WMS Retirement and Estate Planning 2 — Questions and Answers
Question 1: A married couple wants to minimize estate taxes by transferring assets to each other. Which provision allows an unlimited transfer between spouses without triggering gift or estate tax?
- Annual exclusion rule
- Marital deduction (Correct answer)
- Step-up in basis rule
- Generation-skipping transfer exemption
Correct answer: Marital deduction
The unlimited marital deduction allows spouses to transfer any amount of assets to each other free of federal gift or estate tax.
Question 2: A client age 55 withdraws $20,000 from her traditional IRA due to a financial hardship. Which tax consequence applies?
- Only ordinary income tax applies, no penalty
- 10% early withdrawal penalty plus ordinary income tax (Correct answer)
- 20% mandatory withholding with no additional penalty
- Capital gains tax at preferential rates
Correct answer: 10% early withdrawal penalty plus ordinary income tax
Withdrawals from a traditional IRA before age 59½ are subject to ordinary income tax plus a 10% early withdrawal penalty unless an exception applies.
Question 3: Which estate planning tool allows a grantor to transfer assets to heirs while retaining an annuity stream for a fixed term, potentially reducing gift tax?
- Qualified Personal Residence Trust (QPRT)
- Grantor Retained Annuity Trust (GRAT) (Correct answer)
- Charitable Remainder Trust (CRT)
- Irrevocable Life Insurance Trust (ILIT)
Correct answer: Grantor Retained Annuity Trust (GRAT)
A GRAT allows the grantor to transfer appreciation above the IRS hurdle rate to beneficiaries gift-tax free by retaining an annuity for a set term.
Question 4: Under SECURE Act 2.0, what is the required beginning date for RMDs for individuals who turn 73 in 2024?
- April 1 of the year following the year they turn 72
- December 31 of the year they turn 73
- April 1 of the year following the year they turn 73 (Correct answer)
- April 1 of the year following the year they turn 75
Correct answer: April 1 of the year following the year they turn 73
Under SECURE Act 2.0, individuals who reach age 73 must begin RMDs by April 1 of the following calendar year.
Question 5: A 401(k) plan participant leaves her employer at age 55. She wants penalty-free access to her 401(k) funds. Which rule may allow this?
- Rule of 55 (Correct answer)
- 72(t) SEPP rule
- Roth conversion ladder
- Qualified domestic relations order
Correct answer: Rule of 55
The Rule of 55 allows penalty-free withdrawals from a 401(k) if the participant separates from service in or after the year they turn 55.
Question 6: Which type of trust is designed to hold life insurance proceeds outside of the insured's taxable estate while providing liquidity to pay estate taxes?
- Revocable living trust
- Irrevocable Life Insurance Trust (ILIT) (Correct answer)
- Qualified Terminable Interest Property (QTIP) trust
- Spendthrift trust
Correct answer: Irrevocable Life Insurance Trust (ILIT)
An ILIT owns a life insurance policy so that proceeds are excluded from the insured's estate and can be used to provide estate liquidity.
Question 7: A client's estate is valued at $15 million in 2024. Assuming the federal estate tax exemption is approximately $13.61 million, what is the taxable estate before deductions?
- $15 million
- $13.61 million
- $1.39 million (Correct answer)
- $0, because the marital deduction eliminates all tax
Correct answer: $1.39 million
The taxable estate is the gross estate minus the exemption amount: $15M − $13.61M = $1.39 million subject to estate tax.
WMS Retirement and Estate Planning 2
A married couple wants to minimize estate taxes by transferring assets to each other.
Which provision allows an unlimited transfer between spouses without triggering gift or estate tax?