CES Estate Planning Principles & Strategies 3 — Questions and Answers
Question 1: A dynasty trust is primarily designed to:
- Minimize income taxes for the current generation
- Preserve wealth across multiple generations by avoiding repeated transfer taxes (Correct answer)
- Provide charitable deductions to the grantor
- Qualify for the annual gift tax exclusion each year
Correct answer: Preserve wealth across multiple generations by avoiding repeated transfer taxes
Dynasty trusts are long-term trusts structured to hold assets for multiple generations, minimizing estate and GST taxes at each generational transfer.
Question 2: What is the generation-skipping transfer (GST) tax exemption designed to prevent?
- Income shifting among family members in high tax brackets
- Bypassing one or more generations of estate taxes by transferring directly to grandchildren or lower (Correct answer)
- Using retirement accounts to fund college education trusts
- Double taxation of life insurance proceeds
Correct answer: Bypassing one or more generations of estate taxes by transferring directly to grandchildren or lower
The GST tax is imposed on transfers that skip a generation, ensuring these transfers are taxed similarly to transfers that pass through each generation.
Question 3: An Irrevocable Life Insurance Trust (ILIT) keeps life insurance proceeds out of the taxable estate primarily because:
- Life insurance is never subject to estate tax under current law
- The trust, not the insured, owns the policy, so the proceeds are not included in the insured's estate (Correct answer)
- Premiums paid into the trust are deductible as charitable contributions
- State law exempts life insurance from probate and estate taxes
Correct answer: The trust, not the insured, owns the policy, so the proceeds are not included in the insured's estate
When an ILIT owns the life insurance policy, the death benefit is excluded from the insured's taxable estate because the insured holds no incidents of ownership.
Question 4: Which of the following transfers would trigger the three-year inclusion rule under IRC §2035?
- Transferring a vacation home to a QPRT two years before death
- Gifting a life insurance policy owned by the decedent within three years of death (Correct answer)
- Selling appreciated stock to a family member at fair market value
- Transferring assets into a revocable living trust
Correct answer: Gifting a life insurance policy owned by the decedent within three years of death
Under IRC §2035, life insurance policies transferred within three years of death are pulled back into the decedent's gross estate.
Question 5: A pour-over will is most commonly used in conjunction with:
- An irrevocable life insurance trust
- A revocable living trust (Correct answer)
- A charitable remainder trust
- A qualified domestic trust
Correct answer: A revocable living trust
A pour-over will directs that any assets not already transferred to a revocable living trust at death are poured into the trust, ensuring unified administration.
Question 6: Which of the following best describes 'portability' in federal estate tax planning?
- The ability to transfer an IRA to a surviving spouse without tax consequences
- A surviving spouse's right to use the deceased spouse's unused estate tax exemption (Correct answer)
- The ability to move trust assets between states without triggering tax
- The transfer of the annual gift tax exclusion to a surviving spouse
Correct answer: A surviving spouse's right to use the deceased spouse's unused estate tax exemption
Portability allows a surviving spouse to elect to use the deceased spouse's unused exemption (DSUE), potentially doubling the amount that can pass estate-tax-free.
Question 7: In an installment sale to an Intentionally Defective Grantor Trust (IDGT), which of the following is TRUE?
- The sale is treated as a taxable event for capital gains purposes
- No capital gains tax is triggered because grantor trust rules treat the grantor and trust as the same taxpayer (Correct answer)
- The grantor recognizes ordinary income on all payments received
- The IRS considers the entire transaction a gift subject to gift tax
Correct answer: No capital gains tax is triggered because grantor trust rules treat the grantor and trust as the same taxpayer
Because the grantor and the IDGT are treated as the same entity for income tax purposes, the installment sale is disregarded and no capital gains are recognized.
CES Estate Planning Principles & Strategies 3
A dynasty trust is primarily designed to: