Estates Ch 8 Trust

Question 1

The grantor is the individual who contributes property to a trust.

a. True b. False

Answer 1

True

Question 2

Property in a revocable living trust with a living beneficiary avoids probate.

a. True b. False

Answer 2

True

Question 3

The uniform statutory rule against perpetuities set the perpetuities period at 90 years.

a. True b. False

Answer 3

True

Question 4

If a grantor retains the right to receive income from a trust, the value of the trust will be included in the grantor’s gross estate.

a. True b. False

Answer 4

True

Question 5

If gift tax is paid on a transfer to a trust within three years of the decedent’s date of death, the gift tax is included in the decedent’s gross estate.

a. True b. False

Answer 5

True

Question 6

Gift tax paid on transfers to a trust within three years of the grantor’s date of death will be included in the grantor’s gross estate.

a. True b. False

Answer 6

True

Question 7

A trust created by the will of a decedent is known as a testamentary trust.

a. True b. False

Answer 7

True

Question 8

Which of the following trusts would qualify for the unlimited marital deduction?

A power of appointment trust.
A family trust.
A “see-through” trust.
A bypass trust.

Answer 8

A power of appointment trust.
Rationale

A powers of appointment trust (POA) is a marital trust because the surviving spouse has a general power over those assets and must therefore include any remaining assets in their gross estate.

Question 9

A bypass trust can be created during a grantor’s life.

a. True b. False

Answer 9

True

Question 10

Blind trusts are most commonly used by politicians.

a. True b. False

Answer 10

True

Question 11

A special needs trust allows family members to provide for an individual with special needs without adversely effecting government benefits.

a. True b. False

Answer 11

True

Question 12

The three types of special needs trusts are the Third Party SNT, the SNT created from the Omnibus Budget Reconciliation Act of 1993 and the Pooled Trust.

a. True b. False

Answer 12

True

Question 13

Assets exceeding $2,000 owned by or distributed to a person with a disability may jeopardize federal government benefits.

a. True b. False

Answer 13

True

Question 14

Trusteed IRAs allow IRA owners to control how distributions from the IRA will be paid out and to whom the assets will pass after the death of the primary beneficiary.

a. True b. False

Answer 14

True

Question 15

See-through trusts require RMDs.

a. True b. False

Answer 15

True

Question 16

Which of the following is not a party to a trust?

a. Trustee.
b. Income beneficiary.
c. Grantor.
d. Principal

Answer 16

The correct answer is d.

The parties to a trust are the grantor, who creates the trust and contributes the property; the trustee,
who manages the trust and holds the legal title to the trust assets; and the beneficiary, who holds the beneficial title to the property. The principal of the trust is the property contributed to the trust; it is not a party to the trust

Question 17

A trustee is subject to which of the following?

a. Prudent Investor Rule.
b. Trustee’s Ethical Code.
c. Uniform Trustee Provisions.
d. Fiduciary Responsibilities Doctrine.

Answer 17

The correct answer is a.

The Uniform Prudent Investor Act (UPIA) prescribes rules guiding trustees in the investment of trust property and requires that a trustee consider risk and return, beneficiary needs (e.g. need for income or preservation of capital), the effect of inflation, general economic conditions, and potential tax consequences when selecting investments within the trust.

Portfolio diversification is prudent and, therefore, required.

Question 18

A spendthrift clause:

a. Requires the fiduciary of a trust to make small distributions.
b. Protects the trust assets from the claims of the beneficiary’s creditors.
c. Eliminates the problems associated with multiple beneficiaries.
d. Prevents the lapse of a general power of appointment and its subsequent estate tax consequences.

Answer 18

The correct answer is b.
Protects the trust assets from the claims of the beneficiary’s reditors.

Question 19

Kadence contributed $600,000 to an irrevocable trust with no retained powers in 2020 and did not retain any powers over the transferred assets.
She named her only daughter as the sole income and remainder beneficiary and paid gift tax at the date of the transfer of $25,000. In 2022, Kadence died of lung cancer.
The fair market value of the property in the irrevocable trust was $3,000,000 at the date of her death. What amount of the trust assets are included in Kadence’s gross estate?

a. $0.
b. $600,000.
c. $625,000.
d. $3,000,000.

Answer 19

The correct answer is a.

Because the trust was an irrevocable trust and Kadence did not retain any rights to the trust, the value of the trust is not included in Kadence’s gross estate.

However, the $25,000 gift tax is included in her gross estate because it was paid for gifts made within three years of her death

Question 20

A trust created in the will of a decedent is a:

a. Standby trust.
b. Testamentary trust.
c. Trust by will.
d. Decedent’s trust.

Answer 20

The correct answer is b.

A testamentary trust is a trust created in a decedent’s will. The decedent includes the instructions of the trust’s formation and funding in their will.

A standby trust is a trust created during a grantor’s lifetime
that is waiting for assets.

The options included as answers c and d do not exist

Question 21

Of the following statements regarding Tangible Personal Property Trusts (TPPTs), which is true?

A TPPT is designed to utilize temporal discounts to transfer tangible personal property at a reduced gift tax cost.

Only easy-to-value personal property may be included in a TPPT.

Property which is expected to depreciate in value should be transferred to a TPPT.

A TPPT is designed to utilize minority and lack of marketability discounts to transfer property at a reduced gift tax cost.

Answer 21

Option a is a correct statement.

Like a GRAT or QPRT, a TPPT uses temporal discounts to transfer property, in this case tangible personal property, at a reduced gift tax cost. Option b is incorrect because any tangible personal property can be contributed to a TPPT. Option c is incorrect as property which is expected to appreciate should be contributed to the TPPT so that the appreciation occurs in the hands of the beneficiary and not the grantor. Option d is an incorrect statement as the value is reduced by a temporal discount, not minority or lack of marketability discounts.

Question 22

A trust created in the will of a decedent is a:

Standby trust.
Testamentary trust.
Trust by will.
Decedent’s trust.

Answer 22

Testamentary trust.
Rationale

A testamentary trust is a trust created in a decedent’s will. The decedent includes the instructions of the trust’s formation and funding in his will.

A standby trust is a trust created during a grantor’s lifetime that is waiting for assets.

The options included as c and d do not exist.

Question 23

Which of the following statements is false regarding see-through trusts?

See-through trusts provide creditor protection.

See-through trusts require RMDs to be paid.

See-through trusts may be accumulation trusts.

See-through trusts are required to provide the custodian of the IRA the trust document by April 15 following the year of the owner’s death.

Answer 23

See-through trusts are required to provide the custodian of the IRA the trust document by April 15 following the year of the owner’s death.
Rationale

The trust instrument must be provided by October 31 in the year following the death of the IRA owner.

Question 24

Which of the following statements regarding 2503(b) trusts is correct?

The trustee has full discretion to make principal distributions to the beneficiary.

All income of a 2503(b) trust must be paid to the beneficiary at least annually.

When the beneficiary reaches the age of majority, the principal of a 2503(b) trust must be paid to the beneficiary.

No portion of a contribution to a 2503(b) trust qualifies for the annual exclusion.

Answer 24

All income of a 2503(b) trust must be paid to the beneficiary at least annually.
Rationale

Option b is a correct statement. Option a is not correct because the trust document directs the trustee to make distributions. Option c is not correct because the trust does not have to distribute the principal of the trust to the beneficiary when he reaches the age of majority. The trust is only required to pay the income annually. Option d is incorrect because the present value of the income interest that the child will receive over the term of the trust is eligible for the annual exclusion.

Question 25

All of the following are characteristics of revocable trust except:

The grantor can take the property back from the trust.

The income of the trust is typically payable to the grantor.

At the grantor’s date of death, the fair market value of the trust’s assets are included in their federal gross estate.

At the grantor’s date of death, the fair market value of the trust’s assets are included in their probate estate

Answer 25

At the grantor’s date of death, the fair market value of the trust’s assets are included in their probate estate.

Rationale

At the grantor’s date of death, the fair market value of the revocable trust’s assets are not included in the grantor’s probate estate. Property within a revocable trust transfers per the trust document. All of the other statements are characteristics of revocable trusts

Question 26

Of the following, which does not reduce a grantor’s federal gross estate?

A contribution of highly appreciating property to an irrevocable trust
.
A contribution of high income, zero growth property to an irrevocable trust.

The creation of a grantor trust that requires the grantor to pay income tax on the trust’s income.

A contribution of depreciable personal property to a revocable living trust.

Answer 26

A contribution of depreciable personal property to a revocable living trust.
Rationale

A contribution to a revocable living trust does not reduce a grantor’s federal gross estate. All of the other options would reduce a grantor’s federal gross estate.

Answer 27

A contribution to an ILIT that includes a Crummey power is eligible for the gift tax annual exclusion.

Question 28

Which of the following statements concerning trust formation is correct?

The trustee of the trust will receive the trust corpus after paying the income to the income beneficiary.

The remainder beneficiary of a trust receives an annuity payment each year.

The grantor of a trust contributes property to a trust which will be managed by the trustee.

The income beneficiary of a trust always receives the trust property at the termination of the trust.

Answer 28

The grantor of a trust contributes property to a trust which will be managed by the trustee.

Rationale

Option c is a correct statement. Options a, b, and d are incorrect as the remainder beneficiary of a trust receives the trust corpus and the income interest is paid to the income beneficiary each year.

Question 29

Nanette contributed $450,000 to a revocable living trust in 2009. She named herself as the income beneficiary and her only son as the remainder beneficiary. The term of the trust was equal to Nanette’s life expectancy. Nanette died in 2024, when the fair market value of the trust’s assets is $2,000,000.
How much is included in Nanette’s probate estate related to the revocable living trust?

$0.
$345,800.
$450,000.
$2,000,000.

Answer 29

$0.
Rationale

The question asks for the amount included in Nanette’s probate estate.
Because a revocable living trust transfers assets per the trust document, $0 of the value of the trust is included in Nanette’s probate estate.

Remember, however, that the full value of a revocable living trust is included in a decedent’s gross estate.

Question 30

Which of the following situations would not cause the inclusion of an irrevocable trust in a grantor’s gross estate?

The grantor has retained the right to receive the income from the irrevocable trust.

The grantor has retained the right to use the assets contributed to the irrevocable trust for the remainder of his life.

The grantor retains an annuity from the irrevocable trust for a term of years which ends prior to the grantor’s death.

The grantor retains the right to revoke the trust.

Answer 30

The grantor retains an annuity from the irrevocable trust for a term of years which ends prior to the grantor’s death.
Rationale

If the grantor retains an annuity from an irrevocable trust, this right alone will not cause the inclusion of the irrevocable trust in their gross estate.

A GRAT is an irrevocable trust in which the grantor retains an annuity from the trust.

If the grantor outlives the trust, the assets of the irrevocable trust will not be included in their gross estate.

All of the other situations would cause the inclusion of an irrevocable transfer in a grantor’s gross estate.

Question 31

A trustee is subject to which of the following?

Prudent Investor Rule.
Trustee’s Ethical Code.
Uniform Trustee Provisions.
Fiduciary Responsibilities Doctrine.

Answer 31

Prudent Investor Rule.
Rationale

The Uniform Prudent Investor Act (UPIA) prescribes rules guiding trustees in the investment of trust property and requires that a trustee consider risk and return, beneficiary needs (e.g. need for income or preservation of capital), the effect of inflation, general economic conditions, and potential tax consequences when selecting investments within the trust. Portfolio diversification is prudent and, therefore, required.

Question 32

Which of the following statements is false regarding Trusteed IRAs?

Trusteed IRAs can provide creditor protection.

Trusteed IRAs require the named beneficiary to name their successor.

Trusteed IRAs can invade for HEMS.

Trusteed IRAs can limit distributions to the RMD.

Answer 32

Trusteed IRAs require the named beneficiary to name their successor.

Rationale

One of the advantages of a Trusteed IRA is that the original owner can name the successor beneficiaries.

Question 33

A spendthrift clause:

Requires the fiduciary of a trust to make small distributions.

Protects the trust assets from the claims of the beneficiary’s creditors.

Eliminates the problems associated with multiple beneficiaries.

Prevents the lapse of a general power of appointment and its subsequent estate tax consequences.

Answer 33

Protects the trust assets from the claims of the beneficiary’s creditors.

Rationale

Option b is a correct statement. The remaining statements are false

Question 34

Which of the following is not an advantage of using a revocable trust?

Privacy.
Estate tax reduction.
Probate avoidance.
Ability to change the trust.

Answer 34

Estate tax reduction.
Rationale

A revocable trust does not reduce estate taxes. Privacy, probate avoidance, and the ability for the grantor to change the trust are all advantages of a revocable trust.

Question 35

In 2000, Latoya funded a bypass trust with $675,000, the applicable estate tax credit amount at the time. At Latoya’s death in 2024, her will included a testamentary bypass trust and a residual bequest to her U.S. citizen husband.

If Latoya’s net worth at her death was $13,610,000 how much will be transferred to the bypass trust to maximize its benefits?

$0.
$5,389,800.
$12,935,000.
$13,610,000.

Answer 35

$12,935,000.
Rationale

A bypass trust is designed to receive an amount equal to the decedent’s remaining estate tax credit equivalency at their death. Since Latoya had funded a bypass trust during her life with $675,000, and since that funding the applicable estate tax credit equivalency had risen, Latoya’s executor funded the testamentary bypass trust with the difference between the applicable estate tax credit amount at Latoya’s death ($13,610,000 for 2024 and $12,920,000 for 2023) and the funding amount of the intervivos bypass trust ($675,000). In this case, the amount would be $12,935,000 ($13,610,000 - $675,000) for 2024 ($12,245,000 ($12,920,000-$675,000) for 2023).

Question 36

All of the following statements concerning the income beneficiary of a trust are correct, except:

An income interest in a trust can be given to the beneficiary, while also naming the same individual as the remainder beneficiary of the trust.

A decedent will commonly create a testamentary trust that names his spouse as the income beneficiary of the property for the rest of the spouse’s life and the decedent’s children as the remainder beneficiaries.

A dynasty trust only has income beneficiaries. The trust property will never vest with a remainder beneficiary.

When the property is paid to the remainder beneficiary at the termination of a trust, if the income beneficiary is a different individual than the remainder beneficiary, the income beneficiary is treated as having made a taxable gift to the remainder beneficiary.

Answer 36

When the property is paid to the remainder beneficiary at the termination of a trust, if the income beneficiary is a different individual than the remainder beneficiary, the income beneficiary is treated as having made a taxable gift to the remainder beneficiary.
Rationale

Option d is a false statement. The income beneficiary is not viewed as making a gift to the remainder beneficiary at the termination of a trust. At the formation of the trust, the grantor of the trust made a taxable gift to the remainder beneficiary equal to the value of the property contributed less the value of the income interest payable to the income beneficiary. All of the other statements are true statements.

Question 37

Which of the following statements concerning trusts is correct?

A trust can have several beneficiaries, including different classes and individuals.

When a grantor contributes property to a trust, he must recognize any unrealized capital gain or loss he has in the contributed property.

A trust can only have one trustee.

The gift of a remainder interest in a trust is a gift of a present interest.

Answer 37

A trust can have several beneficiaries, including different classes and individuals.

Rationale

A trust can have several beneficiaries. A trust may have income beneficiaries and remainder beneficiaries, and within each class can have several individuals of each type.

Option b is incorrect as a grantor does not recognize any unrealized gain in property transferred to a trust.

Option c is incorrect because a trust can have one or several trustees

. Option d is incorrect because the gift of a remainder interest in a trust is a gift of a future interest, which is not eligible for the annual exclusion.

Question 38

Wyatt created an irrevocable trust 15 years ago for the benefit of his children and grandchildren.
The state’s trust laws were recently updated with more favorable terms than were in effect when the trust was created, and Wyatt would like to take advantage of the new laws.
Which of the following is a method that would allow Wyatt’s trustee to take advantage of the new laws?

Follow the steps outlined in the irrevocable trust to modify or amend the trust.

Revoke the trust under the trust’s revocation provision.

Petition the federal trust court to allow the modification.

Once an irrevocable trust is established and funded, it cannot be modified or amended

Answer 38

Follow the steps outlined in the irrevocable trust to modify or amend the trust.
Rationale

A trust document may contain a provision for modifications to the trust. If no such provisions are included, the trustee could instead follow the steps outlined in the irrevocable trust to appoint a trustee residing in a trust-friendly modifying state, who in turn petitions the trust-friendly state court to modify the irrevocable trust, or the trustee could exercise their power to invade the trust’s property and distribute the property into a new trust (with more beneficial terms) for the same beneficiaries (decanting), or the court in the state of situs can be petitioned to allow a modification (a judicial modification; usually requires consent of all beneficiaries and the grantor, if still living). Option b is incorrect because there is no revocation provision in an irrevocable trust. Option c is incorrect because there is not such federal court.

Question 39

The main difference between a 2503(b) and a 2503(c) trust is:

The 2503(b) trust requires the trustee to accumulate income, whereas the 2503(c) trust requires the trustee to distribute all income.

The 2503(c) trust only allows distributions for the health, education, maintenance, and support of the beneficiary.

The 2503(c) trust must terminate, or the beneficiary must have the right to receive the trust’s assets, when the beneficiary reaches age 21. A 2503(b) trust may hold property for the lifetime of the beneficiary.

The trustee of a 2503(b) trust must distribute the principal of the trust within five years of the beneficiary reaching the age of majority. With a 2503(c) trust the trustee must distribute the principal of the trust at the death of the beneficiary.

Answer 39

The 2503(c) trust must terminate, or the beneficiary must have the right to receive the trust’s assets, when the beneficiary reaches age 21. A 2503(b) trust may hold property for the lifetime of the beneficiary.

Rationale

The main difference between a 2503(b) and 2503(c) trust is that the 2503(b) trust may hold property for the life of the beneficiary, whereas the 2503(c) trust must distribute the property to the beneficiary when he reaches the age of 21. Option a is incorrect - the characteristics are reversed in each trust. Options b and d are incorrect statements with no basis of fact

Question 40

Apollo transfers $8 million of stock to a GRAT naming his kids as the remainder beneficiaries. The GRAT was established for a ten year term.
Which of the following statements concerning this transfer is correct?

If Apollo dies before the end of the trust term, $8 million will be included in his gross estate, even though the value of the GRAT assets are $10 million.

If Apollo lives beyond the ten years, none of the value of the GRAT assets will be included in his gross estate.

Assuming the initial funding of the GRAT resulted in a taxable gift of $3 million, this amount will be added back to his gross estate.

If Apollo dies before the end of the trust, the GRAT’s current value of $10 million will be included in his gross estate, in addition to any taxable gift resulting from the establishment of the GRAT.

Answer 40

If Apollo lives beyond the ten years, none of the value of the GRAT assets will be included in his gross estate.

Rationale

Option a is incorrect since the value included in the gross estate would be the lump sum necessary to support an annuity payment for the remaining term of the GRAT (this is a special exception to the §2036 rule that applies to GRATs).

Option c is incorrect as the taxable gift will not be added to his gross estate, but will go into the calculation of the total estate tax.

Option d is incorrect as the gift does not get added to his gross estate.

Question 41

Which of the following statements concerning trusts is false?

A trust can provide asset protection for a beneficiary.

A trust can provide the grantor with a yearly payment.

Property held within a trust will avoid probate.

Income within a trust is not taxed until the beneficiary receives a distribution

Answer 41

Income within a trust is not taxed until the beneficiary receives a distribution.

Rationale

Option d is a false statement. A trust will be subject to income tax on any income that is not distributed during the year. The income that is distributed is taxed to the beneficiary. All of the other statements are true statements.

Question 42

Which of the following is not a party to a trust?

Trustee.
Income beneficiary.
Grantor.
Principal.

Answer 42

Principal.

Rationale

The parties to a trust are the grantor, who creates the trust and contributes the property; the trustee, who manages the trust and holds the legal title to the trust assets; and the beneficiary, who holds the beneficial title to the property. The principal of the trust is the property contributed to the trust; it is not a party to the trust

Question 43

Your son has been studying trusts in his financial planning class. He has come to you for more information.
Of the following statements listed below, which is correct?

Of the many reasons people create trusts, one reason is to provide for asset management.

Testamentary trusts are created during the grantor’s life.

The property within a revocable living trust is not included in a decedent’s probate or gross estate.

The grantor of a trust must include the full fair market value of any property transferred to a trust within three years of their death in their gross estate.

Answer 43

Of the many reasons people create trusts, one reason is to provide for asset management.
Rationale

Option a is a true statement.
Option b is incorrect because testamentary trusts are created in a grantor’s will. Intervivos trusts are created during the grantor’s life.

Option c is incorrect as property within a revocable living trust is not included in a decedent’s probate estate, but is included in a decedent’s gross estate.

Option d is an incorrect statement. Only gift tax paid on transfers within three years of a decedent’s death and or the death benefit of a life insurance policy transferred within three years of an individual’s date of death are included in the decedent’s gross estate.

Question 44

All of the following statements concerning a power of appointment trust are correct except:

The trust will qualify for the unlimited marital deduction if the surviving spouse is given a general power of appointment over the trust’s assets.

Powers of appointment trusts are irrevocable trusts that can be created either during lifetime or at death.

A general power of appointment trust qualifies the grantor’s contributions for the gift tax annual exclusion if the beneficiary is allowed to take withdrawals at their discretion.

A special power of appointment trust that limits the surviving spouse’s right to an ascertainable standard qualifies the trust for the unlimited marital deduction.

Answer 44

A special power of appointment trust that limits the surviving spouse’s right to an ascertainable standard qualifies the trust for the unlimited marital deduction.

Rationale

A special power of appointment trust that limits the surviving spouse’s right to an ascertainable standard (health, education, maintenance and support) does not qualify the trust for the unlimited marital deduction. All of the other statements are true statements regarding power of appointment trusts.

Question 45

Trusts are a general tool that are beneficial in many financial planning situations. Many trust benefits, such as asset protection and control, are appropriate considerations for the family of a person with special needs.

Which of the following is generally correct regarding special needs trusts?

Family trusts can be established but will likely cause the child to lose federal benefits.

A special needs trust under 42 U.S.C. Sec. 1396p(d)(4)(A) will permit a family member to contribute to the trust for the benefit of the child with special needs without adversely effecting government benefits if funds are paid back to the state, to the extent of the state-provided Medicaid benefits, at the death of the child.

A pooled trust can be established. Banks and brokerage firms establish many of these trusts.

A life insurance trust is prohibited from assisting with the needs of a child with special needs.

Answer 45

A special needs trust under 42 U.S.C. Sec. 1396p(d)(4)(A) will permit a family member to contribute to the trust for the benefit of the child with special needs without adversely effecting government benefits if funds are paid back to the state, to the extent of the state-provided Medicaid benefits, at the death of the child.
Rationale

Option a is not correct because they can be set up to maintain benefits. Option c is incorrect as pooled trusts are established by non-profit organizations. Option d is not correct because life insurance trusts can be used to provide benefits to children with special needs.

Question 46

Levi contributed $300,000 to an irrevocable trust and did not retain any right to the trust’s assets. The income beneficiary of the irrevocable trust was Levi’s nephew, and the remainder beneficiary of the irrevocable trust was Levi’s niece.
At the time of the transfer, Levi paid gift tax of $20,000. Levi died two years later, when the value of the irrevocable trust was $1,200,000.
Based solely on there facts, how much is included in Levi’s gross estate?

$0.
$20,000.
$300,000.
$1,200,000.

Answer 46

$20,000.
Rationale

The full fair market value of the trust is excluded from Levi’s gross estate because the transfer of the trust was irrevocable and Levi did not retain any right to the trust’s assets.

However, gift tax paid on gifts made within three years of Levi’s death is included in his gross estate. In this case, the gift tax paid within three years of Levi’s death was $20,000.

Question 47

Trusts are a general tool that are beneficial in many financial planning situations.
Many trust benefits, such as asset protection and control, are appropriate considerations for the family of a person with special needs.
Which of the following is not generally associated with planning for a special needs situation?

Family trust or third party trust.
A trust under 42 U.S.C. Sec. 1396p(d)(4)(A).
A pooled trust.
A special general advocate trust.

Answer 47

A special general advocate trust.
Rationale

The first three options are correct. The last option is simply made up - it is not a real trust.

Question 48

A trust created to receive an amount equal to the decedent’s remaining applicable estate tax credit equivalency at the decedent’s date of death is a:

Standby trust.
Pourover trust.
Bypass trust.
Revocable trust.

Answer 48

Bypass trust.
Rationale

A bypass trust is created, either at death or during the grantor’s life, to receive property with a fair market value equal to the decedent’s remaining applicable estate tax credit equivalency. The bypass trust is created to ensure that an individual utilizes their full applicable estate tax credit at their death.

Question 49

Which of the following statements is correct regarding the federal bankruptcy and inherited IRAs?

Inherited IRAs are not retirement accounts.

Inherited IRA assets are excludable under ERISA from the bankruptcy estate.

Inherited IRA assets up to $1,000,000 (as indexed) are exempt in bankruptcy.

Inherited IRA assets are exempt in bankruptcy if needed for support.

Answer 49

Inherited IRAs are not retirement accounts.
Rationale

Inherited IRAs are not retirement accounts (according to the Supreme Court) and, therefore, are included in the bankruptcy estate.

Question 50

Maureen created a Qualified Personal Residence Trust (QPRT) in 1999.
The annuity term of the QPRT is ending this year. If Maureen continues to live in the house after this year, how is Maureen’s estate planning affected?

The QPRT is automatically null, and the home reverts to Maureen.

Maureen must begin to pay the remainder beneficiary of the QPRT a fair market value rent.

Maureen’s probate estate will now include the value of the home at her date of death.

Maureen’s gross estate must include the fair market value of the home at her date of death.

Answer 50

Maureen must begin to pay the remainder beneficiary of the QPRT a fair market value rent.

Rationale

If Maureen continues to live in the home after this year, she must begin to pay the remainder beneficiary a fair market value rent. If she does not, the IRS may deem the transaction null and void and include the value of the home in Maureen’s gross estate. The property will not automatically revert to Maureen and it will not be included in Maureen’s probate estate, as the property will transfer per the trust document.

Question 51

There are common objectives, strategies, and benefits asset protection specialists attempt to reach for their clients. Which objective, strategy, or benefit listed below is not a common one sought after by asset protection specialists?

The use of domestic asset protection trusts (DAPTs) to protect all the assets of a client from the reach of creditors.

Slowing a potential creditor’s attachment efforts against the assets of a client.

Increasing the difficulty to the creditor from collecting against the assets of a client.

Creating multiple barriers (i.e., placing client assets in trusts, business entities, etc.) between a creditor and the client’s assets.
Confidence of your answer

Answer 51

The use of domestic asset protection trusts (DAPTs) to protect all the assets of a client from the reach of creditors.
Rationale

Funding a DAPT, or any other asset protection trust, with all the assets of a client (leaving the grantor/client fictitiously destitute) would raise fraudulent conveyance issues and potentially subject the grantor/client (and possibly the client’s asset protection specialist) to fines and other penalties assessed by governing law or the presiding judge. Options b, c, and d are common objectives, strategies, and benefits asset protection specialists attempt to reach for their clients.

Question 52

Which party within a trust arrangement is responsible for monitoring the management of the trust, reviewing the actions or inactions of the trustee(s), and ensuring the objective established for the trust is being met?

Income beneficiary.
Remainder beneficiary.
Trust protector.
Corporate trustee.

Answer 52

Trust protector.
Rationale

A trust protector keeps a close eye on the management of the trust and the actions or inactions of the trustee to ensure the grantor’s objective for establishing the trust is being met. Options a and b are incorrect since these parties are intended to benefit from the trust’s assets but are not legally responsible for overseeing the trust’s management. Option d is incorrect since a trustee cannot review their own actions or inactions (though they may be held accountable for their actions or inactions with the trust).

Question 53

All of the following statements concerning a trusteed IRA or a “see-through” trust are correct except?

They can both ensure the owner’s wishes with regard to maximum distributions.
They can both be used to avoid RMDs.
They can both offer creditor protection.
They can both offer invasion of principal for an ascertainable standard (HEMS).

Answer 53

They can both be used to avoid RMDs.
Rationale

Neither can be used to avoid RMDs. All of the other statements are correct

Question 54

Which of the following is an advantage of a spousal lifetime access trust (SLAT)?

Permits the spouse that established the SLAT the ability to directly access assets they transferred into the trust.

Allows engaged couples that are contemplating marriage to safely set aside assets within the SLAT, protecting the assets from judicial division if a divorce from their future spouse ever occurs.

Permits a married taxpayer to use their lifetime gift tax exclusion while maintaining indirect beneficial use of the transferred assets held in the SLAT.

Allows single taxpayers to gain access to the tax benefits of married taxpayers for those assets transferred to the SLAT.

Answer 54

Permits a married taxpayer to use their lifetime gift tax exclusion while maintaining indirect beneficial use of the transferred assets held in the SLAT.

Rationale

Option a is incorrect since the grantor-spouse of a SLAT is only given indirect access to the assets transferred into the SLAT. Option b is incorrect; however, clients anticipating marriage (and are seeking to protect assets from a future divorce) may consider pre-nuptial agreements and domestic asset protection trusts for potential asset protection. Option d is incorrect since no such trust arrangement exists.

Question 55

UPDATED FOR 2024:
Kadence contributed $600,000 to an irrevocable trust with no retained powers in 2022 and did not retain any powers over the transferred assets. She named her only daughter as the sole income and remainder beneficiary and paid gift tax at the date of the transfer of $25,000. In 2024, Kadence died of lung cancer. The fair market value of the property in the irrevocable trust was $3,000,000 at the date of her death.

What amount of the trust assets are included in Kadence’s gross estate?

$0.
$600,000.
$625,000.
$3,000,000.

Answer 55

$0.
Rationale

Because the trust was an irrevocable trust and Kadence did not retain any rights to the trust, the value of the trust is not included in Kadence’s gross estate. However, the $25,000 gift tax is included in her gross estate because it was paid for gifts made within three years of her death.

Question 56

Davin’s grandfather contributed $350,000 to a simple irrevocable trust naming Davin as the income beneficiary and his brother, Ryan, as the remainder beneficiary. At the time of the transfer Davin’s grandfather paid $12,000 of gift tax. This year, the trust generated $14,000 of taxable dividend income and $3,000 of capital gains.

What amount of income will Davin include on his federal Form 1040 from this trust this year?

$0.
$3,000.
$14,000.
$17,000.

Answer 56

$14,000.
Rationale

Since Davin is the income beneficiary of a simple irrevocable trust, he is taxed on the current year distributable net income of the trust. This year, Davin will include $14,000 on his federal Form 1040. Davin is not taxed on the capital gains unless they are distributed to him.

Question 57

Title held by the beneficiaries

A.Legal title
B.Beneficial title
C.Grantor

Answer 57

Beneficial title

Question 58

Title held by the trustee

A.Legal title
B.Beneficial title
C.Grantor

Answer 58

A.Legal title

Question 59

The person who creates and initially funds the trust

A.Legal title
B.Beneficial title
C.Grantor

Answer 59

C.Grantor

Question 60

Brett died recently leaving all his assets in a trust for his wife Greer. Brett was concerned that Greer would not be able to manage her money adequately to maintain her standard of living for the rest of her life. Therefore, he placed the assets into a spendthrift trust and gave Greer the right to receive a certain amount of property each year.
Brett appointed his good friend Paul to be the trustee of the trust. How is Paul’s ownership classified?

A.Paul holds a life estate over the property.
B.Paul holds the legal title to the property.
C.Paul holds the equitable title to the property.
D.Paul does not hold an interest in the property.

Answer 60

The correct answer is B.

Paul holds the legal title to the property as trustee for the trust.

Greer as the beneficiary holds the equitable title. A life estate identifies the person who has a current beneficial right in the property, which in this case would be Greer.

Question 61

In 2013, Price funded a bypass trust with $5,250,000, the applicable estate tax credit equivalency amount at that time. At Price’s death in 2024, his will included a testamentary bypass trust and a residual bequest to his U.S. citizen wife.
If Price’s net worth at his death was $15,000,000, how much will be transferred to the bypass trust to maximize its benefits?

A.$8,360,000
B.$9,750,000
C.$13,610,000
D.$15,000,000

Answer 61

Solution: The correct answer is A.

Price’s executor would fund the testamentary bypass trust with the difference between the applicable estate tax credit equivalency at Price’s death (2024 - $13,610,000) and the funding amount of the inter vivos bypass trust ($5,250,000). In this case, the amount would be $8,360,000 ($13,610,000 - $5,250,000).

Question 62

During the year, Edward created a trust for the benefit of his five children. The terms of the trust declare that his children can only access the trust’s assets after the trust has been in existence for 20 years and the trust does not include a Crummey provision.
If Edward transfers $100,000 to the trust during the year, what is his total taxable gifts for the year?

A.$0
B.$15,000
C.$85,000
D.$100,000

Answer 62

$100,000

Because the trust does not include a Crummey provision, the transfer to the trust is a gift of a future interest and is not qualified to be offset by the annual exclusion. Therefore, the entire transfer to the trust is subject to gift tax.

Question 63

Which of the following techniques can be used to lower the value of an individual’s gross estate?

Totten Trust
Qualified Personal Residence Trust
Family Limited Partnership
Irrevocable Life Insurance Trust

A.1 only.
B.1 and 2.
C.2, 3 and 4.
D.1, 3 and 4.

Answer 63

Solution: The correct answer is C.

Totten trusts are used to avoid probate, not to lower the value of the gross estate. All of the other techniques can be used to lower the value of an individual’s gross estate.