Insurance, Risk Management & Taxation Flashcards

A client in the 32% marginal tax bracket earns $10,000 of qualified dividend income. What is the federal tax rate applied to those dividends?

Answer: 15% qualified dividend rate

Taxpayers in the 22%-35% ordinary income brackets are taxed at 15% on qualified dividends, not at their marginal ordinary income rate.

Which of the following statements about umbrella liability insurance is correct?

Answer: It provides excess liability coverage above the limits of underlying policies

An umbrella policy provides excess liability coverage that activates after the limits of underlying policies (auto, homeowners) are exhausted.

Under the passive activity loss rules, which of the following individuals qualifies for the $25,000 rental real estate loss allowance?

Answer: An active participant in rental activity with AGI of $85,000

The $25,000 allowance for rental real estate losses phases out between $100,000 and $150,000 of AGI and requires active participation, which is available to active participants below the phase-out range.

A client wants to fund a buy-sell agreement between two equal business partners. Which life insurance arrangement is most commonly used?

Answer: Cross-purchase plan where each partner insures the other

In a cross-purchase buy-sell agreement, each partner owns a policy on the other partner's life, and the death benefit is used to purchase the deceased partner's business interest.

Which of the following tax strategies is used to shift income-producing assets to family members in lower tax brackets?

Answer: Intra-family gifting and income shifting

Intra-family gifting transfers ownership of income-producing assets to family members in lower tax brackets, reducing the overall family tax burden, subject to kiddie tax rules.

A client's homeowners policy has an 80% coinsurance requirement on a home valued at $400,000. If the client insures the home for only $240,000, what is the maximum recovery on a $60,000 partial loss?

Answer: $45,000

Using the coinsurance formula: ($240,000 / ($400,000 × 0.80)) × $60,000 = ($240,000 / $320,000) × $60,000 = 0.75 × $60,000 = $45,000.

Which of the following best describes the estate tax marital deduction?

Answer: It allows an unlimited deduction for assets passing to a U.S. citizen surviving spouse

The unlimited marital deduction allows all assets passing to a surviving U.S. citizen spouse to be deducted from the taxable estate, effectively deferring estate taxes until the second death.