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LUTCF practice questions

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Question 1Life Insurance and Annuities

What is the primary financial purpose of life insurance?

  1. To pay the insured's long-term care costs in old age
  2. To accumulate retirement savings at a guaranteed interest rate
  3. To replace the insured's income and provide funds for dependents if the insured dies Correct answer.
  4. To reimburse medical expenses incurred before death

Explanation

Life insurance is a risk-transfer product that creates an immediate estate, replacing income and covering obligations when the insured dies prematurely. Savings accumulation, medical reimbursement, and long-term care funding are handled by other products or riders.

Question 2Life Insurance and Annuities

A typical individual life insurance policy gives the owner how long after the premium due date before the policy lapses for nonpayment?

  1. 90 days
  2. 31 days Correct answer.
  3. 10 days
  4. 60 days

Explanation

Individual life policies normally include a grace period of about 30 or 31 days after the due date. Coverage remains in force during the grace period, and any unpaid premium is deducted from a death benefit paid during that time.

Question 3Life Insurance and Annuities

Which policy provision prevents an insurer from denying a claim based on a material misstatement in the application once the policy has been in force for a stated period, usually two years?

  1. Reinstatement provision
  2. Entire contract clause
  3. Automatic premium loan provision
  4. Incontestability clause Correct answer.

Explanation

The incontestability clause limits the insurer's right to rescind for misrepresentation after the contestable period, generally two years from issue. After that time, the insurer must pay the claim even if the application contained a material error.

Question 4Life Insurance and Annuities

Which statement accurately describes level term life insurance?

  1. Its premium rises each year with age
  2. It builds cash value the owner may borrow
  3. It pays a level face amount only if death occurs within the term Correct answer.
  4. It guarantees lifetime coverage

Explanation

Level term insurance provides a fixed death benefit for a specified number of years at a level premium and accumulates no cash value. If the insured outlives the term, the coverage ends unless a renewal or conversion privilege is used.

Question 5Life Insurance and Annuities

An insured names his spouse as primary beneficiary and his brother as contingent beneficiary. The spouse dies before the insured and no beneficiary change is made. Who receives the death proceeds?

  1. The insured's estate
  2. The brother Correct answer.
  3. The deceased spouse's estate
  4. The insurer keeps the proceeds

Explanation

A contingent beneficiary receives the proceeds when no primary beneficiary is living at the insured's death. The estate is paid only when no named beneficiary survives the insured.

Question 6Life Insurance and Annuities

An annuity contract is designed primarily to:

  1. Replace income lost through disability
  2. Pay a death benefit to survivors of the annuitant
  3. Reimburse hospital and surgical expenses
  4. Liquidate a sum of money over time, usually to provide retirement income Correct answer.

Explanation

An annuity converts a lump sum into a stream of payments, protecting the owner against the risk of outliving retirement assets. Any death benefit is incidental to the primary income purpose.

Question 7Life Insurance and Annuities

The free-look provision in an individual life insurance policy allows the owner to:

  1. Skip one premium payment each year without penalty
  2. Exchange the policy for any other policy at any time
  3. Return the policy shortly after delivery for a full refund of premiums Correct answer.
  4. Change the beneficiary without the insurer's consent

Explanation

The free-look provision gives the owner a limited period, commonly 10 to 30 days after delivery, to examine the contract and return it for a full premium refund. It exists so the buyer can review the policy without being locked in.

Question 8Life Insurance and Annuities

Which type of life insurance provides lifetime coverage with level premiums and a cash value that grows tax deferred?

  1. Credit life
  2. Decreasing term
  3. Five-year renewable term
  4. Whole life Correct answer.

Explanation

Whole life is permanent insurance with premiums that remain level, a guaranteed death benefit, and cash value that accumulates without current taxation. Term and credit products provide temporary protection and do not build cash value.

Question 9Life Insurance and Annuities

Each year a participating whole life owner receives a dividend; total dividends so far are less than the premiums paid. How are those dividends treated for income tax purposes?

  1. They are taxable only if the policy is a modified endowment contract
  2. They are taxed as long-term capital gain
  3. They are ordinary income in the year received
  4. They are not taxable and reduce the owner's cost basis in the policy Correct answer.

Explanation

Dividends on participating policies are treated as a return of premium until cumulative dividends exceed the owner's basis in the contract. Only the excess is taxable, and then as ordinary income.

Question 10Life Insurance and Annuities

In a universal life policy, the cost-of-insurance charge generally:

  1. Cannot exceed the initial premium
  2. Increases each year as the insured ages because it reflects current mortality cost Correct answer.
  3. Stays level for the life of the contract
  4. Decreases each year as cash value accumulates

Explanation

Universal life separates the death benefit from the cash value, and the insurer deducts a cost-of-insurance charge monthly that reflects the insured's current age and risk class. Because mortality risk rises with age, that charge increases over time even though the policy remains in force.

Question 11Life Insurance and Annuities

Which transaction is a tax-free exchange under IRC Section 1035?

  1. A life insurance policy exchanged for an immediate annuity Correct answer.
  2. A life insurance policy exchanged for a rental property
  3. A life insurance policy exchanged for a mutual fund
  4. A deferred annuity exchanged for a life insurance policy

Explanation

Section 1035 permits exchanges of a life policy for another life policy, a life policy for an annuity, and an annuity for another annuity. Gain is deferred rather than recognized when the exchange follows these patterns.

Question 12Life Insurance and Annuities

A whole life owner stops paying premiums and elects the reduced paid-up nonforfeiture option. What is the result?

  1. A smaller face amount of permanent coverage remains in force with no further premiums due Correct answer.
  2. The full face amount continues in force for a limited number of years
  3. The cash value is paid out in installments over ten years
  4. The policy is automatically surrendered and the cash value is paid in a lump sum

Explanation

Under reduced paid-up, the net cash value purchases a single-premium permanent policy with a lower face amount. Coverage continues for life, and no additional premiums are required.

Question 13Life Insurance and Annuities

A beneficiary elects a life income settlement option with a 10-year period certain and dies after receiving payments for four years. What happens next?

  1. The full original face amount is paid as a lump sum
  2. All payments stop and the insurer keeps the unpaid balance
  3. The insurer refunds the original premium with no interest
  4. The remaining six years of payments continue to the beneficiary's estate or a successor payee Correct answer.

Explanation

A period certain guarantees that payments will be made for at least the stated number of years, even if the beneficiary dies early. Any unpaid guaranteed payments pass to the beneficiary's estate or a named successor.

Question 14Life Insurance and Annuities

During annuitization of a nonqualified annuity, the exclusion ratio determines:

  1. The portion of each payment that is a mortality gain to the insurer
  2. The share of each payment that is a tax-free return of the owner's investment Correct answer.
  3. The surrender charge applied to each payment
  4. The insurer's expense charge deducted from the account

Explanation

The exclusion ratio divides the owner's investment in the contract by the expected return, identifying the portion of each annuity payment that is a nontaxable return of basis. The balance of each payment is taxable income.

Question 15Life Insurance and Annuities

A life policy fails the seven-pay test and becomes a modified endowment contract. Which tax result follows?

  1. Lifetime distributions and loans are taxed income-first and may incur a 10% penalty before age 59½ Correct answer.
  2. The owner may no longer take policy loans
  3. The policy must be exchanged for an annuity within 60 days
  4. Beneficiaries must report the death benefit as ordinary income

Explanation

Modified endowment contracts keep the income-tax-free death benefit but lose favorable lifetime distribution treatment. Withdrawals are taxed as income first and are subject to a 10% penalty when taken before age 59½, with exceptions for disability and certain other cases.

Question 16Life Insurance and Annuities

The waiver of premium rider normally begins to waive premiums when the insured:

  1. Is totally disabled for a waiting period, commonly six months Correct answer.
  2. Attains age 65
  3. Suffers an accidental injury of any kind
  4. Becomes unemployed involuntarily

Explanation

Waiver of premium requires total disability and a waiting period, often six months, before premiums are waived. Once the waiting period is satisfied, premiums are waived and are treated as paid, often retroactively to the start of disability.

Question 17Life Insurance and Annuities

An accelerated death benefit rider allows the owner to:

  1. Raise the face amount without new evidence of insurability
  2. Collect part of the death benefit early when the insured is diagnosed with a terminal illness Correct answer.
  3. Suspend premium payments after any surgery
  4. Borrow the full face amount interest free

Explanation

Accelerated death benefit riders let the owner draw a portion of the death benefit in advance when the insured meets a qualifying condition such as terminal illness. Any amount accelerated reduces the death benefit later paid to the beneficiary.

Question 18Life Insurance and Annuities

When group term life coverage ends because an employee leaves the job, the conversion privilege typically allows the employee to:

  1. Keep the group coverage indefinitely at the group rate
  2. Transfer the coverage to a spouse at no cost
  3. Buy an individual policy without evidence of insurability within a limited period Correct answer.
  4. Withdraw the group face amount in cash

Explanation

Group life conversion lets a departing employee replace group coverage with an individual permanent policy without proving insurability, if applied for within a stated period, usually 31 days. The premium is then based on the employee's individual age and class.

Question 19Life Insurance and Annuities

When a policyowner makes a collateral assignment of a life policy, the assignee:

  1. Becomes the full owner with the right to surrender the policy
  2. Becomes irrevocable beneficiary of the entire face amount
  3. Gains the right to change the beneficiary
  4. Holds the policy as security for a debt, while the owner keeps rights in any value beyond the debt Correct answer.

Explanation

A collateral assignment pledges the policy as security for a loan, giving the lender rights only up to the amount owed. The owner retains the remaining rights and any excess value, unlike an absolute assignment that transfers full ownership.

Question 20Life Insurance and Annuities

To reinstate a lapsed life insurance policy, the owner generally must:

  1. Wait for a new two-year contestable period to begin
  2. Pay all overdue premiums with interest and show evidence of insurability within the reinstatement period Correct answer.
  3. Provide evidence of insurability only if the lapse exceeded five years
  4. Pay only the current premium plus interest

Explanation

Reinstatement restores the original policy, including its original issue age and cash value, if the owner pays overdue premiums with interest and submits satisfactory proof of insurability within the stated period. The contestable period generally runs anew from the reinstatement date.

Question 21Life Insurance and Annuities

Marta sells a policy on her own life to a neighbor for cash; the neighbor has no family or business relationship with her. At Marta's death, how are the proceeds taxed to the neighbor?

  1. The entire proceeds are taxed as long-term capital gain
  2. Only the policy's cash value is taxable
  3. The proceeds are entirely free of income tax
  4. The proceeds are ordinary income to the extent they exceed the consideration and premiums the neighbor paid Correct answer.

Explanation

A transfer for valuable consideration to a person outside the statutory exceptions triggers the transfer-for-value rule, making death proceeds taxable as ordinary income. The buyer may reduce the taxable amount by the consideration paid plus any subsequent premiums.

Question 22Life Insurance and Annuities

Nathan transfers a policy on his own life to an irrevocable trust but keeps the power to remove and replace the trustee with a related or subordinate party. For federal estate tax purposes, the proceeds are:

  1. Included in his gross estate because he retained an incident of ownership Correct answer.
  2. Excluded from his gross estate because the trust cannot be amended
  3. Excluded because the policy was transferred more than three years before death
  4. Included only up to the policy's cash value

Explanation

Incidents of ownership include powers over the policy's economic benefits, such as the power to change trustees in a way that retains control. Retaining such a power causes the full death benefit to be included in the insured's gross estate.

Question 23Life Insurance and Annuities

The seven-pay test determines whether a policy is a modified endowment contract by comparing the premiums paid during the first seven years with:

  1. The level annual premium that would fully pay the policy after seven years Correct answer.
  2. The face amount divided by seven
  3. The policy's projected cash surrender value at the end of year seven
  4. The total cost-of-insurance charges projected for those seven years

Explanation

A policy fails the seven-pay test when premiums are paid more rapidly than the level amount that would be needed to pay the policy up in seven annual payments. Excess funding in the first seven years produces modified endowment status, and material changes can restart the test.

Question 24Life Insurance and Annuities

A 70-year-old buys a single-premium immediate annuity with a life-only payout. Compared with a life-with-10-year-period-certain option bought with the same premium, the life-only option:

  1. Pays the same amount and adds a death benefit
  2. Pays less each month and guarantees payments to a beneficiary
  3. Guarantees payments to the annuitant's estate for at least ten years
  4. Pays more each month but stops payments at the annuitant's death Correct answer.

Explanation

The life-only option provides the highest income per dollar of premium because it contains no minimum payment guarantee. A period certain guarantee costs the annuitant income in exchange for payments continuing to a beneficiary if death occurs early.

Question 25Life Insurance and Annuities

A beneficiary leaves a $200,000 death benefit on deposit with the insurer under the interest-only option and receives $10,000 of interest in the first year. How is that $10,000 taxed?

  1. Tax free until total interest received exceeds $200,000
  2. As ordinary income to the beneficiary Correct answer.
  3. As long-term capital gain
  4. Income tax free, because it is part of a death benefit

Explanation

Life insurance death proceeds are generally excluded from the beneficiary's income, but interest credited on those proceeds under a settlement option is taxable ordinary income as received. Only the principal, not the earnings on it, enjoys the exclusion.

Question 26Life Insurance and Annuities

Which term life insurance product provides a level death benefit and a level premium for a stated period and builds no cash value?

  1. Whole life insurance
  2. Level term insurance Correct answer.
  3. Annually renewable term insurance
  4. Decreasing term insurance

Explanation

Level term insurance keeps both the face amount and the premium constant for the policy term and is pure protection with no cash value. Decreasing term has a declining face amount, annually renewable term generally increases in premium each year, and whole life is permanent coverage with cash value.

Question 27Life Insurance and Annuities

The grace period provision in a life insurance policy allows the owner to:

  1. cancel the policy and receive a full refund at any time
  2. skip premiums for up to one year without affecting coverage
  3. pay an overdue premium after its due date without the policy lapsing Correct answer.
  4. borrow the premium amount from the insurer without interest

Explanation

The grace period, commonly 30 or 31 days, lets the owner pay a late premium while coverage remains in force. If death occurs during grace, the unpaid premium is typically deducted from the death benefit.

Question 28Life Insurance and Annuities

After a life insurance policy has been in force for two years, the insurer generally may not contest the policy because of:

  1. a material misstatement in the application Correct answer.
  2. the owner's decision to change beneficiaries
  3. a change in the insured's health
  4. the insured's failure to pay premiums

Explanation

The incontestability clause bars the insurer from contesting the policy for misrepresentation after the contestable period, usually two years. Nonpayment of premium and later health changes are handled by other policy provisions.

Question 29Life Insurance and Annuities

If the primary beneficiary dies before the insured and no contingent beneficiary is named, the death benefit is usually paid to:

  1. the insured's creditors
  2. the primary beneficiary's estate
  3. the insurer's surplus account
  4. the insured's estate Correct answer.

Explanation

When no living beneficiary exists, the proceeds are typically payable to the insured's estate, where they may be subject to probate and creditor claims. The primary beneficiary's estate would receive the proceeds only if that beneficiary had survived the insured.

Question 30Life Insurance and Annuities

An outstanding policy loan on a whole life policy that is not repaid will:

  1. void the policy immediately
  2. reduce the death benefit payable to the beneficiary Correct answer.
  3. increase the cash value by the loan amount
  4. convert the policy to term insurance

Explanation

An unpaid policy loan, plus accrued interest, is deducted from the death benefit or cash value. The policy remains in force as long as there is sufficient cash value to support the loan.

Question 31Life Insurance and Annuities

During the accumulation phase of a deferred annuity, investment earnings generally:

  1. grow tax deferred until withdrawn or annuitized Correct answer.
  2. are exempt from income tax permanently
  3. are taxed each year as ordinary income
  4. are paid out to the owner annually as taxable income

Explanation

A deferred annuity accumulates earnings on a tax-deferred basis, and the gain is generally taxed when distributed. The deferral is not a permanent exemption from income tax.

Question 32Life Insurance and Annuities

A typical suicide clause in an individual life insurance policy provides that if the insured dies by suicide within the first two years, the insurer will:

  1. pay the full death benefit plus interest
  2. refund the premiums paid, less any indebtedness Correct answer.
  3. pay nothing under any circumstances
  4. pay double the face amount

Explanation

The suicide clause limits the insurer's liability during the initial contestable period, usually to a return of premiums rather than payment of the face amount. After that period, suicide is generally covered like any other cause of death.

Question 33Life Insurance and Annuities

A return-of-premium term policy differs from a standard level term policy in that it:

  1. automatically converts to whole life at expiry
  2. has a cash value that grows like whole life
  3. pays a death benefit only if death is accidental
  4. refunds premiums if the insured survives the term Correct answer.

Explanation

Return-of-premium term refunds premiums, often minus charges, if the insured outlives the policy term. It charges a higher premium than standard level term and remains pure protection.

Question 34Life Insurance and Annuities

A convertible term life policy allows the policyowner to:

  1. increase the face amount at any time without underwriting
  2. convert the policy into an annuity at a guaranteed rate
  3. add a cash value account while keeping term premiums
  4. exchange it for permanent coverage without new underwriting Correct answer.

Explanation

The conversion privilege lets the owner exchange term coverage for a permanent policy without providing new evidence of insurability, usually before a stated age. The premium is based on the insured's attained age at conversion.

Question 35Life Insurance and Annuities

Decreasing term life insurance is most suitable for covering:

  1. a permanent need for a level death benefit
  2. a mortgage balance that declines as the loan is repaid Correct answer.
  3. estate taxes expected to grow over time
  4. retirement income that must last for life

Explanation

Decreasing term has a face amount that falls over the policy term, making it a natural match for a declining debt such as a mortgage. It is not designed for level or increasing long-term needs.

Question 36Life Insurance and Annuities

In a universal life policy with an increasing death benefit (Option B), the death benefit payable is generally the:

  1. specified amount only
  2. specified amount minus outstanding loans
  3. cash value only
  4. specified amount plus the cash value Correct answer.

Explanation

Under Option B, the death benefit equals the specified amount plus the accumulated cash value, so it increases as cash value grows. Option A, by contrast, generally pays a level specified amount.

Question 37Life Insurance and Annuities

The automatic premium loan provision in a whole life policy allows the insurer to:

  1. waive premiums if the insured becomes disabled
  2. increase the death benefit by the unpaid premium
  3. borrow from cash value to pay an overdue premium Correct answer.
  4. cancel the policy after one missed premium

Explanation

The automatic premium loan provision uses available cash value to advance an overdue premium so the policy does not lapse. The amount borrowed, plus interest, reduces later policy values or proceeds.

Question 38Life Insurance and Annuities

If the insurer discovers that the insured's age was understated on the application, the insurer will generally:

  1. adjust the death benefit to the correct-age equivalent Correct answer.
  2. deny the claim entirely because the application was inaccurate
  3. increase the premium retroactively and pay the full face amount
  4. rescind the policy and refund all premiums without interest

Explanation

The misstatement of age provision adjusts the death benefit to the amount the premium paid would have purchased at the insured's correct age. This avoids full rescission for an age error after the policy is in force.

Question 39Life Insurance and Annuities

When a policyowner makes an absolute assignment of a life insurance policy, the owner:

  1. names the assignee only as a revocable beneficiary
  2. permanently transfers all ownership rights to the assignee Correct answer.
  3. retains the right to change the beneficiary
  4. temporarily pledges the policy as collateral for a loan

Explanation

An absolute assignment transfers all ownership rights permanently to the assignee. A collateral assignment, by contrast, is conditional and gives the assignee only a limited interest as security for a debt.

Question 40Life Insurance and Annuities

A beneficiary designation payable per stirpes means that:

  1. the death benefit is paid only to the oldest surviving child
  2. a deceased beneficiary's share passes to that beneficiary's children Correct answer.
  3. the beneficiary must survive the insured by 30 days
  4. all named beneficiaries share equally regardless of family branch

Explanation

Per stirpes distributes by family branch, so a deceased beneficiary's share passes to that beneficiary's descendants. Per capita, by contrast, divides the proceeds equally among surviving beneficiaries.

Question 41Life Insurance and Annuities

Under the extended term nonforfeiture option, a whole life policyowner who stops paying premiums:

  1. buys term insurance with the cash value Correct answer.
  2. must surrender the policy for its reserve value
  3. keeps a reduced paid-up whole life policy
  4. receives the cash surrender value in a lump sum

Explanation

Extended term uses the net cash value to purchase term insurance for the full face amount for whatever period that value will support. The reduced paid-up option instead keeps a smaller permanent policy in force.

Question 42Life Insurance and Annuities

The cash value of a variable life insurance policy is invested in:

  1. the insurer's general account with a guaranteed minimum return
  2. a fixed indexed account with a floor of zero
  3. a separate account whose performance is not guaranteed by the insurer Correct answer.
  4. a bank certificate of deposit chosen by the owner

Explanation

Variable life cash value is held in a separate account, and the policyowner bears the investment risk. The insurer does not guarantee the separate account's performance, although the policy may guarantee a minimum death benefit.

Question 43Life Insurance and Annuities

Once a fixed immediate annuity is annuitized, the payment amount is:

  1. recalculated each month using current interest rates
  2. based on the performance of a stock index
  3. adjusted annually for inflation automatically
  4. fixed and guaranteed for the payout period selected Correct answer.

Explanation

A fixed annuity guarantees a level dollar payment for the payout option chosen, so the annuitant knows the amount in advance. Inflation may erode purchasing power, but the payment itself does not vary with the market.

Question 44Life Insurance and Annuities

A 10% federal income tax penalty generally applies to withdrawals from a nonqualified deferred annuity before the owner reaches age:

  1. 55
  2. 59½ Correct answer.
  3. 70½
  4. 65

Explanation

Withdrawals before age 59½ are generally subject to a 10% federal penalty tax, in addition to ordinary income tax on the gain. Exceptions can apply for death, disability, and certain annuitized payments.

Question 45Life Insurance and Annuities

When a life insurance policy is sold for valuable consideration to a buyer with no insurable interest exception, the death benefit is generally:

  1. taxed as capital gain only
  2. fully income tax free to the buyer
  3. taxable to the buyer above the buyer's basis Correct answer.
  4. excluded from the buyer's income but taxable to the estate

Explanation

Under the transfer-for-value rule, a policy transferred for valuable consideration loses the usual income tax exclusion, and the buyer is taxed on proceeds above basis. Certain exceptions, such as transfers to the insured or a partner, can preserve the exclusion.

Question 46Life Insurance and Annuities

A grantor transfers an existing life insurance policy to an irrevocable life insurance trust and dies within three years of the transfer. The death proceeds are generally:

  1. excluded from the gross estate because the trust is irrevocable
  2. included only if the trust is a grantor trust
  3. excluded if the trustee is an independent party
  4. included in the grantor's estate under the three-year rule Correct answer.

Explanation

Under the three-year rule, life insurance transferred to an irrevocable trust within three years of death is generally pulled back into the grantor's gross estate. Waiting more than three years can avoid that inclusion.

Question 47Life Insurance and Annuities

In an economic benefit split-dollar arrangement, the employer's interest in the policy is typically limited to:

  1. the cash value growth only
  2. premiums paid, with the employee taxed on the benefit Correct answer.
  3. the full death benefit
  4. a share of the death benefit equal to salary

Explanation

In an economic benefit split-dollar plan, the employer generally recovers the premiums it paid, while the employee is taxed on the value of the insurance protection provided. The employer does not own the entire death benefit.

Question 48Life Insurance and Annuities

Accidental death and dismemberment coverage under a group life plan generally pays a benefit when:

  1. the employee retires after age 65
  2. the employee dies or loses a limb or sight from an accident Correct answer.
  3. the employee becomes disabled from illness
  4. the employee dies from any cause

Explanation

AD&D pays only for accidental death or specified accidental losses such as a limb or sight. Death or disability from illness is not covered by AD&D, though it may be addressed by other coverage.

Question 49Life Insurance and Annuities

When a producer replaces an existing life insurance policy, state replacement regulations generally require the producer to:

  1. notify the existing insurer only after delivery
  2. obtain a new medical exam for every replacement
  3. give the applicant a replacement notice and policy list Correct answer.
  4. refuse to write the new policy in all cases

Explanation

Replacement regulations require disclosure to the applicant, typically through a replacement notice and a list of the policies being replaced. This gives the buyer information to compare the old and new coverage.

Question 50Life Insurance and Annuities

If the owner of a deferred annuity dies during the accumulation period, the beneficiary generally receives:

  1. the greater of premiums paid or cash value, with gain taxable Correct answer.
  2. the full death benefit free of income tax on the gain
  3. only the premiums paid, with no earnings
  4. nothing unless annuitization had begun

Explanation

A deferred annuity death benefit is generally at least the greater of premiums paid or the contract's cash value. The gain portion is taxable as ordinary income to the beneficiary, and there is no step-up in basis.