CTC Estate & Gift Tax Planning 2 — Questions and Answers
Question 1: What is the primary estate planning advantage of a Grantor Retained Annuity Trust (GRAT)?
- Asset appreciation above the IRS Section 7520 hurdle rate passes to beneficiaries free of additional gift tax (Correct answer)
- Assets transferred to a GRAT are immediately and permanently removed from the grantor's taxable estate
- The grantor receives a charitable income tax deduction equal to the present value of the annuity stream
- Transfers to a GRAT are excluded from the gift tax annual reporting requirements
Correct answer: Asset appreciation above the IRS Section 7520 hurdle rate passes to beneficiaries free of additional gift tax
A GRAT is structured so the grantor retains an annuity equal to the transferred value plus the Section 7520 rate; any growth above that rate passes to remainder beneficiaries as a tax-efficient wealth transfer.
Question 2: A Qualified Personal Residence Trust (QPRT) is primarily designed to:
- Transfer a personal residence to beneficiaries at a reduced gift tax value while the grantor retains the right to reside there for a specified term (Correct answer)
- Allow rental income from a personal residence to accumulate tax-free for the benefit of trust beneficiaries
- Convert a personal residence into a charitable remainder trust to eliminate estate taxes on the property
- Provide an automatic stepped-up basis for a residence transferred to an irrevocable trust during the owner's lifetime
Correct answer: Transfer a personal residence to beneficiaries at a reduced gift tax value while the grantor retains the right to reside there for a specified term
A QPRT allows the grantor to transfer a personal residence at a discounted gift tax value, since the taxable gift is the remainder interest only; the grantor's retained right to use the home for the trust term reduces the gift's present value.
Question 3: Which statement best describes the structure of a Charitable Remainder Trust (CRT)?
- The grantor transfers assets to the trust, receives an income stream for life or a specified term, and the remainder passes to a qualified charity (Correct answer)
- A charity receives the current income stream from trust assets while the remainder is distributed to the grantor's heirs at death
- All trust income is distributed annually to designated charities, with the principal returning to the grantor at the trust's termination
- The grantor retains legal title to assets but directs periodic charitable contributions from the trust's income
Correct answer: The grantor transfers assets to the trust, receives an income stream for life or a specified term, and the remainder passes to a qualified charity
A CRT provides an income stream (annuity or unitrust payment) to non-charitable beneficiaries for life or a term of years, after which the remaining assets pass to charity; the grantor receives an upfront charitable income tax deduction for the present value of the charitable remainder.
Question 4: The 'applicable exclusion amount' for federal estate and gift tax purposes refers to:
- The cumulative lifetime amount a taxpayer may transfer free of estate and gift tax, shared across both lifetime gifts and the taxable estate (Correct answer)
- The annual per-donee amount that may be given without incurring gift tax liability
- The maximum value of assets that may be held in a revocable living trust without triggering estate tax
- The charitable deduction allowed for bequests made to qualifying organizations in a decedent's estate
Correct answer: The cumulative lifetime amount a taxpayer may transfer free of estate and gift tax, shared across both lifetime gifts and the taxable estate
The applicable exclusion amount (basic exclusion amount) is a unified lifetime credit against both gift and estate taxes; taxable gifts made during life reduce the exemption available at death.
Question 5: Which valuation discounts are most commonly applied to transferred minority interests in a Family Limited Partnership (FLP)?
- Lack of control discount and lack of marketability discount (Correct answer)
- Minority interest premium and geographic illiquidity discount
- Blockage discount and accrued but unpaid income discount
- Cost basis discount and embedded tax liability discount
Correct answer: Lack of control discount and lack of marketability discount
Minority interests in an FLP typically qualify for a lack of control (minority interest) discount and a lack of marketability discount because the interest holder cannot unilaterally liquidate the entity or easily sell the interest.
Question 6: Under IRC Section 2032, an executor may elect the alternate valuation date when:
- Valuing the estate six months after death would reduce both the gross estate value and the total estate tax liability (Correct answer)
- Estate assets have declined in value at any point within 12 months of the decedent's death
- The election reduces estate administration expenses regardless of its effect on the gross estate value
- The estate tax liability is less than $1 million and assets are primarily illiquid
Correct answer: Valuing the estate six months after death would reduce both the gross estate value and the total estate tax liability
The alternate valuation date election under IRC Section 2032 is valid only if it reduces both the value of the gross estate and the estate tax liability; using it solely to reduce one without the other is not permitted.
Question 7: The '529 plan superfunding' strategy in estate planning allows a donor to:
- Front-load up to five years of annual gift exclusions into a 529 plan in a single year, removing the lump sum from the taxable estate immediately (Correct answer)
- Make annual 529 contributions for all grandchildren simultaneously without using any gift tax exclusion
- Convert an existing 529 plan into an irrevocable trust to maximize estate tax savings upon the donor's death
- Use 529 plan assets to fund charitable contributions instead of qualified education expenses
Correct answer: Front-load up to five years of annual gift exclusions into a 529 plan in a single year, removing the lump sum from the taxable estate immediately
IRC Section 529(c)(2)(B) permits a donor to elect to treat a large 529 contribution as if made ratably over five years, allowing up to five times the annual exclusion to be removed from the estate in a single year.
CTC Estate & Gift Tax Planning 2
What is the primary estate planning advantage of a Grantor Retained Annuity Trust (GRAT)?