CEA Estate Planning Principles & Strategies 5 — Questions and Answers
Question 1: A testator dies with a will that was validly executed but includes a provision leaving property to a beneficiary who predeceased the testator. Which doctrine may save that gift for the deceased beneficiary's descendants?
- Ademption by extinction
- Anti-lapse statute (Correct answer)
- Cy-pres doctrine
- Doctrine of abatement
Correct answer: Anti-lapse statute
Anti-lapse statutes in most states preserve a failed bequest by redirecting it to the predeceased beneficiary's descendants if they are within a specified degree of kinship to the testator.
Question 2: Which of the following correctly describes a 'dynasty trust'?
- A trust that terminates upon the death of the grantor's children
- A long-term trust designed to hold assets for multiple generations, often using the GSTT exemption (Correct answer)
- A trust that converts to a charitable remainder trust after 20 years
- A trust limited to a 21-year perpetuities period under common law
Correct answer: A long-term trust designed to hold assets for multiple generations, often using the GSTT exemption
A dynasty trust is structured to last for multiple generations (often in states that have abolished the rule against perpetuities), using the grantor's GSTT exemption to avoid transfer taxes at each generation.
Question 3: For estate planning purposes, what is 'portability' of the estate tax exemption?
- The ability to transfer unused annual gift tax exclusions to a spouse
- The ability of a surviving spouse to use the deceased spouse's unused exemption (DSUE) (Correct answer)
- The option to carry forward unused charitable deductions to future tax years
- The ability to transfer the GST exemption between spouses
Correct answer: The ability of a surviving spouse to use the deceased spouse's unused exemption (DSUE)
Portability allows a surviving spouse to elect to use their deceased spouse's unused estate tax exemption (DSUE amount) by filing a timely estate tax return for the deceased spouse.
Question 4: A client contributes appreciated stock to a Charitable Lead Annuity Trust (CLAT). Which statement about the income tax consequences is CORRECT?
- The client receives an immediate income tax deduction for the present value of the remainder interest
- The client receives an income tax deduction for the present value of the charity's annuity interest (Correct answer)
- All capital gains on the appreciated stock are eliminated
- Annuity payments made to charity are deductible each year when paid
Correct answer: The client receives an income tax deduction for the present value of the charity's annuity interest
In a non-grantor CLAT, the creator receives an upfront charitable income tax deduction equal to the present value of the annuity payments flowing to charity.
Question 5: Which valuation method is most commonly used under IRC § 2032A to value farm or closely held business real property for estate tax purposes?
- Comparable sales (fair market value) method
- Capitalization of earnings or rents method (Correct answer)
- Net asset value method
- Discounted cash flow method
Correct answer: Capitalization of earnings or rents method
IRC § 2032A special use valuation typically uses the capitalization of actual cash rentals for comparable farmland or a formula method based on gross cash rental minus property taxes, divided by an interest rate.
Question 6: A trust document includes a 'Crummey provision.' What is its purpose?
- To allow the trustee to terminate the trust early if assets fall below a threshold
- To give beneficiaries a temporary withdrawal right so contributions qualify for the annual gift tax exclusion (Correct answer)
- To protect trust assets from the beneficiary's creditors indefinitely
- To require mandatory distributions to beneficiaries at age 21
Correct answer: To give beneficiaries a temporary withdrawal right so contributions qualify for the annual gift tax exclusion
A Crummey provision grants beneficiaries a limited window to withdraw trust contributions, converting future-interest gifts into present-interest gifts that qualify for the annual gift tax exclusion.
Question 7: An estate planner recommends a Qualified Personal Residence Trust (QPRT). Which statement accurately describes the estate tax outcome if the grantor survives the QPRT term?
- The home's full date-of-death value is included in the gross estate
- The home passes to remainder beneficiaries at a reduced gift tax cost based on a retained interest discount (Correct answer)
- The home receives a step-up in basis because it was previously a personal residence
- The grantor must repurchase the home at fair market value to continue living there
Correct answer: The home passes to remainder beneficiaries at a reduced gift tax cost based on a retained interest discount
If the grantor survives the QPRT term, the home passes to remainder beneficiaries, and the taxable gift is reduced by the value of the grantor's retained interest, resulting in significant transfer tax savings.
CEA Estate Planning Principles & Strategies 5
A testator dies with a will that was validly executed but includes a provision leaving property to a beneficiary who predeceased the testator.
Which doctrine may save that gift for the deceased beneficiary's descendants?