CEA Family Governance & Wealth Transfer 3

Question 1

An intentionally defective grantor trust (IDGT) is considered 'defective' because:

Accepted Answer

It is treated as a grantor trust for income tax but not for estate tax purposes

Answer

An IDGT is 'defective' for income tax purposes only — the grantor pays income tax on trust earnings, which is itself a tax-free gift, while the assets remain outside the taxable estate.

Question 2

Which of the following best describes the role of a family office in wealth transfer planning?

Accepted Answer

A private entity that coordinates investment, tax, legal, and philanthropic services for ultra-high-net-worth families

Answer

A family office provides centralized, customized financial and administrative services for families with substantial wealth.

Question 3

A grantor retained annuity trust (GRAT) is most effective when:

Accepted Answer

Interest rates are low and the transferred assets are expected to outperform the IRS hurdle rate (7520 rate)

Answer

GRATs work best when assets appreciate beyond the IRS Section 7520 rate, transferring the excess appreciation to heirs gift-tax free.

Question 4

In a family governance structure, a family bank (or private trust company) is primarily used to:

Accepted Answer

Provide intra-family loans, financial education, and entrepreneurial seed funding governed by family rules

Answer

A family bank is a governance tool that pools family capital to offer loans and grants to family members, promoting financial education and entrepreneurship.

Question 5

Which estate planning technique involves selling highly appreciated assets to a grantor trust in exchange for a promissory note, effectively freezing the estate value?

Accepted Answer

Installment sale to an intentionally defective grantor trust (IDGT)

Answer

Selling assets to an IDGT for a promissory note freezes the seller's estate at the note's value while future appreciation passes to trust beneficiaries outside the taxable estate.

(CEA) Certified Estate Advisor Practice Test

(CEA) Certified Estate Advisor Practice Test

CEA Family Governance & Wealth Transfer 3