CEA Taxation & Legal Considerations

Question 1

What is estate tax?

Accepted Answer

Tax on asset transfer at death

Answer

Estate tax is a federal or state tax levied on the total value of a deceased person's assets before they are distributed to heirs. It is a tax on the privilege of transferring property at death, rather than on the inheritance itself. The tax applies only to estates exceeding a certain exemption threshold, and careful estate planning can help minimize its impact.

Question 2

What is gift tax?

Accepted Answer

Tax on property transferred during life

Answer

Gift tax is a federal tax imposed on the transfer of money or property from one person to another while the giver is still alive, without receiving full value in return. The purpose is to prevent individuals from avoiding estate taxes by giving away all their assets before death. There are annual exclusion limits and a lifetime exemption amount that allow for tax-free gifting up to certain thresholds.

Question 3

What is a power of attorney?

Accepted Answer

Authorization to act for another

Answer

A power of attorney (POA) is a legal document that grants one person (the agent or attorney-in-fact) the authority to act on behalf of another person (the principal) in specified matters. This authority can be broad or limited, covering financial, medical, or other legal decisions. It is a vital tool for managing affairs if the principal becomes unavailable or incapacitated.

Question 4

What is capital gains tax?

Accepted Answer

Tax on profit from asset sale

Answer

Capital gains tax is a tax levied on the profit realized from the sale of a non-inventory asset, such as stocks, bonds, real estate, or other investments. The gain is calculated as the difference between the asset's selling price and its original purchase price (cost basis). This tax is an important consideration in investment and estate planning, as inherited assets may receive a 'step-up in basis' which can reduce future capital gains liability for heirs.

Question 5

What is probate?

Accepted Answer

Will validation process

Answer

Probate is the legal process that validates a deceased person's will and oversees the administration of their estate. During probate, the court confirms the will's authenticity, identifies and inventories the deceased's assets, pays off debts and taxes, and then distributes the remaining property to the rightful heirs or beneficiaries. This process ensures the orderly transfer of assets according to legal requirements.

(CEA) Certified Estate Advisor Practice Test

(CEA) Certified Estate Advisor Practice Test

CEA Taxation & Legal Considerations