CFP Estate Planning & Wealth Transfer 2 — Questions and Answers
Question 1: An Irrevocable Life Insurance Trust (ILIT) is designed primarily to:
- Deduct life insurance premiums as a business expense
- Keep life insurance proceeds out of the insured's taxable estate (Correct answer)
- Allow the insured to borrow from the policy tax-free
- Provide the insured with control over death benefit investments
Correct answer: Keep life insurance proceeds out of the insured's taxable estate
By owning the policy through an ILIT, the death benefit is excluded from the insured's gross estate, reducing potential estate taxes.
Question 2: What is the generation-skipping transfer (GST) tax designed to prevent?
- Transfers of assets to charities that skip two generations
- Avoidance of estate tax by transferring assets directly to grandchildren or later generations (Correct answer)
- Income splitting between parents and minor children
- The use of trusts to defer income taxes indefinitely
Correct answer: Avoidance of estate tax by transferring assets directly to grandchildren or later generations
The GST tax imposes an additional tax on transfers to 'skip persons' (grandchildren or lower) to prevent families from avoiding a generation of estate taxation.
Question 3: A Grantor Retained Annuity Trust (GRAT) works by:
- Donating assets to charity while retaining an annuity for a fixed term
- Transferring appreciation above the IRS hurdle rate to heirs with little or no gift tax (Correct answer)
- Allowing heirs to receive income for life before assets pass to charity
- Freezing the value of a closely held business for estate tax purposes
Correct answer: Transferring appreciation above the IRS hurdle rate to heirs with little or no gift tax
In a GRAT, the grantor retains annuity payments for a fixed term; any growth above the Section 7520 rate passes to beneficiaries gift-tax-free.
Question 4: Portability in estate planning refers to:
- Moving assets between states to minimize state estate taxes
- A surviving spouse's ability to use a deceased spouse's unused estate tax exemption (Correct answer)
- The ability to transfer a retirement account to any beneficiary without taxes
- Using a revocable trust that can be moved across jurisdictions
Correct answer: A surviving spouse's ability to use a deceased spouse's unused estate tax exemption
Portability allows a surviving spouse to elect to use the Deceased Spouse's Unused Exemption (DSUE), effectively doubling the amount sheltered from estate tax.
Question 5: A Charitable Remainder Trust (CRT) provides what primary tax and financial benefits?
- A current income tax deduction plus an income stream to the donor, with the remainder passing to charity (Correct answer)
- Full exclusion of the transferred asset from the donor's estate plus avoidance of capital gains on sale
- An above-the-line deduction equal to 100% of the asset's fair market value
- Deferral of all capital gains taxes until the trust terminates
Correct answer: A current income tax deduction plus an income stream to the donor, with the remainder passing to charity
A CRT gives the donor a partial charitable income tax deduction upfront and an income stream for life or a term, with the remainder passing to the named charity.
Question 6: A Family Limited Partnership (FLP) is often used in estate planning to:
- Qualify assets for the marital deduction
- Transfer wealth to heirs at a discount by applying valuation discounts for lack of control and marketability (Correct answer)
- Avoid all gift and estate taxes on business interests
- Provide a charitable deduction equal to the contributed asset's fair market value
Correct answer: Transfer wealth to heirs at a discount by applying valuation discounts for lack of control and marketability
By contributing assets to an FLP and gifting limited partnership interests, valuation discounts (lack of control and marketability) reduce the taxable transfer value.
Question 7: Which estate planning technique allows a parent to superfund a 529 plan by front-loading up to five years' worth of annual exclusion gifts?
- Qualified tuition plan lump-sum election
- 5-year gift averaging (superfunding) (Correct answer)
- Section 2503(c) minor's trust contribution
- Crummey power election
Correct answer: 5-year gift averaging (superfunding)
The 5-year gift averaging election allows a lump-sum contribution to a 529 plan using five years of annual exclusions ($90,000 in 2024) without gift tax, removing the funds from the donor's estate.
CFP Estate Planning & Wealth Transfer 2
An Irrevocable Life Insurance Trust (ILIT) is designed primarily to: