LLQP Segregated Funds & Annuities · Component 2.2 · 30% of the exam
A client dies holding a non-registered segregated fund with a named beneficiary and a large unrealized gain. The estate should expect that:
- Aboth probate fees and income tax are avoided entirely because a beneficiary was named
- probate is bypassed, but the accrued gain is still reported on the deceased's final return
- Cthe gain is forgiven at death because the death benefit guarantee has replaced the market value
- Dthe beneficiary pays the tax on the accrued gain as ordinary income in the year received
Correct answer: B) probate is bypassed, but the accrued gain is still reported on the deceased's final return
A beneficiary designation moves the proceeds outside the estate, avoiding probate and the delays of estate administration. It does not avoid income tax: the deemed disposition at death is reported on the deceased's final return.
Why the other options are wrong
- ANaming a beneficiary addresses probate and privacy, never the income tax on the gain.
- CThe guarantee tops up a shortfall; it does not eliminate tax on an accrued gain.
- DThe tax arises on the deceased's final return, not in the hands of the beneficiary.
Exam tip
Beneficiary designation avoids probate; it never avoids the tax triggered at death.
Common mistake
Telling a client that a named beneficiary makes the proceeds entirely tax-free.
What this tests
CISRO competency component 2.2 — Analyze the available products that meet the client's needs — which is weighted at 30% of the Segregated Funds & Annuities module. Written against the published curriculum.
More from component 2
- A segregated fund's 'guaranteed amount' after a partial withdrawal under proportional reduction is:
- A distinctive estate advantage of a segregated fund over a non-registered mutual fund held jointly with a child is:
- Segregated fund guarantees are most valuable relative to their cost when:
- A segregated fund's annual statement reports:
- Compared with a segregated fund, an exchange-traded fund (ETF) generally offers:
- A segregated fund's 'automatic death benefit reset' feature:
Practice the whole Segregated Funds & Annuities module
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