PFS Estate Planning 1 — Questions and Answers
Question 1: Which of the following documents is most commonly used to transfer assets after death?
- Living trust
- Power of attorney
- Will (Correct answer)
- Letter of intent
Correct answer: Will
A will is the most common and fundamental legal document used to transfer assets after death. It allows an individual to specify how their property, money, and other assets should be distributed to beneficiaries, and it can also name guardians for minor children, ensuring their wishes are legally carried out.
Question 2: What is the main advantage of using a revocable living trust in estate planning?
- It eliminates estate taxes
- It allows total asset protection from creditors
- It bypasses the probate process (Correct answer)
- It ensures Medicaid eligibility
Correct answer: It bypasses the probate process
A main advantage of a revocable living trust in estate planning is its ability to bypass the probate process. Probate is a public, often lengthy, and costly court procedure, so avoiding it allows for a quicker, more private, and potentially less expensive distribution of assets to beneficiaries.
Question 3: Which type of trust becomes irrevocable upon the death of the grantor?
- Charitable remainder trust
- Revocable trust (Correct answer)
- Bypass trust
- Generation-skipping trust
Correct answer: Revocable trust
A revocable trust, also known as a living trust, can be modified or revoked by the grantor during their lifetime. However, upon the grantor's death, the trust typically becomes irrevocable, meaning its terms are fixed and can no longer be altered, and assets are distributed according to its established provisions.
Question 4: What does the term 'step-up in basis' refer to in estate planning?
- An increase in estate value for tax purposes
- Adjusting the cost basis of inherited assets (Correct answer)
- Adding a new beneficiary to a trust
- Raising the income tax bracket
Correct answer: Adjusting the cost basis of inherited assets
The term 'step-up in basis' refers to the adjustment of an inherited asset's cost basis to its fair market value on the date of the decedent's death. This is a significant tax advantage for beneficiaries, as it can reduce or eliminate capital gains taxes if they later sell the inherited asset, as the gain is only calculated from the stepped-up value.
Question 5: Which of the following is NOT typically a goal of estate planning?
- Minimizing estate taxes
- Providing for dependents
- Increasing investment risk (Correct answer)
- Avoiding probate
Correct answer: Increasing investment risk
Estate planning primarily focuses on managing and distributing assets, minimizing estate taxes, and providing for dependents after death. While investment strategies are part of overall financial planning, the core goal of estate planning itself is not to increase investment risk, but rather to preserve and transfer wealth efficiently according to the grantor's wishes.
Question 6: What is the role of an executor in estate administration?
- Serve as a trustee for a trust
- Manage the decedent’s healthcare decisions
- Oversee the estate and distribute assets (Correct answer)
- Determine guardianship for minors
Correct answer: Oversee the estate and distribute assets
An executor is the individual or entity named in a will to manage the deceased person's estate. Their role involves overseeing the entire estate administration process, which includes collecting assets, paying debts and taxes, and ultimately distributing the remaining property to the beneficiaries as specified in the will.
