Financial Planning Flashcards

Which estate planning tool lets assets pass to beneficiaries outside probate while the grantor keeps control during life?

Answer: Revocable living trust

A revocable living trust avoids probate and can be amended or revoked by the grantor.

What is the primary purpose of an irrevocable life insurance trust (ILIT)?

Answer: To remove life insurance proceeds from the insured's taxable estate

An ILIT owns the policy, so proceeds are generally excluded from the insured's gross estate.

A client inherits stock that the decedent bought for $20,000 and that was worth $90,000 at death. Under U.S. rules, what is the heir's cost basis?

Answer: $90,000

Inherited assets generally receive a step-up in basis to fair market value at the date of death.

A client gifts appreciated stock to a family member while alive. What basis does the recipient generally take for computing a gain?

Answer: The donor's original (carryover) basis

Lifetime gifts generally carry over the donor's basis for gain purposes, unlike the step-up at death.

Which document authorizes someone to make financial decisions for a client who becomes incapacitated?

Answer: Durable power of attorney

A durable power of attorney stays effective after incapacity for financial and legal matters.

Why might a planner recommend a donor-advised fund (DAF) to a client with a large one-time income spike?

Answer: It allows an immediate charitable deduction while grants to charities are made over later years

Contributions to a DAF are deductible in the year made, and grants can be recommended over time.

Which beneficiary designation issue most commonly overrides a client's will?

Answer: Retirement accounts and life insurance pass by beneficiary designation, not by the will

Assets with named beneficiaries pass by contract directly to those beneficiaries regardless of the will.