PFS Estate Planning 2 — Questions and Answers
Question 1: Which trust allows a surviving spouse to benefit from assets while keeping them out of the surviving spouse's taxable estate?
- Revocable living trust
- Bypass (credit shelter) trust (Correct answer)
- Charitable remainder trust
- Spendthrift trust
Correct answer: Bypass (credit shelter) trust
A bypass trust holds assets up to the estate tax exemption, benefiting the surviving spouse without including those assets in the survivor's estate.
Question 2: What is the primary benefit of a stepped-up basis for inherited assets?
- It eliminates gift taxes on transfers
- It resets the cost basis to fair market value at date of death, reducing capital gains tax (Correct answer)
- It allows the heir to defer income taxes indefinitely
- It increases the asset's depreciation schedule
Correct answer: It resets the cost basis to fair market value at date of death, reducing capital gains tax
A stepped-up basis resets the inherited asset's cost basis to its fair market value on the decedent's date of death, minimizing the heir's capital gains tax liability.
Question 3: A QTIP trust is designed primarily to:
- Minimize estate taxes by skipping generations
- Provide income to a surviving spouse while controlling ultimate distribution of principal (Correct answer)
- Transfer business interests to key employees
- Avoid probate for real property in multiple states
Correct answer: Provide income to a surviving spouse while controlling ultimate distribution of principal
A Qualified Terminable Interest Property (QTIP) trust qualifies for the marital deduction while allowing the first spouse to die to control who ultimately receives the principal.
Question 4: Which planning tool is most appropriate for transferring a family business to children at a discounted value while retaining an income stream?
- Grantor Retained Annuity Trust (GRAT) (Correct answer)
- Charitable Lead Trust
- Totten Trust
- Blind Trust
Correct answer: Grantor Retained Annuity Trust (GRAT)
A GRAT allows the grantor to transfer appreciating assets to heirs at a reduced gift tax value by retaining an annuity payment for a fixed term.
Question 5: Under the unlimited marital deduction, transfers between spouses are exempt from estate taxes EXCEPT when:
- The transfer exceeds $1 million
- The receiving spouse is not a U.S. citizen (Correct answer)
- The transfer occurs more than three years before death
- The assets include real property
Correct answer: The receiving spouse is not a U.S. citizen
The unlimited marital deduction does not apply to transfers to a non-U.S. citizen spouse; instead, a Qualified Domestic Trust (QDOT) must be used.
Question 6: What does the generation-skipping transfer (GST) tax apply to?
- Transfers to charities that skip family members
- Gifts and bequests to individuals two or more generations below the transferor (Correct answer)
- Annual exclusion gifts that exceed the Crummey limit
- Estate distributions delayed more than five years after death
Correct answer: Gifts and bequests to individuals two or more generations below the transferor
The GST tax is imposed on transfers (gifts, bequests, or trust distributions) to 'skip persons'—individuals at least two generations younger than the transferor, such as grandchildren.
Question 7: A durable power of attorney for finances differs from a standard power of attorney in that it:
- Automatically expires after one year
- Remains effective if the principal becomes incapacitated (Correct answer)
- Requires court approval to become effective
- Only covers real estate transactions
Correct answer: Remains effective if the principal becomes incapacitated
A durable power of attorney remains valid even if the principal becomes mentally or physically incapacitated, making it a critical estate planning document.
PFS Estate Planning 2
Which trust allows a surviving spouse to benefit from assets while keeping them out of the surviving spouse's taxable estate?