RFC Estate Planning & Wealth Transfer 2 — Questions and Answers
Question 1: A client wants to remove appreciating assets from their taxable estate while retaining an income stream for a fixed term. Which trust is BEST suited for this goal?
- Charitable Remainder Trust (CRT)
- Grantor Retained Annuity Trust (GRAT) (Correct answer)
- Irrevocable Life Insurance Trust (ILIT)
- Qualified Personal Residence Trust (QPRT)
Correct answer: Grantor Retained Annuity Trust (GRAT)
A GRAT allows the grantor to transfer appreciation in excess of the IRS Section 7520 hurdle rate to heirs gift-tax free after retaining annuity payments for a fixed term.
Question 2: Under the step-up in basis rules for inherited property, the cost basis of an asset held in a decedent's taxable estate is generally adjusted to:
- The original purchase price paid by the decedent
- The fair market value at the date of death (Correct answer)
- The lower of original cost or fair market value
- The average of original cost and date-of-death value
Correct answer: The fair market value at the date of death
IRC §1014 steps up (or down) the basis of inherited property to its fair market value on the decedent's date of death, eliminating unrealized capital gains accrued during the decedent's lifetime.
Question 3: A surviving spouse wishes to use a deceased spouse's unused federal estate tax exemption. Which portability election deadline applies?
- Six months after the decedent's death
- Nine months after the decedent's death
- Filing an estate tax return within the time limit (generally 9 months, extendable to 15 months) (Correct answer)
- Two years after the decedent's death
Correct answer: Filing an estate tax return within the time limit (generally 9 months, extendable to 15 months)
Portability is elected on a timely filed estate tax return (Form 706) due nine months after death, with an automatic six-month extension available, giving a maximum 15-month window.
Question 4: Which valuation discount is most commonly applied when a minority interest in a closely held family limited partnership (FLP) is transferred as a gift?
- Premium for control
- Discount for lack of control (minority interest discount) (Correct answer)
- Blockage discount
- Built-in gains discount
Correct answer: Discount for lack of control (minority interest discount)
A minority interest discount reflects that a non-controlling FLP interest lacks the ability to force distributions or liquidate assets, reducing its fair market value below proportional net asset value.
Question 5: For federal gift tax purposes, what is the annual exclusion amount per donee in 2024?
- $10,000
- $15,000
- $17,000
- $18,000 (Correct answer)
Correct answer: $18,000
The annual gift tax exclusion is $18,000 per donee for 2024, indexed for inflation in $1,000 increments, allowing tax-free gifts up to that amount without using the lifetime exemption.
Question 6: A Charitable Lead Annuity Trust (CLAT) differs from a Charitable Remainder Trust (CRT) in that:
- A CLAT provides an income stream to the charity first, with remainder to non-charitable beneficiaries (Correct answer)
- A CLAT is a revocable trust while a CRT is irrevocable
- A CLAT pays income to the grantor, then to charity at death
- A CLAT avoids all estate taxes while a CRT does not
Correct answer: A CLAT provides an income stream to the charity first, with remainder to non-charitable beneficiaries
In a CLAT, the annuity is paid to a charity for a specified term, and the remaining assets pass to non-charitable beneficiaries (often family), reversing the payment order of a CRT.
Question 7: Under IRC §2503(e), tuition payments made directly to an educational institution on behalf of another person are:
- Subject to gift tax but eligible for the annual exclusion
- Excluded from gift tax without limit and without using the annual exclusion (Correct answer)
- Deductible as a charitable contribution
- Limited to $10,000 per year per student
Correct answer: Excluded from gift tax without limit and without using the annual exclusion
Direct tuition payments to qualifying educational institutions are excluded from gift tax under §2503(e) with no dollar limit and do not count against the annual or lifetime gift tax exclusion.
RFC Estate Planning & Wealth Transfer 2
A client wants to remove appreciating assets from their taxable estate while retaining an income stream for a fixed term.
Which trust is BEST suited for this goal?