Mixed Deck — All CRPC Topics Flashcards

A client has a large estate composed primarily of an illiquid family business and real estate. A primary objective of their estate plan is to ensure funds are available to pay significant estate taxes and settlement costs without forcing the sale of these core assets. Which of the following strategies BEST addresses this specific objective?

Answer: Purchasing a life insurance policy, potentially held in an Irrevocable Life Insurance Trust (ILIT).

Life insurance provides an immediate, income-tax-free death benefit that creates liquidity to pay estate taxes, debts, and administrative expenses. This prevents the forced, and often unfavorable, sale of illiquid assets like a business or real estate. Placing the policy in an ILIT can also remove the proceeds from the taxable estate.

A client reports feeling purposeless and adrift six months into retirement. Which therapeutic approach does research most support for rebuilding meaning?

Answer: Narrative therapy to reframe their life story

Narrative therapy helps retirees reconstruct a coherent life story that incorporates retirement as a positive new chapter rather than an ending.

What is the excise tax penalty for failing to take a required minimum distribution under SECURE 2.0?

Answer: 25% of the shortfall, reducible to 10% if corrected timely

SECURE 2.0 reduced the RMD penalty from 50% to 25% of the shortfall, further reducible to 10% if corrected within the IRS correction window.

Which of the following BEST describes the primary goal of the 'bucket strategy' in retirement income planning?

Answer: To segment assets by time horizon to manage cash flow and sequence of returns risk.

The bucket strategy involves dividing a retirement portfolio into different 'buckets' based on the time horizon for needing the funds (e.g., short-term, intermediate-term, and long-term). This approach helps manage sequence of returns risk by using conservative, liquid assets for near-term expenses, allowing long-term assets to remain invested for growth without being forced to sell during a downturn.

Academic research on retirement income planning suggests establishing a HECM line of credit EARLY in retirement (rather than as a last resort) primarily because:

Answer: The growing credit line can serve as a buffer asset during market downturns, reducing the need to sell depreciated investments

The 'buffer asset' strategy, popularized by retirement researcher Wade Pfau and others, suggests opening a HECM line of credit at or near retirement even if funds are not immediately needed. Because the unused credit grows over time, it can be drawn on during equity market downturns (allowing a portfolio to recover rather than selling at a loss), effectively acting as a dynamic longevity hedge integrated into a coordinated retirement income plan.

A Qualified Personal Residence Trust (QPRT) is used to:

Answer: Transfer a home to heirs at a reduced gift tax value while the grantor retains the right to live there for a term

A QPRT transfers the remainder interest in a home to heirs at a discounted gift tax value, with the grantor retaining the right to occupy the home for a specified term.

Under the Pension Protection Act of 2006 (PPA), which of the following is a permissible vesting schedule for employer *nonelective* (profit-sharing) contributions made to a defined contribution plan?

Answer: 2 to 6-year graded vesting

The Pension Protection Act of 2006 (PPA) required that employer nonelective contributions (like profit sharing) follow the same faster vesting schedules previously established for matching contributions. The permissible maximum schedules are a 3-year cliff (100% vested after 3 years) or a 2 to 6-year graded schedule (20% vested after 2 years, increasing by 20% each year until 100% vested after 6 years). The 5-year cliff and 2 to 7-year graded schedules were the pre-PPA rules for nonelective contributions.

What is a deferred income annuity (DIA)?

Answer: An annuity purchased today with income payments beginning at a specified future date

A DIA (also called a longevity annuity) is funded with a lump sum today, with income payments starting at a future date—often an advanced age—to hedge against longevity risk.

What is a Section 1035 exchange in the context of annuities?

Answer: A tax-free exchange of one annuity contract for another annuity contract

A Section 1035 exchange allows a tax-free transfer of an existing annuity into a new annuity contract, preserving the cost basis and deferring any accumulated gain.

Which factor most significantly increases a client's required retirement nest egg when all other variables are held constant?

Answer: Increasing life expectancy by 5 years

Extending the distribution period by 5 years substantially increases the required capital because withdrawals must be sustained over a longer horizon.

A 74-year-old client with a $1.2 million Traditional IRA is concerned about outliving her money and also wishes to reduce her current Required Minimum Distributions (RMDs). She uses $180,000 from her IRA to purchase a Qualified Longevity Annuity Contract (QLAC) with income deferred until age 85. How does this transaction impact the calculation of her RMD for the current year?

Answer: The RMD is calculated on $1,020,000, as the amount used to purchase the QLAC is excluded from the RMD calculation base.

Funds used to purchase a QLAC are excluded from the IRA account balance when calculating the annual RMD, up to the current statutory limit (the lesser of $200,000 as of 2023, indexed for inflation, or 100% of the account value). By moving $180,000 into a QLAC, the client reduces her RMD-subject balance from $1,200,000 to $1,020,000 ($1,200,000 - $180,000), thus lowering her current tax liability while securing future income.

A client plans to fund retirement with both a 401(k) and a Roth IRA. Which tax planning advantage does the Roth IRA specifically provide in retirement?

Answer: Qualified withdrawals are tax-free, providing tax diversification

Roth IRA qualified withdrawals are income-tax-free, allowing retirees to manage taxable income levels and reduce tax burden on other sources.

A client receives $18,000 per year from a pension. He contributed $30,000 after-tax to the plan. Using the Simplified Method with 240 expected payments, what is his monthly tax-free exclusion?

Answer: $125

$30,000 ÷ 240 payments = $125 per month excluded from taxable income.

To manage sequence of returns risk, a planner suggests a client hold several years' worth of living expenses in a 'buffer asset.' The strategy is to draw from this asset during market downturns to avoid selling equities at a loss. Which of the following would be the MOST appropriate choice for a buffer asset?

Answer: An indexed universal life insurance policy with a significant cash value.

An ideal buffer asset should be stable in value, liquid, and not highly correlated with the equity market. The cash value in a life insurance policy fits these criteria well, as it typically grows at a contractually guaranteed or stable rate and can be accessed via tax-free loans or withdrawals. A growth stock fund is highly correlated with the market, a long-term bond fund has significant interest rate risk, and non-traded REITs are highly illiquid, making them poor choices for this purpose.

Which retirement account type is NOT subject to required minimum distributions during the original owner's lifetime?

Answer: Roth IRA

Roth IRAs are not subject to RMDs during the original owner's lifetime, making them a powerful tool for legacy planning and tax-free wealth transfer.

Which of the following individuals qualifies as an 'eligible designated beneficiary' entitled to stretch distributions over their own life expectancy?

Answer: A chronically ill individual as defined under IRC Section 7702B

Chronically ill individuals are one of five categories of eligible designated beneficiaries who may use the life expectancy stretch method under SECURE Act rules.

A CRPC designee is offered a large referral fee from a long-term care insurance provider for each client enrolled. How should this be handled ethically?

Answer: Disclose the referral fee arrangement fully to clients before recommending the insurance

Referral fees create conflicts of interest that must be fully disclosed so clients can evaluate whether the recommendation is truly in their best interest.

When is the only time a living will be applicable?

Answer: When the declarant is in a terminal or similar condition.

Explanation: A living will, also known as an advance directive, is a legal document that specifies a person's preferences regarding medical treatment in the event they are unable to communicate their wishes. It becomes applicable when the declarant is in a terminal or similar condition, meaning they are incapacitated and near the end of life with no hope of recovery. In such circumstances, medical providers are required to comply with the instructions outlined in the living will. If the declarant is not in such a condition, the living will may not be applicable, and medical providers may not be obligated to follow its directives.

A client is going through a divorce. Their spouse is entitled to a portion of their 401(k) plan assets. Which legal instrument is required to properly divide the retirement plan assets without causing a taxable event for the plan participant?

Answer: A Qualified Domestic Relations Order (QDRO)

A Qualified Domestic Relations Order (QDRO) is a legal order, typically issued as part of a divorce or legal separation, that recognizes the right of an 'alternate payee' (like a former spouse) to receive all or a portion of a retirement plan participant's benefits. A QDRO is necessary to allow the plan administrator to make payments to someone other than the participant without violating ERISA and to avoid immediate taxation for the participant on the distributed amount.

Which term describes the phenomenon where a retiree's physical health declines after retirement due primarily to reduced mental and social stimulation?

Answer: Disuse syndrome

Disuse syndrome describes physical and cognitive decline resulting from insufficient mental, social, and physical activity in retirement.