Question

1.Which of the following plans provide the greatest immediate tax benefit for the participating employee?

(1) Roth IRA

(2) deductible IRA

(3) non-deductible IRA

(4) 401(k)

a. (1) and (3) only

b. (2) and (4) only

c. (1) (2) and (4) only

d. (2) (3) and (4) only

2.You have met with an elderly client for estate planning. She provided you with a summary of her assets which consist of a home with net equity of $300,000; a life insurance policy with a face amount of $100,000 with a beneficiary designation to her daughter, Sally; an investment account with a balance of $150,000 which is owned in joint tenancy with a right of survivorship with her other daughter, Betty (who has not contributed to the account); and a mountain home with a net equity of $400,000 that is owned as tenants in common with her son, Andy because she gifted him his one-half interest for his last birthday. Your client has a will which leaves all her assets to her three children equally in value (she doesnt care if they share all assets equally). She has advised you that it is her primary goal to leave everything equally to her three children counting any life time gifts she has given to them. Assuming for purposes of this question only that the values of all the above assets will stay constant and she has no concern over the type of assets she leaves any of the children, which of the following would be your recommendation to her to achieve that goal in the easiest manner?

a. Leave everything the way it is now since her will leaves all her assets to her three children equally.

b. Change her beneficiary designation of her life insurance policy to make the proceeds payable to her estate.

c. Change her beneficiary designation of her life insurance policy to make the proceeds payable equally to Betty and her estate and modify her will to add a specific legacy of her interest in the mountain home to Sally.

d. None of the above.

3.Qualified plans require that the purchase of life insurance be governed by what are described as incidental limits. What is the limitation on purchasing life insurance in a profit sharing plan?

a. all amounts in the plan may be used

b. all amounts that have been in the plan for at least two years may be used

c. no amount of plan assets may be used

d. no more than 50% of plan assets may be used

4.Bob had a will drafted which formed a trust for his wife that would be funded with a million dollars at his death. The trust is required to give her all income annually and allows her to designate who among their children will receive the trust principal outright as a distribution free and clear of any trust at her death. Bobs wife possesses a:

a. A special power of appointment

b. A general power of appointment

c. A special power of appointment that is subject to a 5 or 5 general power of appointment

d. A general power of appointment that is an exception to the general rule of estate inclusion under IRC 2041.

5.Which of the following correctly identifies the ESOP/stock bonus plan requirement that an employer must repurchase stock that is not traded on an established market?

a. put option

b. ESOP loan

c. deemed IRA option

d. ERISA 10% requirement

6.In appointing a trustee, which of the following clauses is an inappropriate clause?

a. The appointment clause in which the grantor designates at the time of the creation of the trust, his choices for the trustee, as well as his choices for possible successor trustees in the event the original trustee can no longer serve for any reason.

b. The ability for the heirs to agree by a majority vote to remove a trustee in the event there is agreement that the trustees services are inadequate.

c. A clause that awards a corporate trustee fees in accordance with the fee schedules customarily charged in that geographic location.

d. A clause in an irrevocable trust created to remove appreciating assets from the grantors estate by gifting them into the trust under the shelter of the unified credit applicable exclusion amount, a clause that allows the grantor to remove and replace the trustee.

7.Joe, a retiree, is married (filing jointly) and has a total annual income (including his Social Security benefits) of $50,000. Up to what percentage of Joes Social Security retirement benefits could be subject to income taxation?

a. 50

b. 85

c. 90

d. 100

8.What alternatives are not normally available for governmental (non-public school) employers who want to provide retirement benefits to employees?

(1) qualified pension plan

(2) Section 403(b) plans

(3) qualified profit sharing plan

(4) 401(k) plans

a. (1) and (3) only

b. (2) and (4) only

c. (1) (2) and (3) only

d. (2) (3) and (4) only

9.Prior to his death, Jay set up a $2 million irrevocable trust for his beloved daughter, Rebecca. The trust gave Rebecca a life estate in all income from the trust and when Rebecca died the remainder would go to Jays son, Andy. However, Jay kept the right to have the property go instead to Rebeccas daughter, his granddaughter, if he was alive at the time of Rebeccas death. Jay passed away before Rebecca, which secured Andys right to receive the remainder of the trust. Will any of the trust be included in Jays gross estate?

a. Yes

b. No

10.An employer can sponsor an IRA for employees. Which of the following are types of programs that can be used for this purpose?

(1) Rollover IRA

(2) Deemed IRA

(3) SEP

(4) SIMPLE IRA

a. (1)and (3) only

b. (2) and (4) only

c. (2) and (3) only

d. (3) and (4) only

11.Suzy owns an insurance policy insuring her husbands life. Suzy names her two adult children as the beneficiaries. Suzys husband dies in 2006 and each child collects $250,000. Which of the following is not a correct statement about the tax consequences of this transfer of insurance proceeds to the children?

a. The $250,000 collected by the children is not subject to income taxes.

b. Suzy has made a taxable gift to each of her children of $250,000.

c. Suzys husbands federal gross estate will include the $500,000 face value of the life insurance policy.

d. All of the above statements are correct.

12.Which of the following alternative overall coverage tests must a qualified plan satisfy?

(1) ratio percentage test

(2) average benefit test

(3) usual, reasonable and customary test

(4) ADL minimum qualification trigger test

a. (1) only

b. (1) and (2) only

c. (1) (2) and (3) only

d. (2) (3) and (4) only

13.Suzy inherited her mothers mountain home, which her grandfather had given to her mom. The grandfather had bought the property for $100,000 twenty years ago prior to the gift. At the time of the gift to Suzys mom, Suzys grandfather paid approximately $5,000 in gift taxes, $3,000 of which was attributable to the appreciation on the house at the time the gift was made. At the time of Suzys moms death, the house was worth $500,000. Suzy then sold the home to move to California for net proceeds of $700,000. What is Suzys gain on the sale of the mountain home?

a. $600,000

b. $200,000

c. $597,000

d. None of the above.

14.What percentage of each annuity payment will normally be considered taxable income to a plan participant who has no cost basis in the plan?

a. 25%

b. 50%

c. 75%

d. 100%

15.Joan is married to Perry, a citizen of Great Britain. She passed away unexpectedly in a car crash owning $5 million in assets in 2006. Unaware of the problems associated with marriage to a non-citizen, she did not plan to minimize the estate taxes due when a non-citizen receives a distribution from an estate. Based on these facts, which of these are accurate statements:

a Perry has no choice but to pay estate tax on the $5 million he inherited outright from Joans estate without the benefit of any unified credit.

b Perry can create a QDOT and transfer the $5 million to this QDOT and the assets will avoid estate tax completely although they will be available for distribution of income to him and principal invasions for his health, support and maintenance can be paid to him as well without any estate tax consequence.

c Perry can create a QDOT and he will only pay estate tax on all the distributions to him from the QDOT.

d None of these are accurate statements.

16.Plans that combine the features of a regular profit sharing plan, a savings plan, and Section 401(k) salary reductions may have which of the following features?

(1) employee pre-tax salary reductions

(2) discretionary employer contributions

(3) employee after-tax contributions

(4) guaranteed retirement income benefits

a. (1) and (3) only

b. (1) (2) and (3) only

c. (2) (3) and (4) only

d. (1) (2) (3) and (4)

17.Which of the following is a major concern for allowing withdrawals of deferred compensation amounts during employment?

a. de minimis cash-outs

b. constructive receipt doctrine

c. salary reduction

d. excess benefits

18.Sue decides she will give her farm to her daughter since it is rapidly appreciating as the city moves further and further into what used to be the country. She has her local attorney complete the deed by which she transfers all of her ownership rights to her daughter. She places the deed in her safe deposit box and proceeds with life forgetting all about it. When she dies and her daughter cleans out the safe deposit box, the daughter finds the deed. She takes it to the attorney who advises her that it doesnt matter that she found this deed. He states that the property will still be included in her mothers gross federal estate because there was no completed gift. Which of the following is the best explanation as to why the attorney is correct that there is no completed gift?

a. Because Sue did not have a gratuitous intent when she prepared the deed to transfer it to the daughter.

b. Because Sues daughter never had an opportunity to formally accept the gift.

c. Because Sue never gave up control and dominion of the real estate for the deed was never delivered and recorded to give up ownership rights of the real estate.

d. None of these statements are correct.

19.The IRS has developed two tests for life insurance in a qualified plan designed to determine whether the incidental benefit percentage is being met. What is the maximum allowable percentage of the total cost of the plan allowed for incidental benefits?

a. 10

b. 25

c. 30

d. 50

20.Indicate which of these will not qualify as a marital deduction trust?

a. a trust that provides income to the surviving spouse for his life with a power for the spouse to allocate the trust principal among the decedents children at the surviving spouses death by provision in the surviving spouses will, but passes all of the trust property to the decedents children equally at the surviving spouses death in the event she fails to exercise the power to allocate the trust among the children in her will.

b. a trust that provides all income to the surviving spouse for life with a power for the spouse to allocate the trust principal to her creditors.

c. a trust that provides the following: for all income to be paid to the surviving spouse at least annually; for the spouse to have the power to require the trustee to convert trust property to income-producing; that no one can appoint any trust property away from the spouse; that the spouse has the ability to allocate the trust property among the decedents children; and the executor makes a QTIP election.

d. a trust that provides all income to the surviving spouse for life and requires that any trust assets at the time of the surviving spouses death must be paid to the surviving spouses estate.

21.Sandi wants to convert her traditional IRA to a Roth IRA. The current IRA account value is $100,000. If Sandi follows through, how will the conversion be taxed?

a. $100,000, as capital gains

b. $100,000, as ordinary income

c. $90,000, as capital gains with $10,000 carry-forward

d. $10,000, as ordinary income with $90,000 carry-forward

22.Which of the following statements is an incorrect statement about an advantage of the use of the qualifying-interests: GRATs, GRUTs, PRTs, and QPRTs?

a. a GRAT or GRUT can be used to remove appreciation on the transferred property which accrues after the GRAT or the GRUT is created.

b. a GRAT gives the holder of the term interest the right to an irrevocable right to receive a fixed amount no less than annually.

c. this technique requires the use of a revocable trust.

d. all of the above statements are correct.

23.Which of the following types of credit are normally used with cash balance plans?

(1) years-of-service credit

(2) pay credit

(3) interest credit

(4) supplemental benefit credit

a. (1) only

b. (1) and (2) only

c. (2) and (3) only

d. (3) and (4) only

24.Different types of discounts are often used in determining the ultimate value of a partnership interest. Your client, Bill, has read about these discounts in the Wall Street Journal. He is thinking about forming a family limited partnership to which 40% of Bills ownership in real estate will be contributed with the other 60% ownership of the real estate to be given to a generation-skipping trust he and his wife are creating for their grandchildren, nieces, and nephews. Bill wants to know which discounts he may be able to take advantage of when he starts giving limited partnership interests to his children. Which of the following is a discount that may be relevant to calculating the value to any gifts Bill makes in the future of limited partnership interests?

a. lack of marketability discount

b. minority interest discount

c. fractionalized discount

d. lock-in discount

e. all of the above

f. none of the above

25.Your clients will contains a clause leaving his farm to his sister, Sally, for life and at her death to his nephew, Bill. The type of property interest that Sally receives is called a

a. time-line Estate

b. Remainder

c. Life Estate

d. None of the above.

26.To which of the following pre-retirement distributions will a 10% tax penalty not apply to any amount subject to ordinary income tax?

(1) to purchase a second (vacation) home

(2) upon the employees disability

(3) payments that exceed the amount of medical expenses deductible as an itemized deduction for the year

(4) upon separation from service after age 55

a. and (3) only

b. and (4) only

c. (2) and (3) only

d. (3) and (4) only

27.A creates an ILIT and donates $10,000 for the trustee to acquire a life insurance policy on As life and pay the first years premium. The beneficiaries of the ILIT are As three children, who are all in college and who are given the right to receive principal distributions in the event the trustee deems it appropriate in his sole discretion. The trustee receives As check for $10,000 on May 1st and immediately pays the life insurance premium. No further action is taken by the trustee with regard to the trust during the year. Which is a correct statement?

a if A dies, the death benefits will be included in his estate?

b A correctly files a Form 709, gift tax return by April 15th of the next year reporting the gift of $10,000 and claiming a $10,000 annual exclusion.

c As children were given a reasonable period of time to withdraw the gift so they have received the benefit of a Crummey withdrawal right.

d none of the above is correct.

28.Which of the following are true regarding money purchase plans?

(1) self-employed persons can adopt a money purchase plan

(2) plans in S corporations cannot cover shareholder-employees

(3) money purchase plans can allow after-tax employee contributions

(4) salary reductions allowing pre-tax contributions are not allowed for post-1974 plans

a. (1) and (3) only

b. (1) (3) and (4) only

c. (2) (3) and (4) only

d. (1) (2) (3) and (4)

29.Bob sells investment property in the city for $1.2 million in which he has a basis of $300,000 to Sue. Sue pays Bob $240,000 in cash and gives him a promissory note for $960,000 for the balance owed in the purchase. In the installment payment that is made the next year by Sue, she pays Bob a payment of which $48,000 is principal. How much gain must Bob recognize with respect to this payment?

a. $48,000

b. $0

c. $12,000

d. $36,000

e. $22,500

30.The retroactive amendment provision allows plan sponsors to amend a plan retroactively. What is the primary reason why a plan sponsor would use this provision?

a. to add new employees to the plan

b. to increase plan contribution amounts

c. to name a new plan trustee

d. to eliminate certain disqualifying provisions

31.Sue establishes an irrevocable trust to receive 100 acres of Christmas tree land worth $1 million from which she will retain an 8% annuity for her life and at her death the remaining trust principal will be donated to the American Red Cross. Which of the following most accurately depicts the type of split interest trust that Sue has likely created?

a. charitable remainder annuity trust

b. charitable lead trust

c. wealth replacement trust

d. none of the above

32.Your client owns 1000 shares of BOA stock at a time when it is selling on the stock exchange for $100 per share. She bought the stock when it was at an all-time low for $35 per share. Recently she has examined her life and feels that if Bill Gates and Mr. Buffet can be so generous with their wealth, she should be as well. She consults with you about the advantages of making charitable contributions during life, as well as at death, to a private foundation managed by a successful entrepreneur in her town [the foundation channels money to rescue animals from disasters and war-torn countries]. Which of her assumptions about charitable contributions stated below are correct?

a. if she gives her stock outright to the foundation, she will get a contribution for the fair market value of the stock less the capital gains tax she will have to pay on the appreciation, or $90,250.

b. at her death, her estate will get a charitable contribution for $35,000.

c. she will not owe any gift tax if she contributes the stock.

d. all of the above are correct.

e. all of the above are incorrect.

33.Which one of the following would be considered a disadvantage of cross-tested plans?

a. too many older rank-and-file employees cause plan costs to be lower than with alternatives

b. hiring of new employees may make the plan impractical

c. a plan analysis to determine whether it meets cross-testing requirements must be done at least once every five years

d. such a plan may cause an employer to hire too many older employees

34.Which of the following is the best policy to recommend for the sole purpose of providing a source of liquidity for the estate taxes that may be due at the time of the death of the last spouse?

a term life insurance policy.

b two variable life insurance policies insuring both spouses.

c endowment Insurance

d survivorship Life Insurance

35.Which of the following may allow a defined benefit plan to meet safe harbor nondiscrimination requirements?

(1) a unit credit plan with an annual accrual rate less than 133 1/3% of the rate for any prior year of service

(2) a fractional accrual plan

(3) a fully insured plan

(4) a section 401(k) plan with seven-year cliff vesting

a. (1) and (3) only

b. (1) (2) and (3) only

c. (2) (3) and (4) only

d. (1) (2) (3) and (4)

36.What is the most important purpose for the attestation clause?

a. For the testator to attest that this will is his last will.

b. For the testator to attest that he has disposed of all known assets in this will.

c. For the testators witnesses to attest that they have seen the testator sign the will.

d. None of the above is the correct answer.

37.For a self-employed individual, which of the following is true about the use of life insurance in a Keogh plan?

(1) the entire cost of life insurance is deductible as a plan contribution

(2) the pure life insurance element of an insurance premium is not deductible

(3) the portion of the premium that exceed the pure protection value of the insurance is deductible (using Table2001)

(4) the nondeductible life insurance element essentially becomes additional taxable income

a. (1) and (2) only

b. (2) and (4) only

c. (1) (2) and (3) only

d. (2) (3) and (4) only

38.Which of the following statements is an inaccurate statement regarding the tax implications of the use of the IRC 2503(c) trust

a. gifts to IRC 2503(c) trusts qualify for the annual exclusion.

b. property owned by an IRC 2503(c) trust will be excluded from the donors gross federal taxable estate as long as the donor is not the trustee.

c. income earned by an IRC 2503(c) trust will generally be taxable to the beneficiary to the extent distributions are made to him, with all remaining trust income taxed to the trust.

d. all of the above statements are correct.

39.In order for a severance pay plan to not be treated as an ERISA pension plan, how many months does the employer generally have to complete employee payments?

a. 6

b. 12

c. 24

d. 36

40.In addition to public schools and colleges, which of the following types of organizations may be allowed to establish a tax deferred annuity plan?

(1) private colleges

(2) hospitals

(3) churches

(4) political lobbying organizations

a. (1) only

b. (1) and (2) only

c. (1), (2), and (3) only

d. (2), (3), and (4) only

41.Papa makes a gift in trust of $1 million, arranging for the trust to pay income to his son for his life with the remaining property at his sons death passing equally to the sons children. The trustee has the right to invade the principal during the sons life for the health, support, and maintenance of any of sons children. The trustee decides to invade the principal to write checks to the colleges attended by each of the sons children for their tuition. Which type of generation-skipping transfer has occurred when the trustee makes the distribution?

a. No GST has occurred.

b. A direct skip has occurred.

c. A taxable termination has occurred.

d. A taxable distribution has occurred.

42.Which of the following is true about required employer contributions to a SEP?

a. contributions must be recurring and substantial

b. no contribution needs to be made in any given year

c. a minimum of 2% must be contributed into all eligible employee accounts

d. plan contributions can discriminate in favor of highly compensated employees

43.Suzy dies in 2006 with a business she built from the ground up by herself and which she owns 100% at her death. The value of the business is $2.5 million according to an independent appraisal and the total value of her adjusted gross estate is $10 million with the other assets constituting real estate. Suzys taxable estate is $ 9 million after reduction for a charitable bequest she made to Habitat for Humanity. Suzy has some liquidity problems in her estate and her executor wants to automatically qualify for the IRC 6166 installment method of paying federal estate taxes. Will Suzys estate automatically qualify to use this installment method for paying federal estate taxes?

a Yes, because she exceeds the threshold 35% requirement which is $2.1 million in these facts.

b Yes because even though she does not meet the 35% requirement which is $3.15 million in these facts, she has liquidity problems in her estate and this will automatically qualify her for this deferral.

c No, because she does not meet the required threshold.

d None of these answers are correct.

44.Which of the following are true of contributions to a SIMPLE IRA?

(1) employee salary reduction contributions are subject to FICA

(2) eligible employees may make catch-up contributions of $5,000 in 2011

(3) direct employer contributions are not subject to FICA

(4) employers are required to make a contribution equal to 5% of compensation for all eligible employees

a. (1) and (3) only

b. (1) (2) and (3) only

c. (2) (3) and (4) only

d. (1) (2) (3) and (4)

45.Assume for the purposes herein, that Bob had a will and Bill has been appointed executor, which of the following is NOT required in a notice to creditors:

a. Name of decedent

b. Bills name as the appointed executor

c. Location where claims should be presented.

d. Date by which claims must be presented or be barred under local statutes.

e. All of the above are required in the notice.

46.In general terms, a number of transactions are prohibited between the plan and certain people, including: a fiduciary, a person providing service to the plan, an employer, owner, or employee organization. Which one of the following correctly identifies the term used to describe these people?

a. employee-in-general

b. owner of a 5% or more interest

c. party-in-interest

d. a Department of Labor administrator

47.Bob died leaving a will that passes all his assets to his wife outright, but with a provision that if she chooses to exercise a qualified disclaimer over any of his assets, all properly disclaimed assets will pass to a trust that holds the assets during his wifes life, providing her with income for life and a power to invade the principal as she needs for her health, support, and maintenance. At the time of Bobs death, the unified credit applicable exclusion amount equals $1 million since he died in 2013. Bobs estate is worth $750,000 million. The wife has an estate of approximately $500,000 she inherited from her parents.. The wife wants to control as much as possible of both of their assets. Yet, she also wants to disclaim enough assets to avoid astacking of assets in her estate which could produce a higher estate tax at her death. Her planners advise her that her projected income stream from the combined assets will be sufficient to support her lifestyle however there will not be much growth in the combined estates remaining value. What is the minimum amount of Bobs estate that his Wife should disclaim to avoid a potential stacking of assets in her estate?

a. $500,000

b. $250,000

c. $750,000

d. $1.25 million

48.It may be advantageous for a participant to keep retirement assets in a qualified plan, rather than rolling assets over to an IRA, for all but which one of the following reasons?

a. no spousal consent requirement for IRA

b. investing in life insurance

c. PBGC insurance may be available

d. plan loans may be available

49.Which of the following is NOT sufficient to revoke an entire prior will?

a. The valid execution of a subsequent will which states that all prior wills are revoked.

b. The valid execution of a codicil which expressly revokes all prior wills.

c. The intentional defacing of a prior will.

d. The execution of a codicil which changes one article from your first will leaving your beach house to your daughter instead of your son.

50.Which of the following are considered fundamental steps in the retirement planning process?

(1) assessing client retirement financial needs

(2) determining how much of the need will be met

(3) establish a plan for any cash flow shortfall

(4) sell investments based on projected income needs

a. (1) only

b. (1) and (2) only

c. (1) (2) and (3) only

d. (2) (3) and (4) only

FINC 355: RETIREMENT AND ESTATE PLANNING FINAL EXAMINATION_03 DIRECTIONS: Here is the Final Examination Answer Sheet that you should submit to your Final Examination Assignment Folder. Please submit your Final Examination in MS Word format with the following file name: LastNameFirstInitial_FinalExamAnswerSheet.docx. For example, if you name is John Smith, the file name of your Answer Sheet should be SmithJ_FinalExamAnswerSheet.docx. If you have any questions or comments, please do not hesitate to contact me. NAME: _____________________________________ Question Number 1 Question Which of the following plans provide the greatest immediate tax benefit for the participating employee? (1) Roth IRA (2) deductible IRA (3) non-deductible IRA (4) 401(k) a. b. c. d. 2 (1) and (3) only (2) and (4) only (1) (2) and (4) only (2) (3) and (4) only You have met with an elderly client for estate planning. She provided you with a summary of her assets which consist of a home with net equity of $300,000; a life insurance policy with a face amount of $100,000 with a beneficiary designation to her daughter, Sally; an investment account with a balance of $150,000 which is owned in joint tenancy with a right of survivorship with her other daughter, Betty (who has not contributed to the account); and a mountain home with a net equity of $400,000 that is owned as tenants in common with her son, Andy because she gifted him his one-half interest for his last birthday. Your client has a will which leaves all her assets to her three children equally in value (she doesn't care if they share all assets equally). She has advised you that it is her primary goal to leave everything equally to her three children counting any life time gifts she has given to them. Assuming for purposes of this question only that the values of all the above assets will stay constant and she has no concern over the type of assets she leaves any of the children, which of the following would be your recommendation to her to achieve that goal in the easiest manner? a. Leave everything the way it is now since her will leaves all her assets to her three children equally. b. Change her beneficiary designation of her life insurance policy to make the proceeds payable to her estate. 1 FINC 355: RETIREMENT AND ESTATE PLANNING FINAL EXAMINATION_03 c. Change her beneficiary designation of her life insurance policy to make the proceeds payable equally to Betty and her estate and modify her will to add a specific legacy of her interest in the mountain home to Sally. None of the above. d. 3 Qualified plans require that the purchase of life insurance be governed by what are described as "incidental limits". What is the limitation on purchasing life insurance in a profit sharing plan? a. b. c. d. all amounts in the plan may be used all amounts that have been in the plan for at least two years may be used no amount of plan assets may be used no more than 50% of plan assets may be used 4 Bob had a will drafted which formed a trust for his wife that would be funded with a million dollars at his death. The trust is required to give her all income annually and allows her to designate who among their children will receive the trust principal outright as a distribution free and clear of any trust at her death. Bob's wife possesses a: a. A special power of appointment b. A general power of appointment c. A special power of appointment that is subject to a "5 or 5" general power of appointment d. A general power of appointment that is an exception to the general rule of estate inclusion under IRC 2041. 5 Which of the following correctly identifies the ESOP/stock bonus plan requirement that an employer must repurchase stock that is not traded on an established market? a. b. c. d. 6 put option ESOP loan deemed IRA option ERISA 10% requirement In appointing a trustee, which of the following clauses is an inappropriate clause? a. The appointment clause in which the grantor designates at the time of the creation of the trust, his choices for the trustee, as well as his choices for possible successor trustees in the event the original trustee can no longer serve for any reason. b. The ability for the heirs to agree by a majority vote to remove a trustee in the event there is agreement that the trustee's services are inadequate. c. A clause that awards a corporate trustee fees in accordance with the fee schedules customarily charged in that geographic location. d. A clause in an irrevocable trust created to remove appreciating assets from the grantor's estate by gifting them into the trust under the shelter of the unified credit applicable exclusion amount, a clause that allows the grantor to remove and replace the trustee. 2 FINC 355: RETIREMENT AND ESTATE PLANNING FINAL EXAMINATION_03 7 Joe, a retiree, is married (filing jointly) and has a total annual income (including his Social Security benefits) of $50,000. Up to what percentage of Joe's Social Security retirement benefits could be subject to income taxation? a. b. c. d. 8 50 85 90 100 What alternatives are not normally available for governmental (non-public school) employers who want to provide retirement benefits to employees? (1) qualified pension plan (2) Section 403(b) plans (3) qualified profit sharing plan (4) 401(k) plans a. b. c. d. (1) and (3) only (2) and (4) only (1) (2) and (3) only (2) (3) and (4) only 9 Prior to his death, Jay set up a $2 million irrevocable trust for his beloved daughter, Rebecca. The trust gave Rebecca a life estate in all income from the trust and when Rebecca died the remainder would go to Jay's son, Andy. However, Jay kept the right to have the property go instead to Rebecca's daughter, his granddaughter, if he was alive at the time of Rebecca's death. Jay passed away before Rebecca, which secured Andy's right to receive the remainder of the trust. Will any of the trust be included in Jay's gross estate? a. Yes b. No 10 An employer can sponsor an IRA for employees. Which of the following are types of programs that can be used for this purpose? (1) Rollover IRA (2) Deemed IRA (3) SEP (4) SIMPLE IRA a. b. c. d. (1)and (3) only (2) and (4) only (2) and (3) only (3) and (4) only 3 FINC 355: RETIREMENT AND ESTATE PLANNING FINAL EXAMINATION_03 11 Suzy owns an insurance policy insuring her husband's life. Suzy names her two adult children as the beneficiaries. Suzy's husband dies in 2006 and each child collects $250,000. Which of the following is not a correct statement about the tax consequences of this transfer of insurance proceeds to the children? a. The $250,000 collected by the children is not subject to income taxes. b. Suzy has made a taxable gift to each of her children of $250,000. c. Suzy's husband's federal gross estate will include the $500,000 face value of the life insurance policy. d. All of the above statements are correct. 12 Which of the following alternative overall coverage tests must a qualified plan satisfy? (1) ratio percentage test (2) average benefit test (3) usual, reasonable and customary test (4) ADL minimum qualification trigger test a. (1) only b. (1) and (2) only c. (1) (2) and (3) only d. (2) (3) and (4) only 13 Suzy inherited her mother's mountain home, which her grandfather had given to her mom. The grandfather had bought the property for $100,000 twenty years ago prior to the gift. At the time of the gift to Suzy's mom, Suzy's grandfather paid approximately $5,000 in gift taxes, $3,000 of which was attributable to the appreciation on the house at the time the gift was made. At the time of Suzy's mom's death, the house was worth $500,000. Suzy then sold the home to move to California for net proceeds of $700,000. What is Suzy's gain on the sale of the mountain home? a. $600,000 b. $200,000 c. $597,000 d. None of the above. 14 What percentage of each annuity payment will normally be considered taxable income to a plan participant who has no cost basis in the plan? a. b. c. d. 15 25% 50% 75% 100% Joan is married to Perry, a citizen of Great Britain. She passed away unexpectedly in a car crash owning $5 million in assets in 2006. Unaware of the problems associated with marriage to a non-citizen, she did not plan to minimize the estate taxes due when a noncitizen receives a distribution from an estate. Based on these facts, which of these are accurate statements: a Perry has no choice but to pay estate tax on the $5 million he inherited outright from Joan's estate without the benefit of any unified credit. 4 FINC 355: RETIREMENT AND ESTATE PLANNING FINAL EXAMINATION_03 b c d 16 Perry can create a QDOT and transfer the $5 million to this QDOT and the assets will avoid estate tax completely although they will be available for distribution of income to him and principal invasions for his health, support and maintenance can be paid to him as well without any estate tax consequence. Perry can create a QDOT and he will only pay estate tax on all the distributions to him from the QDOT. None of these are accurate statements. Plans that combine the features of a regular profit sharing plan, a savings plan, and Section 401(k) salary reductions may have which of the following features? (1) employee pre-tax salary reductions (2) discretionary employer contributions (3) employee after-tax contributions (4) guaranteed retirement income benefits a. b. c. d. 17 Which of the following is a major concern for allowing withdrawals of deferred compensation amounts during employment? a. b. c. d. 18 (1) and (3) only (1) (2) and (3) only (2) (3) and (4) only (1) (2) (3) and (4) de minimis cash-outs constructive receipt doctrine salary reduction excess benefits Sue decides she will give her farm to her daughter since it is rapidly appreciating as the city moves further and further into what used to be the country. She has her local attorney complete the deed by which she transfers all of her ownership rights to her daughter. She places the deed in her safe deposit box and proceeds with "life" forgetting all about it. When she dies and her daughter cleans out the safe deposit box, the daughter finds the deed. She takes it to the attorney who advises her that it doesn't matter that she found this deed. He states that the property will still be included in her mother's gross federal estate because there was no completed gift. Which of the following is the best explanation as to why the attorney is correct that there is no completed gift? a. Because Sue did not have a gratuitous intent when she prepared the deed to transfer it to the daughter. b. Because Sue's daughter never had an opportunity to formally accept the gift. c. Because Sue never gave up control and dominion of the real estate for the deed was never delivered and recorded to give up ownership rights of the real estate. d. None of these statements are correct. 5 FINC 355: RETIREMENT AND ESTATE PLANNING FINAL EXAMINATION_03 19 The IRS has developed two tests for life insurance in a qualified plan designed to determine whether the incidental benefit percentage is being met. What is the maximum allowable percentage of the total cost of the plan allowed for incidental benefits? a. b. c. d. 10 25 30 50 20 Indicate which of these will not qualify as a marital deduction trust? a. a trust that provides income to the surviving spouse for his life with a power for the spouse to allocate the trust principal among the decedent's children at the surviving spouse's death by provision in the surviving spouse's will, but passes all of the trust property to the decedent's children equally at the surviving spouse's death in the event she fails to exercise the power to allocate the trust among the children in her will. b. a trust that provides all income to the surviving spouse for life with a power for the spouse to allocate the trust principal to her creditors. c. a trust that provides the following: for all income to be paid to the surviving spouse at least annually; for the spouse to have the power to require the trustee to convert trust property to income-producing; that no one can appoint any trust property away from the spouse; that the spouse has the ability to allocate the trust property among the decedent's children; and the executor makes a QTIP election. d. a trust that provides all income to the surviving spouse for life and requires that any trust assets at the time of the surviving spouses' death must be paid to the surviving spouse's estate. 21 Sandi wants to convert her traditional IRA to a Roth IRA. The current IRA account value is $100,000. If Sandi follows through, how will the conversion be taxed? a. b. c. d. 22 $100,000, as capital gains $100,000, as ordinary income $90,000, as capital gains with $10,000 carry-forward $10,000, as ordinary income with $90,000 carry-forward Which of the following statements is an incorrect statement about an advantage of the use of the "qualifying-interests:" GRATs, GRUTs, PRTs, and QPRTs? a. a GRAT or GRUT can be used to remove appreciation on the transferred property which accrues after the GRAT or the GRUT is created. b. a GRAT gives the holder of the term interest the right to an irrevocable right to receive a fixed amount no less than annually. c. this technique requires the use of a revocable trust. d. all of the above statements are correct. 6 FINC 355: RETIREMENT AND ESTATE PLANNING FINAL EXAMINATION_03 23 Which of the following types of credit are normally used with cash balance plans? (1) years-of-service credit (2) pay credit (3) interest credit (4) supplemental benefit credit a. b. c. d. (1) only (1) and (2) only (2) and (3) only (3) and (4) only 24 Different types of discounts are often used in determining the ultimate value of a partnership interest. Your client, Bill, has read about these discounts in the Wall Street Journal. He is thinking about forming a family limited partnership to which 40% of Bill's ownership in real estate will be contributed with the other 60% ownership of the real estate to be given to a generation-skipping trust he and his wife are creating for their grandchildren, nieces, and nephews. Bill wants to know which discounts he may be able to take advantage of when he starts giving limited partnership interests to his children. Which of the following is a discount that may be relevant to calculating the value to any gifts Bill makes in the future of limited partnership interests? a. lack of marketability discount b. minority interest discount c. fractionalized discount d. lock-in discount e. all of the above f. none of the above 25 Your client's will contains a clause leaving his farm to his sister, Sally, for life and at her death to his nephew, Bill. The type of property interest that Sally receives is called a a. "time-line" Estate b. Remainder c. Life Estate d. None of the above. 26 To which of the following pre-retirement distributions will a 10% tax penalty not apply to any amount subject to ordinary income tax? (1) to purchase a second (vacation) home (2) upon the employee's disability (3) payments that exceed the amount of medical expenses deductible as an itemized deduction for the year (4) upon separation from service after age 55 a. b. c. d. and (3) only and (4) only (2) and (3) only (3) and (4) only 7 FINC 355: RETIREMENT AND ESTATE PLANNING FINAL EXAMINATION_03 27 A creates an ILIT and donates $10,000 for the trustee to acquire a life insurance policy on A's life and pay the first year's premium. The beneficiaries of the ILIT are A's three children, who are all in college and who are given the right to receive principal distributions in the event the trustee deems it appropriate in his sole discretion. The trustee receives A's check for $10,000 on May 1st and immediately pays the life insurance premium. No further action is taken by the trustee with regard to the trust during the year. Which is a correct statement? a if A dies, the death benefits will be included in his estate? b A correctly files a Form 709, gift tax return by April 15th of the next year reporting the gift of $10,000 and claiming a $10,000 annual exclusion. c A's children were given a reasonable period of time to withdraw the gift so they have received the benefit of a Crummey withdrawal right. d none of the above is correct. 28 Which of the following are true regarding money purchase plans? (1) self-employed persons can adopt a money purchase plan (2) plans in S corporations cannot cover shareholder-employees (3) money purchase plans can allow after-tax employee contributions (4) salary reductions allowing pre-tax contributions are not allowed for post1974 plans a. b. c. d. (1) and (3) only (1) (3) and (4) only (2) (3) and (4) only (1) (2) (3) and (4) 29 Bob sells investment property in the city for $1.2 million in which he has a basis of $300,000 to Sue. Sue pays Bob $240,000 in cash and gives him a promissory note for $960,000 for the balance owed in the purchase. In the installment payment that is made the next year by Sue, she pays Bob a payment of which $48,000 is principal. How much gain must Bob recognize with respect to this payment? a. $48,000 b. $0 c. $12,000 d. $36,000 e. $22,500 30 The retroactive amendment provision allows plan sponsors to amend a plan retroactively. What is the primary reason why a plan sponsor would use this provision? a. b. c. d. to add new employees to the plan to increase plan contribution amounts to name a new plan trustee to eliminate certain disqualifying provisions 8 FINC 355: RETIREMENT AND ESTATE PLANNING FINAL EXAMINATION_03 31 Sue establishes an irrevocable trust to receive 100 acres of Christmas tree land worth $1 million from which she will retain an 8% annuity for her life and at her death the remaining trust principal will be donated to the American Red Cross. Which of the following most accurately depicts the type of split interest trust that Sue has likely created? a. charitable remainder annuity trust b. charitable lead trust c. wealth replacement trust d. none of the above 32 Your client owns 1000 shares of BOA stock at a time when it is selling on the stock exchange for $100 per share. She bought the stock when it was at an all-time low for $35 per share. Recently she has examined her life and feels that if Bill Gates and Mr. Buffet can be so generous with their wealth, she should be as well. She consults with you about the advantages of making charitable contributions during life, as well as at death, to a private foundation managed by a successful entrepreneur in her town [the foundation channels money to rescue animals from disasters and war-torn countries]. Which of her assumptions about charitable contributions stated below are correct? a. if she gives her stock outright to the foundation, she will get a contribution for the fair market value of the stock less the capital gains tax she will have to pay on the appreciation, or $90,250. b. at her death, her estate will get a charitable contribution for $35,000. c. she will not owe any gift tax if she contributes the stock. d. all of the above are correct. e. all of the above are incorrect. 33 Which one of the following would be considered a disadvantage of cross-tested plans? a. too many older rank-and-file employees cause plan costs to be lower than with alternatives b. hiring of new employees may make the plan impractical c. a plan analysis to determine whether it meets cross-testing requirements must be done at least once every five years d. such a plan may cause an employer to hire too many older employees 34 Which of the following is the best policy to recommend for the sole purpose of providing a source of liquidity for the estate taxes that may be due at the time of the death of the last spouse? a term life insurance policy. b two variable life insurance policies insuring both spouses. c endowment Insurance d survivorship Life Insurance 35 Which of the following may allow a defined benefit plan to meet safe harbor nondiscrimination requirements? (1) a unit credit plan with an annual accrual rate less than 133 1/3% of the rate for any prior year of service (2) a fractional accrual plan 9 FINC 355: RETIREMENT AND ESTATE PLANNING FINAL EXAMINATION_03 (3) a fully insured plan (4) a section 401(k) plan with seven-year cliff vesting a. (1) and (3) only b. (1) (2) and (3) only c. (2) (3) and (4) only d. (1) (2) (3) and (4) 36 What is the most important purpose for the attestation clause? a. For the testator to attest that this will is his last will. b. For the testator to attest that he has disposed of all known assets in this will. c. For the testator's witnesses to attest that they have seen the testator sign the will. d. None of the above is the correct answer. 37 For a self-employed individual, which of the following is true about the use of life insurance in a Keogh plan? (1) the entire cost of life insurance is deductible as a plan contribution (2) the pure life insurance element of an insurance premium is not deductible (3) the portion of the premium that exceed the pure protection value of the insurance is deductible (using Table2001) (4) the nondeductible life insurance element essentially becomes additional taxable income a. b. c. d. (1) and (2) only (2) and (4) only (1) (2) and (3) only (2) (3) and (4) only 38 Which of the following statements is an inaccurate statement regarding the tax implications of the use of the IRC 2503(c) trust a. gifts to IRC 2503(c) trusts qualify for the annual exclusion. b. property owned by an IRC 2503(c) trust will be excluded from the donor's gross federal taxable estate as long as the donor is not the trustee. c. income earned by an IRC 2503(c) trust will generally be taxable to the beneficiary to the extent distributions are made to him, with all remaining trust income taxed to the trust. d. all of the above statements are correct. 39 In order for a severance pay plan to not be treated as an ERISA pension plan, how many months does the employer generally have to complete employee payments? a. b. c. d. 6 12 24 36 10 FINC 355: RETIREMENT AND ESTATE PLANNING FINAL EXAMINATION_03 40 In addition to public schools and colleges, which of the following types of organizations may be allowed to establish a tax deferred annuity plan? (1) private colleges (2) hospitals (3) churches (4) political lobbying organizations a. b. c. d. (1) only (1) and (2) only (1), (2), and (3) only (2), (3), and (4) only 41 Papa makes a gift in trust of $1 million, arranging for the trust to pay income to his son for his life with the remaining property at his son's death passing equally to the son's children. The trustee has the right to invade the principal during the son's life for the health, support, and maintenance of any of son's children. The trustee decides to invade the principal to write checks to the colleges attended by each of the son's children for their tuition. Which type of generation-skipping transfer has occurred when the trustee makes the distribution? a. No GST has occurred. b. A direct skip has occurred. c. A taxable termination has occurred. d. A taxable distribution has occurred. 42 Which of the following is true about required employer contributions to a SEP? a. b. c. d. 43 contributions must be recurring and substantial no contribution needs to be made in any given year a minimum of 2% must be contributed into all eligible employee accounts plan contributions can discriminate in favor of highly compensated employees Suzy dies in 2006 with a business she built from the ground up by herself and which she owns 100% at her death. The value of the business is $2.5 million according to an independent appraisal and the total value of her adjusted gross estate is $10 million with the other assets constituting real estate. Suzy's taxable estate is $ 9 million after reduction for a charitable bequest she made to Habitat for Humanity. Suzy has some liquidity problems in her estate and her executor wants to automatically qualify for the IRC 6166 installment method of paying federal estate taxes. Will Suzy's estate automatically qualify to use this installment method for paying federal estate taxes? a Yes, because she exceeds the threshold 35% requirement which is $2.1 million in these facts. b Yes because even though she does not meet the 35% requirement which is $3.15 million in these facts, she has liquidity problems in her estate and this will automatically qualify her for this deferral. c No, because she does not meet the required threshold. d None of these answers are correct. 11 FINC 355: RETIREMENT AND ESTATE PLANNING FINAL EXAMINATION_03 44 Which of the following are true of contributions to a SIMPLE IRA? (1) employee salary reduction contributions are subject to FICA (2) eligible employees may make catch-up contributions of $5,000 in 2011 (3) direct employer contributions are not subject to FICA (4) employers are required to make a contribution equal to 5% of compensation for all eligible employees a. b. c. d. (1) and (3) only (1) (2) and (3) only (2) (3) and (4) only (1) (2) (3) and (4) 45 Assume for the purposes herein, that Bob had a will and Bill has been appointed executor, which of the following is NOT required in a notice to creditors: a. Name of decedent b. Bill's name as the appointed executor c. Location where claims should be presented. d. Date by which claims must be presented or be barred under local statutes. e. All of the above are required in the notice. 46 In general terms, a number of transactions are prohibited between the plan and certain people, including: a fiduciary, a person providing service to the plan, an employer, owner, or employee organization. Which one of the following correctly identifies the term used to describe these people? a. b. c. d. 47 employee-in-general owner of a 5% or more interest party-in-interest a Department of Labor administrator Bob died leaving a will that passes all his assets to his wife outright, but with a provision that if she chooses to exercise a qualified disclaimer over any of his assets, all properly disclaimed assets will pass to a trust that holds the assets during his wife's life, providing her with income for life and a power to invade the principal as she needs for her health, support, and maintenance. At the time of Bob's death, the unified credit applicable exclusion amount equals $1 million since he died in 2013. Bob's estate is worth $750,000 million. The wife has an estate of approximately $500,000 she inherited from her parents.. The wife wants to control as much as possible of both of their assets. Yet, she also wants to disclaim enough assets to avoid a"stacking" of assets in her estate which could produce a higher estate tax at her death. Her planners advise her that her projected income stream from the combined assets will be sufficient to support her lifestyle however there will not be much growth in the combined estates remaining value. What is the minimum amount of Bob's estate that his Wife should disclaim to avoid a potential stacking of assets in her estate? a. $500,000 b. $250,000 c. $750,000 d. $1.25 million 12 FINC 355: RETIREMENT AND ESTATE PLANNING FINAL EXAMINATION_03 48 It may be advantageous for a participant to keep retirement assets in a qualified plan, rather than rolling assets over to an IRA, for all but which one of the following reasons? a. b. c. d. no spousal consent requirement for IRA investing in life insurance PBGC insurance may be available plan loans may be available 49 Which of the following is NOT sufficient to revoke an entire prior will? a. The valid execution of a subsequent will which states that all prior wills are revoked. b. The valid execution of a codicil which expressly revokes all prior wills. c. The intentional defacing of a prior will. d. The execution of a codicil which changes one article from your first will leaving your beach house to your daughter instead of your son. 50 Which of the following are considered fundamental steps in the retirement planning process? (1) assessing client retirement financial needs (2) determining how much of the need will be met (3) establish a plan for any cash flow shortfall (4) sell investments based on projected income needs a. (1) only b. (1) and (2) only c. (1) (2) and (3) only d. (2) (3) and (4) only 13