FREE Chartered Life Underwriter (CLU) Fundamentals of Estate Planning Questions and Answers

Question 1

Which of the following is a primary reason for establishing a revocable living trust as part of an estate plan?

Accepted Answer

To allow assets to pass to beneficiaries while avoiding the probate process.

Answer

A primary advantage of a revocable living trust is that assets properly funded into the trust can pass to the designated beneficiaries upon the grantor's death without going through the time-consuming, costly, and public process of probate. While a 'pour-over' will is still necessary, the trust is the main vehicle for asset distribution. It does not offer ultimate creditor protection (as an irrevocable trust might) nor does it typically alter the grantor's income tax situation, as the grantor retains control over the assets.

Question 2

A client grants her spouse a power of appointment over assets in a trust, allowing the spouse to appoint the assets to anyone, including himself, his estate, or his creditors. How is this power of appointment classified for estate tax purposes?

Accepted Answer

A general power of appointment

Answer

A general power of appointment is defined as a power that is exercisable in favor of the powerholder, the powerholder's estate, their creditors, or the creditors of their estate. Because the spouse has the authority to appoint the assets to himself or his own estate, it is classified as a general power of appointment, which typically causes the assets to be included in the powerholder's gross estate for tax purposes.

Question 3

An individual wants to make a substantial gift to his grandchild. To prevent this transfer from being subject to the Generation-Skipping Transfer Tax (GSTT), which of the following is the MOST important factor to consider?

Accepted Answer

The availability and application of the donor's lifetime GSTT exemption.

Answer

The Generation-Skipping Transfer Tax (GSTT) is a federal tax on transfers to 'skip persons' (like grandchildren) that exceed the lifetime GSTT exemption amount. Therefore, the most critical factor in avoiding the tax is whether the donor has a sufficient lifetime exemption to allocate to the gift. While the form of the gift (outright vs. trust) matters for planning, the exemption is the key to avoiding the tax itself.

Question 4

A primary purpose of the unlimited marital deduction in U.S. estate and gift tax law is to:

Accepted Answer

Allow for the tax-free transfer of assets to a U.S. citizen spouse, deferring any potential estate tax until the surviving spouse's death.

Answer

The unlimited marital deduction allows an individual to transfer an unlimited amount of assets to their U.S. citizen spouse during life or at death without incurring federal gift or estate tax. This does not permanently eliminate the tax but defers it; the assets that qualified for the deduction will be included in the surviving spouse's estate upon their death and may be subject to tax at that time.

Question 5

A wealthy client is concerned that the death benefit from their large life insurance policy will increase the size of their gross estate, potentially creating a significant estate tax liability. Which estate planning tool is specifically designed to own a life insurance policy and exclude the proceeds from the insured's taxable estate?

Accepted Answer

An Irrevocable Life Insurance Trust (ILIT)

Answer

An Irrevocable Life Insurance Trust (ILIT) is a specialized trust created specifically to own a life insurance policy. When properly structured and administered, the ILIT is the owner and beneficiary of the policy. This arrangement removes the policy proceeds from the insured's gross estate, thereby shielding the death benefit from federal estate taxes.

CLU - Chartered Life Underwriter Practice Test

CLU - Chartered Life Underwriter Practice Test

FREE Chartered Life Underwriter (CLU) Fundamentals of Estate Planning Questions and Answers