CTA Estate, Gift, and Trust Taxation 2 — Questions and Answers
Question 1: An irrevocable life insurance trust (ILIT) is used primarily to:
- Provide income tax deductions for premium payments
- Remove life insurance proceeds from the insured's taxable estate (Correct answer)
- Avoid paying income tax on investment earnings
- Ensure equal distribution of assets to all heirs
Correct answer: Remove life insurance proceeds from the insured's taxable estate
An ILIT holds a life insurance policy outside the insured's estate, so death benefits pass to beneficiaries free of estate tax.
Question 2: What is the marital deduction in estate tax law?
- A credit equal to 50% of the estate value
- An unlimited deduction for assets passing to a US citizen surviving spouse (Correct answer)
- A deduction for assets left to children
- A flat $5 million exemption for married couples
Correct answer: An unlimited deduction for assets passing to a US citizen surviving spouse
The unlimited marital deduction allows estates to transfer an unlimited amount of assets to a surviving US citizen spouse free of estate tax.
Question 3: A Qualified Personal Residence Trust (QPRT) allows the grantor to:
- Deduct mortgage interest at an enhanced rate
- Transfer a home out of the estate at a discounted gift tax value while retaining use for a term of years (Correct answer)
- Avoid property taxes on a primary residence
- Convert the home's equity into tax-free income
Correct answer: Transfer a home out of the estate at a discounted gift tax value while retaining use for a term of years
A QPRT transfers a residence to heirs at a reduced gift tax value by retaining the right to live in the home for a specified term, leveraging the Section 7520 rate.
Question 4: Which trust structure allows a grantor to transfer assets while retaining an income stream, with the remainder passing to charity?
- Charitable lead trust (CLT)
- Charitable remainder trust (CRT) (Correct answer)
- Irrevocable life insurance trust
- Dynasty trust
Correct answer: Charitable remainder trust (CRT)
A CRT pays an income stream (annuity or unitrust) to the grantor or other beneficiaries for a term, with the remainder going to charity.
Question 5: Portability of the estate tax exemption allows a surviving spouse to:
- Transfer unused exemption to children tax-free
- Use the deceased spouse's unused estate tax exemption in addition to their own (Correct answer)
- Elect to be taxed at the deceased spouse's marginal rate
- Avoid estate taxes entirely
Correct answer: Use the deceased spouse's unused estate tax exemption in addition to their own
Portability allows the surviving spouse to elect to use any unused federal estate tax exemption of the predeceased spouse, effectively doubling the combined exemption.
Question 6: Income earned by a trust that is not distributed to beneficiaries is taxed:
- At the grantor's individual tax rate
- At the trust's compressed tax brackets, which reach the top rate at lower income levels (Correct answer)
- At a flat 21% corporate rate
- Tax-free until distributed
Correct answer: At the trust's compressed tax brackets, which reach the top rate at lower income levels
Undistributed trust income is taxed within the trust at highly compressed brackets, reaching the 37% top rate at only $15,200 of taxable income in 2024.
CTA Estate, Gift, and Trust Taxation 2
An irrevocable life insurance trust (ILIT) is used primarily to: