CTFA Trust and Financial Advisor Certification 3

Question 1

A grantor establishes an irrevocable life insurance trust (ILIT) and transfers a policy to it. To avoid estate inclusion under IRC §2042, what transfer rule must be satisfied?

Accepted Answer

The grantor must survive the transfer by more than 3 years under IRC §2035

Answer

Under IRC §2035, a life insurance policy transferred within three years of death is pulled back into the taxable estate; the grantor must survive more than three years for the transfer to be effective.

Question 2

Which type of trust allows the grantor to retain a fixed annuity payment for a specified term, with the remainder passing to heirs at reduced gift tax value?

Accepted Answer

Grantor Retained Annuity Trust (GRAT)

Answer

A GRAT allows the grantor to retain fixed annuity payments for a term, transferring any appreciation above the IRS §7520 hurdle rate to beneficiaries gift-tax efficiently.

Question 3

A trust document grants the trustee discretionary authority to distribute principal for a beneficiary's 'health, education, maintenance, and support' (HEMS). This standard is significant because it:

Accepted Answer

Keeps trust assets outside the beneficiary's taxable estate if the beneficiary is also the trustee

Answer

The HEMS standard is an ascertainable standard under IRC §2041, which prevents trust assets from being included in a beneficiary-trustee's gross estate.

Question 4

When a fiduciary files IRS Form 1041 for a complex trust, which of the following income items is NOT eligible for the distribution deduction?

Accepted Answer

Capital gains allocated to corpus and not distributed

Answer

Capital gains allocated to trust corpus are generally not included in distributable net income (DNI) and therefore cannot be deducted on Form 1041 via the distribution deduction.

Question 5

A client wants to minimize estate taxes while maintaining some access to trust assets. Which trust structure best achieves this goal?

Accepted Answer

Spousal Lifetime Access Trust (SLAT) naming the spouse as beneficiary

Answer

A SLAT removes assets from the grantor's estate while allowing indirect access through the beneficiary spouse, balancing estate tax reduction with some retained family access.

CTFA - Certified Trust and Fiduciary Advisor Practice Test

CTFA - Certified Trust and Fiduciary Advisor Practice Test

CTFA Trust and Financial Advisor Certification 3