Financial Planning Flashcards

A client moves an existing life insurance policy into an irrevocable life insurance trust (ILIT) and dies two years later. What happens?

Answer: The proceeds are included in the estate under the three-year rule of §2035

Under §2035, policies transferred within three years of death are pulled back into the gross estate, so ILITs often buy new policies instead.

How does a grantor retained annuity trust (GRAT) move wealth to heirs while using little gift tax exemption?

Answer: Appreciation above the §7520 hurdle rate passes to the remainder beneficiaries

A zeroed-out GRAT gives back the original value plus the §7520 rate through annuities, so any excess growth passes to heirs gift-tax free.

A married client wants to give one grandchild twice the annual exclusion amount, using spousal gift splitting. What is required?

Answer: Both spouses must consent on a Form 709 gift tax return

Gift splitting must be elected, with spousal consent, on a filed Form 709, even if no tax is owed.

After the first spouse's death, how does the surviving spouse keep the deceased spouse's unused estate tax exemption (DSUE)?

Answer: Elect portability on a timely filed Form 706 for the deceased spouse's estate

Portability must be elected on a timely filed estate tax return (Form 706), even if no estate tax is due.

A client holds highly appreciated, low-yield stock and wants lifetime income, a charitable deduction, and no immediate capital gains tax on a sale. Which tool fits best?

Answer: A charitable remainder trust

A CRT can sell the assets tax-free inside the trust, pay the donor an income stream, and give a partial charitable deduction for the remainder interest.

A client retired at 62 and plans to delay Social Security and RMDs until later. Why might this be a good window for Roth conversions?

Answer: Lower taxable income in these gap years allows conversions at lower marginal brackets

Low-income years before Social Security and RMDs start let clients fill lower brackets with conversion income.

What income measure determines how much of a retiree's Social Security benefits is taxable, up to 85%?

Answer: Provisional income: AGI plus tax-exempt interest plus half of benefits

Provisional (combined) income above set thresholds makes up to 50% or 85% of benefits taxable.