LLQP Ethics & Professional Practice · Component 1.5 · 60% of the exam
A client asks whether naming his son on his registered plan will prevent tax arising on his death. The correct answer is that the designation:
- Adefer the tax until the son eventually withdraws the money from the plan on his own account
- Bhalves the income inclusion, since a designated plan is treated as a capital gain
- avoids probate on the plan but does not avoid the income inclusion on the final return
- Deliminates the income inclusion because the plan passes outside the estate entirely
Correct answer: C) avoids probate on the plan but does not avoid the income inclusion on the final return
A designation changes who receives the money and keeps the plan out of probate. The value is still included in the deceased's income unless a spouse or a financially dependent child receives it, so the estate bears the tax.
Why the other options are wrong
- ADeferral is available only for a spouse or a dependent child.
- BRegistered plan value is ordinary income, not a capital gain.
- DProbate and income tax are separate; only probate is avoided.
Exam tip
Designation avoids probate; only a spouse or dependent child defers the tax.
Common mistake
Telling a client a beneficiary designation makes a registered plan tax-free.
What this tests
CISRO competency component 1.5 — Integrate into practice the legal aspects of insurance and annuity contracts — which is weighted at 60% of the Ethics & Professional Practice module. Written against the published curriculum.
More from component 1
- An 'assignee' of a life insurance policy is:
- A corporation as policyowner and beneficiary of a policy on a key employee:
- A 'trustee' named to receive proceeds on behalf of a beneficiary:
- The 'automatic premium loan' (APL) provision:
- A life insurance contract 'matures' when:
- The 'assignment' provision typically states that:
Practice the whole Ethics & Professional Practice module
Timed sets weighted like the exam, and review of every question you miss. Free to start.