CFSP Estate Planning & Wealth Transfer 1 — Questions and Answers
Question 1: What is the primary purpose of a last will and testament?
- To avoid the probate process entirely
- To designate the distribution of assets and name an executor upon death (Correct answer)
- To establish a trust for minor children automatically
- To minimize federal estate taxes
Correct answer: To designate the distribution of assets and name an executor upon death
A last will and testament primarily directs how a deceased person's assets should be distributed and designates an executor to manage the estate administration.
Question 2: Which of the following best describes the probate process?
- A tax levied on inherited assets above the exemption amount
- The court-supervised legal process of validating a will and distributing a deceased person's estate (Correct answer)
- A living trust created to transfer assets during the grantor's lifetime
- The tax-free transfer of assets between legally married spouses
Correct answer: The court-supervised legal process of validating a will and distributing a deceased person's estate
Probate is the court-supervised legal process through which a will is validated, debts are paid, and remaining assets are distributed to beneficiaries.
Question 3: Which characteristic most distinguishes a revocable living trust from an irrevocable trust?
- A revocable trust removes assets from the grantor's taxable estate
- A revocable trust can be modified or terminated by the grantor during their lifetime (Correct answer)
- A revocable trust protects assets from the grantor's creditors
- A revocable trust requires court approval before any changes can be made
Correct answer: A revocable trust can be modified or terminated by the grantor during their lifetime
A revocable living trust allows the grantor to retain control and make changes or revoke the trust at any time during their lifetime, unlike an irrevocable trust.
Question 4: What is the primary advantage of designating beneficiaries on retirement accounts and life insurance policies?
- The assets are permanently shielded from all income taxes
- Assets transfer directly to beneficiaries outside of probate (Correct answer)
- Inherited assets receive a step-up in cost basis
- Beneficiaries avoid paying any estate taxes on inherited amounts
Correct answer: Assets transfer directly to beneficiaries outside of probate
Beneficiary designations allow assets to pass directly to named individuals without going through the probate process, enabling faster and private asset transfers.
Question 5: What is a 'step-up in basis' as it applies to inherited assets?
- An increase in asset value attributed to inflation adjustments
- The adjustment of an inherited asset's cost basis to its fair market value at the decedent's date of death (Correct answer)
- A tax credit applied against estate taxes owed by the estate
- An annual increase in the lifetime gift tax exemption amount
Correct answer: The adjustment of an inherited asset's cost basis to its fair market value at the decedent's date of death
A step-up in basis resets the inherited asset's tax cost basis to its fair market value at the date of death, which can significantly reduce capital gains taxes when the asset is later sold.
Question 6: What is the role of an executor (personal representative) in estate administration?
- To contest the validity of the will on behalf of disinherited heirs
- To manage and distribute the estate's assets according to the will and applicable laws (Correct answer)
- To serve as the trustee of all trusts created by the decedent
- To establish new beneficiary designations for any accounts lacking them
Correct answer: To manage and distribute the estate's assets according to the will and applicable laws
An executor is responsible for collecting and inventorying assets, paying valid debts and taxes, and distributing the remaining estate to beneficiaries as directed by the will.
Question 7: Which form of property ownership allows assets to pass directly to a surviving co-owner upon death without going through probate?
- Tenants in common
- Sole ownership with a transfer-on-death deed
- Joint tenancy with right of survivorship (Correct answer)
- Community property without right of survivorship
Correct answer: Joint tenancy with right of survivorship
Joint tenancy with right of survivorship automatically transfers the deceased co-owner's full interest to the surviving co-owner(s) by operation of law, bypassing probate.
CFSP Estate Planning & Wealth Transfer 1
What is the primary purpose of a last will and testament?