Multiple Choice
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1.
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Investors might consider making a Section 1035 exchange to:
I. improve the return on the contract
II. upgrade the
carrier
III. establish a higher death benefit on a variable contract
IV. change
from a variable to a fixed contract
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a. | I and II only | b. | III and IV only | c. | I, II and IV
only | d. | I, II, III and IV |
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2.
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403(b) and 501(c)(3) plans are tax-sheltered annuity (TSAs) programs for
employees. Which of the following would NOT qualify to have a TSA?
a. | county school system | b. | church association | c. | labor
union | d. | any of the above would qualify for TSAs |
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3.
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Your client invests $40,000 in an immediate fixed annuity and selects a five
year payout option. The insurance company will pay monthly annuity payments of $1,000 to the
annuitant over the next five years. Approximately what portion of each month's payment is
considered tax-free return of principal?
a. | 16.7% | b. | 33.3% | c. | 66.7% | d. | 83.3% |
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4.
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A client purchased a non-qualified variable annuity in 2002 for $50,000.
Today the account is worth $75,000. If the client withdrew $30,000 today, the withdrawal would
be taxed:
a. | as $25,000 taxable earnings and $5,000 tax-free return of
principal | b. | as $30,000 of tax-free return of principal | c. | using the exclusion
ratio, 1/3rd taxable income and 2/3rd tax-free return of principal | d. | as $25,000 capital
gain |
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5.
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The “exclusion ratio” in a variable annuity is based on:
a. | the annuitant’s life expectancy | b. | the value of the annuity
units | c. | the value of the accumulation units | d. | projected value of annuity
payments |
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6.
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Which of the following exchanges NOT permitted tax-free under Section
1035?
a. | an annuity exchanged for another annuity | b. | an annuity exchanged
for a life insurance policy | c. | a life insurance policy exchanged for an
annuity | d. | a life insurance policy exchanged for another life
policy |
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7.
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The 10% penalty applies to withdrawals prior to age 59 1/2 from:
a. | non-qualified annuities | b. | qualified annuities | c. | both a and
b | d. | neither a nor b |
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8.
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Income in a variable annuity contract grows tax-deferred. When the
earnings are distributed to the annuitant, that income is:
a. | taxed as ordinary income | b. | taxed as capital gains | c. | taxed as a
combination of capital gains and ordinary income | d. | received
tax-free |
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9.
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Which of the following non-individual contractholders enjoys tax-deferred growth
of income within their annuities?
a. | corporations | b. | general partnerships | c. | estates that receive
an annuity upon a contractholder’s death | d. | family limited
partnerships |
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10.
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A client owns a deferred fixed annuity and wishes to transfer it to his
revocable living trust. For tax purposes, this transfer:
a. | has income tax consequences | b. | has gift tax consequences | c. | has estate tax
consequences | d. | none of the above |
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11.
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A contractholder dies leaving her heirs a deferred variable annuity with an
enhanced death benefit rider. At the time of her death, the annuity is still in its
accumulation phase. She initially invested $150,000 and the cash value in the account is
$225,000 on the date of death. She also purchased an enhanced death benefit rider that will pay
$280,000 to her beneficiaries due to previous increases in the cash value. For estate tax
purposes, the value of the annuity is:
a. | $0, the death benefits are payable to the beneficiaries estate
tax-free | b. | $150,000 | c. | $225,000 | d. | $280,000 |
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12.
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Sam purchased a deferred fixed annuity a number of years ago. Upon his
retirement in October 1997, he annuitized the contract, selecting a straight life with 10-year period
certain payout that paid him $1,500 per month. In October 2008, Sam dies. The value of
this annuity, for estate tax purposes, is:
a. | $0 | b. | the discounted value of $1,500 per month for 11
years, discounted at the rates published in IRS tables | c. | the comparable cost to purchase an annuity
paying $1,500 a month for 10 years | d. | none of the
above |
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13.
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Generally speaking, a beneficiary who inherits an annuity in its annuity period
must choose to receive the benefits:
a. | at the same rate as the deceased annuitant | b. | at the same or more
rapid rate than deceased annuitant | c. | at the same or less rapid rate than the
deceased annuitant | d. | as a lump sum |
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14.
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At retirement, Tristan used the $500,000 of proceeds from his 401k plan to
purchase an immediate joint and one-half survivor annuity to provide a lifetime income for him and
his wife, Isolde. The joint payments are $2,000 per month. If Tristan dies, what is the
practical impact of this annuity on on his estate taxes?
a. | the estate must pay taxes on the value of a lifetime annuity paying $2,000 per month
to Isolde | b. | the estate must pay taxes on the value of a lifetime annuity paying $1,000 per month
to Isolde | c. | there is no estate tax consequence since Isolde was married to
Tristan | d. | only the annuity’s death benefits are taxable for estate tax
purposes |
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15.
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The general rule for distribution of an inherited annuity is that the
beneficiary must:
a. | recieve the proceeds within 5 years of the date of death | b. | take the proceeds as
a lump sum | c. | roll the proceeds into a qualified retirement plan | d. | a and
b |
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16.
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Which of the following is true of a spouse who inherits an owner-driven annuity
during its accumulation period?
a. | the spouse must withdraw the proceeds within five years of the date of
death | b. | the spouse may “step into the shoes” of the deceased owner and continue
to hold the annuity indefinitely | c. | the spouse must annuitize the contract and
accept income payment over his or her lifetime | d. | the spouse may roll the annuity into a
qualified retirement account or IRA |
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17.
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Due to tax complications, advisors should refrain from recommending that an
annuity contract:
a. | be owned by a trust | b. | be owned jointly | c. | name a trust as
beneficiary | d. | all of the above |
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18.
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In a tax sheltered annuity:
a. | employee contributions are made with before-tax dollars | b. | employee
contributions are made with after-tax dollars | c. | employer contributions are made with after-tax
dollars | d. | both a and c |
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19.
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Annuity payments received from tax sheltered annuities are:
a. | fully taxable as ordinary income | b. | fully taxable as capital
gains | c. | partially taxable as ordinary income, using the exclusion ratio | d. | tax-free |
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20.
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The 10% penalty for premature withdrawal from a qualified annuity:
a. | applies to the earnings portion of the withdrawal only | b. | applies to the the
principal portion of the withdrawal only | c. | applies to the the entire
withdrawal | d. | is treated the same as premature withdrawals from non-qualified
annuities |
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