STEP Trust and Estate Planning 3 — Questions and Answers
Question 1: A Charitable Remainder Annuity Trust (CRAT) pays a fixed dollar amount each year. What is the minimum required payout rate under IRC §664?
- 3%
- 5% (Correct answer)
- 7%
- 10%
Correct answer: 5%
IRC §664 requires a CRAT to pay at least 5% of the initial net fair market value of trust assets annually to the non-charitable beneficiary.
Question 2: Under the generation-skipping transfer (GST) tax rules, a 'skip person' is best defined as:
- Any grandchild regardless of whether the transferor's child is living
- A natural person assigned to a generation two or more levels below the transferor (Correct answer)
- Any trust with no current beneficiaries in the transferor's generation
- A non-family member more than 37.5 years younger than the transferor
Correct answer: A natural person assigned to a generation two or more levels below the transferor
A skip person is someone who is two or more generations below the transferor, or a trust where all current interests are held by skip persons.
Question 3: Which doctrine allows a court to reform a trust to correct a drafting error that does not reflect the settlor's actual intent, even after the settlor's death?
- Cy-près doctrine
- Equitable deviation
- Reformation for mistake (Correct answer)
- Resulting trust
Correct answer: Reformation for mistake
Reformation for mistake allows a court to rewrite trust language to conform to the settlor's original intent when clear and convincing evidence shows the document does not reflect that intent.
Question 4: A surviving spouse disclaims an interest in the deceased spouse's estate. For the disclaimer to be a 'qualified disclaimer' under IRC §2518, it must be made within how many months of the transfer?
- 6 months
- 9 months (Correct answer)
- 12 months
- 18 months
Correct answer: 9 months
IRC §2518 requires a qualified disclaimer to be delivered in writing within 9 months of the date of transfer creating the interest.
Question 5: Which trust structure is specifically designed to hold S corporation stock without disqualifying the S election?
- Revocable living trust for up to 2 years post-death only
- Qualified Subchapter S Trust (QSST) or Electing Small Business Trust (ESBT) (Correct answer)
- Irrevocable life insurance trust (ILIT)
- Grantor Retained Unitrust (GRUT)
Correct answer: Qualified Subchapter S Trust (QSST) or Electing Small Business Trust (ESBT)
Only a QSST or an ESBT qualifies as a permitted S corporation shareholder; all other irrevocable trusts generally terminate the S election.
Question 6: Under the Prudent Investor Rule, a trustee who delegates investment management to an outside manager remains liable unless the trustee:
- Monitors the manager continuously without any delegation authority
- Selects the agent prudently, establishes the scope of authority, and monitors performance (Correct answer)
- Obtains court approval before any delegation
- Delegates only to a bank or regulated institution
Correct answer: Selects the agent prudently, establishes the scope of authority, and monitors performance
The Uniform Prudent Investor Act permits delegation but requires the trustee to prudently select the agent, define the scope of delegation, and periodically monitor the agent's actions.
Question 7: A decedent owned a life insurance policy on their own life payable to the estate. What is the estate tax consequence?
- Proceeds are excluded because life insurance is never taxable
- Proceeds are included in the gross estate under IRC §2042 (Correct answer)
- Proceeds are included only if the policy was purchased within three years of death
- Proceeds are excluded if the beneficiary is a surviving spouse
Correct answer: Proceeds are included in the gross estate under IRC §2042
Under IRC §2042, life insurance proceeds are included in the gross estate when the decedent possessed any incident of ownership or when proceeds are payable to the estate.
STEP Trust and Estate Planning 3
A Charitable Remainder Annuity Trust (CRAT) pays a fixed dollar amount each year.
What is the minimum required payout rate under IRC §664?