Chapter 3 Qs

Question 1

Which business entities are NOT subject to income tax on their profits?

Answer 1

Limited Companies (3A6)

Question 2

A will is AUTOMATICALLY revoked (in full or in part) on

Answer 2

Marriage and Divorce

Question 3

Gary is a leaseholder in a block of 12 flats. Gary and two other leaseholders are interested in buying a freehold. How many more leaseholders would have to agree to enforce the sale?

Answer 3

3 more leaseholders (50% of the building)

Question 4

Brad, Tac and Harris are the three directors of a limited company. If the company were to close with unsecured debts of £90,000, what amount of the debt would Brad be personally responsible for?

Answer 4

None (limited company)

Question 5

Josh has set up a bare trust with his wife Beryl as the beneficiary. He them dies leaving two children, Jennifer and Jane. His personal legal Representative is his friend Mike. Who is entitled to the benefits of the trust?

Answer 5

Beryl is entitled to the entire trust absolutely (3H2)

Question 6

*A limited company with shares with the nominal value £20,000 has applied to be quoted on the Stock Exchange as a public company. By how much must the nominal value be increased before the company can be quoted on the Stock Exchange.

Answer 6

30,000 (3A5)

50,000 nominal value

Question 7

TT Lanterns Ltd has insufficient assets to repay its creditors . What option might be considered in an attempt to rescue the company as a going concern?

Answer 7

Administration

Question 8

Which of the following has a separate legal identity from its owners

A) Limited Company
B) Sole Trader
C) Partnership
D) A self-employed person

Answer 8

A) Limited Company

A limited company has a separate legal identity to its owners (the shareholders). A sole- trader, partnership and self-employed person do not.

Question 9

In which of the following circumstances would the powers granted under an ordinary Power of Attorney not be revoked?

A. In the event of mental incapacity
B. If the donor leaves the country
C. In the event of bankruptcy
D. In the event of death

Answer 9

B. If the donor leaves the country

An ordinary power of attorney would not be revoked if the donor left the country but would automatically be revoked on death, mental incapacity or bankruptcy.

Question 10

Under a life assurance contract how would you define insurable interest?

A. The duty to disclose all facts a person might expect an underwriter to know
B. The proposer is required to have some financial interest in the life assured
C. The proposer has to be related to the life assured
D. The proposer owes money to the life assured

Answer 10

B. The proposer is required to have some financial interest in the life assured

In order to have a valid life assurance contract, the proposer must have some financial interest in the life assured; this is called insurable interest. Answer c) and d) are incorrect, as the proposer could be related to the life assured or owe them money, but these things alone are not a financial interest. Answer a) is also false.

Question 11

Under which scenario would non-disclosure have taken place?

A. A client tells an IFA about a previous heart condition, but the IFA doesn’t tell the
insurer
B. An employed agent of the insurer does not inform the insurer of the client’s
previous heart condition
C. A self-employed agent of the insurer does not pass onto the insurer a material
fact the client had disclosed
D. The client advised that a previous heart condition occurred 10 years ago, but had
actually happened 11 years ago

Answer 11

A. A client tells an IFA about a previous heart condition, but the IFA doesn’t tell the
insurer

The IFA is the agent of the client and must disclose all relevant information to the insurance company. If this does not happen, there has been non-disclosure, and the policy will be void. In the same scenario, but the adviser is either a self-employed representative or employed agent of the insurer, the policy would still be valid and therefore, there has been no non-disclosure.

Question 12

Who would the term bankruptcy apply to?

A. Individuals only
B. Companies and individuals
C. Companies
D. Sole traders only

Answer 12

A. Individuals only

The term bankruptcy applies to individuals – including sole traders and partners - who cannot repay their debts to creditors. Liquidation is the term applied to the process of a company being brought to an end because of insolvency.

Question 13

Which of the following would you expect to be identified in a will?

i) Names of the executors
ii) Names of the beneficiaries
iii) Preferences for medical treatment
iv) Assets to be left and to who

A. i and ii only
B. i, ii and iii only
C. i, ii and iv only
D. i, ii, iii and iv

Answer 13

C. i, ii and iv only

A will should name the executors (who are responsible for dealing with the deceased’s estate), the beneficiaries (who benefit from the will) and should clearly state the assets and to whom they should be distributed. A will applies on death, and therefore you would not expect to see preferences for medical treatment.

Question 14

What are the three formalities required in making a will?

A. Printed writing, typed writing and hand writing
B. Writing, signature and attestation
C. Executors, trustees and beneficiaries
D. Testator’s signature and two witness signatures

Answer 14

B. Writing, signature and attestation

The three formalities to making a valid will are the writing of the will, the signature of the testator (the person making the will) and the attestation (the signing of the will by two witnesses who must also witness the testator sign and vice versa).

Question 15

How does a discretionary trust differ from an absolute trust?

A. A discretionary trust allows the trustees flexibility over beneficiaries, whereas
under an absolute trust the beneficiaries are specifically named
B. A discretionary trust allows flexibility over which assets to include, whereas an
absolute trust covers the whole of the estate
C. A discretionary trust has an open-ended period for distributing assets, but an
absolute trust has a fixed time period
D. An absolute trust has no interest in possession but a discretionary trust has an
interest in possession

Answer 15

A. A discretionary trust allows the trustees flexibility over beneficiaries, whereas
under an absolute trust the beneficiaries are specifically named

An absolute trust has specified beneficiaries, which cannot be changed, compared to a discretionary trust, which gives flexibility to trustees over when or even if a beneficiary receives benefits. An absolute trust ends when the beneficiary reaches a certain age, e.g. a minor reaching 18. Interest in possession trusts are where the trustees must pass on trust income to the beneficiary. This is true of absolute trusts but not discretionary trusts.

Question 16

What is the definition of a beneficiary who has a contingent interest under a trust?

A. A beneficiary who is entitled to income from trust assets, but not the capital
B. A beneficiary who cannot exercise control over the trust assets
C. A beneficiary whose entitlement is dependent on something else happening first
D. A beneficiary who shares entitlement to trust assets with other beneficiaries

Answer 16

C. A beneficiary whose entitlement is dependent on something else happening first

If a beneficiary has a contingent interest in a trust, their entitlement is dependent on something happening first, e.g. outliving another beneficiary.

Question 17

SJP 18/19 21 - 29*
A financial adviser has been approached by his client, Billy, who has recently been appointed as a deputy by the Court of Protection on behalf of his mother Betty, who has lost mental capacity. Berry is a joint trustee of a discretionary trust with her brother, Jimmy. Who will have the power to act on any advice given in relation to the trust assets?

A) Billy only
B) Jimmy only
C) Billy and Jimmy acting together
D) Either Billy or Jimmy

Answer 17

B) Jimmy only

Question 18

An IFA within a large authorised firm is recommending a new personal pension arrangement for her client. She is acting as

A) Agent of personal provider only
B) Agent to the client only
C) Agent for the client and the pension provider jointly
D) Agent for the authorised firm only

Answer 18

B) Agent to the client only (3:1)

Question 19

Katrina entered into a personal loan arrangement with a finance company 3 months before her 18th birthday. What is the legal position in respect to this arrangement.

A) The contract is valid as she is within 6months of her 18th birthday
B) Katrina can avoid all liability under the contract
C) Katrinas parents could be made liable for the debt
D) The contract is automatically void from outset

Answer 19

B) Katrina can avoid all liability under the contract (3:1)

Question 20

Tony, Peter and Steve jointly own an investment property as tenants in common. Tony owns 20%, Steve owns 30% and Peter owns 50% of the property. The property is subject to a mortgage. If Tony dies, what will happy to his share of the property?

A) It will be automatically shared equally between Steve and Peter
B) It will be passed to Tonys estate
C) It will be passed to Steve and Peter in proportion with their current respective shareholdings in the property
D) It will be passed to the lender to repay Tonys share of the mortgage

Answer 20

B) It will be passed to Tonys estate (3:1)

Question 21

Michaela owns a property outright and in perpetuity, but does not own the freehold. This is most likely because the ownership is

A) on a commonhold basis
B) On a leasehold basis
C) Subject to fuedal tenure
D) Subject to a shared ownership agreement

Answer 21

A) On a commonhold basis (3:1)

Question 22

• In the case of bankruptcy, who has a statutory duty to investigate, where necessary, the bankrupts affairs and send a report to creditors

A) An insolvency practitioner appointed by the creditors
B) The lead creditor
C) The official reciever
D) The trustee in bankruptcy

Answer 22

C) The official reciever (3:1)

Question 23

*Jessica wrote a will some time ago leaving most of her assets to her husband and a small bequest to her mother. What is the impact, if any, of her recent divorce on the will?

A) Her divorce has no impact on the will
B) Her bequest to her mother remains valid and her ex-husband will only receive the statutory amount
C) The will becomes invalid and all her assets would pass accordingly to the laws of intestacy
D) The will remains valid and her assets distributed as if her ex husband had predeceased her

Answer 23

D) The will remains valid and her assets distributed as if her ex husband had predeceased her (3:3)

Question 24

Ethel has purchased shares for £5000 and placed them under a trust for her Grandson. She has arranged the trust so that he will automatically receive the shares at the age of 18, but there will not br any access before the time. The trust she has most likely used is a

A) Bare trust
B) Discretionary trust
C) Discounted gift trust
D) Flexible trust

Answer 24

A) Bare trust

Question 25

*In creating a trust for her client, a solicitor recommends the inclusion of a charging clause in the trust wording. What is this most likely related to ?

A) To allow ad hoc payments to the beneficiaries, for their education or advancement
B) To allow professional trustees to be remunerated for their services
C) To clearly set out the costs of preparing and executing the trust deed under the law society rules
D) To prevent trustees from deriving any personal benefit from the trust

Answer 25

B) To allow professional trustees to be remunerated for their services (3:3)

Question 26

Mr Jones has recently died intestate leaving behind a wife, a brother and parents but no children or grandchildren. Under the laws of intestacy, what can Mrs Jones expect to receive from the estate?

A. She will receive everything
B. £250,000 plus a life interest in half the residue
C. Personal chattels and £250,000
D. Personal chattels plus £450,000 plus one half of the residue

Answer 26

A. She will receive everything

As Mr Jones died without leaving a will, the laws of intestacy apply. As he is married with no children, his wife is the sole beneficiary. If Mr Jones had children, on his death, his wife would receive all personal chattels plus £250,000 and half the residue of the estate. The other half would be split between the children.

Question 27

*What do the trustees of a trust have to provide to a life office in order to have the benefits of a life policy paid to them?

A. A copy of the death certificate of the policyholder and a copy of the trust deed
B. A copy of the grant of probate and a deed of appointment
C. A copy of the grant of probate and a copy of the trust deed
D. A copy of the death certificate of the policyholder and a deed of appointment

Answer 27

A. A copy of the death certificate of the policyholder and a copy of the trust deed

Only a copy of the trust deed and copy of the death certificate are needed by the life company to pay out benefits to trustees. The benefits are owned by the trust on the death of the policyholder and are therefore deemed to be outside of the estate, so a grant of probate is not required. A deed of appointment is a legal document that is used to appoint an individual (or professional body) into a specific role, for example, the appointment of a new trustee. It is not required for the payment of death benefits from a life office.