CES CES Beneficiary Rights & Distribution Planning 2 — Questions and Answers
Question 1: Under the '5 and 5' power in a trust, what is the maximum amount a beneficiary can withdraw annually without adverse estate tax consequences?
- The greater of $5,000 or 5% of the trust corpus (Correct answer)
- The lesser of $5,000 or 5% of the trust income
- Exactly $5,000 regardless of trust size
- 5% of the trust corpus only
Correct answer: The greater of $5,000 or 5% of the trust corpus
The '5 and 5' power allows a beneficiary to withdraw the greater of $5,000 or 5% of the trust corpus annually without including the lapsed power in their gross estate.
Question 2: What is a Crummey power, and what tax benefit does it provide?
- A power allowing annual exclusion gifts to trusts by giving beneficiaries a temporary withdrawal right (Correct answer)
- A power allowing trustees to accumulate income tax-free
- A power granting beneficiaries unlimited access to trust principal
- A power to convert a revocable trust to an irrevocable trust
Correct answer: A power allowing annual exclusion gifts to trusts by giving beneficiaries a temporary withdrawal right
A Crummey power gives beneficiaries a temporary right to withdraw contributions, qualifying the transfer for the annual gift tax exclusion.
Question 3: Which distribution standard requires a trustee to consider the beneficiary's other resources before making a distribution?
- Support standard (Correct answer)
- Comfort standard
- Best interests standard
- Accumulation standard
Correct answer: Support standard
A support standard typically requires the trustee to consider the beneficiary's other income and assets before distributing trust funds for support needs.
Question 4: A trust has both income and remainder beneficiaries with conflicting interests. What principle guides the trustee in managing assets for both?
- Income maximization principle
- Impartiality principle (Correct answer)
- Remainder protection principle
- Total return principle
Correct answer: Impartiality principle
The impartiality principle requires a trustee to act fairly among all beneficiaries, balancing the income beneficiary's desire for current distributions against the remainder beneficiary's interest in preserving principal.
Question 5: What is an 'ascertainable standard' in a trust, and why is it important for estate tax planning?
- A vague discretionary standard that maximizes trustee flexibility
- A defined standard tied to health, education, maintenance, or support that avoids estate tax inclusion (Correct answer)
- A standard requiring court approval for all distributions
- A standard that pegs distributions to the CPI
Correct answer: A defined standard tied to health, education, maintenance, or support that avoids estate tax inclusion
An ascertainable standard limits the power holder's right to distributions in a measurable way (HEMS), ensuring the power is not included in the power holder's gross estate under IRC §2041.
Question 6: Which document allows a beneficiary to formally request a change in trustee when dissatisfied with administration?
- Trust amendment
- Petition for removal (Correct answer)
- Letter of instruction
- Certificate of trust
Correct answer: Petition for removal
A beneficiary can file a petition for removal of a trustee with the appropriate court when there is cause, such as breach of fiduciary duty or failure to communicate.
CES CES Beneficiary Rights & Distribution Planning 2
Under the '5 and 5' power in a trust, what is the maximum amount a beneficiary can withdraw annually without adverse estate tax consequences?