AEP Advanced Estate Planning Techniques

Question 1

What is the primary purpose of a Grantor Retained Annuity Trust (GRAT)?

Accepted Answer

To transfer assets with reduced gift tax liability.

Answer

A Grantor Retained Annuity Trust (GRAT) is an estate planning tool used to transfer appreciating assets to beneficiaries with minimal or no gift tax. The grantor places assets into the trust and receives an annuity payment for a specified term. If the assets appreciate beyond the IRS-assumed growth rate, the excess growth passes to the beneficiaries gift-tax free, effectively "freezing" the value of the gift for tax purposes.

Question 2

What is a key feature of an Irrevocable Life Insurance Trust (ILIT)?

Accepted Answer

It holds life insurance policies outside the taxable estate.

Answer

An Irrevocable Life Insurance Trust (ILIT) is specifically designed to own life insurance policies, removing the death benefit proceeds from the insured's taxable estate. By doing so, the ILIT helps avoid estate taxes on the insurance payout, which can be substantial. The trust is irrevocable, meaning the grantor gives up control over the policy, ensuring it is not included in their estate for tax purposes.

Question 3

What type of planning is a Family Limited Partnership (FLP) primarily used for?

Accepted Answer

Transferring wealth within families.

Answer

A Family Limited Partnership (FLP) is an estate planning tool primarily used to transfer wealth to younger generations while retaining some control and achieving valuation discounts for gift and estate tax purposes. Assets, such as real estate or business interests, are transferred into the FLP, and partnership interests are then gifted to family members. This structure can also offer asset protection benefits.

Question 4

How does a Charitable Remainder Trust (CRT) benefit estate planning?

Accepted Answer

It enables charitable giving with income and tax advantages.

Answer

A Charitable Remainder Trust (CRT) allows individuals to make a significant charitable donation while retaining an income stream for themselves or other non-charitable beneficiaries for a specified term or life. Upon the trust's termination, the remaining assets are distributed to the designated charity. This strategy offers immediate income tax deductions, potential capital gains tax avoidance on appreciated assets, and reduces the donor's taxable estate.

Question 5

What is one benefit of using a Qualified Personal Residence Trust (QPRT)?

Accepted Answer

It transfers property with valuation discounts.

Answer

A Qualified Personal Residence Trust (QPRT) is an estate planning tool that allows a homeowner to transfer their primary or secondary residence to beneficiaries at a reduced gift tax value. The grantor retains the right to live in the home for a specified term. After this term, the home passes to the beneficiaries, and any appreciation in value after the transfer is removed from the grantor's taxable estate, often at a discounted gift tax value due to the retained interest.

(AEP) Accredited Estate Planner Practice Test

(AEP) Accredited Estate Planner Practice Test

AEP Advanced Estate Planning Techniques