NASAA Series 65 — All Questions

A client transfers an existing $1 million life insurance policy to an irrevocable life insurance trust and dies two years later. What is the estate tax result?

• a.The proceeds are excluded only if the trust was funded with premium gifts under the annual exclusion
• b.Only the policy's cash value at transfer is included, not the proceeds
• c.The proceeds are excluded, because an irrevocable trust owns the policy
• d.The proceeds are included in her gross estate because she died within three years of the transfer✓

Life insurance transferred within three years of death is brought back into the gross estate at its full proceeds value. Ownership by an irrevocable trust helps only after the three years have passed. The cash value is not the measure. Premium gifts do not change the three-year rule.IRC s.2035(a)

A client in a second marriage wants her husband to receive income for life, wants her children from her first marriage to receive the principal afterward, and wants the transfer to qualify for the unlimited marital deduction. Which tool fits?

• a.A QTIP trust, which qualifies for the marital deduction and fixes who receives the remainder✓
• b.A testamentary special-needs trust for the husband
• c.A credit shelter trust, which also qualifies for the unlimited marital deduction
• d.An outright bequest to the husband, with a request that he leave the principal to her children

A QTIP trust pays all income to the surviving spouse for life and still qualifies for the marital deduction, while the grantor decides who receives the remainder. A credit shelter trust uses the exclusion amount and does not qualify for the marital deduction. An outright bequest gives up control of the remainder. A special-needs trust is for a beneficiary with a disability.IRC s.2056(b)(7)

A client's adult son receives means-tested government benefits because of a disability. How should she leave him an inheritance so as to protect his eligibility?

• a.By naming him directly as beneficiary of her IRA, since retirement accounts are never counted as his resources
• b.Through a joint account with the son as co-owner
• c.Outright through her will, since inheritances received by a person with a disability are never counted as resources
• d.Through a third-party supplemental needs trust whose trustee has discretion over distributions✓

A properly drafted third-party supplemental needs trust with a discretionary trustee keeps the assets from being counted as his resources while still paying for extras. Outright gifts and beneficiary designations leave the money in his hands and can disqualify him. A joint account makes the funds his, which would also be counted.SSA POMS SI 01120.200 (trusts and SSI resource counting)

Which document names another person to make medical decisions for the client if she cannot speak for herself, rather than only stating her wishes about life support?

• a.A durable power of attorney for finances
• b.A health care proxy (durable power of attorney for health care)✓
• c.A living will
• d.A last will and testament

A health care proxy names an agent to make medical decisions when the client is incapacitated. A living will states treatment wishes but does not name a decision maker. A financial power of attorney covers property and not medical care. A will operates only after death.Uniform Health-Care Decisions Act s.2

A client asks her adviser representative to prepare a will for her after reviewing her estate. What is the proper response?

• a.Prepare a standard form for her, since a will for her own benefit is not legal advice
• b.Draft it if she signs a waiver acknowledging that the adviser is not an attorney
• c.Draft it if the firm's compliance department approves the template
• d.Decline to draft it and refer her to an attorney, since drafting legal documents could be the unauthorized practice of law✓

Drafting a will is the practice of law, which an adviser representative who is not an attorney should not do. The proper course is to coordinate with her attorney. Calling it a standard form does not change that. A waiver does not authorize unlicensed practice. Compliance approval of a template does not license the representative to draft legal documents.State unauthorized-practice-of-law statutes

For 2026, a single filer has $44,000 of taxable income from wages before counting an $8,000 long-term capital gain. The 0% rate on long-term gains applies to taxable income up to $49,450 for a single filer. What is the federal tax on the gain?

• a.$382.50, because $5,450 of the gain fits under the 0% ceiling and $2,550 is taxed at 15%✓
• b.$510.00, because the $2,550 that exceeds the 0% ceiling is taxed at 20%
• c.$0, because her total taxable income is below the 15% bracket's lower limit of $49,450 before the gain
• d.$1,200, because the entire gain is taxed at 15% once she has any other taxable income

Long-term gains sit on top of ordinary taxable income. Her $44,000 leaves $5,450 of room below $49,450, so that part of the gain is taxed at 0%. The remaining $2,550 is taxed at 15%, giving $382.50. Ignoring the stacking would give a wrong answer in either direction. The 20% rate begins far higher than this.IRC 1(h); Rev. Proc. 2025-32 sec. 4.03 (2026 thresholds)

A single client under age 50 has modified AGI of $160,500 in 2026, inside the $153,000 to $168,000 Roth IRA phase-out range. His earned income is more than enough. What is the most he may contribute to a Roth IRA for 2026?

• a.$0, because income above $153,000 bars any Roth contribution
• b.$3,750, because he is halfway through the phase-out range✓
• c.$1,875, because the reduction is figured over a $10,000 range
• d.$7,500, because the phase-out affects only converted amounts

The limit falls in a straight line across the range. His income is $7,500 into a $15,000 range, so half of the $7,500 limit is lost and $3,750 remains. A $10,000 range is the traditional-IRA deduction width used for single filers in earlier years and does not apply here. Contributions are barred completely only at $168,000, and the phase-out applies to direct contributions, which is what this client is making.IRC 408A(c)(3); IRS Notice 2025-67 (2026 limits)

At year-end, a client's traditional IRAs total $200,000, of which $40,000 is after-tax (nondeductible) basis. She converts $50,000 to a Roth IRA during the year and has no other IRAs. How much of the conversion is taxable?

• a.$0, because a conversion is a rollover and rollovers are never taxed
• b.$40,000, because 20% of every distribution from the combined IRAs is treated as nontaxable basis✓
• c.$50,000, because every converted dollar is taxable in the year of conversion
• d.$10,000, because she can withdraw all of her basis first and only the remainder is taxable

Nondeductible basis is recovered pro rata across all traditional, SEP and SIMPLE IRAs, not first-in. Basis is $40,000 of $200,000, or 20%, so 20% of the $50,000 converted ($10,000) is tax free and $40,000 is taxable. Treating the basis as coming out first would give $10,000 taxable, which is the common mistake. A conversion is a taxable event for the pre-tax portion.IRC 408(d)(2); IRS Pub. 590-A; Form 8606

A client was born in 1953, owns only a traditional IRA, and is retired. By what date must she take her first required minimum distribution?

• a.April 1, 2027, the April 1 following the year she reaches age 73✓
• b.April 1, 2026, the April 1 following the year she reaches age 72
• c.April 15, 2027, the tax filing deadline for the year she reaches age 73
• d.December 31, 2026, the end of the year she reaches age 73

She turns 73 in 2026. Distributions must begin by April 1 of the year after she reaches 73, which is April 1, 2027. The first RMD may be delayed to that date, but doing so means two distributions fall in 2027. December 31 applies to RMDs for later years, not the first one. April 15 is a filing date and has no role in RMD timing.IRC 401(a)(9)(C); IRS Pub. 590-B

A 71-year-old client is not yet subject to required minimum distributions. She wants to give $20,000 to her church this year from her traditional IRA. Which statement about a qualified charitable distribution (QCD) is correct?

• a.She is eligible, but the $20,000 must be reported as income and then claimed as a charitable itemized deduction on Schedule A if she itemizes
• b.She is eligible, but the transfer may be made to a donor-advised fund to qualify
• c.She is not eligible, because QCDs are available only once RMDs have begun at age 73, which the SECURE 2.0 Act set as the starting age
• d.She is eligible, because QCDs are available from age 70½, and a direct transfer to the church is excluded from her gross income✓

A QCD may be made once the owner reaches 70½, which is earlier than the RMD age. The money must go directly from the IRA trustee to an eligible charity, and the amount is excluded from gross income instead of being included and then deducted. Distributions to donor-advised funds do not qualify. A QCD can also satisfy an RMD when one applies, but the age rule does not depend on RMDs.IRC 408(d)(8); IRS Pub. 590-B

A client's father died in 2025 and left him, an adult nondisabled son, his traditional IRA. The son is not an eligible designated beneficiary. By what date must the inherited IRA be fully distributed under the 10-year rule?

• a.December 31, 2026, the end of the year after the year of death
• b.December 31, 2035, the end of the tenth year following the year of death✓
• c.December 31, 2030, the end of the fifth year following the year of death
• d.December 31 of the year he reaches age 73, as if he were the original owner

A designated beneficiary who is not a spouse, minor child, disabled or chronically ill person, or someone not more than 10 years younger than the owner must empty the account by December 31 of the tenth year after the owner's death. For a 2025 death that date is December 31, 2035. The five-year rule applies only when there is no designated beneficiary and the owner died before the required beginning date. A non-spouse beneficiary cannot treat the account as his own.IRC 401(a)(9)(H); IRS Pub. 590-B

A 57-year-old client has family coverage under an HDHP for all of 2026 and is not enrolled in Medicare. What is the most she may contribute to her HSA for 2026?

• a.$9,850, because the IRA catch-up amount of $1,100 applies to HSAs as well
• b.$8,750, because the catch-up amount is available only to self-only coverage
• c.$9,750, the family limit of $8,750 plus a $1,000 catch-up✓
• d.$5,400, because the catch-up is added to the self-only limit once she is over 55

The 2026 family HDHP limit is $8,750. An eligible individual aged 55 or older by year-end adds a $1,000 catch-up, which is a fixed statutory amount that is not indexed and is separate from the $1,100 IRA catch-up. The total is $9,750. Both types of coverage allow the catch-up. Using the self-only limit would understate her family limit.IRC 223(b); Rev. Proc. 2025-19; IRS Pub. 969

A grandmother wants to fund a 529 plan for a grandchild in 2026 with the largest lump sum that can be treated as using only annual gift-tax exclusions. The annual exclusion is $19,000, she makes no other gifts to the grandchild, and she is not splitting gifts. What is the maximum?

• a.$95,000, by electing to spread the gift over five years✓
• b.$114,000, because the election covers the year of the gift plus five more years
• c.$76,000, because the election covers the year of the gift plus three more years
• d.$19,000, because only one year's exclusion is ever available for a single gift

Section 529 allows a contribution to be treated as made ratably over five years at the donor's election, so up to five times the annual exclusion ($95,000) can be given at once without using lifetime exemption. The election is made on a gift tax return. The period is five calendar years in total, counting the year of the gift, so four or six multiples are wrong.IRC 529(c)(2)(B); Rev. Proc. 2025-32 sec. 4.42

A married client makes a $30,000 cash gift to his daughter in 2026 from his own account. His wife consents to treat half the gift as hers, and the annual exclusion is $19,000 per donee. What is the result?

• a.$30,000 is a taxable gift, because gifts above $19,000 lose the exclusion entirely
• b.No gift tax and no use of lifetime exemption, and no return is needed because the gift is under $38,000 with both spouses' exclusions combined
• c.No gift tax and no use of lifetime exemption, but a gift tax return must be filed to elect gift splitting✓
• d.$11,000 is a taxable gift, because only his own $19,000 exclusion may be applied to the $30,000 gift without his spouse's consent

With the spouse's consent, each spouse is treated as giving $15,000, and both are under the $19,000 exclusion. The election to split gifts requires Form 709 even though no tax results, so the answer that claims no return is needed is wrong. Without splitting, $11,000 would be a taxable gift reducing his lifetime exemption, but the election removes that outcome. The exclusion applies per gift, so the excess is the only part ever taxable.IRC 2513, 2503(b)

A husband dies in 2026 leaving a $3 million estate entirely to his wife. His executor wants the wife to be able to use his unused estate-tax exclusion later. What must be done?

• a.The executor must timely file an estate tax return electing portability, even though no estate tax is owed✓
• b.The wife must claim the unused exclusion on her own income tax return when she files
• c.The executor must place the unused exclusion in a trust within nine months
• d.Nothing; the unused exclusion passes to the wife automatically at death

The deceased spousal unused exclusion (DSUE) is available to the survivor only if the executor makes the portability election on a timely filed estate tax return, which is required even for an estate below the filing threshold. It is not automatic. The election is not made on an income tax return, and a trust is not required for it.IRC 2010(c)(5)(A); IRS Pub. 559

A client sells 100 shares of a stock for a $4,000 loss. Twenty days later she buys 100 shares of the same stock for $6,000. What is her basis in the new shares?

• a.$6,000, because the new purchase is a separate transaction with its own cost
• b.$2,000, because the loss is subtracted from the cost of the new shares
• c.$10,000, because the disallowed $4,000 loss is added to the $6,000 cost✓
• d.$4,000, because the basis of the old shares carries over unchanged

A repurchase within 30 days before or after a loss sale is a wash sale. The $4,000 loss is not deductible now; it is added to the basis of the replacement shares, so the new basis is $10,000, and the holding period of the old shares is added too. The loss is deferred, not lost. Subtracting it would reverse the adjustment.IRC 1091; IRS Pub. 550

A retired client, age 62 at the annuity starting date in 2022, receives $1,850 a month from a qualified plan pension. His after-tax contributions in the plan total $46,800. Using the Simplified Method, what part of each payment is taxable until his cost is recovered?

• a.$1,670, because $180 of each payment is a return of cost ($46,800 divided by 260)✓
• b.$1,655, because the exclusion is figured with the divisor used for annuities that began before November 19, 1996
• c.$1,850, because pension payments are fully taxable until age 65
• d.$180, because only the recovered cost is taxed

At a starting age of 61 to 65, the Simplified Method divisor for a single life annuity beginning after November 18, 1996 is 260. The monthly exclusion is $46,800 ÷ 260 = $180, leaving $1,670 taxable. The $1,655 figure comes from the older table. The $180 is the excluded part, not the taxable part. Payments from a plan with a cost basis are not fully taxable.IRC 72(d); IRS Pub. 575

A single retiree receives $24,000 in Social Security benefits. Her other income, including tax-exempt interest, is $22,000. How much of her benefits is taxable?

• a.$20,400, because 85% of benefits are taxable once combined income exceeds $25,000
• b.$12,000, because half of the benefits are taxable once combined income exceeds $25,000
• c.$0, because tax-exempt interest is not counted in the formula
• d.$4,500, because her combined income of $34,000 is not above the $34,000 level for the 85% tier✓

Combined income is other income plus half of benefits: $22,000 + $12,000 = $34,000. For a single filer the 50% tier covers combined income from $25,000 to $34,000, so the taxable amount is the lesser of half of the benefits ($12,000) or half of the excess over $25,000 ($4,500). The 85% tier starts only above $34,000. Tax-exempt interest is included in combined income.IRC 86; IRS Pub. 915

For 2026, a 10-year-old dependent has $4,000 of interest and dividend income and no other income. Of the $4,000, how much is taxed at the parents' rate under the kiddie tax rules, given the $1,350 amounts?

• a.$0, because a dependent child pays tax only at the child's own rate
• b.$1,300, the amount above $2,700 (twice the $1,350 amount)✓
• c.$4,000, because all unearned income of a young child is taxed at the parents' rate
• d.$2,650, the amount above the first $1,350

The first $1,350 of unearned income is offset by the dependent's standard deduction, and the next $1,350 is taxed at the child's rate. Unearned income above $2,700 is taxed at the parents' rate: $4,000 − $2,700 = $1,300. Treating only the first $1,350 as sheltered ignores the child-rate layer. Taxing the whole amount at the parents' rate overstates the rule.IRC 1(g); Rev. Proc. 2025-32 sec. 4.02

A 52-year-old participant earned $180,000 of Social Security (FICA) wages from her employer in 2025. Her plan allows catch-up contributions and has a Roth feature. How must her 2026 catch-up contributions be made?

• a.As Roth contributions, because her prior-year FICA wages exceeded the $150,000 threshold✓
• b.As Roth contributions, but only on the amount of her wages above $150,000
• c.As Roth contributions only if her 2026 adjusted gross income exceeds $150,000
• d.As pre-tax contributions only, because Roth treatment is optional for catch-up contributions at any pay level

Beginning in 2026, an employee whose FICA wages from the employer in the prior year exceeded the indexed threshold ($150,000 for the 2025 wage test) must make catch-up contributions as Roth contributions. The test uses prior-year wages from that employer, not current-year AGI, and it applies to all of the catch-up amount rather than a slice of it. A plan with no Roth feature cannot let such an employee make catch-ups at all.IRC 414(v)(7); IRS Notice 2025-67

A 45-year-old begins participating in her employer's SIMPLE IRA on March 1, 2025. In February 2027, before she has been in the plan for two years, she withdraws $10,000 and does not roll it over. Apart from regular income tax, what additional tax applies?

• a.A 6% excise tax, which applies to all excess contributions to a SIMPLE IRA
• b.No additional tax, because a SIMPLE IRA is an employer plan with a hardship exception for any amount
• c.A 25% additional tax, because the withdrawal came within two years of her first participation✓
• d.A 10% additional tax, the same early-withdrawal rate as for any IRA owner under age 59½

A SIMPLE IRA distribution before age 59½ is subject to the 10% additional tax, but the rate rises to 25% if it is taken within two years of the date the individual first participated in the plan. She started in March 2025 and withdrew in February 2027, which is inside the window. The 6% tax is for excess contributions, not distributions.IRC 72(t)(6); IRS Pub. 590-B

A 62-year-old opened her first Roth IRA with a contribution for 2023. She has contributed $20,000 in total, and the account is now worth $26,000. In 2026 she withdraws $23,000. How is the withdrawal taxed?

• a.$3,000 is taxable and subject to the 10% additional tax, because the distribution is not qualified
• b.Nothing is taxable, because she is over 59½ and all withdrawals are then tax free
• c.The whole $23,000 is taxable, because withdrawals before the fifth year are fully taxable
• d.$3,000 is taxable earnings and the 10% additional tax does not apply, because she is over 59½✓

Roth withdrawals come out as contributions first, and contributions are always tax free and penalty free. The five-tax-year period began on January 1, 2023, so it runs through 2027 and her 2026 withdrawal is not qualified. The $3,000 of earnings is taxable. The 10% additional tax does not apply because she is past 59½. Age alone does not make a distribution qualified; the five-year requirement must also be met.IRC 408A(d); IRS Pub. 590-B

A 40-year-old uses $10,000 from his traditional IRA toward buying his first home. He has never owned a home and meets the other requirements. What is the tax result?

• a.The $10,000 is included in income and the 10% additional tax applies, as for any pre-59½ distribution
• b.The $10,000 is included in income, but the 10% additional tax does not apply, subject to a $10,000 lifetime limit✓
• c.The $10,000 is excluded from income and the 10% additional tax does not apply
• d.The $10,000 is included in income and a 25% additional tax applies, because he is buying a home

Up to $10,000 over a lifetime from an IRA for qualified first-time homebuyer costs avoids the 10% additional tax on early distributions, but only that tax is waived. The money from a traditional IRA is still ordinary income. No 25% tax applies, because that rate is for SIMPLE IRAs in the first two years.IRC 72(t)(2)(F); IRS Pub. 590-B

A 50-year-old client receives a $50,000 eligible rollover distribution paid to her from a 401(k) plan, and the plan withholds $10,000 for federal tax. She deposits only the $40,000 she received into an IRA within 60 days. What is the result?

• a.$10,000 is a taxable distribution, unless she also deposits $10,000 of her own money within 60 days✓
• b.$50,000 is taxable, because a partial rollover cancels the whole rollover
• c.The full $50,000 is a tax-free rollover, because the withheld tax is treated as deposited
• d.$10,000 is taxable, and the plan must refund the withholding so it can be deposited

When an eligible rollover distribution is paid to the participant, 20% must be withheld. To roll over the entire $50,000 she must deposit $50,000, replacing the $10,000 from other funds. If she rolls over only $40,000, the missing $10,000 is a taxable distribution, plus a 10% additional tax if she is under 59½ and no exception applies. A direct rollover avoids the withholding.IRC 3405(c), 402(c); IRS Pub. 590-A

A married couple filing jointly has a $14,000 net capital loss for the year and no capital gains in other years to offset it. How much can they deduct against ordinary income this year, and what happens to the rest?

• a.$3,000 now, and the other $11,000 is lost
• b.$3,000 now, and the other $11,000 carries forward to later years✓
• c.$14,000 now, because capital losses are fully deductible against wages
• d.$7,000 now and $7,000 next year, because the deduction is split evenly over two years

Net capital losses offset capital gains without limit, and any remaining net loss reduces ordinary income by up to $3,000 a year ($1,500 for married filing separately). The unused part carries forward indefinitely, keeping its character. Here that is $3,000 now and $11,000 carried over.IRC 1211(b), 1212(b); IRS Pub. 550

What holding requirement must an investor meet for dividends on common stock to be taxed as qualified dividends?

• a.Hold the stock for more than one year as of the date the dividend is paid
• b.Hold the stock more than 60 days during the 121-day period beginning 60 days before the ex-dividend date✓
• c.Hold the stock at least 30 days before and 30 days after the ex-dividend date
• d.Hold the stock more than 60 days during the 91-day period beginning 45 days before the ex-dividend date

Qualified dividends receive long-term capital gain rates only if the holding period is met: more than 60 days within the 121-day window that starts 60 days before the ex-dividend date. A one-year hold is the long-term gain test for a sale, not for dividends. The 30-day window is the wash sale period, which is a different rule.IRC 1(h)(11), 246(c); IRS Pub. 550

An investor buys a bond with a $1,000 face amount for $985 in the secondary market, exactly eight full years before it matures, and holds it to maturity. How is the $15 of market discount treated?

• a.It is ordinary interest income, because market discount on a bond is always ordinary
• b.It is tax exempt, because discount at purchase is a return of capital
• c.It is treated as zero, because it is less than one-fourth of 1% of $1,000 times eight full years, or $20, so the $15 is capital gain✓
• d.It is ordinary income that must be accrued each year, because the bond was bought below par and market discount is treated as interest as it accrues

Market discount is the difference between the redemption price and the purchase price. It is normally ordinary income when realized, but it is treated as zero if it is below the de minimis amount: 0.25% of the redemption price times the full years left to maturity. Here that is $1,000 × 0.0025 × 8 = $20. The $15 is below $20, so it is not ordinary market discount, and the gain is taxed as capital gain.IRC 1278(a)(2)(C); IRS Pub. 550

A client paid $9,000 of margin interest on money borrowed to buy taxable investments and has $6,000 of net investment income this year. What can she deduct as investment interest expense this year?

• a.$6,000, and the remaining $3,000 is permanently lost
• b.$9,000, because margin interest is deductible in full on investment property
• c.$6,000, with the remaining $3,000 carried forward to the next year✓
• d.$3,000, which is the excess of interest over investment income

Investment interest is deductible only up to net investment income. She can deduct $6,000 and carry the unused $3,000 forward indefinitely, which is why the lost-forever answer is wrong. The $3,000 is the amount carried, not the amount deducted.IRC 163(d); IRS Pub. 550

A 45-year-old professional takes one graduate evening course to improve his job skills. He has already completed postsecondary education. Which federal education credit may he be able to claim?

• a.The Lifetime Learning Credit, worth up to $2,000 per return, because it has no degree requirement or limit on years✓
• b.The Lifetime Learning Credit, worth up to $2,500 per course, because it is available per class
• c.The American Opportunity Credit, worth up to $2,500 per student, because it covers any year of study including graduate courses
• d.The American Opportunity Credit, because graduate students qualify for it in their first year

The Lifetime Learning Credit is available for courses to acquire or improve job skills, with no degree requirement, no limit on the number of years, and a maximum of $2,000 per return. The American Opportunity Credit is limited to the first four years of postsecondary education for a student pursuing a degree or credential, so graduate study does not qualify. The credit is figured per return, not per course.IRC 25A; IRS Pub. 970

In a defined contribution plan that is top-heavy for the plan year, what minimum employer contribution must generally be made for each non-key employee?

• a.2% of compensation for each year of service, up to 20%, which is the minimum for defined benefit plans
• b.5% of compensation, but only for non-key employees who make elective deferrals
• c.3% of compensation in every case, even if key employees receive a lower rate
• d.3% of compensation, or a lower percentage equal to the highest rate given to any key employee✓

A top-heavy plan must give non-key employees a minimum contribution of 3% of compensation. If the highest contribution rate for any key employee is below 3%, the non-key minimum is reduced to that rate. The 3% is therefore a ceiling in that case, not an absolute floor.IRC 416(c)(2)

A married couple, both under age 50, file jointly in 2026. The husband has $60,000 of compensation and the wife has none. The 2026 IRA limit is $7,500 per person. What is the most that can be contributed to IRAs for the two of them?

• a.$30,000, since each spouse may contribute $7,500 to a traditional IRA and also to a Roth IRA
• b.$7,500, since only the spouse who earned the income can contribute
• c.$15,000 total, $7,500 to each spouse's IRA, since their combined compensation is sufficient✓
• d.$60,000, since the limit is 100% of the earner's compensation

A spousal IRA lets a working spouse's compensation support a contribution for a nonworking spouse on a joint return. Each spouse may contribute up to $7,500, but the total cannot exceed their combined taxable compensation, which is $60,000. The limit is a combined limit across a person's traditional and Roth IRAs, so doubling for both types is wrong.IRC 219(c); IRS Pub. 590-A

A retired client gives his daughter stock with a $20,000 cost basis and a $100,000 market value as a gift, and she sells it for $100,000 soon after. His brother held identical stock (cost $20,000, value $100,000 at his death) and leaves it to his own daughter at death, and she sells it for $100,000. What gain does each daughter report?

• a.$80,000 for each, because both received the stock from a relative
• b.$80,000 for the daughter who received the gift, and $0 for the daughter who inherited it✓
• c.$0 for the daughter who received the gift, and $80,000 for the daughter who inherited it
• d.$0 for each, because transfers between family members carry no gain

A donee generally takes the donor's basis for gain, so the gift recipient has $20,000 of basis and an $80,000 gain. Inherited property generally takes a basis equal to its fair market value at the date of death, so the heir has $100,000 of basis and no gain. This is why appreciated assets are often held until death instead of given away.IRC 1014(a), 1015(a)

For 2026, what is the minimum annual deductible a health plan must have to be an HSA-qualifying HDHP with self-only coverage?

• a.$2,200
• b.$1,700✓
• c.$3,400
• d.$8,500

For 2026 an HDHP must have an annual deductible of at least $1,700 for self-only coverage and $3,400 for family coverage. The $3,400 amount is the family minimum, $8,500 is the self-only out-of-pocket cap, and $2,200 is an unrelated HRA figure.IRC 223(c)(2); Rev. Proc. 2025-19

A widow who dies in 2026 leaves a taxable estate of $12.5 million. During life she made $3 million of taxable gifts that used her exclusion in earlier years. Using a $15 million exclusion and the 40% top rate, what is the approximate federal estate tax, ignoring credits other than the unified credit?

• a.$0, because the $12.5 million estate is under the $15 million exclusion
• b.$1,200,000, which is 40% of the $3 million of prior taxable gifts
• c.$1,000,000, which is 40% of the $2.5 million by which the estate falls short of the exclusion
• d.$200,000, which is 40% of the $500,000 by which her estate plus prior taxable gifts exceeds $15 million✓

The estate tax base adds adjusted taxable gifts to the taxable estate: $12.5 million plus $3 million is $15.5 million. The unified credit shelters the first $15 million, so $500,000 is taxed at the top rate of 40%, or $200,000. The exclusion is a single lifetime amount shared by gifts and the estate, so looking at the estate alone is wrong.IRC 2001(b), 2010(c)(3); Rev. Proc. 2025-32 sec. 4.14

A U.S.-citizen client gives $200,000 cash to his spouse, who is not a U.S. citizen, in 2026. The annual exclusion for gifts to a noncitizen spouse is $194,000, and the regular annual exclusion is $19,000. What is the taxable gift?

• a.$0, because gifts between spouses always qualify for the unlimited marital deduction
• b.$6,000, because the unlimited marital deduction does not apply to a noncitizen spouse✓
• c.$200,000, because gifts to a noncitizen are never excludable
• d.$181,000, because only the regular $19,000 annual exclusion applies

The unlimited marital deduction is denied for gifts to a noncitizen spouse, but a larger annual exclusion ($194,000 for 2026) is allowed instead. The taxable gift is $200,000 less $194,000, or $6,000. The regular $19,000 exclusion is replaced by the higher one, not stacked on top of it.IRC 2523(i); Rev. Proc. 2025-32 sec. 4.42

Under the SEC's interpretation of an investment adviser's fiduciary duty, how should an adviser handle a known conflict of interest in a way that satisfies its duty of loyalty?

• a.Make full and fair disclosure that is specific enough for the client to give informed consent, and avoid saying it "may" have the conflict when it does✓
• b.Disclose the conflict in general terms in Form ADV once, because the client is deemed to consent by continuing the relationship after receiving the brochure
• c.Tell the client only that it "may" have conflicts, since that wording is sufficient if the conflict actually exists and the client signs the advisory agreement
• d.Eliminate every conflict, because an adviser may never have a conflict with a client

The adviser must either eliminate the conflict or disclose it fully and fairly so the client can give informed consent. Saying an adviser "may" have a conflict when it actually has one is inadequate. Conflicts are permitted when disclosed and consented to, so a flat ban is wrong, and consent cannot be inferred merely from the client staying.Advisers Act sec. 206; Release IA-5248 (2019)

An advisory agreement with a retail client says the client waives all of the adviser's fiduciary duties under federal law. How does the SEC's interpretation treat this provision?

• a.The waiver is valid if the adviser also gives the client a copy of Form CRS
• b.The waiver is valid for a client who is financially sophisticated, but not for a retail client
• c.The federal fiduciary duty may not be waived, though the agreement can shape how it applies to the agreed scope of services✓
• d.The waiver is valid, because the client signed it after reading the agreement

The SEC states that an adviser's federal fiduciary duty may not be waived, even by an institutional or sophisticated client, though the scope of services the adviser agrees to provide can shape how the duty applies. A signature, a client's sophistication, or additional disclosures do not create a valid waiver. Waiver language of this sort can also itself be misleading to a client.Advisers Act sec. 206, 215; Release IA-5248 (2019)

Under the SEC's interpretation of the adviser's duty to seek best execution, what is the determinative factor when an adviser with discretion selects a broker-dealer for client trades?

• a.The lowest commission rate offered by any broker-dealer, in every case
• b.Whether the transaction represents the best qualitative execution, not simply the lowest possible commission✓
• c.Whether the broker-dealer is affiliated with the adviser, since affiliates are always preferred
• d.Whether the broker-dealer provides research, since soft-dollar benefits must always be maximized

The duty of best execution requires the adviser to seek execution under which the client's total cost or proceeds is the most favorable under the circumstances. The determinative factor is the best qualitative execution, not the lowest commission. Affiliation and research do not by themselves answer the question, and conflicts such as those need their own disclosure.Advisers Act sec. 206; Release IA-5248 (2019)

An adviser is choosing between two comparable funds for a retail client's account. One has a lower expense ratio, and the other costs more but is the one the adviser reasonably believes best fits the client's needs. Under the SEC's interpretation, what is required?

• a.The adviser may recommend the costlier fund if it has a reasonable belief that doing so is in the client's best interest, treating cost as one factor among others✓
• b.The adviser may recommend the costlier fund only if the client signs a waiver of the duty of care and the adviser discloses the cost difference in writing
• c.The adviser must recommend the lowest-cost fund, because cost is the only factor that matters
• d.The adviser must recommend the fund with the highest expected return regardless of cost

The SEC says an adviser need not simply recommend the lowest-cost or least remunerative product, because cost is one of many factors in whether advice is in the client's best interest. What the adviser needs is a reasonable belief that the advice serves the client given the client's objectives. It must also disclose any conflict, such as higher compensation. Waiving the duty of care is not an option.Advisers Act sec. 206; Release IA-5248 (2019)

A 40-year-old converted a $30,000 pre-tax traditional IRA to a Roth IRA in 2025, paying tax on the whole amount. She has never made a regular Roth contribution. In 2027 she withdraws the $30,000, qualifies for no exception, and the Roth has had no earnings. What additional tax applies?

• a.$7,500, a 25% additional tax on the converted amount
• b.$1,500, a 5% additional tax during the five-year period
• c.$0, because the conversion amount was already taxed
• d.$3,000, which is a 10% additional tax on the converted amount that was taxed at conversion✓

Converted amounts that are withdrawn within the five-year period beginning with the year of conversion are subject to the 10% additional tax on the part that was included in income because of the conversion, unless an exception applies. Her withdrawal is $30,000 of conversion, so the tax is $3,000. Paying income tax on the conversion does not remove the extra tax, and the 25% rate belongs to SIMPLE IRAs in the first two years.IRC 408A(d)(3)(F); IRS Pub. 590-B

A 529 plan has been maintained for the same beneficiary for more than 15 years. In 2026 the beneficiary contributes $2,000 of her own money to a Roth IRA, and the 2026 IRA contribution limit for her is $7,500. What is the most that can move from the 529 plan to her Roth IRA in 2026 under the special rollover rule, assuming she has not used any of the lifetime cap?

• a.$7,500, because her own contribution is counted separately from the rollover
• b.$5,500, because the annual IRA limit is reduced by her own contributions for the year✓
• c.$35,000, because the lifetime cap can be rolled over in a single year
• d.$2,000, because the rollover is limited to the amount she contributed herself

The special 529-to-Roth rollover is limited each year to the IRA contribution limit, reduced by contributions made that year to all IRAs for the beneficiary, which here is $7,500 − $2,000 = $5,500. The rollover must be a direct trustee-to-trustee transfer, the account must have been maintained for 15 years, and the total for the beneficiary over time is capped at $35,000. That lifetime figure is not an annual allowance.IRC 529(c)(3)(E); IRC 408A(c)(2)