Ch: 16 Types of Clients S66

Liam died with the following assets and liabilities: $200,000 in securities left to his wife, a $650,000 home left to his wife (the home cost $150,000), a $250,000 life insurance policy with his daughter as beneficiary, and $75,000 in debts and estate expenses. What is Liam's gross estate? A) $600,000. B) $1,100,000. C) $1,025,000. D) $250,000.

B The question asks for the gross estate, not the adjusted gross estate or taxable estate. The market value of all assets in which Liam possessed an incident of ownership at the time of death are included in the gross estate. The amount is therefore $1,100,000. The adjusted gross estate would be less the $75,000 of debt and expenses.

Which type of individual account allows for investments held in that account to go straight to a named beneficiary outside of probate? A) TOD account B) Account titled JTWROS C) Testamentary account D) Advisory account

A A simple way for an individual account owner to ensure that the assets in the account pass directly to the named beneficiary is to use the Transfer on Death (TOD) option. Although the assets in a JTWROS account pass to the survivor without probate, the question specifies an individual, not a joint account.

Which of the following business entities has an income tax filing due date (disregarding possible extensions) of March 15? I. Sole proprietorship II. Single-member LLC III. Multiple-member LLC electing to be treated as a corporation​ IV. S corporation A) III and IV B) II, III, and IV C) I and IV D) I and II

A For partnership returns (including LLCs with more than 1 member) and S corporation returns, the due date is March 15. One effect of this is that LLCs, partnerships, and S corporations all have the same filing deadline. For C corporations, the due date is the 15th day of the 4th month following the close of the corporation's year; this date is April 15 for a calendar-year filer.

Which of the following business entities has an income tax filing due date (disregarding possible extensions) of March 15? I. Sole proprietorship II. Single-member LLC III. Multiple-member LLC electing to be treated as a corporation​ IV.S corporation

A For partnership returns (including LLCs with more than 1 member) and S corporation returns, the due date is March 15. One effect of this is that LLCs, partnerships, and S corporations all have the same filing deadline. For C corporations, the due date is the 15th day of the 4th month following the close of the corporation's year; this date is April 15 for a calendar-year filer.

A form of business organization that offers flow-through of income and loss while providing the owner(s) with limited liability is a sole proprietorship an LLC a C corporation an S corporation A) II and IV B) I and III C) II and III D) I and IV

A Only an LLC or an S corporation allows for direct participation in the income or losses of the business while offering limited liability. The sole proprietorship has flow-through, but unlimited liability. The C corporation limits liability but has no flow-through.

Under current tax law (2022), how much can a married couple give to their adult son and his wife without incurring a gift tax obligation? A) $64,000 B) Unlimited C) $16,000 D) $32,000

A The current gift tax exclusion (2022) is $16,000 per donor to each recipient. A married couple can give $32,000 to a single individual and qualify for the exclusion. In this case, the married couple can give $32,000 to their son and $32,000 to their daughter-in-law without paying any gift tax.

An investor inherits 1,000 shares of the ABC Global Growth Fund when the NAV is $9.50, the bid price is $9.00, and the ask price is $9.15. Two years later, the investor sells all shares when the NAV is $14.25, the bid is $14.50, and the ask is $14.60. What are the tax consequences of this sale? A) Long-term capital gain of $5,500 B) Long-term capital gain of $5,350 C) Long-term capital gain of $4,750 D) Long-term capital gain of $5,450

A Upon death, the beneficiary inherits closed-end funds at their bid price (what the estate could have sold them for), or $9.00 per share. The sale two years later takes place at the bid ($14.50) for a profit of $5.50 per share (times 1,000 shares). Remember, in the case of a closed-end fund, the NAV does not figure into any computations; prices are based on supply and demand and have a bid and ask price, the same as any stock. How did you know this was a closed-end company? Only in the case of a closed-end company can the ask price be lower than the NAV (ask = $9.15, NAV = $9.50).

After receiving some money from an inheritance, an individual purchases a rare gold coin for $10,000. Five years later, he gives the coin to his daughter-in-law after receiving an appraisal showing the coin is worth $15,000. The daughter-in-law's cost basis of the coin is A) $15,000. B) $10,000. C) $5,000. D) $0.00.

B When a gift is made of an asset, whether it be a security or a collectible, the donor's cost basis passes to the donee. In this case, the original cost is $10,000 and that becomes the cost basis for the daughter-in-law and is used to determine a gain or loss when that coin is sold. Do not confuse this with the annual gift tax exclusion. Because the value of the gift did not exceed $16,000, the donor has no gift tax obligation, but that is completely different from the daughter's cost basis

A customer is selling inherited stock. The decedent originally paid $50 per share and on the date of the decedent's death, the stock was worth $60 per share. On the day the customer sells the stock, the price per share is $62. What is the investor's cost basis in the stock? A) 50 B) 62 C) 60 D) 55

C

One of your ultra-high net worth clients has extensive real estate holdings and is concerned about his children being forced to liquidate some of them in order to pay the estate taxes after his death. One tool that could be suggested to solve this problem would be A) registering the properties as JTWROS. B) placing the properties into a living trust. C) using a TOD account. D) purchasing a life insurance policy using an ILIT.

D Estate taxes must be paid within nine months of death. If the client doesn't want to have to liquidate his real estate holdings, then another source for the tax payment must be found. A frequently-used tool is the irrevocable life insurance trust (ILIT) where a policy is purchased on the life of the client, but owned by the trust. When properly structured, this means that the death benefit is not included in the estate and passes tax free to the beneficiaries. Those funds can then be used to pay the estate taxes and the real estate assets pass to the beneficiaries. A living trust won't work because the only way the policy's proceeds aren't considered part of the estate is when the trust is irrevocable. TOD and JTWROS avoid probate, but do not avoid estate taxes.

Which of the following vehicles make use of the unified estate tax credit? Bypass trust Generation-skipping trust Living trust Simple trust A) III and IV B) I and II C) II and III D) I and IV

B Both the bypass trust and the generation-skipping trust are tools used by estate planners to reduce estate taxes. They do so by passing the amount in the unified credit (currently $5.34 million for 2014) to heirs other than the spouse, usually grandchildren in the case of the GST.

During the previous fiscal year, The Kaplan Family Trust received $24,000 in dividends and $35,000 in interest from corporate bonds. Securities transactions during the year resulted in long-term capital gains of $48,000, $20,000 of which were reinvested in the corpus. The DNI for the Kaplan Family Trust is A) $79,000 B) $87,000 C) $11,000 D) $107,000

B Distributable Net Income (DNI) is dividends and interest plus capital gains that have not been reinvested back into the trust. In this case, $24,000 + $35,000 + $28,000 = $87,000.

If a businessowner's goal is to establish an entity that features ease in raising capital, which of these entities is the most appropriate? A) A sole proprietorship B) A limited liability company (LLC) C) An S form of corporation D) A general partnership

B If a businessowner's goal is ease in raising capital, the limited liability company (LLC) is the best choice because it has no restrictions on the number or nationality of investors. While the regular or C corporate form is also preferable, the S form of corporation is limited to a maximum of 100 potential shareholders, none of whom may be a nonresident alien.

To comply with the regulations regarding customer identification programs, the minimum identifying information that must be obtained from each customer before opening an account includes name I. oral assurance that the customer is of legal age II. a street address, unless the primary mailing address is a PO Box located in the state of residence IV. a taxpayer identification number A) II and III B) I and IV C) III and IV D) I and II

B Mere oral assurance that the customer is of legal age is not sufficient; the actual date of birth must be obtained. A PO Box is never acceptable without a physical address. In addition, the identity of the person opening the account must be verified through documentation such as an unexpired driver's license or passport.

XYZ, Inc. is a C corporation in the 21% federal income tax bracket. Which of the following investments offers the company the highest after-tax return? A) Corporate bond with a 6.75% coupon B) ABCD, Inc. preferred stock paying a 6% dividend C) Municipal bond with a 5% coupon rate D) REIT paying a 6.5% dividend

B The key to this answer is that corporations have a 50% dividend exclusion on dividends received from other companies. The math looks like this: Only half of the 6% dividend is taxable. That means 3% per year is tax free and the other 3% is subject to tax at the 21% rate. So, we have 3% + 79% of the taxable 3% = 3% + 2.37% = 5.37% after-tax return. The municipal bond is not taxed, but that only produces 5% after tax. The corporate bond is subject to 21% tax so the corporation gets to retain the other 79%. That computes to 6.75 x 79% = 5.33%, just a bit less than the preferred stock. In most cases, dividends paid to corporations by REITs are fully taxable. That makes the after-tax return on the 6.5% dividend only 5.14%.

Oscar and Hilda, a married couple, are collecting Social Security. They speak to their financial planner for advice on taxation of those benefits. At what level do their benefits become subject to income tax?​ A) When 50% of their benefits added to all their other income, including tax-exempt interest, exceeds $25,000 B) When 50% of their benefits added to all their other income, including tax-exempt interest, exceeds $32,000 C) When 50% of their benefits added to all their other income, excluding tax-exempt interest, exceeds $32,000 D) When 50% of their benefits added to all their other income, excluding tax-exempt interest, exceeds $25,000

B These are the current numbers used by the IRS to determine if Social Security benefits are taxable. It is interesting that the computation of provisional or combined income indirectly can cause tax-exempt interest to become taxable. Once the couple's income under this computation exceeds $44,000, 85% of it is taxable. If the question dealt with a single person, the limit would be $25,000 rather than $32,000.

When does a customer have to receive the OCC Options Disclosure Document? A) Within 5 business days of the first options trade B) At or prior to accepting the customer's first order to trade options covered by the ODD C) Within 15 days of account approval by the firm's designated options supervisor D) With the confirmation of the first options transaction

B When opening an account to trade options, the owner must be told about the risks involved with trading options. By providing the owner with an options disclosure document titled Understanding the Risks and Uses of Options, the broker-dealer satisfies the risk disclosure requirements. There are 2 alternatives for meeting the delivery requirement. It may be done before or at the time the broker-dealer approves that customer's options account or accepts the customer's first order to trade the listed options covered by the ODD

One of your customers has a substantial savings account at the local S&L. The customer has several grandchildren and wants the flexibility of being able to change the beneficiary allocations as their financial conditions change. You should recommend that the customer investigate the use of A) a durable power of attorney (POA). B) an irrevocable trust. C) a Totten trust. D) a Uniform Transfers to Minors Act (UTMA) account.

C

Among the differences between C corporations and S corporations is the liability assumed by the shareholders the number of allowable shareholders the tax treatment of the corporation's earnings residency requirements of shareholders A) I and IV B) II and III C) II, III, and IV D) I, II, III, and IV

C A feature common to both C and S corporations is the limited liablity of the investor. That is, the investor is not liable for the debts of the business and cannot lose more than the original investment. Unlike C corporations, there is a limit placed on the number of shareholders in an S corporation. At the time of this printing, that maximum is 100, none of whom may be a nonresident alien (C corps have no residency restrictions). The primary practical difference is the fact that S corporation earnings (and losses) flow through to the shareholders, whereas C corporation earnings are only received by shareholders when dividends are paid.

An individual purchased a variable life insurance policy 10 years ago with a guaranteed death benefit of $100,000. The annual premium for this policy was $2,000 per year. The individual dies and, due to outstanding performance of the separate account, leaves a death benefit to the beneficiary of $121,000. What are the income tax consequences to that beneficiary? A) Ordinary income tax is due on $21,000. B) Ordinary income tax is due on the $1,000 that exceeds the original cost. C) No tax is due. D) There is a long-term capital gain of $1,000.

C One of the nice things about life insurance proceeds is that even when the death benefit is increased due to separate account performance, it is still free of income tax

Several entrepreneurs form an S corporation. Under which of the following circumstances will the entrepreneurs risk losing their tax benefits? 150 new investors buy into the corporation during the year. 1 new member is a nonresident alien. 50% of the corporation's income is derived from passive investments in limited partnerships. The corporation issues several classes of stock. A) I and II B) I, II, and III C) I, II, III, and IV D) I only

C S corporations must not have more than 100 stockholders, and each stockholder must be a citizen or resident of the United States. The corporation can only have 1 class of stock, and no more than 25% of the corporation's income can come from passive activities. If you were not aware of this last fact, a useful test-taking technique is recognizing that all the other choices are correct and there is no way to select them without this one.

If the executor of an estate containing a substantial stock portfolio is of the opinion that the economy is about to enter a down cycle, estate taxes could be reduced by A) reallocating the assets to less risky securities. B) asking for an extension to file the return. C) using the alternative valuation date. D) liquidating the portfolio in advance of the market downturn.

C The executor of an estate has the option of valuing the assets either as of the date of death or six months later (the alternative valuation date). If stock prices fall, then the estate will shrink, resulting in lower estate taxes.

Liam died with the following assets and liabilities: $200,000 in securities left to his wife, a $650,000 home left to his wife (the home cost $150,000), a $250,000 life insurance policy with his daughter as beneficiary, and $75,000 in debts and estate expenses. What is Liam's gross estate? A) $250,000. B) $1,025,000. C) $1,100,000. D) $600,000.

C The question asks for the gross estate, not the adjusted gross estate or taxable estate. The market value of all assets in which Liam possessed an incident of ownership at the time of death are included in the gross estate. The amount is therefore $1,100,000. The adjusted gross estate would be less the $75,000 of debt and expenses

William died in 2019 with the following assets and liabilities: $200,000 in securities left to his wife, $650,000 home left to his wife (the home cost $150,000), $250,000 life insurance policy with his daughter named as beneficiary, and $75,000 in debts and estate expenses. What is William's net estate? A) $0; it is below the $11.4 million exemption equivalent B) $625,000 C) $175,000 D) $750,000

C The question is asking for the net estate, not the amount of estate tax due. The market value of all assets that William has an incident of ownership in will be included in the gross estate. All assets left to the spouse and the debts/expenses are allowable reductions to arrive at the net or taxable estate. The math goes like this. The $1.1 million gross estate (add together the assets ($200,000 + $650,000 + $250,000) is reduced by the $850,000 left to his wife. That brings the net estate down to $250,000 ($1,100,000 minus $850,000). The net estate is further reduced by the $75,000 in debt and expenses. Subtracting $75,000 from $250,000 leaves a net estate of $175,000. That is well below the estate tax exemption of $11.4 million in assets for 2019.

When a will calls for property to be distributed per stirpes, it means that A) the property is divided into as many equal shares as there are surviving children and grandchildren of the designated ancestor. B) all living descendants of the ancestor receive equal shares in the property remaining after all estate expenses are paid. C) the property is divided into as many equal shares as there are surviving children of the designated ancestor and deceased children who left surviving descendants. D) the property is divided into as many equal shares as there are surviving children of the designated ancestor, with nothing going to surviving descendants of deceased children.

C When a will calls for a per stirpes distribution of assets, it provides that if any named beneficiary predeceases the testator (the maker of the will), surviving children of that individual share in the share that the individual would have received. For example, if the testator had three children and one of them died first, any children of the deceased would share in their parent's portion (they would split one-third of the estate between them).

A client has just finalized her divorce and intends to sell her gold wedding band. Because the price of gold has risen significantly since she married 20 years ago, she will be able to realize a profit on the sale, but she does not know what to use as the cost basis. You suggest she speak to a tax specialist who will tell her to A) obtain an appraisal from a qualified jeweler and use that as the cost basis. B) use a cost basis of zero because it was a gift. C) ignore the profit for tax purposes because precious metals are not subject to capital gains taxation. D) use the original cost of the ring

D Regardless of the nature of the asset, the cost basis of any asset acquired as a gift is that of the donor. Although not tested, the maximum rate on capital gains from collectibles, such as a gold ring, is 28% (higher than the rate for securities).

Mr. Peabody Fawcett and his sister, Ms. Gwenyth Paige-Newberry open a brokerage account at your firm with an initial deposit of $11 million. The account is opened as tenancy in common (TIC) with Peabody owning 40% and Gwenyth the balance. Several years later, Peabody is fatally injured while playing polo. As a result A) the account will be frozen until the results of the probate court are released B) Mr. Fawcett's share will be transferred to his sister and an individual account will be opened in her name C) the account will be frozen until receiving instructions from the executor of Mr. Fawcett's account D) 40% of the value of the account will be transferred to an estate account in his name and 60% will be transferred into an individual account in her name

D With an account opened as tenancy in common (TIC), in the event that one party dies, their portion of the assets will be transferred to an estate account and distributed according to will; the surviving party's assets remain undistributed and will be transferred into an individual account.