CPB CPB Tax Planning & Optimization 2 — Questions and Answers
Question 1: What does QSBS stand for in the context of tax planning for high-net-worth clients?
- Qualified Small Business Stock (Correct answer)
- Qualified Savings Bond Security
- Qualified Standard Basis System
- Quarterly Stock Basis Statement
Correct answer: Qualified Small Business Stock
Qualified Small Business Stock (QSBS) under IRC Section 1202 can allow eligible investors to exclude up to 100% of capital gains from qualifying stock sales.
Question 2: Which IRS code section governs tax-deferred like-kind exchanges for real property?
- Section 401(k)
- Section 1031 (Correct answer)
- Section 529
- Section 1014
Correct answer: Section 1031
Section 1031 allows investors to defer capital gains taxes by exchanging one investment property for another like-kind property, subject to strict timing rules.
Question 3: The generation-skipping transfer (GST) tax is primarily designed to prevent:
- Double taxation on dividend income
- Bypassing estate taxes by passing wealth directly to grandchildren or later generations (Correct answer)
- Avoiding gift taxes on annual exclusion gifts
- Deferring income recognition indefinitely
Correct answer: Bypassing estate taxes by passing wealth directly to grandchildren or later generations
The GST tax imposes an additional layer of tax when assets skip a generation, preventing families from avoiding estate taxes at the children's level.
Question 4: A Grantor Retained Annuity Trust (GRAT) is primarily used to:
- Defer income taxes on investment returns
- Transfer future asset appreciation out of an estate with minimal gift tax cost (Correct answer)
- Protect assets from creditor claims
- Fund charitable organizations while generating income
Correct answer: Transfer future asset appreciation out of an estate with minimal gift tax cost
A GRAT is structured so the grantor receives an annuity stream and any appreciation above the IRS hurdle rate passes to heirs free of gift tax.
Question 5: In estate and gift tax planning, the 'unified credit' refers to:
- A tax deduction available to holders of unified accounts
- A lifetime exemption amount that offsets both gift and estate taxes (Correct answer)
- A credit for foreign taxes paid on overseas assets
- A business expense deduction for unified operations
Correct answer: A lifetime exemption amount that offsets both gift and estate taxes
The unified credit provides a lifetime exemption (currently over $13 million per individual) that can be applied against taxable gifts during life and the estate at death.
Question 6: Which strategy allows high-income earners who exceed the Roth IRA income limits to still fund a Roth IRA?
- Direct rollover from a 401(k)
- Backdoor Roth conversion (Correct answer)
- In-service distribution
- Qualified rollover from a pension
Correct answer: Backdoor Roth conversion
The backdoor Roth strategy involves making a non-deductible Traditional IRA contribution and then converting it to a Roth IRA, bypassing income limits.
CPB CPB Tax Planning & Optimization 2
What does QSBS stand for in the context of tax planning for high-net-worth clients?