Tax Consulting Estate and Gift Tax 2

Question 1

What is a Grantor Retained Annuity Trust (GRAT) primarily used for?

Accepted Answer

Transferring asset appreciation to heirs with minimal gift tax

Answer

A GRAT transfers appreciation above the IRS hurdle rate (Section 7520 rate) to heirs free of gift tax, making it effective when assets are expected to grow substantially.

Question 2

The generation-skipping transfer (GST) tax is designed to prevent:

Accepted Answer

Avoidance of estate taxes by skipping a generation of beneficiaries

Answer

The GST tax applies to transfers to skip persons (generally grandchildren or below) to prevent wealthy families from avoiding estate tax at each generational level.

Question 3

Which valuation discount applies when transferring a minority interest in a closely held business?

Accepted Answer

Both minority interest discount and discount for lack of marketability typically apply

Answer

Transfers of minority interests in closely held businesses typically receive both a minority interest discount (lack of control) and a discount for lack of marketability, potentially reducing value by 30-40%.

Question 4

An Irrevocable Life Insurance Trust (ILIT) is used primarily to:

Accepted Answer

Remove life insurance proceeds from the taxable estate

Answer

An ILIT holds a life insurance policy outside the insured's estate, keeping the death benefit from being included in the taxable estate while providing liquidity for heirs.

Question 5

What is the 'three-year rule' relevant to estate taxation of life insurance?

Accepted Answer

Transfers of life insurance policies within 3 years of death are pulled back into the estate

Answer

Under IRC Section 2035, if a decedent transferred a life insurance policy within 3 years of death, the policy proceeds are included in the gross estate.

Tax Consulting Practice Test

Tax Consulting Practice Test

Tax Consulting Estate and Gift Tax 2