ChFC Estate Planning Practice Questions
Question 1
A client funded a revocable living trust with most of her assets but also has a pour-over will. What is the purpose of the pour-over will?
- A. It directs any assets not titled in the trust at death into the trust, though those assets typically must pass through probate first.
- B. It allows all of the client's assets to bypass probate by transferring them to the trust automatically at death.
- C. It governs the distribution of tangible personal property such as jewelry and furniture, while financial accounts are handled by the trust.
- D. It revokes the trust at the client's death so that the remaining assets can be distributed under the terms of the will.
Show answer and explanation
Correct answer: A. It directs any assets not titled in the trust at death into the trust, though those assets typically must pass through probate first.
A pour-over will acts as a safety net, catching any assets that were never retitled into the trust (or acquired shortly before death and not yet transferred) and directing them into the trust at death. Because these assets are typically still held in the decedent's individual name, they generally must pass through probate before being poured into the trust — the pour-over will does not itself avoid probate for those assets.
- A. A pour-over will acts as a safety net, directing any assets left outside the trust at death into the trust — but those probate assets typically must pass through the probate process first before reaching the trust.
- B. A pour-over will doesn't allow assets to bypass probate; the assets it captures are in the decedent's individual name and generally must go through probate before reaching the trust.
- C. A pour-over will can capture any probate asset titled in the decedent's individual name, including financial accounts, not just tangible personal property.
- D. A pour-over will doesn't revoke the trust; it complements the trust by directing stray assets into it.
Question 2
An elderly client is considering gifting a very low-basis stock position versus holding it until death. What planning comparison is essential?
- A. Compare gift carryover basis with potentially available basis adjustment at death, estate exposure and diversification risk
- B. Assume gifts receive an immediate fair-market-value basis for the donee, so the donor's original cost and holding period become irrelevant
- C. Assume inherited assets carry the decedent's original basis, so holding to death adds no tax advantage
- D. Focus on estate tax exposure and treat capital-gains tax on the low-basis shares as a secondary issue
Show answer and explanation
Correct answer: A. Compare gift carryover basis with potentially available basis adjustment at death, estate exposure and diversification risk
A lifetime gift generally carries over the donor's basis, while property included in the estate may receive a basis adjustment at death. The comparison must also weigh estate tax exposure and the risk of holding a concentrated position.
- A. Weighs carryover versus adjusted basis alongside estate tax and diversification, which is the full comparison.
- B. Gifted property generally keeps the donor's basis (carryover), not a fair-market-value basis.
- C. Inherited property generally receives a basis adjustment, so holding to death can matter a great deal.
- D. Treating the gain tax as secondary ignores the basis difference that is central to a low-basis position.
Question 3
Parents want to support an adult child who receives means-tested public benefits. Why may a direct large inheritance be problematic?
- A. It satisfies medical and disability planning needs, so no separate trust or benefits strategy is required
- B. It can jeopardize benefits eligibility, warranting specialized trust and public-benefits advice
- C. It is generally disregarded under asset tests when held for less than twelve months
- D. It creates an employer-sponsored plan for the child through the parents' business
Show answer and explanation
Correct answer: B. It can jeopardize benefits eligibility, warranting specialized trust and public-benefits advice
Means-tested benefits count countable assets, so a large direct inheritance can disqualify an adult child. A properly designed special-needs trust, reviewed with public-benefits counsel, can supplement support without losing eligibility.
- A. An inheritance does not replace disability or benefits planning; the eligibility problem remains.
- B. Direct assets can push the child over resource limits, so specialized planning is needed.
- C. Assets are not generally disregarded for a short period; countable resources can affect eligibility.
- D. An inheritance has nothing to do with creating an employer plan.
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A father purchased stock decades ago for $20,000. At his death, the stock's fair market value is $150,000, and he leaves it outright to his daughter through his estate. What is the daughter's income tax basis in the stock?
- A. $20,000, carried over from her father's original purchase price
- B. $0, since inherited property has no cost basis
- C. $85,000, the simple average of the original cost and date-of-death value
- D. $150,000, stepped up to the fair market value at the date of death
Show answer and explanation
Correct answer: D. $150,000, stepped up to the fair market value at the date of death
Under IRC Section 1014, property acquired from a decedent generally receives a step-up (or step-down) in basis to its fair market value on the date of death. The daughter's basis becomes $150,000, eliminating the built-in gain that existed during her father's lifetime. This differs from lifetime gifts, which carry over the donor's original basis under Section 1015.
- A. Carryover basis from the decedent's original cost applies to lifetime gifts, not to property acquired from a decedent's estate, which instead receives a stepped-up basis.
- B. Inherited property is not given a zero basis — it receives a stepped-up basis equal to fair market value at death.
- C. There is no rule averaging the original cost and the date-of-death value, simple or otherwise; the applicable rule is a full step-up to date-of-death fair market value.
- D. Correct. Property acquired from a decedent generally receives a basis equal to its fair market value on the date of death — here, $150,000, eliminating the built-in gain that existed during the father's lifetime.