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CPWA Test Prep > Estate Issues and Wealth Transfer > Flashcards

Estate Issues and Wealth Transfer Flashcards

1
Q

What is the role of a will in estate planning?

A

A will directs how assets are distributed upon death, ensuring that an individual’s preferences are followed and reducing potential conflicts among heirs.

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2
Q

Define probate and its primary purpose.

A

Probate is the legal process of validating a will, managing a decedent’s assets, paying debts, and distributing remaining assets to heirs.

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3
Q

What is intestacy, and what are its consequences?

A

Intestacy occurs when an individual dies without a valid will, leading to asset distribution according to state law rather than the decedent’s wishes.

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4
Q

Describe the unlimited marital deduction and its importance in estate planning.

A

The unlimited marital deduction allows assets to be transferred to a surviving spouse without incurring estate taxes, deferring tax until the second spouse’s death.

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5
Q

Explain the concept of a power of appointment.

A

A power of appointment grants an individual the authority to decide how certain assets are distributed, allowing for flexible estate planning.

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6
Q

What are the two types of powers of appointment?

A

General and special (or limited) powers of appointment. General allows broader control, potentially adding assets to the powerholder’s estate, while special limits appointees.

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7
Q

What is the generation-skipping transfer (GST) tax, and who does it affect?

A

GST tax applies to transfers made to individuals at least two generations below the donor, preventing tax avoidance by skipping generations.

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8
Q

Define a Qualified Domestic Trust (QDOT).

A

A QDOT allows non-U.S. citizen spouses to receive assets without incurring estate tax, deferring it until distributions are made or the spouse passes away.

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9
Q

What is the annual gift tax exclusion for 2024?

A

The annual gift tax exclusion for 2024 is $18,000 per recipient, allowing donors to give up to this amount without incurring gift tax.

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10
Q

Describe a disclaimer in estate planning.

A

A disclaimer allows beneficiaries to refuse an inheritance, causing the asset to pass as if the disclaiming individual predeceased the decedent, often for tax benefits.

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11
Q

What is the difference between a revocable and an irrevocable trust?

A

Revocable trusts can be changed or canceled by the grantor, while irrevocable trusts cannot, often providing greater tax advantages and asset protection.

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12
Q

Explain the concept of portability in estate planning.

A

Portability allows a surviving spouse to use any unused estate tax exemption of their deceased spouse, maximizing tax-free transfer opportunities.

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13
Q

What is a Charitable Remainder Trust (CRT)?

A

A CRT provides income to beneficiaries for life or a set term, with the remaining assets passing to a charity, offering tax benefits for the donor.

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14
Q

How does a Family Limited Partnership (FLP) aid in wealth transfer?

A

An FLP allows wealth to be transferred to family members at reduced tax rates due to valuation discounts, while retaining control within the family.

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15
Q

What is the purpose of a Living Will in estate planning?

A

A Living Will provides directives for medical care in cases of incapacitation, ensuring that healthcare decisions align with the individual’s wishes.

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16
Q

Define “stepped-up basis” in estate planning.

A

Stepped-up basis adjusts the asset’s cost basis to its value at the owner’s death, potentially reducing capital gains tax for heirs upon sale.

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17
Q

How does a Crummey Trust work in gifting?

A

A Crummey Trust allows contributions to qualify for the annual gift tax exclusion by providing beneficiaries with a temporary withdrawal right.

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18
Q

What is the purpose of a durable power of attorney?

A

A durable power of attorney appoints someone to manage financial matters on behalf of an individual in case of incapacitation.

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19
Q

What is a health care proxy?

A

A health care proxy names someone to make medical decisions for an individual if they become unable to do so themselves.

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20
Q

Explain the concept of a charitable lead trust (CLT).

A

A CLT provides income to a charity for a set term, with the remaining assets passing to non-charitable beneficiaries, offering estate tax benefits.

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21
Q

What is an irrevocable life insurance trust (ILIT)?

A

An ILIT holds a life insurance policy outside of the insured’s estate, helping avoid estate tax on insurance proceeds.

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22
Q

Describe the purpose of a Qualified Personal Residence Trust (QPRT).

A

A QPRT allows a residence to be transferred out of an estate at a reduced gift tax value, with the grantor retaining use for a set term.

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23
Q

What are bypass or credit shelter trusts?

A

Bypass trusts preserve the estate tax exemption of the first spouse to die, passing remaining assets tax-free to heirs after the second spouse’s death.

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24
Q

Define intestate succession.

A

Intestate succession is the legal distribution of a decedent’s assets when there is no valid will, following state laws.

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25
Q

What is an executor’s role in estate administration?

A

The executor manages and distributes the decedent’s estate according to the will, including paying debts and filing taxes.

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26
Q

Explain the concept of fair market value in estate valuation.

A

Fair market value is the price at which an asset would sell between willing buyers and sellers, used for estate tax purposes.

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27
Q

What is a durable power of attorney for health care?

A

This document appoints an agent to make medical decisions on behalf of an individual when they are unable to do so.

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28
Q

How does a special needs trust work?

A

A special needs trust provides for a disabled person without affecting their eligibility for government benefits.

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29
Q

What is the purpose of lifetime gifting in estate planning?

A

Lifetime gifting reduces the taxable estate and may allow the use of annual exclusions, reducing estate tax liability.

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30
Q

Explain an irrevocable trust’s role in Medicaid planning.

A

Assets in an irrevocable trust are excluded from Medicaid calculations, potentially qualifying the grantor for benefits.

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31
Q

What is a testamentary trust?

A

A testamentary trust is established upon the grantor’s death per their will, often for minor children or charitable purposes.

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32
Q

Define the concept of “gift splitting” in gift tax planning.

A

Gift splitting allows a married couple to split a gift, doubling the amount eligible for the annual exclusion.

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33
Q

What are Qualified Charitable Distributions (QCDs) from an IRA?

A

QCDs allow individuals over 70½ to make charitable contributions directly from an IRA, excluding the amount from taxable income.

34
Q

Explain tenancy in common.

A

In tenancy in common, co-owners have separate, undivided interests in property, which can pass to their heirs upon death.

35
Q

What is the benefit of a step-up in basis at death?

A

The step-up in basis reduces capital gains tax on inherited property, as the cost basis resets to the value at the decedent’s death.

36
Q

Describe the gift tax exclusion for education and medical expenses.

A

Payments made directly to educational or medical institutions are excluded from gift tax, regardless of the annual exclusion.

37
Q

What is the federal estate tax exemption for 2024?

A

The federal estate tax exemption for 2024 is $13.61 million, allowing estates below this amount to avoid federal estate tax.

38
Q

Explain the use of marital trusts in estate planning.

A

Marital trusts, like QTIP trusts, defer estate tax by providing income to a surviving spouse, with remaining assets passing to other heirs.

39
Q

What are Medicaid look-back periods?

A

The Medicaid look-back period is the timeframe in which asset transfers may disqualify a person from Medicaid eligibility.

40
Q

Describe a Qualified Terminable Interest Property (QTIP) Trust.

A

A QTIP Trust provides income to a surviving spouse, allowing the remaining assets to pass to other beneficiaries, deferring estate taxes.

41
Q

What is the purpose of a GRAT (Grantor Retained Annuity Trust) in estate planning?

A

A GRAT allows a grantor to transfer assets with minimal gift tax by retaining an annuity, with remaining assets passing to beneficiaries tax-free if the grantor outlives the trust term.

42
Q

Define the “Crummey power” and its use in estate planning.

A

Crummey power allows beneficiaries a temporary withdrawal right over contributions to a trust, enabling gifts to qualify for the annual exclusion.

43
Q

What is an Irrevocable Life Insurance Trust (ILIT), and why is it used?

A

An ILIT holds life insurance policies outside the grantor’s estate, providing estate tax benefits by excluding death benefits from the estate.

44
Q

Explain how a Qualified Domestic Trust (QDOT) benefits non-U.S. citizen spouses.

A

A QDOT allows a non-U.S. citizen spouse to inherit assets without immediate estate tax, deferring tax until distributions or the spouse’s death.

45
Q

Describe the purpose of the annual gift tax exclusion.

A

The annual gift tax exclusion allows individuals to give up to $18,000 per recipient (2024) without gift tax implications, reducing taxable estate size.

46
Q

What is a bypass trust, and how does it function in estate planning?

A

A bypass trust (credit shelter trust) uses the estate tax exemption of the first spouse to die, preserving assets for heirs and minimizing estate taxes upon the surviving spouse’s death.

47
Q

What are GRATs and GRUTs, and how do they differ?

A

A GRAT pays a fixed annuity to the grantor, while a GRUT pays a percentage of the trust’s value, with both used to pass assets with minimized gift tax.

48
Q

Explain “incidents of ownership” in life insurance and estate inclusion.

A

If a decedent holds any control over a life insurance policy, such as the ability to change beneficiaries, the policy is included in their estate.

49
Q

What is the purpose of a dynasty trust?

A

A dynasty trust allows wealth to be preserved and transferred across multiple generations with minimal estate and generation-skipping transfer taxes.

50
Q

How does a community property arrangement affect estate planning?

A

In community property states, each spouse owns half of marital property, with both halves receiving a step-up in basis upon one spouse’s death.

51
Q

What is a Tenancy by the Entirety (TBE) and its advantage in asset protection?

A

TBE is a form of joint ownership for married couples providing creditor protection, as one spouse’s creditors cannot claim the other’s interest.

52
Q

Define a charitable lead trust (CLT) and its tax benefits.

A

A CLT pays income to charity for a set term, with the remainder going to beneficiaries, reducing estate and gift tax liability.

53
Q

What is the difference between a living trust and a testamentary trust?

A

A living trust is created during the grantor’s lifetime and avoids probate, while a testamentary trust is established at death through a will.

54
Q

Describe the alternate valuation date in estate tax calculations.

A

The alternate valuation date allows estate assets to be valued six months after death, potentially reducing estate tax if asset values decline.

55
Q

What is a special needs trust?

A

A special needs trust provides for a disabled person without impacting their eligibility for government benefits like Medicaid or SSI.

56
Q

Explain the concept of “step-down in basis.”

A

Step-down in basis occurs if an inherited asset has declined in value, resetting the basis to fair market value, reducing tax benefits.

57
Q

What is the kiddie tax, and who does it affect?

A

The kiddie tax applies to unearned income of children under 18 (or students under 24), taxing investment income at their parents’ rate.

58
Q

What are 529 plans, and how are they used in estate planning?

A

529 plans are tax-advantaged savings accounts for education expenses, allowing high contributions without gift tax when spread over five years.

59
Q

Describe the importance of the 5-and-5 power in trust planning.

A

The 5-and-5 power allows beneficiaries to withdraw the greater of $5,000 or 5% of the trust value, ensuring tax efficiency and asset control.

60
Q

What is the primary benefit of gifting assets with a lower basis during the donor’s lifetime?

A

Gifting assets with a lower basis can shift future appreciation to the recipient’s estate, reducing the donor’s estate tax liability.

61
Q

Define a 2503(c) trust.

A

A 2503(c) trust is a minor’s trust allowing assets to grow tax-deferred until the beneficiary turns 21, qualifying for the annual gift tax exclusion.

62
Q

Explain the purpose of a disclaimer trust.

A

A disclaimer trust provides flexibility by allowing beneficiaries to disclaim assets, transferring them into a trust for tax or asset protection.

63
Q

What is a GRAT and its tax strategy benefit?

A

A GRAT is used to transfer appreciation on assets tax-free to beneficiaries, with minimal gift tax if the grantor outlives the trust term.

64
Q

What is a Qualified Personal Residence Trust (QPRT) used for?

A

A QPRT reduces the value of a residence in the estate by allowing it to pass to heirs after a term, while the grantor retains use of the home.

65
Q

Define a Tenancy in Common (TIC).

A

TIC allows co-owners to hold an undivided share in property, with each owner’s share passing to their heirs upon death.

66
Q

Explain gift-splitting for married couples in estate planning.

A

Gift-splitting allows spouses to combine their annual exclusions, doubling the amount they can gift to each recipient without tax.

67
Q

Describe a testamentary trust’s role in estate planning.

A

Established upon death through a will, testamentary trusts allow asset control and management for heirs, often used for minors.

68
Q

What is a Qualified Terminable Interest Property (QTIP) Trust?

A

A QTIP Trust provides income to a surviving spouse and allows remaining assets to pass to other heirs, commonly used in second marriages.

69
Q

What are Medicaid look-back periods, and how do they affect asset transfers?

A

The look-back period (up to five years) checks for asset transfers made to qualify for Medicaid, impacting eligibility if disqualifying transfers are found.

70
Q

How does a Crummey Trust qualify gifts for the annual exclusion?

A

By giving beneficiaries temporary withdrawal rights, Crummey Trusts enable contributions to qualify for the annual gift tax exclusion.

71
Q

What is the function of an irrevocable trust in estate planning?

A

Irrevocable trusts remove assets from the grantor’s estate, providing tax advantages and asset protection, as the grantor cannot alter the trust.

72
Q

Describe a dynasty trust’s advantage.

A

Dynasty trusts allow assets to pass through multiple generations, reducing estate taxes and preserving wealth over time.

73
Q

Define the concept of ‘fair market value’ for estate tax purposes.

A

Fair market value is the price an asset would fetch in a willing sale, essential for calculating estate tax.

74
Q

What is a GRAT’s primary risk to the grantor?

A

If the grantor dies before the GRAT term ends, the remaining assets are included in their estate, losing tax benefits.

75
Q

Explain portability of the estate tax exemption.

A

Portability allows a surviving spouse to use any unused estate tax exemption of their deceased spouse, maximizing tax-free transfers.

76
Q

What is a Qualified Charitable Distribution (QCD)?

A

A QCD allows IRA owners over 70½ to make direct charitable donations up to $100,000 per year, excluding it from taxable income.

77
Q

Describe a Special Needs Trust’s benefit.

A

Special Needs Trusts provide for disabled beneficiaries without affecting eligibility for government assistance programs.

78
Q

What is the marital deduction in estate planning?

A

The marital deduction allows unlimited asset transfers to a spouse without estate or gift taxes, deferring tax until the second death.

79
Q

Explain the impact of the GST tax exemption.

A

The GST exemption protects certain transfers to younger generations from the generation-skipping transfer tax.

80
Q

What is a spousal lifetime access trust (SLAT)?

A

A SLAT allows one spouse to make a gift to an irrevocable trust for the benefit of the other, offering asset protection and estate tax savings.

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