CIM Estate Planning 3 — Questions and Answers
Question 1: What is the federal estate tax effect of placing assets in a revocable living trust?
- Assets are removed from the gross estate immediately
- Assets are removed from the gross estate after three years
- Assets receive a 50% valuation discount
- Assets remain included in the grantor's gross estate (Correct answer)
Correct answer: Assets remain included in the grantor's gross estate
Because the grantor retains the power to revoke, the assets stay in the gross estate under IRC Section 2038.
Question 2: An insured transfers an existing life insurance policy to an ILIT and dies two years later. What is the estate tax result?
- The death benefit is included in the insured's gross estate (Correct answer)
- Only the cash surrender value at transfer is included
- Nothing is included because the ILIT owns the policy
- Only the premiums paid in the final year are included
Correct answer: The death benefit is included in the insured's gross estate
Under IRC Section 2035, a life insurance policy transferred within three years of death is pulled back into the gross estate.
Question 3: Why are Crummey withdrawal powers commonly included in an irrevocable life insurance trust?
- To let the grantor revoke the trust if needed
- To make gifts to the trust qualify as present-interest gifts for the annual exclusion (Correct answer)
- To shift the trust's income tax to the beneficiaries permanently
- To allow the trustee to cash in the policy without consent
Correct answer: To make gifts to the trust qualify as present-interest gifts for the annual exclusion
A temporary right of beneficiaries to withdraw contributions converts future-interest gifts into present-interest gifts eligible for the annual exclusion.
Question 4: A spendthrift clause in a trust primarily serves to:
- Limit the trustee's investment discretion
- Require the beneficiary to save a portion of each distribution
- Prevent beneficiaries' creditors from reaching trust assets before distribution (Correct answer)
- Allow the grantor to reclaim assets if the beneficiary overspends
Correct answer: Prevent beneficiaries' creditors from reaching trust assets before distribution
Spendthrift provisions bar beneficiaries from assigning their interests and generally shield undistributed trust assets from their creditors.
Question 5: Which statement best describes an intentionally defective grantor trust (IDGT)?
- Assets are included in the grantor's estate, but income is taxed to the trust
- The trust is void for estate tax purposes but valid for gift tax purposes
- Both income and assets are taxed to the beneficiaries
- Assets are excluded from the grantor's estate, but the grantor pays income tax on trust income (Correct answer)
Correct answer: Assets are excluded from the grantor's estate, but the grantor pays income tax on trust income
An IDGT is drafted to be a completed gift for transfer-tax purposes while remaining a grantor trust for income tax, so the grantor's tax payments further shrink the estate.
Question 6: In a zeroed-out grantor retained annuity trust (GRAT), what passes to the remainder beneficiaries free of gift tax?
- Appreciation exceeding the IRS Section 7520 hurdle rate (Correct answer)
- The full initial contribution
- The annuity payments made to the grantor
- Only the income generated in the first year
Correct answer: Appreciation exceeding the IRS Section 7520 hurdle rate
When the annuity's value equals the contribution, the taxable gift is near zero and any growth above the 7520 rate passes to remainder beneficiaries.
Question 7: To qualify for the marital deduction, a QTIP trust must give the surviving spouse:
- The right to withdraw principal at any time
- A general power of appointment over all assets
- All trust income, payable at least annually, for life (Correct answer)
- The power to name the remainder beneficiaries
Correct answer: All trust income, payable at least annually, for life
A QTIP requires that the surviving spouse receive all income at least annually for life, while the first spouse controls the remainder beneficiaries.
CIM Estate Planning 3
What is the federal estate tax effect of placing assets in a revocable living trust?