Strategies to transfer property

Lifetime gifts, transfers at death by will, trust or operation of law, and the trade-offs among them on tax, control, privacy, cost and timing. Items ask which transfer method best meets a client's stated goal for a particular asset.

ProbateNon-probate transfers

Practice question for this objective

Free sampleEstate Planninghard

Elena, aged 72, funded an irrevocable trust for her three adult children several years ago. She retained no beneficial interest and cannot revoke the trust, but the deed is drafted so that the trust is a grantor trust for income tax purposes, and the deed neither requires nor permits the trustee to reimburse her for tax. This year the trust earns 300,000 dollars of taxable income, the trustee accumulates all of it inside the trust, and Elena pays the resulting 96,000 dollars of federal income tax from her personal current account. Her planner is asked what that payment achieves. Which assessment is correct?

AThe 96,000 dollar payment is itself a taxable gift to the three children in the year it is made and has to be reported on a gift tax return for that year
BThe trust is a separate taxpayer that must report the 300,000 dollars on its own fiduciary return, and Elena's payment is treated as an additional contribution to the trust
CThe 96,000 dollar payment is not a further gift to the children, so it reduces her taxable estate while the trust compounds on its full pre-tax income Correct
DThe trust stops being a grantor trust once the settlor pays the tax without reimbursement, so income from next year onward is taxed to the trust at the compressed rates

Income tax a grantor pays on grantor trust income is not an additional gift, so it shifts wealth to the beneficiaries free of transfer tax. The grantor trust rules make Elena the owner of the trust income for income tax purposes, so the 300,000 dollars is reported on her individual return and the 96,000 dollar liability is hers, not the trust's and not the children's. Because she is discharging her own obligation she is not transferring property to the beneficiaries, so no gift arises and no exclusion or exemption is consumed. The economic effect is a transfer all the same: 96,000 dollars leaves her estate in every year the trust produces this level of income, while the trust assets that will pass to the children compound on the full 300,000 dollars rather than on what is left after tax. This is why a trust is often drafted to be defective on purpose. Whether the trustee may reimburse the settlor is a drafting question that affects the estate tax risk of the arrangement, and it does not determine grantor status, which turns on the powers and interests set out in the deed.

Why A is wrong: This looks right because the children plainly benefit from the payment, but it discharges Elena's own legal liability rather than theirs, and paying one's own tax bill is not a transfer of property to another person.

Why B is wrong: This applies the ordinary treatment of a non-grantor trust to a trust that has deliberately been made defective for income tax purposes, so the income is reported on Elena's individual return and there is no fiduciary tax liability for her to fund.

Why C is correct: The tax is legally Elena's own because the grantor trust rules make her the owner of the trust income, so paying it depletes her estate without using any exclusion or exemption and leaves the trust assets growing undiminished.

Why D is wrong: Grantor status is set by the powers and interests written into the deed, not by who happens to write the cheque to the tax authority, so the absence of a reimbursement clause changes nothing about how future income is taxed.

See more CFP practice questions, answers explained.

Exam traps in Estate Planning

Answers that look right on this material and are not. Each one is a distractor from a different question in the CFP bank for this domain.

400,000 dollars, after the allocated exemption is applied to the full transferred amount
Why it is wrong: This allocates the exemption correctly but never applies the annual exclusion, taxing 1,000,000 dollars at 40 percent; an outright present interest gift to an individual skip person reduces the amount exposed to this tax by the annual exclusion in the same way it reduces the taxable gift.
A trust paying Peter all of its income at least annually for life and giving him a power to appoint the capital in favour of anyone he chooses, including his own estate, so that no election by her executor is required
Why it is wrong: This is a general power of appointment trust, and it does qualify for the marital deduction without any election, which makes it look like the cleaner answer, but the power lets Peter redirect the capital away from Ruth's children and so defeats her third objective outright.

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