Final exam
FINC 355: RETIREMENT AND ESTATE PLANNING
TRUE OR FALSE
1. Traditional
401(k) plans can be funded entirely through salary reductions by employees,
enabling employers to bear no additional cost for employee compensation.
2. A cash
balance plan establishes a separate fund for each plan participant.
3. Defined
benefit plans provide more benefit security than do age-weighted or
cross-tested plans.
4. All group
insurance programs offered to employees must comply with ERISA reporting and
disclosure requirements.
5. A
cross-tested plan uses a fixed age-weighted formula. The plan is designed to maximize benefits for
a firm’s highly compensated employees while providing whatever is necessary for
remaining employees to satisfy nondiscrimination regulations.
6. An
employee cannot be covered under both a defined benefit and a defined
contribution plan.
7. A
self-employed person with less than 10 employees can use a money purchase plan
to fund his or her own retirement.
8. Unlike a
traditional IRA, a Roth IRA contribution is not restricted by active
participation in an employer’s retirement plan.
9. An early
distribution penalty can be assessed on Roth IRA withdrawals.
10. Account
holders with more than one Roth IRA can treat them as separate accounts when
calculating tax consequences of distributions from any of them.
11. A trust
cannot provide for creditor protectioninsurance
12. Including
a spendthrift clause is recommended for children with money management or
substance abuse problems.
?
MULTIPLE CHOICE
13. All of the
following are true regarding tax implicatons of cash balance plans, except
a. employer
contributions to the plan are deductible when made
b. taxation
of the employee on employer contributions is deferred
c. the plan
is not subject to minimum funding rules of the Internal Revenue Code
d. certain
employers who adopt a cash balance plan may be eligible for a business tax
credit up to $500
e. employees
may make voluntary contributions to a “deemed IRA” established under the plan
14. Which of
the following is (are) true regarding elective deferrals in a Section
401(k)?
a. elective
deferrals are not subject to Social Security and Federal Unemployment payroll
taxes
b. elective
deferrals are always made on an after-tax basis
c. if the
company elects to have a safe harbor plan, elective deferrals must meet the
actual deferral percentage test
d. account
funds can be withdrawn without a premature distribution penalty if the employee
becomes disabled or dies
e. since
employees elect the amount of funds to defer, nondiscrimination tests do not
apply to elective deferrals
15. Which of
the following types of employer plans are exempt from most or all ERISA
provisions?
a. plans of
state, federal, or local governments or governmental organizations
b. plans of
churches, synagogues, or related organizations
c. plans
maintained solely to comply with workers’ compensation, unemployment
compensation, or disability insurance laws
d. all of
the above
e. none of
the above because no employer plans are exempt from ERISA provisions
16. Irrevocable
Life Insurance Trusts (ILIT) are primarily designed to ensure that the death
benefit is excludable from the insured’s federal gross estate.
a. true
b. false
?
17. All of the following approaches are commonly used to
increase the security of benefits for an employee under a nonqualified deferred
compensation plan, except
a. employer’s
general assets
b. reserve
account maintained by employer
c. third-party
guarantees
d. corporate-owned
life insurance
e. employer
reserve account with employee investment direction
18. Paul owns the following property:
a. Boat (fee
simple)
b. Condominium
on the beach (tenancy in common with his brother and sister)
c. House
and two cars with his wife, Karen (tenancy by the entirety)
d. Checking
account with his son, William (POD)
e. Karate
business (JTWROS with his partner, Mike)
Which item(s) will go through probate, if any? There may be multiple answers. List each LETTER you believe is correct.
19. Two brothers have consulted you about the purchase of a
lakefront cottage. The brothers plan to use the cottage on a seasonal basis.
They are unsure of how they should title the property. Which of the following
items of information do you need to obtain before making a recommendation?
1. The
purchase price of the cottage
2. How much
each brother plans to contribute toward the purchase of the cottage
3. Whether
the brothers want their interest in the cottage to pass under their wills when
they die
A. 1 and 2
B. 3 only
C. 1, 2, and
3
D. 2 and 3
?
20. Are all of the items listed below reasons why having a
will is important? (Either all are True or any single item is False)
a. The state
directs how the decedent’s property is transferred
b. A
spouse’s share of the decedent’s estate may be equal to a child’s
c. Children
may be treated equally although not equitably
d. May
require the appointment of an administrator who will usually have to furnish a
surety bond, thereby raising the costs of administration
e. The
administrator of the estate is determined by the court
21. Annual
additions to an age-weighted plan include
a. employer
contributions to participants’ accounts
b. employee
contributions to own account
c. forfeitures
from other accounts
d. only a
and b
e. all of
the above
22. Which plan
has benefit levels that are guaranteed by both the employer and the Pension
Benefit Guaranty Corporation (PBGC)?
a. money
purchase plan
b. target
benefit plan
c. cross
tested plan
d. defined
benefit plan
e. tax-deferred
annuity
23. Advantages
of defined benefit plans include all of the following, except
a. defined
benefit plans are easy to design and easy to explain to employees
b. employees
obtain a tax-deferred retirement savings medium
c. retirement
benefits at adequate levels can be provided for all employees regardless of age
d. benefit
levels are guaranteed both by the employer and, for some plans, by the PBGC
e. for an
older highly compensated employee, a defined benefit plan will allow the
maximum amount of tax-deferred retirement saving
?
24. Which of
the following is (are) true regarding the tax implications of having a money
purchase plan?
a. employer
contributions and plan earnings are tax-deferred for the employee
b. employers
beginning a new plan are eligible for a $2,500 business tax credit in the first
year to help with startup costs
c. the
employer tax deduction is limited to 25% of total payroll of the employees
covered under the plan
d. only a
and b
e. only a
and c
25. All of the
following are true regarding money purchase plans, except
a. most
money purchase plan benefit formulas use a factor related to the employee’s
service that favors owners and key employees
b. nondiscrimination
regulations provide a safe harbor for money purchase plans
c. a plan
benefit formula can be integrated with Social Security
d. forfeitures,
unvested amounts left behind by employees in their plans, can be used to reduce
future employer contributions
e. money
purchase plan funds are generally invested in a pooled account managed by the
employer or a fund manager selected by the employer
26. A tax-free
rollover of a Roth IRA can be made to
a. another
Roth IRA
b. a
traditional IRA
c. a
tax-deferred annuity
d. a and b
6. a and c
27. Ways that
a Roth IRA differs from a traditional IRA include:
a. initial
investment and earnings can be withdrawn tax-free
b. Roth IRA
contributions can be made past age 59½
c. Roth
IRAs are never subject to minimum distribution rules
d. a and b
e. a and c
?
28. Directors
of Xenon Corporation are considering changing from a traditional defined
benefit plan to another type of plan.
They have asked you to explain the advantages and disadvantages of such
a change. You explain that if Xenon Corp.
converts to
a. a defined
contribution plan, most or all plan assets would be credited immediately to
vested employees
b. a cash
balance plan, Xenon Corp. must increase the level of contribution to older
employees
c. a cash
balance plan, Xenon Corp. would no longer need actuarial services
d. only a
and b
e. only a
and c
29. Maxton
Manufacturing, Inc., uses prior year testing to monitor discrimination in its
Section 401(k) plan. Last year, the
actual deferral percentage (ADP) for all nonhighly compensated employees at
Maxton was 4%. This year, the ADP for
highly compensated employees at Maxton can be as high as
a. 2%
b. 4%
c. 5%
d. 6%
e. 8%
30. The
retirement plan for Bethel Shalom synagogue must adhere to ERISA reporting and
disclosure rules.
a. true
b. false
?
31. Harper
Engineering, Inc., offers several benefits to employees. Which of its benefits
would be exempt from the ERISA reporting and disclosure requirements?
a. Harper
pays for life insurance to provide for employee dependents if the employee dies
b. Harper
gives each employee a small gift worth less than $5 on St. Patrick’s Day
c. Harper
has a scholarship program that pays for employee tuition for industry-relevant
continuing education, based on the employee passing the course, out of the
employer’s general assets
d. b and c
e. a and c
32. Sentenal
Corp., a restaurant supply company, is a closely held business. Tom Brady, founder and owner of the business
is 59. Jeff Alcorn, age 53, is a key
employee. The business employs 10 other
rank-and-file employees earning an average of $30,000 per year. Both Tom and Jeff would like to contribute
between $30,000 and $40,000 per year to a qualified retirement account. The
advantages of using a profit sharing, age-weighted plan at Sentenal rather than
a defined benefit plan include:
a. the
age-weighted plan is simpler to install
b. the
age-weighted plan is less expensive to administer
c. the
age-weighted plan allows more flexibility in plan contributions
d. all of
the above
e. only a
and b
33. The law
firm of Willie, Cheatum, and Howe is structured as a professional corporation
that has three key employees between ages 39 and 43, two law clerks in their
late 20s, and two secretaries, both age 31. The three key employees earn
$500,000 per year. The law clerks are
paid $30,000 and the secretaries are paid $15,000 annually. Turnover for both the law clerks and
secretaries has been rather high, with at least one law clerk and one secretary
leaving about every 6 months for the past year.
Characteristics of the firm that would make a cross-tested plan a less
than optimal solution for the firm include
a. the plan
would have to be reconsidered at each new hire
b. the plan
would provide relatively few advantages given the age of the highly compensated
group
c. having
more than one highly compensated employee makes coverage tests related to the
plan more difficult to apply
d. all of
the above
e. none of
the above
?
34. Shannon
McDougal will retire December 31 of this year. Shannon has worked for Shamrock
Construction for 30 years. During his last 5 years, he earned $40,000, $47,000,
$44,000, $46,000, and $48,000. Shamrock’s retirement plan uses a unit credit
formula that awards employees 1.5% for each year of service using a financial
average of the last 3 years. Shannon’s annual benefit will be:
a. $19,500
b. $20,250
c. $20,700
d. $21,150
e. $21,600
35. April
Showers, age 30, opened the Unique Boutique 5 years ago. April has five
employees ranging in age from 25 to 42. Earnings have fluctuated. Profits have
been made only in the last two years. April should
a. not have a
defined benefit plan because it is designed for older business owners
b. have a
defined benefit plan because it will maximize April’s tax deduction
c. not have
a defined benefit plan because there are a large number of years until the
owner or employees retire
d. have a
defined benefit plan because the owner can get $1,500 tax credit for
establishing a new retirement plan
e. not
establish a defined benefit plan because it is not likely April can meet the
annual funding requirements
36. Mandy
Thomas, age 47, is the owner of The Golf Pro Shop. Mandy wants to retire at age
55. The company adopted a defined benefit plan 2 years ago, 3 years after the
business opened. Mandy wants to increase the amount that she contributes to her
own retirement. Mandy can
a. increase
the amount without limit
b. increase
the amount within limits set by the Internal Revenue Code
c. increase
the amount, but must also contribute to all other company employee accounts by
the same proportion
d. increase
the amount, but maximum benefit will be cut in half because the plan is less
than 10 years old
e. she
cannot increase her contribution
?
37. The owner
of Whitney Corporation, Inc., earned $250,000 in 2013. In the same year, three highly compensated
employees earned $100,000 each. The
remaining 30 line workers earn about $20,000 each, for a total payroll of
$600,000 for this group of workers.
Whitney Corporation made the maximum allowable contribution to each
employee’s money purchase plan in 2013.
In 2013, what was the total amount that Whitney Corporation contributed
to their money purchase plan?
a. $51,000
b. $150,000
c. $225,000
d. $276,000
e. $318,000
38. Orville
Winbacher died last year at age 58, leaving $500,000 accumulated in a Roth IRA.
Which of the following is (are) true?
a. monies in
the Roth IRA must be distributed within a year of the Orville’s death either to
his estate or to a beneficiary
b. distribution
from the account can be made over the life of a designated beneficiary if begun
within a year of Orville’s death
c. initial
distribution of Orville’s Roth IRA funds to a beneficiary are tax-free, but
subsequent investment returns on amounts distributed are taxable
d. a and b
e. b and c
39. George
Flint was transferred to Chicago three years ago. When he left Detroit, he sold
his home and put some of the money in a new Roth IRA. He and his wife, Wilma,
have been renting a home for the past 3 years. Recently, the homeowner decided
to sell. George is interested in buying the home. George can make a
penalty-free withdrawal from his Roth IRA to help complete the purchase.
a. true
b. false
?
40. Brothers
Tim and Jim Shanton have asked you, their financial advisor, to settle a
friendly quarrel between them. Tim argues that a Roth IRA and a traditional IRA
are actuarially equivalent if $4,000 is available for investing on a before-tax
basis, contributions to the traditional IRA are deductible, tax rates are
expected to stay the same, and both have the same interest rates. So, it makes
no difference which vehicle one uses to save for retirement. Jim insists that a
Roth IRA is the better investment. You tell them
a. Tim is
wrong; the tax deduction available for a traditional IRA allows more money to
work for the contributor
b. Jim is
wrong; at least for some low-income individuals, the traditional IRA is a
better investment because of its relatively lower tax rates
c. Tim is
right; the two investments are equivalent in every respect when considered at
the end of an investment horizon at least 10-years long
d. Jim is
right; the ability to make tax-free withdrawals from a Roth IRA gives a greater
return even when contributions and interest rates are equivalent over time
e. both are
right; the two investments are actuarially equivalent, but absence of a minimum
distribution date and more liberal penalty-free withdrawal options may make the
Roth IRA more attractive
41. Which of
the following statis is (are) NOT correct?
a. A durable
power of attorney for health care is always a direct substitue for a living
will.
b. A living
will only covers a narrow range of situations.
c. A living
will must generally meet the requirements of a formally drafted state statue.
d. Many well-intentioned living wills have failed because of
vagueness and/ or ambiguities.
42. A __________ is a legal request for how one’s estate
should be distributed upon death
a. Letter of last insturction
b. Will
c. Asset distribution
d. None of the above
43. The person transferring asssets to antoher person in a
trust is called the
a. Trustee
b. Grantor
c. Executor
d. None of the above
44. A ______________ is a legal documemnt created by
indiviudals to specify their preferences if they become mentally or physically
disabled
a. Power of attorney
b. Living trust
c. Codicil
d. Living will
45. A _____________
trust, the grantor is no longer the owner of the assets in the trust
disabled
a. Living
b. Revocable living
c. Irrovocable living
d. None of the above
46. Which of the following is not true regarding estate
taxes?
a. They are dependent on the value of an estate
b. Any funds that are provided as a result of a life
insurance policy are counted as part of the estate for tax purposes
c. All the assets in an estate can be distributed tax-free
to children or others
d. All of the above are true
?
47. Which of the following situaitons would NOT constitute a
transfer that comes within the gift tax statues?
a. Robin creates a trust under the terms of which her
daughter is to get income for life and her granddaughter the remainder at the
daughter’s death.
b. Robbie purchases real propety and has the title conveyed
to himslefan to his brother as joint tenants.
c. Randal creates an irrovocable trust giving inocme for
life to his wife and providing that at her death the corpus is to be
distributed to his son.
d. Ray purchases a U.S. savings bond made payable to himself
and his wife, Raquel. Raquel cashes the bond to be used for her own
benefit.
e. Rose creates a joint bank account for herself and her
daugher. There have been no withdrawls from the account.
48. A living trust is one in which the grantor creates an
inter vivos trust that is funded with part of all of the grantor’s property.
a. True
b. False
49. Which of the following transfers qualify for the
unlimited marital deduction?
a. Outright bequest to resident alien spouse
b. Property passing to citizen spouse in QTIP
c. Income beneficiary of CRT is a nonresident alien spouse
(trust is not a QDOT)
d. Outright bequest
to resident spouse who, prior to the decedent’s death, was a noncitizen bu who
after the decedent’s death and before the estate return was filed, became a
U.S. citizen.
e. b and d
?
50. The generation-skipping transfer tax (GSTT) is in
addition to the unified gift and estate tax and is designed to tax large
transfers tht skip a generation (i.e. from grandparent to grandchile). The
purpose of the tax is to collect potentially lost tax dollars from the skipped
generation.
a. True
b. False
