cfp practice

Matt Williams' yearly compensation is $80,000. He electively defers $10,000 to his employer's 401(k). Matt's wife Cindy Williams does not work outside the home. The Williams' have no other taxable income. How much can they contribute to an IRA and deduct in the 2019 tax year?

$12,000 Feedback: It is reasonable to assume that the Williams' AGI falls under the $103,000 active participation phase out limit for deductibility because no other taxable income numbers is indicated in the question. Therefore, Matt can make a deductible IRA contribution. Cindy can contribute to a spousal IRA ($6,000) because her husband has compensation. The Williams' AGI falls under the spousal contribution $193,000 phaseout that applies when the pther spouse is an active participant. Do not assume that the Williams' are age 50 or older.

Sam Waters, age 63, has decided to retire. The company he has worked for maintains an endorsement type split dollar life insurance arrangement on his life. Sam has no other life insurance and has been told that due to several health problems if he applied for life insurance he would be rated (increased premium) or declined coverage althogether. His employer has informed him that he can purchase the policy that is currently held under the split dollar agreement. Presuming that Sam does buy the policy from his employer, what amount would he have to pay for it? Universal Life Current death benefit $1,000,000 Cash Value $120,000 Premiums paid $100,000

$120,000 Feedback: Under this endorsement method spilt dollar life insurance arrangement, if Sam wants to buy the policy under which he is the named insured, he will have to pay the higher of the cash value or premiums paid. The company will realize a gain representing the excess cash value over the premiums paid. The endorsement slipt dollar agreement typically precludes the employer charging interest to the insured employee.

Following three days in the hospital for hip replacement surgery, Mrs. Tuttle spent 110 days in a skilled care facility. She qualified for her stay under Medicare. The cost of the facility was $370.50 per day and the Medicare specified coverage amount is $170.50 per day. How much did Medicare pay for Mrs/ Tuttle's extended care?

$23,410 Feedback: Medicare will pay for the first 20 days of rehabilitative skilled nursing home care in full @ $370.50. It will also cover $100 (the daily charge exceeding $170.50) for the next 80 days. After 100 days there is no Medicare coverage for extended care. 20 days @ $367.50 = $7,410 80 more days @ $200 = $16,000 TOTAL $23,410

your client, William Smith, age 35, is divorced with no children. He has just won a local $5 million LOTTO. The LOTTO administrators have given William 4 choices as to how to receive his winnings. Consdering investment opportunities that might be available to William, which distribution would you recommend to William?

$250,000 in annual payments amde at the beginning of the year for the next 20 years (subject to tax) Feedback: Select one rate of return to compare the options. Answer B using 5% return produces a PV of $3,271,330 Answer C using 5% return produces a PV of $3,243,128 Answer D produces a return of only 3.63% Now consider taxes. The tax on $3,500,000 is approximately $1,350,000 netting $2,150,000 The tax on $250,000 is approximately $66,000 producing net income of $184,000 To get $184,000 from $2,150,000 over 20 years, the investment would have to earn about 6.2%. That may be difficult to acheive. This is an "opportunity cost" question.

Mrs. Kalish, age 82, gifted the following assets over the past three years. Three years ago - she gifted a stock portfolio with a basis of $1million and a FMV of $1.5 million currently worth $2 million. Two years ago - she placed $2 million in a 5 year GRAT with a gift tax value of $1.25 million, currently worth $2.4 million. One year ago - she gifted a whole life insurance policy with a face value of $1 million and an interpolated terminal reserve plus unearned premium of $100,000. This year, because she is sad over the passing of her pet cat, Melina, she gave $100,000 to the Society for the Prevention of Cruelty to Animals. Mrs. Kalish passed away today. Which of the following is true?

$3.4 million of the assets will be included in Mrs. Kalish's gross estate. Feedback: No 3-year rule applies to the stock. Because it was a taxable gift it will be added to the taxable estate rather than included in the gross estate. The stock was gifted to the daughter. Thus, the daughter's carryover basis is $1million, which, given the $2 million in sales proceeds produces a capital gain of $1 million. The GRAT (5year) and the life insurance (3-year rule) are included in the gross estate. The GRAT assets would be included in Mrs. Kaslish's gross estate likely at date of death FMV because she dies before the end of the term of the trust. The life insurance policy would be included in her gross estate at face value because Mrs. Kalish had incidents of ownership in the three year period prior to her death.

Bob works for Technotalk, Inc.Bob's salary is $100,000. He makes an elective deferral of $19,000 to the company's 401(k) plan. If Technotalk is a large company, what is the maximum it could contribute and deduct as a match and a profit-sharing contribution for Bob in 2019?

$37,000 Feedback: Section 415 of the Internal Revenue Code limits the annual addition to a maximum of 100% of compensation or $56,000. $56,000-$19,000=$37,000. The company may contribute and deduct more than 25% of salary in addition to the elective deferral of an individual employee/participant (not to exceed $56,000) providing that the plan deduction for total includible compensation does not exceed 25% (elective deferrals)

Mr. Sims purchased a $500,000 life policy in 1987 paying a single premium of $50,000. The contract cash value has grown to $110,000. He has decided to surrender the contract this year. Which of the following is true?

$50,000 of the $110,000 will be income tax free; the remaining $60,000 will be subject to tax at ordinary income tax rates. Feedback: The policy is not a MEC; therefore, the cash value in excess of basis ($50,000) will be subject to tax at ordinary income tax rates, but not the 10% penalty. It was purchased before MEC rules took effect in 1988.

Bill has retired. His company provided an ESOP. Stock with a basis of $50,000 was contributed to Bill's ESOP account. At Bill's retirement, stock having a market value of $125,000 was distributed to him. Six months after retirement, Bill sold all of the shares for $150,000. Which statement below best describes Bill's tax situation?

$50,000 was taxed as ordinary income when Bill retired; $75,000 will be taxed at LTCG rates at the time of sale, and $25,000 will be taxed at STCG rates when Bill sells the stock. Feedback: The unrealized appreciation is taxable as long-term capital gain to Bill when the ESOP shares are sold, even if sold immediately. If Bill holds the shares for a period of time after distribution, any additional gain (above the net unrealized appreciation) is taxed as long or short-term capital gain, depending on the holding period. The $25,000 gain above the distribution price of $125,000 and the sale price of $150,000 is STCG because Bill held the shares for only 6 months after they were distributed to him.

Tom, age 51, works for a not-for-profit organization. He contributes $19,000 annually to a 403(b) provided by his employer. Tom's wife, Melinda (age 48), works for another not-for-profit organization. She contributes $5,000 annually to her employers 457 plan. If he earns $100,000 and Melinda earns $50,000 in the current year, how much can they contribute to a traditional IRA that would be deductible on their 2019 tax return?

$6,000 Feedback: The 403(b) retirement plan makes Tom an active participant for the purposes of deducting an IRA contribution. Given that Tom is an active participant and the amount of Tom and Linda's AGI, Tom's IRA contribution is not deductible. Contributing to the nongovernmental 457 does not classify Melinda as an active participant for purposes of deducting her IRA contribution. Their combined AGI is $150,000. Under the "tainted spouse rules," Melinda can make a deductible IRA contribution because the joint AGI is less than $193,000.

David and Rose Caldwell own a four bedroom home having a current FMV of $450,000. They purchased the home 20 years ago for $125,000. The land is now worth $100,000. The home is partially destroyed by fire causing damages of $100,000. Under a HO policy, the home is insured for $250,000. The Caldwells purchased replacement cost coverage. Ignoring deductible, what amount of benefit should the Caldwells receive from their Homeowner's insurance policy?

$89,286 Feedback: The land is not insured. The replacement value of the home is $350,000. ($450,000 FMV less $100,000 land). Replacement coverage under HO policies is reduced to the extent that the policy owner does not carry insurance representing 80% of replacement value. $350,000 x .8 = $280,000. The Caldwells only have $250,000 in coverage which represents 89.29% of the required coinsurance. Multiply the $100,000 in damages by .8929 to calculate an insurance benefit of $89,286

George and Linda gifted $106,000 to an irrevocable living trust that includes Crummey provisions. The trust has named their two twin nephews, Larry and Barry as its beneficiaries. George and Linda consent to gift splitting. When George or Linda dies, how much, if any, of the gift will be brought back into their gross estate(s)?

0 A gift of cash to an irrevocable living trust is irrevocable. The gift is removed from their gross estates for federal estate tax purposes. While both George and Linda will have made a taxable gift of $23,000, that is not reflected in their gross estate(s). Rather, it is added to their taxable estate(s) to arrive at the tax base.. ($106,000 - [60,000 (15,000 x 4)] = $46,000 46,000 / 2 = 23,000 each

Chariots of Hire, a tour bus company, employs 19 workers but only 15 are covered under its group insurance plan. If one of the covered employees is terminated, what is the amount of time for which the employee is able to continue his or her group coverage under COBRA rules?

0- months of coverage Feedback: Under COBRA rules, employers having 20 or more employees must, under specific circumstances, allow terminated employees and members of their families to continue to be covered under the employer's group health insurance plan. Chariots of Hire has only 19 employees and we do not know if they are full-time workers.

Mrs. Perry will report a current tax year AGI of $145,000. She recently donated $100,000 of publicly held stock to a private university. The stock was purchased 10 years ago for $25,000. What is the maximum allowable income tax deduction she can take in the current year for this gift?

43,500 Feedback: A private university is deemed to be a public charity/50% organization. Mrs. Perry's gift of long-term appreciated property is allowed a deduction of 30% of her AGI. Valuating at basis (50%), would provide Mrs. Perry with a deduction of only $25,000.

C registered advisers with AUM at least $100 million - are required to file annual updates to their ADV within _____ days of the end of their fiscal year.

90

Law school classmates, Mr. Ball and Mr. Desmond are both attorneys. At this time, their law practice which specializes in personal injury law, BaDe, PC (Professional corporation) does not provide any retirement plan. The two counselors want to establish a qualified plan. They want a plan that requires no employee contributions nor mandatory contributions. BaDe currently has only two other employees who are part-time paralegals. The practice plans to hire another attorney. Which of the following plans would you recommend for BaDe, Attorneys at Law?

A Profit-sharing plan Feedback: The profit sharing plan best fits the objectives and preferences of Esquires Ball and Desmond. They do not want a plan that requires mandatory annual funding. The defined-benefit plan would not fit their model. The attorneys do not want to defer personal income. This eliminates the 401(k). The SEP is not a qualified plan. The SEP would probably have to cover part-time employees. Relative to the profit sharing arrangement, 1he ERISA 1,000-hour rule would exclude the part-time employees from participating.

An U.S. investor owns German bonds. What will make the bonds increase in value?

A decline in U.S. interest rates Feedback: If a U.S. investor owns securities denominated in a foreign currency, that individual would profit if the dollar declined (devalued) or the value of the foreign currency rose (revalued). An increase in European interest rates would decrease the value of German bonds. If U.S. interest rates decline, the value of the dollar will decline. Score 1 of 1 Question:

A premature distribution penalty tax applies to which one of the following IRA distributions?

A distribution made to the owner ($10,000 lifetime limit) for the primary residence Feedback: The distribution must be for the purchase of a first home, not necessarily a primary residence.

Pat Dugan is a 70-year-old man about to retire. If he annuitizes the current account balance from the retirement plan in which he has participated throughout his long career, which of the following annuity options will provide Pat with the highest payment in his first year of retirement?

A life annuity Feedback: The life annuity always produces the highest payout. A life annuity may also be called as a pure life annuity or a straight life annuity.

Your client, Byron Sheridan, died recently at age 83. He was married to Virginia, age 83. Byron enjoyed managing his investments and diversifiedhis invested assets among several asset classes. When Byron died, he held the assets listed below. Which of them would be eligible for a step up in basis?

A municipal bond purchased at a discount ($95,000) two years ago now having a date of death FMV of $100,000 Feedback: The municipal bond was held for the long-term and is eligible for stepped up basis upon Byron's death. Short-term gain property does not step up in basis nor does a tax deferred account such as an annuity (and retirement accounts generally). The CD is cash. There is no stepped up basis; a dollar is a dollar.

ally has asked you (a CFP® practitioner) to evaluate the following bonds. She is in this highest marginal tax bracket. On a tax-equivalent basis, which of the bonds provides the best return? Note: Unless the question indicates that the client is subject to the 3.8% investment tax mandated by the Affordable Care Act, do not use 3.8% in any calculation.

A municipal revenue bond paying 5.2% Feedback: The taxable equivalent yield for the municipal bond is .052/.63 = 8.25%. The interest from the zero coupon bond, while not constructively received is taxable each year (phantom income). In this question, only one calculation can enable you to compare returns for all four bonds.

Which of the following trusts is required to distribute income annually?

A simple trust Feedback: By definition, a simple trust distributes income annually.

Childhood pals Stu and Lou had always wanted to spend time together, so shortly after graduating high school, they opened a hamburger joint called Good Guys Burgers. The business has been quite successful over the past forty some years and has grown into a chain of 33 stores. Stu and Lou estimate that the business is worth $9 million and plan to engage a business valuation specialist to peg an accurate fair market value for the business. Stu and Lou, now in their early sixties, recently had their first discussion about business succession planning. Although Stu has a son, Mark, in his late twenties, Mark tours with a rock band and has no interest in stepping into his father's shoes. Lou has no children and his wife has serious health problems so she could not assume his business responsibilities if Lou dies. On the advice from their insurance agent, Lou and Stu decide to enter into an insurance-funded cross purchase death buy/ sell agreement. Each owner acquires life insurance on the other. If this agreement is executed and funded and Lou dies, who, if anyone, would experience a stepped up basis relative to the buy/sell transaction?

Both Lou's Estate and Stu Feedback: Both Lou's estate and surviving owner Stu both experience basis step up. Lou's estate gets an increase in basis to date-of-death fair market value (unless the AVD was selected which is not indicated in the data) due to the post mortem sale. Stu receives basis step up due to contributing additional capital (the life insurance death benefit) to the business (Good Guys Burgers) to buy out Lou's equity in the business.

Your married client, Mr. Hart, has a son, Robert. Robert is about to enroll in college to study pharmacology. Mr. and Mrs. Hart are delighted that Robert has turned his life around. Only two years ago, Robert was convicted of a felony for distributing a controlled substance. Which among the following education financing strategies is available to the Harts if their AGI is around $100,000?

Claim the Lifetime Learning Credit Feedback: Both the American Opportunity credit and Lifetime Credit programs specify certain exclusions. For the American Opportunity Credit only, an otherwise eligible student can be excluded if convicted of a felony (in this case distributing a controlled substance). This restriction does not apply to the Lifetime Learning Credit. The Hart's relatively low joint AGI qualifies them for a Lifetime Learning Credit. Answer D is unclear because it does not indicate whether the tuition is to be paid directly to the education provider. If it is paid to Robert, all or part of the gift may be exposed to federal gift tax. Regarding Answer D. No charitable gift deduction is available for tuition payments to a school.

What is the least important obligation when you, a CFP® practitioner, are about to begin the first step in the financial planning process?

Disclosing the exact amount of conpensation that you will receive for performing the planning services. Feedback: Disclosure of planner compensation should occur be in the first step that establishes a mutually agreeable relationship between the planner and the client(s). However, the exact amount of planner compensationis unknown in the earlier steps of the financial planning process. Thus, disclosing the exact amount of planner compensation is not required.

Which of the following is not an exception to the premature early withdrawal penalty for distributions (before age 59-1/2) from an IRA?

Distributions to pay medical insurance premiums following separation from employment after 12 consecutive weeks of unemployment insurance benefits in accordance with a QDRO Feedback: To avoid the premature withdrawal penalty for distributions from an IRA used to pay medical premiums while unemployed, there is a requirement to file for federal or state unemployment insurnace benefits after separation from service. Only distributions for tuition and fees for post secondary education are eligible for the penalty-free withdrawal. The QDROs exclusion is for qualified plans only.

our newest client, Tiffany, is age 23. Her Uncle Donald gave her $5,000 as a college graduation present after receiving her BA degree in Communications. Tiffany tells you that she would like to invest the full $5,000 into a Roth IRA. After college and given the current economic environment, it took her some time to find a job. She has only been working for six months and has no spare cash. You tell Tiffany that she should understand her cash flow and establish an emergency fund before investing for retirement. Tiffany, who enjoys reading financial magazines and listening to financial experts on morning talk shows is adamant about wanting the Roth. What should you do now?

Educate Tiffany as to why she needs to have an emergency fund before saving for retirement. Feedback: While it is true that Tiffany could have penalty-free access to a Roth IRA, arguably, the financial planner's main function is that of an educator. Does the exam want "educate" as an answer? Yes! There is no need to end the client/planner relationship at this point. There is little, if any information in the question to indiciate a need for life insurance before dealing with other financial matters.

Mr. Smith is subject to the AMT. Which of the following can reduce his AMT payable?

Exercising more nonqualified stock options Feedback: Exercising nonqualified stock options will increase his regular income which thus reduces his AMT payable. The mortgage interest deduction associated with a larger mortgage will decrease his taxable income. Purchasing public purpose bonds will have no effect.

George Hallas owns 80% and his daughter, Georgina, 20% of Hallas, Inc. (a corporation). Hallas, Inc. grosses approximately $20 million in a typical year. George and his daughter also own a general partnership worth $5 million. George owns a $3 million life insurance policy outright under which he is the named insured. He wants to remove the life insurance policy from his estate. What do you recommend?

Gift the policy to his daughter Feedback: If the corporation owns the policy, the proceeds may be considered in valuing the decedent's interest for federal estate tax purposes unless there is valid agreement fixing the price that would reflect an arms-length sale to an unrelated party. This would be questionable because the buyer and seller are daughter and father, respectively. Answers B and C create a similar problem. When George dies, the partnership dissolves. The ownership of the policy after that point would be uncertain and possibly flow through George's estate.

Robert Zimmerman owns Smokey Bacon, Inc. Smokey Bacon provides a profit sharing 401(k). Robert makes the maximum elective deferral and with the company match and typical forfeitures, annual additions have ranged between $20,000 - $25,000. He has started another company, Eggcellent Eggs, Inc. with some good friends, and they are considering a profit sharing 401(k) plan for Eggcellent Eggs. Robert will be a controlling shareholder in Eggcellent Eggs. Given Robert's positions, which of the following statements is true?

He cannot defer any compensation into Eggcellent Eggs 401(k) plan. Feedback: Robert can be a participant in Eggcellent Eggs plan for profit sharing contributions but not elect any more deferrals. Answer C is incorrect because his annual additions limit (for both plans combined) is the lesser of 100% of compensation or $56,000 (2019)(Bacon and Eggs are related employers).

John Jay is dismayed at having his CFP® marks revoked. Upon investigation of the complaints. The disciplinary commission ruled he repeatedly placed clients' property in the firm's accounts. John believes that he can disprove the charges. What can he do?

He may file an appeal to the commission within 30 days of its ruling. Feedback: An individual subject to discipline by the commission must appeal its decision within 30 days. Yes, under the new rules the dispute will go to arbitration, but Answer C comes before Answer D.

Arthur, age 63 regrets retiring early. He's single and bored. Arthur found a job at Walmart as a greeter. The job will pay $15,000 per year. Arthur doesn't need the money because he is currently receiving $5,000 per month from his former employer's money purchase pension plan plus early Social Security retirement benefits of $1,000 per month. Arthur lives in a comfortable apartment, has full medical coverage and makes no charitable contributions. He normally claims the standard deduction. Which of the following is true if he takes the job with Walmart?

He will remain in a 22-24% income tax bracket. Feedback: Arthur will be in the 22-24% bracket. If he works the same hours for better pay, Arthur will exceed the 1-2 rule ($17,640) which would reduce his current Social Security retirement benefits. For now, Arthur remains with Walmart.

Charter, Inc. is owned 50% by John Tillman and 50% by his brother-in-law, Brad Porter. Currently, the company maintains a stock redemption buy sell arrangement funded with insurance. Now that John and Brad better understand step up in basis rules, they would like to change to do a cross-purchase buy-sell plan funded with insurance. In light of their situation, which of the following statements is true?

I, III I. Charter, Inc. owns and is the beneficiary of the stock redemption plan insurance policies. I. Charter, Inc. owns and is the beneficiary of the stock redemption plan insurance policies. Feedback: Under an insurance funded cross-purchase buy sell agreement, each owner buys a policy on the other owner(s). Under the current corporate (Charter, Inc.) stock redemption buy sell agreement, the company owns the policies (Answer I). If one owner buys a policy on the other (from Charter, Inc. the transfer for value rules would cause the death proceeds of those policies to be subject to federal income tax.

An employer can self-fund certain benefits under a 501(c)(9) voluntary employees' beneficiary association (VEBA). Which of the following may be funded?

I. Death benefits II. Medical benefits III. Unemployment benefits

Which of the following statements about disability payments and benefits are true?

I. Employer contributions to employee group disability insurance plans are generally tax deductible. Benefits will be taxable to the insured employee. II. When an employee pays for an individual disability policy, or the plan is contributory, the employee pays for the plan with after-tax dollars. Tll or part (contributory) of the benefits will be tax-free to the employee. III. The employer offers an executive bonus (Section 162) to purchase an individual disability policy for an employee. The premium is deductible by the employer, and the benefits are tax-free to the employee IV. Insured S corporation owners always receive tax-free disability benefits. Employer contributions for group disability insurance are generally treated as an ordinary and deductible business expense. The premiums will result in no taxable income to the employee. However, disability insurance benefits will result in taxable income to the claimant. If the plan is operates through an executive bonus - Section 162) and the employee is charged with the insurance premium (bonus), then the benefits are received tax-free.

Chris Towns is the self-employed owner of Chris Craft Stores. He reports profits or losses from his business on Schedule C. Chris Craft Stores has 10 employees. The business is very successful - enough to fund various employee benefits for Chris and his employees. Which of the following current benefits are either added to the front of Chris's 1040 as part of gross income or are shown as deductions on the front of the 1040 to determine AGI?

I. Group life insurance having a death benefit of $200,000 under which Chris is the named insured II. A SEP contribution for Chris III. Net profit from Chris Craft Stores of $350,000 V. Group health insurance premiums for himself and his wife Because the face value of the group life is in exceeds $50,000 the premium on the face value exceeding that amount is treated as compensation and becomes part of Chris's gross income. The SEP contribution and the health insurance premiums for Chris and his wife are deductions for AGI (above the line deductions). The net profit from this unincorporated business represents income to Chris: It is part of his gross income. Chris's income, which clearly exceeds phaseout limits, makes his wife ineligible for the spousal IRA deduction.

A few years ago John and Jim started a business J&J, Inc. as an S corp. In spite of a sluggish economy, the company has grown at a rapid rate. J&J has focused on selling shoes to men with small feet. At the time the business formalized they entered into an entity buy sell agreement funded with life insurance policies on each owner. However, John produces more of the income than does his partner Jim. This reflects Jim's personality, he is uncomfortable around most people. Therefore Jim handles the administration of the business. John now believes that he can outsource the administrative work and decrease the overall expense of the business. Because of this John wants to sever ties with J&J and start his own company with lower overhead and thus substantially higher revenues. He believes he can do this by selling all sizes of shoes rather than shoes only to men with small feet. His research shows that this will greatly increase the size of his market. Upon learning of John's plans, Jim went into business with a new co-owner, Scott. They too will form an S corporation, J&S Inc. This time Scott and Jim will implement a cross purchase buy sell agreement. Jim does not want to manufacture shoes of all sizes due to the inherent cost of production. Which of the following statements is/are correct regarding the situation if Jim is looking to use his current life insurance policy owned by J&J, Inc to fund the new Cross Purchase Buy Sell with Scott.

I. Jim's Policy Owned by J&J can be aquired by Scott to fund the Cross Purchase Agreement for J&S, Inc. II. If Scott and Jim enter into an Entity purchase buy sell agreement J&S Inc could buy Jim's policy from J&J Inc and there would not be a transfer for value exposure. V. John could buy his policy from J&J Inc and this would not trigger transfer for value rules. I, II, V Feedback: Statement I is correct. It is permissible although it would create a transfer for value issue. Statement II is correct because a corporation in which the insured is a shareholder can purchase the policy without triggering transfer for value rules. Statement III is not correct. There will still be tax due to transfer for value regardless of how much longer Jim lives. Statement IV confuses 2 different rules. Statement V is correct because John can buy his own policy.

Pension contributions are based on compensation. Which of the following is generally considered to be compensation to an employee?

I. Salary II. Bonus Salaries and bonuses are clearly compensation. A reimbursement pays the employee back for business expenses incurred but is not compensation. An ISO is a right to buy the employer's stock and is not compensation. However, if the ISO becomes disqualified because the stock is exercised and sold in the same calendar year, the employee may be required to recognize any profits as compensation. Deferred compensation is not treated as compensation until it is constructively received. For tax purposes, compensation is considered current when it is paid no later than 2-1/2 months after the year in which it is earned. For a more-than-50% owner, the compensation must be paid by year end. Deferred compensation is not compensation for tax purposes until it is constructively received.

Barry retired a few years ago from Belmont, Inc. at age 65. He is turning age 70 at the beginning of this year. He is planning to return to work at Belmont toward the end of the year on a full-time basis. Barry has the following types of retirement accounts not all of which come through his current employer. From which of the following accounts does Barry have to take a mandatory distribution by April 1st of next year?

I. Simple IRA II. SEP IRA IV. Traditional IRA V. Belmont 401(k) plan (account from retirement at age 65) A minimum distribution is required for the year in which the participant attains age 70-1/2. Considering the question is worded, Barry still will be retired when he reaches age 70-1/2 (middle of the year). He will be back to work at the end of the year and may not be eligible to participate in the 401(k) until the following year.

Which of the following statements is (are) true about profit-sharing plans?

I. They may be integrated with Social Security. II. They may receive contributions for individual employees in excess of 25% of that participant's eligible compensation. III. They generally peremit the employer to make flexible contributions. IV. They may be age-weighted.

Under code Section 6166 which is the following is true?

I. You can only use it if the client dies owning a business. III. During the first 4 years the estate only has to pay interest on any tax owed at the death of the client. V. It allows for installment payment of estate taxes over 10 equal installments beginning 4 years after the client's death. It is available for sole-proprietor interest. It is 35% of the adjusted gross estate. The 2% interest rate only applies to a limited dollar amount, but the remainder also qualifies for interest only payments.

Hal, age 63+, is trying to decide whether he should being taking Social Security benefit 36 months before his FRA. He is a fully insured worker. Regarding Hal's situation, which of the following statements is correct?

II, V II. Hal will receive 80% of his PIA that would apply at his FRA. V. If Hal does not work, his benefits may or may not be subject to federal income taxation. Feedback: Hal will not be eligible for Medicare until age 65 (Answer I). Claiming benefits 36 months early would result in a 20% permanent reduction in Hal's benefits (36/180). If Hal works part-time before the year in which he reaches his full retirement age (FRA) his benefits will be reduced $1 for every $2 he earns above a specific threshold. During his FRA year only, he will lose $1 in benefits for every $3 by which his earned income exceeds that threshold. Hal's Social Security retirement benefits will be subject to federal income tax if his AGI plus ½ of his benefits (provisional income) exceed $25,000+. Given that we do not know Hal's provisional income, indeed his Social Security benefits may (or may not be) subject to federal income tax.

Which of the following types of qualified retirement plans can be integrated with Social Security?

II. A money-purchase plan IV. A stock bonus plan V. A defined benefit plan II, IV, V Feedback: ESOPs and 401(k) plans with no employer matching contributions cannot be integrated with Social Security. Item I does indicates a pure 401(k) with no match or profit sharing contribution. Defined benefit and money purchase pension plans can be integrated. Stcok bonus plans can be integrated.

our client, Stephen Stone, age 55, has a net worth of approximately $400,000. He is concerned about the costs associated with long-term care beyond 100 days. Which statements are correct?

II. If Stephen purchases an LTC policy, the policy may provide benefits if he is unable to perform a minimum amount of ADLs. III. Medicaid may pay if Stephen uses up his assets to below the state threshold. II, III Feedback: If Stephen purchases a long-term care insurance policy, and is unable to perform the requisite number of ADLs to trigger benefits (typically, tow or three), the policy will probably pay the benefit. Medicare may cover Stephen's LTC expenses if he "spends down" his assets to a mandated level of impoverishment. Medicare pays for no more than 100 days of (rehabilitative) care. Medical expense insurance does not provide long-term care benefits.

Charlie was granted an incentive stock option (ISO) four years ago when the FMV and option price was $20 per share. Charlie exercised the option two years ago when the stock was trading at $30 per share. If he sold the stock today for $35 per share, which statement(s) is/are true?

II. There are no regular income tax consequences when the ISO is granted or exercised; Charlie will pay capital gains presuming the stock is sold at a gain. III. If Charlie sells the stock for $35 per share, he will be taxed at capital gains rates on the $15 gain per share. IV. At the time of exercise, $10 per share may have been an add-back item for AMT purposes. II, III, IV Feedback: Because the stock was held for the two-year/one-year holding periods, it retains ISO status and thus qualifies for LTCG. The bargain element of $10 per share may hvae an AMT add-back. However, the question does not indicate any AMT was paid, therefore the basis is the cost of the shares.

IV. Gift the personally owned policy to his life insurance trust (His wife and two daughters its beneficiaries.) V. Buy the employer-paid key person life insurance policy and then gift the policy to his life insurance trust

IV. Gift the personally owned policy to his life insurance trust (His wife and two daughters its beneficiaries.) V. Buy the employer-paid key person life insurance policy and then gift the policy to his life insurance trust Answers I and II will trigger "transfer for value" rules and make the policy's death benefit subject to income tax. If Dr. Perkins gifts the policy to his wife it will be includible it in her gross estate for federal estate tax purposes thus increasing potential estate tax at the second death. Answer E is the best answer to get the policies out of his wife's estate. The exact amount of taxable gift less exclusion is not part of the answer. Since is wife is a beneficiary, it is unlikely that gift splitting is permissible. But, his estate tax applicable amount remains available.

Your client, Tom Adkins, is concerned about his disability income insurance policy. When he bought the policy, the agent told him the company would not change the premium at any time. What should he look for in the policy provision?

Non-cancelable continuation Feedback: Non-cancellable policies provide premium rates that are guaranteed not to increase in the future. Insurance is a unilateral which means that the insured pays the premium to the insurance company to cover the perils, but that does not answer this question.

Holly, the daughter of Mr. and Mrs. Golightly, is going to college. She plans to get her Masters at a state university. Unfortunately, due to economic conditions, her parents never set up a 529 plan or other education related arrangement. Holly may qualify for some state merit scholarships. Her parents, both professionals, earn well over $80,000 each, but spend most of what they make. Which of the following college tax and funding strategies may generate federal income tax credits for undergraduate as well as graduate education?

None of the above Feedback: The American Opportunity Credit may be available for the undergraduate years, but not for the graduate years. The Lifetime Learning Credit is subject to an AGI phaseout. The Coverdell ESA and PLUS loans do not generate federal income tax credits.

Mr. and Mrs. Grandparent have paid $50,000 into their granddaughter's "prepaid tuition program." The arrangement qualifies as a Section 529 program. Which of the following is true?

Prepaid tuition plans may only pay for tuition and mandatory fees. Feedback: If the beneficiary of a prepaid tuition (529) plan attends a private or out-of-state college, the program will determine the value of the contract. If the QHEEs are equal to, or greater than, the total distribution, they are tax-free. Prepaid tuition plans pay for tuition and mandatory fees. They do not cover room and board. Prepaid tuition plans do affect the expected family contributions.

Corporate annual reports would generally not include which of the following?

Profitability projections Feedback: Profitability projections should not be included in corporate annual reports. The SEC believes that such projections could mislead shareholders and others.

Ted is an unhappy taxpayer. He just learned that he will be subject to AMT. As Ted's financial planner, what suggestions would you make that might help him mitigate or eliminate his exposure to the AMT?

Purchase public purpose municipal bondsIV. Purchase high-yield taxable corporate bonds

An employee contribution to which of the following plans is not subject to FICA and FUTA taxes?

Section 125 plan Feedback: A 125 is a flexible spending account (FSA) into which contributions are elected before the employee compensation is actually earned. All the other plans shown require FICA and FUTA tax on employee deferrals

What is beta?

The measure of the systematic risk of a security

Former college roomates, Barbara and Kathy, are 50/50 owners of BK, Inc. When they started BK, the corporation acquired two $1,000,000 face value key-person term life insurance policies. Barbara is the named insured in one policy and Kathy in the other. Over the years, the company has paid $5,000 in premium on Barbara's policy and $4,000 in premium on Kathy's policy. Barbara and Kathy have decided to use the policies to back a new cross purchase buy-sell agreement. If Barbara buys the policy in which Kathy is the named insured paid by BK, what will be the tax outcome if Kathy dies within one year following Barbara's acquisition of the policy?

The policy will be subject to the transfer for value rules making the death benefit net of basis subject to federal income tax. Feedback: The policy was sold to someone other than the insured or to a business in which the buyer is an owner or partner. Whether the policy is term or permanent insurance is immaterial to the rule. Transfer for value rulesmakes the policy's death benefits income taxable to the benficiary to the extent that it exceeds basis. The 3-year rule doesn't apply when a sale (transfer for value) occurs.

Which of the following statements is true regarding differences between time-weighted return or dollar-weighted return?

The reason to calculate the time-weighted return rather than the dollar-weighted return is to evaluate the performance of the portfolio manager. Feedback: The time-weighted return is the geometric mean calculation. The dollar-weighted return is the IRR.

Loretta started receiving substantially equal annual payments from her IRA at age 58. After a total of three payments, Loretta stopped receiving payments at age 61. What will be the amount of the recapture tax to which Loretta's distributions will be subject?

The recapture amount will be 10% of the total annual payments received before Loretta attained age 59 ½ , plus interest. Feedback: The recapture amount will be 10% of the total annual payments received before Loretta attained age 59 ½, plus interest.

Toby Smith, age 61, gifts $1million to an irrevocable trust that provides income only to his troublesome son, Bugsy, age 37. Bugsy can't keep a job and is always asking for money from his father and others. The trust income is distributed quarterly. Toby's investment advisor handles the $1million trust portfolio. The payout is approximately 3% or $30,000. Toby is married with three other children. The other children are upset because no trust arrangement was established for them. Which of the following statements accurately reflects Toby's situation?

Toby has made a taxable gift of $1 million. Feedback: Gifts in trust are future interest gifts. No Crummey powers are included. The income is taxable to Bugsy. This is a 2503(b) trust. The trust is not tainted. Nothing indicates that Toby is the trustee. Toby transferred the money into the trust. Nothing indicates a split gift. There is no Crummey provision.

Joe Jones works for "Take-A-Boat" boat rentals. The company has a SIMPLE plan in which Joe participates. As he approaches 70, Joe plans on working fewer hours. He would still like to participate in the SIMPLE plan. Which of the following can you accurately tell Joe?

You can continue to contribute to a SIMPLE. Feedback: We do not know Joe's AGI. AGI affects Answer D. If Joe's AGI is over the threshold, he may not contribute to a Roth. After 70½ Joe cannot contribute to either an IRA or a non-deductible IRA. As an employee, Joe must take distributions from the SIMPLE when he reaches 70, however, he can still contribute. (Yes, money is flowing out of and into Joe's account in the same year(s)).

Mr. Able, age 75, came to you, a CFP® professional, with large folders filled with investment data. He is confused. He has concerns regarding all the investments his advisor has sold him. He would like you to help him identify which investments have been performing better over the last 10+ years. You tell him that because this analysis will take a considerable amount of time, you would need to charge him a fee. Mr. Able agrees. As you proceed you realize that the investments are specific common stocks or bonds. The allocation reflects the traditional 70/30 split. Over the prior decade, on average, the stock portion generated returns of over 10% and the bond portion generated returns of 4%. How should you best respond to Mr. Able's concerns?

You should discuss Mr. Able's health because the return levels may have to continue for the next decade. Feedback: Mr. Able's health and life expectancy should factor into his investment plans. Given strong health and a family history of longevity, he might live for another 20 years. In light of historical returns in the decade from 2009 to 2019, the overall portfolio return is certainly acceptable. The advisor has not underperformed.

Which of the following risks is not presented in an investment in zero-coupon bonds ?

reinvestment rate risk Feedback: One advantage of a zero-coupon is the elimination of reinvestment rate risk because there is no coupon to be reinvested. The zero coupon bond is genrally subject to market risk, interest rate risk, and, if the zero is not a Treasury security, defafult risk.

Which of the following statements is true regarding a QPRT if the grantor dies during the retained-interest term?

t leaves the grantor's estate with no greater tax liability than had the QPRT not been estabished. Feedback: The full value of the home generally reflecting the date of death FMV is brought back into the gross estate. Had the QPRT never been established, the estate would have the same tax exposure because the property would appear in the gross estate at FMV.

This year, Joe Jackson started a 529 college savings plan for his sister's son, Jimmy. He gifted $75,000 ($15,000 for five years) to a 529 plan that is operated by the state in which both he and Jimmy reside. However, Joe does not feel that the ending balance in the 529 account will be enough to pay for his nephew's total college costs. Joe has observed that his sister and brother-in-law seem to live well beyond their means. His brother-in-law is an executive earning $750,000 per year. His sister and her husband travel extensively to complete in winter sports. They have not earmarked any money for their son's education. Joe's financial advisor said he could fund a UTMA with $50,000 and invest it in AA rated nationally diversified municipal bonds that would generate $1,000 in annual income. The UTMA would increase by the interest on a tax-free basis and all the funds can be distributed for Jimmy's college expenses. Joe could name himself the custodian. How would you, a CFP® practitioner, respond if Joe asked you whether or not this advice is sound?

this is sensible advice Feedback: The UTMA invested in municipal securities appears to be sensible. While the transfer of the $50,000 to Jimmy's custodial account is a taxable gift, Uncle Joe can use his gift tax property exemption of $11,400,000 to avoid the current gift tax. Under kiddie tax rules, earnings generated by the UTMA may be taxed at 37% plus the 3.8% Medicare investments tax. In that light, tax free interest from municipal bonds make sense. The tax-free income should enable the account to have a FMV of $65,000 in 10 years.