CLU Fundamentals of Estate Planning Questions and Answers — Questions and Answers
Question 1: An individual dies without a valid will, leaving behind a spouse and two minor children. How will the deceased's separate property typically be distributed under intestate succession laws?
- The property will be sold, and the proceeds held in trust until the children reach the age of majority.
- The spouse will inherit the entire estate.
- The estate will be divided, with the spouse and children each receiving a specific share. (Correct answer)
- The state will seize the property since there was no valid will.
Correct answer: The estate will be divided, with the spouse and children each receiving a specific share.
When a person dies intestate (without a will), state laws determine how their property is distributed. In a scenario with a surviving spouse and children, the estate is typically divided among them. The specific shares can vary by state, but generally, the spouse does not inherit the entire estate automatically; the children are legally entitled to a portion.
Question 2: Which of the following is a primary purpose of the probate process?
- To minimize the estate taxes owed by the beneficiaries.
- To allow creditors to bypass the estate and collect directly from beneficiaries.
- To provide a legal framework for validating the will and supervising the distribution of the decedent's assets. (Correct answer)
- To fast-track the transfer of all assets to the surviving spouse, avoiding any legal oversight.
Correct answer: To provide a legal framework for validating the will and supervising the distribution of the decedent's assets.
Probate is the court-supervised legal process that occurs after someone dies. Its main functions are to prove the validity of the deceased person's will, appoint an executor to manage the estate, pay outstanding debts and taxes, and ensure the remaining assets are distributed to the proper beneficiaries as determined by the will or state law.
Question 3: A married couple owns their home as Joint Tenants with Right of Survivorship (JTWROS). If one spouse dies, what is the consequence of this form of ownership?
- The deceased spouse's share must go through probate to be transferred to the surviving spouse.
- The property is automatically divided, with half going to the surviving spouse and half to the deceased's children.
- The surviving spouse automatically inherits the entire property without it passing through probate. (Correct answer)
- The deceased spouse's share passes to the beneficiaries named in their will.
Correct answer: The surviving spouse automatically inherits the entire property without it passing through probate.
A key feature of Joint Tenancy with Right of Survivorship (JTWROS) is that upon the death of one owner, their interest in the property automatically passes to the surviving joint tenant(s). This transfer happens outside of the probate process.
Question 4: Which type of trust is created and becomes effective only upon the death of the grantor, as specified in their will?
- Revocable Living Trust
- Irrevocable Life Insurance Trust
- Charitable Remainder Trust
- Testamentary Trust (Correct answer)
Correct answer: Testamentary Trust
A testamentary trust is a trust that is created by the terms of a person's will and does not come into existence until the person dies and the will is probated. In contrast, living trusts (both revocable and irrevocable) are created and funded during the grantor's lifetime.
Question 5: Which of the following estate planning tools allows for the transfer of an unlimited amount of assets to a surviving spouse without incurring federal estate or gift tax?
- The annual gift tax exclusion
- A bypass trust
- The unlimited marital deduction (Correct answer)
- A generation-skipping transfer
Correct answer: The unlimited marital deduction
The unlimited marital deduction is a provision in U.S. tax law that allows an individual to transfer an unrestricted amount of assets to their U.S. citizen spouse at any time, including at death, free from federal gift and estate taxes.
Question 6: A client wishes to set up a trust to provide for a child with special needs without jeopardizing their eligibility for government benefits like Medicaid or Supplemental Security Income (SSI). Which type of trust is most suitable for this purpose?
- A Revocable Living Trust
- A Special Needs Trust (Correct answer)
- A Charitable Lead Trust
- A Grantor Retained Annuity Trust (GRAT)
Correct answer: A Special Needs Trust
A Special Needs Trust (SNT), also known as a Supplemental Needs Trust, is specifically designed to hold assets for a beneficiary with a disability. The trust's assets are managed by a trustee and are used to supplement, not replace, the public benefits the beneficiary receives. This structure allows the beneficiary to enjoy the trust assets without being disqualified from essential government assistance programs.
CLU Fundamentals of Estate Planning Questions and Answers
An individual dies without a valid will, leaving behind a spouse and two minor children.
How will the deceased's separate property typically be distributed under intestate succession laws?