CES Estate Planning Principles & Strategies 2 — Questions and Answers
Question 1: Which of the following best describes the step-up in basis that occurs at death?
- The estate's tax basis is reset to zero
- Inherited assets receive a new basis equal to fair market value at the date of death (Correct answer)
- Capital gains taxes are prepaid by the estate before distribution
- Beneficiaries assume the decedent's original purchase price as their basis
Correct answer: Inherited assets receive a new basis equal to fair market value at the date of death
When assets are inherited, their tax basis is stepped up to the fair market value as of the decedent's date of death, eliminating unrealized capital gains.
Question 2: A Qualified Personal Residence Trust (QPRT) is primarily used to:
- Avoid probate on a primary residence
- Transfer a home to heirs at a reduced gift tax value (Correct answer)
- Generate charitable deductions for the donor
- Protect the home from Medicaid estate recovery
Correct answer: Transfer a home to heirs at a reduced gift tax value
A QPRT allows a homeowner to transfer their residence to an irrevocable trust at a reduced gift tax value by retaining the right to live in the home for a specified term.
Question 3: Under the unlimited marital deduction, which transfers qualify for a full federal estate tax deduction?
- Transfers to any family member who is a U.S. citizen
- Outright transfers to a surviving spouse who is a U.S. citizen (Correct answer)
- Transfers to a domestic trust for a non-citizen spouse
- Transfers to a spouse that are contingent on surviving ten years
Correct answer: Outright transfers to a surviving spouse who is a U.S. citizen
The unlimited marital deduction allows an unlimited amount to pass estate-tax-free to a surviving spouse who is a U.S. citizen.
Question 4: Which document allows a person to name someone to make healthcare decisions if they become incapacitated?
- A living will
- A financial power of attorney
- A healthcare proxy (durable power of attorney for healthcare) (Correct answer)
- A revocable living trust
Correct answer: A healthcare proxy (durable power of attorney for healthcare)
A healthcare proxy, also called a durable power of attorney for healthcare, designates an agent to make medical decisions on behalf of an incapacitated principal.
Question 5: What is the primary benefit of using a Grantor Retained Annuity Trust (GRAT)?
- It removes assets from the estate with certainty regardless of investment returns
- It allows asset appreciation above the IRS hurdle rate to pass to heirs gift-tax-free (Correct answer)
- It provides the grantor with an income tax deduction at funding
- It bypasses the generation-skipping transfer tax on transfers to grandchildren
Correct answer: It allows asset appreciation above the IRS hurdle rate to pass to heirs gift-tax-free
A GRAT transfers appreciation above the IRS Section 7520 hurdle rate to beneficiaries without additional gift or estate tax.
Question 6: Which estate planning technique is commonly used by non-citizen spouses to qualify for the marital deduction?
- Qualified Domestic Trust (QDOT) (Correct answer)
- Qualified Personal Residence Trust (QPRT)
- Charitable Remainder Unitrust (CRUT)
- Intentionally Defective Grantor Trust (IDGT)
Correct answer: Qualified Domestic Trust (QDOT)
A QDOT allows a non-citizen surviving spouse to benefit from the marital deduction, with estate taxes deferred until distributions are made or the spouse dies.
Question 7: Which of the following is a key characteristic of a spendthrift provision in a trust?
- It limits the trustee's ability to invest in volatile assets
- It prevents beneficiaries from assigning their interest or creditors from attaching it (Correct answer)
- It requires mandatory distributions at specific ages
- It allows the grantor to reclaim trust assets in an emergency
Correct answer: It prevents beneficiaries from assigning their interest or creditors from attaching it
A spendthrift provision restricts a beneficiary's ability to voluntarily transfer their interest and protects it from attachment by creditors.
CES Estate Planning Principles & Strategies 2
Which of the following best describes the step-up in basis that occurs at death?