STEP Trust and Estate Planning 2 — Questions and Answers
Question 1: A settlor creates a trust but retains the power to revoke it. For federal estate tax purposes, how is the trust treated at the settlor's death?
- The trust assets are excluded from the gross estate
- The trust assets are included in the gross estate under IRC §2038 (Correct answer)
- Only income earned after creation is included
- The trust is treated as a completed gift at creation
Correct answer: The trust assets are included in the gross estate under IRC §2038
Under IRC §2038, assets in a revocable trust are fully includible in the settlor's gross estate because the settlor retained the power to alter, amend, or revoke.
Question 2: Which type of trust allows the trustee to distribute income or principal among a class of beneficiaries at the trustee's absolute discretion, providing maximum creditor protection?
- Support trust
- Discretionary trust (Correct answer)
- Spendthrift trust
- Hybrid trust
Correct answer: Discretionary trust
A discretionary trust gives the trustee unfettered discretion over distributions, meaning creditors of a beneficiary cannot compel a distribution that has not yet been made.
Question 3: Under the Uniform Trust Code, which fiduciary duty requires a trustee to treat all beneficiaries — both current and remainder — impartially?
- Duty of loyalty
- Duty of prudent investment
- Duty of impartiality (Correct answer)
- Duty to inform
Correct answer: Duty of impartiality
The duty of impartiality requires the trustee to balance the interests of income beneficiaries and remainder beneficiaries without favoring either group.
Question 4: A testator's will leaves the residuary estate 'to my children in equal shares.' One child predeceased the testator leaving two grandchildren. Under most anti-lapse statutes, what happens to that child's share?
- The share lapses and passes to the surviving children
- The share passes to the two grandchildren by representation (Correct answer)
- The share escheats to the state
- The share reverts to the testator's spouse
Correct answer: The share passes to the two grandchildren by representation
Anti-lapse statutes typically substitute the deceased beneficiary's descendants to prevent the gift from failing when the predeceased beneficiary is a specified relative.
Question 5: For a Qualified Personal Residence Trust (QPRT), the gift tax value of the remainder interest is calculated using which primary factor?
- The appraised value of the home only
- The IRS §7520 rate and the length of the retained term (Correct answer)
- The homeowner's actuarial life expectancy alone
- The property's assessed value for local tax purposes
Correct answer: The IRS §7520 rate and the length of the retained term
The remainder interest value in a QPRT is determined using the applicable §7520 rate and the retained term period, with a higher rate or longer term producing a lower taxable gift.
Question 6: Which estate planning technique involves an installment sale to a grantor trust in exchange for a promissory note, freezing the value of the sold assets for estate tax purposes?
- Grantor Retained Annuity Trust (GRAT)
- Intentionally Defective Grantor Trust (IDGT) installment sale (Correct answer)
- Charitable Remainder Unitrust (CRUT)
- Qualified Opportunity Zone investment
Correct answer: Intentionally Defective Grantor Trust (IDGT) installment sale
An installment sale to an IDGT freezes the seller's estate at the note value while allowing asset appreciation to pass income-tax-free to the trust because it is disregarded for income tax purposes.
Question 7: When a fiduciary files a federal estate tax return (Form 706), what is the standard federal closing letter replacement introduced by the IRS that practitioners can use to confirm the estate examination is closed?
- IRS Letter 627
- Account transcript from IRS e-services (Correct answer)
- IRS Notice 2015-57 confirmation
- Form 4422 discharge certificate
Correct answer: Account transcript from IRS e-services
Since 2015, the IRS replaced the estate tax closing letter with account transcripts available through e-services as the standard method to confirm that the estate examination period has closed.
STEP Trust and Estate Planning 2
A settlor creates a trust but retains the power to revoke it.
For federal estate tax purposes, how is the trust treated at the settlor's death?