Types of Clients

Valuation of assets from a deceased person

6 months after death

When are estate taxes due?

9 months after death

One of your customers purchased a variable life insurance contract through your firm. After 14 years, he had deposited $15,000 in premiums, and his death benefit had grown to $80,000. Shortly after taking out a loan against cash value of $10,000, he was killed in an automobile accident. What will be the tax consequences of this situation to the death benefit? A) His beneficiary must pay taxes on the amount of the death benefit that is over and above the cost base of $15,000. B) The first $15,000 is tax-free with the excess being treated as a long-term capital gain. C) His beneficiary must pay taxes on the amount of the death benefit that is over and above the cost base of $15,000 plus the unpaid loan. D) His beneficiary need not pay taxes on the death benefit.

D) His beneficiary need not pay taxes on the death benefit. A death benefit payable on a life insurance policy or contract is not subject to taxation. The insurance company will deduct the balance of the $10,000 loan before it releases the death benefit to the beneficiary, but that does not affect the tax consequences.

J.B. Rich founded Rich, Inc., and he owns a substantial block of stock with a very low cost basis. Which of the following statements are true regarding the disposition of J.B.'s stock? I. If it is given away, the recipient of the gift assumes J.B.'s cost basis. II. If it is given away, the recipient of the gift receives a stepped-up basis to the market value as of the date of the gift. III. If it is inherited, the beneficiary will assume J.B.'s cost basis. IV. If it is inherited, the beneficiary receives a stepped-up basis to the market value as of the date of J.B.'s death.

If it is given away, the recipient of the gift assumes J.B.'s cost basis. If it is inherited, the beneficiary receives a stepped-up basis to the market value as of the date of J.B.'s death.

Agatha has an account with her aunt, Sally, which is registered as TIC. If Sally predeceases Agatha, the assets in the account go to A) the person designated under the laws of escheat in her state. B) Agatha. C) Sally's estate. D) Sally's spouse.

C) Sally's estate. When an account is opened as tenants in common (TIC), upon the death of one of the cotenants, that individual's share now becomes part of the deceased's estate. It might be that Agatha or Sally's spouse are beneficiaries named in Sally's will, but we don't know that.

A married couple wishes to open an account at your firm. Which choice of registration would you recommend if they insist that no trading be done without the consent of both of them? A) Joint tenancy B) Tenants with right of survivorship C) Tenants in common D) Tenants in the entirety

Tenants in the entirety Tenants in the entirety (TBE) is unique in that it is the only common form of account registration requiring the consent of both parties prior to any activity taking place in the account. With the other forms, any party to the account can initiate trading activity. LO 16.

Under the minimum distribution rules, Jason is required to take a minimum distribution of $10,000 in 2023 from his IRA. However, a distribution of only $8,000 has been made. Assuming that Jason does not correct the problem, what is the dollar amount of penalty that may be assessed in this situation? A) $500 B) $4,000 C) $2,000 D) $200 Explanation The penalty for failure to make the correct amount of required minimum distribution is 25% of the difference between the minimum required amount and the actual distribution. In this case, this would be 25% of $2,000 ($10,000 − $8,000) or $500. Please note that the SECURE Act 2.0 reduced the penalty to 25% or even as low as 10% if promptly corrected.

A) $500 The penalty for failure to make the correct amount of required minimum distribution is 25% of the difference between the minimum required amount and the actual distribution. In this case, this would be 25% of $2,000 ($10,000 − $8,000) or $500. Please note that the SECURE Act 2.0 reduced the penalty to 25% or even as low as 10% if promptly corrected.

When comparing the tax treatment of C corporations, S corporations, and LLCs, it would be correct to state that A) only the C and S corporations offer the benefit of "flow-through." B) all three of these have the same tax filing date. C) the C corporation is the only one that pays taxes. D) registered personnel opening a brokerage account for any of these would follow similar suitability procedures.

C) the C corporation is the only one that pays taxes. Only the C corporation is a separately taxed entity; the income (or loss) from an S corporation or LLC flows-through to the shareholders/members. The tax filing dates for the two flow-through entities is the same, generally March 15, while that for the C corporation is the 15th day of the 4th month after the end of the fiscal year (April 15 for a calendar year filer). The suitability for the S corporation and the LLC generally looks through to the individual owners where that is not the case with the C corporation.

All of these would be characteristics of a traditional 401(k) plan except A) the employer can contribute more than 25% of total payroll B) in-service employees may be eligible for hardship withdrawals C) employees can choose from a variety of investment options D) employees may have a portion of their contribution matched by the employer Explanation 401(k) plans provide for hardship withdrawals, a choice of investment options, and employer matching. Although there are exceptions to this, in general (and on the exam), you will have to know that the employer share of the contributions to a traditional 401(k) plan (or any other DC plan) may not exceed 25% of total payroll.

A) the employer can contribute more than 25% of total payroll 401(k) plans provide for hardship withdrawals, a choice of investment options, and employer matching. Although there are exceptions to this, in general (and on the exam), you will have to know that the employer share of the contributions to a traditional 401(k) plan (or any other DC plan) may not exceed 25% of total payroll.

Keisha has three married children, each with children of their own. She wishes to leave equal shares of her estate to each of her children. What happens if one of those children dies before Keisha? A) The estate is divided equally among the two surviving children B) The share belonging to the deceased child is distributed per stirpes C) The estate is divided on a per capita basis D) The estate is divided equally between the 2 surviving children and the children of the deceased child

B) The share belonging to the deceased child is distributed per stirpes Unless specified otherwise, assets in an estate are distributed per stirpes (sometimes called in stirpes). Stirpes is a Latin word meaning branches and, in this context, it is used to determine how the next generation receives a share in an estate when the parent predeceases the grandparent. As an example, if Keisha had child A, B, and C, and C died having 2 living children, the estate would be divided as follows: Child A gets ⅓, child B gets ⅓, and the two children of child C receive ¹⁄₆ each (sharing half of child C's portion). If you selected, "The estate is divided equally between the two surviving children and the children of the deceased child," that would mean that everyone would receive ¼ and that is not the way it is done.

When opening an account for a trust, which of the following sets of terms are synonymous? A) Beneficiary/trustee B) Trustee/settlor C) Settlor/grantor D) Grantor/trustee

C) Settlor/grantor The settlor, sometimes referred to as the grantor, is the person who establishes the trust. The trustee administers the trust and could be the grantor but does not have to be.