taxed.
Question 7: Under the 'reciprocal trust doctrine,' mirrored SLATs created by spouses may be disregarded for estate tax purposes. What is the primary result?
- The trusts are merged into one trust for administrative purposes
- Assets in each trust are included in the creating spouse's gross estate (Correct answer)
- The surviving spouse loses access to both trusts immediately
- The annual gift tax exclusion is disallowed for all transfers to the trusts
Correct answer: Assets in each trust are included in the creating spouse's gross estate
Under the reciprocal trust doctrine, if spouses create substantially identical cross-trusts, the IRS may 'uncross' them, causing each grantor's assets to be included back in their own gross estate.
CEA Estate Planning Principles & Strategies 4
When using the annual gift tax exclusion, which type of gift does NOT qualify for the present interest requirement?