PFS Communication with Teachers & Parents 3 — Questions and Answers
Question 1: A PFS advising a parent on estate planning should communicate that assets held in a revocable living trust at death:
- Avoid estate taxes automatically
- Pass outside of probate to named beneficiaries (Correct answer)
- Receive a stepped-up basis only if held for 5+ years
- Are excluded from the gross estate
Correct answer: Pass outside of probate to named beneficiaries
Assets in a revocable living trust pass to beneficiaries outside probate, but they remain part of the grantor's taxable estate for estate tax purposes.
Question 2: When a teacher client inquires about disability insurance, a PFS should explain that an 'own-occupation' disability policy pays benefits when the insured:
- Cannot perform any occupation for gainful employment
- Cannot perform the specific duties of their own occupation (Correct answer)
- Is partially disabled and earning less than 50% of prior income
- Has a disability lasting at least 24 months
Correct answer: Cannot perform the specific duties of their own occupation
An own-occupation policy pays benefits if the insured cannot perform the material duties of their specific occupation, regardless of whether they could work in another field.
Question 3: A parent asks their PFS about the dependent care FSA benefit. The annual maximum contribution limit per household for a dependent care FSA is:
- $2,750
- $3,050
- $5,000 (Correct answer)
- $6,500
Correct answer: $5,000
The dependent care FSA contribution limit is $5,000 per household ($2,500 if married filing separately), not per individual.
Question 4: A PFS should advise a teacher with a defined benefit pension that the pension's value for net worth purposes is best estimated using:
- The total contributions made to the pension fund
- The present value of projected future pension payments (Correct answer)
- The current market value of the pension fund's investments
- The accrued benefit multiplied by years to retirement
Correct answer: The present value of projected future pension payments
The present value of projected future pension payments, discounted at an appropriate rate, is the most accurate method to estimate a defined benefit pension's value.
Question 5: When communicating life insurance needs to a parent, a PFS using the human life value approach bases the death benefit primarily on:
- The family's current outstanding debts
- The present value of the insured's projected future earnings (Correct answer)
- A multiple of the insured's current annual income
- The cost of replacing all family services
Correct answer: The present value of the insured's projected future earnings
The human life value approach calculates life insurance need based on the present value of the income the insured is expected to earn over their remaining working life.
Question 6: A teacher asks a PFS about TRS (Teacher Retirement System) and whether rollover to an IRA is permitted at separation. Generally, a teacher separating from service may roll over:
- Only employer contributions from TRS to an IRA
- Eligible rollover distributions from TRS to a traditional IRA (Correct answer)
- TRS funds only to another 403(b), not an IRA
- TRS funds only if age 59½ or older
Correct answer: Eligible rollover distributions from TRS to a traditional IRA
Eligible rollover distributions from a governmental 403(b) or defined benefit pension plan like TRS may generally be rolled over to a traditional IRA, preserving tax deferral.
Question 7: A parent client is asking about the 'kiddie tax.' Under current rules, unearned income above the threshold for a dependent child under age 19 (or full-time student under 24) is taxed at:
- The child's marginal tax rate
- A flat 10% rate
- The parent's marginal tax rate (Correct answer)
- The trust and estate tax rate schedule
Correct answer: The parent's marginal tax rate
The kiddie tax subjects a child's net unearned income above the annual threshold to taxation at the parent's marginal tax rate to prevent income shifting.
PFS Communication with Teachers & Parents 3
A PFS advising a parent on estate planning should communicate that assets held in a revocable living trust at death: