CEA Taxation & Legal Considerations 3 — Questions and Answers
Question 1: A grantor who transfers a personal residence to a qualified personal residence trust (QPRT) retains the right to live there for 10 years. If the grantor dies in year 7 of the trust term, the residence:
- Passes to the remainder beneficiaries free of estate tax
- Is included in the grantor's gross estate at its original transfer value
- Is included in the grantor's gross estate at its full FMV at death (Correct answer)
- Passes outright to the surviving spouse with no estate tax
Correct answer: Is included in the grantor's gross estate at its full FMV at death
If the grantor dies before the QPRT term ends, the full FMV of the residence is pulled back into the gross estate, negating the tax benefit.
Question 2: Which valuation discount is most commonly applied when gifting a minority interest in a family limited partnership (FLP)?
- Premium for control
- Minority interest and lack of marketability discounts (Correct answer)
- Blockage discount only
- Net asset value premium
Correct answer: Minority interest and lack of marketability discounts
Minority interest discounts (for lack of control) and lack-of-marketability discounts are routinely applied to FLP interests, reducing the taxable gift value.
Question 3: A charitable lead annuity trust (CLAT) pays a fixed annuity to charity for a specified term, after which the remainder passes to:
- The grantor's estate
- Named non-charitable beneficiaries such as children (Correct answer)
- The charity that received the annuity payments
- A donor-advised fund
Correct answer: Named non-charitable beneficiaries such as children
In a CLAT the charity receives income first, and then the remaining assets pass to the grantor's heirs, often with reduced gift or estate tax.
Question 4: Under IRC § 2503(e), direct payments for tuition and medical expenses on behalf of another person:
- Count against the annual gift tax exclusion
- Are excluded from gift tax without limit when paid directly to the provider (Correct answer)
- Are subject to the generation-skipping transfer tax
- Must be reported on Form 709
Correct answer: Are excluded from gift tax without limit when paid directly to the provider
Section 2503(e) allows unlimited exclusion of direct tuition and medical payments to educational institutions and medical providers, in addition to the annual exclusion.
Question 5: When an estate is required to file a federal estate tax return (Form 706), what is the standard filing deadline after the date of death?
- 6 months
- 9 months (Correct answer)
- 12 months
- 18 months
Correct answer: 9 months
Form 706 is due within 9 months of the decedent's date of death, with a 6-month extension available upon request.
Question 6: A testamentary trust is one that:
- Is created and funded during the grantor's lifetime
- Takes effect and is funded at the grantor's death through the will (Correct answer)
- Avoids probate because assets transfer by operation of law
- Is irrevocable from the moment of signing
Correct answer: Takes effect and is funded at the grantor's death through the will
A testamentary trust is established within a will and does not come into existence or receive assets until the testator dies and the will is admitted to probate.
Question 7: For federal income tax purposes, a revocable living trust is treated as:
- A separate taxpaying entity that must file its own Form 1041
- A grantor trust whose income is reported on the grantor's personal Form 1040 (Correct answer)
- A simple trust with a $600 exemption
- A complex trust required to distribute all income annually
Correct answer: A grantor trust whose income is reported on the grantor's personal Form 1040
Because the grantor retains control and can revoke the trust, all income is attributed to and taxed on the grantor's individual return under the grantor trust rules.
CEA Taxation & Legal Considerations 3
A grantor who transfers a personal residence to a qualified personal residence trust (QPRT) retains the right to live there for 10 years.
If the grantor dies in year 7 of the trust term, the residence: