WMS Retirement and Estate Planning 3 — Questions and Answers
Question 1: A client inherits a traditional IRA from a non-spouse in 2024. Under the SECURE Act, by when must distributions be completed?
- 5 years from the decedent's death
- 10 years from the decedent's death (Correct answer)
- The beneficiary's life expectancy using single life table
- No deadline; distributions can be stretched indefinitely
Correct answer: 10 years from the decedent's death
The SECURE Act eliminated the stretch IRA for most non-spouse beneficiaries, requiring full distribution within 10 years of the account owner's death.
Question 2: Which defined benefit plan formula bases retirement benefits on the average of an employee's highest-earning years and years of service?
- Money purchase plan
- Final average pay formula (Correct answer)
- Cash balance plan
- Target benefit plan
Correct answer: Final average pay formula
The final average pay formula calculates benefits based on the average of the employee's highest compensation years multiplied by years of service.
Question 3: A testator wants certain assets to bypass probate and pass directly to named beneficiaries. Which of the following accomplishes this for a brokerage account?
- Adding a codicil to the will
- Titling the account as Transfer on Death (TOD) (Correct answer)
- Placing the account in a testamentary trust
- Filing a disclaimer with the probate court
Correct answer: Titling the account as Transfer on Death (TOD)
A Transfer on Death (TOD) designation allows brokerage account assets to pass directly to named beneficiaries outside of probate.
Question 4: Which provision in a defined benefit pension plan guarantees a surviving spouse at least 50% of the participant's accrued benefit if the participant dies before retirement?
- Qualified Joint and Survivor Annuity (QJSA)
- Qualified Pre-Retirement Survivor Annuity (QPSA) (Correct answer)
- Qualified Optional Survivor Annuity (QOSA)
- Qualified Domestic Relations Order (QDRO)
Correct answer: Qualified Pre-Retirement Survivor Annuity (QPSA)
The QPSA provides the surviving spouse with at least 50% of the participant's vested accrued benefit if the participant dies before the annuity starting date.
Question 5: A couple uses a bypass trust (credit shelter trust) in their estate plan. What is the primary benefit of this structure?
- It qualifies assets for the marital deduction on both deaths
- It shelters assets up to the exemption amount from estate tax on the second spouse's death (Correct answer)
- It avoids all state income taxes on trust income
- It eliminates the need for probate in all states
Correct answer: It shelters assets up to the exemption amount from estate tax on the second spouse's death
A bypass trust holds assets up to the applicable exclusion amount so they are not included in the surviving spouse's taxable estate, effectively using both spouses' exemptions.
Question 6: Under IRC Section 72(t), a taxpayer takes Substantially Equal Periodic Payments (SEPPs) from an IRA beginning at age 50. How long must the payments continue to avoid the 10% penalty?
- Until age 59½
- For at least 5 years
- Until age 59½ or for at least 5 years, whichever is longer (Correct answer)
- For exactly 10 years regardless of age
Correct answer: Until age 59½ or for at least 5 years, whichever is longer
SEPPs must continue for the longer of 5 years or until the taxpayer reaches age 59½ to avoid retroactive imposition of the 10% penalty.
Question 7: Which document grants a named individual legal authority to make financial and legal decisions on behalf of another person who becomes incapacitated?
- Healthcare proxy
- Living will
- Durable power of attorney (Correct answer)
- Revocable living trust
Correct answer: Durable power of attorney
A durable power of attorney remains valid upon the principal's incapacity, allowing the agent to manage financial and legal affairs.
WMS Retirement and Estate Planning 3
A client inherits a traditional IRA from a non-spouse in 2024.
Under the SECURE Act, by when must distributions be completed?