CTFA Trust and Financial Advisor Certification 3 — Questions and Answers
Question 1: A grantor establishes an irrevocable life insurance trust (ILIT) and transfers a policy to it. To avoid estate inclusion under IRC §2042, what transfer rule must be satisfied?
- The grantor must survive the transfer by at least 1 year
- The grantor must survive the transfer by more than 3 years under IRC §2035 (Correct answer)
- The grantor must divest all premium-paying obligations within 6 months
- The trust must be funded with at least $1 million in additional assets
Correct answer: The grantor must survive the transfer by more than 3 years under IRC §2035
Under IRC §2035, a life insurance policy transferred within three years of death is pulled back into the taxable estate; the grantor must survive more than three years for the transfer to be effective.
Question 2: Which type of trust allows the grantor to retain a fixed annuity payment for a specified term, with the remainder passing to heirs at reduced gift tax value?
- Qualified Personal Residence Trust (QPRT)
- Grantor Retained Annuity Trust (GRAT) (Correct answer)
- Charitable Remainder Annuity Trust (CRAT)
- Spousal Lifetime Access Trust (SLAT)
Correct answer: Grantor Retained Annuity Trust (GRAT)
A GRAT allows the grantor to retain fixed annuity payments for a term, transferring any appreciation above the IRS §7520 hurdle rate to beneficiaries gift-tax efficiently.
Question 3: A trust document grants the trustee discretionary authority to distribute principal for a beneficiary's 'health, education, maintenance, and support' (HEMS). This standard is significant because it:
- Gives the trustee unlimited discretion to distribute any amount
- Keeps trust assets outside the beneficiary's taxable estate if the beneficiary is also the trustee (Correct answer)
- Requires equal distributions among all beneficiaries
- Mandates annual principal distributions regardless of need
Correct answer: Keeps trust assets outside the beneficiary's taxable estate if the beneficiary is also the trustee
The HEMS standard is an ascertainable standard under IRC §2041, which prevents trust assets from being included in a beneficiary-trustee's gross estate.
Question 4: When a fiduciary files IRS Form 1041 for a complex trust, which of the following income items is NOT eligible for the distribution deduction?
- Dividend income distributed to beneficiaries
- Capital gains allocated to corpus and not distributed (Correct answer)
- Interest income distributed to current beneficiaries
- Rental income distributed pursuant to trustee discretion
Correct answer: Capital gains allocated to corpus and not distributed
Capital gains allocated to trust corpus are generally not included in distributable net income (DNI) and therefore cannot be deducted on Form 1041 via the distribution deduction.
Question 5: A client wants to minimize estate taxes while maintaining some access to trust assets. Which trust structure best achieves this goal?
- Revocable living trust with full retained control
- Spousal Lifetime Access Trust (SLAT) naming the spouse as beneficiary (Correct answer)
- Totten trust with the client as both grantor and beneficiary
- Constructive trust imposed by court order
Correct answer: Spousal Lifetime Access Trust (SLAT) naming the spouse as beneficiary
A SLAT removes assets from the grantor's estate while allowing indirect access through the beneficiary spouse, balancing estate tax reduction with some retained family access.
Question 6: Under the Uniform Trust Code, what is the primary purpose of a 'no-contest' (in terrorem) clause in a trust?
- To penalize beneficiaries who contest the trustee's investment decisions
- To disinherit beneficiaries who challenge the validity of the trust without probable cause (Correct answer)
- To prevent creditors from bringing claims against trust assets
- To restrict beneficiaries from seeking court accountings
Correct answer: To disinherit beneficiaries who challenge the validity of the trust without probable cause
An in terrorem clause forfeits a beneficiary's interest if they contest the trust, discouraging frivolous challenges to the grantor's intent.
Question 7: A charitable remainder unitrust (CRUT) pays the income beneficiary a fixed percentage of the trust's fair market value as revalued annually. How does this differ from a charitable remainder annuity trust (CRAT)?
- A CRAT pays a fixed percentage of annually revalued assets while a CRUT pays a fixed dollar amount
- A CRUT pays a fixed percentage of annually revalued assets while a CRAT pays a fixed dollar amount (Correct answer)
- Both pay the same fixed dollar amount but differ in how the charitable deduction is calculated
- CRUTs require a minimum 10-year term while CRATs have no minimum term
Correct answer: A CRUT pays a fixed percentage of annually revalued assets while a CRAT pays a fixed dollar amount
CRUTs recalculate the payout each year based on the current fair market value, while CRATs pay a fixed dollar amount determined at inception regardless of asset performance.
CTFA Trust and Financial Advisor Certification 3
A grantor establishes an irrevocable life insurance trust (ILIT) and transfers a policy to it.
To avoid estate inclusion under IRC §2042, what transfer rule must be satisfied?