RMA Risk Management & Estate Planning 3 — Questions and Answers
Question 1: A couple has a combined estate of $28 million in 2024. What is the MOST important estate planning concern under current law?
- Avoiding the generation-skipping transfer tax entirely
- Planning for the potential sunset of the elevated exemption after 2025 (Correct answer)
- Maximizing Roth conversions
- Establishing a qualified domestic trust (QDOT)
Correct answer: Planning for the potential sunset of the elevated exemption after 2025
The Tax Cuts and Jobs Act's doubled exemption is scheduled to sunset after 2025, roughly halving the exemption, making proactive gifting or trust strategies urgent.
Question 2: Which long-term care insurance benefit trigger is standard in most policies?
- Inability to perform 2 of 6 activities of daily living (ADLs) or severe cognitive impairment (Correct answer)
- Any single hospitalization exceeding 30 days
- A physician's general recommendation for care
- Medicare denial of coverage
Correct answer: Inability to perform 2 of 6 activities of daily living (ADLs) or severe cognitive impairment
HIPAA-compliant LTC policies require that the insured be unable to perform at least 2 of 6 ADLs or have severe cognitive impairment to qualify for tax-free benefits.
Question 3: A durable power of attorney for finances differs from a standard power of attorney in that it:
- Requires court approval before use
- Remains effective if the principal becomes incapacitated (Correct answer)
- Automatically expires after one year
- Only covers real property transactions
Correct answer: Remains effective if the principal becomes incapacitated
A durable power of attorney contains language that keeps the agent's authority intact even if the principal later becomes incapacitated, unlike a standard POA which terminates on incapacity.
Question 4: The Monte Carlo simulation technique is used in retirement planning primarily to:
- Calculate the exact depletion date of a portfolio
- Model the probability of portfolio success across thousands of market scenarios (Correct answer)
- Determine the optimal Social Security claiming age
- Estimate future Medicare premium costs
Correct answer: Model the probability of portfolio success across thousands of market scenarios
Monte Carlo simulations run thousands of randomized market return sequences to estimate the probability that a withdrawal strategy sustains the portfolio over the retirement horizon.
Question 5: Which estate planning document expresses a person's wishes regarding end-of-life medical treatment and designates a healthcare decision-maker?
- Pour-over will
- Advance healthcare directive (living will + healthcare proxy) (Correct answer)
- Revocable living trust
- Letter of instruction
Correct answer: Advance healthcare directive (living will + healthcare proxy)
An advance healthcare directive combines a living will (treatment preferences) with a healthcare proxy (agent designation), covering both substantive and agent-based healthcare decisions.
Question 6: A retiree drawing 5% annually from a $1 million portfolio experiences a 30% loss in year one. Approximately how large must returns be in subsequent years to recover, compared to a scenario with no initial loss?
- Slightly higher, because of compounding
- Substantially higher, because ongoing withdrawals prevent full compounding recovery (Correct answer)
- The same, because markets revert to the mean
- Lower, because the tax basis is now reduced
Correct answer: Substantially higher, because ongoing withdrawals prevent full compounding recovery
Ongoing withdrawals reduce the remaining capital that benefits from recovery returns, so higher average returns are needed to compensate compared to a lump-sum scenario.
Question 7: What is the annual gift tax exclusion per donee for 2024, allowing gifts free of gift tax reporting?
- $10,000
- $15,000
- $18,000 (Correct answer)
- $20,000
Correct answer: $18,000
The IRS annual gift tax exclusion for 2024 is $18,000 per donee, adjusted periodically for inflation, and is separate from the lifetime exemption.
RMA Risk Management & Estate Planning 3
A couple has a combined estate of $28 million in 2024.
What is the MOST important estate planning concern under current law?