Chapter 10

Question 1

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

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 from a retirement plan?

Answer 3

To offer at least three core investment options and provide enough information to make an informed investment decision.

Question 4

Can an employer offer its own stock as an investment option in employees’ retirement accounts under Section 404(c) of ERISA?

Answer 4

Yes, but it is not required.

Question 5

What are the elements of a trust?

Answer 5

• Settlor’s intention to create the trust
• Subject matter
• Trustee to act as fiduciary
• Beneficiary

Question 6

How is the trust of a decedent distributed by branch?

Answer 6

If each branch of the family is to receive an equal share of an estate.

Question 7

How is the trust of a decedent distributed per capita?

Answer 7

If each beneficiary receives an equal percentage.

Question 8

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

Answer 8

Beneficiaries receive an equal percentage of the trust.

Question 9

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

Answer 9

Beneficiaries receive an equal share.

Question 10

How is income from a revocable trust taxed?

Answer 10

At the grantor’s tax rate, and the grantor pays income taxes.

Question 11

How is income from an irrevocable trust taxed?

Answer 11

At the trust’s tax rate, and the trust pays income taxes.

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 for collecting full Social Security benefits?

Answer 14

40 calendar quarters.

Question 15

What is the full retirement age for Social Security?

Answer 15

Between the ages of 66 and 67 depending on the year of birth.

Question 16

If a person has reached full retirement age and continues to work, how are their Social Security benefits affected?

Answer 16

The benefit amount will not be reduced by the person’s earnings.

Question 17

If a person has NOT yet reached full retirement age and continues to work while collecting benefits, what happens to their benefits?

Answer 17

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

Question 18

What can a divorced person receive if their marriage lasted 10 years or longer?

Answer 18

50% of her ex-spouse’s full retirement amount if her own benefit is less.

Question 19

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

Answer 19

Yes.

Question 20

What happens to the benefits collection if the collecting spouse remarries?

Answer 20

The benefits collection will cease.

Question 21

What is the threshold for a gift tax to apply?

Answer 21

Gifts exceeding $19,000 per person, per year, adjusted for inflation.

Question 22

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

Answer 22

They will reduce the value of the estate.

Question 23

What happens to the cost basis of community property assets when 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, not estate taxes.

Question 25

What are qualified IRA investments?

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 does JTIC ownership allow each owner to do?

Answer 29

It gives an undivided interest in property and permits an individual owner to appoint her own beneficiary(ies) after her death.

Question 30

How are withdrawals from a qualified retirement plan taxed?

Answer 30

100% are taxed as ordinary income.

Question 31

What is created to divide a person's retirement account during a divorce?

Answer 31

A Qualified Domestic Relations Order (QDRO).

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 amount of gains are excluded from taxes upon the sale of a primary residence for a single tax return?

Answer 34

$250,000.

Question 35

What amount of gains are excluded from taxes upon the sale of a primary residence for a joint tax return?

Answer 35

$500,000.

Question 36

What is a SIMPLE 401(k)?

Answer 36

An employer-sponsored retirement plan for businesses with no more than 100 employees.

Question 37

What are the conditions for a SIMPLE 401(k)?

Answer 37

* Employer cannot offer any other retirement plan * Not subject to non-discrimination rules

Question 38

What is a deferred compensation plan used for?

Answer 38

As an incentive to retain employees.

Question 39

In deferred compensation plans, who provides the ultimate credit?

Answer 39

Employers.

Question 40

How much can two individuals in the same household contribute to two IRAs?

Answer 40

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

Question 41

What may create a deductible loss in a Roth IRA?

Answer 41

When all Roth accounts are closed and the amount received is less than the investment, minus distributions.

Question 42

Can an individual purchase real estate in an IRA?

Answer 42

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

Question 43

Why is owning municipal bonds in an IRA most likely unsuitable?

Answer 43

IRAs offer tax advantages that are more beneficial when held in a taxable account.

Question 44

Are beneficiaries taxed on income distributed by a trust?

Answer 44

Yes, but not on the principal that remains in the trust.

Question 45

Who are primary beneficiaries?

Answer 45

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

Question 46

Who are contingent beneficiaries?

Answer 46

They will only be paid after the primary beneficiary dies.

Question 47

What can IRAs be funded only by?

Answer 47

Cash.

Question 48

What investments may not be included in IRAs?

Answer 48

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

Question 49

What does investing in gold provide to a portfolio?

Answer 49

A hedge against inflation.

Question 50

What can distributions from a 529 plan pay for?

Answer 50

Tuition at a foreign university.

Question 51

What is another term for a 529 plan?

Answer 51

Qualified Tuition Plan (QTP).

Question 52

Is a 529 plan more effective in saving for college than a trust?

Answer 52

Yes.

Question 53

Who owns the assets in a 529 plan?

Answer 53

They are not owned by the beneficiary.

Question 54

What amount can individuals withdraw annually from their 529 plans for private school tuition?

Answer 54

$10,000.

Question 55

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

Answer 55

$95,000.

Question 56

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

Answer 56

$2,000.

Question 57

What happens to the recipient’s basis when assets are inherited?

Answer 57

It is the market value at the time of the donor’s death.

Question 58

Under the UGMA, who has custody of the assets?

Answer 58

The custodian, not the minor.

Question 59

How can a person avoid taxation when distributing an estate?

Answer 59

Donate any amount exceeding the estate tax exclusion to charities.

Question 60

What does a person’s attitude toward money influence?

Answer 60

Whether a person is interested in investing or making a personal purchase.

Question 61

What do limited liability companies (LLCs) provide?

Answer 61

Pass through of both income and losses to its owners.

Question 62

What are the owners of an LLC referred to as?

Answer 62

Members.

Question 63

How do LLC members report income?

Answer 63

On Form K-1.

Question 64

What is the formula for personal net worth?

Answer 64

Assets - Liabilities

Question 65

What is the formula for discretionary (Net) Income?

Answer 65

Income - Expenses