Unit 16 Review

Question 1

Which of the following items is not required under the customer identification program (CIP)?

A) Physical address
B) Date of birth
C) Sex
D) Visa details for non-citizens

Answer 1

C) Sex

The CIP does not ask if the account holder is male or female.

Question 2

Which of the following vehicles make use of the unified estate tax credit?

I. Bypass trust
II. Generation-skipping trust
III. Living trust
IV. Simple trust

Answer 2

D) I and II

Both the bypass trust and the generation-skipping trust are tools used by estate planners to reduce estate taxes. They do so by passing the amount in the unified credit (currently $5.34 million for 2014) to heirs other than the spouse, usually grandchildren in the case of the GST.

Question 3

Samantha Wells, a British citizen temporarily working in the United States, wants to form a business venture with other investors. She is looking for favorable tax treatment of earnings and losses. She also wants to limit the number of investors, but is willing to share control of the enterprise with others to attract them. What business form do you advise to her?

A) C Corporation
B) General Partnership
C) S Corporation
D) Limited Partnership

Answer 3

B) General Partnership

Limited partnerships would not work because the other investors have limited say in how the enterprise is run. C corporations do not provide favorable tax treatment of gains or losses. While an S corporation appears to be appropriate, only U.S. citizens or resident aliens can be shareholders.

Question 4

Which of the following accounts could be opened with a TOD designation?

I. Individual
II. Joint tenants in common
III. Joint tenants with rights of survivorship
IV. UTMA

Answer 4

I and III

The only types of accounts that may have the Transfer on Death (TOD) designation are individual, JTWROS, and TBE accounts. Minors cannot designate a beneficiary. Upon the death of a minor, any assets belong in the deceased’s estate.

Question 5

Which of the following business entities files a tax return on the 15th day of the 4th month after the end of the calendar (or fiscal) year?

A) Multiple member LLCs on Form 1065
B) C corporations on Form 1120
C) S corporations on Form 1120s
D) Partnership returns on Form 1065

Answer 5

B) C corporations on Form 1120

Of this group, the C corporation is the only one filing on the 15th day of the 4th month (April 15 for a calendar-year filer). The other three all file their returns along with a Schedule K-1 for each partner, member, or shareholder on the 15th day of the 3rd month, typically, March 15.

Question 6

A feature of which of the following business entities is limited liability but no flow-through of earnings or losses?

A) Corporation
B) Sole proprietorship
C) Limited partnership
D) LLC

Answer 6

A) Corporation

The corporation (always assume C corporation unless it says different on the test) offers limited liability to its shareholders, but there is no flow-through of income or loss. LLCs and limited partnerships offer both and the sole proprietorship has unlimited liability.

Question 7

Wade Kimmons purchased 200 shares of ABC common stock on March 9, 2009, paying $32 per share. Since the date of the purchase, Mr. Kimmons has received $518 in dividends. With the stock selling for $89 per share on July 27, 2016, Wade gives all 200 shares to his niece, Kendra. One week later, Kendra sells all of the ABC stock for $85 per share. The tax consequences of this are

A) short-term capital loss of $800.
B) long-term capital gain of $11,118.
C) long-term capital loss of $800.
D) long-term capital gain of $10,600.

Answer 7

D) long-term capital gain of $10,600.

When securities are the subject of a gift, the donee (recipient) acquires the donor’s cost basis and holding period. That means that Kendra’s cost was $32 per share and the holding period was over 7 years. That is a gain of $53 per share or a total of $10,600, and it is long term. The dividends have nothing to do with the question.

Question 8

One of your customers would like to be able to reduce current taxable income. Contributions to which of the following would be an appropriate recommendation?

A) A donor advised fund
B) A deferred annuity
C) A Roth IRA
D) A Section 529 plan for grandchildren

Answer 8

A) A donor advised fund

A donor-advised fund operates as a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code. As such, contributions to the fund will generate a current tax deduction for the customer. Section 529 plans offer tax-deferred growth but not a current tax deduction. Roth IRAs offer the potential of tax-free income, but current contributions are not tax-deductible. A deferred annuity means the earnings in the account are deferred until the money is withdrawn. Once again, there is no current tax benefit. Remember, every annuity on the exam is nonqualified unless something in the question indicates otherwise.

Question 9

During the previous fiscal year, The Kaplan Family Trust received $24,000 in dividends and $35,000 in interest from corporate bonds. Securities transactions during the year resulted in long-term capital gains of $48,000, $20,000 of which were reinvested in the corpus. The DNI for the Kaplan Family Trust is

A) $11,000
B) $107,000
C) $79,000
D) $87,000

Answer 9

D) $87,000

Distributable Net Income (DNI) is dividends and interest plus capital gains that have not been reinvested back into the trust. In this case, $24,000 + $35,000 + $28,000 = $87,000.

Question 10

An investment constraint that is unique to private foundations is the requirement to

A) distribute 5% of its assets each year as qualifying distributions.
B) invest 5% of its assets each year in qualifying investments.
C) have an investment policy statement.
D) have a board of directors.

Answer 10

A) distribute 5% of its assets each year as qualifying distributions.

Under Section 4942 of the Internal Revenue Code, a private foundation must pay out each year an amount equal to 5% of its net investment assets in “qualifying distributions”. There is no legal requirement on how much must be invested each year, and having an investment policy statement is not unique to foundations. Likewise, there is nothing unique about the requirement to have a board of directors and that isn’t an investment constraint.

Question 11

Which of the following would be used to provide end-of-life instructions once a person becomes incapacitated?

A) Living will
B) Living trust
C) Durable power of attorney
D) Incapacitated will

Answer 11

A) Living will

The purpose of a living will is to give clear instructions regarding end-of-life decisions, such as organ donation or when to end life-extending measure. There is no such thing as an incapacitated will. A living trust deals with how assets are distributed and a durable power of attorney grants authorization to a person to legally act on behalf of someone who cannot do so.

Question 12

A client purchases 1,000 shares of the ABC Global Growth Fund when the NAV is $8.75 and the POP is $9.21. Three years later, the client makes a gift to her daughter when NAV is $9.50 and POP is $10.00, and the daughter elects to receive all distributions in cash. Two years later, she sells all shares when the NAV is $14.25 and POP is $15.00. What are the tax consequences of this sale?

A) Long-term capital gain of $4,750
B) Long-term capital gain of $5,040
C) Long-term capital gain of $5,000
D) Long-term capital gain of $5,500

Answer 12

B) Long-term capital gain of $5,040

In the case of a gift of securities, the donee acquires the donor’s cost basis, $9.21 per share. Sale (redemption) takes place at the NAV ($14.25) for a profit of $5.04 per share (times 1,000 shares).

Question 13

When comparing a private equity fund to a public one, it would be incorrect to state that the private fund has

A) lower reporting costs.
B) less liquidity.
C) stronger governance.
D) higher risk.

Answer 13

C) stronger governance

The first step is to notice that the question is looking for the statement that is not correct. Corporate governance is an area where public shareholders look to ensure that the management is performing in ways that not only maximize operating results, but also represent high standards of business ethics. In the case of private funds, there are very few shareholders and they generally take less of an interest in ESG (environment, social, and corporate governance) matters. Private funds are not liquid and because they are private, they do not have the costs of regular reporting to the SEC. In general, private funds are considered a higher-than-average risk investment.

Question 14

When advisory clients wish to structure their portfolios to support companies that engage in social or environmental policies that they agree with, it is known as

A) engineered investing.
B) program-related investing.
C) impact investing.
D) asset allocation.

Answer 14

C) impact investing.

Impact investing can be defined as the intentional allocation of capital to generate a positive social or environmental impact.

Question 15

A professional tennis player comes to you seeking advice on setting up a trust. She is interested in giving to charity and also wants discretion as to when income is distributed to the beneficiaries, her parents. Which trust do you advise she use?

A) Simple trust
B) Charitable remainder trust
C) Charitable lead trust
D) Complex trust

Answer 15

D) Complex trust

Only a complex trust allows the two features that she requires. Simple trusts may not make charitable contributions, and they provide no discretion on income distribution. The two types of charitable trusts mentioned provide no ongoing discretion as to when income is distributed or who the beneficiaries are.

Question 16

Walter and Wanda Willingham are new client’s. While reviewing their holdings, you notice an account at a local bank titled, “Walter Willingham, in Trust for Walter Willingham, Jr.” The account provides that, upon Walter’s death, the assets in the account will pass to his son. This is an example of

A) an account opened JTWROS.
B) a Totten trust.
C) an UTMA account.
D) a testamentary trust.

Answer 16

B) a Totten trust.

A Totten trust is an informal trust that is set up as a bank account. The person who sets up the Totten account is the trustee of the account and can name any person as the beneficiary of the account. Upon the death of the trustee, the money will immediately be made available to the named beneficiary.

Question 17

Because a trust account is managed for the beneficial interest of the beneficiary, the investment adviser representative handling the account can

A) have a check drawn on the account payable to the trustee for trustee expenses.
B) have funds withdrawn from the account at the direction of the beneficiary.
C) place the securities in the trust fund in a noncustodial brokerage account.
D) arrange to have the trust’s funds pledged to support a loan for the trustee.

Answer 17

A) have a check drawn on the account payable to the trustee for trustee expenses.

The trustee can be reimbursed for trustee expenses that are reasonable. A trust account must be managed by the trustee and not by the beneficiary. Only the trustee can direct a withdrawal of funds, provided the withdrawal is done in a manner consistent with the trust document. Trust funds must be placed in custodial accounts (not to be confused with custodian for minors), not in noncustodial accounts.

Question 18

One of the situations that investment adviser representatives may encounter is the death of a client. When that happens, orders may be accepted from

A) the deceased client’s spouse.
B) the deceased client’s children.
C) the trustee in intestacy.
D) an individual with a durable power of attorney.

Answer 18

C) the trustee in intestacy.

In most cases, your clients will have a will. (Editorial comment – not on the exam, but you are acting in your clients’ best interest when you strongly urge them to prepare a proper will.) When the deceased has not written a will, he is considered to have died intestate. The appointment of the person who will administer the estate is based on state law. That person may be called the administrator of the estate or the trustee in intestacy. The spouse may be appointed to that role, but would be acting as the trustee, not as the spouse and same is true of the children. A durable power of attorney is dissolved upon the death of either principal to the power.

Question 19

Which of the following statements regarding grantor trusts is not correct?

A) If the grantor can receive income from the trust, he is treated as the owner of the trust.
B) If the grantor has the power to revoke the trust, he is treated as the owner of the trust.
C) If the grantor can control the beneficial enjoyment of the trust, he is treated as the owner of the trust.
D) The grantor may be taxed on trust income only if the grantor actually received the income.

Answer 19

D) The grantor may be taxed on trust income only if the grantor actually received the income.

As long as the grantor has the power directly or indirectly to control the trust, he is treated as the owner. The grantor may be taxed on trust income if the grantor either actually or constructively receives the income.