Series 65 Unit 16

A complex trust has the following income for the year: $1,500 in taxable interest, $2,000 in dividends (reinvested in the stock), and $3,000 in tax-exempt interest. In addition, the portfolio realized $3,500 in capital gains that were reinvested in the corpus. What is the distributable net income (DNI) for the trust? A) $6,500 B) $10,000 C) $1,500 D) $4,500

A) $6,500 All investment income, regardless of source, will be considered DNI and will be included in the taxable income calculation to the trust unless distributed. That portion of the DNI representing tax-exempt interest maintains its tax-free status. Reinvested capital gains are not part of a trust's DNI. The computation is: $1,500 in taxable interest + $2,000 in dividends (reinvestment means nothing here) + $3,000 in tax-exempt interest. This is a total of $6,500 of DNI. When distributed, only $3,500 will be taxable. LO 16.e

Which of the following accounts can only be opened by spouses? A) Tenants in the entirety B) TOD accounts C) Tenants with right of survivorship D) Tenants in common

A) Tenants in the entirety The unique characteristic of a tenants in entirety account is that it can only be opened by spouses. Each of the others can be opened jointly by any legal persons. LO 16.a

There are numerous benefits to opening an account at a brokerage firm with a transfer on death (TOD) designation. One of those is A) probate is avoided. B) the owner of the account may change beneficiaries with the permission of the court. C) estate taxes are reduced. D) simplification of the transfer of assets held at multiple brokerage firms.

A) probate is avoided. A TOD account avoids probate, but not estate taxes. The owner of the account may change beneficiaries and their percentages as he wishes. The TOD account is an account at a specific broker-dealer and only relates to the assets in that account. LO 16.f

One of your customers would like to be able to reduce current taxable income. Contributions to which of the following would be an appropriate recommendation? A) A Roth IRA B) A donor advised fund C) A deferred annuity D) A Section 529 plan for grandchildren

B) A donor advised fund A donor-advised fund operates as a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code. As such, contributions to the fund will generate a current tax deduction for the customer. Section 529 plans offer tax-deferred growth but not a current tax deduction. Roth IRAs offer the potential of tax-free income, but current contributions are not tax-deductible. A deferred annuity means the earnings in the account are deferred until the money is withdrawn. Once again, there is no current tax benefit. Remember, every annuity on the exam is nonqualified unless something in the question indicates otherwise. LO 16.f

A feature of which of the following business entities is limited liability but no flow-through of earnings or losses? A) Limited partnership B) Corporation C) LLC D) Sole proprietorship

B) Corporation The corporation (always assume C corporation unless it says different on the test) offers limited liability to its shareholders, but there is no flow-through of income or loss. LLCs and limited partnerships offer both and the sole proprietorship has unlimited liability. LO 16.b

Which of the following is (are) advantages of irrevocable insurance trusts? Provide estate liquidity. I. Insurance proceeds are removed from the estate of the insured for tax purposes. II. The insured has the flexibility to alter the trust arrangements. III. Once set up, no changes may be made. A) II and IV B) III and IV C) I and III D) I and II

D) I and II As with all life insurance, the proceeds are available almost immediately upon death providing estate liquidity. When done properly, the proceeds of the policy are not included in the deceased's estate, thereby saving estate taxes. The trust is irrevocable—no changes can be made, and this is one of the few disadvantages. LO 16.e

A client of yours is getting older and is concerned about having her wishes met relating to medical issues when she is no longer capable of communicating them. The most appropriate vehicle for her would be A) a living will. B) an incapacitation will. C) a joint and survivors will. D) a life support will.

A) a living will. A living will, more commonly known as an advance health care directive or medical directive, is used to convey the individual's wishes for life support and other similar issues involving end-of-life matters. The other terms are bogus. LO 16.d

Increasingly, many institutional investors, especially those in the philanthropic arena, are using ESG factors when considering where to invest their funds. Those factors are most accurately described as A) environmental, social, and governance. B) exchange, sales, and general. C) exchange, sensitivity, and growth. D) earnings, systematic, and governmental.

A) environmental, social, and governance. The ESG business factors that should be considered when analyzing a firm are a company's environmental, social, and governance risk exposures. LO 16.d

One of your customers has been told that an irrevocable trust is something to consider. Probably the most significant reasons for this type of trust is that A) it generally avoids estate tax. B) it allows the grantor to serve as trustee. C) the assets in the trust pass directly to the beneficiary following probate. D) the donor has the ability to change the beneficiary as desired.

A) it generally avoids estate tax. A properly constructed irrevocable trust removes the grantor's assets from the estate thereby eliminating estate tax on them. The grantor no longer has the power to change the beneficiary and cannot serve as trustee. The assets pass directly to the beneficiary without going through probate. LO 16.f

During a trip to visit grandchildren, one of your clients suffers a massive heart attack and dies, intestate. Directions for handling the account could only come from A) the person appointed as administrator of the estate. B) the spouse. C) the person with a durable power of attorney. D) the person named as executor of the estate.

A) the person appointed as administrator of the estate. Dying intestate means that there is no valid will. In that case, the state will appoint someone as administrator of the estate with the responsibility of handling all of the affairs of the deceased. Only when there is a will is there an executor, and a durable power of attorney is canceled upon the death of either party to the power. Only if the account were registered as JTWROS with the spouse (or if the spouse were named the executor) would the spouse have any authority. LO 16.d

All of the following statements relating to an account registered as tenants in common are true except A) upon the death of one of the cotenants, that individual's share of the account passes to the survivor(s) B) each cotenant has an undivided interest in the entire account C) this form of registration is less common for married couples than JTWROS D) cotenants can own unequal percentages of the assets in the account

A) upon the death of one of the cotenants, that individual's share of the account passes to the survivor(s) Unlike an account registered JTWROS, when a cotenant in a TIC account dies, that individual's share of the account passes to the individual's estate, not the other cotenant(s). That would be the case with JTWROS (which is why that form is far more popular with married couples instead of TIC). In a TIC account, each cotenant has an undivided interest (specific securities in the portfolio are not designated to each cotenant—they share ownership in the entire portfolio). This is not to be confused with the fact that the ownership interests can be unequal. For example, one investor can own 40% of the account and the other 60%. LO 16.a

Which of the following would be used to provide end-of-life instructions once a person becomes incapacitated? A) Incapacitated will B) Living will C) Durable power of attorney D) Living trust

B) Living will The purpose of a living will is to give clear instructions regarding end-of-life decisions, such as organ donation or when to end life-extending measure. There is no such thing as an incapacitated will. A living trust deals with how assets are distributed and a durable power of attorney grants authorization to a person to legally act on behalf of someone who cannot do so. LO 16.d

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) liquidating the portfolio in advance of the market downturn. B) using the alternative valuation date. C) asking for an extension to file the return. D) reallocating the assets to less risky securities.

B) using the alternative valuation date. 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. LO 16.g

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) $0.00. C) $10,000. D) $5,000.

C) $10,000. 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. LO 16.g

If the Smiths want to open a joint account at AAA Securities Corporation and have their securities transferred to their three daughters upon the death of the last surviving account holder, their agent should recommend that the Smiths open A) individual accounts in the name of each daughter. B) a joint tenancy account with right of survivorship. C) a joint tenancy account with right of survivorship and execute a transfer on death (TOD) registration form. D) a tenants in common account.

C) a joint tenancy account with right of survivorship and execute a transfer on death (TOD) registration form. The agent should recommend that the Smiths open a joint account with right of survivorship and complete a transfer of death registration form. The joint tenancy account gives the Smiths joint ownership in the securities in the account. The surviving joint tenant immediately becomes the owner of the whole property upon the death of the other joint tenant (right of survivorship). The transfer upon death registration identifies the beneficiaries to receive the securities upon the death of the last joint tenant. The TOD provision is available on individual accounts and joint accounts opened as JTWROS and TBE. It is not available for TIC (tenants in common) accounts. LO 16.f

When advisory clients wish to structure their portfolios to support companies that engage in social or environmental policies that they agree with, it is known as A) engineered investing. B) asset allocation. C) impact investing. D) program-related investing.

C) impact investing. Impact investing can be defined as the intentional allocation of capital to generate a positive social or environmental impact. LO 16.d

Which of the following statement(s) regarding gift taxes for a gift made in 2022 are true? I. Gifts of $16,000 per person per year can be given without a tax liability. II. Gifts in excess of $16,000 per person per year may be subject to tax. III. The donor, not the recipient, is responsible for any tax liability. IV. The tax rate increases with the size of the gift. A) III and IV B) I and II C) II and III D) I, II, III, and IV

D) I, II, III, and IV In accordance with current gift tax regulations, an individual may give a gift of up to $16,000 per person in one year with no gift tax liability. If the gift exceeds $16,000, it is the donor who is responsible for any tax. The gift tax is a progressive tax, which means that as the size of the gift increases, the percentage of applicable tax will also increase. LO 16.g

An agent may open a joint account for which of the following? I. Lee and his 13-year-old son, Tom II. Mary and Kelley, 2 adult college roommates III. Jerry and Mark, friends and partners in business for more than 20 years IV. Melinda and her minor nephew, John, for whom she is guardian A) I and III B) II and IV C) I and IV D) II and III

D) II and III Joint account owners share ownership of the account and must be adults. A minor may not legally exercise control over an account and may not be an owner of record of an account. Remember that a joint account is owned by 2 or more persons and, under both state and federal law, a minor is not a person. LO 16.a

Mr. Hawkins sets up a revocable trust for the benefit of his adult daughter, Madeleine. His wife may draw from it only if she needs to. Income on the trust will be taxed to A) Madeleine as the primary beneficiary B) Mrs. Hawkins as the contingent beneficiary C) the trust because it is a separate legal entity D) Mr. Hawkins as the donor

D) Mr. Hawkins as the donor Because Mrs. Hawkins has an economic interest, this is a grantor trust. Thus, all income will be taxed to the donor, Mr. Hawkins. LO 16.d

Which of the following individuals may not open a joint account? A) Three sisters B) Two spouses C) Business colleagues D) Parent and a minor

D) Parent and a minor Any 2 or more persons can have a joint account, but a minor is specifically excluded from the definition of a person. LO 16.a

Ms. Abbot has a joint account with her sister. She enters a sell order in the account and instructs that the proceeds check be made out to her only. If your firm sends the check but makes it payable to both Ms. Abbot and her sister, this is an example of A) not following instructions, a prohibited practice under the Uniform Securities Act B) an unlawful practice because the transaction was unauthorized C) an unfortunate error that can be reconciled with the broker-dealer through a process called reclamation D) the proper joint account procedure

D) the proper joint account procedure In joint accounts, either party may act. However, by law, all checks must be made payable to all owners, so the firm is following required procedure. LO 16.a