CRPC - Chartered Retirement Planning Counselor Estate Planning Objectives Questions and Answers — Questions and Answers
Question 1: Which of the following represents the MOST fundamental objective of creating an estate plan?
- To eliminate all potential estate and inheritance taxes.
- To ensure the client's assets are transferred to the desired people or entities in the intended manner. (Correct answer)
- To guarantee that all of the client's assets will avoid the probate process.
- To maximize the financial return on all estate assets for the benefit of the heirs.
Correct answer: To ensure the client's assets are transferred to the desired people or entities in the intended manner.
While tax minimization, probate avoidance, and asset growth are all important goals, the most fundamental purpose of an estate plan is to provide for the orderly transfer of assets according to the client's specific wishes. This ensures their legacy is handled as they intended.
Question 2: A client, Sarah, is a 70-year-old widow in good health. She wants to ensure her daughter can manage her finances and make healthcare decisions if she becomes unable to do so herself. Which combination of estate planning documents is MOST essential to meet these specific objectives during her lifetime?
- A durable power of attorney for finances and a healthcare proxy/power of attorney. (Correct answer)
- A revocable living trust and a last will and testament.
- An irrevocable life insurance trust (ILIT) and a living will.
- A letter of instruction and a testamentary trust.
Correct answer: A durable power of attorney for finances and a healthcare proxy/power of attorney.
A durable power of attorney for finances grants the authority to manage financial affairs, and a healthcare proxy (or medical power of attorney) grants the authority to make medical decisions. These documents are specifically designed for managing affairs during a period of incapacity, which is the client's stated goal. A will and testamentary trust are only effective after death, and an ILIT serves a different purpose related to life insurance and estate taxes.
Question 3: A client has a large estate composed primarily of an illiquid family business and real estate. A primary objective of their estate plan is to ensure funds are available to pay significant estate taxes and settlement costs without forcing the sale of these core assets. Which of the following strategies BEST addresses this specific objective?
- Establishing a series of annual exclusion gifts to family members.
- Maximizing contributions to qualified retirement plans.
- Creating a detailed letter of instruction for the executor.
- Purchasing a life insurance policy, potentially held in an Irrevocable Life Insurance Trust (ILIT). (Correct answer)
Correct answer: Purchasing a life insurance policy, potentially held in an Irrevocable Life Insurance Trust (ILIT).
Life insurance provides an immediate, income-tax-free death benefit that creates liquidity to pay estate taxes, debts, and administrative expenses. This prevents the forced, and often unfavorable, sale of illiquid assets like a business or real estate. Placing the policy in an ILIT can also remove the proceeds from the taxable estate.
Question 4: John and Mary, a married couple, own their home as Joint Tenants with Rights of Survivorship (JTWROS). John also has a brokerage account titled solely in his name, with his son from a previous marriage named as the beneficiary in his will. If John dies, what is the most likely disposition of these two assets?
- Both the home and the brokerage account will pass to Mary.
- Both assets will be subject to the probate process before distribution.
- The home will pass directly to Mary outside of probate, while the brokerage account will be distributed through probate according to the will. (Correct answer)
- The home will be divided between Mary and John's son, and the brokerage account will go to his son.
Correct answer: The home will pass directly to Mary outside of probate, while the brokerage account will be distributed through probate according to the will.
Property titled as JTWROS passes directly to the surviving joint owner(s) by operation of law, overriding the will and avoiding probate. The brokerage account, being titled only in John's name without a transfer-on-death (TOD) designation, is a probate asset and will be controlled by the terms of his valid will.
Question 5: One of the key objectives in estate planning is to minimize transfer costs. Besides federal and state estate taxes, which of the following represents a significant cost that a well-structured estate plan using a revocable living trust aims to reduce?
- Probate court fees and legal expenses. (Correct answer)
- Annual gift tax exclusions.
- Capital gains taxes realized during the decedent's life.
- Generation-skipping transfer tax on all bequests to grandchildren.
Correct answer: Probate court fees and legal expenses.
Probate can be a lengthy and expensive public court process involving filing fees, executor commissions, and attorney's fees. A primary reason for using a revocable living trust is to hold title to assets so they can pass to beneficiaries outside of the probate process, thereby reducing these specific administrative costs.
Question 6: A client with a large estate wishes to leave a significant legacy to a university while also receiving an income stream for life and a current income tax deduction. Which of the following estate planning tools is specifically designed to meet all these objectives?
- A 529 College Savings Plan.
- A direct bequest in a last will and testament.
- A Charitable Remainder Trust (CRT). (Correct answer)
- Gifting appreciated stock directly to the university.
Correct answer: A Charitable Remainder Trust (CRT).
A Charitable Remainder Trust (CRT) allows the donor to transfer assets to an irrevocable trust, receive a potential income stream for a set term or for life, get a partial charitable income tax deduction in the year of the gift, and have the remainder of the trust assets pass to the named charity upon their death. This tool uniquely combines a lifetime income stream, a current tax benefit, and a future charitable gift.
CRPC - Chartered Retirement Planning Counselor Estate Planning Objectives Questions and Answers
Which of the following represents the MOST fundamental objective of creating an estate plan?