CES Client Advisory & Consultation 3 — Questions and Answers
Question 1: A client with a closely held business wants to transfer ownership to adult children while minimizing gift tax. Which advisory technique involves selling assets to a trust in exchange for a promissory note?
- Qualified opportunity zone investment
- Installment sale to an intentionally defective grantor trust (IDGT) (Correct answer)
- Charitable lead annuity trust (CLAT)
- Uniform Transfers to Minors Act (UTMA) account
Correct answer: Installment sale to an intentionally defective grantor trust (IDGT)
An installment sale to an IDGT allows the grantor to transfer appreciating assets out of the estate while receiving a note, with no capital gains recognized on the sale because the grantor is deemed owner for income tax purposes.
Question 2: During a consultation, a client reveals that their spouse is not a U.S. citizen. How does this affect the marital deduction planning discussion?
- The unlimited marital deduction applies fully regardless of the spouse's citizenship
- Transfers to a non-citizen spouse do not qualify for the unlimited marital deduction; a QDOT may be required (Correct answer)
- Non-citizen spouses automatically receive a stepped-up basis on all inherited assets
- A non-citizen spouse must file a gift tax return for any inheritance received
Correct answer: Transfers to a non-citizen spouse do not qualify for the unlimited marital deduction; a QDOT may be required
The unlimited marital deduction does not apply to non-citizen spouses; a Qualified Domestic Trust (QDOT) is required to defer estate taxes on assets left to a non-citizen spouse.
Question 3: A client asks whether annual exclusion gifts count against their lifetime gift tax exemption. What is the correct advisory response?
- All gifts reduce the lifetime exemption dollar-for-dollar regardless of amount
- Annual exclusion gifts (up to the annual limit per recipient) do not reduce the lifetime exemption (Correct answer)
- Only taxable gifts made before age 65 reduce the lifetime exemption
- Annual exclusion gifts must be reported on Form 709 and reduce the exemption
Correct answer: Annual exclusion gifts (up to the annual limit per recipient) do not reduce the lifetime exemption
Gifts that qualify for the annual exclusion (currently $18,000 per recipient in 2024) are not taxable gifts and do not reduce the donor's lifetime applicable exclusion amount.
Question 4: When advising a client on trust protector provisions, what is the primary purpose of naming a trust protector?
- To serve as a backup trustee who also manages trust investments
- To provide flexibility to modify an irrevocable trust in response to changes in law or family circumstances (Correct answer)
- To act as a beneficiary advocate who overrides trustee decisions
- To file annual trust tax returns on behalf of the trustee
Correct answer: To provide flexibility to modify an irrevocable trust in response to changes in law or family circumstances
A trust protector is granted specific powers (such as modifying terms or changing trustees) to allow an irrevocable trust to adapt to unforeseen legal or family changes without court involvement.
Question 5: A client has minor grandchildren and wants to fund their education. The advisor compares 529 plans to Crummey trusts. What is the key advantage of a 529 plan in this context?
- 529 plans allow tax-free growth and withdrawals for qualified education expenses, with simpler administration than a trust (Correct answer)
- 529 plans allow the account owner to deduct contributions from federal taxable income
- 529 plans have no contribution limits and are exempt from gift tax rules
- 529 plans are irrevocable once funded and always receive a step-up in basis
Correct answer: 529 plans allow tax-free growth and withdrawals for qualified education expenses, with simpler administration than a trust
529 plans provide tax-free growth and tax-free qualified withdrawals with significantly less administrative complexity than maintaining a Crummey trust.
Question 6: A client's estate plan includes a pour-over will. During consultation, the advisor should explain that a pour-over will accomplishes which primary function?
- It transfers all probate assets directly to heirs without court oversight
- It directs any assets not already in the revocable trust at death into the trust through probate (Correct answer)
- It bypasses estate taxes on assets that pour into the trust
- It automatically funds a testamentary trust with retirement accounts
Correct answer: It directs any assets not already in the revocable trust at death into the trust through probate
A pour-over will captures any assets outside the revocable living trust at death and funnels them into the trust through the probate process, ensuring consolidated distribution per trust terms.
Question 7: A client is concerned about potential estate recovery by their state's Medicaid program after death. Which advisory strategy helps protect the primary residence from Medicaid estate recovery?
- Transferring the home to a revocable living trust
- Transferring the home to an irrevocable Medicaid asset protection trust well before the look-back period (Correct answer)
- Adding the home to a joint tenancy with the client's children immediately before a Medicaid application
- Deeding the home to the client's spouse under the unlimited marital deduction
Correct answer: Transferring the home to an irrevocable Medicaid asset protection trust well before the look-back period
An irrevocable Medicaid asset protection trust, funded outside the 5-year look-back period, can shelter the home from Medicaid estate recovery in many states.
CES Client Advisory & Consultation 3
A client with a closely held business wants to transfer ownership to adult children while minimizing gift tax.
Which advisory technique involves selling assets to a trust in exchange for a promissory note?