AFC Retirement and Estate Planning 4 — Questions and Answers
Question 1: A client inherits a Roth IRA from a non-spouse. Under the SECURE Act, what rule governs distributions?
- Distributions must begin by December 31 of the year following death
- All assets must be distributed within 10 years, but no annual RMDs are required (Correct answer)
- Distributions can be stretched over the beneficiary's life expectancy
- The inherited Roth IRA must be converted to a traditional IRA
Correct answer: All assets must be distributed within 10 years, but no annual RMDs are required
Non-spouse beneficiaries of Roth IRAs must empty the account within 10 years under the SECURE Act, but unlike traditional IRAs, no annual RMDs are required within that period.
Question 2: What is the annual gift tax exclusion for 2024 that allows individuals to give gifts without filing a gift tax return?
- $15,000 per recipient
- $17,000 per recipient
- $18,000 per recipient (Correct answer)
- $20,000 per recipient
Correct answer: $18,000 per recipient
The annual gift tax exclusion for 2024 is $18,000 per recipient, indexed for inflation, allowing gifts up to this amount per person without using the lifetime exemption.
Question 3: A defined benefit pension plan provides monthly income based on years of service and final salary. What is the key risk this plan transfers to the employer?
- Inflation risk
- Investment/longevity risk (Correct answer)
- Legislative risk
- Sequence of returns risk
Correct answer: Investment/longevity risk
In a defined benefit plan, the employer bears the investment and longevity risk, guaranteeing a specific monthly benefit regardless of investment performance or how long the retiree lives.
Question 4: Which document specifically outlines an individual's wishes regarding end-of-life medical treatment and is legally distinct from a healthcare proxy?
- Durable power of attorney
- Living will (advance directive) (Correct answer)
- POLST form
- Letter of instruction
Correct answer: Living will (advance directive)
A living will (or advance directive) documents specific medical treatment wishes, while a healthcare proxy designates a person to make those decisions; they are complementary but legally distinct.
Question 5: Under what circumstance can a surviving spouse roll over an inherited IRA into their own IRA, and what is the key benefit?
- Only if the deceased was younger than 59½; avoids immediate taxation
- At any time; RMDs are based on the surviving spouse's own age and life expectancy (Correct answer)
- Only if the surviving spouse is over age 70½; avoids penalty
- Only if the IRA is a Roth; avoids future RMDs
Correct answer: At any time; RMDs are based on the surviving spouse's own age and life expectancy
A surviving spouse can roll an inherited IRA into their own IRA at any time, which resets RMD timing based on the survivor's own age and allows continued tax-deferred growth.
Question 6: A client establishes an irrevocable life insurance trust (ILIT). What is the primary estate planning benefit?
- Life insurance proceeds avoid income tax when paid to a trust
- The death benefit is excluded from the insured's taxable estate while providing liquidity for estate taxes (Correct answer)
- Premiums paid into the trust are income tax deductible
- The trust can be amended to change beneficiaries at any time
Correct answer: The death benefit is excluded from the insured's taxable estate while providing liquidity for estate taxes
An ILIT owns the life insurance policy, keeping the death benefit out of the insured's taxable estate while providing liquidity to pay estate taxes or other obligations.
Question 7: What is the 'four percent rule' in retirement planning, and what was it originally based on?
- Withdraw 4% of portfolio value each year, adjusted for inflation, based on Monte Carlo projections for a 40-year retirement
- Withdraw 4% of initial portfolio value annually, inflation-adjusted, based on historical 30-year retirement simulations (Correct answer)
- Invest 4% of income in a Roth IRA annually to fund a 30-year retirement
- Keep 4% of retirement assets in cash to cover short-term expenses
Correct answer: Withdraw 4% of initial portfolio value annually, inflation-adjusted, based on historical 30-year retirement simulations
The 4% rule, from the Bengen study, suggests withdrawing 4% of initial portfolio value annually (adjusted for inflation), based on historical data showing this rate sustains a 30-year retirement.
AFC Retirement and Estate Planning 4
A client inherits a Roth IRA from a non-spouse.
Under the SECURE Act, what rule governs distributions?