Certified Financial Planner (CFP) Estate Planning Flashcards

24 sample cards from the Estate Planning deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. What is a general power of appointment, and what is its estate/gift tax consequence to the holder?

   A general power of appointment lets the holder appoint property to themselves, their estate, their creditors, or the creditors of their estate. Property subject to a general power is included in the powerholder's gross estate (and its exercise/release is a taxable transfer), because it is treated as ownership.

2. What is a limited (special) power of appointment, and how is it treated for transfer-tax purposes?

   A limited (special) power of appointment allows the holder to appoint property only to a restricted class that excludes the holder, their estate, their creditors, and their estate's creditors. Property subject only to a limited power is NOT included in the powerholder's gross estate and its exercise is not a taxable transfer.

3. What is the '5-and-5' (five-or-five) power, and why is it significant?

   A 5-and-5 power lets a beneficiary withdraw each year the greater of \$5{,}000 or 5\% of trust principal. It is a limited exception so that only the unexercised lapse amount exceeding the greater of \$5{,}000 or 5\% is treated as a taxable release/gross-estate inclusion—mitigating Crummey lapse problems.

4. What is the basic exclusion amount (estate and gift unified exemption) for 2026, and is it portable?

   For 2026 the unified basic exclusion amount is approximately \$15 million per individual (under the 2025 OBBBA, set at \$15{,}000{,}000 and indexed thereafter). The unused exclusion is portable—a surviving spouse may use the deceased spouse's unused exclusion amount (DSUE) by making a timely portability election on Form 706.

5. What is the top federal gift and estate tax rate, and is the estate/gift tax system unified?

   The top federal gift and estate tax rate is 40\%. The system is unified, meaning a single lifetime exemption and rate schedule apply cumulatively to both lifetime taxable gifts and the taxable estate at death.

6. List the major deductions allowed in computing the taxable estate from the gross estate.

   (1) Unlimited marital deduction (property passing to a U.S.-citizen spouse), (2) unlimited charitable deduction, (3) funeral and administration expenses, (4) debts and mortgages of the decedent, and (5) certain casualty/theft losses during administration.

7. What is the unlimited marital deduction, and what is the special rule when the surviving spouse is NOT a U.S. citizen?

   The unlimited marital deduction permits unlimited tax-free transfers (during life or at death) to a U.S.-citizen spouse. If the surviving spouse is not a U.S. citizen, the marital deduction is generally denied unless property passes through a Qualified Domestic Trust (QDOT).

8. What is portability (DSUE), and which form/election is required to claim it?

   Portability allows a surviving spouse to add the Deceased Spousal Unused Exclusion (DSUE) amount to their own exclusion. It must be elected on a timely filed federal estate tax return (Form 706) for the first deceased spouse, even if no tax is otherwise due. Note: the GST exemption is NOT portable.

9. Define the generation-skipping transfer (GST) tax and identify a 'skip person.'

   The GST tax is a separate flat tax (currently 40\%) imposed on transfers to beneficiaries two or more generations below the transferor. A skip person is a person assigned to a generation two or more below the transferor (e.g., a grandchild) or a trust whose beneficiaries are all skip persons.

10. Name the three types of generation-skipping transfers subject to GST tax.

    (1) Direct skip—an outright transfer to a skip person; (2) Taxable termination—an interest in trust ends, leaving only skip persons as beneficiaries; and (3) Taxable distribution—a distribution from a trust to a skip person.

11. What is the GST tax rate and exemption for 2026, and how does the GST exemption differ from the estate-tax exclusion in terms of portability?

    The GST tax rate is a flat 40\% (maximum estate rate), and the GST exemption equals the basic exclusion amount (approximately \$15 million in 2026, indexed). Unlike the estate/gift exclusion, the GST exemption is NOT portable between spouses.

12. What is the 'predeceased ancestor' (predeceased parent) exception to GST tax?

    If a transferee's parent (who is a descendant of the transferor) is already deceased at the time of transfer, the transferee moves up a generation. For example, a grandchild whose parent has died is treated as the transferor's child, so the transfer is not a generation-skip and avoids GST tax.

13. What is the alternate valuation date for estate assets, and what conditions must be met to elect it?

    The alternate valuation date is 6 months after the date of death. An executor may elect it only if it both (1) decreases the value of the gross estate AND (2) decreases the total estate tax (or GST tax) due. Assets sold/distributed before 6 months are valued at the disposition date.

14. What is a minority discount and a lack-of-marketability discount in estate valuation?

    A minority (lack-of-control) discount reduces the value of a non-controlling business interest because the owner cannot direct company decisions. A lack-of-marketability discount reduces value because the interest cannot be readily sold/converted to cash. Both are common for closely held business interests.

15. What is the special-use valuation under IRC Section 2032A, and roughly how much can it reduce the gross estate?

    Special-use valuation (Section 2032A) lets qualifying real property used in farming or a closely held business be valued at its actual current use rather than highest-and-best-use fair market value. It can reduce the gross estate by a capped, inflation-adjusted amount (around \$1.4 million range in recent years), subject to recapture if use changes.

16. What is a buy-sell agreement, and how do a cross-purchase and an entity (stock redemption) agreement differ?

    A buy-sell agreement is a binding contract obligating the sale/purchase of a business interest upon a triggering event (death, disability, retirement). In a cross-purchase, the surviving OWNERS buy the departing owner's interest (each owns a policy on the others). In an entity/redemption plan, the BUSINESS itself buys the interest (the business owns the policies).

17. In a cross-purchase buy-sell plan with N owners, how many life insurance policies are required, and what basis advantage does cross-purchase offer over entity redemption?

    A cross-purchase requires $N \times (N-1)$ policies (each owner insures every other owner). Its advantage is that surviving owners receive a step-up in cost basis equal to the purchase price paid, whereas an entity redemption gives surviving owners no increase in their stock basis.

18. What requirements must a buy-sell agreement meet under IRC Section 2703 to fix the estate-tax value of a family business interest?

    Under Section 2703, the agreement's price is respected for estate-tax valuation only if it (1) is a bona fide business arrangement, (2) is not a device to transfer value to family for less than full consideration, and (3) has terms comparable to similar arm's-length agreements among unrelated parties.

19. What is IRC Section 6166, and what relief does it provide for estates holding a closely held business?

    Section 6166 allows an estate where a closely held business exceeds 35\% of the adjusted gross estate to defer and pay the estate tax attributable to that business in installments—up to 14 years (interest-only for the first 4 years, then up to 10 annual principal-plus-interest payments).

20. Distinguish a Charitable Remainder Trust (CRT) from a Charitable Lead Trust (CLT).

    A CRT pays an income stream to a non-charitable beneficiary for a term/life, with the remainder going to charity (donor gets a current deduction for the remainder value). A CLT pays an income stream to charity for a term, with the remainder passing to non-charitable beneficiaries (heirs), often reducing transfer tax on the remainder.

21. Compare a CRAT and a CRUT.

    A Charitable Remainder Annuity Trust (CRAT) pays a FIXED dollar annuity (at least 5\% of the initial value), with no additional contributions allowed. A Charitable Remainder Unitrust (CRUT) pays a FIXED PERCENTAGE (at least 5\%) of the trust's value revalued annually, so payments vary, and additional contributions are permitted.

22. What is a special needs (supplemental needs) trust, and why is its structure important?

    A special needs trust holds assets for a disabled beneficiary while preserving eligibility for means-tested government benefits (Medicaid, SSI). It must be drafted so distributions supplement—not supplant—government benefits; the beneficiary cannot have direct control or the right to demand principal, or benefits eligibility is lost.

23. For unmarried/nontraditional couples, why is comprehensive estate planning especially critical, and name two key documents they should prioritize.

    Unmarried partners receive NO intestate succession rights, no unlimited marital deduction, and no default decision-making authority. Two priority documents are (1) a valid will or revocable trust naming the partner as beneficiary, and (2) durable powers of attorney for health care and finances naming the partner as agent.

24. What is a disclaimer (qualified disclaimer), and what are the key requirements for it to be a postmortem planning tool under IRC Section 2518?

    A qualified disclaimer is an irrevocable, unqualified refusal to accept an interest, treating the disclaimant as predeceasing so the property passes to the next taker. Requirements: it must be (1) in writing, (2) made within 9 months of the transfer (or the beneficiary turning 21), (3) made before accepting any benefits, and (4) the disclaimant cannot direct who receives the property.

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