estate and trust tax principal Interview Questions and Answers

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100 Estate and Trust Tax Principal Interview Questions and Answers

  1. What is the difference between a grantor trust and a non-grantor trust for tax purposes?

    • Answer: In a grantor trust, the grantor (the person who created the trust) is treated as the owner for tax purposes, meaning the trust's income is taxed on the grantor's individual income tax return. A non-grantor trust files its own tax return (Form 1041) and pays taxes on its income separately. The key difference lies in who bears the tax liability.

  2. Explain the concept of the marital deduction.

    • Answer: The marital deduction allows for the unlimited deduction of assets transferred to a surviving spouse in an estate. This prevents double taxation of the same assets in a couple's estates.

  3. What is the unified credit and how does it affect estate tax calculations?

    • Answer: The unified credit is a credit against estate and gift taxes. It effectively exempts a certain amount of assets from estate tax. The amount of the credit is adjusted annually for inflation. The credit reduces the amount of tax owed.

  4. Describe the generation-skipping transfer tax (GSTT).

    • Answer: The GSTT is a tax on transfers to beneficiaries who are two or more generations below the grantor. It's designed to prevent the avoidance of estate taxes through multiple generations of trusts. There are exemptions available.

  5. What are the different types of trusts commonly used in estate planning?

    • Answer: Common types include revocable trusts (where the grantor retains control and the trust is taxed on the grantor's return), irrevocable trusts (where the grantor relinquishes control and the trust files a separate tax return), testamentary trusts (created upon death), and various life-income trusts (like QTIP trusts).

  6. Explain the concept of a Qualified Terminable Interest Property (QTIP) trust.

    • Answer: A QTIP trust allows a surviving spouse to receive income from the trust assets during their lifetime, but after the spouse's death, the assets pass to other beneficiaries outside of the marital deduction. This allows for tax-efficient planning while providing for the spouse.

  7. What are some common valuation challenges in estate tax planning?

    • Answer: Valuing closely held businesses, intangible assets, and complex financial instruments can be challenging. Determining fair market value often involves professional appraisals and potentially litigation.

  8. How does the tax treatment of charitable gifts differ between outright donations and gifts to a charitable remainder trust?

    • Answer: Outright donations are generally deductible in the year of the gift, subject to limitations. Charitable remainder trusts provide an income stream for a period of time (to beneficiaries) before the remainder goes to charity; the donor gets a charitable deduction based on the present value of the remainder interest.

  9. What are the potential tax implications of owning property in a different state than your residency?

    • Answer: Depending on the states involved, you may be subject to estate or inheritance tax in both states. Reciprocity agreements can help mitigate this, but careful planning is needed to avoid double taxation.

  10. Explain the concept of "basis" in the context of inherited assets.

    • Answer: The basis of an inherited asset is generally the fair market value at the date of death (or alternate valuation date). This has implications for capital gains taxes when the asset is later sold.

  11. [Question 11: Example - What are the key differences between a Crummey trust and a Qualified Personal Residence Trust (QPRT)?]

    • Answer: [Answer 11: A Crummey trust allows for annual gift tax exclusions while a QPRT removes the value of a personal residence from the estate for estate tax purposes, but carries significant risk if the grantor dies before the trust term expires.]

  12. [Question 12: Example - Explain the role of a power of attorney in estate planning.]

    • Answer: [Answer 12: A power of attorney designates an individual to manage financial and legal affairs if the grantor becomes incapacitated. It does not necessarily impact estate taxes but helps manage assets during life.]

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