CLA/CP Exam Estate Planning and Probate 5 — Questions and Answers
Question 1: What is the 'stepped-up basis' rule for inherited property under current U.S. federal tax law?
- Heirs pay capital gains on all appreciation during the decedent's lifetime
- The heir's cost basis is reset to the fair market value of the property at the date of death (Correct answer)
- The original purchase price carries over to the heir
- The basis is increased by 50% of appreciation
Correct answer: The heir's cost basis is reset to the fair market value of the property at the date of death
Under IRC §1014, inherited property receives a basis equal to its fair market value on the decedent's date of death, eliminating capital gains on pre-death appreciation.
Question 2: Which trust arrangement is irrevocable, removes assets from the taxable estate, and is commonly used to hold life insurance policies?
- Revocable living trust
- Irrevocable Life Insurance Trust (ILIT) (Correct answer)
- Grantor Retained Annuity Trust (GRAT)
- Qualified Personal Residence Trust (QPRT)
Correct answer: Irrevocable Life Insurance Trust (ILIT)
An ILIT owns a life insurance policy so the death benefit is excluded from the insured's taxable estate, provided the insured does not retain any incidents of ownership.
Question 3: What is the role of a guardian ad litem in a probate proceeding?
- To manage estate investments during administration
- To represent the interests of a minor or incapacitated person in the proceeding (Correct answer)
- To appraise estate property
- To collect debts owed to the estate
Correct answer: To represent the interests of a minor or incapacitated person in the proceeding
A guardian ad litem is appointed by the court to protect the legal interests of a minor or incompetent beneficiary who cannot represent themselves.
Question 4: When creditors' claims exceed estate assets in an insolvent estate, which class of debts is typically paid last?
- Funeral expenses
- Administration expenses
- General unsecured creditors
- Specific bequests to family (Correct answer)
Correct answer: Specific bequests to family
In an insolvent estate, specific bequests to beneficiaries are paid last after all creditor claims, following a statutory priority order that places administration expenses and secured claims first.
Question 5: What is a 'no-contest clause' (in terrorem clause) in a will, and what is its general effect?
- It bars creditors from contesting estate debts
- It disinherits a beneficiary who challenges the will in court (Correct answer)
- It requires all beneficiaries to consent to estate distributions
- It prevents the executor from resigning
Correct answer: It disinherits a beneficiary who challenges the will in court
An in terrorem clause provides that any beneficiary who contests the will forfeits their inheritance, discouraging frivolous challenges.
Question 6: Which federal tax return must be filed to elect portability of a deceased spouse's unused estate tax exemption?
- Form 1041
- Form 706 (Correct answer)
- Form 709
- Form 1040
Correct answer: Form 706
Form 706 (United States Estate Tax Return) must be timely filed by the executor to make the portability election, even if no estate tax is due.
Question 7: What distinguishes a 'testamentary trust' from a 'living trust'?
- A testamentary trust is created during life; a living trust is created by will
- A testamentary trust is created by will and takes effect at death; a living trust is created and funded during the grantor's lifetime (Correct answer)
- A testamentary trust avoids probate; a living trust does not
- A testamentary trust is always irrevocable; a living trust is always revocable
Correct answer: A testamentary trust is created by will and takes effect at death; a living trust is created and funded during the grantor's lifetime
A testamentary trust is established within a will and only comes into existence—and must go through probate—upon the testator's death, unlike a living trust that is created and funded during life.
CLA/CP Exam Estate Planning and Probate 5
What is the 'stepped-up basis' rule for inherited property under current U.S. federal tax law?