Practice Quiz 16

Question 1

What is the maximum gift that Bob and Sue, a married couple, can give to one donee in 2017 without paying any gift tax, assuming they have not made any previous taxable gifts?

A)
$10,994,000.
 B)
$11,008,000.
 C)
$28,000.
 D)
$5,518,000.

Answer 1

B

For 2017, the answer is $11,008,000 [($5,490,000 applicable exclusion amount × 2 donors) + ($14,000 annual exclusion × 2)]

Question 2

All of the following are methods to avoid probate EXCEPT:

A)
Passing property by contract (e.g., designating beneficiaries for life insurance, IRAs, or retirement plan benefits).
B)
Owning real estate in states where the decedent is not domiciled.
C)
Titling property as joint tenancy with right of survivorship or tenancy by the entirety.
D)
Transferring property by deed during life.

Answer 2

B

Owning real estate in other states is not a method to avoid probate. Typically a probate proceeding must be conducted in each state in which the decedent owned real property.

Question 3

The ABC Company maintains a split-dollar life insurance plan for one of its key executives. ABC owns the policy and pays all the premiums. Which of the following statements regarding this plan is CORRECT?
A)
ABC Company may deduct the premiums it pays on the policy.
B)
This plan is a collateral assignment plan.
C)
The key executive must pay income tax each year on any economic benefit he derives from the plan.
D)
The death benefit received under the plan will be subject to income tax.

Answer 3

C

This is an endorsement plan because the employer owns the policy. Under an endorsement split dollar plan, the insured employee must pay income taxes each year on the economic benefit derived from the plan. Premiums are not deductible, and the death benefit is tax free.

Question 4

All of the following statements regarding Medicare supplement (Medigap) insurance policies are correct EXCEPT:
A)
the most comprehensive and expensive policy form is Policy A.
B)
policies must be guaranteed renewable.
C)
they cover some of the copayments and deductibles imposed by Medicare Part A and Part B.
D)
policies may not exclude preexisting conditions.

Answer 4

A

Medigap policy form “A” is the most basic and inexpensive form of Medigap coverage available.

Question 5

Which of the following are covered under ‘Coverage C-Personal Property’ of all the homeowners forms?

1. Personal property that is owned.
2. Personal property used by the insured anywhere in the world.
3. Property not located on the premises and is rented, or held for rental, to others.
4. Credit cards or ATM cards.

Answer 5

1 and 2

Statements 3 and 4 are incorrect. Property not located on the premises and is rented, or held for rental, to others, and credit cards and ATM cards are all excluded under Coverage C of homeowners forms.

Question 6

Which of the following statements regarding secular trusts is (are) CORRECT?

1. Funds held in a secular trust cannot be reached by the employer’s creditors.
2. The employer receives an income tax deduction equal to the amount of the trust earnings each year.
3. A secular trust is an irrevocable trust.
4. Because the funds in a secular trust are subject to a substantial risk of forfeiture, the employee will not be taxed until amounts are distributed from the trust.

Answer 6

1 and 3

Statement 1 is correct. Creditors of the employer do not have access to the funds in a secular trust. Statement 2 is incorrect. The employer receives a deduction for amounts contributed to the trust each year, not for the trust earnings. Statement 3 is correct. A secular trust is an irrevocable trust. Statement 4 is incorrect. Funds in a secular trust are not subject to a substantial risk of forfeiture; therefore, the employee is taxed when the employer makes a contribution to the trust.

Question 7

Jerry has the following capital gains and losses for the current year:

LTCG $20,000 STCG $20,000
LTCL $15,000 STCL $7,500
What are Jerry’s net long-term and short-term gains?

A)
$5,000	$12,500
 B)
$5,000	$20,000
 C)
$15,000	$20,000
 D)
$0	$17,500

Answer 7

A

Question 8

Which of the following is (are) considered to be covered autos under a personal auto policy?

1. Any vehicle listed in the policy.
2. Newly-acquired vehicles.
3. Boats owned by the insured.
4. Automobiles used as delivery vehicles.

Answer 8

1 and 2

Question 9

Which of the following statements concerning active bond management strategies is (are) CORRECT?

1. Once an investor has a forecast of interest rates, the bond portfolio’s maturity can be lengthened when interest rates are expected to decline, or shortened when interest rates are expected to rise.
2. Short maturities sacrifice price appreciation opportunities and usually offer lower coupons, but serve to protect the investor if rates are expected to rise.

Answer 9

Both are correct

Question 10

John died last month with a gross estate valued at $10 million. His will created a bypass trust and transferred assets equal to the applicable exclusion amount into the trust. Assets not transferred to the bypass trust were transferred to John’s surviving spouse, Margaret. What is the result of these actions?

A)
The assets in the bypass trust will not be included in Margaret’s gross estate upon her death.
B)
John has overqualified his estate because of the bypass trust.
C)
Income from the bypass trust must be paid to Margaret each year for the remainder of her life.
D)
The assets transferred to the bypass trust will be eligible for the estate tax marital deduction.

Answer 10

A

Question 11

Barrett is a project manager with an engineering firm. He has a consulting practice on the side and averages $40,000 per year from this business. He operates his business as a C corporation and has never received any salary or dividends. Which of the following statements is (are) CORRECT?

1. The corporation might be liable for an accumulated earnings tax.
2. The accumulated earnings tax is imposed only on a corporation that is seeking to avoid income tax on such earnings.

Answer 11

1 only

Question 12

Which of the following states that liability for the negligence of one person can be transferred to another under certain conditions?
A)
Vicarious liability.
 B)
Collateral source rule.
 C)
Res ipsa loquitur.
 D)
Negligence per se.

Answer 12

A

Question 13

To be eligible for long-term care benefits under Medicaid, the individual must be:
A)
previously confined to a hospital.
 B)
eligible for Medicare.
 C)
above a certain income level.
 D)
indigent or impoverished.

Answer 13

D

Question 14

Napoleon Enterprises sponsors a SIMPLE 401(k) plan for its employees. Under the plan, the company matches employee contributions up to 3% of compensation. Which of the following statements about Napoleon Enterprise’s SIMPLE 401(k) plan is CORRECT?
A)
Napoleon Enterprises’ contributions must be vested using either a 3-year cliff or 2-to-6-year vesting schedule.
B)
Employees cannot make after-tax contributions to the plan.
C)
Withdrawals made within 2 years of initial participation are subject to a 25% premature distribution penalty tax.
D)
Napoleon Enterprises can match as little as 1% of compensation for 2 out of 5 years.

Answer 14

B

Question 15

Which CFP Board Practice Standard states, “a financial planning practitioner shall consider sufficient and relevant alternatives to the client’s current course of action in an effort to reasonably meet the client’s goals, needs and priorities”?

A)
200-1-Determining a Client’s Personal and Financial Goals, Needs and Priorities.
B)
400-1-Identifying and Evaluating Financial Planning Alternatives.
C)
300-1-Analyzing and Evaluating the Client’s Information.
D)
500-2-Selecting Products and Services for Implementation.

Answer 15

B

Question 16

Which of the following qualified retirement plans allow unrestricted investment in employer securities?

1. Money purchase pension plans.
2. Stock bonus plans.
3. ESOPs.
4. Traditional profit-sharing plans.

Answer 16

2, 3, and 4

Question 17

Under a profit-sharing plan:
A)
the company has flexibility as to annual funding.
B)
up to 25% of the plan’s assets can be invested in the employer’s stock.
C)
the employer bears investment risk.
D)
the company must make annual contributions.

Answer 17

A

Question 18

Steve died on July 31. His assets and the fair market value at the time of his death were as follows:

Cash $20,000
Personal residence $2,000,000
Life insurance payable to Steve’s estate $1,000,000
Series EE bonds $1,000,000
State of Louisiana bonds $2,500,000
Steve has a balance on his residence mortgage of $150,000. What is the value of Steve’s gross estate?

A)
$6,350,000.
 B)
$6,520,000.
 C)
$6,370,000.
 D)
$4,020,000.

Answer 18

B

All assets are included in the gross estate, for a total of $6,520,000. Any liabilities are irrelevant to the determination of the gross estate. The liabilities are deducted from the gross estate in arriving at the adjusted gross estate.

Question 19

Which of the following circumstances may cause the Pension Benefit Guaranty Corporation (PBGC) to terminate a defined benefit plan?

1. The plan is financially unable to pay benefits.
2. The plan cannot afford to meet its minimum funding standards.
3. The plan administrator has not completed the annual IRS Form 5500 filings.
4. The investment portfolio is too conservative.

Answer 19

1 and 2

Question 20

In 2017, George decided to begin a program of lifetime giving to his 5 grandchildren and 3 great-grandchildren. He wants to control the amount of annual gifts to avoid the imposition of federal gift tax, and he does not desire to use any of his or his wife’s, Sue, applicable credit amount. However, Sue is willing to split each gift over a period of 10 years. Over the 10-year period, George can give a total amount of gifts (ignoring future indexing of the annual exclusion), including the gift splitting, of:

A)
$280,000.
 B)
$1,120,000.
 C)
$140,000.
 D)
$2,240,000.

Answer 20

D

Question 21

Which of the following factors is NOT necessary for calculating the measure of risk that is used in Markowitz’s efficient frontier?
A)
Beta for each asset class.
B)
The percentage of the portfolio invested in each asset class.
C)
Standard deviation for each asset class.
D)
Correlation between each asset class and every other asset class.

Answer 21

A

The efficient frontier consists of efficient portfolios. An efficient portfolio has the highest return for a given level of risk. The risk measure is standard deviation, specifically, the standard deviation of a multi-asset portfolio. The other choices represent the necessary inputs determining the standard deviation of a multi-asset portfolio. Beta is not used in the calculation.

Question 22

Which of the following statements regarding disability insurance is CORRECT?
A)
Disability insurance is less important than life insurance because the probability of death at most ages is greater than the probability of disability.
B)
Disability insurance is available only to insureds that are also covered by life insurance.
C)
Disability insurance should be purchased with an elimination period that is short enough not to place the insured in a financial bind.
D)
Disability insurance should be purchased as an any occupation definition to provide the most protection to a specialized worker, such as a surgeon.

Answer 22

C

Disability insurance is at least as important as life insurance (probably more so because the likelihood of disability is much greater than that of premature death). Disability insurance should be purchased with a waiting period that is short enough not to put a financial strain on the insured. Own occupation disability insurance will provide the most protection for a specialized worker. Life insurance coverage is not a requirement for disability insurance.

Question 23

Beverly’s husband, age 67, died with a $1.2 million balance in his traditional IRA. Beverly, who is the designated beneficiary, would like to know what her options are regarding her deceased husband’s IRA. She is currently 55 years old and has a life expectancy of 30 years. When she was younger, Beverly ran a consulting business, which allowed her to contribute a significant amount of money to a self-employed Keogh plan. When she closed her business, she rolled over the plan balance into her own traditional IRA. Which of the following statements regarding inheriting her husband’s IRA is(are) CORRECT?

1. Beverly’s only option is to withdraw the funds from her husband’s IRA using the five-year rule.
2. Beverly can roll her deceased husband’s traditional IRA over to her own traditional IRA.

Answer 23

2 only

Question 24

Sam is purchasing a whole life insurance policy on his wife’s life and making their son the beneficiary. Sam remains the owner of the policy. Sam does not want to miss making a premium payment and wants to make large payments at least annually. His insurance agent has told him to be careful how he pays the premium or he could end up making the policy a modified endowment policy (MEC). This did not sound bad to Sam until he found that loans were considered distributions. He has asked you to explain when a life insurance policy is considered a MEC so he can avoid the MEC limitations. You tell him the 7-pay test results in a change in the tax treatment of life insurance policies for which the aggregate premiums paid during the first 7 years of the contract exceeds a certain amount. The amount of premiums paid that make the policy a MEC is

A)
The net level premiums that would have been paid if the policyholder paid the equivalent of 7 level annual premiums by the end of the 3rd year.
B)
The net level premiums that would have been paid up to the time in question if the policy was considered paid-up after 7 level annual premium payments were received.
C)
The paid-up value of the policy after 7 years.
D)
The present value of the expected death benefits, less the insured’s basis of the policy.

Answer 24

B

The 7-pay test requires that the total premiums paid never exceed the amount of level annual premiums paid if the policyholder had been charged a level amount that would pay the policy up after 7 years. If the level amount for a 7-pay policy is a $3,000 annual premium, then the premiums paid cannot exceed $3,000 in the 1st year. In the 2nd year, the total premiums paid cannot exceed $6,000. If at any time the total premiums paid exceed the net level premiums that would have been paid up to the time in question, the policy is considered a modified endowment contract and its tax treatment changes.

Question 25

The adjustment process in a competitive market moves toward:
A)
shortage.
 B)
capitalism.
 C)
surplus.
 D)
equilibrium.

Answer 25

D