Crunch Time : Chapter 10

Question 1

What does the ‘reasonableness’ standard under FINRA’s suitability guidelines require?

Answer 1

A recommendation must be suitable for at least some investors.

Question 2

What must new customers of a broker-dealer provide according to the Customer Identification Program (CIP)?

Answer 2

A physical (street) address.

Question 3

What does Section 404(c) of ERISA require regarding investment options?

Answer 3

At least three core investment options must be offered.

Question 4

Is it required for employers to offer their own stock as an investment option in retirement accounts under Section 404(c) of ERISA?

Answer 4

No, it is not required.

Question 5

What are the elements of a trust?

Answer 5

• Settlor’s intention
• Subject matter
• Trustee as fiduciary
• Beneficiary

Question 6

How is the trust of a decedent distributed if each branch of the family is to receive an equal share?

Answer 6

By branch.

Question 7

How is the trust of a decedent distributed if each beneficiary receives an equal percentage?

Answer 7

Per capita.

Question 8

In a Per Capita Trust, how do beneficiaries receive their share?

Answer 8

An equal percentage of the trust.

Question 9

In a Branching Trust, how do beneficiaries receive their share?

Answer 9

An equal share.

Question 10

How is income from a revocable trust taxed?

Answer 10

At the grantor’s tax rate.

Question 11

How is income from an irrevocable trust taxed?

Answer 11

At the trust’s tax rate.

Question 12

Do both revocable and irrevocable trusts avoid probate?

Answer 12

Yes.

Question 13

What do Health Savings Accounts (HSAs) provide for qualified medical expenses?

Answer 13

Tax-free withdrawals.

Question 14

What is the minimum work history required to collect full Social Security benefits?

Answer 14

40 calendar quarters.

Question 15

What is the full retirement age for Social Security dependent on?

Answer 15

The year of the person’s birth.

Question 16

If a person has reached full retirement age and continues to work while collecting Social Security benefits, what happens to their benefit amount?

Answer 16

It will not be reduced by their earnings.

Question 17

If a person has NOT reached full retirement age and continues to work while collecting benefits, how is their benefit affected?

Answer 17

$1.00 is deducted for every $2.00 of earnings above an earnings limit.

Question 18

What percentage of an ex-spouse’s full retirement amount can a divorced individual receive if the marriage lasted 10 years or longer?

Answer 18

50%.

Question 19

Will spousal collection of Social Security benefits continue if the main spouse remarries?

Answer 19

Yes.

Question 20

Will the benefits collection cease if the collecting spouse remarries?

Answer 20

Yes.

Question 21

What is the gift tax threshold per person, per year (currently adjusted for inflation)?

Answer 21

$10,000 (maximum is $19,000).

Question 22

How do gifts given over a person’s lifetime affect the value of their estate for estate tax purposes?

Answer 22

They reduce the value.

Question 23

What happens to the cost basis of community property assets if one spouse dies?

Answer 23

It steps up to the market value at the time of death.

Question 24

What is the purpose of a Transfer on Death (TOD) account designation?

Answer 24

To avoid probate.

Question 25

What types of investments are qualified for an IRA?

Answer 25

* Fixed or variable annuities * REITs * Common stocks * Corporate or government debt * U.S. gold minted coins * Real estate

Question 26

What must be considered when evaluating IRA holdings that include municipal securities?

Answer 26

Immediate suitability consideration.

Question 27

What is the first step for an IAR upon the death of an advisory client?

Answer 27

Identify the beneficiaries.

Question 28

Does a joint tenants in common (JTIC) account ease the probate process?

Answer 28

No.

Question 29

What type of interest does JTIC ownership give each owner?

Answer 29

An undivided interest in property.

Question 30

How are 100% of withdrawals from a qualified retirement plan taxed?

Answer 30

As ordinary income.

Question 31

What is a Qualified Domestic Relations Order (QDRO) used for?

Answer 31

To divide a person's retirement account during a divorce.

Question 32

Are spouses benefitting from a QDRO subject to early withdrawal penalties?

Answer 32

No.

Question 33

In a non-qualified retirement plan, what is taxed as ordinary income at the time of withdrawal?

Answer 33

Only the earnings.

Question 34

What is the tax exclusion amount on gains from the sale of a primary residence?

Answer 34

$250,000 for single filers; $500,000 for joint filers.

Question 35

What are the characteristics of a SIMPLE 401(k)?

Answer 35

* For businesses with no more than 100 employees * Employer cannot offer any other retirement plan * Not subject to non-discrimination rules

Question 36

What incentive might a company offer to retain employees?

Answer 36

A deferred compensation plan.

Question 37

Who provides the ultimate credit in deferred compensation plans?

Answer 37

Employers.

Question 38

How much can two individuals from the same household contribute to their IRAs together?

Answer 38

$14,000 total ($7,000 each).

Question 39

What may create a deductible loss in a Roth IRA?

Answer 39

Closing all Roth accounts and receiving less than the investment, minus distributions.

Question 40

Can an individual purchase real estate in an IRA?

Answer 40

Yes, as long as it is not the primary residence, vacation home, or business location.

Question 41

Why is owning municipal bonds in an IRA often considered unsuitable?

Answer 41

IRAs offer tax advantages better held in a taxable account.

Question 42

Are beneficiaries taxed on income distributed by a trust?

Answer 42

Yes, but not on the principal that remains.

Question 43

Who are primary beneficiaries?

Answer 43

The first to receive payments if an annuity owner dies or from a trust account.

Question 44

Who are contingent beneficiaries?

Answer 44

They will be paid only after the primary beneficiary dies.

Question 45

Can IRAs be funded by cash only?

Answer 45

Yes.

Question 46

What types of investments are prohibited in IRAs?

Answer 46

* Collectibles * Gold * Commodities (except U.S. minted gold coins)

Question 47

What benefit does investing in gold provide for a portfolio?

Answer 47

A hedge against inflation.

Question 48

Can distributions from a 529 plan be used for tuition at a foreign university?

Answer 48

Yes.

Question 49

What is another name for a 529 plan?

Answer 49

Qualified Tuition Plan (QTP).

Question 50

Which is more effective in saving for college: a 529 plan or a trust?

Answer 50

A 529 plan.

Question 51

Who owns 529 plan assets?

Answer 51

Not the beneficiary.

Question 52

How much can individuals withdraw annually from their 529 plans for private school tuition?

Answer 52

$10,000.

Question 53

How much can individuals withdraw tax-free from their 529 plan to repay a qualified student loan?

Answer 53

Up to $10,000.

Question 54

What is the maximum initial gift amount to front-load a 529 plan per beneficiary?

Answer 54

$95,000 (or $190,000 for a married couple).

Question 55

What is the maximum contribution limit for a Coverdell Education Savings Account (CESA)?

Answer 55

$2,000.

Question 56

What is the basis of inherited assets?

Answer 56

The market value at the time of the donor’s death.

Question 57

What does the custodian have under the UGMA?

Answer 57

Custody of the assets, not the minor.

Question 58

To avoid taxation when distributing an estate, what should be done with amounts exceeding the estate tax exclusion?

Answer 58

Donate to charities.

Question 59

What does a person's attitude toward money influence?

Answer 59

Interest in investing or making personal purchases.

Question 60

What advantage do limited liability companies (LLCs) provide to their owners?

Answer 60

Pass through of both income and losses.

Question 61

What are the owners of an LLC referred to as?

Answer 61

Members.

Question 62

On what form do LLC members report income?

Answer 62

Form K-1.