RFC Insurance, Risk Management & Taxation 2 — Questions and Answers
Question 1: A client owns a life insurance policy with a $500,000 death benefit and has named their estate as beneficiary. Which of the following is true regarding federal estate taxes?
- The death benefit is excluded from the gross estate entirely
- The death benefit is included in the gross estate if the insured held incidents of ownership (Correct answer)
- Life insurance proceeds are never subject to estate taxes regardless of beneficiary
- The death benefit is only taxable if the policy was purchased within 3 years of death
Correct answer: The death benefit is included in the gross estate if the insured held incidents of ownership
If the insured held incidents of ownership (such as the right to change beneficiaries or borrow against the policy), the death benefit is included in the gross estate.
Question 2: Which type of annuity rider guarantees that a surviving spouse will continue to receive income payments for their lifetime after the annuitant dies?
- Return of premium rider
- Joint and survivor rider (Correct answer)
- Guaranteed minimum withdrawal benefit
- Cost-of-living adjustment rider
Correct answer: Joint and survivor rider
A joint and survivor rider ensures that annuity payments continue to the surviving spouse for their lifetime after the primary annuitant's death.
Question 3: Under the wash sale rule, which of the following transactions would disallow a capital loss deduction?
- Selling stock at a loss and repurchasing it 35 days later
- Selling stock at a gain and buying substantially identical securities
- Selling stock at a loss and buying a call option on the same stock 20 days later (Correct answer)
- Selling stock at a loss and buying bonds of the same company
Correct answer: Selling stock at a loss and buying a call option on the same stock 20 days later
The wash sale rule disallows a loss if substantially identical securities (including options) are acquired within 30 days before or after the sale at a loss.
Question 4: A business owner wants to protect against the financial loss resulting from the death of a key employee. Which risk management strategy is most appropriate?
- Business overhead expense insurance
- Key person life insurance (Correct answer)
- Disability buyout insurance
- Group term life insurance
Correct answer: Key person life insurance
Key person life insurance is purchased by the business on the life of a critical employee, with the business as owner and beneficiary, to offset financial losses from that employee's death.
Question 5: Which of the following best describes the alternative minimum tax (AMT) for individuals?
- A flat 28% tax applied to all income regardless of deductions
- A parallel tax system that adds back certain preference items to ensure minimum tax liability (Correct answer)
- A surtax on net investment income above threshold amounts
- An additional Medicare tax imposed on high-income earners
Correct answer: A parallel tax system that adds back certain preference items to ensure minimum tax liability
The AMT is a parallel tax computation that adds back certain tax preference items and adjustments, ensuring taxpayers pay at least a minimum level of tax.
Question 6: Which of the following statements about the gift tax annual exclusion is correct?
- It applies only to gifts of future interests
- It is $10,000 per donor per year and is not inflation-adjusted
- It allows each donor to give up to the indexed amount per recipient per year free of gift tax (Correct answer)
- It is unlimited for gifts between spouses regardless of citizenship
Correct answer: It allows each donor to give up to the indexed amount per recipient per year free of gift tax
The annual exclusion allows a donor to give up to the inflation-indexed amount (currently $18,000 in 2024) per recipient per year without gift tax consequences, provided the gift is of a present interest.
Question 7: A client has a traditional IRA and wants to convert it to a Roth IRA. Which of the following is true about the tax treatment of the conversion?
- The converted amount is tax-free if the client is over age 59½
- The converted amount is included in gross income in the year of conversion (Correct answer)
- Only the earnings portion is taxable upon conversion
- The conversion is subject to a 10% early withdrawal penalty regardless of age
Correct answer: The converted amount is included in gross income in the year of conversion
When converting a traditional IRA to a Roth IRA, the pre-tax amount converted is included in the taxpayer's gross income in the year of conversion.
RFC Insurance, Risk Management & Taxation 2
A client owns a life insurance policy with a $500,000 death benefit and has named their estate as beneficiary.
Which of the following is true regarding federal estate taxes?