UNIT 22 CHECKPOINT EXAM Flashcards
One difference between an UTMA account and an UGMA account is
A) an UTMA account has a wider set of allowed investments.
B) an UTMA account transfers at the age of majority, an UGMA account can go until the beneficiary turns 30 year of age.
C) an UGMA account is tax deferred and a UTMA account is not.
D) UTMA assets are considered an irrevocable gift, an UGMA account allows the custodian to reclaim the assets.
A) an UTMA account has a wider set of allowed investments.
Explanation
UTMA accounts allow real estate holdings, an UGMA account does not. Neither accounts are tax deferred and both accounts are irrevocable. The UGMA transfers at the age of majority, the UTMA may transfer as late as age 25.
Sam Malloy owns a small business and has built a substantial estate both with his business success and his early career as a pro athlete. He wants to set up his estate in a way that he will control the assets until he passes away or becomes incapacitated. Once that time comes, he wants control to transfer easily and he wants to avoid probate. Sam should
A) establish a revocable living trust.
B) create a last will and testament.
C) establish an irrevocable living trust.
D) place his assets in a transfer on death account.
A) establish a revocable living trust.
Explanation
A revocable living trust will accomplish his goals for his estate. An irrevocable trust takes away his control of his assets. The business cannot be placed in a transfer on death account. A will must go through probate.
Many investors like to put a transfer on death (TOD) designation on their brokerage accounts. Which of these are benefits of doing so?
I. The TOD designation avoids estate taxes.
II. The TOD designation avoids probate.
III. The account holder is relieved of decision making in the account.
IV. There is flexibility to change beneficiaries as conditions dictate.
A) II and III
B) I and IV
C) II and IV
D) I and III
C) II and IV
II. The TOD designation avoids probate.
IV. There is flexibility to change beneficiaries as conditions dictate.
Explanation
The transfer on death (TOD) designation allows the account holder to name a specific beneficiary (or beneficiaries) to receive the account’s assets upon death. Those named persons may be changed whenever the account holder wishes. Although this bypasses probate, it does not avoid estate taxes. TOD has nothing to do with giving investment discretion.
A client and his spouse own shares in the KAPCO Fund as tenants in common. He has a 60% ownership interest in the account and the spouse has the balance. If the client dies, what happens to the shares in the account?
A) His interest would automatically be transferred to the spouse.
B) Ownership of the shares would be determined by probate court.
C) 50% of the shares would belong to his spouse and the remaining half would be distributed to his estate.
D) 40% of the shares would belong to his spouse and the remaining balance would be distributed to his estate.
D) 40% of the shares would belong to his spouse and the remaining balance would be distributed to his estate.
Explanation
In a TIC account, securities owned by the decedent pass to the deceased owner’s estate—in this case, 60% of the assets. The 40% belonging to the spouse is retained by the spouse.
Which of these business structures would pass through the results of the business to the owners and protect the owners from the liabilities of the company?
A) A C Corporation
B) A General partnership
C) A Sole proprietorship
D) An LLC
D) An LLC
Explanation
The LLC is the only one of these that both passes the income and losses through while providing liability protection. C Corps protect but do not pass through losses. General partnerships and sole proprietorships passes results through, but offer no protection.
Alan and Barbara Collins have three minor children; Dan, Ellen, and Frank. Which of the following UTMA accounts could be opened?
A) Barbara Collins as custodian for Ellen Collins
B) Alan Collins as custodian for Dan and Frank Collins
C) Alan and Barbara Collins as custodians for Ellen Collins
D) Frank Collins as custodian for Dan Collins
A) Barbara Collins as custodian for Ellen Collins
Explanation
In an UTMA account, one adult is custodian for one minor. There is no such thing as joint custodians or joint beneficiaries.
Which of these is not correct?
A) Both a 529 College Savings Plan and an ESA may be used to pay for pre-college education expenses.
B) There is no annual contribution limit for a 529 plan.
C) There are no earnings limits for those contributing to a 529 plan.
D) A 529 plan’s assets must be used by age 30, an ESA does not.
D) A 529 plan’s assets must be used by age 30, an ESA does not.
Explanation
An education savings account (ESA) must be used by age 30, a 529 plan has no such limit. As of January 1, 2018, both plans may be used for pre-college education costs.
Sam Malloy owns a small business and has built a substantial estate both with his business success and his early career as a pro athlete. He would like to begin to move assets out of his estate in a way that will allow him to benefit from the assets, but also allows for an easy transfer to his heirs when he dies. He needs to lower the size of his estate before he passes and hates the idea of a public hearing that is part of probate. Sam should
A) establish a revocable living trust.
B) establish an irrevocable living trust.
C) create a last will and testament.
D) place his assets in a transfer on death account.
B) establish an irrevocable living trust.
Explanation
An irrevocable living trust will accomplish his goals. The assets in a revocable trust remain part of his estate as do the assets in a TOD account and a will. Also, a will must be probated.
Marsha, Jane, Cynthia, Craig, Jim, and Robert are owners of an account JTWROS. If Craig, Jim, and Robert pass away then their interest in the account
A) remains in the account and is now the property of the surviving tenants.
B) is identified and distributed with the decedent’s estate.
C) is divided in half and one half of the account is distributed evenly to the decedent’s beneficiaries.
D) is distributed through the probate process.
A) remains in the account and is now the property of the surviving tenants.
Explanation
In a joint tenants with rights of survivorship (JTWROS), the assets of the decedent simply remain in the account and are property of the survivors. There is no probate process for these assets, but they are still a part of the decedent’s estate for tax purposes.
Your customer, Jim, wants to deposit money into a 529 College Savings plan for his great-niece Penelope. He states four reasons why he likes the 529 plan. Unfortunately, you need to tell him he is incorrect on one point. Which of his following points is not considered a feature of a 529 College Savings Plan?
A) The money grows tax deferred.
B) The growth can be tax free if used for qualified education expenses.
C) If she gets into a good prep school the money can be used for that as well as college.
D) She has to use the money by the time she turns 30, so she will not be able to put it off too long.
D) She has to use the money by the time she turns 30, so she will not be able to put it off too long.
Explanation
529 plans grow tax deferred and the funds may be withdrawn tax-free if used for qualified education expenses. These plans may be used to fund secondary education (pre-college). There is no age limit to when the funds must be used.
