CRPC Estate Planning Objectives 3 — Questions and Answers
Question 1: An irrevocable life insurance trust (ILIT) is primarily used to:
- Provide the trustee control over investment of premiums
- Keep life insurance proceeds out of the insured's taxable estate (Correct answer)
- Allow the insured to borrow against the cash value tax-free
- Ensure the surviving spouse receives all insurance proceeds
Correct answer: Keep life insurance proceeds out of the insured's taxable estate
An ILIT owns a life insurance policy so that the death benefit is excluded from the insured's gross estate, reducing potential estate taxes.
Question 2: The annual gift tax exclusion allows an individual to give how much per recipient in 2024 without using their lifetime exemption?
- $15,000
- $16,000
- $17,000
- $18,000 (Correct answer)
Correct answer: $18,000
For 2024, the annual gift tax exclusion is $18,000 per recipient, indexed for inflation in $1,000 increments.
Question 3: What is a generation-skipping transfer (GST) tax designed to prevent?
- Double taxation on assets transferred at death
- Avoidance of estate taxes by skipping a generation of heirs (Correct answer)
- Rapid liquidation of estate assets
- Transfer of real property to non-family members
Correct answer: Avoidance of estate taxes by skipping a generation of heirs
The GST tax imposes an additional tax on transfers made to individuals two or more generations below the transferor to prevent estate tax avoidance.
Question 4: Which estate planning strategy involves transferring appreciating assets to family members now so future growth occurs outside the taxable estate?
- Charitable remainder unitrust (CRUT)
- Grantor retained annuity trust (GRAT) (Correct answer)
- Special needs trust
- Spendthrift trust
Correct answer: Grantor retained annuity trust (GRAT)
A GRAT allows the grantor to transfer assets to a trust, retain an annuity for a term, and if growth exceeds the IRS hurdle rate, the excess passes to heirs gift-tax free.
Question 5: A special needs trust is established primarily to:
- Reduce estate taxes for high-net-worth families
- Provide for a disabled beneficiary without disqualifying them from government benefits (Correct answer)
- Transfer a family business to the next generation
- Fund education expenses for grandchildren
Correct answer: Provide for a disabled beneficiary without disqualifying them from government benefits
A special needs trust supplements — but does not replace — government benefits, ensuring the beneficiary retains eligibility for programs like Medicaid and SSI.
Question 6: When is a step-up in cost basis most beneficial in estate planning?
- When gifting assets during lifetime to reduce estate taxes
- When heirs inherit highly appreciated assets, eliminating capital gains on growth during the decedent's life (Correct answer)
- When converting a traditional IRA to a Roth IRA
- When transferring assets to a charitable remainder trust
Correct answer: When heirs inherit highly appreciated assets, eliminating capital gains on growth during the decedent's life
Assets inherited at death receive a step-up in basis to the fair market value on the date of death, eliminating the capital gains tax on appreciation during the decedent's lifetime.
Question 7: What is the primary disadvantage of an outright bequest to a minor child under age 18?
- It triggers generation-skipping transfer tax automatically
- A court-appointed guardian of the property must manage the assets until the child reaches majority (Correct answer)
- The assets are subject to a 10% early withdrawal penalty
- The child must pay income tax on the entire inheritance immediately
Correct answer: A court-appointed guardian of the property must manage the assets until the child reaches majority
Minors cannot legally own significant property outright, so a court-appointed guardian (or conservator) must oversee the assets, which can be costly and restrictive.
CRPC Estate Planning Objectives 3
An irrevocable life insurance trust (ILIT) is primarily used to: