NASAA Series 66 — All Questions

A client with stock worth $800,000 and a basis of $100,000 transfers it to a charitable remainder trust that then sells it. Which statement is correct?

• a.The trust sells tax-free; the client gets income plus a partial deduction✓
• b.The client receives a charitable deduction for the full $800,000 market value
• c.The client gets no deduction at all, since the right to income is retained
• d.The client is taxed on the $700,000 gain when the stock is transferred

A CRT is tax-exempt, so it can sell appreciated stock without paying tax at the sale, and the client keeps an income stream with a deduction equal to the present value of the charity's remainder. The transfer is not a taxable sale. A full deduction is impossible because the client keeps an income interest. Retaining income does not eliminate the deduction for the remainder.IRC sections 664 and 170(f)(2)

A U.S. citizen dies with a $5 million estate and leaves all of it outright to a spouse who is not a U.S. citizen. What is needed for the estate to claim the unlimited marital deduction?

• a.A prenuptial agreement waiving the spouse's rights to the property
• b.The property must pass into a qualified domestic trust (QDOT)✓
• c.Nothing more, since the marital deduction is unlimited for any spouse
• d.The estate must elect portability on a timely Form 706

The marital deduction is denied for property passing outright to a surviving spouse who is not a U.S. citizen unless the property passes to a QDOT, which defers estate tax until principal is distributed or the spouse dies. The deduction is not unlimited for every spouse. A waiver would not satisfy the statute. Portability is a separate election concerning the unused exclusion, not a way to claim the deduction.IRC section 2056(d)

A 40-year-old single client has 2026 modified AGI of $160,500. Assume the Roth IRA contribution limit is $7,500 and the phase-out range for single filers is $153,000 to $168,000. What is the maximum Roth IRA contribution?

• a.$5,625
• b.$3,750✓
• c.$7,500
• d.$1,875

The $160,500 income is halfway through the $15,000 range ($7,500 / $15,000 = 50%), so the limit is cut by half, from $7,500 to $3,750. The full $7,500 applies only below $153,000. The $5,625 figure assumes a 25% reduction. Zero applies only at or above $168,000.IRC section 408A(c)(3)

A single client covered by a workplace retirement plan has 2026 modified AGI of $95,000, above the $91,000 top of the deduction phase-out. The client contributes to a traditional IRA. What is the result?

• a.The contribution is an excess contribution, because income exceeds the limit for IRAs
• b.The contribution is partly deductible, because income is within the phase-out range
• c.The contribution is permitted but nondeductible, and the basis is tracked on Form 8606✓
• d.The contribution is fully deductible, because income limits apply only to Roth IRAs

Income limits affect only whether a traditional IRA contribution is deductible when the owner is covered by a plan; anyone with earned income may contribute. Above $91,000 for a covered single filer the deduction is gone, and the after-tax basis is tracked on Form 8606. The excess-contribution answer applies Roth rules to a traditional IRA. The deduction is not partial because the income is beyond the range. It is not fully deductible, because covered taxpayers face a phase-out.IRC section 219(g)

A married couple filing jointly, both age 40, has $90,000 of compensation, all earned by one spouse. Ignoring income limits for Roth contributions, what is the most they can put into IRAs for 2026 if the individual limit is $7,500?

• a.$8,600, which includes a catch-up contribution amount
• b.$7,500, since only the earning spouse may contribute
• c.$90,000, limited only by their combined compensation
• d.$15,000, as long as joint compensation covers both✓

A spousal IRA lets a nonworking spouse contribute based on the working spouse's compensation, so the couple can contribute up to $7,500 each, or $15,000, provided joint compensation covers it. Restricting contributions to the earner ignores the spousal rule. The catch-up of $1,100 applies only at age 50 or older. Compensation is a ceiling, not the limit.IRC section 219(c)

A client holds a $93,000 pre-tax traditional IRA. This year the client makes a $7,000 nondeductible contribution to another traditional IRA and converts that $7,000 to a Roth IRA. All balances are as of year-end. How much of the conversion is taxable?

• a.$0
• b.$6,510✓
• c.$7,000
• d.$6,473

The pro-rata rule treats all traditional IRAs as one: after-tax basis is $7,000 of a $100,000 total (the $93,000 left plus the $7,000 converted), so 7% of the conversion is tax-free and 93% x $7,000 = $6,510 is taxable. Zero assumes the converted dollars can be selected as the after-tax ones. $6,473 comes from leaving the converted $7,000 out of the denominator. $7,000 ignores the basis altogether.IRC section 408(d)(2)

A 45-year-old converted $20,000 from a traditional IRA to a Roth IRA two years ago. The Roth IRA has never held regular contributions or other conversions, and the client now withdraws the $20,000. What is the tax result?

• a.Income tax on $20,000 with no additional tax, since conversions are available any time
• b.No income tax and no additional tax, because Roth contributions come out first
• c.Income tax on $20,000 plus a $2,000 additional tax, since the full amount is taxable
• d.No income tax, but the 10% additional tax of $2,000 applies within five years✓

The converted amount was taxed at conversion, so it is not taxed again, but a distribution within five years of conversion before age 59½ draws the 10% additional tax on the part that was taxable at conversion ($2,000). Taxing the $20,000 again would tax it twice. Because the account holds nothing but the conversion, the withdrawal comes from it; if regular contributions were also in the account, the ordering rules would take those out first, tax-free and penalty-free, and conversions carry their own five-year clocks.IRC section 408A(d)(3)(F)

A 76-year-old client was required to take a $20,000 RMD for the year but took nothing, and then takes the full amount and files the correction within the correction window. What is the excise tax?

• a.$10,000
• b.$5,000
• c.$20,000
• d.$2,000✓

The excise tax on a missed RMD is 25% of the shortfall, reduced to 10% if the account owner takes the missed amount and files a return within the correction window. Ten percent of $20,000 is $2,000. $5,000 is the uncorrected 25% rate. $10,000 reflects the pre-2023 50% rate. $20,000 is the full shortfall and not the tax.IRC section 4974(a) and (e)

An adult child of the owner, who is not disabled or chronically ill, inherits a Roth IRA from a parent who died in 2025 after the account had been open more than five years. Which statement describes the child's distribution requirements?

• a.Annual withdrawals over the beneficiary's life expectancy must begin the year after death
• b.Empty the account by the end of year ten after death, with no required annual withdrawals✓
• c.Empty it within five years, because the owner died after the required beginning date
• d.The beneficiary may roll the account into their own Roth IRA to delay withdrawals

An adult child who is not an eligible designated beneficiary falls under the ten-year rule, and a Roth IRA owner is treated as having died before the required beginning date, so no annual distributions are required within the ten years; qualified withdrawals are also tax-free. Life-expectancy payments are for eligible designated beneficiaries such as a surviving spouse, a minor child, or a disabled or chronically ill person. The five-year rule applies only when there is no designated beneficiary, and a Roth owner is never treated as having died after the required beginning date. Only a surviving spouse may treat the IRA as their own.IRC section 401(a)(9)(B)(ii) and (H)

A 52-year-old widow inherits her late husband's traditional IRA and plans to take distributions for living expenses. Which choice avoids the 10% additional tax on those withdrawals?

• a.Either choice, because a surviving spouse is exempt from the additional tax in both
• b.Retitle the account to her children, since the exception passes to them as owners
• c.Roll it into her own IRA, since a spousal rollover waives the additional tax for withdrawals
• d.Keep the account as an inherited IRA, since distributions made because of the owner's death are exempt✓

Distributions from an inherited IRA are exempt from the 10% additional tax on early distributions whatever the beneficiary's age, so the widow can withdraw freely (subject to income tax). Treating the account as her own makes withdrawals before 59½ subject to the additional tax. Surviving-spouse status alone does not exempt distributions. Retitling to children is not a method of accessing her own needs.IRC section 72(t)(2)(A)(ii)

A 71-year-old client who is not yet required to take RMDs wants to send $5,000 directly from a traditional IRA to a public charity. Which statement is accurate?

• a.It qualifies, because QCD eligibility begins at age 70½, regardless of the RMD age✓
• b.It qualifies only if the payment is directed to the client's own donor-advised fund
• c.It does not qualify until the client reaches the age at which RMDs must begin
• d.It qualifies, but the $5,000 is taxable income offset only by an itemized deduction

A QCD is available from age 70½ regardless of the RMD age, and a direct transfer to a public charity is excluded from gross income. It does not wait for RMDs to begin. The exclusion means the amount is not income at all, so no deduction is needed. Gifts to donor-advised funds do not qualify as QCDs.IRC section 408(d)(8)

A 56-year-old client leaves a job and holds the former employer's 401(k) and an old rollover IRA. Which source can fund withdrawals before age 59½ without the 10% additional tax?

• a.Neither account, because the exception does not begin until the client turns 59½
• b.The old IRA, since the age 55 exception applies to every retirement account
• c.The former employer's 401(k), since separation after age 55 qualifies✓
• d.Either account, because both qualify once the client has passed the age of 55

The exception applies to distributions from an employer plan after separation from service in or after the year the employee turns 55, and it does not extend to IRAs, so rolling the money into an IRA first would lose it. It does not apply to every account, nor does it cover both sources. The exception begins at 55, not 59½.IRC section 72(t)(2)(A)(v)

Which of the following is NOT subject to the limit of one rollover per 12-month period?

• a.A 60-day rollover distribution from one traditional IRA to another
• b.A 60-day rollover distribution from a SEP-IRA to a traditional IRA
• c.A 60-day rollover distribution from a Roth IRA to another Roth IRA
• d.A trustee-to-trustee transfer between two traditional IRAs✓

The one-per-year limit applies to 60-day rollovers made by the owner from any IRA, aggregated across all the owner's IRAs, including SEP, SIMPLE and Roth IRAs. A direct transfer between trustees is not a rollover distribution and can be repeated as often as needed. The three rollover choices all count toward the limit.IRC section 408(d)(3)(B); IRS Announcement 2014-32

An employee leaves after exactly four years of service. The employer's $10,000 matching contribution follows the statutory two-to-six-year graded vesting schedule. How much of the match belongs to the employee?

• a.$8,000
• b.$6,000✓
• c.$4,000
• d.$10,000

Graded vesting runs 20% after two years, then 40%, 60%, 80% and 100% after six years, so four years means 60% of $10,000, or $6,000. $4,000 is the three-year (40%) figure. $8,000 is the five-year (80%) figure. $10,000 would be the result of the shorter three-year cliff schedule, a different permitted schedule.IRC section 411(a)(2)(B)(ii)

A participant has a vested 401(k) balance of $60,000 and asks for the largest loan the plan can allow. What is the maximum, assuming the plan permits loans?

• a.$60,000
• b.$10,000
• c.$50,000
• d.$30,000✓

The cap is the lesser of $50,000 or the greater of $10,000 and half of the vested balance: half of $60,000 is $30,000, which is above $10,000 and below $50,000. $10,000 is only the floor for small balances. $50,000 ignores the half-of-balance limit. $60,000 is the entire balance, which a loan cannot exceed.IRC section 72(p)(2)(A)

A 40-year-old takes a hardship withdrawal from a 401(k) to buy a first home. How is the withdrawal taxed?

• a.Ordinary income plus the 10% additional tax, since the first-home exception is limited to IRAs✓
• b.Ordinary income only, since the first-home exception applies to every employer plan alike
• c.Tax-free, if the funds are used for the principal residence within 120 days
• d.As ordinary income with the additional tax waived, since hardship status exempts it

A hardship withdrawal is not itself an exception to the 10% additional tax, and the $10,000 first-time homebuyer exception applies to IRA distributions, not to 401(k) plans. The hardship label does not waive the tax. The 120-day period is an IRA concept and still does not make the withdrawal tax-free. The exception is not available across every plan.IRC section 72(t)(2)(F); Treas. Reg. 1.401(k)-1(d)(3)

A small business funds a SEP-IRA with 12% of compensation for the owner. What contribution must it make for an eligible employee earning $40,000?

• a.$10,000, since the employer must equal the owner's dollar contribution amount
• b.$0, since employees fund a SEP through their own deferrals
• c.$4,800, since the same percentage applies to every eligible employee✓
• d.$1,200, since the employer match is limited to 3% of pay

SEP contributions must be allocated by a written formula that gives all eligible employees the same percentage of pay, so 12% of $40,000 is $4,800. The 3% figure belongs to the SIMPLE IRA match. A standard SEP has no employee deferrals. Matching the owner's dollar contribution would not follow a uniform percentage.IRC section 408(k)(3)(C)

An employee earning $60,000 defers 5% of pay into the employer's SIMPLE IRA. The employer uses the standard matching formula. What is the employer match?

• a.$600, the 1% reduced-match election
• b.$1,800, a match of 3% of pay✓
• c.$1,200, the 2% nonelective contribution
• d.$3,000, matching the full 5% deferral

The standard SIMPLE match is dollar for dollar up to 3% of compensation, so 3% of $60,000 is $1,800 even though the employee deferred $3,000. Matching all of the deferral ignores the cap. The $1,200 figure is the 2% nonelective alternative, which is given regardless of deferrals. $600 is the 1% reduced match, which the employer may elect only in limited years and must announce in advance.IRC section 408(p)(2)(A)(iii)

Which description fits a cash balance plan?

• a.A defined contribution plan in which the participant selects investments and carries the risk
• b.A defined benefit plan that credits each participant with a hypothetical account balance✓
• c.A profit-sharing plan in which the employer's yearly contribution is entirely discretionary
• d.A nonqualified deferral arrangement held on the employer's balance sheet

A cash balance plan is a defined benefit plan: the employer funds it, carries the investment risk and promises a benefit stated as a hypothetical account balance. Participant-directed accounts describe a 401(k), a defined contribution plan. Discretionary yearly contributions describe profit sharing. A nonqualified plan lacks the qualified status that a cash balance plan has.IRC section 411(a)(13) and (b)(5)

A self-employed consultant with no employees and $60,000 of net earnings wants to shelter as much as possible. Why might a solo 401(k) beat a SEP-IRA?

• a.It allows employee elective deferrals in addition to an employer contribution✓
• b.It is the only plan permitting a sole proprietor to contribute
• c.It permits participants to avoid every early-distribution additional tax
• d.It allows a much higher employer contribution percentage than a SEP

A solo 401(k) lets the owner make elective deferrals as the employee and an employer profit-sharing contribution on top, which helps at modest income, while a SEP has only the employer contribution. The employer percentage is comparable in both. Early distributions from a 401(k) are still penalized. A sole proprietor can also contribute to a SEP or a SIMPLE.IRC section 401(k); IRC section 408(k)

A 45-year-old leaves county government and withdraws funds from a governmental 457(b) plan. How is the withdrawal taxed?

• a.Ordinary income only, since the 10% additional tax does not reach 457(b) plans✓
• b.As ordinary income plus the 10% additional tax, since the participant is under age 59½
• c.Tax-free, because the account was funded with deferrals of pretax pay from salary
• d.As ordinary income plus 10%, unless the participant has reached age 55 or older

The 10% additional tax on early distributions applies to qualified plans, 403(b) plans and IRAs but not to a governmental 457(b), so a withdrawal after severance is ordinary income only (if rolled to an IRA, later IRA withdrawals would be subject to it). Pretax deferrals are taxable when withdrawn. The age 55 rule is a separate exception for qualified plans that is unnecessary here.IRC section 72(t)(1); IRC section 457(d)

An executive's deferred compensation is held in a rabbi trust, and the employer later becomes insolvent. What is the likely outcome for the executive?

• a.The executive ranks as a secured creditor with first claim on all of the trust assets
• b.The assets are shielded from the employer's creditors because they sit in a separate trust
• c.The PBGC insures the deferred balance up to its annual statutory maximum guarantee
• d.The assets remain reachable by the employer's creditors, so the executive could lose the deferrals✓

A rabbi trust keeps assets reachable by the employer's creditors in insolvency, which is how the executive avoids current taxation under constructive receipt, so the executive is only a general unsecured creditor. Protection from creditors would trigger current tax. The executive has no secured claim. PBGC insurance covers qualified defined benefit plans, not nonqualified deferred compensation.Treas. Reg. section 1.451-2 (constructive receipt)

A 401(k) committee adds a new fund to a menu that already offers a broad range of diversified options. It never compares the fund's fees or performance with alternatives. Which ERISA duty is most clearly implicated?

• a.Plan documents, because the committee departed from the written plan terms
• b.Prudence, because the selection followed no reasoned investigation✓
• c.Diversification, because the committee added only one new fund
• d.Bonding, because the committee did not insure the added investment

ERISA measures prudence by the process a prudent expert would follow, including investigating and comparing alternatives, fees and performance before selecting an investment. The menu was already diversified, and adding one fund does not create a diversification problem. Nothing indicates the plan terms were violated. The bonding rule covers people who handle plan funds and has nothing to do with investment selection.ERISA section 404(a)(1)(B), 29 USC 1104(a)(1)(B)

Which of the following is a prohibited transaction under ERISA for a plan fiduciary?

• a.Making a participant loan under a plan loan program that meets the legal conditions
• b.Buying shares of a mutual fund managed by an unrelated adviser at market price
• c.Buying land from the plan sponsor's president for the plan✓
• d.Paying a recordkeeper reasonable compensation under a written service contract

Buying property from a party in interest, such as the sponsor's president, is a prohibited transaction. ERISA exempts reasonable compensation for necessary services under a reasonable arrangement. Participant loans that follow the plan's loan program and legal conditions are also exempt. Purchasing a fund from an unrelated manager involves no party in interest.ERISA section 406(a); section 408(b)(2)

A disqualified person engages in a prohibited transaction involving $200,000. Assuming the transaction is not corrected in time, what is the first-tier excise tax for the year?

• a.$30,000✓
• b.$200,000
• c.$20,000
• d.$50,000

The first-tier tax is 15% of the amount involved for each year in the taxable period, so 15% of $200,000 is $30,000. $20,000 would be 10%. $50,000 would be 25%, the missed-RMD rate. $200,000 is the 100% second-tier tax, which applies only if the transaction is still uncorrected after notice.IRC section 4975(a) and (b)

To gain liability relief under ERISA section 404(c), a plan must give participants what minimum choices and trading frequency?

• a.At least five diversified options with differing risk and return, changeable annually
• b.At least two diversified options with differing risk and return, changeable monthly
• c.At least three diversified options with differing risk and return, changeable on plan anniversary
• d.At least three diversified options with differing risk and return, changeable at least quarterly✓

The regulation requires at least three diversified investment alternatives, each with materially different risk and return characteristics, and the chance to give investment instructions at least quarterly. Two alternatives is too few and monthly is more frequent than required. Five alternatives is more than the regulation asks, and annual-only changes is too infrequent. The anniversary-only choice fails the quarterly rule.29 CFR 2550.404c-1(b)(2)(ii)

A plan satisfies the section 404(c) conditions. Which responsibility do the plan fiduciaries still keep?

• a.Reporting each participant's investment gains on that participant's tax return
• b.Covering losses that result from a participant's own allocation decisions
• c.Prudently selecting and monitoring the investment options offered on the menu✓
• d.Choosing the asset mix for every participant who gives instructions

Section 404(c) relieves fiduciaries of liability for losses that result from a participant's own exercise of control, but they remain responsible for the prudence of the menu itself. Participant-directed losses are what the safe harbor shields them from. Individual tax reporting belongs to the participant. If a participant gives instructions, the participant, not the fiduciary, chooses the mix.ERISA section 404(c); 29 CFR 2550.404c-1(d)

A participant fails to make an investment election. Which option can the plan use as a qualified default investment alternative?

• a.A fund holding only the sponsoring company's stock, as an eligible account
• b.The plan's highest-yielding fund over the previous three years
• c.A target-date fund keyed to the participant's expected retirement date or age✓
• d.A money market fund, held for as long as the participant remains in the plan

Qualified default investment alternatives are a target-date or lifecycle fund, a balanced fund and a managed account. A capital preservation product qualifies only for the first 120 days after the first contribution, not indefinitely. An employer stock fund is not a QDIA. Past yield is not a criterion at all.29 CFR 2550.404c-5(e)(4)

A plan committee wants to transfer responsibility for selecting plan investments to an outside party. Which appointment achieves this?

• a.An attorney who drafts the investment policy statement for the committee
• b.A registered adviser, bank or insurer that acknowledges fiduciary status in writing✓
• c.The plan's recordkeeper, which places participant trades under its administrative contract
• d.A broker-dealer that provides non-discretionary recommendations on the investment menu

An investment manager as defined in ERISA section 3(38) must be a registered investment adviser, bank or insurance company that has the power to manage plan assets and acknowledges in writing that it is a fiduciary; the committee is then relieved of investment decisions but must still prudently select and monitor the manager. A recordkeeper administers rather than manages. Non-discretionary advice leaves the decision with the committee. An attorney drafting a policy statement does not manage assets.ERISA section 3(38) and section 405(d)

A plan trustee learns that a co-fiduciary is making an imprudent investment with plan assets, takes no steps to remedy it and gains nothing personally. What is the trustee's position?

• a.Liable, because knowing of another's breach and not acting to remedy it creates liability✓
• b.Liable only if the plan document specifically names the trustee as a named fiduciary
• c.Not liable, since liability attaches only to the fiduciary who personally made the investment decision
• d.Not liable, because the trustee received no personal benefit from the imprudent investment

A fiduciary is liable for another fiduciary's breach if it knows of the breach and fails to make reasonable efforts to remedy it. Liability is not confined to the one who acted, and personal profit is not required. The rule applies to anyone who is a fiduciary, whether or not named in the plan document.ERISA section 405(a)(3), 29 USC 1105(a)(3)

A plan holds $7 million in assets handled by plan officials and has no employer securities. What is the required fidelity bond?

• a.$700,000
• b.$350,000
• c.$500,000✓
• d.$1,000,000

The bond must equal 10% of the funds handled, between $1,000 and a maximum of $500,000, so 10% of $7 million is $700,000 but the cap limits it to $500,000. $350,000 would be 5%. $700,000 ignores the cap. The $1,000,000 maximum applies only to plans that hold employer securities.ERISA section 412; 29 USC 1112(a)

A plan document requires a fund that the committee has found imprudent after a fee review. What must the committee do?

• a.Follow the document in every case, since the document controls fiduciary conduct fully
• b.Follow the document only where consistent with ERISA, and so drop the imprudent fund✓
• c.Set the document aside whenever the committee prefers a different approach
• d.Ask the Department of Labor for written permission before changing the fund lineup

Fiduciaries must follow the plan documents only insofar as they are consistent with ERISA, so a document term cannot excuse an imprudent investment. The document does not override the statute. Fiduciaries cannot ignore it merely by preference, since its terms still generally bind them. No agency approval is required before a fiduciary acts prudently.ERISA section 404(a)(1)(D), 29 USC 1104(a)(1)(D)

A parent withdraws $25,000 from a 529 plan in 2026 to pay private elementary school tuition. Assume the K-12 expense limit is $20,000 per beneficiary per year. How is the withdrawal treated?

• a.None of it is qualified, since 529 plans cover only college expenses
• b.Only $20,000 is qualified; the other $5,000 is nonqualified✓
• c.The extra $5,000 is a tax-free rollover to a sibling's account
• d.All $25,000 is qualified, since K-12 tuition is a qualified expense

For tax years after 2025, qualified K-12 expenses are limited to $20,000 per year per beneficiary, so the excess is nonqualified and its earnings portion is taxable and subject to the 10% additional tax. The limit applies, so not all $25,000 qualifies. K-12 tuition has been a qualified expense since 2018. Moving funds to a sibling requires a rollover into another 529 account within 60 days, not a withdrawal.IRC section 529(c)(7)

A beneficiary's 529 account has been open 16 years, and the beneficiary has $50,000 of earned income and no other IRA contributions in 2026. Assuming a $7,500 IRA limit, what is the most that can be rolled to a Roth IRA this year?

• a.$15,000, twice the annual contribution limit
• b.$35,000, the lifetime maximum for such rollovers
• c.$0, since the account must be open at least 20 years
• d.$7,500, the annual IRA contribution limit✓

A 529-to-Roth rollover requires an account open 15 years and is capped each year at the IRA limit (reduced by other IRA contributions) and at $35,000 over a lifetime. The lifetime cap is not an annual amount. Doubling the limit is not allowed. Fifteen years, not twenty, is the holding requirement, so the account qualifies.IRC section 529(c)(3)(E)

A child's grandparents and an aunt each contribute $1,500 to the child's Coverdell ESA in the same year. The contribution limit is $2,000 per beneficiary. What is the result?

• a.No excess, since each contributor stays below the $2,000 per-donor limit
• b.The $2,500 excess is treated as income taxable to the child, with no excise tax
• c.A 10% additional tax on the entire $4,500 that was contributed to the account
• d.A $2,500 excess contribution, subject to a 6% excise tax each year it remains✓

The $2,000 limit applies to all contributions for one beneficiary from every contributor combined, so $4,500 leaves $2,500 in excess, taxed at 6% each year until withdrawn. The limit is per beneficiary, not per donor. The 10% additional tax applies to nonqualified distributions, not excess contributions. The excess is not income to the child; the excise tax is the cost.IRC sections 530(b)(1)(A)(iii) and 4973(e)

In 2026 a 17-year-old dependent has $5,000 of interest and dividend income and no earned income. Using the $1,350 standard deduction base, how much is taxed at the parents' rate under the kiddie tax?

• a.$1,350
• b.$5,000
• c.$3,650
• d.$2,300✓

The first $1,350 is sheltered by the child's standard deduction and the next $1,350 is taxed at the child's rate, so unearned income above $2,700 goes at the parents' rate: $5,000 - $2,700 = $2,300. $1,350 is only the first band. $3,650 subtracts only the standard deduction. $5,000 taxes all of it at the parents' rate.IRC section 1(g); Rev. Proc. 2025-32

A 40-year-old in the 24% bracket withdraws $3,000 from an HSA and spends it on a vacation. What is the combined federal income tax and additional tax cost?

• a.$1,020
• b.$1,320✓
• c.$720
• d.$600

A distribution not used for qualified medical expenses is ordinary income ($3,000 x 24% = $720) plus a 20% additional tax ($600), a total of $1,320. $720 omits the additional tax. $1,020 applies the 10% IRA-style rate instead of 20%. $600 is the additional tax alone.IRC section 223(f)(2) and (4)

An employee's health FSA plan allows carryover. At year-end the employee has $900 unused, and the 2026 carryover limit is $680. What happens?

• a.$680 is paid out to the employee as taxable income, and $220 is forfeited
• b.Nothing carries over, since FSA balances are always forfeited at year-end
• c.All $900 carries into the next year because the plan allows carryover
• d.$680 may be carried into the next year, and the remaining $220 is forfeited✓

A health FSA may allow a carryover up to a set amount ($680 for 2026), and anything above the limit is forfeited under the use-it-or-lose-it rule. The carryover has a cap, so the full $900 does not move. FSA balances are not paid out in cash; that would defeat the pretax treatment. Forfeiture of everything applies only when no carryover or grace period is offered.IRS Notice 2013-71; Rev. Proc. 2025-32

In 2026 a 40-year-old whose disability began at age 33 asks about opening an ABLE account. Is the person eligible?

• a.No, because onset must have occurred before age 26, as in the original ABLE Act
• b.Yes, because onset of disability before age 46 now qualifies✓
• c.No, because ABLE accounts are limited to beneficiaries under age 18
• d.Yes, but only if a parent or guardian opens the account

The age limit for disability onset rises from 26 to 46 beginning in 2026, so onset at 33 qualifies. The age-26 rule is the prior law. ABLE accounts have no limit tied to being a minor. An eligible adult may open and control the account.IRC section 529A(e)(1)(A)

Two friends own a brokerage account as joint tenants with right of survivorship. One dies, and the will leaves all of that person's assets to a nephew. Who takes the account?

• a.The nephew, because the will controls all property owned at death
• b.The estate, which distributes it after probate under the will
• c.The surviving joint tenant, because survivorship overrides the will✓
• d.The nephew and the surviving joint tenant, each taking half of the account

Property held as joint tenants with right of survivorship passes automatically to the survivor outside probate, regardless of the will. The will cannot reach it. A fifty-fifty division would describe tenants in common only if the decedent could leave a half interest by will. Probate distribution would apply to property titled in the decedent's sole name.Uniform Probate Code section 6-101 (nonprobate transfers); state property law

U.S. citizen spouses own a $1,000,000 home as joint tenants with right of survivorship, and the husband paid the entire purchase price. The husband dies. What amount of the home is included in his gross estate?

• a.$1,000,000, since he paid the full price
• b.$500,000, since half of a qualified spousal joint interest is included✓
• c.$0, since survivorship property passes outside the estate
• d.$250,000, since the marital deduction removes half of the interest

For spouses who are the only joint tenants, a qualified joint interest brings exactly half of the value into the decedent's gross estate, whoever paid for it. Inclusion of the full amount follows the contribution rule that applies to joint owners who are not spouses. Survivorship passes the title outside probate but does not remove the value from the estate. The marital deduction applies after inclusion, to the amount included; it does not halve what is included.IRC section 2040(b)

Which form of ownership is available only to married couples and, in states that recognize it, can shield the property from the creditors of just one spouse?

• a.A custodial account under the Uniform Transfers to Minors Act
• b.Joint tenancy with right of survivorship
• c.Tenancy by the entirety✓
• d.Tenancy in common

Tenancy by the entirety treats the spouses as a single owner with survivorship rights, and in states that recognize it a creditor of only one spouse generally cannot reach the property. Joint tenancy is open to any people and is reachable by a creditor of one owner. Tenancy in common has no survivorship and no married-couple limit. A UTMA account is held for a minor.State property law (tenancy by the entirety)

Spouses in a community property state hold stock with a $200,000 basis. When the first spouse dies, it is worth $600,000. What is the surviving spouse's basis in the stock?

• a.$300,000
• b.$200,000
• c.$400,000
• d.$600,000✓

Under the community property rule both halves get a stepped-up basis at the first death, so the survivor's basis is the full $600,000. $200,000 is the original basis with no step-up. $300,000 steps up only half and ignores the survivor's share. $400,000 is the result for spouses holding as joint tenants in a common-law state, where only the decedent's half is stepped up.IRC section 1014(b)(6)

A client's brokerage account is registered transfer on death to a daughter, but the client's will leaves everything to a son. At the client's death, who receives the account?

• a.The daughter, because the registration passes outside the will✓
• b.The daughter and the son equally, because the two documents conflict
• c.The estate, so the account goes through probate before distribution
• d.The son, because the will states the client's final wishes

A transfer-on-death registration is a contract with the broker that takes effect at death and overrides the will, so the named beneficiary receives the assets without probate. The will governs only probate assets. A conflict does not produce a split. The account would go through probate only if the TOD registration had been absent.Uniform TOD Security Registration Act (nontestamentary transfer on death)

A grandparent dies intestate, and the estate of $300,000 passes per stirpes. One child is living; the other child predeceased, leaving three children. How much does each of the three grandchildren receive?

• a.$50,000✓
• b.$100,000
• c.$75,000
• d.$150,000

Per stirpes divides the estate by branch, so each of the two children's branches receives $150,000, and the three grandchildren split the deceased child's branch for $50,000 each. $75,000 would split the estate among four people equally. $100,000 would split it among only the three grandchildren. $150,000 is the whole branch.Uniform Probate Code section 2-106

Which statement about a revocable living trust is correct?

• a.It can avoid probate for assets titled in the trust, but the assets remain in the grantor's taxable estate✓
• b.It eliminates the step-up in basis at death, because the trust is treated as the owner
• c.It removes the assets from the grantor's taxable estate, since the trust is a separate legal entity
• d.It shields the assets from the grantor's creditors, since the grantor no longer owns them

Because the grantor can revoke or change the trust, assets titled in it avoid probate but are included in the gross estate and reachable by the grantor's creditors. Estate tax removal requires an irrevocable transfer. Assets in the trust still receive a step-up in basis at death, since they are included in the estate.IRC sections 2036 and 2038; IRC section 1014(b)(1)

A 45-year-old receives $50,000 from an ex-spouse's 401(k) under a qualified domestic relations order. Which statement is correct?

• a.It is subject to the 10% additional tax, since the recipient is under age 59½
• b.It is tax-free, since transfers between divorcing spouses never create income
• c.It is taxable to the plan participant, since the account remains the participant's
• d.It is taxable to the recipient, exempt from the 10% additional tax, and may be rolled over✓

A payment to an alternate payee under a QDRO is taxed to the alternate payee, is exempt from the 10% additional tax, and can be rolled into an IRA. The participant is not taxed on a QDRO payment to a spouse or former spouse. The tax-free divorce transfer rule applies to IRA transfers incident to divorce, not to payments out of an employer plan.IRC section 402(e)(1)(A); IRC section 72(t)(2)(C)

A client contributes appreciated stock to a donor-advised fund. Which statement is accurate?

• a.The client takes the deduction only in each later year in which the fund makes a grant
• b.The gift is irrevocable, and the client may take a deduction in the year of contribution✓
• c.The client may reclaim the assets later, since the fund is held in the client's own name
• d.The fund's earnings are taxed to the client each year as they accrue

A donor-advised fund contribution is a completed, irrevocable gift to the sponsoring charity, and the donor has only advisory privileges over grants, so the deduction is available when the contribution is made. The donor cannot take the assets back. The deduction does not wait for grants. The fund is a charity, so its earnings are not taxed to the donor.IRC section 170(f)(18); IRC section 4966

A client's agent under a durable power of attorney tries to sell the client's securities after the client dies. What is the status of that authority?

• a.It ended at the client's death, and the executor now has authority over the estate✓
• b.It continues because "durable" means the authority survives the principal's death
• c.It continues until the brokerage firm receives a copy of the death certificate
• d.It survives for a short period so that open transactions may be completed

A power of attorney, durable or not, ends when the principal dies; durability means it survives the principal's incapacity. After death, the personal representative named in the will controls the estate's assets. Notice to the firm does not extend the authority. A short survival period is not recognized by agency law.Uniform Power of Attorney Act section 110

A parent retitles a $400,000 account as joint tenants with right of survivorship with an adult son, and nothing else shows a different intent. The parent's will divides everything equally among three children. At the parent's death, who owns the account?

• a.All three children equally, since the will states the parent's wishes
• b.The son alone, since survivorship overrides the will✓
• c.The son alone only if he contributed to the account
• d.The estate, since adding a joint owner does not change title

Retitling the account as joint tenants with right of survivorship gave the son survivorship rights, so it passes to him alone at death, whatever the will says. The will does not control survivorship property. Contribution is not required for survivorship ownership. The account passes outside the estate; the other children could prevail only with evidence that the parent never meant survivorship, such as a convenience account, and the stem rules that out.State property law (joint tenancy); Uniform Probate Code section 6-212