CEA Trusts & Probate Administration 4 — Questions and Answers
Question 1: What is the primary advantage of a Revocable Living Trust over a simple will?
- It reduces federal estate taxes
- It avoids the probate process for trust assets (Correct answer)
- It provides greater asset protection from creditors
- It allows assets to pass to charity tax-free
Correct answer: It avoids the probate process for trust assets
Assets properly titled in a revocable living trust pass to beneficiaries without going through probate, saving time and maintaining privacy.
Question 2: In the context of probate, what does 'ademption' mean?
- A bequest fails because the beneficiary died before the testator
- A specific bequest fails because the property no longer exists in the estate at death (Correct answer)
- A will is revoked by the testator before death
- An heir waives their right to inherit
Correct answer: A specific bequest fails because the property no longer exists in the estate at death
Ademption occurs when property specifically bequeathed in a will has been sold, lost, or destroyed before the testator's death, causing that gift to fail.
Question 3: A Charitable Remainder Trust (CRT) provides what benefit to the grantor during their lifetime?
- Full charitable deduction equal to the donated amount
- An income stream during life with a charitable deduction for the present value of the remainder (Correct answer)
- Complete avoidance of capital gains on appreciated assets contributed
- Medicaid eligibility after a five-year lookback period
Correct answer: An income stream during life with a charitable deduction for the present value of the remainder
A CRT pays income to the grantor (or other beneficiaries) for life or a term, then passes the remainder to charity, generating a partial charitable deduction upfront.
Question 4: What is the '65-day rule' relevant to trust taxation?
- Trustees have 65 days after year-end to file trust income tax returns
- Trustees can elect to treat distributions made within 65 days after year-end as made in the prior tax year (Correct answer)
- Beneficiaries have 65 days to disclaim an inheritance
- A trust must distribute income within 65 days or it becomes a grantor trust
Correct answer: Trustees can elect to treat distributions made within 65 days after year-end as made in the prior tax year
Under IRC Section 663(b), trustees of complex trusts can elect to treat distributions made within 65 days after year-end as distributions of the prior tax year.
Question 5: What distinguishes a 'special needs trust' from other trusts?
- It is designed to hold assets for minor children only
- It supplements government benefits for a disabled beneficiary without disqualifying them from means-tested programs (Correct answer)
- It is irrevocable and cannot be modified under any circumstances
- It must be established by a court order
Correct answer: It supplements government benefits for a disabled beneficiary without disqualifying them from means-tested programs
A special needs trust is structured so its assets are not counted as resources for Medicaid or SSI eligibility, preserving the beneficiary's government benefits.
Question 6: When a beneficiary 'disclaims' an inheritance, what is the tax consequence?
- The beneficiary pays gift tax on the disclaimed amount
- The disclaimed property passes as if the beneficiary predeceased the decedent, with no gift tax to the disclaimant (Correct answer)
- The estate pays additional estate tax on the disclaimed amount
- The disclaimant must wait two years before receiving other inheritances
Correct answer: The disclaimed property passes as if the beneficiary predeceased the decedent, with no gift tax to the disclaimant
A qualified disclaimer under IRC Section 2518 allows a beneficiary to refuse an inheritance, with the property passing to the next taker as if the disclaimant predeceased — no gift tax applies.
Question 7: What is a 'no-contest' (in terrorem) clause in a will or trust?
- A provision preventing the trustee from investing in risky assets
- A clause that disinherits any beneficiary who unsuccessfully challenges the document (Correct answer)
- A provision requiring unanimous beneficiary consent for trustee decisions
- A clause preventing creditors from contesting estate distributions
Correct answer: A clause that disinherits any beneficiary who unsuccessfully challenges the document
A no-contest clause discourages frivolous will or trust contests by penalizing challengers with disinheritance if their challenge fails.
CEA Trusts & Probate Administration 4
What is the primary advantage of a Revocable Living Trust over a simple will?