AFC - Accredited Financial Counselor Accredited Financial Counselor Retirement and Estate Planning 1 — Questions and Answers
Question 1: Which of the following best describes the 'stretch IRA' strategy that was significantly curtailed by the SECURE Act of 2019?
- Converting a traditional IRA to a Roth IRA over multiple years to reduce tax liability
- Allowing non-spouse beneficiaries to take RMDs over their own life expectancy, deferring taxes for decades (Correct answer)
- Combining multiple inherited IRAs into a single account to simplify distributions
- Rolling an inherited IRA into the beneficiary's own IRA to restart the distribution clock
Correct answer: Allowing non-spouse beneficiaries to take RMDs over their own life expectancy, deferring taxes for decades
Prior to the SECURE Act, non-spouse beneficiaries could 'stretch' distributions from an inherited IRA over their own life expectancy, maximizing tax-deferred growth. The SECURE Act replaced this with the 10-year rule for most non-spouse beneficiaries, requiring full distribution within 10 years of the original owner's death.
Question 2: A married couple has a combined estate of $28 million. Which estate planning tool allows both spouses' federal estate tax exemptions to be fully utilized even if one spouse leaves everything to the other?
- A qualified personal residence trust (QPRT)
- A portability election filed on the deceased spouse's estate tax return (Correct answer)
- A charitable remainder trust (CRT)
- A generation-skipping trust (GST)
Correct answer: A portability election filed on the deceased spouse's estate tax return
The portability election, made available under current law, allows a surviving spouse to use any unused portion of their deceased spouse's federal estate tax exemption (DSUE). By filing a timely estate tax return even when no tax is owed, the surviving spouse can effectively double their estate tax exemption.
Question 3: What is the primary purpose of a durable power of attorney for finances in estate planning?
- To distribute assets to heirs immediately upon death, bypassing probate
- To authorize a named agent to manage financial affairs if the principal becomes incapacitated (Correct answer)
- To reduce the taxable estate by transferring assets to an irrevocable trust
- To designate a guardian for minor children in the event of the principal's death
Correct answer: To authorize a named agent to manage financial affairs if the principal becomes incapacitated
A durable power of attorney for finances allows a designated agent to manage financial matters—paying bills, managing investments, filing taxes—if the principal becomes mentally or physically incapacitated. The 'durable' designation means it remains effective even after incapacity, unlike a standard power of attorney.
Question 4: A client converts $50,000 from a traditional IRA to a Roth IRA. Which of the following statements about this conversion is correct?
- The converted amount is tax-free if the client has held the traditional IRA for more than five years
- The converted amount is added to ordinary income in the year of conversion and taxed at the client's marginal rate (Correct answer)
- The conversion triggers a 10% early withdrawal penalty regardless of the client's age
- The converted amount is subject to capital gains tax rates rather than ordinary income rates
Correct answer: The converted amount is added to ordinary income in the year of conversion and taxed at the client's marginal rate
A Roth conversion is treated as a taxable distribution from the traditional IRA; the converted amount is included in the client's gross income for that year and taxed at ordinary income rates. There is no early withdrawal penalty on conversions, though the 10% penalty may apply to any amounts withheld for taxes unless replaced within 60 days.
Question 5: Which type of trust is specifically designed to reduce estate taxes by allowing a grantor to transfer assets to heirs at a discounted gift tax value, typically using assets expected to appreciate significantly?
- Grantor retained annuity trust (GRAT) (Correct answer)
- Spendthrift trust
- Testamentary trust
- Blind trust
Correct answer: Grantor retained annuity trust (GRAT)
A GRAT allows the grantor to transfer assets into an irrevocable trust while retaining an annuity payment for a fixed term. If the assets grow faster than the IRS hurdle rate (Section 7520 rate), the excess appreciation passes to heirs free of gift and estate tax. GRATs are especially effective with low interest rates and appreciating assets.
Question 6: A client is 72 years old and has not yet taken their required minimum distribution (RMD) for the current year. What is the penalty for failing to take the full RMD amount on time?
- 10% of the amount not withdrawn
- 25% of the amount that should have been withdrawn (reduced to 10% if corrected promptly) (Correct answer)
- 50% of the amount that should have been withdrawn
- The account loses its tax-deferred status entirely
Correct answer: 25% of the amount that should have been withdrawn (reduced to 10% if corrected promptly)
Under the SECURE 2.0 Act (2022), the penalty for missing an RMD was reduced from 50% to 25% of the shortfall. It is further reduced to 10% if the RMD error is corrected within the correction window (generally by the end of the second tax year following the missed RMD). This replaced the previous flat 50% excise tax.
AFC - Accredited Financial Counselor Accredited Financial Counselor Retirement and Estate Planning 1
Which of the following best describes the 'stretch IRA' strategy that was significantly curtailed by the SECURE Act of 2019?