RMA Risk Management & Estate Planning 2 — Questions and Answers
Question 1: A retiree wants to protect against the risk of outliving assets. Which strategy BEST addresses longevity risk?
- Investing entirely in Treasury bills
- Purchasing a single premium immediate annuity (SPIA) (Correct answer)
- Holding a large cash reserve
- Laddering short-term CDs
Correct answer: Purchasing a single premium immediate annuity (SPIA)
A SPIA converts a lump sum into guaranteed lifetime income, directly hedging longevity risk regardless of how long the retiree lives.
Question 2: Which type of trust allows a grantor to retain an annuity interest for a specified term while transferring the remainder to heirs at a reduced gift tax value?
- Charitable Remainder Annuity Trust (CRAT)
- Grantor Retained Annuity Trust (GRAT) (Correct answer)
- Qualified Personal Residence Trust (QPRT)
- Spendthrift Trust
Correct answer: Grantor Retained Annuity Trust (GRAT)
A GRAT lets the grantor receive fixed annuity payments for a term, with any appreciation above the IRS hurdle rate passing to heirs gift-tax free.
Question 3: Under the step-up in basis rules, what happens to the cost basis of appreciated assets inherited at death?
- Basis carries over from the decedent unchanged
- Basis is stepped up to fair market value at the date of death (Correct answer)
- Basis is reduced by estate taxes paid
- Basis is set to zero
Correct answer: Basis is stepped up to fair market value at the date of death
IRC §1014 generally steps up the basis of inherited assets to their fair market value on the decedent's date of death, eliminating embedded capital gains.
Question 4: A sequence-of-returns risk is MOST damaging when it occurs:
- During the accumulation phase when the investor is young
- Early in the distribution phase when withdrawals begin (Correct answer)
- After the portfolio has fully recovered from a prior bear market
- When bond yields are rising
Correct answer: Early in the distribution phase when withdrawals begin
Large early losses combined with ongoing withdrawals permanently deplete the portfolio, leaving less capital to benefit from later recoveries.
Question 5: Which federal estate tax provision allows a surviving spouse to use the deceased spouse's unused estate tax exemption?
- Marital deduction
- Portability election (Correct answer)
- QTIP election
- Annual exclusion
Correct answer: Portability election
Portability, enacted in 2010, allows the executor to elect to transfer the deceased spouse's unused exemption (DSUE) to the surviving spouse via a timely-filed estate tax return.
Question 6: What is the primary purpose of an irrevocable life insurance trust (ILIT)?
- To avoid income taxes on dividends
- To keep life insurance proceeds out of the taxable estate (Correct answer)
- To convert term life to permanent life insurance
- To fund a charitable bequest
Correct answer: To keep life insurance proceeds out of the taxable estate
An ILIT owns the policy so proceeds are not included in the insured's gross estate, providing liquidity without increasing estate tax liability.
Question 7: When a retiree's spending needs exceed Social Security plus pension income, which risk is the adviser MOST directly addressing by recommending a floor-and-upside strategy?
- Inflation risk only
- Both longevity and sequence-of-returns risk (Correct answer)
- Currency risk
- Credit default risk
Correct answer: Both longevity and sequence-of-returns risk
A floor-and-upside approach guarantees essential expenses via secure income (floor) while investing surplus for growth, simultaneously managing longevity and sequence risk.
RMA Risk Management & Estate Planning 2
A retiree wants to protect against the risk of outliving assets.
Which strategy BEST addresses longevity risk?