Financial Advisor Tax Planning Strategies for Financial Advisors 2 — Questions and Answers
Question 1: Which estate planning strategy allows a donor to gift assets while retaining an income stream, with the remainder passing to charity?
- Charitable Remainder Trust (CRT) (Correct answer)
- Grantor Retained Annuity Trust (GRAT)
- Irrevocable Life Insurance Trust (ILIT)
- Qualified Personal Residence Trust (QPRT)
Correct answer: Charitable Remainder Trust (CRT)
A Charitable Remainder Trust provides the donor with income for life or a term of years, with the remaining assets passing to a charity, generating a partial charitable deduction.
Question 2: For 2024, what is the annual federal gift tax exclusion per recipient?
- $15,000
- $16,000
- $17,000
- $18,000 (Correct answer)
Correct answer: $18,000
For 2024, the annual gift tax exclusion is $18,000 per recipient, allowing donors to give up to this amount to any number of individuals without using lifetime exemption.
Question 3: The step-up in basis at death means that inherited assets receive a new cost basis equal to:
- The original purchase price paid by the decedent
- The fair market value at the date of the decedent's death (Correct answer)
- The average of purchase price and date-of-death value
- The value reported on the estate tax return less estate taxes paid
Correct answer: The fair market value at the date of the decedent's death
Under IRC Section 1014, inherited assets receive a stepped-up cost basis equal to their fair market value on the date of the owner's death, potentially eliminating capital gains tax on lifetime appreciation.
Question 4: Qualified Opportunity Zone (QOZ) investments allow investors to:
- Receive tax-free dividends on investments
- Defer and potentially reduce capital gains taxes by investing in designated economically distressed areas (Correct answer)
- Deduct losses from QOZ investments against ordinary income
- Avoid estate taxes on QOZ fund investments
Correct answer: Defer and potentially reduce capital gains taxes by investing in designated economically distressed areas
Qualified Opportunity Zone investments allow investors to defer capital gains by investing within 180 days, with potential gain reduction and tax-free appreciation if held for 10+ years.
Question 5: Which of the following is a tax-efficient strategy for a high-income client with a large traditional IRA who wants to reduce future RMDs?
- Contributing to a taxable brokerage account
- Converting portions of the traditional IRA to a Roth IRA in low-income years (Correct answer)
- Taking maximum distributions before age 59½
- Investing the IRA in tax-exempt municipal bonds
Correct answer: Converting portions of the traditional IRA to a Roth IRA in low-income years
Converting traditional IRA assets to a Roth IRA reduces future RMDs because Roth IRAs have no RMD requirements, and conversions in lower-income years minimize the tax cost.
Question 6: What is 'asset location' in tax-efficient portfolio management?
- Choosing which state to domicile investment accounts
- Placing investments in the most tax-advantaged account types based on their tax characteristics (Correct answer)
- Allocating assets geographically across international markets
- Determining the physical custody location of securities
Correct answer: Placing investments in the most tax-advantaged account types based on their tax characteristics
Asset location is the strategy of placing tax-inefficient assets (like bonds and REITs) in tax-deferred accounts and tax-efficient assets (like index funds) in taxable accounts.
Financial Advisor Tax Planning Strategies for Financial Advisors 2
Which estate planning strategy allows a donor to gift assets while retaining an income stream, with the remainder passing to charity?