CES Financial Analysis & Planning 3

Question 1

A trust holds a rental property generating $40,000 of net income annually. The trustee distributes $25,000 to the income beneficiary. How is the trust's distributable net income (DNI) relevant here?

Accepted Answer

DNI caps the deduction the trust can claim for distributions

Answer

DNI limits the distribution deduction a trust can claim; the trust deducts the lesser of actual distributions or DNI, and beneficiaries are taxed on the character of income up to DNI.

Question 2

A CES practitioner is comparing a taxable investment account to a tax-deferred annuity for a 65-year-old client. Which factor most favors the annuity for estate planning purposes?

Accepted Answer

Annuities avoid probate through beneficiary designation

Answer

Annuities with named beneficiaries pass outside probate, providing privacy and potentially faster transfer, though gains are subject to ordinary income tax by beneficiaries.

Question 3

Which valuation method for a closely held business applies a market-derived multiple to normalized earnings before interest, taxes, depreciation, and amortization?

Accepted Answer

EBITDA multiple method (market approach)

Answer

The EBITDA multiple method, a form of the market approach, values a business by multiplying normalized EBITDA by a multiple derived from comparable transactions or public companies.

Question 4

A client is concerned about the 3.8% Net Investment Income Tax (NIIT). Which income type is generally subject to this surtax for a trust?

Accepted Answer

Passive rental income retained in the trust

Answer

Passive rental income retained within a trust is subject to the 3.8% NIIT once the trust's AGI exceeds the threshold (approximately $15,200 in 2024).

Question 5

When structuring an installment sale to a grantor trust for estate planning, what is the primary income tax advantage?

Accepted Answer

Interest payments from the trust to the grantor are not taxable income

Answer

Because the grantor is treated as owning the trust for income tax purposes, interest paid by the trust to the grantor on the installment note is ignored — it's a transaction with oneself.

(CES) Certified Estate and Trust Specialist Practice Test

(CES) Certified Estate and Trust Specialist Practice Test

CES Financial Analysis & Planning 3