PFS Estate Planning 3 — Questions and Answers
Question 1: Which type of trust is irrevocable and allows the grantor to transfer life insurance proceeds outside of the taxable estate?
- Revocable Living Trust
- Irrevocable Life Insurance Trust (ILIT) (Correct answer)
- Testamentary Trust
- Special Needs Trust
Correct answer: Irrevocable Life Insurance Trust (ILIT)
An ILIT owns a life insurance policy so that the death benefit is excluded from the grantor's taxable estate, preserving more wealth for heirs.
Question 2: What is a Crummey power in the context of trust planning?
- The trustee's authority to remove beneficiaries
- A beneficiary's temporary right to withdraw contributions, qualifying gifts for the annual exclusion (Correct answer)
- A grantor's right to reclaim assets within three years
- A court order to terminate a trust early
Correct answer: A beneficiary's temporary right to withdraw contributions, qualifying gifts for the annual exclusion
Crummey powers give trust beneficiaries a short window to withdraw contributions, converting otherwise future-interest gifts into present-interest gifts eligible for the annual gift tax exclusion.
Question 3: A 529 plan superfunding election allows a contributor to:
- Contribute unlimited amounts free of gift tax if used for tuition
- Front-load five years of annual exclusion gifts into a 529 plan at once (Correct answer)
- Deduct contributions from federal income taxes
- Avoid GST tax on distributions to grandchildren
Correct answer: Front-load five years of annual exclusion gifts into a 529 plan at once
Superfunding allows a lump-sum contribution of up to five times the annual gift tax exclusion to a 529 plan, spread over five years for gift tax purposes.
Question 4: Which document directs how medical decisions should be made if a person is unable to communicate their wishes?
- Durable power of attorney for finances
- Healthcare proxy (healthcare power of attorney) (Correct answer)
- Living will
- Letter of instruction
Correct answer: Healthcare proxy (healthcare power of attorney)
A healthcare proxy (or healthcare power of attorney) appoints a specific individual to make medical decisions on behalf of the incapacitated person.
Question 5: How does a charitable remainder trust (CRT) benefit the grantor during their lifetime?
- It removes all assets from the taxable estate immediately upon creation
- It provides the grantor with income payments for life or a term, with the remainder passing to charity (Correct answer)
- It allows the grantor to receive a full income tax deduction equal to the asset's value
- It transfers assets to heirs free of capital gains tax
Correct answer: It provides the grantor with income payments for life or a term, with the remainder passing to charity
A CRT pays the grantor (or named beneficiaries) an income stream for a specified period, after which the remaining assets pass to the designated charity.
Question 6: Which estate planning strategy is best for a client who wants to transfer a vacation home to children now but continue using it?
- Qualified Personal Residence Trust (QPRT) (Correct answer)
- Bypass Trust
- Irrevocable Life Insurance Trust
- Charitable Lead Annuity Trust
Correct answer: Qualified Personal Residence Trust (QPRT)
A QPRT allows the grantor to transfer a personal residence to heirs at a reduced gift tax value while retaining the right to use the property for a fixed term.
Question 7: The portability election in federal estate tax law allows a surviving spouse to:
- Transfer any unused state estate tax exemption to heirs
- Use the deceased spouse's unused federal estate tax exemption in addition to their own (Correct answer)
- Elect to pay estate taxes in installments over ten years
- Avoid filing an estate tax return if the estate is below the annual exclusion
Correct answer: Use the deceased spouse's unused federal estate tax exemption in addition to their own
Portability allows the surviving spouse to apply the deceased spouse's unused federal estate tax exemption (DSUEA) to their own estate or gifts, effectively doubling the exemption for married couples.
PFS Estate Planning 3
Which type of trust is irrevocable and allows the grantor to transfer life insurance proceeds outside of the taxable estate?