Unit 16
A corporation organized as a C corporation 1. is taxed on the corporate level and then again to its shareholders when dividends are paid. 2. is limited to a maximum of 100 shareholders. 3. provides limited liability to its owners. 4. may not have any trusts as shareholders. A) I and II B) III and IV C) I and III D) II and IV
C) I and III C corporations are taxable on the corporate level and then again to the shareholder when income is distributed in the form of dividends. Shareholders' liability is limited to the amount of their investment. The S corporation is limited to 100 shareholders. Trusts may own shares of both C and S corporations.
Which of the following is (are) advantages of irrevocable insurance trusts? 1. Provide estate liquidity. 2. Insurance proceeds are removed from the estate of the insured for tax purposes. 3. The insured has the flexibility to alter the trust arrangements. 4. Once set up, no changes may be made. A) I and III B) I and II C) II and IV D) III and IV
B) 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.
Dr. Howard dies. Which of the following life insurance policies will be included in his gross estate? Policy I—owned by Dr. Howard; he is the insured and his wife is the beneficiary. Policy II—owned by Mrs. Howard; she is the beneficiary. Policy III—originally owned by Dr. Howard; Mrs. Howard is the insured and he gave the policy to his daughter 5 years ago. Policy IV—owned by Dr. Howard; Mrs. Howard is the insured and he is the beneficiary. A) I and II B) I and IV C) I, II, III, and IV
B) I and IV The question asks which will be included in the gross estate, not which policies will be part of the taxable estate. Any policies that are owned by the decedent at the date of death will be included in the decedent's gross estate. Of course, there may be a deduction from the gross estate for anything left to a spouse. Policy II was never owned by the decedent, therefore it is not included. Policy III is not included because it was given away more than three years before Dr. Howard's death.
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) $32,000 C) Unlimited D) $16,000
A) $64,000 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 estate account is opened with Family Asset Protectors (FAP) a registered investment adviser. Management decisions regarding the account must be made at the direction of the A) investment adviser. B) estate's executor or administrator. C) estate creditors. D) attorney with guardianship over the surviving children.
B) estate's executor or administrator. Only the estate executor (or administrator when the individual dies intestate) can make investment management and distribution decisions. This does not mean that the executor must make the investment decisions for the account, only that decisions as to who will do the management are within his purview. A guardian with authority over the children does not necessarily have power over the estate unless the guardian is also the administrator or the executor of the estate.
Which of the following vehicles make use of the unified estate tax credit? 1. Bypass trust 2. Generation-skipping trust 3. Living trust 4. Simple trust A) I and IV B) III and IV C) II and III D) I and II
D) I and II 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.
Which of the following statements regarding an S corporation owner and an owner of an LLC are true? 1. Creditors have very limited recourse rights to the owners. 2. They may not be nonresident aliens. 3. They both are considered stockholders. 4. Both receive the tax benefit of owning flow-through entities. A) II and III B) I and IV C) I and III D) II and IV
B) I and IV Creditors don't have recourse to the owners of either entity unless the owners have specifically allowed it. Both are flow-through or conduit entities. Owners of S corporations are stockholders, whereas those in an LLC are members. Nonresident aliens may not own an S corporation.
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) $10,000 B) $1,500 C) $6,500 D) $4,500
C) $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.
There are a number of different ways in which a business may be structured. For tax purposes, which form is taxed on its income? A) General partnership B) S corporation C) Sole proprietorship D) LLC
C) Sole proprietorship A sole proprietorship's income is taxed on the owner's Form 1040. Specifically, Schedule C of the Form 1040 is used to report income (or loss) from a sole proprietorship. Partnerships, LLCs, and S corporations are flow-through entities. They file information returns and send a Schedule K-1 to each owner indicating the amount of taxable income (or loss) to be reported by that owner who then is responsible for any tax consequences.
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 deferred annuity C) A Section 529 plan for grandchildren D) A donor advised fund
D) 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.
Several entrepreneurs form an S corporation. Under which of the following circumstances will the entrepreneurs risk losing their tax benefits? 1. 150 new investors buy into the corporation during the year. 2. 1 new member is a nonresident alien. 3. 50% of the corporation's income is derived from passive investments in limited partnerships. 4. The corporation issues several classes of stock. A) I, II, and III B) I and II C) I only D) I, II, III, and IV
D) I, II, III, and IV 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.
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) the assets in the trust pass directly to the beneficiary following probate. B) it allows the grantor to serve as trustee. C) the donor has the ability to change the beneficiary as desired. D) it generally avoids estate tax.
D) 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.
