CEA Family Governance & Wealth Transfer 2 — Questions and Answers
Question 1: A family limited partnership (FLP) is commonly used in estate planning primarily to:
- Eliminate all estate taxes on transferred assets
- Facilitate valuation discounts and centralize asset management (Correct answer)
- Avoid the need for a will or trust
- Convert ordinary income to capital gains
Correct answer: Facilitate valuation discounts and centralize asset management
FLPs allow valuation discounts for lack of control and marketability while centralizing management of family assets.
Question 2: Which document serves as the foundational governance framework outlining a family's shared values, mission, and decision-making processes across generations?
- Revocable living trust
- Family constitution or charter (Correct answer)
- Durable power of attorney
- Qualified domestic relations order
Correct answer: Family constitution or charter
A family constitution or charter is a non-legal document that articulates shared values, mission, and governance protocols for multigenerational families.
Question 3: A dynasty trust differs from a standard irrevocable trust primarily because it:
- Must terminate within 21 years of creation
- Can last multiple generations by avoiding the rule against perpetuities in certain states (Correct answer)
- Requires a corporate trustee at all times
- Is limited to holding real estate assets only
Correct answer: Can last multiple generations by avoiding the rule against perpetuities in certain states
Dynasty trusts are structured in states that have abolished the rule against perpetuities, allowing wealth to pass across many generations without triggering estate taxes.
Question 4: When a family council is established, its primary role in family governance is to:
- Replace the board of directors of a family business
- Serve as a formal forum for family communication, education, and shared decision-making (Correct answer)
- Manage the day-to-day operations of family investments
- File required tax returns on behalf of family members
Correct answer: Serve as a formal forum for family communication, education, and shared decision-making
A family council provides structured communication and shared decision-making but does not replace legal business governance bodies.
Question 5: The generation-skipping transfer (GST) tax applies when assets are transferred to a 'skip person,' which is generally defined as a beneficiary who is:
- A surviving spouse of the transferor
- Two or more generations below the transferor (Correct answer)
- A sibling of the transferor
- A charitable organization
Correct answer: Two or more generations below the transferor
A skip person is a transferee who is at least two generations below the transferor, such as a grandchild.
Question 6: In the context of family governance, what is the primary purpose of a family retreat or family assembly?
- To legally amend trust documents
- To strengthen family cohesion, educate rising generations, and discuss shared goals (Correct answer)
- To establish annual gifting strategies
- To appoint new corporate officers
Correct answer: To strengthen family cohesion, educate rising generations, and discuss shared goals
Family retreats focus on relationship building, education, and shared vision rather than legal or financial mechanics.
Question 7: A spousal lifetime access trust (SLAT) allows the grantor to:
- Revoke the trust at any time without tax consequences
- Remove assets from the taxable estate while the spouse retains indirect access to benefits (Correct answer)
- Transfer assets directly to children free of gift tax
- Avoid probate for jointly held property
Correct answer: Remove assets from the taxable estate while the spouse retains indirect access to benefits
A SLAT removes assets from the grantor's taxable estate while the beneficiary spouse can access trust income or principal, providing indirect benefit to the grantor.
CEA Family Governance & Wealth Transfer 2
A family limited partnership (FLP) is commonly used in estate planning primarily to: