CFSP Estate Planning & Wealth Transfer 2 — Questions and Answers
Question 1: What is an Irrevocable Life Insurance Trust (ILIT) primarily used to accomplish?
- To provide tax-free retirement income to the grantor
- To remove life insurance proceeds from the insured's taxable estate (Correct answer)
- To convert term life insurance to permanent insurance more efficiently
- To maximize cash value accumulation within a life insurance policy
Correct answer: To remove life insurance proceeds from the insured's taxable estate
An ILIT holds life insurance policies outside of the insured's estate, preventing the death benefit from being included in the taxable estate at death.
Question 2: What is the federal annual gift tax exclusion amount per recipient for 2024?
- $10,000
- $15,000
- $18,000 (Correct answer)
- $25,000
Correct answer: $18,000
The annual gift tax exclusion for 2024 is $18,000 per recipient, allowing individuals to give this amount to any number of recipients without using their lifetime exemption.
Question 3: What is a Qualified Terminable Interest Property (QTIP) trust designed to accomplish?
- Minimize income taxes on retirement account distributions to heirs
- Provide income to a surviving spouse while controlling the ultimate disposition of assets (Correct answer)
- Transfer discounted business interests to family members
- Fund charitable donations while providing income back to the grantor
Correct answer: Provide income to a surviving spouse while controlling the ultimate disposition of assets
A QTIP trust provides income to a surviving spouse while allowing the decedent to control who ultimately receives the trust assets at the spouse's death, and it qualifies for the marital deduction.
Question 4: What is the primary tax benefit of a Charitable Remainder Trust (CRT)?
- The grantor avoids all estate taxes on assets transferred to the trust
- The grantor receives an immediate partial charitable deduction and deferred capital gains treatment on contributed assets (Correct answer)
- All income generated by the trust is permanently tax-exempt to the grantor
- The trust qualifies for the unlimited marital deduction
Correct answer: The grantor receives an immediate partial charitable deduction and deferred capital gains treatment on contributed assets
A CRT provides the grantor with an immediate charitable income tax deduction for the present value of the remainder interest and defers capital gains recognition on contributed appreciated assets.
Question 5: What is the Generation-Skipping Transfer (GST) tax designed to prevent?
- Spouses from transferring assets to each other tax-free using the marital deduction
- Wealthy individuals from avoiding estate tax by transferring wealth directly to grandchildren or lower generations (Correct answer)
- Charities from receiving large bequests without estate tax consequences
- Minors from receiving large inheritances before reaching legal adulthood
Correct answer: Wealthy individuals from avoiding estate tax by transferring wealth directly to grandchildren or lower generations
The GST tax imposes an additional tax on transfers made to individuals two or more generations below the transferor, preventing families from bypassing estate tax at the intermediate generation.
Question 6: What is 'portability' in the context of federal estate taxes?
- The ability to transfer real property between states without triggering estate taxes
- The ability of a surviving spouse to elect to use the deceased spouse's unused estate tax exemption (Correct answer)
- The automatic rollover of retirement account balances to a surviving spouse
- The carryover of unused capital loss deductions from the estate to beneficiaries
Correct answer: The ability of a surviving spouse to elect to use the deceased spouse's unused estate tax exemption
Portability allows a surviving spouse to elect to use any remaining portion of the deceased spouse's federal estate tax exemption, effectively increasing the couple's combined tax-free transfer amount.
Question 7: What is the purpose of a durable power of attorney for finances in an estate plan?
- To authorize an agent to make medical decisions if the principal becomes incapacitated
- To authorize a named agent to manage the principal's financial affairs if the principal becomes incapacitated (Correct answer)
- To transfer assets to a trust without going through probate
- To name a guardian for minor children in the event of the principal's death
Correct answer: To authorize a named agent to manage the principal's financial affairs if the principal becomes incapacitated
A durable power of attorney for finances designates a trusted agent to manage financial decisions—such as paying bills, managing investments, and filing taxes—if the principal becomes unable to do so.
CFSP Estate Planning & Wealth Transfer 2
What is an Irrevocable Life Insurance Trust (ILIT) primarily used to accomplish?