CEA Taxation & Legal Considerations 2 — Questions and Answers
Question 1: A decedent dies with a gross estate of $15 million. After allowable deductions the taxable estate is $12.4 million. Using the 2024 federal exemption of $13.61 million, what is the federal estate tax owed?
- $0, because the taxable estate is below the exemption (Correct answer)
- $494,000 at a 40% rate on the excess
- $4,960,000 at the flat 40% rate on the full taxable estate
- $1,240,000 at a 10% effective rate
Correct answer: $0, because the taxable estate is below the exemption
Because the taxable estate of $12.4 million is below the 2024 unified exemption of $13.61 million, no federal estate tax is owed.
Question 2: Which legal document gives a designated person authority to make financial decisions on behalf of a living individual who has become incapacitated?
- Revocable living trust
- Durable power of attorney (Correct answer)
- Pour-over will
- Letters testamentary
Correct answer: Durable power of attorney
A durable power of attorney remains effective upon incapacity and grants the agent authority over financial matters.
Question 3: Under the step-up in basis rule, an heir who inherits stock originally purchased for $10,000 but worth $90,000 at the decedent's death will have a cost basis of:
- $10,000 (original purchase price)
- $50,000 (average of purchase price and date-of-death value)
- $90,000 (fair market value at death) (Correct answer)
- $0 (basis is eliminated at death)
Correct answer: $90,000 (fair market value at death)
IRC § 1014 steps up the heir's basis to the asset's fair market value on the date of death, eliminating any built-in gain.
Question 4: A married couple wants to maximize estate tax savings using portability. What must the surviving spouse do to use the deceased spouse's unused exemption (DSUE)?
- File a gift tax return within 9 months of death
- File a timely federal estate tax return (Form 706) for the deceased spouse's estate (Correct answer)
- Execute a disclaimer within 9 months of inheriting assets
- Establish a bypass trust within 6 months of death
Correct answer: File a timely federal estate tax return (Form 706) for the deceased spouse's estate
Portability is only available if the executor of the first spouse's estate files a Form 706 electing to transfer the DSUE, even if no estate tax is owed.
Question 5: Which type of trust is designed specifically to hold life insurance proceeds outside of the insured's taxable estate?
- Charitable remainder trust (CRT)
- Qualified personal residence trust (QPRT)
- Irrevocable life insurance trust (ILIT) (Correct answer)
- Special needs trust (SNT)
Correct answer: Irrevocable life insurance trust (ILIT)
An ILIT owns the life insurance policy so that proceeds are not included in the insured's gross estate upon death.
Question 6: The annual federal gift tax exclusion allows an individual to give up to a certain amount per recipient per year without gift tax consequences. What is the 2024 annual exclusion amount?
- $15,000
- $16,000
- $17,000
- $18,000 (Correct answer)
Correct answer: $18,000
The IRS adjusted the annual gift tax exclusion to $18,000 per recipient for 2024, up from $17,000 in 2023.
Question 7: Under the kiddie tax rules, unearned income of a dependent child above the threshold is taxed at:
- The child's own marginal rate
- A flat 10% federal rate
- The parents' marginal tax rate (Correct answer)
- The trust and estate compressed tax rate schedule
Correct answer: The parents' marginal tax rate
The kiddie tax taxes a child's unearned income above the threshold at the parent's marginal rate to prevent income-shifting strategies.
CEA Taxation & Legal Considerations 2
A decedent dies with a gross estate of $15 million.
After allowable deductions the taxable estate is $12.4 million.
Using the 2024 federal exemption of $13.61 million, what is the federal estate tax owed?