CPB CPB Estate Planning & Trust Services 2 — Questions and Answers
Question 1: What is the unlimited marital deduction in federal estate tax planning?
- A tax break for married couples who file joint income tax returns
- An unlimited deduction allowing tax-free transfer of assets to a surviving US citizen spouse (Correct answer)
- A deduction reducing estate taxes based on years of marriage
- A reduced estate tax rate exclusively available to married couples
Correct answer: An unlimited deduction allowing tax-free transfer of assets to a surviving US citizen spouse
The unlimited marital deduction allows an unlimited amount of assets to pass to a surviving US citizen spouse estate-tax-free, though this only defers—not eliminates—the estate tax.
Question 2: A Qualified Terminable Interest Property (QTIP) trust is primarily structured to:
- Qualify investment assets for special capital gains treatment
- Provide the surviving spouse with income for life while ensuring assets ultimately pass to the grantor's chosen remainder beneficiaries (Correct answer)
- Shelter family business assets from estate taxation
- Fund charitable organizations while providing the grantor with a tax deduction
Correct answer: Provide the surviving spouse with income for life while ensuring assets ultimately pass to the grantor's chosen remainder beneficiaries
A QTIP trust qualifies for the marital deduction while allowing the first spouse to die to control who receives the remaining assets after the surviving spouse passes away.
Question 3: What is a dynasty trust in the context of private banking estate planning?
- A trust established exclusively for members of European noble families
- A long-term trust structured to hold and grow family wealth across multiple generations while avoiding estate tax at each generation (Correct answer)
- A trust used solely for business succession planning purposes
- A short-term charitable trust with a fixed 10-year term
Correct answer: A long-term trust structured to hold and grow family wealth across multiple generations while avoiding estate tax at each generation
A dynasty trust is designed to last for multiple generations (sometimes in perpetuity in states without a rule against perpetuities), sheltering assets from estate taxes at each generational transfer.
Question 4: Which legal document empowers a designated person to make medical and healthcare decisions for a client who becomes incapacitated?
- Last will and testament
- Durable power of attorney for healthcare (healthcare proxy) (Correct answer)
- Revocable living trust
- Letter of instruction
Correct answer: Durable power of attorney for healthcare (healthcare proxy)
A durable power of attorney for healthcare designates a healthcare agent to make medical decisions on behalf of an incapacitated person, surviving the principal's incapacity.
Question 5: What is the primary estate planning function of a Family Limited Partnership (FLP)?
- Reduce current income taxes on partnership business income
- Transfer wealth to family members at discounted valuations while the senior generation retains some management control (Correct answer)
- Avoid the probate process for all family assets
- Protect against the costs of long-term care and nursing home expenses
Correct answer: Transfer wealth to family members at discounted valuations while the senior generation retains some management control
An FLP allows seniors to gift limited partnership interests to heirs at discounts for lack of control and marketability, effectively transferring more wealth while using less of the gift tax exemption.
Question 6: In federal estate tax planning, what does 'portability' of the estate tax exemption mean?
- The ability to move domicile and change the state estate tax exposure
- A surviving spouse's ability to elect to use the deceased spouse's unused federal estate tax exemption (Correct answer)
- The transfer of retirement account balances without penalty upon the owner's death
- Moving a trust from one jurisdiction to another to take advantage of favorable laws
Correct answer: A surviving spouse's ability to elect to use the deceased spouse's unused federal estate tax exemption
Portability allows a surviving spouse to elect the Deceased Spousal Unused Exclusion (DSUE), effectively stacking both spouses' exemptions to shield a larger combined estate.
CPB CPB Estate Planning & Trust Services 2
What is the unlimited marital deduction in federal estate tax planning?