CFG Retirement Income & Estate Planning 4 — Questions and Answers
Question 1: A 75-year-old client uses a reverse mortgage (HECM) to supplement retirement income. Which statement about HECMs is accurate?
- The borrower must make monthly principal and interest payments
- Loan proceeds are taxable as ordinary income
- The loan becomes due when the borrower permanently leaves the home (Correct answer)
- HECMs are only available to borrowers under age 70
Correct answer: The loan becomes due when the borrower permanently leaves the home
A HECM becomes due and payable when the last borrower permanently vacates the home, sells it, or passes away, not while the borrower lives there.
Question 2: Which Medicaid planning strategy involves transferring assets to a spouse in order to protect them from spend-down requirements, using the Community Spouse Resource Allowance (CSRA)?
- Spousal impoverishment protection (Correct answer)
- Miller trust (income-only trust)
- Medicaid asset transfer penalty
- Qualified income trust
Correct answer: Spousal impoverishment protection
Federal Medicaid spousal impoverishment rules allow the community (non-institutionalized) spouse to retain assets up to the CSRA without those assets being counted for the institutionalized spouse's eligibility.
Question 3: A client aged 82 owns a $500,000 annuity with a cost basis of $200,000. If she surrenders it, how is the $300,000 gain taxed?
- As long-term capital gains at preferential rates
- As ordinary income in the year of surrender (Correct answer)
- Half as ordinary income, half as capital gains
- Tax-free because she is over age 80
Correct answer: As ordinary income in the year of surrender
Gains inside a non-qualified annuity are taxed as ordinary income when distributed, not at preferential capital gains rates.
Question 4: What is the look-back period Medicaid uses when reviewing asset transfers for potential disqualifying gifts prior to a nursing home application?
- 12 months
- 24 months
- 36 months
- 60 months (Correct answer)
Correct answer: 60 months
Medicaid reviews asset transfers made within the 60-month (5-year) look-back period prior to application, and gifts during that window may create a penalty period of ineligibility.
Question 5: A 70-year-old client asks about qualified longevity annuity contracts (QLACs). Which feature distinguishes a QLAC from a standard IRA annuity?
- QLAC premiums are excluded from RMD calculations up to IRS limits and payments can be deferred to age 85 (Correct answer)
- QLACs provide immediate income starting at age 59½
- QLAC funds are invested in equities with a guaranteed floor
- QLACs eliminate the need for a beneficiary designation
Correct answer: QLAC premiums are excluded from RMD calculations up to IRS limits and payments can be deferred to age 85
QLACs allow retirees to defer income to as late as age 85, and the premium used to purchase a QLAC is excluded from the RMD calculation up to IRS limits.
Question 6: Under portability rules, a surviving spouse may elect to use a deceased spouse's unused federal estate tax exemption (DSUE). What must the executor do to preserve portability?
- File a federal estate tax return (Form 706) within 9 months of death (or extended deadline) (Correct answer)
- File Form 8606 within 60 days of death
- Record the DSUE election with the county probate court
- Submit IRS Form 1041 within the tax year of death
Correct answer: File a federal estate tax return (Form 706) within 9 months of death (or extended deadline)
To elect portability and preserve the DSUE amount, the executor must timely file a federal estate tax return (Form 706) even if the estate is below the filing threshold.
Question 7: A financial gerontologist recommends a systematic withdrawal strategy (SWS) from a client's portfolio. The '4% rule' was designed to sustain withdrawals for how long?
- 10 years
- 20 years
- 30 years (Correct answer)
- 40 years
Correct answer: 30 years
The 4% rule, based on the Bengen study, was designed to sustain inflation-adjusted withdrawals for a 30-year retirement period without depleting the portfolio.
CFG Retirement Income & Estate Planning 4
A 75-year-old client uses a reverse mortgage (HECM) to supplement retirement income.
Which statement about HECMs is accurate?