CES Financial Analysis & Planning 2 — Questions and Answers
Question 1: A decedent's estate includes a closely held business valued at $2.4 million. The executor wants to defer estate tax payments. Which IRC section allows installment payments over up to 14 years?
- IRC Section 303
- IRC Section 6161
- IRC Section 6166 (Correct answer)
- IRC Section 2032A
Correct answer: IRC Section 6166
IRC Section 6166 allows estates with closely held business interests exceeding 35% of the adjusted gross estate to pay estate taxes in installments over up to 14 years.
Question 2: When calculating the present value of a remainder interest in a charitable remainder unitrust (CRUT), which interest rate published by the IRS is used?
- Federal short-term rate
- Applicable Federal Rate (AFR)
- Section 7520 rate (Correct answer)
- Prime lending rate
Correct answer: Section 7520 rate
The Section 7520 rate, set monthly at 120% of the federal mid-term AFR, is used to value remainder interests in charitable split-interest trusts.
Question 3: A surviving spouse inherits a traditional IRA. Which distribution option is EXCLUSIVELY available to a surviving spouse beneficiary and not to other beneficiaries?
- Take a lump-sum distribution
- Roll the IRA into their own IRA (Correct answer)
- Disclaim the inherited IRA
- Stretch distributions over 10 years
Correct answer: Roll the IRA into their own IRA
Only a surviving spouse can roll an inherited IRA into their own IRA, allowing them to delay RMDs until they reach age 73 and designate new beneficiaries.
Question 4: An estate planner calculates a client's net worth by summing all assets and subtracting liabilities. Which asset is generally EXCLUDED from the taxable gross estate?
- Revocable living trust assets
- Life insurance owned by an irrevocable trust (Correct answer)
- Retirement accounts payable to the estate
- Jointly held property with right of survivorship
Correct answer: Life insurance owned by an irrevocable trust
Life insurance held in an irrevocable life insurance trust (ILIT) for more than three years before death is excluded from the decedent's gross estate.
Question 5: Which financial ratio best measures a closely held business's ability to service its debt obligations from operating income when valuing it for estate purposes?
- Current ratio
- Debt-to-equity ratio
- Debt service coverage ratio (Correct answer)
- Price-to-earnings ratio
Correct answer: Debt service coverage ratio
The debt service coverage ratio (DSCR) measures net operating income relative to total debt service, reflecting the business's ability to meet debt obligations from operations.
Question 6: A grantor establishes a qualified personal residence trust (QPRT) and transfers their $900,000 home into it. What is the primary estate planning benefit?
- The home escapes capital gains tax at death
- The transfer removes the full value from the taxable estate immediately
- The gift tax value is reduced by the retained term interest (Correct answer)
- The home receives a stepped-up basis at the end of the trust term
Correct answer: The gift tax value is reduced by the retained term interest
With a QPRT, the taxable gift is the remainder interest — the full home value discounted by the grantor's retained right to live there — significantly reducing transfer taxes.
Question 7: Under the SECURE 2.0 Act, at what age must a traditional IRA account holder begin taking required minimum distributions (RMDs) if they were born in 1951?
- 70½
- 72
- 73 (Correct answer)
- 75
Correct answer: 73
Under SECURE 2.0, individuals born in 1951 must begin RMDs at age 73, as the RMD age was raised from 72 to 73 starting in 2023.
CES Financial Analysis & Planning 2
A decedent's estate includes a closely held business valued at $2.4 million.
The executor wants to defer estate tax payments.
Which IRC section allows installment payments over up to 14 years?