CRPC Estate Planning Objectives 4 — Questions and Answers
Question 1: Which of the following best describes the role of a trustee in an estate plan?
- To distribute assets according to the will after probate
- To file the estate tax return on behalf of the heirs
- To manage trust assets and administer the trust according to its terms for the benefit of beneficiaries (Correct answer)
- To serve as personal representative of the probate estate
Correct answer: To manage trust assets and administer the trust according to its terms for the benefit of beneficiaries
A trustee has a fiduciary duty to manage and distribute trust assets in accordance with the trust document and in the best interests of the beneficiaries.
Question 2: Which strategy is most effective for transferring a family business to the next generation while minimizing gift and estate taxes?
- Gifting the entire business at once using the annual exclusion
- Using a family limited partnership (FLP) with valuation discounts (Correct answer)
- Converting the business to a sole proprietorship before death
- Placing the business in a QTIP trust
Correct answer: Using a family limited partnership (FLP) with valuation discounts
A family limited partnership can achieve valuation discounts for lack of control and lack of marketability, reducing the taxable value of the transferred interests.
Question 3: What is the '3-year rule' related to estate planning and life insurance?
- Life insurance must be held for 3 years before it qualifies for the marital deduction
- If the insured transfers a life insurance policy and dies within 3 years, the death benefit is included in the taxable estate (Correct answer)
- Life insurance premiums must be paid for 3 years before the ILIT is valid
- The IRS can audit an estate for up to 3 years after the return is filed
Correct answer: If the insured transfers a life insurance policy and dies within 3 years, the death benefit is included in the taxable estate
Under IRC Section 2035, if an insured transfers a life insurance policy to an ILIT and dies within three years of the transfer, the death benefit is pulled back into the taxable estate.
Question 4: A charitable lead trust (CLT) is designed to:
- Provide income to the donor during their lifetime with remainder to charity
- Provide income payments to charity for a period, then pass remaining assets to heirs (Correct answer)
- Transfer assets to charity in exchange for a charitable gift annuity
- Eliminate all estate taxes for a charitable donor
Correct answer: Provide income payments to charity for a period, then pass remaining assets to heirs
In a CLT, the charity receives income (annuity or unitrust payments) for a specified term, and the remaining assets pass to the donor's heirs at reduced transfer tax cost.
Question 5: Under the Uniform Transfers to Minors Act (UTMA), at what point does the custodian lose control of the assets?
- When the minor completes high school
- When the minor reaches the age of majority specified by state law (typically 18-25) (Correct answer)
- When the minor gets married
- At age 30 regardless of state law
Correct answer: When the minor reaches the age of majority specified by state law (typically 18-25)
UTMA accounts must be distributed to the beneficiary when they reach the age of majority under state law, which varies but is typically between 18 and 25.
Question 6: What is the primary purpose of a spendthrift provision in a trust?
- To allow the beneficiary to borrow against the trust principal
- To protect trust assets from the beneficiary's creditors and from the beneficiary's own financial mismanagement (Correct answer)
- To restrict charitable distributions from the trust
- To trigger a step-up in basis for trust assets
Correct answer: To protect trust assets from the beneficiary's creditors and from the beneficiary's own financial mismanagement
A spendthrift provision prevents the beneficiary from assigning their interest and prevents creditors from reaching trust assets before distribution.
Question 7: Which estate planning document names a guardian for minor children?
- Revocable living trust
- Durable power of attorney
- Last will and testament (Correct answer)
- Advance healthcare directive
Correct answer: Last will and testament
A last will and testament is the appropriate legal document for nominating a guardian to care for minor children if both parents die.
CRPC Estate Planning Objectives 4
Which of the following best describes the role of a trustee in an estate plan?