Business Study Deck Flashcards by Jamar Blackman

Which of the following statements about general partnerships is correct?

Only managing partners have liability for the partnership debts.
All partners are accountable for the firm’s operation and management.
The partnership must have at least one limited partner.
They provide an investment opportunity for people who want to be actively involved in the operation of the business.

All partners are accountable for the firm’s operation and management.

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The person creating a trust is known as the

corpus
trustee
grantor
trust officer

grantor

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03  Which of the following qualified retirement plans promises the employee a specified benefit at retirement based on a formula? 
  defined contribution
  defined benefit
  SEP
  SIMPLE

defined benefit

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Under a cross-purchase buy-sell plan funded by life insurance

death proceeds are taxable to the corporation
the agreement is between an owner and the corporation
the surviving stockholders are not allowed to purchase the policies on their own lives
each stockholder is typically the owner and beneficiary of insurance on the life of each other stockholder

each stockholder is typically the owner and beneficiary of insurance on the life of each other stockholder

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Some portion of a life insurance death benefit may be subject to federal income tax if

the transfer-for-value rule applies
the insured’s estate is the beneficiary
the insured had any incidents of ownership
the death benefit exceeds the value of a business interest as established in the buy-sell agreement

the transfer-for-value rule applies

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An S Corporation is

a corporation which is taxed as an unincorporated business
any business which elects to have earnings taxed as a distribution of dividends
a subsidiary corporation with a nonprofit tax status
normally owned by 90 or more stockholders

a corporation which is taxed as an unincorporated business

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A trust that can be altered or canceled by the grantor is a

super trust
revocable trust
remainder trust
reversionary trust

revocable trust

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Pre-approach mail can be helpful to a business insurance practice because

it eliminates the need to call for a scheduled appointment
it preconditions the prospect to expect a request for an appointment and to be more receptive to that request
it can do an effective selling job by itself; prospects always will call you
it is a low-cost way to avoid using the telephone

it preconditions the prospect to expect a request for an appointment and to be more receptive to that request

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When a business has sufficient cash flow to meet all financial obligations as they become due, it is said to be

solvent
profitable
retaining its earnings
making a good return on its investment

solvent

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The sale of stock under a cross-purchase plan will generally be viewed by the IRS as

a sale of stock
a stock redemption
a partial redemption
a distribution of dividends

a sale of stock

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What right does the insured key person typically have in a key person policy?

the right to name a secondary beneficiary
no rights, because the owner is the business
the right to assume ownership of the policy at retirement
the right to any cash value in excess of what the corporation has contributed

no rights, because the owner is the business

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A disadvantage of a sole proprietorship is

the loss of income at the death of a sole proprietor
double taxation at both the individual and business levels
the autonomy because there is no boss to criticize the sole proprietor’s work
the detailed annual reporting to the Small Business Administration maintain sole proprietorship status

the loss of income at the death of a sole proprietor

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The maximum possible marital deduction for a $2,000,000 adjusted gross estate would be

$192,800
$625,000
$1,200,000
$2,000,000

$2,000,000

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An important advantage of a cross-purchase buy-sell agreement is that it

requires fewer policies to fund than a stock redemption agreement
increases the cost basis of the business for the surviving owners
permits 30 percent of the premium to be deducted for tax purposes in partnership situations
avoids premium differences, even when there is a wide spread in the ages of the owners

increases the cost basis of the business for the surviving owners

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Hernandez bought stock valued at $100,000. When Hernandez died, the stock was valued at $150,000 and was left outright to Hernandez’s spouse, Maria. Maria’s cost basis for a subsequent sale is

$50,000
$75,000
$100,000
$150,000

$150,000

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Which of the following statements regarding using tax-related ideas as approaches to business insurance prospects is correct?

Life insurance premiums are always deductible to a corporation.
Death proceeds from a key person policy are received by a partnership free of federal income tax.
Life insurance premiums are generally income-tax deductible when the business itself is the beneficiary.
The cash value of a permanent life insurance policy owned by a partnership is taxable as ordinary income for federal income tax purposes.

Death proceeds from a key person policy are received by a partnership free of federal income tax.

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What is the tax status of premiums paid by a corporation for key person insurance on an owner of a corporation?

The owner is allowed a deduction of 30 percent of the premium paid for key person life insurance.
The insured owner deducts the premium according to his or her share of ownership of the corporation.
The premiums paid by the corporation are not counted as taxable income to the insured key person.
The insured receives an economic benefit and therefore must report part of the premium as taxable income.

The premiums paid by the corporation are not counted as taxable income to the insured key person.

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A sole proprietor wants his son and daughter to own the business after his death. Which of the following may be a serious obstacle to achieving this objective?

Section 303 prohibits such intra-family transfers.
No legal provision for continuance can be made in the owner’s will.
In the absence of a will, the estate administrator must liquidate the business within 90 days.
A widow may have a legal right to receive a portion of her deceased husband’s estate, including the value of the business.

A widow may have a legal right to receive a portion of her deceased husband’s estate, including the value of the business.

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Where are key person life insurance cash values generally listed on the balance sheet?

cash
liability
other assets
owner’s equity

other assets

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A codicil is best described as

a form of joint ownership
an addendum or addition to a will
a distribution of property outside the will
an amendment to a trust giving sprinkle power

an addendum or addition to a will

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Which of the following is true regarding key person life insurance?

Cash values belong to the insured.
Premiums are generally tax deductible by the business.
The insured key employee reports only the PS 58 cost of insurance as income.
In situations involving large corporations, death proceeds may be subject to the alternative minimum tax.

In situations involving large corporations, death proceeds may be subject to the alternative minimum tax.

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Tenancy by the entirety may exist only:

with personal property
between a husband and wife
among no more than 4 persons
among 3 or more members of the same family

between a husband and wife

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Which of the following is true with regard to heirs becoming active in a business at the death of an owner?

In a partnership, retaining family ownership may require reorganization of the business when a partner dies and his heirs become active members.
In a partnership, the surviving partners are required by law to accept the heirs as co-owners.
In a corporation, the other stockholders must give written permission for the transfer of stock to heirs.
In a corporation, if the heirs remain inactive in the management of a company, they forfeit any right to dividend income.

In a partnership, retaining family ownership may require reorganization of the business when a partner dies and his heirs become active members.

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With regard to a business fact-finding interview, it is

appropriate to offer specific insurance solutions during this interview
inappropriate to use an extensive fact-finding form because most business owners don’t like detailed and structured fact-finding interviews
inappropriate to ask for the prospect’s financial statements until after he or she has agreed to a specific recommendation for life insurance
very useful to use a fact-finding form that has some open-ended questions that invite subjective responses about a prospect’s feelings

very useful to use a fact-finding form that has some open-ended questions that invite subjective responses about a prospect’s feelings

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25. Which of the following statements about prospecting is true? Members of a tips club represent the same industry or profession. Cold calls in the business market are a common practice among insurance agents. Referrals are generally unimportant in the business insurance market. Premiums are deductible by the business on its income tax return.

Cold calls in the business market are a common practice among insurance agents.

26. Retained earnings, accumulated earnings, and retained income are terms variously used interchangeably with current assets or fixed assets surplus intangible assets unreasonable compensation

surplus

27. Cash flow addresses the status of the firm's debts the efficiency of a firm's operations the timing of actual receipts minus expenditures ratio of profits divided by owner's equity

unknown

28. Which of the following is an advantage of cold-call prospecting with businesses? It is a time-efficient way of developing professional relationships with business owners. It is a way of contacting business prospects with whom you share no mutual acquaintances. It is a way of guaranteeing appointments with every business owner in a neighborhood. It is a way to develop an academic understanding of how businesses work and the needs of business owners.

It is a way of contacting business prospects with whom you share no mutual acquaintances.

29. The business purpose of becoming involved in community activities is to make sales in the business community as soon as possible further your personal interests and motivate yourself increase your visibility and become known seek ways to gain additional business tax deductions

increase your visibility and become known

30. Which of the following statements about the use of fact-finding forms is correct? It is often better to just wing it rather than to use a fact-finding form. Once you have chosen a fact-finding form, use it the same way in all situations regardless of the prospect's personal needs. Fact-finding forms help you cover all points and leave nothing to chance and memory. An in-depth conversation without using a fact-finding form is the most effective way to uncover a business owner's needs.

Fact-finding forms help you cover all points and leave nothing to chance and memory.

31. A major purpose of the approach in business insurance is to prepare for an appointment begin a fact-finding interview recommend types of policies the prospect could purchase establish rapport and start a business relationship

establish rapport and start a business relationship

32. The most logical candidate to typically enter into a buy-sell agreement with a sole proprietor is a key employee a retired co-owner a state work creation program a newly incorporated competing business

a key employee

33. If a partnership purchases a disability insurance policy to fund the buyout of a disabled owner, which of the following statements is correct? The sale of disability income policies to individual partners is an unethical and illegal duplication of coverage. The sale of disability income policies to individual partners will provide a way to replace lost salary in the event of disability. There is no need for life insurance coverage to provide funds in the event of a partner's death. The policy should be replaced within the free look period with a life insurance policy offering a disability waiver of premium.

The sale of disability income policies to individual partners will provide a way to replace lost salary in the event of disability.

34. Selling a business interest under a disability buyout agreement avoids capital gains taxation for the disabled seller can generate significant tax obligations for the disabled seller must be funded to avoid imposition of the alternative minimum tax must be unfunded to avoid imposition of the accumulated earnings tax

can generate significant tax obligations for the disabled seller

35. In planning a Section 303 stock redemption, a business owner should be aware that corporate control may shift as a result of the redemption stock ownership must equal no less than 10 percent of the estate stock dividends must generate no less than 20 percent of annual income corporate control must remain st

corporate control may shift as a result of the redemption

36. Mr. Smith owns a successful business. His two children participate in the business. His wife does not have an active role in the business. What is the most appropriate way to balance the needs of the spouse and children at Mr. Smith's death? Leave the entire business interest to the spouse. Leave an undervalued business interest to the children. Leave an overvalued business interest to the children. Leave a fairly valued business to the children and insurance to the spouse.

Leave a fairly valued business to the children and insurance to the spouse.

37. A Section 303 stock redemption is a method of withdrawing estate settlement funds from a corporation a method of withdrawing income tax funds from a partnership a way to convert capital gain into ordinary income a way to convert capital gain into capital loss

a method of withdrawing estate settlement funds from a corporation

38. In a double-duty Section 303 stock redemption disability insurance takes the place of life insurance life insurance takes the place of disability insurance life insurance proceeds are paid to the corporation and it loans the proceeds to the spouse life insurance proceeds are paid to the spouse, who then loans the proceeds to the corporation

life insurance proceeds are paid to the spouse, who then loans the proceeds to the corporation

39. In order to underwrite a key person life insurance policy an insurer generally requires that the business have an insurable interest in the key person when the policy is issued have an insurable interest in the key person for the contract duration be organized as a corporation be organized as a partnership

have an insurable interest in the key person when the policy is issued

40. Which of the following types of business entities is (are) considered a pass-through entity under the federal income tax law? I. a partnership II. an S corporation I only II only Both I and II Neither I nor II

Both I and II

41. Which of the following statements concerning partnerships is (are) correct? I. A general partnership is essentially two or more individuals operating a business for profit. II. In a general partnership, the partners bear no personal liability for the firm's obligations. I only II only Both I and II Neither I nor II

I only

42. Which of the following statements about the executive bonus (Sec 162) plan is (are) correct? I. The executive owns and names a beneficiary on life insurance on his/her life. II. The life insurance premium is treated as income and treated as taxable to the executive. I only II only Both I and II Neither I nor II

Neither I nor II

43. Which of the following statements concerning prospecting and the pre-approach is (are) correct? I. Most agents agree that direct mail is the most effective follow-up to pre-approach letters. II. Having prospects and clients come to your office conveys an attitude of professionalism and establishes the premise that they are coming to you for advice. I only II only Both I and II Neither I nor II

II only

44. Which of the following is (are) correct about joint ownership? I. Tenancy in common can only be established at the time of property purchase. II. Tenancy in common passes automatically at death to the joint tenant(s). I only II only Both I and II Neither 1 nor II

Neither 1 nor II

45. Which of the following statements concerning the accumulated earnings tax is (are) correct? I. The accumulated earnings tax applies to closely held corporations and partnerships. II. The accumulated earnings tax is a tax on excessive compensation. I only II only Both I and II Neither I nor II

Neither I nor II

46. Which of the following statements regarding the income taxation of key person life insurance is (are) correct? I. Premiums are deductible by partnerships but not corporations. II. Premiums are generally not reportable by the key person. I only II only Both I and II Neither I nor II

II only

47. All of the following statements regarding key person insurance are correct EXCEPT Key person insurance is bought, paid for, and owned by the business on a key employee. Premiums for key person insurance are not deductible to the business. Unlike key person life insurance, key person disability insurance is deductible to the business. If a transfer-for-value takes place, part of the death proceeds may be subject to federal income taxation.

Unlike key person life insurance, key person disability insurance is deductible to the business.

48. All of the following statements represent the rights of a stockholder EXCEPT the right to sell or transfer shares of stock the right to automatically participate in the management decisions the right to receive dividends, if declared, in proportion to the number of shares owned the right to share assets in proportion to the number of shares owned in the event of liquidation

the right to automatically participate in the management decisions

49. All of the following are prospecting sources to use in the business markets EXCEPT tip clubs representing diverse industries current clients who are business owners or key employees members of community organizations you use solely for prospecting businesses that you and/or your family patronize

members of community organizations you use solely for prospecting

50. All of the following are characteristics of the corporate form of business EXCEPT continuity of existence ease of transferability of interests limited liability of stockholders decentralized management

decentralized management...

11. Which of the following statements about sole proprietorships is true? (A) The sole proprietorship form is advantageous for small firms; incorporation is advisable in any case where the business is large enough to qualify for a charter. (B) Operations are more restricted than in the case of a limited partnership. (C) Sole proprietors are not eligible for qualified retirement plans. (D) The sole proprietor's financial liability is unlimited and unshared.

(D) The sole proprietor's financial liability is unlimited and unshared.

12. An S Corporation is (A) a corporation which is taxed like an unincorporated business (B) any business which elects to have earnings taxed as a distribution of dividends (C) a subsidiary corporation with a nonprofit tax status (D) normally owned by 90 or more stockholders

(A) a corporation which is taxed like an unincorporated business

13. Which of the following is characteristic of limited liability companies? (A) They are taxed as corporations. (B) They allow only one class of ownership. (C) Members cannot be active in the management of the business. (D) They have no restrictions on foreign ownership.

(D) They have no restrictions on foreign ownership.

``` 14. A joint venture most closely resembles (A) a partnership (B) an S corporation (C) a sole proprietorship (D) a professional corporation ```

(A) a partnership

15. Which of the following is true with regard to a limited partnership? (A) The income is taxed at corporate levels. (B) Both limited and general partners enjoy limited liability equal to their capital contributions. (C) The partnership interest of the limited partner can be reached by any of his or her creditors. (D) Upon dissolution of the partnership, the general partner has priority in obtaining any assets before the limited partners are paid.

16. A professional corporation differs from other closely held corporations in which of the following ways? (A) There may be only 35 stockholders in a professional corporation. (B) A professional corporation is taxed at special lower income tax rates. (C) Ownership is limited to licensed practitioners in a given profession. (D) A buy-sell agreement is not needed with professional corporations.

(D) A buy-sell agreement is not needed with professional corporations.

17. Which of the following is (are) a true statement regarding federal taxation as it applies to corporations? I. Dividends are paid out of profits that have already been taxed as II. All undistributed earnings are taxed at capital gains rates. corporate income. (A) I only (B) II only (C) Both I and II (D) Neither I nor II

(A) I only

18. Which of the following statement about partnerships is correct? 1. Each partner must obtain the consent of all other partners for each business transaction. II. Each partner can sell his or her interest to a third party without the consent of the other partners. (A) I only (B) II only (C) Both I and 11 (D) Neither I nor II

(D) Neither I nor II

``` 19. All of the following are characteristics of the corporate form of business EXCEPT (A) unlimited life (B) lack of transferability (C) limited liability (D) centralized management ```

(B) lack of transferability

20. All of the following statements about partnerships are correct EXCEPT (A) In a general partnership, the partners bear personal liability for the firm's obligations. (B) A general partnership is essentially two or more individuals operating a business for profit. (C) A partnership can be incorporated or unincorporated depending on the number of partners. (D) A limited partnership is simply an unincorporated organization with at least one general and one limited partner.

``` 19. Retained earnings, accumulated earnings, and retained income are terms variously used interchangeably with (A) current assets or fixed assets (B) surplus (C) intangible assets (D) unreasonable compensation ```

(B) surplus

``` 20. Where are key person life insurance cash values generally listed on the balance sheet? (A) other assets (B) liability (C) net worth (D) cash ```

(A) other assets

``` 21. Working capital is (A) net sales (B) gross sales (C) profits before taxes (D) excess of current assets over current liabilities ```

(D) excess of current assets over current liabilities

22. Cash flow addresses: (A) the status of the firm's debts (B) the efficiency of a firm's operations (C) the timing of actual cash transactions (D) the rate at which inventory can be converted to cash

23. The primary purpose of estate planning is the help the estate owner: (A) achieve his or her goals for the distribution of assets following death (B) minimize the costs of transferring the estate under all circumstances (C) arrange for the purchase of a decedent's business interest at a predetermined price (D) guarantee that the sole proprietorship can continue after the owner's death

(A) achieve his or her goals for the distribution of assets following death

24. What is the formula for determining owner's equity on a balance sheet? (A) earnings plus assets equals owner's equity (B) assets minus liabilities equals owner's equity (C) assets divided by liabilities equals owner's equity (D) liabilities multiplied by assets equals owner's equity

(B) assets minus liabilities equals owner's equity

``` 25. Goods most recently bought or produced are treated as those first sold is an example of: (A) FIFO (first in, first out) (B) LIFO (last in, first out) (C) FOFI (first out, first in) (D) LOLI (last out, last in) ```

(B) LIFO (last in, first out)

26. Which of the following is (are) correct about the balance sheet: I. It summarizes the income and expenses of a business over a period of time. II. It represents a snapshot of the financial status of a business at a Point in time. (A) I only (B) II only (C) Both I and II (D) Neither I nor Ii

(B) II only

27. Which of the following statements concerning the income statement is (are) correct? I. It summarizes the income and expenses of a business over a period of time. II. It represents a snapshot of the financial status of a business at a point in time. (A) I only (B) II only (C) Both I and ll (D) Neither I nor II

(A) I only

``` 28. On a balance sheet all of the following are considered current assets EXCEPT (A) cash (B) inventory (C) equipment (D) accounts receivable ```

14. Which of the following does the text suggest as the best source to start prospecting in the business markets? (A) tip clubs (B) current clients (C) centers of influence (D) businesses that you and/or your family patronize

(B) current clients

15. Which of the following statements about prospecting and the preapproach is true? (A) Third-party influence refers to your social status. (B) The advantages of conducting the initial interview in the prospect's office far outweigh the disadvantages. (C) Most agents agree that direct mail is the most effective follow-up to preapproach letters. (D) Having prospects and clients come to your office conveys an attitude of professionalism and establishes the premise that they are coming to you for advice.

(D) Having prospects and clients come to your office conveys an attitude of professionalism and establishes the premise that they are coming to you for advice.

16. preapproach mail can be helpful to a business insurance practice because it (A) eliminates the need for a scheduled appointment (B) preconditions the prospect to expect a request for an appointment and to be more receptive to that request (c) does an effective job of selling by itself and prospects will call you (D) makes your work easier because you do not have to follow up on the mailing

(B) preconditions the prospect to expect a request for an appointment and to be more receptive to that request

The "rule of eight" states that (A) The first eight seconds of the approach or eight words of the agent may win or lose the sale. (B) Prospecting results improve if you have just eaten before making calls. (C) It is best to stand at least eight feet from the prospect in the approach. (D) Your phone approach creates a first impression and your first meeting a second.

(A) The first eight seconds of the approach or eight words of the agent may win or lose the sale.

A major purpose of the approach in business insurance is to (A) prepare for an appointment (B) establish rapport and start a business relationship (C) begin a fact-finding interview (D) recommend types of policies the prospect could purchase

(B) establish rapport and start a business relationship

Third-party influence refers to (A) your social connections (B) those centers of influence who refer you to others (C) reference material that establishes prestige and credibility (D) endless chain prospecting

The business purpose of becoming involved in community activities is to (A) make sales in the business community as soon as possible (B) increase your visibility and become known (C) further your personal interests and motivate yourself (D) seek ways to gain additional business tax deductions

(A) make sales in the business community as soon as possible

21. AP of the following are criteria for a person to be a center of influence for business insurance sales EXCEPT (A) a person who is a former policyowner (B) a person who has high prestige in the community (C) a person who has more than a passing interest in your business success (D) a person who has access to or knowledge of a wide circle of successful people on a regular basis

(A) a person who is a former policyowner

22. All of the following statements about prospecting are true EXCEPT (A) Cold calls are seldom successful in the business insurance markets and should not be used for prospecting in this field. (B) The local library often contains reference books and directories that can be effective tools for identifying prospects. (C) Tips clubs are composed of local salespersons from a diverse group of industries and are formed for the exchange of information on business prospects. (D) Active participation in community organizations is a way to gain valuable contacts because the more successful business owners are often among the leaders of these organizations.

(A) Cold calls are seldom successful in the business insurance markets and should not be used for prospecting in this field.

23. All of the following are keys to an effective preapproach EXCEPT (A) your attitude (B) your prospecting ability (C) your knowledge of taxes (D) your ability to build trust and prestige

15. Which of the following characteristics of a sole proprietorship does not point directly to a need for life insurance? (A) The sole owner is usually the manager of the business and the only person completely familitir with its operation. (B) A sole proprietorship expires with the death of the owner. (C) There are no associates who must be consulted on major decisions. (D) The owner does not usually have the full range of fringe benefits available to an owner of a corporation who serves as an employee

Select the life situation below which must urgently calls for life insurance coverage. A) Mr. Braunschweiger becomes a stockholder of General Motors. B) A stockholder personally guarantees his corporation's note for a $100.000 loan. c) A business executive signs a will leaving his Kodak stock to his son and government bonds of equal market value to his daughter. D) Smith purchases 5 percent of the stock in a small corporation but continues to work for General Motors as a line foreman.

B) A stockholder personally guarantees his corporation's note for a $100.000 loan.

17. On the death of a partner, the surviving partner is charged with the specific duty of (A) continuing the business to help support the widow (B) buying out the heirs within 6 months (C) notifying the newspapers of the firm's new status (D) winding up the firm's business and accounting for the remaining assets

(D) winding up the firm's business and accounting for the remaining assets

18 Select the most important reason why close-corporation stock is usually an unsuitable investment for a deceased stockholder's family. (A) It is usually too expensive for the average investor. (B) Ordinarily the other stockholders comprise the only market for the stock, and there isn't likely to be much return except through a sale. (C) Stock ownership and management of a close corporation are separate. (D) Dividends are subject to income tax at surcharge rates.

(B) Ordinarily the other stockholders comprise the only market for the stock, and there isn't likely to be much return except through a sale.

19. Which of the following is a goal of the fact-finding interview? (A) obtain referrals (B) build prestige and confidence (C) make tentative recommendations (D) get agreement on a solution to the need

(B) build prestige and confidence

20. The immediate and most urgent problem of heirs to a closely held business is typically (A) to liquidate the business interest without probate (B) payment of federal estate taxes within 3 months of death (C) a need for current income to replace the salary of the deceased (D) a need for current income to replace the dividends paid on the deceased's stock

21. In the transition to fact-finding, the advisor should A) Move ahead without any explanation B) explain the next step and tell the prospect why it is important C) explain the importance of the fact-finding and then immediately leave D) insist that the fact-finding interview be a continuing part of the initial meeting

B) explain the next step and tell the prospect why it is important

22. Which of the following statements concerning liquidation of a business n the event of the owner's death is (are) correct? I. Even in a forced liqoodwill is retained and uidation. any value in g II. With a planned liquidation, the estate executor generally has no time to passed on to the heirs. wait for an orderly collection of accounts receivable. (A) I only (B) II only (C) Both I and II (D) Neither I nor II

(D) Neither I nor II

23. Which of the following statements concerning the use of fact-finding forms is (are) correct? I. Fact-finding forms help you cover all points and leave nothing to chance and memory. II. After you have chosen a fact-finding form, use it the same way in all situations regardless of the prospect's personal needs. (A) I only (B) II only (C) Both I and II (D) Neither I nor II

(A) I only

24. All of the following are goals of the fact-finding interview EXCEPT (A) Build trust and credibility with the prospect. (B) Obtain at least three referrals. C) Gather information that will be needed for a proposal. (D) Obtain agreement to proceed to the next step in the sales process.

(B) Obtain at least three referrals.

11. Some portion of a life insurance death benefit may be subject to federal income tax if (A) the insured had any incidents of ownership (B) the death benefit exceeds the value of a business interest as established in the buy-sell agreement (C) the transfer-for-value rule is applicable (D) all of the above

12. Which of the following is a characteristic of a wait-and-see buy-sell agreement? (A) It is the same as a cross-purchase plan. (B) All surviving stockholders are required to buy the stock of the deceased stockholder. (C) Purchase options must be exercised at least 30 days before the death of a stockholder or the agreement is void. (D) If options to purchase are not exercised, the corporation is required to purchase the interest of the deceased owner.

(D) If options to purchase are not exercised, the corporation is required to purchase the interest of the deceased owner.

13. Under an insurance-funded cross-purchase buy-sell plan: (A) Death proceeds are taxable to the corporation. (B) The agreement is between an owner and the corporation. (C) The surviving stockholders are not allowed to purchase policies on their own lives. (D) Each stockholder is typically the owner and beneficiary of insurance on the life of each other stockholder.

(D) Each stockholder is typically the owner and beneficiary of insurance on the life of each other stockholder.

14. When life insurance is used to fund a partnership buy-sell agreement, what is the federal income tax result? (A) Premiums are not deductible and proceeds are received income tax free. (B) The life insurance proceeds may be subject to the corporate alternative minimum tax. (C) Premiums are tax deductible to each partner, but proceeds are taxable when received. (0) Any annual increase in policy cash value must be reported by each partner as taxable income.

(A) Premiums are not deductible and proceeds are received income tax free.

15. Smith, Jones and Carey enter into a cross-purchase buy-sell agreement funded by life insurance. How many policies must be purchased? (A) 3 (B) 6 (C) 9 (D) 12

(B) 6

``` 16. The price at which property would exchange hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell describes: (A) net worth (B) goodwill value (C) fair market value (D) fair return on investment ```

17. In a two-owner corporation, who normally owns the life insurance policies that fund a cross-purchase buy-sell agreement? (A) Each policy is jointly owned. (B) Each owns a policy on him or herself. (C) Each owns a policy on the other. (D) The corporation owns a policy on both owners.

18. Which of the following statements is (are) correct regarding the federal income tax treatment when life insurance is used to fund a buy-sell agreement under an entity plan? I. Premiums are tax deductible by the firm and the proceeds are received tax free. II. Premiums are deductible and the proceeds are fully reportable as taxable income. (A) I only (B) II only (C) Both I and II (D) Neither I nor II

(D) Neither I nor II

19. Which of the following statements regarding a funded buy-sell agreement is (are) correct? I. It can provide assurance that heirs will not be forced to sell to outsiders II. It provides assurance that a bank will lend the funds needed to buy the heirs' interest in the company. (A) I only (B) II only (C) Both I and II (D) Neither I nor II

(A) I only

``` 20. A buy-sell agreement is appropriate in all of the following business forms EXCEPT (A) S corporation (B) Sole proprietor (C) Limited liability company (D) Large publicly held corporation ```

(D) Large publicly held corporation

``` 24. Using the straight capitalization method to determine the value of a business, how much capital is required to produce $10,000 a year at a capitalization rate cf 15 percent? (A) $150.000 (B) $ 66.667 (C) $ 15.000 (D) $ 1.500 ```

(B) $ 66.667

25. Premiums paid for a disability buy-out policy are (A) fully deductible as a business expense (B) partially deductible as business expense (C) not tax deductible, but the benefits are received tax free (D) not tax deductible, and the benefits are taxable when they are received

26. A business overhead expense policy (A) covers operating expenses when an owner is unable to work due to a disability (B) pays the owner a specified monthly benefit if disability occurs (C) includes coverage for the cost of inventory, capital expenses, and lost profits (D) covers the owners' salary during a period of disability

(A) covers operating expenses when an owner is unable to work due to a disability

27. The benefit that can be received from a business overhead policy is: (A) the actual amount of expenses incurred with a maximum monthly benefit specified in the policy (B) unlimited amount based on actual expenses incurred during a period of disability (C) the fixed monthly amount stated in the policy (D) subject to a monthly deductible as stated in the policy

(A) the actual amount of expenses incurred with a maximum monthly benefit specified in the policy

28. The straight capitalization method of valuing a closely held business (A) averages a company's balance sheet value over 5 years (B) divides a company's historical assets by current liabilities (C) divides a company's earnings by a reasonable rate of return (D) averages a company's publicly listed stock value over 2 years

29. Section 303 of the Internal Revenue Code pertains to (A) stock redemptions to pay estate tax and other final expenses (B) cross-purchase plans at death (C) gift taxes on the transferred property at death (D) the estate's ability, if qualified, to extend the payment of estate taxes for a period of years

(A) stock redemptions to pay estate tax and other final expenses

30. The proceeds of a Section 303 Stock redemption are generally (A) not taxable (B) taxable as a capital gain (C) taxable as ordinary income (D) considered a dividend distribution for tax purposes

(A) not taxable

The valuation method that is often the easiest to compute and determines owners equity by subtracting liabilities from assets is called the: (A) sales method (B) book value method (C) straight capitalization method (D) comparative price/earnings method

(B) book value method

Which of the following statements regarding the valuation of a business for estate tax purposes is correct? A buy-sell agreement specifying a selling price established in an arm's length transaction will establish an estate tax value that likely will be acceptable to the Internal Revenue Service IL A buy-sell agreement with a lifetime first-offer provision is one of the factors that is likely to establish an estate tax value acceptable to the Internal Revenue Service. (A) I only (B) II only (C) Both I and II (D) Neither I nor II

All of the following statements regarding disability buy-out agreements are correct EXCEPT (A) To avoid potential legal disputes, the buy-sell agreement should define dsabllity in the same manner as does the disability policy used to fund the agreement. (B) Most disability buyouts provide for a waiting period of a year or two. (C) A partnership is automatically dissolved if a partner becomes disabled (D) A disabled corporate owner has no inherent or legal right to receive a salary.

14. When a business owns a key person life insurance policy (A) cash value will be an asset of the business (B) premiums are tax deductible (C) the key person must report the premium as a taxable benefit (D) the cash value portion of the death benefit will be taxable to the business

(A) cash value will be an asset of the business

``` 15. Which of the following methods can be used for determining the value of a person for key person life insurance? (A) unit benefit (B) contribution to earnings (C) endorsement system (D) defined contribution plan ```

(B) contribution to earnings

``` 16. The beneficiary of a key person life insurance policy should be the (A) spouse of the insured (B) estate of the insured (C) spouse or estate of the insured (D) business or employer ```

(D) business or employer

17. A key person life insurance policy (A) generally requires that the business continue to have an insurable interest in the key person for the duration of the contract. (B) can never be transferred to the key person if he or she leaves the firm, but must be surrendered for its cash value instead (C) must be specifically issued for that purpose. (D) can be any type of policy, although permanent policies are frequently used because of their favorable impact on the balance sheet.

(D) can be any type of policy, although permanent policies are frequently used because of their favorable impact on the balance sheet.

18. Which of the following is true regarding key person life insurance? (A) Cash values can be used by the business. (B) Death benefits are taxable income if payable to the business. (C) The policy must be sold to the key person upon leaving the firm. (D) None of the above.

(A) Cash values can be used by the business.

``` 19. In which form of business is key-person life insurance appropriate? (A) partnership (B) S corporation (C) sole proprietorship (D) all of the above ```

(D) all of the above

20. One generally accepted way to determine the amount of insurance to own on a key person uses the (A) salary test (B) length of employment calculation (C) estimated cost to replace that employee (D) personal financial liability of the employee

Which at the following statements is true about key person insurance? A) C corporations can deduct the cost of premiums on a key person life insurance policy. (B) Premiums paid by an S corporation for key person life insurance are income tax deductible if the key employee is one of the owners. (C) In the case of partnerships subject to the alternative minimum tax, some tax would be due on the gain in the cash value of a key person policy. (D) In general, proceeds of a key person life insurance policy paid to an unincorporated business at the insured's death are free from federal income taxation.

(D) In general, proceeds of a key person life insurance policy paid to an unincorporated business at the insured's death are free from federal income taxation.

Which of the following statements regarding the income taxation of key person life insurance is correct? I. Premiums are deductible by partnerships but not corporations. II. Premiums are generally not reportable by the key person. (A) I only (B) II only (C) Both I and II (D) Neither I nor II

(B) II only

23. All of the following statements regarding key person insurance are correct EXCEPT (A) Key person insurance is bought, paid for, and owned by the business on a key employee (B) Premiums for key person insurance are not deductible to the business (C) Unlike key person life insurance, Key person disability insurance is deductible to the business (D) If a transfer-for-value takes place, part of the death proceeds may be subject to federal income taxation

``` 17. The person creating a trust is known as the (A) grantor (B) corpus (C) trustee (D) trust officer ```

(A) grantor

``` 18. Federal taxes on the transfer of property at death are called (A) accumulated earnings tax (B) inheritance taxes (C) estate taxes (D) income taxes ```

19. section 6166 permits (A) a partial tax-free stock redemption to pay estate taxes (B) a legitimate way to increase the marital deduction for estate tax purposes (C) deferring and spreading out the payment of estate taxes attributable to a business interest (D) a way to average dividends received over a 10 year period to lower income tax duo

20. Estate planning can be viewed as a four-step process that includes (A) an analysis and an accumulation phase (B) an income tax and an estate tax phase (C) a gifting and a disposition phase (D) a lifetime and a death-time phase

(A) an analysis and an accumulation phase

``` 21. A gift that is given without limits or restrictions, for complete control or enjoyment to someone is called a gift of (A) reversionary interest (B) life estate (C) present interest (D) future interest ```

22. Life insurance is normally transferred to the beneficiary at the death of the insured by which of the following methods? (A) By will (B) By intestacy (C) By contract (D) By Trust

``` 23. Implementation of planning tools takes place in which phase of estate planning? (A) analysis (B) structuring (C) accumulation (D) disposition ```

(B) structuring

Which of the following statements is (are) correct regarding life insurance death proceeds passing directly to the beneficiary? (A) It passes by will (B) It passes by intestacy (C) It passes by right of survivorship (D) It passes by right of contract

(D) It passes by right of contract

25 Which of the following is (are) correct about joint ownership? , I. Tenancy in common can only be established at the time of property purchase. I. Tenancy in common passes automatically at death to the joint tenant(s). (A) I only (B) II only (C) Both I and II (D) Neither I nor II

(D) Neither I nor II

26. Emotional concerns that cause prospects to undertake estate planning include all of the following EXCEPT (A) worry about old-age issues (B) awareness that friends are dying (C) a feeling that their affairs are not in order (D) inadequate liquidity to pay estate settlement costs

(D) inadequate liquidity to pay estate settlement costs

16. Salaries of owner-employees of C corporations are generally (A) paid out of after-tax dollars (B) income deductible by the corporation (C) treated as dividends for federal income tax purposes

(B) income deductible by the corporation

17. Which of the following statements about general partnerships is correct? (A) The partnership must have at least one limited partner. (B) Only managing partners have liability for the partnership debts. (C) All partners are accountable for the firm's operation and management. (D) They provide an investment opportunity for people who do not want to be actively involved in the operation of the business.

18. When a creditor makes a claim on a sole proprietor's assets, one benefit of cash value life insurance ownership is that (A) both the cash value and death benefit are generally untouchable by creditors (B) the cash value is generally untouchable by creditors although the death benefit can be attached by creditors (C) the death benefit is generally untouchable by creditors although the cash value can be attached by creditors (D) both the cash value and death benefit can be attached by creditors

(A) both the cash value and death benefit are generally untouchable by creditors

19. Which of the following statements regarding partnerships is correct? (A) In a general partnership, the partners bear no personal liability for the firm's obligations. (B) A general partnership is essentially two or more individuals operating a business for profit. (C) A partnership can be incorporated or unincorporated depending on the number of partners. (D) A limited partnership is simply an unincorporated nonprofit organization.

(B) A general partnership is essentially two or more individuals operating a business for profit.

20. Which of the following statements regarding the liability of general partners in a partnership is correct? (A) Each partner is subject to unlimited liability for the firm's obligations. (B) Each partner is subject to unlimited liability for the personal obligations of all other partners. (C) Each partner's obligation is limited to his or her investment in the firm. (D) Each partner's obligation is limited to his or her share of the firm's unsecured assets.

(A) Each partner is subject to unlimited liability for the firm's obligations.

21. Which of the following is a characteristic of a limited partner? (A) The partner has unlimited liability for the firm's obligations. (B) The partner participates in general management decisions. (C) The partner has unlimited liability for the personal obligations of other limited partners. (D) The partner is not liable for the firm's financial obligations beyond his or her investment in the firm.

(D) The partner is not liable for the firm's financial obligations beyond his or her investment in the firm.

22. Which of the following is a characteristic of a C corporation? (A) It is a separate taxpaying entity. (B) It is a pass-through entity for tax purposes. (C) The business is automatically dissolved at the death of an owner. (D) The owners are personally liable for the debts of the business.

(A) It is a separate taxpaying entity.

23. Which of the following is one characteristic of a C corporation that distinguishes it from a sole proprietorship? (A) Corporate creditors can claim the personal assets of stockholders. (B) Stock cannot be sold outside the firm at the death of an owner. (C) C corporation losses can be deducted against the personal income of a shareholder. (D) The shareholders have limited liability in the event of business failure.

(D) The shareholders have limited liability in the event of business failure.

All of the following are the right of a stockholder EXCEPT (A) the right to sell or transfer shares of stock (B) the right to automatically participate in the management decisions (C) the right to receive dividends, if declared, in proportion to the number of shares owned (D) the right to share assets in proportion to the number of shares owned in the event of liquidation

(B) the right to automatically participate in the management decisions

25. All of the following are a characteristic of a general partnership EXCEPT (A) The partners share in the firm's profits. (B) The partnership permits the pooling of capital and the sharing of risk. (C) The partnership is a separate taxable entity that automatically reduces the tax liability of the individual partners. (0) Partnership profits pass directly to partners as personal income for federal tax purposes.

(C) The partnership is a separate taxable entity that automatically reduces the tax liability of the individual partners.

51. A partnership may legally be created only by (A) conversion of successful proprietorship (B) written agreement between two owners (C) an oral or written agreement (D) legislative action

52. Which of the following is a true statement regarding federal taxation as it applies to corporations? (A) Dividends are paid out of profits that have already been taxed as corporate income. (6) All undistributed earnings are taxed at capital gains rates. (C) Proceeds of key person fife insurance are normally considered as income for income tax purposes. (D) Corporations receiving death proceeds from life insurance are normally taxable.

(A) Dividends are paid out of profits that have already been taxed as corporate income.

``` 53. Corporate federal income tax rates from 2009 range from: (A) 15% to 38% (B) 20% to 45% (C) 25% to 50% (D) 20% to 35% ```

(A) 15% to 38%

54. An unincorporated business owned by one person is called a (A) partnership (B) C corporation (C) S corporation (D) sole proprietorship

(D) sole proprietorship

55. Which of the following is an advantage of a sole proprietorship? (A) business start-up is simple (B) separate tax status of the business (C) limited liability of the sole proprietor (D) disability protection offered by the Small Business Administration

(A) business start-up is simple

56. A disadvantage of a sole proprietorship is (A) double taxation at both the individual and business levels (B) the autonomy because there is no boss to criticize the sole proprietor's work (C) the detailed annual reporting to the Small Business Administration to maintain sole proprietorship status (D) the loss of income at the death of a sole proprietor

(D) the loss of income at the death of a sole proprietor

57. At the death of a sole proprietor under the provisions of state law (A) the business is automatically managed by the employees (B) the business is automatically managed by the state surrogate (C) all business activities continue unless the sole proprietor's will expressly states that the business will cease (D) all business activities cease unless the sole proprietor's will expressly states that the business may be continued

(D) all business activities cease unless the sole proprietor's will expressly states that the business may be continued

58. The term S corporation is derived from (A) state incorporation regulations (B) federal securities regulations (C) the Internal Revenue Code (D) the Uniform Commercial Code

59. Which of the following statements concerning a closely held corporation is (are) correct? 1. Shares of a closely held corporation may be bought on public stock exchanges. II. There is a clear separation between ownership and management in closely held corporations. (A) I only (B) II only (C) Both I and II (D) Neither i nor II

(D) Neither i nor II

60. All of the following are characteristics of a closely held C corporation EXCEPT (A) There is a union of ownership and management. (B) There is a ready market for the stock. (C) Limited liability may be meaningless. (D) Compensation as salary must be reasonable.

(B) There is a ready market for the stock.

16. A forced liquidation of a sole proprietorship typically (A) brings more money than selling the business as a going concern (B) increases the amount received by heirs above capitalized value (C) results in the issuance of publicly traded stock to heirs (D) means bringing business activity to a halt

(D) means bringing business activity to a halt

17. Which of the following statements concerning the role of an executor managing the affairs of a business interest is correct? (A) A business owner should not name an executor in his or her will. (6) Federal law requires an executor to establish a business trust. (C) An executor can be held liable for business losses. (D) State law requires an executor to establish a business trust.

18. Leaving the ownership of a business, which represents the major asset of an estate, to an adult child under the provisions of a will (A) guarantees creditor protection (B) automatically invalidates the will (C) guarantees continuing income to other family members (D) can result in an election against the will by a surviving spouse

(D) can result in an election against the will by a surviving spouse

19. When a partner dies, the deceased partner's heirs want income while the surviving business associates typically (A) want to pay a special dividend to the estate of the deceased (B) favor reinvesting profits within the business (C) want to incorporate the business (D) favor liquidating the business

(B) favor reinvesting profits within the business

20. Minority shareholders in a corporation are entitled to (A) a salary under state law (B) a year-end bonus under federal law (C) information about the company's financial affairs (D) automatically convert their stock into interest-bearing bonds

21. A minority interest in a company is generally (A) valued at a discount (B) valued at a premium (C) deemed to be worthless for estate tax purposes (D) deemed to be worthless for income tax purposes

(A) valued at a discount

22. Which of the following statements about the role of life insurance in business continuation planning is correct? (A) It is inappropriate for a sole proprietorship. (B) Proceeds can facilitate the orderly liquidation of a sole proprietorship. (C) Premiums are tax deductible by a corporation but not by a partnership. (D) Premiums are tax deductible by a partnership but not by a corporation.

(B) Proceeds can facilitate the orderly liquidation of a sole proprietorship.

23. What is the decision style of a business owner who resolves problems or makes decisions using information available at a given point in time without outside participation? (A) democratic (B) consultative (C) participative (D) authoritarian

(D) authoritarian

24. The immediate and most urgent problem of heirs to a closely held business is typically (A) to liquidate the business interest without probate (B) payment of federal estate taxes within 3 months of death (C) a need for current income to replace the salary of the deceased owner (D) a need for current income to replace the dividends paid on the deceased's stock

Which of the following statements about social style is (are) correct? I. A driver social style is forceful and direct, will not waste time on small talk, and wants to be in control. II. An amiable social style is easygoing and dependent, enjoys personal relations and wants to be accepted. (A) I only (B) II only (C) Both 1 and II (D) Neither I nor 11

21. What is the objective of a cross-purchase buy-sell agreement funded with life insurance? (A) provide protection to offset financial losses to a business due to death of a mid-level employee (B) disposal of business interest upon death of an owner, by having the business purchase the deceased's interest (C) disposal of business interest upon death of an owner, by transferring ownership to surviving co-owners who continue the business (D) transfer stockowner's interest at stockholder's death to his or her heirs, and have partial stock redemption, providing estate with cash to pay settlement costs

(C) disposal of business interest upon death of an owner, by transferring ownership to surviving co-owners who continue the business

22. This is the person(s) or entity that purchases the stock of a deceased owner under a stock redemption buy-sell plan. (A) the estate (B) the business (C) the surviving co-owners in equal percentages (D) the surviving co-owners in unequal percentages

(B) the business

23. Smith and Jones enter into a cross-purchase buy-sell agreement. When Smith dies, this is the person who purchases the business interest. (A) Jones (B) the business (C) Smith's estate (D) Smith's spouse

(A) Jones

24. If Able and Baker enter into a cross-purchase buy-sell plan and Able is older than Baker, this is what occurs regarding premiums. (A) Baker will pay lower insurance premiums to fund the plan than Able. (B) Baker will pay higher insurance premiums to fund the plan than Able. (C) Baker will be able to depreciate the premium differential. (D) Baker will be able to deduct the premium differential.

(B) Baker will pay higher insurance premiums to fund the plan than Able.

Cash is generally not used to fund a buy-sell agreement for this reason. (A) It is illegal under state law. (B) There may be insufficient funds. (C) Cash reserves for this purpose are tax-exempt. (D) Cash reserves for this purpose are tax deductible.

(B) There may be insufficient funds.

16. At the death of a shareholder, a stock redemption plan requires (A) the business to buy the deceased's shares from his or her estate at a price stipulated in the agreement (B) all interested parties to examine the situation and make a decision on the best way to proceed (C) surviving shareholders to buy a deceased owner's shares from his or her estate individually (D) the estate to sell the deceased's shares to a key employee

(A) the business to buy the deceased's shares from his or her estate at a price stipulated in the agreement

17. Using the wait-and-see approach, corporate shareholders (A) agree to a series of buy-sell options that may result in the use of either a stock redemption or cross-purchase plan. (B) agree at each fiscal year end whether or not to deduct accumulated earnings and profits (C) enter into a buy-sell agreement after it is determined which shareholder will die first (D) agree to transfer policies to each other to avoid the transfer-for-value rule.

(A) agree to a series of buy-sell options that may result in the use of either a stock redemption or cross-purchase plan.

18. The cross-purchase form of buy-sell agreement is advantageous because (A) it is less likely than a stock redemption plan to be subject to legal challenge by dissatisfied family members (B) premium payments are tax deductible on individual Form 1040 (C) it requires fewer policies to fund than a stock purchase plan (D) it increases the surviving owner's cost basis in the business

(D) it increases the surviving owner's cost basis in the business

``` 19. Which of the following buy-sell forms is always treated as a sale of stock rather than a dividend? (A) entity purchase (B) cross-purchase plan (C) stock redemption plan (D) wait-and-see buy plan ```

(B) cross-purchase plan

20. Unless a sole proprietor leaves specific instructions in a will, the final disposition of his or her business interest rests with (A) federal tax court (B) the surviving spouse (C) the executor of the estate (D) surviving family members

21. If money is borrowed to fund an entity buy-sell agreement (A) interest costs can be carried as a business asset on the balance sheet (B) interest costs can be carried as a business asset on the income statement (C) state law requires co-owners to personally guarantee loan repayments (D) a significant amount of future earnings will be committed to debt repayment

(D) a significant amount of future earnings will be committed to debt repayment

22. Which of the following statements is correct regarding the installment purchase of a deceased's business interest by the surviving owners? (A) The installment payments are tax deductible by the surviving owners. (B) The installments payments are tax deductible by the business entity. (C) The deceased's heirs are creditors of the surviving owners. (D) The deceased's heirs are creditors of the business entity.

23. Which of the following statements concerning the accumulated earnings tax is correct? (A) It applies to the annual cash value build-up of life insurance at the rate of 15 percent. (B) It applies to the annual cash value build-up of life insurance at the rate of 39.6 percent. (C) It permits annual tax-exempt accumulations up to one million dollars. (D) It is a penalty tax imposed on the accumulated earnings of C corporations.

(D) It is a penalty tax imposed on the accumulated earnings of C corporations.

24. The Internal Revenue Service will generally accept the value of a business interest specified in a buy-sell agreement if (A) different valuation criteria are used for lifetime and death time sales (B) there is an arms-length transaction (C) it omits a first-offer provision (D) there was a step transaction

(B) there is an arms-length transaction

25. When a disabled owner sells a business share, the difference between the sale price and the owner's basis is (A) treated as a taxable gain (B) stepped up so there is no taxable gain (C) not taxed if there is an installment sale (D) deducted from any disability buyout benefits available

(A) treated as a taxable gain

16. The straight capitalization method of valuing a closely held business (A) averages a company's balance sheet value over 5 years (B) divides a company's historical assets by current liabilities (C) divides a company's earnings by a reasonable rate of return (D) averages a company's publicly listed stock value over 2 years

17. In order to qualify for a tax-favored redemption under Section 303, the value of the stock owned by a decedent must be worth (A) 35 percent or more of the taxable estate (B) 50 percent or more of the taxable estate (C) 35 percent or more of the adjusted gross estate (D) 50 percent or more of the adjusted gross estate.

18 A Section 303 stock redemption is (A) a method of withdrawing estate settlement funds from a corporation (B) a method of withdrawing income tax funds from a partnership (C) a way to convert capital gain into ordinary income (D) a way to convert capital gain into capital loss

(A) a method of withdrawing estate settlement funds from a corporation

19. To derive an estimate of future earnings, past earnings for 5 or more years should be (A) disregarded because past performance is not a guarantee of future results (B) averaged, with greater weight given to earnings from recent years (C) added together for an estimate of annual future earnings (D) added together and multiplied by five

(B) averaged, with greater weight given to earnings from recent years

20. Which of the following statements about the ownership of a family held business is correct? (A) It is best to split the business equally among all heirs. (B) There is a desire to transfer ownership outside the family. (C) There is a desire to retain ownership within the family. (D) Closely held stock pays high dividends.

21. Mr. Smith owns a successful business. His two children participate in the business. His wife does not have an active role in the business. What is the most appropriate way to balance the needs of the spouse and children at Mr. Smith's death? (A) Leave the entire business interest to the spouse. (B) Leave an undervalued business interest to the children. (C) Leave an overvalued business interest to the children. (D) Leave a fairly valued business to the children and insurance to the spouse.

(D) Leave a fairly valued business to the children and insurance to the spouse.

22. Which of the following statements about buy-sell agreements drafted for family-owned businesses is correct? (A) Such agreements are invalid under state law. (B) Such agreements are invalid under federal law. (C) The Internal Revenue Code specifically permits under valuation of gifted business interests to family members. (D) Such agreements cannot simply be devices to transfer the business to family members for less than full value.

(D) Such agreements cannot simply be devices to transfer the business to family members for less than full value.

23. In planning a Section 303 stock redemption, a business owner should be aware that (A) corporate control may shift as a result of the redemption (B) stock ownership must equal no less than 10 percent of the estate (C) stock dividends must generate no less than 20 percent of annual income (D) corporate control must remain static for 10 years after the redemption

(A) corporate control may shift as a result of the redemption

24. Which of the following statements about redeeming business ownership shares is correct? (A) In most states, a corporation must have retained earnings to redeem its shares. (B) In most states, a corporation must borrow from a bank to redeem its shares. (C) A corporation can deduct premiums on life insurance used to redeem its shares. (D) A partnership can deduct premiums on life insurance used to redeem

(A) In most states, a corporation must have retained earnings to redeem its shares.

25. Selling a business interest under a disability buyout agreement (A) avoids capital gains taxation for the disabled seller (B) can generate significant tax obligations for the disabled seller (C) must be funded to avoid imposition of the alternative minimum tax (D) must be unfunded to avoid imposition of the accumulated earnings tax

(B) can generate significant tax obligations for the disabled seller

``` 14, Key person life insurance should be made payable to the (A) spouse of the insured (B) estate of the insured (C) employer (D) stockholders ```

15. Which of the following statements about key person life insurance is correct? (A) Premiums are tax deductible by the business. (B) Premiums are tax deductible by the insured. (C) Postdeath borrowing can be easily substituted for life insurance. (D) Key person life insurance indirectly strengthens a company's credit position.

(D) Key person life insurance indirectly strengthens a company's credit position.

16. Which of the following statements about the income taxation of key person life insurance is correct? (A) Internal cash value build-up is taxed annually at the rate of 15 percent. (B) Internal cash value build-up is taxed annually at the rate of 28 percent. (C) Premiums are deductible by partnerships but not corporations. (D) Premiums are generally not reportable by the key person.

(D) Premiums are generally not reportable by the key person.

17. In order to underwrite a key person life insurance policy an insurer generally requires the business to (A) have an insurable interest in the key person when the policy is issued (B) have an insurable interest in the key person for the contract duration (C) be organized as a corporation (D) be organized as a partnership

(A) have an insurable interest in the key person when the policy is issued

18. When a key employee leaves a company, the company (A) must surrender the policy because insurable interest no longer exists (B) may keep the policy because insurable interest existed when the policy was established (C) must transfer the policy to the employee (D) must transfer the policy to the employee's replacement

(B) may keep the policy because insurable interest existed when the policy was established

19. A salary continuation plan will allow for tax-deductible salary to be paid to disabled I. owner/employees and key employees of a C Corporation II. owners of sole proprietorships and partnerships (A) 1 only (6) 11 only (C) Both I and II (D) Neither I nor II

(A) 1 only

20. All of the following are benefits of key person life insurance EXCEPT (A) provides indemnification to the business due to the death of a key employee (B) provides for a lifetime reserve fund for the business (C) provides funds to pay the salary of a key employee in case he or she is disabled (D) provides for a strengthening of the general credit position of the company

16. Which of the following statements is correct about the phases of estate planning? (A) The accumulation phase begins at death. (B) The accumulation phase is also called asset structuring. (C) The disposition phase is limited to transfers at death. (D) The disposition phase includes lifetime gifts and transfers at death.

(D) The disposition phase includes lifetime gifts and transfers at death.

17. What happens to an individual's property if he or she dies without a will? (A) The property is distributed according to the rules of the Internal Revenue Code. (B) The property is distributed according to the rules of intestate succession. (C) The individual's property becomes the property of the federal government. (D) The individual's property becomes the property of the state.

(B) The property is distributed according to the rules of intestate succession.

18. Which of the following statements describes a codicil? (A) an illegal will alteration (B) a formal written addendum to a will (C) an informal oral addendum to a will (D) an informal oral addendum to a living trust

(B) a formal written addendum to a will

19. The parent of a minor should do which of the following when executing a will? (A) give primary consideration to the reduction of estate taxes (B) disinherit the child until the age of majority (C) give primary consideration to the selection of a guardian (D) defer to the state rules of intestacy

20. Which of the following statements concerning property held in joint tenancy is correct? (A) Property can be transferred by a will to a third party. (B) Property can be transferred by trust to a third party. (C) Property automatically passes under the rules of intestacy. (D) Property automatically passes at death to the other joint tenant(s).

(D) Property automatically passes at death to the other joint tenant(s).

21. What happens to property held as tenants in common at death? (A) It can be transferred by will to a third party. (B) It cannot be transferred by will to a spouse or child. (C) It automatically passes at death to the joint tenant(s). (D) It automatically passes at death under the rules of intestacy.

(A) It can be transferred by will to a third party.

22. Which of the following statements concerning joint ownership is correct? (A) Joint tenants own individual and specific shares of property. (B) Tenancy in common can be established only at the time of property purchase. (C) Individuals may become tenants in common regardless of when they acquired ownership. (D) A parent and child holding title as joint tenants by the entirety own individual and specific shares of property.

23. Another name for a trust that is created through a will is (A) living trust (B) grantor trust (C) perpetual trust (D) testamentary trust

D) testamentary trust

24. Mary and Mark Harris own their home as tenants by the entirety. Each contributed equally to the cost of the home. If Mark dies first, what percentage of the home's value will be included in his gross estate? (A) 0 percent (B) 25 percent (C) 50 percent (D) 100 percent

25. John Williams bought XYZ stock for $50 a share. The XYZ stock is worth $125 a share when John dies. How much of each share's value is included in John's gross estate for federal estate tax purposes? (A) $50 (B) $75 (C) $125 (ID) $175

(A) $125

11, Which of the following statements about federal gift and estate taxes is correct? (A) The same tax rate applies to both gifts and estates. (B) The federal gift tax rate is lower than the federal estate tax rate. (C) The federal estate tax rate is lower than the federal gift tax rate. (D) The federal gift tax credit is lower than the federal estate tax credit.

(A) The same tax rate applies to both gifts and estates.

12. Which of the following statements about the marital deduction is correct? (A) No more than 50 percent of a decedent's estate can qualify for the deduction. (B) Interest earned on marital deduction property is exempt from income tax. (C) Property left to a surviving spouse is exempt from future estate tax. (D) Leaving an entire estate to a surviving spouse can lead to a future estate tax trap.

(D) Leaving an entire estate to a surviving spouse can lead to a future estate tax trap.

13. Lillian Winters, a single individual, died in 2009, leaving an estate of $1,500,000. The applicable credit at the time of her death was $780,800. How much estate tax was paid? (A) none (B) $102,200 (C) $237,000 (D) $719,200

(A) none

14. A QTIP trust can best be described as a trust that (A) bypasses the probate process (B) can be used to preserve the estate tax marital deduction (C) can be used to fund bequests to heirs other than a spouse (D) automatically disclaims a spouse's rights to gifted property

(B) can be used to preserve the estate tax marital deduction

``` 15. Allowable statutory deductions for federal estate tax purposes include (A) funeral expenses (B) life insurance premiums (C) bequests to minor children (D) bequests to adult children ```

(A) funeral expenses

16. Which of the following statements about state death taxes is correct? (A) They are calculated at 60 percent of the federal estate tax payable. (B) State death taxes can be payable even if no federal estate taxes are due. (C) If federal estate taxes are not payable, there are no state death taxes due, (D) State inheritance taxes are a statutory deduction against the federal gross estate.

(B) State death taxes can be payable even if no federal estate taxes are due.

17. Federal estate taxes are due and payable within (A) 3 years and 6 months after the date of death (B) 6 months after the conclusion of probate (C) 3 months after the date of death (D) 9 months after the date of death

(D) 9 months after the date of death

18. Internal Revenue Code Section 6166 permits an extension of time to pay the federal estate tax. In order to qualify for this extension, a closely held business interest must exceed (A) 10 percent of the gross estate (B) 20 percent of the taxable estate (C) 35 percent of the adjusted gross estate (D) 50 percent of the adjusted gross estate

19. In order to qualify for the annual gift tax exclusion, a gift must (A) consist of tangible personal property (B) be a gift of a present interest (C) be a gift of a future interest (D) made in cash

(B) be a gift of a present interest

``` 20. The applicable credit amount can be used to offset I. gift tax. 11. estate tax (A) I only (6) 11 only (C) both I and 11 (D) neither I nor ii ```

35. A partnership may legally be created only by (A) conversion of successful proprietorship (B) written agreement between two owners (C) an oral or written agreement (D) legislative action

36. Which life situation below most urgently calls for life insurance coverage? (A) Mr. Braunschweiger becomes a stockholder of General Motors. (B) A stockholder personally guarantees his corporation's note for a $100,000 loan. (C) A business executive signs a will leaving his Kodak stock to his son and government bonds of equal market value to his daughter. (D) Smith purchases 5 percent of the stock in a small corporation but continues to work for General Motors as a line foreman.

(B) A stockholder personally guarantees his corporation's note for a $100,000 loan.

37. Which of the following is true regarding key person life insurance? (A) Cash values can be used by the business. (B) Death benefits are taxable income if payable to the business. (C) The policy must be sold to the key person upon leaving the firm. (D) None of the above.

(A) Cash values can be used by the business.

38. Which of the following characteristics of a sole proprietorship does not point directly to a need for life insurance? (A) The sole owner is usually the manager of the business and the only person completely familiar with its operation. (B) A sole proprietorship expires with the death of the owner. (C) There are no associates who must be consulted on major decisions. (D) The owner does not usually have the full range of fringe benefits available to an owner of a corporation who serves as an employee.

39. Upon the death of a partner, the surviving partner is charged with the specific duty of (A) continuing the business to help support the widow (B) buying out the heirs within 6 months (C) notifying the newspapers of the firm's new status (D) winding up the firm's business and accounting for the remaining assets

(D) winding up the firm's business and accounting for the remaining assets

40. Select the most important reason why close-corporation stock is usually an unsuitable investment for a deceased stockholder's family. (A) It is usually too expensive for the average investor. (B) Ordinarily the other stockholders comprise the only market for the stock, and there is not likely to be much return except through a sale. (C) Stock ownership and management of a close corporation are separate. (D) Dividends are subject to income tax at surcharge rates.

(B) Ordinarily the other stockholders comprise the only market for the stock, and there is not likely to be much return except through a sale.

41, Some portion of a life insurance death benefit may be subject to federal income tax if (A) the insured had any incidents of ownership (B) the death benefit exceeds the value of a business interest as established in the buy-sell agreement (C) the transfer-for-value rule is applicable (D) all of the above

42. The most valuable thing that any business can have is (A) plenty of capital for expenses (B) skilled management (C) a good credit rating (D) recognizable trade marks and valuable patents

(B) skilled management

``` 43. How much capital is required to produce $10,000 a year at a capitalization rate of 15 percent? (A) $150,000 (B) $ 66,667 (C) $ 15,000 (D) $ 1,500 ```

(A) $ 66,667

44. Laws of Descent and Distribution become effective when a person (A) dies without having made a valid will (B) distributes property by trust to his or her heirs (C) executes an insured buy-sell agreement (D) none of the above

(A) dies without having made a valid will

45. Which of the following statements about sole proprietorships is true? (A) The sole proprietorship form is advantageous for small firms: incorporation is advisable in any case where the business is large enough to qualify for a charter. (B) Operations are more restricted than in the case of a limited partnership. (C) Sole proprietors are not eligible for qualified retirement plans. (D) The sole proprietor's financial liability is unlimited and unshared.

(D) The sole proprietor's financial liability is unlimited and unshared.

46. An S Corporation is (A) a corporation that is taxed as an unincorporated business (B) any business that elects to have earnings taxed as a distribution of dividends (C) a subsidiary corporation with a nonprofit tax status (D) normally owned by 90 or more stockholders

(A) a corporation that is taxed as an unincorporated business

``` 47. Retained earnings, accumulated earnings, and retained income are terms variously used interchangeably with (A) current assets or fixed assets (B) surplus (C) intangible assets (D) unreasonable compensation ```

(B) surplus

``` 48. Which of the following is characteristic of limited liability companies? (A) They are taxed as corporations. (B) They allow only one class of ownership. (C) Members cannot be active in the management of the business. (D) They have no restrictions on foreign ownership. ```

(D) They have no restrictions on foreign ownership.

49. Which of the following is a characteristic of a wait-and-see buy-sell agreement? (A) It is the same as a cross-purchase plan. (B) All surviving stockholders are required to buy the stock of the deceased stockholder. (C) Purchase options must be exercised at least 30 days before the death of a stockholder or the agreement is void. (D) If options to purchase are not exercised, the corporation is required to purchase the interest of the deceased owner.

(D) If options to purchase are not exercised, the corporation is required to purchase the interest of the deceased owner.

``` 50. What is the maximum amount of the estate tax marital deduction? (A) $155,800 (B) $192,800 (C) $600,000 (D) unlimited ```

(D) unlimited

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