CSP Legal & Regulatory Compliance 2 — Questions and Answers
Question 1: Under the Employee Retirement Income Security Act (ERISA), which fiduciary duty requires plan administrators to act solely in the interest of plan participants and beneficiaries?
- Duty of loyalty (Correct answer)
- Duty of prudence
- Duty of diversification
- Duty of disclosure
Correct answer: Duty of loyalty
ERISA's duty of loyalty requires fiduciaries to act exclusively for the benefit of plan participants and beneficiaries, not for any other party.
Question 2: Which federal law governs the transfer of retirement plan assets upon an employee's death and requires that a surviving spouse be the primary beneficiary unless a waiver is signed?
- COBRA
- ERISA (Correct answer)
- IRC Section 409A
- The Pension Protection Act
Correct answer: ERISA
ERISA requires that qualified retirement plans designate the surviving spouse as the default primary beneficiary, and the spouse must consent in writing to any alternative designation.
Question 3: A buy-sell agreement funded by life insurance triggers a tax concern under IRC Section 101(j) if the policy is owned by a corporation on a key employee who has not provided written consent. What is this issue called?
- Transfer-for-value rule
- Corporate-owned life insurance (COLI) notice and consent rule (Correct answer)
- Alternative minimum tax trap
- Split-dollar imputed income problem
Correct answer: Corporate-owned life insurance (COLI) notice and consent rule
IRC Section 101(j) requires employers to obtain written consent from insured employees before issuing COLI policies, or death benefits may lose their income-tax-free status.
Question 4: When a succession plan involves transferring ownership of an S-corporation, which of the following is a critical legal restriction that must be observed?
- S-corporations cannot be transferred without IRS approval
- S-corporations cannot have more than 100 shareholders or certain ineligible shareholders (Correct answer)
- S-corporations must convert to C-corporation status before any ownership transfer
- S-corporations are prohibited from using buy-sell agreements
Correct answer: S-corporations cannot have more than 100 shareholders or certain ineligible shareholders
S-corporations are limited to 100 shareholders and cannot have ineligible shareholders such as non-resident aliens or certain trusts, which constrains succession transfer options.
Question 5: Which legal doctrine can cause a family limited partnership (FLP) to be included in a decedent's taxable estate if the IRS finds the arrangement lacked legitimate non-tax business purposes?
- Step transaction doctrine
- Economic substance doctrine
- Substance over form doctrine
- All of the above doctrines may apply (Correct answer)
Correct answer: All of the above doctrines may apply
The IRS and courts have applied the step transaction, economic substance, and substance over form doctrines to collapse FLP arrangements that lack genuine business purposes.
Question 6: For a grantor retained annuity trust (GRAT) to achieve its estate-planning goal, what must happen with the invested assets relative to the IRC Section 7520 hurdle rate?
- Assets must grow slower than the 7520 rate to minimize taxable gifts
- Assets must grow faster than the 7520 rate to pass wealth transfer-tax free (Correct answer)
- Assets must match the 7520 rate exactly to avoid gift tax recapture
- Assets must be reinvested within the trust before the 7520 rate changes
Correct answer: Assets must grow faster than the 7520 rate to pass wealth transfer-tax free
A GRAT succeeds when trust assets outperform the Section 7520 hurdle rate; the excess appreciation passes to remainder beneficiaries free of gift tax.
Question 7: Under state law, what document must typically be recorded with the county recorder or secretary of state when a partner withdraws from a general partnership as part of a succession event?
- Statement of Withdrawal
- Certificate of Amendment
- Articles of Dissolution
- Notice of Dissociation (Correct answer)
Correct answer: Notice of Dissociation
Most states following the Revised Uniform Partnership Act (RUPA) allow a dissociating partner to file a Statement of Dissociation to provide public notice and limit future liability.
CSP Legal & Regulatory Compliance 2
Under the Employee Retirement Income Security Act (ERISA), which fiduciary duty requires plan administrators to act solely in the interest of plan participants and beneficiaries?