G.58 Sources for estate liquidity Flashcards
(20 cards)
Which of the following is NOT a source of estate liquidity
A. Life insurance proceeds
B. Retirement accounts
C. Real estate investments
D. Liquid assets, such as savings accounts or money market accounts
Read Estate Investments
Explanations: Real estate investments are not a source of estate liquidity because they may take time to sell and convert to cash.
Which type of life insurance policy provides the highest amount of liquidity to an estate?
A. Term life insurance
B. Whole life insurance
C. Variable life insurance
D. Universal life insurance
Term Life Insurance
Explanation: Term life insurance provides the highest amount of liquidity to an estate because it is designed to provide a death benefit without accumulating cash value.
Which of the following retirement accounts is NOT subject to required minimum distributions (RMDs)?
A. Traditional IRA
B. Roth IRA
C. 401(k)
D. SEP IRA
Roth IRA
Explanation: Roth IRA is not subject to RMDs because it is funded with after-tax contributions.
Which of the following statements about a trust as a source of estate liquidity is true?
A) A trust can only be funded with cash assets.
B) A trust can provide a source of estate liquidity while allowing the grantor to retain some control over the assets.
C) A trust must be irrevocable to be used as a source of estate liquidity.
D) A trust is subject to estate taxes on the death of the grantor.
A trust can provide a source of estate liquidity while allowing the grantor to retain some control over the assets.
Which of the following scenarios illustrates the use of a life insurance policy as a source of estate liquidity?
A) A married couple sets up a trust to hold their assets and minimize estate taxes.
B) A wealthy individual donates assets to a charitable foundation to reduce the size of their taxable estate.
C) An individual with a large estate purchases a life insurance policy to provide cash for estate expenses and taxes.
D) A business owner sets up a buy-sell agreement with a partner to ensure the continuation of the business after their death.
An individual with a large estate purchases a life insurance policy to provide cash for estate expenses and taxes.
Which of the following statements about annuities as a source of estate liquidity is true?
A) Annuities are always subject to income taxes when the funds are withdrawn.
B) Annuities can be a source of estate liquidity if the contract includes a death benefit.
C) Annuities must be fully annuitized before they can be used as a source of estate liquidity.
D) Annuities can be used to reduce estate taxes by reducing the size of the taxable estate.
Annuities can be a source of estate liquidity if the contract includes a death benefit.
Which of the following scenarios illustrates the use of a retirement account as a source of estate liquidity?
A) A business owner sets up a 401(k) plan for their employees to provide retirement benefits.
B) An individual makes contributions to a traditional IRA to reduce their taxable income.
C) A surviving spouse inherits a deceased spouse’s IRA and takes distributions over their lifetime.
D) An individual names their children as beneficiaries of their Roth IRA to avoid income taxes on withdrawals.
A surviving spouse inherits a deceased spouse’s IRA and takes distributions over their lifetime.
Which of the following strategies can be used to reduce the size of a taxable estate and provide liquidity to the estate?
A) Charitable gifting
B) Grantor retained annuity trust (GRAT)
C) Family limited partnership (FLP)
D) Qualified personal residence trust (QPRT)
Charitable gifting
Which of the following scenarios illustrates the use of a trust as a source of estate liquidity?
A) An individual sets up a revocable trust to manage their assets during their lifetime and avoid probate.
B) A wealthy individual donates assets to a charitable foundation to reduce the size of their taxable estate.
C) An individual sets up an irrevocable trust to hold their life insurance policy and provide cash for estate expenses and taxes.
D) A business owner sets up a buy-sell agreement with a partner to ensure the continuation of the business after their death.
An individual sets up an irrevocable trust to hold their life insurance policy and provide cash for estate expenses and taxes.
Which of the following types of accounts are subject to probate?
A) Joint accounts with rights of survivorship
B) Payable-on-death accounts
C) Revocable trusts
D) Irrevocable trusts
Revocable trusts are subject to probate because the grantor retains control over the assets during their lifetime.
John owns a business and wants to ensure that his family can continue to operate the business after his death. Which of the following estate planning strategies can be used to provide liquidity to his estate and ensure the continuation of the business?
A) Family limited partnership (FLP)
B) Grantor retained annuity trust (GRAT)
C) Buy-sell agreement
D) Charitable lead trust
Buy-sell agreement
Explanation: A buy-sell agreement can be used to ensure the continuation of the business after John’s death, while providing cash to his estate to cover estate expenses and taxes.
Sarah is a high-net-worth individual with a large estate. She wants to minimize estate taxes while providing liquidity to her estate. Which of the following strategies can she use?
A) Charitable gifting
B) Irrevocable life insurance trust (ILIT)
C) Qualified personal residence trust (QPRT)
D) Payable-on-death (POD) accounts
Irrevocable life insurance trust (ILIT)
Explanation: An ILIT can be used to provide liquidity to Sarah’s estate by holding a life insurance policy, while minimizing estate taxes by removing the policy’s death benefit from her taxable estate.
Tom is a retiree who relies on his retirement accounts for income. He wants to ensure that his beneficiaries can inherit the accounts without paying unnecessary taxes. Which of the following strategies can he use?
A) Roth IRA conversions
B) Charitable remainder trust (CRT)
C) Joint accounts with rights of survivorship
D) Family limited partnership (FLP)
Roth IRA conversions
Explanation: Roth IRA conversions can be used to reduce the amount of income taxes Tom’s beneficiaries will pay on inherited retirement accounts.
Anna is a business owner with multiple real estate investments. She wants to ensure that her estate has enough liquidity to cover expenses and taxes. Which of the following strategies can she use?
A) Irrevocable life insurance trust (ILIT)
B) Charitable lead trust (CLT)
C) Installment sale to an intentionally defective grantor trust (IDGT)
D) Family limited partnership (FLP)
Installment sale to an intentionally defective grantor trust (IDGT)
Explanation: An installment sale to an IDGT can be used to provide liquidity to Anna’s estate by selling her real estate investments to the trust, while minimizing gift and estate taxes.
Mike is a retiree with a large estate that includes a significant amount of liquid assets. He wants to ensure that his estate has enough liquidity to cover expenses and taxes, but he doesn’t want to sell his assets during his lifetime. Which of the following strategies can he use?
A) Installment sale to an intentionally defective grantor trust (IDGT)
B) Charitable remainder trust (CRT)
C) Payable-on-death (POD) accounts
D) Revocable trust
A revocable trust can be used to manage Mike’s assets during his lifetime and avoid probate, while providing liquidity to his estate after his death.
Jane is a widow with two children. She wants to provide liquidity to her estate and ensure that her children receive equal inheritances. Which of the following strategies can she use?
A) Irrevocable life insurance trust (ILIT)
B) Family limited partnership (FLP)
C) Grantor retained annuity trust (GRAT)
D) Joint accounts with rights of survivorship
Irrevocable life insurance trust (ILIT)
Explanation: An ILIT can be used to provide liquidity to Jane’s estate by holding a life insurance policy, while ensuring that her children receive equal inheritances by designating them as beneficiaries of the trust.
Mark is a business owner who wants to ensure that his business continues to operate after his death. He also wants to provide liquidity to his estate and minimize estate taxes. Which of the following strategies can he use?
A) Charitable lead trust (CLT)
B) Grantor retained annuity trust (GRAT)
C) Buy-sell agreement
D) Qualified personal residence trust (QPRT)
Buy-sell agreement
Explanation: A buy-sell agreement can be used to ensure the continuation of Mark’s business after his death, while providing cash to his estate to cover estate expenses and taxes. The agreement can also be structured to minimize estate taxes by setting a predetermined price for the business interests.
Lisa is a retiree who wants to provide for her grandchildren’s education. She also wants to provide liquidity to her estate and minimize estate taxes. Which of the following strategies can she use?
A) Charitable remainder trust (CRT)
B) Irrevocable life insurance trust (ILIT)
C) Payable-on-death (POD) accounts
D) Roth IRA conversions
Charitable remainder trust (CRT)
Explanation: A CRT can be used to provide for Lisa’s grandchildren’s education by making annual payments to them from the trust’s income, while providing liquidity to her estate by holding assets that will eventually pass to charity. The trust can also be structured to minimize estate taxes by removing the assets from Lisa’s taxable estate.
Jack is a high-net-worth individual with a large estate that includes multiple real estate investments. He wants to provide liquidity to his estate and minimize estate taxes. Which of the following strategies can he use?
A) Qualified personal residence trust (QPRT)
B) Installment sale to an intentionally defective grantor trust (IDGT)
C) Joint accounts with rights of survivorship
D_ Revocable trust
Installment sale to an intentionally defective grantor trust (IDGT)
Explanation: An installment sale to an IDGT can be used to provide liquidity to Jack’s estate by selling his real estate investments to the trust, while minimizing gift and estate taxes.
Karen is a business owner who wants to provide for her family after her death. She also wants to provide liquidity to her estate and minimize estate taxes. Which of the following strategies can she use?
a. Charitable lead trust (CLT)
b. Irrevocable life insurance trust (ILIT)
c. Payable-on-death (POD) accounts
d. Grantor retained annuity trust (GRAT)
An ILIT can be used to provide liquidity to Karen’s estate by holding a life insurance policy, while ensuring that her family receives the death benefit free of income and estate taxes. The trust can also be structured to minimize estate taxes by removing the policy’s death benefit from Karen’s taxable estate.
