Financial Advisor Estate Planning — Questions and Answers
Question 1: What is the primary advantage of a revocable living trust over a traditional will?
- It removes assets from the grantor's taxable estate
- It avoids probate and keeps asset distribution private (Correct answer)
- It protects assets from the grantor's creditors during life
- It qualifies the grantor for Medicaid by transferring assets to heirs
Correct answer: It avoids probate and keeps asset distribution private
A revocable living trust avoids probate — the public court process for validating a will and distributing assets — and keeps the distribution private. However, because the grantor retains control, the trust assets remain in the taxable estate and are reachable by creditors.
Question 2: For 2024, the annual gift tax exclusion allows an individual to give how much per recipient without filing a gift tax return or reducing their lifetime exemption?
- $13,000
- $15,000
- $17,000
- $18,000 (Correct answer)
Correct answer: $18,000
The annual gift tax exclusion for 2024 is $18,000 per recipient. Gifts at or below this threshold do not require filing Form 709 and do not reduce the donor's lifetime unified credit. A married couple can combine exclusions (gift splitting) to transfer $36,000 per recipient per year.
Question 3: Which estate planning document designates a specific individual to make medical decisions for a person who becomes incapacitated?
- Durable power of attorney for finances
- Living will (advance directive)
- Healthcare proxy (durable power of attorney for healthcare) (Correct answer)
- Testamentary trust
Correct answer: Healthcare proxy (durable power of attorney for healthcare)
A healthcare proxy or durable power of attorney for healthcare names a specific agent to make medical decisions on the principal's behalf if incapacitated. A living will states the principal's own wishes but does not delegate authority to another person; a financial durable POA covers only financial matters.
Question 4: A client dies without a valid will. How are her assets distributed?
- The probate court designs a custom distribution plan based on the client's known wishes
- Assets pass entirely to the surviving spouse regardless of other heirs
- State intestacy laws determine distribution, typically prioritizing spouse and children (Correct answer)
- Assets escheat to the state until claimed by heirs within seven years
Correct answer: State intestacy laws determine distribution, typically prioritizing spouse and children
Dying without a valid will is called dying intestate. State intestacy statutes then dictate the distribution order — usually spouse first, then children, then more distant relatives. The specific shares vary by state. Assets do not automatically go to the state unless there are truly no heirs.
Question 5: Which trust structure is most commonly used to keep life insurance death benefits out of the insured's taxable estate?
- Revocable living trust
- Irrevocable Life Insurance Trust (ILIT) (Correct answer)
- Charitable remainder trust (CRT)
- Spendthrift trust
Correct answer: Irrevocable Life Insurance Trust (ILIT)
An Irrevocable Life Insurance Trust (ILIT) owns the life insurance policy, so at death the proceeds are paid to the trust — not the insured's estate — keeping them out of the taxable estate. A revocable trust does not achieve this because the grantor retains control and the assets remain estate-taxable.
Question 6: The unlimited marital deduction allows a U.S. citizen to transfer what amount to a U.S. citizen surviving spouse free of federal estate or gift tax?
- Up to the current federal estate tax exemption amount
- Up to $5 million, indexed for inflation
- An unlimited amount (Correct answer)
- Only amounts that do not exceed the annual gift tax exclusion
Correct answer: An unlimited amount
The unlimited marital deduction permits transfers of any amount between U.S. citizen spouses — during life or at death — completely free of federal estate and gift tax. This defers rather than eliminates the tax; the estate tax applies when the surviving spouse later dies and passes assets to non-spouse heirs.
Financial Advisor Estate Planning
What is the primary advantage of a revocable living trust over a traditional will?