Posted: March 23rd, 2017

Which item(s) will go through probate, if any? There may be multiple answers. List each LETTER you believe is correct.

Question

Final exam

FINC 355: RETIREMENT AND ESTATE PLANNING

TRUE OR FALSE

1. 1.Traditional 401(k) plans can be funded entirely through salary reductions by employees, enabling employers to bear no additional cost for employee compensation.

True

False

2. 2.A cash balance plan establishes a separate fund for each plan participant.

True

False

3. 3.Defined benefit plans provide more benefit security than do age-weighted or cross-tested plans.

True

False

4. 4.All group insurance programs offered to employees must comply with ERISA reporting and disclosure requirements.

True

False

5. 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.

True

False

6. 6.An employee cannot be covered under both a defined benefit and a defined contribution plan.

True

False

7. 7.A self-employed person with less than 10 employees can use a money purchase plan to fund his or her own retirement.

True

False

8. 8.Unlike a traditional IRA, a Roth IRA contribution is not restricted by active participation in an employer’s retirement plan.

True

False

9. 9.An early distribution penalty can be assessed on Roth IRA withdrawals.

True

False

10. 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.

True

False

11. 11.A trust cannot provide for creditor protection insurance

True

False

12. 12.Including a spendthrift clause is recommended for children with money management or substance abuse problems.

True

False

MULTIPLE CHOICE

13. 13.All of the following are true regarding tax implicatons of cash balance plans, except
14. a.employer contributions to the plan are deductible when made
15. b.taxation of the employee on employer contributions is deferred
16. c.the plan is not subject to minimum funding rules of the Internal Revenue Code
17. d.certain employers who adopt a cash balance plan may be eligible for a business tax credit up to $500
18. e.employees may make voluntary contributions to a “deemed IRA” established under the plan
19. 14.Which of the following is (are) true regarding elective deferrals in a Section 401(k)?
20. a.elective deferrals are not subject to Social Security and Federal Unemployment payroll taxes
21. b.elective deferrals are always made on an after-tax basis
22. c.if the company elects to have a safe harbor plan, elective deferrals must meet the actual deferral percentage test
23. d.account funds can be withdrawn without a premature distribution penalty if the employee becomes disabled or dies
24. e.since employees elect the amount of funds to defer, nondiscrimination tests do not apply to elective deferrals
25. 15.Which of the following types of employer plans are exempt from most or all ERISA provisions?
26. a.plans of state, federal, or local governments or governmental organizations
27. b.plans of churches, synagogues, or related organizations
28. c.plans maintained solely to comply with workers’ compensation, unemployment compensation, or disability insurance laws
29. d.all of the above
30. e.none of the above because no employer plans are exempt from ERISA provisions
31. 16.Irrevocable Life Insurance Trusts (ILIT) are primarily designed to ensure that the death benefit is excludable from the insured’s federal gross estate.
32. a.true
33. b.false
34. 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
35. a.employer’s general assets
36. b.reserve account maintained by employer
37. c.third-party guarantees
38. d.corporate-owned life insurance
39. e.employer reserve account with employee investment direction
40. 18.Paul owns the following property:
41. a.Boat (fee simple)
42. b.Condominium on the beach (tenancy in common with his brother and sister)
43. c.House and two cars with his wife, Karen (tenancy by the entirety)
44. d.Checking account with his son, William (POD)
45. 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. 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?
20. 1.The purchase price of the cottage
21. 2.How much each brother plans to contribute toward the purchase of the cottage
22. 3.Whether the brothers want their interest in the cottage to pass under their wills when they die
23. A.1 and 2
24. B.3 only
25. C.1, 2, and 3
26. D.2 and 3
27. 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)
28. a.The state directs how the decedent’s property is transferred
29. b.A spouse’s share of the decedent’s estate may be equal to a child’s
30. c.Children may be treated equally although not equitably
31. d.May require the appointment of an administrator who will usually have to furnish a surety bond, thereby raising the costs of administration
32. e.The administrator of the estate is determined by the court
33. 21.Annual additions to an age-weighted plan include
34. a.employer contributions to participants’ accounts
35. b.employee contributions to own account
36. c.forfeitures from other accounts
37. d.only a and b
38. e.all of the above
39. 22.Which plan has benefit levels that are guaranteed by both the employer and the Pension Benefit Guaranty Corporation (PBGC)?
40. a.money purchase plan
41. b.target benefit plan
42. c.cross tested plan
43. d.defined benefit plan
44. e.tax-deferred annuity
45. 23.Advantages of defined benefit plans include all of the following, except
46. a.defined benefit plans are easy to design and easy to explain to employees
47. b.employees obtain a tax-deferred retirement savings medium
48. c.retirement benefits at adequate levels can be provided for all employees regardless of age
49. d.benefit levels are guaranteed both by the employer and, for some plans, by the PBGC
50. e.for an older highly compensated employee, a defined benefit plan will allow the maximum amount of tax-deferred retirement saving
51. 24.Which of the following is (are) true regarding the tax implications of having a money purchase plan?
52. a.employer contributions and plan earnings are tax-deferred for the employee
53. b.employers beginning a new plan are eligible for a $2,500 business tax credit in the first year to help with startup costs
54. c.the employer tax deduction is limited to 25% of total payroll of the employees covered under the plan
55. d.only a and b
56. e.only a and c
57. 25.All of the following are true regarding money purchase plans, except
58. a.most money purchase plan benefit formulas use a factor related to the employee’s service that favors owners and key employees
59. b.nondiscrimination regulations provide a safe harbor for money purchase plans
60. c.a plan benefit formula can be integrated with Social Security
61. d.forfeitures, unvested amounts left behind by employees in their plans, can be used to reduce future employer contributions
62. e.money purchase plan funds are generally invested in a pooled account managed by the employer or a fund manager selected by the employer
63. 26.A tax-free rollover of a Roth IRA can be made to
64. a.another Roth IRA
65. b.a traditional IRA
66. c.a tax-deferred annuity
67. d.a and b
68. 6.a and c
69. 27.Ways that a Roth IRA differs from a traditional IRA include:
70. a.initial investment and earnings can be withdrawn tax-free
71. b.Roth IRA contributions can be made past age 59½
72. c.Roth IRAs are never subject to minimum distribution rules
73. d.a and b
74. e.a and c
75. 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
76. a.a defined contribution plan, most or all plan assets would be credited immediately to vested employees
77. b.a cash balance plan, Xenon Corp.must increase the level of contribution to older employees
78. c.a cash balance plan, Xenon Corp.would no longer need actuarial services
79. d.only a and b
80. e.only a and c
81. 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
82. a.2%
83. b.4%
84. c.5%
85. d.6%
86. e.8%
87. 30.The retirement plan for Bethel Shalom synagogue must adhere to ERISA reporting and disclosure rules.
88. a.true
89. b.false
90. 31.Harper Engineering, Inc., offers several benefits to employees.Which of its benefits would be exempt from the ERISA reporting and disclosure requirements?
91. a.Harper pays for life insurance to provide for employee dependents if the employee dies
92. b.Harper gives each employee a small gift worth less than $5 on St.Patrick’s Day
93. 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
94. d.b and c
95. e.a and c
96. 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:
97. a.the age-weighted plan is simpler to install
98. b.the age-weighted plan is less expensive to administer
99. c.the age-weighted plan allows more flexibility in plan contributions
100. d.all of the above
101. e.only a and b
102. 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
103. a.the plan would have to be reconsidered at each new hire
104. b.the plan would provide relatively few advantages given the age of the highly compensated group
105. c.having more than one highly compensated employee makes coverage tests related to the plan more difficult to apply
106. d.all of the above
107. e.none of the above
108. 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:
109. a.$19,500
110. b.$20,250
111. c.$20,700
112. d.$21,150
113. e.$21,600
114. 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
115. a.not have a defined benefit plan because it is designed for older business owners
116. b.have a defined benefit plan because it will maximize April’s tax deduction
117. c.not have a defined benefit plan because there are a large number of years until the owner or employees retire
118. d.have a defined benefit plan because the owner can get $1,500 tax credit for establishing a new retirement plan
119. e.not establish a defined benefit plan because it is not likely April can meet the annual funding requirements
120. 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
121. a.increase the amount without limit
122. b.increase the amount within limits set by the Internal Revenue Code
123. c.increase the amount, but must also contribute to all other company employee accounts by the same proportion
124. d.increase the amount, but maximum benefit will be cut in half because the plan is less than 10 years old
125. e.she cannot increase her contribution
126. 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?
127. a.$51,000
128. b.$150,000
129. c.$225,000
130. d.$276,000
131. e.$318,000
132. 38.Orville Winbacher died last year at age 58, leaving $500,000 accumulated in a Roth IRA.Which of the following is (are) true?
133. 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
134. b.distribution from the account can be made over the life of a designated beneficiary if begun within a year of Orville’s death
135. c.initial distribution of Orville’s Roth IRA funds to a beneficiary are tax-free, but subsequent investment returns on amounts distributed are taxable
136. d.a and b
137. e.b and c
138. 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.
139. a.true
140. b.false
141. 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
142. a.Tim is wrong; the tax deduction available for a traditional IRA allows more money to work for the contributor
143. b.Jim is wrong; at least for some low-income individuals, the tradi