RFC Estate Planning & Wealth Transfer 3 — Questions and Answers
Question 1: A decedent owned a farm worth $10 million but cash-poor heirs cannot pay the estate tax without selling it. Which IRC provision allows installment payment of estate taxes attributable to a closely held business?
- IRC §6161
- IRC §6166 (Correct answer)
- IRC §6324
- IRC §2032A
Correct answer: IRC §6166
IRC §6166 permits estates where a closely held business exceeds 35% of the adjusted gross estate to pay the portion of estate tax attributable to that business in installments over up to 14 years.
Question 2: Which of the following best describes the 'three-year rule' under IRC §2035?
- Life insurance gifted within three years of death is pulled back into the gross estate (Correct answer)
- Annual exclusion gifts made within three years of death are included in the taxable estate
- Transfers to a spouse are included if made within three years of death
- Revocable trust assets are excluded if the trust was created more than three years before death
Correct answer: Life insurance gifted within three years of death is pulled back into the gross estate
Under IRC §2035, if the decedent transferred an incident of ownership in a life insurance policy within three years of death, the policy proceeds are included in the gross estate.
Question 3: A client establishes a Spousal Lifetime Access Trust (SLAT) for the benefit of their spouse. A key risk of this strategy is:
- Gift taxes are assessed immediately at the maximum rate
- If the marriage ends in divorce, the grantor loses indirect access to the trust assets (Correct answer)
- The trust assets receive a step-up in basis at the grantor's death
- The surviving spouse cannot be a trustee
Correct answer: If the marriage ends in divorce, the grantor loses indirect access to the trust assets
Because the grantor's indirect access to SLAT assets depends on the spouse remaining alive and married, divorce or the spouse's premature death eliminates that access to the gifted assets.
Question 4: Special use valuation under IRC §2032A allows qualifying real property used in farming or a closely held business to be valued at:
- Liquidation value
- Its actual use value rather than highest and best use value (Correct answer)
- Original cost plus improvements
- 50% of fair market value, capped at $1 million
Correct answer: Its actual use value rather than highest and best use value
IRC §2032A permits the estate to value qualifying real property at its current-use value (e.g., as a farm) rather than its potentially much higher highest and best use value, reducing the taxable estate.
Question 5: When a testator's will fails to dispose of all property (partial intestacy), the undisposed portion passes under:
- Federal intestacy statutes
- The residuary clause of the will, if one exists; otherwise state intestacy law (Correct answer)
- State intestacy statutes exclusively
- A constructive trust imposed by the probate court
Correct answer: The residuary clause of the will, if one exists; otherwise state intestacy law
A well-drafted residuary clause captures assets not otherwise distributed; absent such a clause, the undisposed assets pass under the decedent's state intestacy statutes.
Question 6: A client transfers a personal residence to a Qualified Personal Residence Trust (QPRT) for 10 years. If the grantor dies during the trust term:
- Only 50% of the home's value is included in the gross estate
- The entire fair market value of the residence is included in the gross estate (Correct answer)
- The home passes to the remainder beneficiaries free of estate tax
- The trust terminates and the home returns to the grantor's heirs at original cost basis
Correct answer: The entire fair market value of the residence is included in the gross estate
If the grantor dies before the QPRT term ends, the full date-of-death value of the residence is pulled back into the gross estate under IRC §2036, negating the estate planning benefit.
Question 7: A 'pour-over will' in estate planning serves which primary purpose?
- It directs all probate assets into the decedent's revocable living trust at death (Correct answer)
- It avoids probate for all assets owned by the decedent
- It establishes a new irrevocable trust at the time of death
- It designates beneficiaries for retirement accounts
Correct answer: It directs all probate assets into the decedent's revocable living trust at death
A pour-over will directs any probate assets that were not titled in the revocable trust during the decedent's lifetime to flow ('pour over') into that trust at death.
RFC Estate Planning & Wealth Transfer 3
A decedent owned a farm worth $10 million but cash-poor heirs cannot pay the estate tax without selling it.
Which IRC provision allows installment payment of estate taxes attributable to a closely held business?