Chartered Life Underwriter (CLU) Estate Planning Fundamentals Syllabus

Why do beneficiary designations override the terms of a will?

Assets with valid beneficiary designations (life insurance, IRAs, annuities) are contractual non-probate transfers that pass directly to the named beneficiary; the will controls only probate assets.

What is the danger of failing to name a contingent beneficiary?

If the primary beneficiary predeceases the owner, the proceeds may default to the estate, subjecting them to probate and possibly creditors, and defeating the intended non-probate transfer.

What is the step-up in basis at death?

Inherited property generally receives a new income-tax basis equal to its fair market value on the date of death (or alternate valuation date), eliminating tax on appreciation that occurred during the decedent's life.

Does a step-up in basis apply to gifted property during life?

No. Lifetime gifts carry over the donor's basis (carryover basis); the step-up to fair market value applies only to property included in the decedent's gross estate at death.

How is basis treated for community property when one spouse dies?

Both the decedent's half and the surviving spouse's half of community property receive a full step-up (double step-up) to fair market value at the first spouse's death.

What is the annual gift tax exclusion, and what is its key requirement?

An exclusion (indexed; $19,000 per donee in 2025) allowing tax-free gifts each year per recipient with no limit on the number of recipients. The gift must be of a present interest (immediate enjoyment).

What is gift splitting?

An election allowing a married couple to treat a gift made by one spouse as made one-half by each, effectively doubling the annual exclusion and combined exemption available to a single donee.

What gift tax exclusions exist for education and medical expenses?

Unlimited exclusion for amounts paid directly to a qualifying educational institution for tuition, and directly to a medical provider for medical care, regardless of the annual exclusion limit.

Why are lifetime gifts of appreciating property a useful estate-reduction strategy?

Gifting removes the asset and all future appreciation from the donor's estate; gift tax is computed on the lower present value, leveraging the exclusion and freezing the value.

What is the federal gift and estate tax basic exclusion amount, and how is it described?

A unified lifetime exemption (inflation-indexed; $13.99 million in 2025) that shelters cumulative taxable lifetime gifts and the taxable estate from transfer tax. It is 'unified' across gift and estate tax.

What is the top federal gift and estate tax rate?

40 percent on transfers exceeding the available exemption.

What is the gift tax annual exclusion's interaction with the lifetime exemption?

Annual exclusion gifts do not use any lifetime exemption. Only taxable gifts (amounts exceeding the annual exclusion) reduce the unified credit/exemption available at death.

What is portability (DSUE) in federal estate tax?

The Deceased Spousal Unused Exclusion: a surviving spouse may add the unused portion of the first deceased spouse's exemption to their own, by filing a timely estate tax return (Form 706) making the election.

List the major steps to compute the federal estate tax.

Determine the gross estate; subtract deductions (debts, expenses, marital, charitable) to get the taxable estate; add adjusted taxable gifts to get the tax base; compute tentative tax; subtract gift taxes paid and the unified credit to get tax due.

What is included in the gross estate?

All property the decedent owned or controlled at death: solely owned assets, the includible portion of jointly held property, life insurance with incidents of ownership, certain retained-interest transfers, general powers of appointment, and revocable transfers.

What is the unlimited marital deduction?

A deduction allowing an unlimited amount of property to pass to a surviving U.S.-citizen spouse free of gift or estate tax, deferring (not eliminating) transfer tax until the second spouse's death.

What is the unlimited charitable deduction?

An estate and gift tax deduction for the full value of property transferred to qualifying charities, with no dollar limit, reducing the taxable estate dollar for dollar.

What special rule applies to the marital deduction for a non-citizen spouse?

The unlimited marital deduction is generally unavailable; to qualify, property must pass to a Qualified Domestic Trust (QDOT), which defers tax until distributions or the surviving spouse's death.

What is the generation-skipping transfer (GST) tax?

A separate flat tax (at the highest estate tax rate, 40%) imposed on transfers to 'skip persons' (e.g., grandchildren) that skip a generation, preventing avoidance of transfer tax at the intervening generation.

Who is a 'skip person' for GST purposes?

A person two or more generations below the transferor (such as a grandchild), or a trust in which all interests are held by skip persons.

Name the three types of generation-skipping transfers.

Direct skips, taxable distributions, and taxable terminations.

What is the GST exemption?

A separate exemption (equal to the estate/gift basic exclusion amount, $13.99 million in 2025) that can be allocated to transfers to shelter them from GST tax.

What are the essential parties to a trust?

The grantor (settlor/trustor) who creates and funds it, the trustee who holds legal title and manages the property, and the beneficiaries who hold equitable/beneficial interests.

How does a revocable trust differ from an irrevocable trust for estate tax?

Assets in a revocable trust remain in the grantor's gross estate (the grantor retains control). A properly structured irrevocable trust removes assets from the grantor's estate because control is relinquished.

What is the primary estate-planning benefit of a revocable living trust?

It avoids probate and provides incapacity management and privacy, but it provides no estate tax savings or creditor protection while the grantor is living.

What is a bypass (credit shelter / B) trust and its purpose?

An irrevocable trust funded at the first spouse's death with the exemption amount; it provides for the surviving spouse but is excluded from the survivor's estate, preserving the first spouse's exemption.

What is a QTIP (marital / C) trust?

A Qualified Terminable Interest Property trust that pays all income to the surviving spouse for life and qualifies for the marital deduction, while letting the first spouse control the ultimate disposition of the remainder.

What is an Irrevocable Life Insurance Trust (ILIT) and what does it accomplish?

An irrevocable trust that owns a life insurance policy so the death proceeds are excluded from the insured's gross estate, providing estate-tax-free liquidity to pay taxes or benefit heirs.

What is a Crummey power and why is it used in an ILIT?

A beneficiary's temporary right to withdraw contributions to the trust, which converts the gift into a present interest so it qualifies for the annual gift tax exclusion (covering premium payments).

What is the three-year lookback rule for transferred life insurance?

If an insured transfers an existing policy (or incidents of ownership) and dies within three years, the death proceeds are pulled back into the gross estate. New policies bought directly by an ILIT avoid this.

Name three specialized trusts and their purposes.

Special needs trust (provides for a disabled beneficiary without disqualifying them from government benefits); QPRT (transfers a residence at a discounted gift value); GRAT/CRAT/charitable trusts (income/remainder split-interest planning).

What are the common sources of estate liquidity?

Cash and marketable securities, life insurance proceeds, sale of assets, loans, installment payment of estate tax under IRC Section 6166, and Section 303 stock redemptions.

What does IRC Section 6166 provide?

It allows the estate tax attributable to a closely held business interest to be paid in installments (interest-only for up to 5 years, then up to 10 annual installments) when the business exceeds 35% of the adjusted gross estate.

What is a Section 303 stock redemption?

A provision allowing a corporation to redeem a deceased shareholder's stock and have the proceeds treated as a sale (capital gain/return of basis) rather than a dividend, to the extent of estate taxes and administration costs, providing liquidity.

What is a Charitable Remainder Trust (CRT)?

An irrevocable split-interest trust that pays income to the donor/beneficiaries for life or a term, with the remainder passing to charity; it provides an income stream, a current charitable deduction, and capital-gains deferral.

What is the difference between a CRAT and a CRUT?

A Charitable Remainder Annuity Trust pays a fixed dollar amount (fixed percentage of initial value) with no additional contributions. A Charitable Remainder Unitrust pays a fixed percentage of the trust's annually revalued assets and permits additional contributions.

What is a Charitable Lead Trust (CLT)?

A split-interest trust that pays income to a charity for a term, after which the remainder passes to noncharitable beneficiaries (often family), reducing transfer taxes on the remainder; it is essentially the reverse of a CRT.

What is a donor-advised fund?

A charitable account at a sponsoring organization to which a donor makes an irrevocable contribution (deductible now) and later recommends grants to charities over time.

What is the general rule for valuing assets in the gross estate?

Assets are valued at fair market value on the date of death, defined as the price a willing buyer and willing seller would agree upon, neither under compulsion and both with reasonable knowledge of the facts.

What is the alternate valuation date (AVD)?

An election to value the gross estate six months after death; it is available only if it reduces both the gross estate value and the estate tax. Assets sold/distributed before then are valued on the disposition date.

What is special use valuation under IRC Section 2032A?

An election allowing qualifying farm or closely held business real property to be valued at its actual (current) use rather than highest-and-best use, reducing the gross estate up to an indexed limit.

What valuation discounts commonly apply to closely held business interests?

Discounts for lack of marketability (no ready market) and lack of control/minority interest, which reduce the value of fractional or non-controlling interests in the gross estate or for gifting.