CERTIFIED ESTATE PLANNER (CEP) EXAM BANK |
ACCURATE CURRENTLY TESTING EXAM QUESTIONS AND
ANSWERS WITH DETAILED RATIONALES | VERIFIED FOR
GUARANTEED PASS | STUDY GUIDE INCLUSIVE
1.
John establishes an irrevocable trust in 2023, transferring $5 million into it. The trust benefits his
two children, and John retains no control or interest. Which statement best describes the gift-tax
treatment?
A. No gift occurs until the trust terminates.
B. The entire $5 million is a completed gift in 2023.
C. The gift is incomplete because John can change beneficiaries.
D. The gift is excluded under the annual exclusion amount.
Rationale: Because John transferred full control and beneficial ownership, the gift is completed
at the moment of transfer. A completed gift means it’s reportable for gift-tax purposes in 2023
and consumes part of his lifetime exemption. Option A is wrong because the tax isn’t delayed
until termination; C is incorrect because he retains no powers; D is wrong since only $17,000 per
donee qualifies for the annual exclusion.
2.
Mary dies owning $9 million in assets and had made $1 million in lifetime taxable gifts. What
portion of her estate will be subject to federal estate tax if the 2025 unified credit exemption is
$13.61 million?
A. $10 million
B. $9 million
,C. $0
D. $1 million
Rationale: The unified credit combines lifetime taxable gifts and estate assets. Mary’s total
transfers ($9 million + $1 million = $10 million) fall below the $13.61 million exemption, so no
estate tax applies. Options A and B ignore the credit; D misstates that gifts are taxed again at
death—they’re merely added back for exemption calculation.
3.
A revocable living trust is primarily created to accomplish which objective?
A. Reduce federal estate taxes.
B. Avoid probate and maintain management continuity.
C. Create an immediate completed gift.
D. Protect assets from creditors.
Rationale: A revocable trust keeps assets under the grantor’s control, allowing probate
avoidance and smooth management if incapacity occurs. It doesn’t remove assets from the
taxable estate, so A is false. C is incorrect because revocable trusts don’t create completed gifts,
and D overstates creditor protection—revocable-trust assets remain reachable by creditors.
4.
A client owns a life-insurance policy on his life and designates his estate as beneficiary. What is
the estate-tax effect?
A. The policy proceeds are excluded from the gross estate.
B. Only cash value is included.
C. The full proceeds are included in the gross estate.
D. The proceeds are subject only to income tax.
,Rationale: Under IRC § 2042, insurance proceeds payable to the insured’s estate are fully
includible in the gross estate. A is false because naming the estate guarantees inclusion; B
misstates the rule (cash value is irrelevant at death); D confuses estate and income taxation—life-
insurance proceeds are generally income-tax-free to recipients.
5.
Which of the following is a characteristic of a bypass (credit-shelter) trust?
A. It defers all estate taxes until both spouses die.
B. It eliminates capital-gains tax on appreciated assets.
C. It allows income distributions only to descendants.
D. It terminates automatically at the first spouse’s death.
Rationale: A bypass trust uses the deceased spouse’s exemption to shelter assets from estate
tax at the first death and passes them estate-tax-free to heirs at the second death. B is wrong
because capital-gains still apply; C is overly restrictive; D is incorrect since it’s funded at the first
death, not terminated.
6.
Which document gives another person authority to manage financial affairs if the principal
becomes incapacitated?
A. Living will
B. Health-care proxy
C. Durable power of attorney
D. Testamentary trust
Rationale: A durable power of attorney remains effective during incapacity, allowing the agent
to manage property and finances. A covers medical treatment wishes, B designates a health-care
agent, and D activates only after death via the will.
, 7.
A client transfers stock to a grantor retained annuity trust (GRAT). The main advantage is:
A. Avoiding all gift tax.
B. Freezing asset value for estate-tax purposes.
C. Providing income-tax-free payments to the grantor.
D. Avoiding inclusion if the grantor dies during the term.
Rationale: A GRAT allows appreciation beyond the IRS Section 7520 rate to escape future
estate taxation—freezing the taxable value at transfer. A is wrong because a small taxable gift
occurs; C misstates that annuity payments are taxable income; D is false because dying during
the term generally brings inclusion.
8.
Which of the following correctly defines step-up in basis?
A. Assets receive the donor’s basis at death.
B. Assets receive fair-market value basis at death.
C. Assets are depreciated to zero before transfer.
D. Basis increases only if assets are gifted.
Rationale: Under IRC § 1014, property included in a decedent’s estate receives a step-up to
fair-market value at date of death, eliminating unrealized capital gain. A is gift-basis rule; C and
D misunderstand basis adjustments.
9.
An irrevocable life-insurance trust (ILIT) primarily serves to:
ACCURATE CURRENTLY TESTING EXAM QUESTIONS AND
ANSWERS WITH DETAILED RATIONALES | VERIFIED FOR
GUARANTEED PASS | STUDY GUIDE INCLUSIVE
1.
John establishes an irrevocable trust in 2023, transferring $5 million into it. The trust benefits his
two children, and John retains no control or interest. Which statement best describes the gift-tax
treatment?
A. No gift occurs until the trust terminates.
B. The entire $5 million is a completed gift in 2023.
C. The gift is incomplete because John can change beneficiaries.
D. The gift is excluded under the annual exclusion amount.
Rationale: Because John transferred full control and beneficial ownership, the gift is completed
at the moment of transfer. A completed gift means it’s reportable for gift-tax purposes in 2023
and consumes part of his lifetime exemption. Option A is wrong because the tax isn’t delayed
until termination; C is incorrect because he retains no powers; D is wrong since only $17,000 per
donee qualifies for the annual exclusion.
2.
Mary dies owning $9 million in assets and had made $1 million in lifetime taxable gifts. What
portion of her estate will be subject to federal estate tax if the 2025 unified credit exemption is
$13.61 million?
A. $10 million
B. $9 million
,C. $0
D. $1 million
Rationale: The unified credit combines lifetime taxable gifts and estate assets. Mary’s total
transfers ($9 million + $1 million = $10 million) fall below the $13.61 million exemption, so no
estate tax applies. Options A and B ignore the credit; D misstates that gifts are taxed again at
death—they’re merely added back for exemption calculation.
3.
A revocable living trust is primarily created to accomplish which objective?
A. Reduce federal estate taxes.
B. Avoid probate and maintain management continuity.
C. Create an immediate completed gift.
D. Protect assets from creditors.
Rationale: A revocable trust keeps assets under the grantor’s control, allowing probate
avoidance and smooth management if incapacity occurs. It doesn’t remove assets from the
taxable estate, so A is false. C is incorrect because revocable trusts don’t create completed gifts,
and D overstates creditor protection—revocable-trust assets remain reachable by creditors.
4.
A client owns a life-insurance policy on his life and designates his estate as beneficiary. What is
the estate-tax effect?
A. The policy proceeds are excluded from the gross estate.
B. Only cash value is included.
C. The full proceeds are included in the gross estate.
D. The proceeds are subject only to income tax.
,Rationale: Under IRC § 2042, insurance proceeds payable to the insured’s estate are fully
includible in the gross estate. A is false because naming the estate guarantees inclusion; B
misstates the rule (cash value is irrelevant at death); D confuses estate and income taxation—life-
insurance proceeds are generally income-tax-free to recipients.
5.
Which of the following is a characteristic of a bypass (credit-shelter) trust?
A. It defers all estate taxes until both spouses die.
B. It eliminates capital-gains tax on appreciated assets.
C. It allows income distributions only to descendants.
D. It terminates automatically at the first spouse’s death.
Rationale: A bypass trust uses the deceased spouse’s exemption to shelter assets from estate
tax at the first death and passes them estate-tax-free to heirs at the second death. B is wrong
because capital-gains still apply; C is overly restrictive; D is incorrect since it’s funded at the first
death, not terminated.
6.
Which document gives another person authority to manage financial affairs if the principal
becomes incapacitated?
A. Living will
B. Health-care proxy
C. Durable power of attorney
D. Testamentary trust
Rationale: A durable power of attorney remains effective during incapacity, allowing the agent
to manage property and finances. A covers medical treatment wishes, B designates a health-care
agent, and D activates only after death via the will.
, 7.
A client transfers stock to a grantor retained annuity trust (GRAT). The main advantage is:
A. Avoiding all gift tax.
B. Freezing asset value for estate-tax purposes.
C. Providing income-tax-free payments to the grantor.
D. Avoiding inclusion if the grantor dies during the term.
Rationale: A GRAT allows appreciation beyond the IRS Section 7520 rate to escape future
estate taxation—freezing the taxable value at transfer. A is wrong because a small taxable gift
occurs; C misstates that annuity payments are taxable income; D is false because dying during
the term generally brings inclusion.
8.
Which of the following correctly defines step-up in basis?
A. Assets receive the donor’s basis at death.
B. Assets receive fair-market value basis at death.
C. Assets are depreciated to zero before transfer.
D. Basis increases only if assets are gifted.
Rationale: Under IRC § 1014, property included in a decedent’s estate receives a step-up to
fair-market value at date of death, eliminating unrealized capital gain. A is gift-basis rule; C and
D misunderstand basis adjustments.
9.
An irrevocable life-insurance trust (ILIT) primarily serves to:
