Free ChFC Practice Questions with Answers

Correct answer: A. The individual must be covered under a qualifying high-deductible health plan (HDHP) and have no other disqualifying health coverage, such as a general-purpose health FSA.

To be HSA-eligible, an individual must be covered by a qualifying HDHP and have no other disqualifying coverage — including a general-purpose health FSA or being enrolled in Medicare. B is wrong (and actually a disqualifier) because Medicare enrollment ends HSA eligibility; C is irrelevant, as HSA eligibility doesn't depend on a cafeteria plan; D is unrelated to HSA rules.

• A. Correct. HSA eligibility requires enrollment in a qualifying HDHP and no other disqualifying coverage (such as a general-purpose health FSA, another non-HDHP plan, or Medicare).
• B. Medicare enrollment is disqualifying coverage for HSA contribution purposes, not a requirement — someone enrolled in Medicare cannot contribute to an HSA, so coordinating the HDHP with Part A gets it backwards.
• C. An individual (including a self-employed person without an employer-sponsored cafeteria plan) can establish and contribute to an HSA on their own; a cafeteria plan and salary-reduction funding are not required.
• D. There is no earned-income ceiling tied to the Social Security wage base for HSA eligibility, and the FICA treatment of contributions is not an eligibility condition.

• Source: IRC section 223 (health savings accounts)

Correct answer: C. Add it to their own applicable exclusion amount for use during lifetime gifting and, ultimately, at their own death

Portability allows a surviving spouse to add a deceased spouse's unused applicable exclusion amount (DSUE) to their own, for use against either gift tax on lifetime transfers or estate tax at the surviving spouse's own death. The election requires a timely filed estate tax return for the first spouse's estate, but once validly elected, the DSUE amount does not expire during the surviving spouse's lifetime (subject to being lost upon remarriage and a subsequent spouse's death before that spouse is fully used, in certain circumstances).

• A. There is no 2-year expiration on a properly elected DSUE amount.
• B. Incorrect — DSUE is usable against both gift and estate tax, not gift tax alone.
• C. Correct — DSUE can be applied to both lifetime gift tax and the surviving spouse's eventual estate tax.
• D. A timely filed estate tax return with the portability election is required; it is not automatic.

• Source: IRC section 2010 (unified credit; basic exclusion amount)

Correct answer: A. In the client's best interest, even where doing so conflicts with the planner's own compensation

A fiduciary duty requires the planner to place the client's interests ahead of their own, including foregoing higher personal compensation when a lower-cost or otherwise better option serves the client. The suitability standard (B) is a lower bar that only requires a recommendation be appropriate, not optimal, and does not require subordinating the advisor's interests. Industry custom (C) and opt-in disclosure (D) are not the legal test.

• A. Correct. A fiduciary standard requires the planner to place the client's best interest first, even when that conflicts with how the planner is compensated — a materially higher bar than suitability.
• B. 'Merely suitable' describes the lower suitability standard (appropriate given objectives), not the fiduciary standard, which demands the client's best interest.
• C. Following prevailing industry sales practices describes conformity to custom, not the client-first obligation that defines a fiduciary duty.
• D. A fiduciary duty is continuous and doesn't switch on only when the client specifically asks for it — it applies throughout the advisory relationship.

Correct answer: C. $5,000 net long-term capital gain, after the net short-term loss is netted against the long-term gain

Capital gains and losses are first netted within each holding-period category: net short-term = $2,000 gain − $5,000 loss = $3,000 net short-term loss. There is no long-term loss to net, so net long-term = $8,000 gain. The net short-term loss is then netted against the net long-term gain in the same tax year: $8,000 − $3,000 = $5,000, which retains long-term character since the larger component (the long-term gain) determines the character of the combined result. Choice A ignores the short-term loss; choice B incorrectly defers the short-term loss to a future year instead of netting it this year; choice D ignores the long-term gain entirely.

• A. This ignores netting entirely by simply adding the gains together and disregarding the $5,000 short-term loss.
• B. Short-term and long-term results are netted within their own categories first, then netted against each other; the $3,000 net short-term loss isn't carried forward when there's a long-term gain to absorb it in the same year.
• C. The $2,000 short-term gain nets against the $5,000 short-term loss to produce a $3,000 net short-term loss, which then nets against the $8,000 long-term gain, leaving a $5,000 net long-term capital gain.
• D. This isolates the short-term loss and ignores the long-term gain against which it must be netted in the same tax year; there's also no ordinary-income offset here since there's a net capital gain overall.

• Source: IRC section 1222 (capital gain and loss definitions)

Correct answer: B. Evaluate premium sustainability, inflation protection, benefit triggers, elimination periods and portfolio stress under extended care needs and bequest goals.

Long-term care is a tail-risk and cash-flow problem. Policy mechanics and the household's capacity to absorb extended care costs matter more than one expected-cost figure.

• A. A first-year premium comparison ignores benefit design, inflation and long-duration cost risk.
• B. These factors capture both policy terms and the portfolio's resilience under prolonged care.
• C. Illustrated values depend on assumptions and are not a locked-in return.
• D. Medicare covers limited skilled care, not extended custodial care.

Correct answer: C. It offers a lower return for its level of risk than an efficient alternative, or bears more risk than necessary for its return

The efficient frontier represents the set of portfolios offering the maximum expected return for each level of risk (or, equivalently, the minimum risk for each level of return). A portfolio plotting below the frontier is suboptimal — it is not efficiently diversified, meaning an investor could achieve the same return with less risk, or more return for the same risk, by moving to a portfolio on the frontier.

• A. Maximum return for a given risk level describes a portfolio sitting on the efficient frontier, not one plotting below and to the right of it.
• B. A portfolio below and to the right of the frontier is, by definition, sub-optimally constructed; optimal diversification would place it on the frontier.
• C. Correct. Plotting below/right of the frontier means the portfolio earns less return than an efficient portfolio at the same risk level, or bears more risk than necessary for its return — it's inefficient.
• D. Being off the frontier says nothing about whether unsystematic risk has been diversified away; an inefficient portfolio can still carry uncompensated company-specific risk.

Correct answer: A. The bonus is deductible by the employer if compensation is reasonable and is income to the executive; the death benefit is generally income-tax-free to her beneficiary

A bonus used to pay premiums is compensation: the employer deducts it if total pay is reasonable, and the executive reports it as income. Because she owns the policy, the death benefit generally passes income-tax-free to her named beneficiary.

• A. This captures the deduction and income-inclusion on the bonus and the tax-free death benefit.
• B. The bonus is taxable income, and death proceeds are generally income-tax-free.
• C. Policy ownership does not affect the employer's deduction for reasonable compensation, and life insurance death proceeds are generally income-tax-free to the beneficiary.
• D. The bonus is deductible compensation and is taxable to the executive, not a tax-free fringe benefit.

• Source: IRC section 162 (trade or business expenses)
• Source: IRC section 101 (certain death benefits; life insurance proceeds excluded)

Correct answer: B. $20,000

RMD = prior year-end account balance ÷ the applicable Uniform Lifetime Table factor. Here, $530,000 ÷ 26.5 = $20,000. Choice A divides by too large a number, C multiplies instead of dividing correctly, and D confuses the divisor with the answer.

• A. This divides the balance by 30 instead of the correct age-73 factor of 26.5, understating the required distribution.
• B. Correct. RMD = prior year-end balance ÷ Uniform Lifetime Table factor = $530,000 ÷ 26.5 = $20,000.
• C. This divides by 25 rather than the correct factor of 26.5, overstating the RMD.
• D. This mistakes the life-expectancy factor itself (26.5) for a dollar figure rather than using it as the divisor in the RMD calculation.

• Source: IRS: Retirement topics - Required minimum distributions (RMDs)

Correct answer: B. Highly compensated or key employees who benefit from the discriminatory provisions lose the exclusion for benefits attributable to that discrimination and are taxed on those amounts; non-highly-compensated employees are unaffected.

Cafeteria plan nondiscrimination failures under Section 125 result in highly compensated or key employees losing the exclusion for the discriminatory benefits — those employees are taxed on the value of benefits, while non-highly-compensated employees keep their tax-favored treatment. The penalty is targeted, not plan-wide. A, C, and D overstate the consequence.

• A. Discrimination doesn't disqualify the entire plan for everyone or require refiling with the IRS; the tax consequence falls specifically on the highly compensated/key employees who benefited from the discriminatory terms.
• B. Correct. If a cafeteria plan discriminates in favor of HCEs or key employees, those employees lose the tax exclusion for the discriminatory benefits and must include them in income; non-highly-compensated participants keep their tax-favored treatment.
• C. The employer doesn't lose its deduction for plan benefits and there is no excise tax on excess contributions; the consequence is targeted at the affected employees' income inclusion.
• D. There's no IRS mechanism that automatically converts a discriminatory cafeteria plan into a qualified retirement plan or imposes vesting and funding rules; these are entirely different plan types.

• Source: IRC section 125 (cafeteria plans)

Correct answer: B. A taxable termination subject to the generation-skipping transfer (GST) tax, because the remainder passes to skip persons (the grandchildren)

When a trust's income beneficiary is a non-skip person (the child) but the remainder passes to skip persons (grandchildren, two or more generations below the grantor), the child's death triggering distribution to the grandchildren constitutes a taxable termination under the GST tax rules, layered on top of any estate or gift tax otherwise due on the underlying transfer.

• A. Incorrect — the child's intervening income interest does not exempt the eventual skip-person distribution from GST tax.
• B. Correct — the shift of trust corpus to grandchildren upon the child's death is a classic taxable termination subject to GST tax.
• C. AMT is unrelated to generation-skipping transfers; this is a fabricated connection.
• D. The GST tax regime specifically exists to address exactly this kind of multi-generational trust structure.

• Source: IRC section 2612 (taxable termination, taxable distribution, direct skip)

Correct answer: B. Explain that joint planning needs full disclosure to both spouses, urge him to share it, and consider ending the joint engagement if he refuses

In a joint engagement the planner owes duties to both clients, so a plan built on information one spouse is withholding cannot serve either of them. The appropriate course is to explain the disclosure requirement, encourage the husband to share the account, and consider withdrawing from the joint engagement if he will not.

• A. Keeping a separate secret file makes the planner a party to concealment and leaves the shared plan built on incomplete facts.
• B. This addresses the conflict transparently, respects both clients, and preserves the integrity of the joint plan, with withdrawal as the fallback.
• C. Disclosing without first giving the husband a chance to correct the situation skips the proper first step and damages the relationship needlessly.
• D. A joint plan that deliberately leaves out a known asset rests on incomplete facts, and a private file note does not cure the concealment from the other client.

Correct answer: B. $40,000

In a Section 1031 exchange, gain is recognized to the extent of boot received, but not more than the realized gain. The investor received $40,000 of cash boot, which is less than the $100,000 realized gain, so $40,000 is recognized.

• A. Receiving boot means some gain is recognized, so the exchange is not fully deferred.
• B. Recognized gain is the lesser of boot received or realized gain, which is $40,000.
• C. This is the deferred portion of the gain, not the amount recognized.
• D. The full realized gain is not recognized when the exchange otherwise qualifies for deferral.

• Source: IRC section 1031 (like-kind exchanges of real property)

Correct answer: C. Term insurance provides pure death-benefit protection for a specified period with no cash value accumulation, while whole life provides permanent coverage with cash value accumulation

Term insurance is designed to provide a death benefit only for a defined period (e.g., 10, 20, or 30 years) and builds no cash value. Whole life insurance is a permanent product that provides lifetime coverage as long as premiums are paid and accumulates cash value on a tax-deferred basis.

• A. Reverses the actual attributes; whole life builds cash value, while term provides pure protection and generally does not.
• B. Incorrect; whole life is permanent coverage that does not expire as long as premiums are paid — it's term insurance that expires at the end of its level period.
• C. Correct — accurately describes the fundamental distinction between the two products.
• D. Incorrect; at issue, term premiums are typically much lower than whole life premiums for the same face amount, because whole life premiums fund cash value accumulation as well as mortality cost.

Correct answer: D. -3.5%

The approximate percentage price change of a bond can be estimated as -duration × change in yield. Here, -7 × 0.50% = -3.5%, meaning the bond's price is expected to fall approximately 3.5% as rates rise by 50 basis points, illustrating the inverse relationship between bond prices and interest rates.

• A. Reflects a decimal/basis-point conversion error, treating 50 bps as 0.05% instead of 0.50%.
• B. Gets the magnitude right but the direction wrong — bond prices move inversely to interest rates, so rising rates produce a price decline, not an increase.
• C. Confuses duration itself with the percentage price change; duration is a multiplier, not the answer.
• D. Correct — -7 × 0.50% = -3.5% price decline.

Correct answer: B. As a guaranteed payment that is ordinary income subject to self-employment tax and deductible by the LLC

A fixed payment to a partner for services is a guaranteed payment under IRC Section 707(c). It is ordinary income to the partner, subject to self-employment tax, and generally deductible by the partnership.

• A. A guaranteed payment is not a distribution of profit and does not reduce basis.
• B. This describes the treatment for ordinary income, self-employment tax, and the LLC deduction.
• C. Partners are not employees of their partnership, so W-2 treatment does not apply.
• D. Payment for services is ordinary income, not capital gain.

Correct answer: C. 73

SECURE 2.0 raised the RMD age to 73 for individuals who turn 72 after December 31, 2022 (and had not yet reached 72 before that date). The age rises again to 75 starting in 2033 for those born in 1960 or later. Age 70½ was the rule before the original SECURE Act (2020), and age 72 applied only briefly between the two laws, so both are outdated for someone born in 1958.

• A. Age 70½ was the RMD age under pre-2020 law; it no longer applies.
• B. Age 72 applied under the original SECURE Act for those turning 72 before 2023; SECURE 2.0 raised the age for someone born in 1958.
• C. Under SECURE 2.0, individuals born between 1951 and 1959 must begin RMDs at age 73, which applies to Maria, who was born in 1958.
• D. Age 75 applies under SECURE 2.0 only to those born in 1960 or later, not to someone born in 1958.

• Source: IRS: Retirement topics - Required minimum distributions (RMDs)
• Source: IRS: Retirement plan and IRA required minimum distributions FAQs

Correct answer: C. $4,000

The basic safe harbor formula matches 100% of the first 3% of pay deferred ($3,000) plus 50% of the next 2% ($1,000). Deferrals above 5% of pay earn no additional match, so the total is $4,000.

• A. This counts only the first tier and omits the 50% match on the next 2% of pay.
• B. This matches 100% of the first 5% of pay, ignoring that the second tier is matched at 50%.
• C. The two tiers combine to 4% of pay, or $4,000.
• D. This matches the full 6% deferral dollar for dollar, which the safe harbor formula does not require.

Correct answer: D. According to the intestacy statute of the state having jurisdiction, typically prioritizing a surviving spouse and descendants

When someone dies intestate (without a valid will), state intestacy statutes govern distribution of probate assets, generally following a hierarchy that favors a surviving spouse and children/descendants, then more distant relatives. Property escheats to the state only in the rare case where no eligible heirs can be located at all.

• A. Business partners and co-owners have no automatic claim to a deceased individual's personal probate assets absent a specific contractual or beneficiary arrangement; intestacy law governs family/heir distribution, not business relationships.
• B. A healthcare directive and a durable power of attorney govern decisions during life (and cease at death); neither controls the distribution of probate property after death.
• C. Escheat to the state occurs in the rare case where no eligible heirs can be located; it isn't the general outcome of dying intestate, and surviving relatives are not excluded.
• D. Correct. Without a valid will, probate assets pass according to the state's intestacy statute, which typically gives priority to a surviving spouse and descendants in a defined order.

Correct answer: A. Fee-based (fee-and-commission)

'Fee-only' means compensation comes exclusively from client-paid fees with no commissions. Since this practitioner earns both an AUM fee and insurance commissions, the correct term is 'fee-based,' not fee-only.

• A. Charging an AUM-based fee while also earning commissions on insurance sales to the same clients is the classic definition of a fee-based (fee-and-commission) arrangement.
• B. Fee-only means compensation comes exclusively from client-paid fees with no commissions from product sales; earning insurance commissions here disqualifies this label.
• C. Commission-only would mean no advisory fees at all; the AUM fee component rules this out.
• D. Fee-and-commission arrangements are common and permitted (subject to disclosure and suitability/fiduciary obligations); they are not banned under state insurance law.

Correct answer: B. The deductible portion of a traditional IRA contribution

Deductible traditional IRA contributions are an adjustment to gross income, reducing AGI directly, and are available whether or not the taxpayer itemizes. Mortgage interest, SALT, and charitable contributions are itemized deductions, taken below the line on Schedule A.

• A. Mortgage interest on a primary residence is an itemized deduction claimed on Schedule A, not an above-the-line adjustment to income.
• B. Correct. The deductible portion of a traditional IRA contribution is an adjustment to income taken in arriving at AGI, available whether or not the taxpayer itemizes.
• C. State and local income taxes (SALT) are an itemized deduction on Schedule A, subject to the SALT cap, not an above-the-line adjustment.
• D. Charitable contributions to a public charity, including cash gifts made during the year, are an itemized deduction, not an adjustment used in computing AGI.

Correct answer: A. 2 of 6

Federal tax-qualified LTC standards require the inability to perform at least 2 of the 6 ADLs (bathing, dressing, toileting, transferring, continence, eating) without substantial assistance, or a severe cognitive impairment, as the benefit trigger.

• A. Under IRC Section 7702B, tax-qualified LTC benefits trigger when the insured needs substantial assistance with at least 2 of the 6 ADLs (or has a severe cognitive impairment).
• B. Requiring assistance with only 1 of 6 ADLs is below the qualifying threshold for a tax-qualified LTC policy.
• C. 3 of 6 overstates the threshold; the qualifying minimum is 2, not 3.
• D. Requiring impairment in all 6 ADLs is far more restrictive than the actual 2-of-6 statutory standard.

• Source: IRC section 7702B (qualified long-term care insurance)

Correct answer: C. 11.4%

CAPM: E(R) = Rf + β(Rm − Rf) = 3% + 1.4(9% − 3%) = 3% + 1.4(6%) = 3% + 8.4% = 11.4%. Choice A simply restates the market return, choice B is the risk premium alone without adding back the risk-free rate, and choice D incorrectly multiplies beta by the total market return instead of the risk premium.

• A. 9.0% is simply the given market return; it doesn't apply the stock's higher-than-market beta of 1.4 to the equity risk premium.
• B. 8.4% reflects only the risk premium component (1.4 x 6%) without adding back the 3% risk-free rate.
• C. Using CAPM: expected return = 3% + 1.4 x (9% - 3%) = 3% + 8.4% = 11.4%.
• D. 12.6% overstates the result; it doesn't match applying the 1.4 beta to the 6-point market risk premium and adding the 3% risk-free rate.

Correct answer: C. The premiums are not deductible, and the death proceeds are generally received income-tax-free by the corporation, provided the notice-and-consent and other requirements of IRC Section 101(j) (employer-owned life insurance) are satisfied

Under IRC Section 264, premiums on employer-owned key person life insurance are not deductible when the employer is a beneficiary. Under the employer-owned life insurance rules of IRC Section 101(j), the death benefit remains income-tax-free to the corporate beneficiary only if specific notice-and-consent requirements are satisfied before the policy is issued and the insured meets an eligible-employee or other statutory exception; otherwise a portion of the proceeds may become taxable.

• A. Incorrect — premiums on employer-owned life insurance where the employer is a beneficiary are nondeductible under Section 264.
• B. Incorrect legal basis — the Section 101(j) taxability trigger relates to compliance with notice-and-consent and other statutory requirements, not a blood/marriage relationship to the insured.
• C. Correct — combines the Section 264 nondeductibility of premiums with the conditional Section 101(j) exclusion for proceeds.
• D. Overstates the exemption — both provisions create real tax consequences if the applicable requirements are not properly satisfied.

• Source: IRC section 101 (certain death benefits; life insurance proceeds excluded)

Correct answer: A. 40%

Under the standard 6-year graded schedule, vesting is 0% before 2 years, 20% at 2 years, 40% at 3 years, 60% at 4 years, 80% at 5 years, and 100% at 6 years. At exactly 3 years of service, the minimum required vested percentage is 40%.

• A. Correct. Under the standard 6-year graded schedule (20% at year 2, +20% each year), an employee with 3 years of service is vested 40% (20% + 20%).
• B. 20% is the vested percentage at exactly 2 years of service, one year less than described here.
• C. 60% is the vested percentage at 4 years of service, one year more than the 3 years described.
• D. 100% vesting isn't reached until 6 years of service under this schedule, far beyond the 3 years described.

• Source: IRC section 411 (minimum vesting standards)
• Source: ERISA section 203 (29 U.S.C. 1053, minimum vesting standards)

Correct answer: D. The plan allows the executive to accelerate or change the timing of a distribution at his sole discretion, outside the limited permissible circumstances

Section 409A strictly limits an executive's ability to accelerate or change the timing or form of a deferred compensation distribution after the initial election, except in narrowly defined circumstances (e.g., death, disability, unforeseeable emergency). An impermissible acceleration or discretionary change triggers immediate income inclusion, a 20% additional tax, and interest.

• A. A properly made advance election of a fixed distribution date, with payment made on that date, is exactly what 409A requires — this is compliant, not a violation.
• B. Timely elections made before the service year begins are the compliant norm under 409A, not a violation.
• C. Rabbi trusts subject to general creditor claims are a standard, compliant informal funding vehicle and don't themselves cause constructive receipt.
• D. Correct — unauthorized acceleration or discretionary timing changes are a classic 409A violation triggering the penalty tax.

• Source: IRC section 409A (nonqualified deferred compensation)