Which of the following statements relating to trusts is CORRECT?

A) A simple trust is required to distribute all of its income in the year earned.

B) A complex trust is required to distribute all of its income in the year earned.

C) A simple trust may distribute principal during the year.

D) A complex trust may only distribute principal during the year in which the trust terminates.

Answer: A) A simple trust is required to distribute all of its income in the year earned.

Carol is opening an investment account with her agent and will be expected to disclose all of the following items of financial or personal information EXCEPT her:

A) educational background.

B) age.

C) annual income.

D) investment experience.

Answer: A) educational background.

Alvin's spouse is a trustee of a trust established by Henrietta Flood, which directs income from the trust be paid to Alvin, for as long as he lives. Alvin's son, Floyd, will receive the principal upon Alvin's death. Floyd would like to receive some of the principal before Alvin's death and Alvin does not object. How should his spouse, the trustee, act in this situation?

A) Distribute part of the income to Floyd.

B) Follow the trust terms, continuing to distribute the income to Alvin and the principal to Floyd upon Alvin's death.

C) Distribute part of the principal to Floyd.

D) Distribute all of the principal to Floyd.

Answer: B) Follow the trust terms, continuing to distribute the income to Alvin and the principal to Floyd upon Alvin's death.

If a trust has been established under which the father is to receive income for life, and his son is to receive the trust principal on the father's death, which of the following statements is TRUE?

A) The trustee must notify the son each time an income distribution is made to the father.

B) The trustee does not need to keep records of the income distribution to the father.

C) The trustee can withhold income distributions to the father to preserve principal to the son.

D) The trustee is not required to notify the son when an income distribution is made to the father.

Answer: D) The trustee is not required to notify the son when an income distribution is made to the father.

Which of the following statements regarding an S corporation owner and an owner of an LLC are TRUE?

Creditors have the very limited recourse rights to the owners.

They may not be nonresident aliens.

They both are considered stockholders.

Both are taxable as flow-through entities.

A) II and IV.

B) I and IV.

C) I and III.

D) II and III.

Answer: B) I and IV.

Tax considerations are frequently an important factor when determining appropriate recommendations for advisory clients. In which of the following accounts is the tax status of the individual a critical factor?

An account opened in the name of the XYZ Corporation, organized as a C corporation, by their chief investment officer.

An account opened by a sole proprietor in the name of the company.

An account opened in the name of ABC Corporation, an S corporation by one of its shareholders.

An account opened in the name of the GHI fund, a Regulated investment company, by the fund's portfolio manager.

A) I and IV.

B) III and IV.

C) II and III.

D) I and II.

Answer: C) II and III.

A man is planning to start his own glass sculpturing business. He wants to be able to deduct his anticipated losses for the first two years. He anticipates that the enterprise will borrow money from lenders and is willing to personally guarantee the debt. He also wants to attract other investors but does not want to give up control of the day-to-day business decisions. What business form do you recommend?

A) C corporation.

B) S corporation.

C) Limited partnership.

D) General partnership.

Answer: C) Limited partnership.

If the Smiths want to open a joint account at AAA Securities Corporation and have their securities transferred to their three daughters upon the death of the last surviving account holder, their agent should recommend that the Smiths open:

A) a joint tenancy account with right of survivorship.

B) a joint tenancy account with right of survivorship and execute a transfer on death (TOD) registration form.

C) individual accounts in the name of each daughter.

D) a tenants in common account.

Answer: B) a joint tenancy account with right of survivorship and execute a transfer on death (TOD) registration form.

A wealthy individual has set up a GRAT. Should he die during the time the trust is active, how are the remaining assets in the trust taxed?

A) The original value plus any appreciation passes to the beneficiaries, but is subject to gift tax.

B) The original value plus any appreciation passes to the beneficiaries and is taxed as ordinary income.

C) No tax is due if the grantor should die during the term of the trust.

D) The original value plus any appreciation is taxed as part of the grantor's estate.

Answer: D) The original value plus any appreciation is taxed as part of the grantor's estate.

A professional tennis player comes to you seeking advice on setting up a trust. She is interested in giving to charity and also wants discretion as to when income is distributed to the beneficiaries, her parents. Which trust do you advise she use?

A) Charitable lead trust.

B) Complex trust.

C) Simple trust.

D) Charitable remainder trust.

Answer: B) Complex trust.

A complex trust has the following income for the year: $1,500 in taxable interest, $2,000 in dividends (reinvested in the stock), and $3,000 in tax-exempt interest. In addition, the portfolio realized $3,500 in capital gains that were reinvested in the corpus. What is the distributable net income (DNI) for the trust?

A) $6,500.

B) $1,500.

C) $4,500.

D) $10,000.

Answer: A) $6,500

If 150 investors want to form a corporation to limit their financial liability to the amount of money they invest and do not want to be responsible for any debt that the corporation incurs, they would most likely form a(n):

A) C corporation.

B) S corporation.

C) general partnership.

D) proprietorship.

Answer: A) C corporation.

In which of the following business entities is an owner jointly and severally liable for the obligations of the business?

A) A limited liability company (LLC).

B) An S corporation.

C) A general partnership.

D) A sole proprietorship.

Answer: C) A general partnership.

Which of the following statements about S corporations are CORRECT?

S corporation status offers greater opportunity for raising additional capital than do other forms of business structure.

Stockholders of S corporations are taxed on the net profits of the corporation, even if they do not receive taxable dividends.

An S corporation may have no more than 50 shareholders.

An S corporation may have only one class of stock.

A) I and III.

B) III and IV.

C) II and IV.

D) I and II.

Answer: D) II and IV.

Several entrepreneurs form an S corporation. Under which of the following circumstances will the entrepreneurs risk losing their tax benefits?

150 new investors buy into the corporation during the year.

1 new member is a nonresident alien.

50% of the corporation's income is derived from passive investments in limited partnerships.

The corporation issues several classes of stock.

A) I, II, III and IV.

B) I only.

C) I and II.

D) I, II and III.

Answer: A) I, II, III and IV.

An investment policy statement would likely include:

I. expected returns of the recommended strategy and the expected range of these returns.

II. recommended allocations among differing asset classes.

III. strategies used for selecting specific stocks in the equity portion of the portfolio.

IV. disclosure of the fees that the adviser will earn for implementing the recommended strategy.

A) II, III and IV.

B) I, II and III.

C) I only.

D) I and II.

Answer: B) I, II and III.

A customer and his spouse own shares in the ABC Fund as joint tenants with rights of survivorship. If the customer dies, what happens to the shares in the account?

A) The spouse would own all the shares.

B) One-half of the shares would belong to the spouse, and the remaining half would be distributed to the customer's estate.

C) Ownership of the shares must be determined by probate court.

D) The account would be frozen until the estate was settled.

Answer: A) The spouse would own all the shares.

An S corporation is characterized by:

A) limited lifetime.

B) flow-through tax treatment.

C) unlimited personal liability.

D) more than 100 shareholders.

Answer: B) flow-through tax treatment.

A wealthy individual has set up a GRAT. During the term of the trust, how is the income taxed?

A) To the beneficiaries.

B) Deferred until the termination of the trust.

C) Only to the extent that the actual earnings exceed the amount of the annuity payout.

D) To the grantor.

Answer: D) To the grantor.

Which of the following types of business organizations do not protect owners' personal assets from losses incurred by the business?

General partnership.

Sole proprietorship.

S corporation.

C corporation.

A) III and IV.

B) I and II.

C) I only.

D) II and III.

Answer: B) I and II.