Financial Analysis & Planning Flashcards

A CES practitioner reviews a client's balance sheet and notes the client holds $500,000 in Series EE savings bonds. What is a key income tax consideration when these bonds are transferred at death?

Answer: The accrued interest becomes income in respect of a decedent (IRD) taxable to the recipient

Accrued interest on savings bonds that was not previously reported is IRD — it is included in the gross estate and taxed as ordinary income when the bonds are redeemed by the beneficiary.

Which financial planning strategy involves systematically gifting appreciated stock to a low-income family member who sells it at a lower capital gains tax rate?

Answer: Income shifting through intrafamily gifts

Income shifting transfers appreciated assets to family members in lower tax brackets who can sell at reduced long-term capital gains rates of 0% or 15%, subject to kiddie tax rules.

A CES practitioner calculates a modified endowment contract (MEC) status for a life insurance policy. Under FIFO or LIFO treatment, which rule applies to MEC withdrawals?

Answer: LIFO — gains come out first, subject to ordinary income tax and a 10% penalty

MEC withdrawals follow LIFO treatment, meaning earnings come out first and are subject to ordinary income tax plus a 10% penalty if taken before age 59½.

When preparing a comprehensive estate plan, which document directs the distribution of probate assets and names a personal representative?

Answer: Last will and testament

A last will and testament is the legal document that controls the distribution of probate assets and designates an executor (personal representative) to administer the estate.

A trust document specifies that the trustee must distribute income annually but may distribute principal at the trustee's discretion. Which type of interest does the income beneficiary hold?

Answer: Mandatory income interest with discretionary principal interest

The beneficiary holds a mandatory income interest (trustee must distribute income) combined with a discretionary principal interest (trustee may but is not required to distribute principal).

A client's estate plan includes a credit shelter trust (bypass trust) funded at the first spouse's death. What is the primary benefit of this structure under current federal estate tax law?

Answer: It shelters the first spouse's exemption amount from estate tax at the surviving spouse's death

A credit shelter trust captures the deceased spouse's federal estate tax exemption, keeping those assets and their future growth out of the surviving spouse's taxable estate.

Under the alternate valuation date election (IRC Section 2032), assets must be valued six months after the date of death. Which condition must be met for this election to be available?

Answer: The election must reduce both the gross estate value and the estate tax liability

The alternate valuation election is only available if it reduces both the gross estate value and the federal estate tax liability — it cannot be used merely to increase basis.