An estate plan for a married client creates a qualified terminable interest property (QTIP) trust for her husband, who is a United States citizen. Under the trust, all income is payable to the husband for life at least annually, the remainder passes to their children, no person may appoint trust property to anyone other than the husband during his life, and the executor intends to make the QTIP election.
Which statement about the QTIP trust is correct? Answer: The trust property qualifies for the federal estate tax marital deduction at the client's death, but the full value of the trust property is included in the husband's gross estate at his death.
Under IRC § 2056(b)(7), a QTIP trust qualifies for the estate tax marital deduction if the surviving spouse receives all income for life, payable at least annually, and no person holds a power to appoint trust property to anyone other than the surviving spouse during the spouse's life. Because the trust qualified for the marital deduction at the first spouse's death, its assets are then included in the surviving spouse's gross estate under IRC § 2044, regardless of the limited income interest. The option stating the assets escape both estates is wrong: QTIP defers, not eliminates, estate tax. The option denying the marital deduction because the husband cannot receive principal is wrong; principal access is not required. The option including only lifetime income is wrong; the entire trust corpus is includible in the husband's estate.
A widowed client owns a brokerage account titled in the name of her revocable living trust, a bank account payable on death to her daughter, an IRA naming her son as beneficiary, and household items titled solely in her name with no beneficiary designation. Her will contains a pour-over clause leaving all property not otherwise disposed of to the trustee of the trust. The executor begins probate.
Which asset is controlled by the will and must pass through probate? Answer: The household items, because they are held in the client's individual name and have no death-beneficiary designation.
Under general probate and trust law, probate reaches assets owned in the decedent's individual name at death that do not pass by trust, beneficiary designation, or joint ownership. The household items meet that test and must pass through the pour-over will before the trustee receives them. The brokerage account is already held by the trust and is not a probate asset; the payable-on-death account passes by contract to the daughter; the IRA passes by beneficiary designation to the son. Pour-over language does not pull non-probate assets into the probate estate.
- Which of the following statements regarding a revocable living trust is true?
Answer: The grantor is taxed on all of the trust's income during life, and the trust assets are included in the grantor's gross estate at death.
IRC §§ 676 and 2038 govern. Because the grantor may revoke the trust and take back the assets, the trust is a grantor trust: all of its income is taxed to the grantor each year, and at death the assets are included in the grantor's gross estate. The statement that funding the trust is a completed gift is wrong: a gift is complete only when the donor has parted with dominion and control, and the retained power to revoke makes the transfer incomplete, so it does not qualify for the annual exclusion or use the exemption. The statement that distributed income is taxed to the beneficiary is wrong: grantor trust status applies to the entire trust, so the grantor pays tax on income whether it is distributed or accumulated. The statement that the assets are protected from the grantor's creditors is wrong: assets the grantor can reclaim are reachable by creditors; asset protection requires an irrevocable transfer.
- Which of the following statements about an irrevocable trust is correct?
Answer: An irrevocable trust generally removes assets from the grantor's gross estate, but the assets are included if the grantor retained the right to receive the trust income for life.
IRC § 2036(a)(1) is the governing rule. A completed transfer to an irrevocable trust generally removes assets from the grantor's gross estate, but the assets are included when the grantor retains the right to receive the trust income for life; a retained income interest also makes the trust a grantor trust under IRC § 677. The statement that assets transferred to an irrevocable trust generally receive a step-up in basis at the grantor's death limited to gift tax paid is wrong: a completed lifetime gift takes the donor's carryover basis under IRC § 1015 and does not receive the IRC § 1014 step-up at death; if the assets are included in the estate, they generally receive the normal estate-tax basis adjustment, not a gift-tax-paid limit. The statement that the grantor may not serve as trustee is wrong: a grantor may serve as trustee of an irrevocable trust if the retained powers do not include the power to revoke the trust or shift beneficial enjoyment. The statement that an irrevocable trust is always a separate taxpayer is wrong: an irrevocable trust can be a grantor trust, and its income is then taxed to the grantor.
An investor has transferred her taxable brokerage account, currently worth $2.4 million with a cost basis of $800,000, into a revocable living trust. She is the trustee and retains the right to revoke the trust and withdraw assets. Her daughter is successor trustee, and her will directs that any assets not already in the trust be transferred to the trust at death.
Which statement about the tax and probate treatment of the brokerage account is correct? Answer: The account avoids probate, but its full value is included in her gross estate for estate-tax purposes, and the beneficiaries receive a stepped-up basis equal to its fair market value at her death.
Under IRC § 2038, property transferred to a revocable living trust is included in the grantor's gross estate because she retained the right to revoke and withdraw the assets. Because the account is held in the trust, it is not a probate asset. Under IRC § 1014, assets included in the gross estate receive a stepped-up basis equal to fair market value at death. The statement that the trust is a separate taxpayer and excludes the account from the estate is wrong; a revocable trust is ignored for tax purposes while the grantor controls it, and the account receives a stepped-up basis, not a carryover basis. The statement that the account remains in probate because she is trustee is wrong; being trustee does not make the trust a probate asset, and the trust instrument, not the pour-over will, governs the trust assets. The statement that a revocable trust avoids estate tax or conditions the step-up on paying estate tax is wrong; retained control causes estate inclusion, and the step-up applies regardless of estate-tax liability.
A married client dies in 2026, leaving $14 million to a credit shelter trust created under his will. The trust is fully covered by his $15 million federal estate and gift tax exemption. His wife receives income, and an independent trustee may distribute principal to her for health, education, maintenance, and support. She has no power to appoint trust assets to herself or her estate, and the remainder passes to their children.
Which statement about the trust is correct? Answer: The trust assets are not included in the wife's gross estate, and the husband's applicable exclusion is used to shelter the trust assets from estate tax at his death.
A credit shelter trust is designed to use the decedent's applicable exclusion under IRC § 2010. Because the amount funded is within the $15 million exemption, no federal estate tax is due at the husband's death even though the trust does not qualify for the marital deduction. Because the wife has only an income interest and no general power of appointment, the trust is not included in her gross estate under IRC § 2041. A life-income interest alone does not cause inclusion, and the trust is not a grantor trust as to the wife merely because she receives income.
A client creates a revocable living trust, transfers a $1 million portfolio into the trust, and names herself as trustee and lifetime beneficiary. Her daughter is the remainder beneficiary. She asks about the tax and legal consequences.
Which statement is correct? Answer: Because she may revoke the trust, it is a grantor trust; all trust income is taxed to her, and the assets remain in her gross estate.
Under the Internal Revenue Code grantor-trust rules, a grantor who can revoke the trust without the consent of an adverse party is treated as the owner of the trust property, so all income is taxable to her. Under IRC § 2038, assets subject to her power to revoke are also included in her gross estate. The completed-gift answer is wrong because a revocable transfer is not a completed gift; a revocable trust is not a separate taxpayer; and revocable trust assets generally remain reachable by creditors and are not estate-tax protected.
- Which of the following statements regarding a pour-over will is true?
Answer: A pour-over will directs that the decedent's remaining assets be transferred into a trust created during the decedent's lifetime, and those assets are subject to probate before the trust receives them.
Under state estate-planning law, a pour-over will directs the executor to transfer the decedent's remaining probate assets into a trust, typically a revocable living trust, that the decedent established during life. Because the transfer is made through the will, the assets are probate assets and pass through the estate before the trustee receives them. The statement that a pour-over will avoids probate is wrong: assets already held in the living trust avoid probate, but assets that pour over through the will do not. The statement that the will's revocability makes its assets non-probate transfers is wrong: every will is revocable until death, and assets passing under a will are probate assets by definition. The statement that unrealized appreciation is reported on the decedent's final return is wrong: assets included in the gross estate receive a new income tax basis equal to fair market value under IRC § 1014, and no income is recognized on pre-death appreciation.
In 2026, a client who itemizes deductions contributes $300,000 cash to a donor-advised fund. The fund agreement gives her the right to recommend grants to qualified charities and to name successor advisors.
Which statement about the contribution is correct? Answer: The contribution is a completed gift, is deductible in the year made, and the sponsoring organization holds legal control of the contributed assets.
Under IRC § 170 and the donor-advised fund rules, a contribution to a donor-advised fund is an irrevocable completed transfer to the sponsoring charitable organization; the donor's right to recommend grantees and successor advisors is advisory only. The charitable deduction is available in the year of contribution, subject to applicable charitable-contribution limits. The other options describe a revocable or donor-owned account, which is not how a donor-advised fund is structured.
- For tax year 2026, which of the following statements about contributions to a donor-advised fund is correct?
Answer: Contributions of long-term appreciated securities are deductible at fair market value, limited to 30% of adjusted gross income, and the donor does not recognize the built-in gain.
IRC § 170 governs the deduction. A contribution of capital-gain property held more than one year to a public charity, including the sponsoring charity of a donor-advised fund, is deductible at fair market value, is subject to the 30%-of-AGI limit rather than the 60% cash limit, and is not a sale, so the donor recognizes no gain on the appreciation. The statement that a qualified charitable distribution may go directly to a donor-advised fund is wrong: under IRC § 408(d)(8), such distributions may not be made to donor-advised funds, supporting organizations, or private foundations, even though the donor has reached age 70½. The statement that the deduction is delayed until grants are made is wrong: the deduction is allowed in the year of the contribution, and the advisory right to recommend grants does not defer it. The statement that the contribution is an incomplete gift included in the donor's gross estate is wrong: the contribution is irrevocable and completed for gift and estate tax purposes, and the nonbinding advisory privileges do not keep the assets in the donor's estate.
- Which of the following statements about a testamentary trust is correct?
Answer: A testamentary trust is created by the decedent's will, comes into existence only at death, and is funded from the assets of the probate estate.
Under state trust and probate law, a testamentary trust does not exist until the grantor dies: it is created by the will, and the executor funds it from the probate estate, so its assets are probate assets. The statement that the grantor may fund the trust during life is wrong: no trust exists during the grantor's lifetime; while the will may be amended by codicil until death, that does not create a lifetime trust that can receive assets. The statement that the trust avoids probate is wrong: because the will creates the trust, the assets pass through the executor and the probate court before the trust is funded. The statement that the trust takes effect when the will is signed is wrong: a will and any trust created by it speak only at death, so the grantor cannot act as trustee or receive income from the trust during life.
