AEP Advanced Estate Planning Techniques 2 — Questions and Answers
Question 1: A Spousal Lifetime Access Trust (SLAT) allows the grantor to remove assets from their taxable estate while still allowing indirect access through which party?
- The grantor's children
- The grantor's spouse as a beneficiary (Correct answer)
- The grantor's business partners
- A charitable organization
Correct answer: The grantor's spouse as a beneficiary
A SLAT is an irrevocable trust that names the grantor's spouse as a beneficiary, allowing the grantor to indirectly benefit from the trust assets through the spouse.
Question 2: What is the primary risk associated with a 'reciprocal trust' arrangement between spouses?
- Gift tax exposure on trust contributions
- The IRS may 'uncross' the trusts and include assets in each grantor's estate (Correct answer)
- Loss of step-up in basis for trust assets
- Disqualification from the marital deduction
Correct answer: The IRS may 'uncross' the trusts and include assets in each grantor's estate
The reciprocal trust doctrine allows the IRS to uncross mirror-image trusts created by spouses, effectively including the assets back in each spouse's taxable estate.
Question 3: In a Qualified Personal Residence Trust (QPRT), what happens if the grantor dies before the trust term expires?
- The residence passes to trust beneficiaries estate-tax free
- The full value of the residence is included in the grantor's taxable estate (Correct answer)
- Only the remainder interest is included in the estate
- The trust automatically converts to a GRAT
Correct answer: The full value of the residence is included in the grantor's taxable estate
If the grantor dies during the QPRT term, the entire value of the residence is pulled back into the grantor's taxable estate, eliminating the estate tax benefit.
Question 4: A Delaware Incomplete Non-Grantor (DING) Trust is primarily designed to achieve which tax planning objective?
- Eliminate federal estate taxes on transferred assets
- Shift income to lower-bracket beneficiaries
- Avoid state income tax in high-tax states (Correct answer)
- Maximize the annual gift tax exclusion
Correct answer: Avoid state income tax in high-tax states
A DING trust is structured so that the trust is taxed in a no-income-tax state like Delaware or Nevada, allowing the grantor in a high-tax state to reduce state income tax liability.
Question 5: Which advanced technique involves selling appreciated assets to an intentionally defective grantor trust (IDGT) in exchange for an installment note?
- Charitable lead annuity trust
- Sale to an IDGT (Correct answer)
- Grantor retained annuity trust
- Self-canceling installment note
Correct answer: Sale to an IDGT
A sale to an IDGT allows the grantor to transfer future appreciation out of the estate without gift tax, as the sale is disregarded for income tax purposes but recognized for estate tax purposes.
Question 6: What is the 'estate freeze' concept underlying a Family Limited Partnership (FLP) strategy?
- Converting ordinary income assets to capital gain assets
- Transferring future appreciation to junior partners while retaining control (Correct answer)
- Eliminating the step-up in basis at death
- Converting partnership interests to annuities
Correct answer: Transferring future appreciation to junior partners while retaining control
An FLP freezes the senior generation's interest at today's value while transferring future appreciation to limited partnership interests held by heirs, reducing the taxable estate over time.
Question 7: Under IRC Section 2036, an FLP may be included in the grantor's estate if the grantor retained which type of interest?
- A limited partnership interest only
- The right to possess, enjoy, or receive income from transferred property (Correct answer)
- A general partner interest with no economic rights
- Any interest in the FLP exceeding 5% of total value
Correct answer: The right to possess, enjoy, or receive income from transferred property
IRC §2036 pulls assets back into the estate when the decedent retained the right to possess, enjoy, or receive income from transferred property, which courts have applied aggressively to FLPs.
AEP Advanced Estate Planning Techniques 2
A Spousal Lifetime Access Trust (SLAT) allows the grantor to remove assets from their taxable estate while still allowing indirect access through which party?