AEP Taxation in Estate Planning

Question 1

Which federal tax is directly associated with transferring property at death?

Accepted Answer

Estate tax

Answer

The federal tax directly associated with transferring property at death is the estate tax. This tax is levied on the total value of a deceased person's assets, including cash, real estate, stocks, and other property, before distribution to heirs. It is distinct from income tax, which applies to earnings, and gift tax, which applies to transfers made during life.

Question 2

Which of the following is NOT subject to federal estate tax?

Accepted Answer

Life insurance not owned by the deceased

Answer

Life insurance proceeds are generally included in the deceased's taxable estate if the deceased owned the policy or had incidents of ownership at the time of death. However, if the life insurance policy is neither owned by the deceased nor payable to their estate, such as a policy owned by another individual or an irrevocable life insurance trust, the proceeds are typically not subject to federal estate tax in the deceased's estate. This is a common estate planning strategy to remove assets from the taxable estate.

Question 3

What is the annual exclusion amount for gifts under the federal gift tax (as of recent IRS rules)?

Accepted Answer

$17,000

Answer

As of recent IRS rules (specifically for 2023, and often updated annually), the annual exclusion amount for gifts under the federal gift tax is $17,000. This means an individual can give up to $17,000 per year to any number of recipients without incurring gift tax or using up any of their lifetime gift tax exemption. This amount is adjusted periodically for inflation.

Question 4

What does the step-up in basis rule apply to?

Accepted Answer

Inherited assets

Answer

The step-up in basis rule applies specifically to inherited assets. When an asset is inherited, its cost basis for the beneficiary is "stepped up" to its fair market value on the date of the decedent's death, rather than the original purchase price. This rule is highly advantageous for beneficiaries, as it can significantly reduce or even eliminate capital gains tax if they choose to sell the asset shortly after inheritance.

Question 5

Which tax applies when a person gives over the annual exclusion amount to another individual?

Accepted Answer

Gift tax

Answer

When an individual transfers assets to another person during their lifetime, and the value of that transfer exceeds the annual gift tax exclusion amount, the federal gift tax applies. While the donor is generally responsible for paying the gift tax, they can use a portion of their lifetime gift and estate tax exemption to cover the taxable gift, thereby avoiding immediate payment of the tax. This tax is distinct from estate tax, which applies at death, and capital gains tax, which applies to profits from asset sales.

(AEP) Accredited Estate Planner Practice Test

(AEP) Accredited Estate Planner Practice Test

AEP Taxation in Estate Planning