Final Review

During the financial planning process a CFP® professional has discovered that there is a behavioral finance issue related to recency that will affect planning with the client. When is the most appropriate time for the planner to consider and deal with this issue? A) Analyzing and evaluating the client's current financial situation. B) Developing the recommendations. C) Communicating the recommendations. D) Implementing the recommendations.

B is the answer. Behavioral finance issues, such as recency, should be considered while the planner is developing the recommendations. While such issues can be raised and discussed at any time, the CFP Board has specifically identified Domain 4 - Developing the Recommendation as a time to consider behavioral finance issues. The CFP®; professional will want to consider these issues while developing recommendations so that the planner will be prepared to provide education on the issues and so the planner may consider alternatives in the event that the issues cannot be resolved as recommended by the planner. Recency bias occurs when the client remains focused on, and makes decisions around, recent events rather than evaluating based on a long-term view-point. For example, clients who focus on short-term returns in evaluating their portfolio may feel when an investment has had a good year that it is a great investment to hold, even though the long-term return is lagging far behind other similar investments. Similarly, clients with long-term time horizons who make drastic portfolio changes every time the market goes up or down may be doing so as a result of recency bias. In developing the recommendations, a planner who is aware of the client's tendency to make such changes will want to consider alternatives that discourage the client from making mistakes due to such a psychological bias. Topic 8; Domain 4

Harold Schmidt is 50 years of age and has a good electrical business that he has developed over the past 20 years. Harold has taken his son Ted into the business and has been grooming his son to take over when Harold is ready to retire. Harold has consulted a CFP® professional for advice on his business continuation planning. Which of the following approaches would be the most appropriate recommendation for Harold? A) Installment sale to son at retirement B) Installment sale to son over 15 years until Harold retires C) Private annuity sale to son D) Gift to son at retirement

Rationale A is the answer. An installment sale at retirement will provide payments so Harold will have money to live on during retirement. An installment sale now will mean that the son will become the owner of the business and have control over it before Harold is ready for retirement. The preferred approach for Harold would be to make the installment sale at the time he is retiring. The private annuity similarly gives the son ownership immediately. A gift to the son of the business at retirement will not provide Harold with any retirement cash flow. Topic 70; Domain 4

Raymond Rodgers, a CFP® practitioner, has been performing financial planning services for a client for several years. The client is 66 years of age and has just sold his business for $2 million. The client has come to see Rodgers to review his financial plan. What is the next step for Rodgers? A) Establish and define the client-planner relationship B) Gather information necessary to fulfill the engagement C) Analyze and evaluate the client's current financial situation D) Monitor the recommendation

Rationale A is the answer. Due to the client's sale of the business, the scope of the engagement may need to be changed. The planner needs to define and document the scope of the engagement with the client. Even though the planner and client have an existing relationship, the sale of the business is a change of situation that may suggest the need for different services and a different engagement. (Topic 8, Domain 7)

Steven Myers, age 47, is married and has two children and is President of Myers Associates, Inc., a graphic arts design company. Steven has consulted a CFP® professional for comprehensive financial planning. The CFP® professional has obtained documents from Steven concerning his employee salary and benefits at his company. The Myers company has a disability income plan which provides long-term disability coverage for its employees. Under the plan, the company pays half of the premium, and the employee pays half. Steven Myers, who has an annual income of $90,000, is insured under the plan for replacement of one-half of his monthly income. If Steven Myers is disabled and receives Social Security disability benefits of $12,000 during the year, how much of this $12,000 will be includible in Steven's gross income for federal income tax purposes? A) None B) 0-50% C) 50-85% D) 50-100%

Rationale A is the answer. Generally, for a taxpayer who files a joint return and whose "combined income" (AGI + foreign income + tax exempt income + ½ of Social Security benefits) is above $32,000, up to 50% of Social Security benefits are included in income. If a MFJ taxpayer's combined income exceeds $44,000, up to 85% of Social Security benefits may be subject to taxation. In this case, Steven Myers will have to report one-half of the $45,000 he will receive as disability income insurance benefits because his employer paid one-half of the premiums. Since his combined income will be only $22,500 + $6,000 (which is ½ of his Social Security benefit), for a total combined income of $28,500, he will be below the $32,000 minimum and none of the Social Security benefits will be included in his gross income. Topic 53; Domains 3 and 6

Steven Myers, age 47, is married and has two children and is President of Myers Associates, Inc., a graphic arts design company. Steven has consulted a CFP® professional for comprehensive financial planning. The CFP® professional has obtained documents from Steven concerning his employee salary and benefits at his company. The Myers company has a disability income plan which provides long-term disability coverage for its employees. Under the plan, the company pays half of the premium, and the employee pays half. Steven Myers, who has an annual income of $90,000, is insured under the plan for replacement of one-half of his monthly income. Which of the following statements concerning the Myers company disability income plan is correct? A) The company could provide the disability income plan for its executive employees only and pay the entire premium for each executive. B) If Steven Myers is totally and permanently disabled, he will receive a tax credit to reduce the impact of taxes on the disability income. C) If Steven Myers is totally and permanently disabled and receives benefits under the company disability plan, the benefit payments will be fully taxable income. D) If Steven Myers is totally and permanently disabled in an accident, he will receive benefits equal to his monthly income.

Rationale A is the answer. Long-term disability income plans are not subject to nondiscrimination rules, so such plans may be provided for only a select group of executives. The tax credit for disabled persons is available only for persons of low income. Steven Myers has income over the maximum for this credit. If Steven Myers receives disability benefits, they will be one-half taxable income because the employer pays half of the premium. Steven's plan will only pay him 50% of his monthly salary if he should become disabled for any reason. Topic 25; Domain 2 or 3

Following the collection and analysis of the client's financial information, a CFP® professional prepares a comprehensive financial plan for her client. At their next meeting, the CFP® professional presents the recommendations, and then at the conclusion of the presentation, the CFP® asks for feedback from the client. After a moment, the client begins to express some concerns about the budgeting issues and the savings that will be required. The CFP® professional wants to find out more about the client's concerns. Which of the following responses would be most appropriate for the CFP® professional to employ? A) Reflection-of-feelings response B) Interpretive response C) Suggestive response D) Explanatory response

Rationale A is the answer. Reflection-of-feelings response is a technique a counselor uses during active listening to encourage additional discussion. The counselor responds to the client by attempting to reflect back to the client in words the underlying feelings presented by the client's statements of concern. The counselor communicates understanding and empathy for the client's distress. The other responses presented in this question are responses a counselor uses to signal that she is moving away from active listening and in a new direction beyond the client's statements. Topic 15; Domain 5

A CFP® practitioner has entered into an engagement with a client to provide financial planning in the areas of investments, income tax, and retirement planning. The client is 45 years of age and has his own business operating a tavern. The client provided income tax returns, statements from brokers and banks, and retirement plan information. During a data gathering meeting, the CFP® practitioner learned that the client wants to retire at age 60 at 90% of his current income. The client has limited knowledge and experience with financial matters, and he is a conservative investor. The client is not married and lives with his mother who is 80 years old. The client has no emergency fund and has all of his money invested with his broker. The broker is a friend and has a discretionary power to trade in the account. The client is concerned about some bad investments in the account. What is the next action the CFP® practitioner should take? A) Evaluate the client's asset allocation and investment types B) Discuss with the client redefining the engagement to include implementation in connection with investments C) Consider interrelationships among financial planning recommendations for investments and liquidity planning D) Conduct sensitivity analysis to determine different assumptions that will meet the client's goals

Rationale A is the answer. The CFP® practitioner has gathered the data as required in the second step of the financial planning process. The next step is to evaluate the client's current situation, including its strengths and vulnerabilities. The client seeks investment planning so part of this evaluation will be to evaluate the client's current asset allocation and investment types. This evaluation is required before the planner proceeds to prepare recommendations in the fourth step. During the development of recommendations, the planner may conduct sensitivity analysis and consider any interrelationships among financial planning recommendations. After the recommendations are made, the planner could discuss implementation and determine whether the client needs or wants help with implementation. At that time the scope of the engagement may need to be changed. Topic 8, Domain 3

Joy Linowitz is 72 years of age and has obtained financial planning from a CFP® professional who has recommended that she sell some of her bond portfolio for her current expenses. Which of the following transactions will result in the most interest income for Joy? A) Cash in the Series EE bonds she has held for 25 years B) Sell the corporate bonds she has held for 25 years C) Sell Series HH bonds she obtained from exchange of Series EE bonds purchased 25 years ago D) Sell U.S. Treasury bonds she has held for 25 years

Rationale A is the answer. The Series EE bonds accumulate interest until the bonds are cashed in, so the 25 years of interest will be received at the time the bonds are cashed. The corporate bonds, Series HH bonds, and U.S. Treasury bonds pay interest semiannually, so the amount of income received at the time of sale is only a part of a semiannual interest payment. Consequently, the income from the Series EE bonds will be much greater. Topic 33; Domains 4 and 6

Which of the following statements concerning systematic and/or unsystematic risk is not correct? A) Unsystematic risk can be reduced through diversification of a portfolio. B) A coefficient of determination of .75 in a portfolio means that 75% of the portfolio's risk is unsystematic. C) A portfolio's beta is a measure of its systematic risk. D) A fully diversified portfolio has no unsystematic risk.

Rationale B is the answer. A coefficient of determination of .75 means that 75% of the risk in the portfolio is systematic and 25% of the risk is unsystematic. Topics 34 and 35

A CFP® professional has contacted the Golden Fleece Insurance Company for a quote for insuring a client's home. The Golden Fleece Insurance Company has been given an A+ rating by A.M. Best Company. What can the CFP® professional properly tell the client about the insurance company? A) A+ is the highest rating given by A.M. Best, so this company is one of the safest. B) A+ is the second highest rating given by A.M. Best, so this company is very safe. C) A+ is a standard rating given by A.M. Best, so this company has adequate overall performance. D) A+ is a rating based only on adequacy of loss reserves and surplus, and this rating means the company is financially stable.

Rationale B is the answer. A+ is the second highest rating given by A.M. Best Company, so the insurer has demonstrated superior overall performance and a very strong ability to meet obligations to policyholders. The highest rating is A++. The criteria used are both quantitative and qualitative, and ratings are based on the insurer's overall performance, competitive market position, and ability to meet obligations to policyholders. Topic 31; Domain 6

A CFP® professional has been reviewing income tax returns that a client has provided during their meetings. The CFP® professional observed that the client has in some years been required to pay AMT and appears likely to incur additional AMT in the future. In order to suggest ways that the client might avoid AMT in the future, the CFP® professional has selected ways that the client has been able to reduce the AMT in the past. Which of the following methods has the client been able to use to reduce the AMT that otherwise might have been required? A) Exercise ISOs B) Make charitable contributions C) Pay state income tax in advance D) Invest in private activity municipal bonds

Rationale B is the answer. Gifts to charity are deductible for both the regular income tax and the AMT, so charitable contributions will reduce the client's taxes even when AMT may otherwise be required. For example, state income taxes and real estate taxes will be added back, and miscellaneous itemized deductions are all added back. The payment of state income tax in advance, therefore, will not reduce AMT because the state taxes are added back. Exercising ISOs will result in additional AMT to the extent of the bargain element. Interest on private activity municipal bonds is taxable for AMT purposes. Topic 46; Domain 3

A CFP® professional has been updating the income tax planning for the Wiggins, who have been clients for many years. The Wiggins' daughter Sally is 18 years of age and will go to college this year. While at college, she will get a job to earn some money. Sally will earn $4,200, and her parents will pay her support of $2,900. Sally will put $1,500 of her earnings in a money market fund. She will use the remainder of her earnings to pay her first semester tuition. Which of the following statements concerning income tax planning for the Wiggins are correct? (1) Sally's parents will get a qualified dependent (family) tax credit for her. (2) Sally's parents will not get a qualified dependent (family) tax credit for her. (3) Sally's earnings are subject to tax. (4) Sally's earnings are not subject to tax. A) (1) and (3) only B) (1) and (4) only C) (2) and (3) only D) (2) and (4) only

Rationale B is the answer. Sally's parents will be able to take a dependency exemption for Sally because they pay more than one-half of her support. The support includes the cost of education, but the tuition cost is $2,700, which is less than one-half of the total support. Although Sally's earnings are more than the income tax exemption amount of $4,150 in 2019, she is a full-time student under age 24, so her parents will be able to claim her as a dependent. Sally's earnings will not be subject to tax because she can take the standard deduction equal to her earned income plus $350, up to the maximum of $12,200 for 2019. Topic 43

Sim 110Question 25 of 85 Simulated Exam 1 Session 2 Harry Thomas bought a newly issued six-year zero-coupon, 11% annual bond with a par value of $1,000. He paid $534.64 for the bond. How much income must Harry report for federal income tax purposes during the second year of this bond's life? A) $42.09 B) $65.28 C) $79.78 D) $86.11

Rationale B is the answer. The bond's imputed value will grow by 11% per year, as follows: 1. $534.64 x 1.11 = $593.45 2. $593.45 x 1.11 = $658.73 3. $658.73 x 1.11 = $731.19 4. $731.19 x 1.11 = $811.62 5. $811.62 x 1.11 = $900.90 6. $900.90 x 1.11 = $1,000.00 (The imputed value is the present value of the $1,000 face amount, discounted at 11% per year, for the remaining number of years of the bond's life.) In Year two, the imputed value rose by $65.28 ($658.73 - $593.45). That amount, though not received in cash, is taxable income to the bondholder. Topic 33; Domain 6 or 7

David Legend, CFP® is a registered representative and Investment Advisory Representative at an independent broker/dealer, and operates on a fee-plus-commission basis. A client recently decided to implement various recommendations David had made in the comprehensive financial plan. The client had been provided David's disclosure document that indicated generally commissions are payable to David for various transactions. In this regard, which of the following is correct? A) If the client asks for the dollar amount to be paid to David on a transaction, David is not required to provide that information. B) Assuming that the client asks what percentage commission David will earn on a transaction, he must divulge it. C) Because David had provided his disclosure document at the inception of the engagement, he is not required to disclose the percentage or dollar amount of commissions when asked. D) When the client asks about David's commissions, he must supply the contractual document from the financial product provider to demonstrate the calculation methodology.

Rationale B is the answer. The certificant is generally not required to disclose the dollar amount or percentage commission unless the client specifically asks, in which case the certificant must then make the disclosure. He is not required to supply the contractual document with the product provider. Topics 1 and 2; Domain 8

Mark Hassim is 64 years of age and has built up an importing business that he would like to see pass to his family members. He believes that he has ample wealth without the business interest for his retirement income needs and would like to get his family involved in the company by giving them interests in the business. Mark wants to retain management control over the business but provide the family members with income. He would like to reduce his income taxes by reducing his income from the business as much as possible. Mark would also like to give interests to family members to reduce the size of his estate. Mark has run his business as a sole proprietorship but has been considering the adoption of a different business form. The CFP® professional has gathered data on Mark's business interest and other assets and liabilities and has confirmed that Mark does not need the income from the business to provide the retirement income that he wants. Which of the following alternatives should the CFP® professional recommend to Mark for his business entity and plan of asset transfer? A) S corporation with Mark owning 51% of the shares and family members owning the rest B) LLC with Mark as manager and family members owning the financial shares C) Limited partnership with Mark as the general partner and family members as limited partners D) C corporation with Mark owning the voting shares and family members owning non-voting shares

Rationale B is the answer. The limited liability company can be set up with Mark as the manager so he can continue to control the operation of the business, but the family members will own the financial shares. The financial shares can be designated as the ownership shares that entitle family members to all of the income (and losses) from the business. Mark would only be paid for his work as the manager and not receive profits from the company. The other forms of business would provide for Mark to continue in some kind of ownership capacity, so he would continue to receive a share of the profits. With the S corporation, Mark would have control of the entity by virtue of his owning 51% of the stock, but he would also have to report 51% of the income from the business. As the general partner in a limited partnership, Mark would also receive a share of the profits as income. The C corporation would probably not be recommended due to the double taxation of profits and the added expense and work of maintaining a corporate entity. Topics 44 and 70; Domain 4

Howard Cross has group disability insurance through his place of employment, where he earns an annual salary of $20,000. The plan will pay 70% of earnings after 90 days but will only pay 60% if other sources are available. Howard owns a disability policy that will pay $500 a month after 180 days, and Social Security will pay him $800 per month. Howard will be disabled for over a year. What amount will he receive in disability benefits for months 5, 6, and 7? A) Month 5: $1,167, Month 6: $1,967, Month 7: $2,467 B) Month 5: $1,167, Month 6: $1,800, Month 7: $2,300 C) Month 5: $1,800, Month 6: $1,800, Month 7: $2,300 D) Month 5: $1,000, Month 6: $1,500, Month 7: $2,300

Rationale B is the answer. This question requires you to calculate the monthly payments that will be made by three different plans. The first plan is a group disability plan provided by the employer and will pay 70% of the annual salary of $20,000. The 70% of $20,0000 is $14,000 and this amount is divided by 12 to calculate the monthly payment, which will be $1,167. The payments begin after 90 days so this is the amount that will be paid in month 5. In month 6, Social Security will begin to make monthly payments because there is always a 5 month delay before the start of Social Security disability payments. In month 6 the payments from the group plan will then have to be reduced to 60% of the annual salary. The payment for the group plan will be 60% of the $20,000 or $12,000 divided by 12 is $1,000. So the payment for month 6 will be $1,000 from the group plan plus $800 from Social Security for a total of $1,800. The individual policy owned by Howard will pay $500 after 6 months, so in the seventh month, he will be paid $1,000 from the group disability plan, $800 from Social Security, and $500 from the individual disability policy for a total of $2,300.

Joseph and Florence Seltzer are 67 years of age and are retired. They have consulted a CFP® professional previously for retirement planning and want her assistance in arranging an investment for their son. The Seltzers' son is starting a business, and they want to help him by investing in the business. They will not be involved in the operation of the business, and their son will run the business. The business is projected to have losses for the first three years before becoming profitable. The Seltzers have some money in an investment fund that they can invest in the new business and have income from pensions, IRAs, Social Security, and other investments that will be sufficient for their needs. Which of the following forms of business should the CFP® professional recommend to the Seltzers? A) Corporation B) Partnership C) LLC D) Limited partnership

Rationale C is the answer. A limited liability company (LLC) will provide both the Seltzers and their son with the protection of limited exposure to liability losses and will allow for tax losses to flow through to them in the first three years of operations. The Seltzers will be able to take deductions for the losses on their income tax returns just as they would with a partnership or limited partnership (They may be subject to passive activity rules). The corporation form of business does not offer the flow through of losses to investors. The partnership form does not offer limited liability protection for the Seltzers or their son. The limited partnership form would provide protection from liability to the Seltzers but not to their son. Topic 44; Domain 4

The Martins have a beach house in Florida, in addition to their principal residence in New Hampshire. Their AGI, without considering their beach house, is $90,000. The Martins will pay $6,500 in mortgage interest, $1,200 in property taxes, $400 in insurance, and $2,200 for repairs, maintenance, and general upkeep on their beach house. The house cost $115,000, excluding land, in 1998, when the Martins purchased it. Under MACRS, residential real estate is classified as 27.5 year property, and nonresidential real estate is 39 year property. Which of the following statements concerning the Martins' second home is correct? A) If the Martins rented out their beach house for less than 20 days during the year, they would not have to report the income from the rental on their tax return. B) If the Martins rented out the beach house for 25 days, for a total income of $5,000, and used it personally for 15 days, they could receive a partial deduction for depreciation against their rental income. C) If the Martins used the beach house for 10 days and showed an intention to produce income by receiving $10,000 in rent and actively participating in decisions regarding the property, their AGI would be less than $90,000. D) The Martins will receive a deduction for interest, property taxes, and insurance, whether or not they rented out their beach house.

Rationale C is the answer. According to tax Regulations, no income on the rental of a vacation home for less than 15 days is included in gross income. However, when the home is rented out for 15 or more days and the taxpayer uses it less than 15 days or 10% of the rental (whichever is more), then the home is not considered a residence. In addition, if an intention to produce income is shown, the taxpayer can treat the home as a rental property and deduct all costs associated with the property, even to the extent of creating a loss. In this case, the expenses, including depreciation (27.5 years), would be $14,482 and would create a loss of $4,482, which would offset other income because the Martins' AGI is not high enough to trigger limitations on rental losses and because they qualify for active participation, with regard to the beach house. When personal use exceeds 14 days, expenses are allocated between personal and rental use, and expenses are only deductible to the extent of income (no loss can be created). In calculating the expenses that can be used, depreciation is the last available, and the portion of the other expenses already allocated against the rental income would have reduced the income to zero. The depreciation cannot be used to create a loss, so it is not deductible. Finally, only mortgage interest and property taxes are deductible as itemized deductions, regardless of rental income. Topic 49

David and Lenore Amaya have two children enrolled in private colleges. Their son James is 20 is living on his own, and will be a junior; their daughter Kylie is 18 and will be a freshman. They have a third child who will be ready for college in two more years. David is a stock broker and earns $195,000 annually, and Lenore is a dentist and earns $135,000 annually. The Amayas' AGI is $350,000. James worked during the summer in a research lab and earned $15,000 for the summer and will earn an additional $6,000 during the school year, and this amount represents more than 50% of his support. Kylie worked at the swim club and earned $2,500. The college tuition and expenses for James are $35,000 annually but he has a partial scholarship for $10,000. Kylie will have college tuition and expenses of $38,000. The Amayas have set up a 529 plan for James that holds $20,000 and another 529 plan for Kylie that has $50,000. Which of the following methods should be used for paying the higher education expenses for the Amaya children? A) The parents should take the American Opportunity Tax Credit (AOTC) and both children can take distributions from the 529 plans B) The parents should take the Lifetime Learning Credit for James, AOTC and 529 plan distributions for Kylie C) James should take the AOTC; both children can take 529 plan distributions D) James and Kylie should take AOTC credits, and both children should take 529 distributions

Rationale C is the answer. David and Lenore cannot take the AOTC or Lifetime Learning Credit because their AGI is above the phaseout level. James can take advantage of the AOTC due to the income he has earned to that covers more than 50% of his living costs. James can obtain reduction of his income taxes by claiming the AOTC. Kylie did not earn enough income to benefit from using AOTC, and her parents will benefit from using the qualified dependent credit for her. Distributions can be taken from the 529 plans, and James can use the 529 plan for the expenses above the amount needed to qualify for the credit. Topic 18, Domain 4

A CFP® professional is helping William Schmidt with his retirement planning and is gathering information about his expected retirement. William turns 70½ on July 22, 2019 and has continued to work at the advertising firm where he has worked for 25 years. William wants to work until he is 74 and the employer is willing for him to continue working. William has a 401(k) plan in which he has a balance of $450,000 plus he has a 3.5% interest in his employer's stock through an ESOP. The current market value of the interest in the employer stock is approximately $200,000. William also has a traditional IRA to which he made deductible contributions and which is now worth $150,000. When must William begin to take distributions from his 401(k) and from the IRA? A) April 1, 2020 for both B) April , 2020 for the 401(k) and April 1, 2024 for the IRA C) April 1, 2020 for the IRA and April 1, 2024 for the 401(k) D) April 1, 2024 for both

Rationale C is the answer. Distributions from qualified plans must begin by April 1 of the year following the later of either (1) the year in which the employee turned 70½ or (2) the year the employee retires if the employee is not a 5% owner. In this question, the employee is a 3.5% owner so the distributions can be delayed until April 1 of the year following the year of retirement. The IRA distributions, however, must begin by April 1 of the year following the year in which the employee turns 70½. Since William will be 70½ in 2019, his distributions from the IRA must begin April 1, 2020. William will retire when he is 74 in 2023, so the distributions from the 401(k) must begin April 1, 2024. Topic 60; Domains 2 and 3

Virginia Shotsky is 60 years of age and has worked with a CFP® professional to prepare a plan for retirement. Virginia had expected to retire at age 62, but she learned recently that she has pancreatic cancer and is expected to live no more than 24 months. Virginia has a substantial estate and is divorced. She has one daughter age 26. What actions can the CFP® professional recommend to reduce Virginia's estate? (1)Give a cash value life insurance policy to charity (2)Transfer a cash value life insurance policy to a trust for her daughter (3)Set up an ILIT (4)Make gifts to charity and to her daughter of marketable securities A) (1) and (3) only B) (2) and (4) only C) (4) only D) (1), (2), (3), and (4)

Rationale C is the answer. Gifts to charity of marketable securities will reduce the assets that will be included in Virginia's gross estate. Virginia will also be able to take an income tax deduction in the year of the gift to charity. The gifts to her daughter of marketable securities will not be brought back into the gross estate even though the taxable gifts are added back to the tentative tax base. The gifts of life insurance whether to charity or to her daughter will be brought back into the estate if Virginia dies within 3 years of the gifts, so those gifts are not likely to reduce her estate. The gift of life insurance to the charity will result in a tax deduction for the proceeds passing to the charity, so Virginia's taxable estate will be reduced. Since the same result can be accomplished simply by naming the charity or her daughter as the beneficiaries of these policies, there does not appear to be a good reason to transfer ownership of the policies for estate tax purposes. The ILIT is also unlikely to reduce Virginia's estate because any life insurance policy transferred to the trust within 3 years of death will be included in the gross estate. Virginia is unlikely to be able to get a new policy issued insuring her after having received the diagnosis of pancreatic cancer so she will not be able to set up an ILIT with a new policy. Topics 66 and 67; Domain 4

Ian McClair is 45 years of age and his wife Sally is 42 years of age. They have two children ages 9 and 7. The McClairs consulted a CFP® professional primarily for education and investment planning but accepted the planner's suggestion that they undertake comprehensive financial planning. The McClairs had done no estate planning, and the planner recommended that they obtain wills. After the planner completed her presentation of the plan, Sally mentioned that she was going to be visiting her parents in Canada where she was born. The planner then asked whether Sally had become a U.S. citizen, and she answered that she had not. Ian stated that he was a U.S. citizen. What is the effect of Sally's citizenship on estate planning for the McClairs? A) If Sally dies first, her estate must use a QDOT to obtain a marital deduction. B) If Sally dies first, only a unified credit may be used by her estate. C) If Sally dies first, her estate can take advantage of an unlimited marital deduction. D) If Sally dies first, her estate will not be subject to estate tax in the U.S.

Rationale C is the answer. If Sally dies first, then Sally's estate will be entitled to take the unlimited marital deduction because Ian is a U.S. citizen. If Ian dies first, his estate will be required to use a QDOT to obtain a marital deduction because Sally is not a U.S. citizen. Sally's estate will be subject to estate tax in the U.S. because she is a resident of the U.S. Topic 69; Domains 4 and 7

A CFP® professional is explaining how Section 303 can assist in estate planning. She wants to explain to the client some of the requirements for the application of Section 303. The CFP® professional can tell the client that a Sec. 303 redemption will be appropriate for all of the following estates, EXCEPT: A) At his death, the decedent owned stock of a closely held corporation in joint tenancy WROS with his wife. B) Before his death, the decedent had transferred his stock in a closely held corporation to a revocable trust. C) By will, the decedent bequeathed his stock in a closely held corporation to his daughter and provided for estate and death taxes to be paid by the residue. D) Before his death, the decedent's adjusted basis in his closely held stock was almost zero.

Rationale C is the answer. If stock is included in the decedent's gross estate, it can be redeemed under Sec. 303. One-half of the jointly owned stock will be included in the decedent's gross estate, so some of this stock can be redeemed from the wife to the extent that it bears a portion of estate taxes. Similarly, stock that was transferred to the revocable trust can be redeemed from the trustee to the extent that it bears a portion of estate taxes. A Sec. 303 redemption cannot occur where the stock has been transferred by a specific bequest and will not bear any of the taxes. A decedent's stock receives a step-up in basis at death, so a Sec. 303 redemption is appropriate when the basis was near zero before death. The estate can sell the stock at no capital gain. Topic 71; Domain 5

Arthur Bayeux has consulted a CFP® professional for financial planning and especially for advice on estate planning and investments. The CFP® professional has prepared a financial plan for the client and has presented it with his recommendations. The recommendations include the preparation of a revocable trust for the client. Arthur has accepted the CFP® professional's recommendations but does not want to spend the time or money on a revocable trust. The CFP® professional has estimated that Arthur will leave an estate of approximately $22 million and believes that Arthur's estate and heirs will benefit greatly from a revocable trust. What should the CFP® professional do next in this situation? A) He should set up a meeting for Arthur with an estate attorney. B) He should go online and find a form for a revocable trust that the client can use. C) He should educate Arthur on the benefits of a revocable trust. D) He should document Arthur's refusal to adopt the trust.

Rationale C is the answer. In order to convince a client to implement the recommendations, a planner may need to spend some time educating the client on the benefits of the proposed action. The CFP® professional needs to demonstrate the importance of the revocable trust in Arthur's estate plan. The CFP® professional should not set up the meeting with an estate attorney without Arthur's consent. He should not take any similar actions such as talking to heirs or others without the client's knowledge or agreement. The CFP® professional also should not go online to find a form for Arthur to use because this action is tantamount to unauthorized practice of law. Finally, the CFP® professional should at some point write a letter to Arthur describing the reasons for the revocable trust and Arthur's refusal, and a copy of the letter should be placed in the file. The CFP® professional needs to document the refusal but that should be after trying to educate him on the benefits. Topic 8, Domain 5

A CFP® professional has reviewed information provided by a client during data gathering on investments, income tax returns, and retirement accounts. The client is 50 years of age, married, and has two children. The client and wife have a modified AGI of $130,000 and file a joint income tax return. The CFP® professional observed that the client has invested in a real estate limited partnership that has generated losses of $8,000 last year, and the client has not taken any deduction for the losses. The client also owns an investment in residential real estate that the client manages and rents out. This investment produced losses of $12,000 last year. The client did not deduct those losses. What action should the CFP® professional recommend for the client? A) File an amended return and seek a refund for an additional $20,000 in deductions for losses. B) File an amended return and seek a refund for an additional $12,000 in deductions for losses. C) File an amended return and seek a refund for an additional $10,000 in deductions for losses. D) File an amended return and seek a refund for an additional $8,000 in deductions for losses.

Rationale C is the answer. Losses from the real estate limited partnership are passive losses that cannot be deducted against the client's active income. The losses from the residential real estate rented by the client can be deducted in part due to the real estate exception for active participation. The maximum deduction is $25,000 but this maximum is reduced by one dollar for every two dollars that the client's modified AGI exceeds $100,000. Since the client's modified AGI is $130,000, the maximum deduction is reduced by ½ x $30,000 = $15,000. The client can deduct $25,000 - $15,000 = $10,000. Topic 49.

Ace is a CFP® professional who has been engaged to work with Kendra Price regarding retirement planning and investments. Ace has had several meetings with Kendra and has appropriately assessed her goals and priorities, as well as her investment risk tolerance. Today, Ace presented a recommendation that Kendra purchase several stocks for her investment portfolio. What should the CFP® professional do next? A) Implement the plan, collect commissions, monitor the plan B) Implement the plan, obtain feedback from the client, monitor the plan C) Obtain feedback from the client, implement the plan, monitor the plan D) Provide a prospectus, obtain feedback from the client, implement the plan

Rationale C is the answer. Once the planner has made a recommendation, the client will need to provide feedback as to whether she agrees with the recommendation made or she prefers another choice. Once the planner and client have reached an agreement, the plan can be implemented. The plan will then need to be monitored on a regular basis. Stocks purchased on the secondary market do not require a prospectus (only newly issued securities must have a prospectus). Topics 8 and 33, Domain 5

Cecil Trombly is 71 years of age and owns a horse farm on 150 acres of valuable land in a beautiful rural section of Virginia. Cecil's sons are working in the business and would like to continue to operate the farm for many years. Cecil has consulted a CFP® professional for advice on his estate planning. What should the CFP® professional tell Cecil about the benefits of special use valuation? A) Estate taxes can be postponed and paid in installments over 10 years. B) Estate liquidity is enhanced by converting some stock to cash. C) Estate taxes can be reduced by reducing the value of real estate used in a business. D) Estate taxes can be reduced by valuation discounts such as for lack of marketability

Rationale C is the answer. Special use valuation reduces estate taxes by allowing real estate used in a closely held business to be valued at its current use rather than at fair market value. The real estate must be used in a farm or closely held business, and the real estate must be at least 25% of the gross estate. The real estate must pass to a family member, and heirs must continue to use the land in the same farming operation or closely held business over the next 10 years. Topic 66; Domain 5

Franklin Maurer is 67 years of age and has retired from a company where he had been an engineer for 20 years. At the time he retired, Maurer consulted a CFP® professional for retirement income planning. At the recommendation of the CFP® professional, Maurer rolled his qualified plan assets into an IRA invested in diversified equity mutual funds and has not been taking distributions. He has been using funds in his investment account for his living expenses and purchases. These funds are invested in stocks, bonds, and tax free municipals. His CFP® professional recommended withdrawals of 5% from his investment assets to provide his retirement income. The economy has entered a recession following declines in the Dow Jones Industrial Average, the NASDAQ, and the S&P of approximately 20% this year. The Fed has been reducing interest rates and unemployment has risen to 8.5%. Maurer's investment account has decreased by over 20% and he is concerned about running out of money in retirement. Maurer has scheduled a review of his situation with the CFP® professional. What is the first action that the CFP® professional should take or recommend for Maurer? A) Undertake a Monte Carlo simulation of the likelihood of Maurer running out of money in retirement B) Advise Maurer of alternatives such as consulting work to increase his income and reduce his withdrawals C) Obtain information on Maurer's investment account, IRA, and expenses D) Change the engagement to have the CFP® professional perform investment management

Rationale C is the answer. The CFP® professional has previously provided retirement income planning and is providing monitoring of the plan for the client. In order to provide the monitoring, the planner will need to gather information on the investment account, IRA, and expenses. This information will be needed if a Monte Carlo simulation test is to be performed. The test will help to determine whether Maurer needs to change his current living standards, adjust his withdrawals, or consider other alternatives such as consulting. The CFP® professional has not previously performed the investment management so a new engagement would need to be added if that is found to be desired by the client. That change in engagement would be at the implementation stage if a change is found to be required in the withdrawals and investments. Topic 12; Domains 3 and 7

A CFP® professional has been advising Paul Innugati who is 51 years of age and married with two children. The CFP® professional has reviewed the education planning for Paul's older son Kallik, who is 15 years of age and in his sophomore year of high school. Kallik wants to apply to an engineering school to begin studies after he graduates from high school. Paul would like to qualify for as much financial aid as possible. Paul set up an UTMA account for Kallik several years ago and contributed some stock that has grown in value by $3,000. Paul's father-in-law set up a 529 plan for Kallik and has invested it in mutual funds that have appreciated in value from $10,000 to $14,000 (Paul is the custodian). Paul has a whole life insurance policy that has cash value of $30,000, and he has an IRA with $30,000. Paul's brokerage account has securities that have increased in value from $40,000 to $50,000. What should the CFP® professional recommend that Paul do first? A) Sell the stock in the UTMA account B) Borrow from the life insurance policy C) Sell the securities in the brokerage account D) Take a withdrawal from the IRA

Rationale C is the answer. The CFP® professional should recommend selling the securities in the brokerage account because the gains will increase income reported on the FAFSA if sold during Kallik's junior year or later. By selling in the sophomore year instead of the junior year, the income can be kept lower in Kallik's junior year when the financial aid is determined for college. The UTMA account should then be used as early as possible because student assets have more impact on financial aid then parent assets, and Kallick may qualify in later years if the UTMA account is spent. There is no reason to borrow from the life insurance or take a withdrawal from the IRA until after the UTMA account is used. Life insurance and IRAs are not countable assets in the financial aid formula. (Topic 21)

Robert and Janice Repice are 65 and 63 years of age and have consulted a CFP® certificant in connection with their retirement income need. From detailed information on their current and anticipated expenses in retirement, the planner has determined that if the Repices retire this year, the Repices' income need in retirement is $70,000 per year. They have Social Security benefits and pension plans that will provide them with $50,000 annually. They are not concerned at all about leaving an inheritance for family members. They have two universal life insurance policies and have provided the following information about the policies: Face Value $50,000 Cash Value $29,000 Gain 0 Face Value $25,000 Cash Value $10,000 Gain 0 The Repices would like the planner to advise them concerning the insurance policies. What should the planner recommend that the Repices do with the policies? A) Sell the policies and invest the proceeds 50% in stock ETFs and 50% in bond ETFs. B) Sell the policies and invest the proceeds in a variable annuity that will pay a guaranteed minimum income and has a 10 year period certain C) Arrange a 1035 exchange of the policies for a fixed annuity and invest the excess in CDs. D) Arrange a 1035 exchange of the policies for a $100,000 life insurance policy.

Rationale C is the answer. The Repices need guaranteed income that will be provided by the fixed annuity and CDs. While they have no gain in their policies so that a 1035 exchange is not required to avoid income tax, they need the safety of the fixed annuity payments. The Repices need an additional $20,000 of income annually in retirement so they cannot take the risk of a variable annuity or investments in stock. The investments in ETFs and in an annuity with a period certain are also not required because they are not looking to leave any inheritance. They will want to find an annuity with the highest annual payment so they will not want a period certain that would reduce their payments. Topics 27, 28 and 33; Domain 4

A CFP® professional is helping a client to plan a buy-sell agreement for his corporation. The client owns the business with two friends. The CFP® professional wants to tell the client about some of the different tax consequences that can arise with a buy-sell agreement, particularly a stock-redemption agreement. Which of the following statements concerning a stock-redemption buy-sell agreement for a closely held corporation will be appropriate for the CFP® professional to present to the client? A) The premiums for the life insurance policies insuring the shareholders are deductible by the corporation. B) The premiums for the life insurance policies insuring the shareholders are taxable income to the shareholders. C) The corporation can pay the death proceeds to the estate to redeem the deceased shareholder's stock, so there will be no taxable gain on the sale. D) The death proceeds of a life policy insuring a controlling shareholder and payable to the corporation are includible in the gross estate of the controlling shareholder.

Rationale C is the answer. The premiums are not deductible by the corporation, and they are not income to the shareholders. The corporation can pay the death proceeds to the estate to redeem the deceased shareholder's stock, so there will be no taxable gain on the sale. Even though a shareholder has a controlling interest, the death proceeds of a life policy insuring the shareholder and payable to the corporation are not includible in the gross estate of the controlling shareholder. Topics 29, 62, and 70; Domain 5

Next year, Tom Traxler is planning to sell the commercial property on which he operated his business to his daughter Sally, for $300,000. Tom's adjusted basis in the property will be $100,000. The sale will be structured as an installment sale, with Sally to make a down payment of $60,000 and make installment payments annually for 12 years. Sally will pay 10% interest on any unpaid balance. Tom wants to know what will happen if he died after Sally had made the second installment payment. Tom's will leaves his estate to his wife. Which of the following statements concerning the estate tax treatment of the installment payments due after Tom's death is correct? A) The unpaid installments will not be included in Tom's gross estate. B) The unpaid installments will be included in Tom's gross estate at their face value of $200,000. C) The present value of the unpaid installments will be included in Tom's gross estate. D) The unpaid installments plus the interest payable on the balances will be included in Tom's gross estate.

Rationale C is the answer. The unpaid installments should be included in Tom's gross estate, discounted to present value, using the Sec. 7520 interest rate for the month of Tom's death. Topics 66 and 70; Domain 3

A client of modest means has described losses he has taken in the real estate and stock markets over the past few years, but he is 60 years of age and wants to plan for retirement at age 65. The client is committed to making substantial contributions to retirement plans, but his retirement goals exceed his projected assets. He has asked you to recommend some investments with higher returns so he can achieve the returns needed to reach his goals. You point out to him that higher returns will mean higher risk, that there is a risk-return tradeoff, and that you do not recommend such high risks for him at this stage in his life. He asks for investments that will not be high risk but that have high returns. In order to assist this client, you will need to make use primarily of what structured communication? A) Accurate empathy B) Advising C) Counseling D) Either/Or Questions

Rationale C is the answer. There are three kinds of structured communication: interviewing, advising, and counseling. In this question, the financial planning process has proceeded past the interviewing stage. The client has already received advice concerning the risk-return tradeoff and the higher risk that will accompany higher returns. The financial planner will need to provide counseling instead of more advising. The financial planner will need to make use of the attributes of a good counselor such as accurate empathy, but empathy is not a structured communication. Either/Or questions will probably not be helpful in this discussion since the financial planner does not need to get specific answers as much as provide counseling that will allow for rapport building and more collaboration on the client's problem. Topic 15; Domain 5

For which of the following reasons may a CFP® certificant reveal information about a client under the Rules relating to the Principle of Confidentiality in the CFP Board's Code of Ethics and Professional Responsibility? (1) To carry out a transaction for the client (2) To comply with legal requirements (3) To defend the CFP® professional in a civil dispute with the client (4) To defend the CFP® professional against charges of wrongdoing A) (1) and (2) only B) (2) and (3) only C) (2) and (4) only D) (1), (2), (3), and (4)

Rationale D is the answer. A CFP® professional is allowed to reveal information about a client for all four of the listed reasons. Topic 1; Domain 8

Ben Patel placed $5,000 in an UGMA account for his son soon after birth and then several years later invested the money in a 529 plan. Ben's parents have also contributed to a 529 plan for Ben's son. Ben has consulted a CFP® professional to advise him on the 529 plans. Ben would like his son to be eligible for financial aid and is not familiar with the effect of 529 plans on eligibility. Ben's son will be applying for college in 5 years and earns some money in the summers and has been saving for college. Which of the following statements will be appropriate for the CFP® professional to make to Ben concerning the impact of 529 savings plans on financial aid? A) A 529 savings plan owned by grandparents is treated as assets of the student on the FAFSA. B) Qualified distributions from a 529 savings plan owned by the student are countable income on the FAFSA. C) Qualified distributions from a 529 savings plan owned by the grandparents are not countable income on the FAFSA. D) A 529 savings plan purchased by the student's UGMA is treated as assets of the parent on the FAFSA.

Rationale D is the answer. Even though the student's UGMA or UTMA is used to fund a 529 savings plan, the assets are treated as parent assets on the FAFSA. A 529 savings plan owned by grandparents is not treated as assets of the student or parent on the FAFSA, but qualified distributions will be treated as income of the student. Qualified distributions from a 529 savings plan owned by the student or parent are not countable income on the FAFSA. (Topics 18 and 21)

Calypso Lee has been working with a CFP® professional for several years and met with her for an annual review. Lee was interested in taking advantage of the tax benefits of a like-kind exchange and wanted to know what exchanges she might be able to pursue. Which of the following transactions would be appropriate for the CFP® professional to tell Lee would qualify for a like-kind exchange? A) Lee will exchange her residence in New York for a residence in Florida. B) Lee will exchange her stock portfolio for a bond portfolio. C) Lee will exchange her interest in a partnership for an interest in another partnership. D) Lee will exchange her rental duplex in Boston for a home in Texas that she will rent out.

Rationale D is the answer. For an exchange to qualify for the tax benefits of a like-kind exchange, the property exchanged must be held for investment or in a trade or business. The rental duplex is held for investment and for the rental business, and the home in Texas will similarly be held for rental and investment. The residences are not held for investment or for trade or business because they are for personal use; therefore, they do not qualify. An exchange of stocks, bonds, business inventory, and partnership interests are specifically excluded from eligibility for like-kind exchange treatment. Topic 48

Two years ago, James Johnson was granted 5,000 non-qualified stock options by his employer. The options will expire in 10 years and have a strike price of $12 per share. Currently, the stock is selling for $30 per share. Johnson would like advice as to what to do with the options. Which of the following statements is appropriate in connection with a recommendation for Johnson? A) Johnson can elect to be taxed this year on the options even though he will wait to exercise them in a later year. B) Johnson can exercise the options and sell them this year and will report both long-term capital gains and ordinary income from the sale. C) Johnson can exercise the options and wait a year to sell them in order to get capital gains treatment on the appreciation above $12 per share. D) If Johnson exercises the options this year, he will have to report ordinary income even if he does not sell any of the shares.

Rationale D is the answer. If Johnson exercises the options this year, he will have to report ordinary income even if he does not sell any of the shares. Under Section 83(b), Johnson could have elected to be taxed on the options in the year they were granted, but he cannot elect to be taxed two years later on the options. If Johnson exercises the options and sells them this year, he will report ordinary income to the extent of the bargain element from the sale. Johnson can exercise the options and wait a year to sell them in order to get capital gains treatment on the appreciation above $30 per share. Topic 57; Domains 4 and 5

Next year, Tom Traxler is planning to sell the commercial property on which he operated his business to his daughter Sally, for $300,000. Tom's adjusted basis in the property will be $100,000. The sale will be structured as an installment sale, with Sally to make a down payment of $60,000 and make installment payments annually for 12 years. Sally will pay 10% interest on any unpaid balance. Tom wants to know what will happen if he died after Sally had made the second installment payment. Tom's will leaves his estate to his wife. If the installment note were given to Sally under a codicil to Tom Traxler's will, which of the following statements would be correct? A) Sally must recognize gain on the remaining installments. B) Sally must report the remaining installments as income in respect of a decedent. C) The remaining installments receive a step-up in basis. D) Tom's estate must recognize gain on the remaining installments.

Rationale D is the answer. If the installment note were bequeathed to Sally, Tom's estate must recognize the remaining gain immediately. The estate is treated as making a disposition of the note. There is no step-up in basis. Sally will not have to report the installments as income in respect of a decedent because she is now the obligor and owner of the note. Topics 66 and 70; Domain 7

Martha Gault, a single mother, is employed as a teacher and receives a salary of $58,000 annually. Martha's school insures her for disability, and she was out of work for two months. Martha also receives $18,000 in alimony from her 2009 divorce, and $6,000 in child support from her ex-husband. A CFP® professional is helping Martha to do some income tax planning. How should the CFP® professional calculate Martha's adjusted gross income, based on the following information: Salary $58,000 Alimony received 18,000 Child support 6,000 Interest income 2,000 403(b) contributions 7,000 529 plan contribution 500 Disability income 8,000 IRA contribution 1,000 Medical expenses 2,000 Health insurance 4,000 Child care 1,200 State and local taxes 2,200 A) $60,000 B) $68,000 C) $70,000 D) $79,000

Rationale D is the answer. Martha Gault is not self-employed, so she is not entitled to adjustments for self-employment tax or self-employed health insurance. She is also not entitled to an IRA deduction because her income is above the threshold for persons who are active participants in an employer-sponsored retirement plan. She is an active participant because she contributes to a 403(b) plan. The deduction is completely phased out for single persons who are active participants with income of $74,000 (2019) or more. Child support received is not income for Martha. The other expenditures similarly do not provide adjustments. Martha will have gross income of $86,000 from salary, disability income, alimony, and interest income. She will reduce her income by the $7,000 in contributions to the 403(b) plan, so her AGI will be $79,000. Topic 43 TCJA of 2017 changed alimony inclusion in income/deductions for divorces finalized after 12/31/18.

Several years ago, a CFP® professional helped a client, Ken Randall, to establish an UTMA account for his daughter. Ken is the custodian of the account. The daughter is now at the age of majority, and Ken does not want his daughter to know about the account. What should the CFP® professional do? A) Advise the daughter of the account. B) Set up an appointment with the daughter and father to discuss the account. C) Follow the client's wishes and not tell the daughter. D) Advise the client of his fiduciary obligation to the daughter.

Rationale D is the answer. While the Uniform Transfers to Minors Act does state that the custodian must turn over control of the account to the minor upon reaching the age of majority, the transfer of control does not happen automatically. The father must fill out the appropriate forms to transfer the account to the child. So, while the father could potentially delay that transfer to the daughter's control, he should do so with the understanding that, as the custodian, he is a fiduciary and must act in the best interest of the daughter. Upon reaching the age of majority she will be able to sue him for breach of his fiduciary responsibility if she feels he has done something harmful to her. If answer choice D were not one of the choices, the next best answer would be B, to set up a joint appointment with father and daughter to discuss the account and the father's reasons for wanting to delay the transfer of control. Editor's note: The UTMA is a model law and each state has the right to adopt it as is or to modify it in some ways. Some states allow the custodian, at the time the account is established, to extend the custodial relationship to the minor's age 25; however, since this is not part of the model law, students who work in states that allow such a change should be careful to answer UTMA questions based on the general rules rather than the laws of their particular state. Answer choice A is incorrect because the planner's client is the father, the custodian of the account. Until such time as the father is no longer custodian of the account, the planner does not have an obligation to advise the daughter, nor should he violate his client's confidentiality. Of course, it would be wise for the planner to document his discussion with the father, noting that the father was advised of the potential consequences of not telling the daughter about the account or turning it over to her. (Topic 18, Domain 7)

Prior to entering into an agreement to prepare a comprehensive financial plan with a new client, Gary Peters, CFP®, fully discussed the proposed relationship, including the six step financial planning process, compensation to be paid, and other relevant details. Which of the following is correct? A) Gary has satisfied the Rules of Conduct in terms of defining the relationship. B) The certificant should have submitted the proposed relationship to CFP Board on the standard new client form. C) Gary has not completely satisfied the Rules of Conduct because the proposed relationship must be reduced to writing. D) The certificant must disclose in writing the percentage commission he may earn.

A is the answer. Prior to entering into an agreement, the certificant shall at least discuss with the prospective client all the relevant items indicated. If the certificant provides the information in writing, he shall encourage the prospective client to review it, and offer to answer any questions. Note that, at the time of engagement in a financial planning relationship, the certificant must enter into a written agreement if the services include financial planning or the material elements of financial planning. (Rules of Conduct: 1.2 and 1.3.) There is no requirement to disclose the percentage commission unless the client asks specifically for that information. Topic 1; Domains 1 and 8

Sheryl Kramer inherited stock that her mother purchased for $25,000. At her mother's death, Sheryl lived in a community-property state with her husband David, and the stock was valued at $50,000. Two years later, the Kramers moved to a state that followed common-law principles of property ownership, and the stock was then valued at $60,000. Five years later, in 2019, the stock was valued at $100,000, and Sheryl gave the stock to the Kramers' two children. Sheryl and David agreed to split gifts. What is the amount of Sheryl's taxable gifts? A) $15,000 B) $20,000 Rationale C) $30,000 D) $50,000

B is the answer. The value of the gift is $100,000 on the date the gift is made. Sheryl and her husband split gifts, so Sheryl will report one-half of the gift, or $50,000. She can take one annual exclusion for each child, so the taxable gift is reduced by $30,000 to $20,000. Remember that for each child, Sheryl's husband will also take an annual exclusion on his gift tax return. Topic 66; Domain 2

Leroy Heart is 52 years of age and has worked for his current employer for 7 years. Heart wants to withdraw some money from his retirement plan, but he is not certain what kind of plan his employer has. A CFP® professional can tell Heart that a loan may be permitted if Heart's employer maintains any of the following plans, EXCEPT: A) Profit-sharing plan B) 401(k) plan C) SIMPLE 401(k) plan D) SEP

D is the answer. Loans are permitted from all types of retirement plans (if the plan documents allows for loans) except SEPs and SIMPLE IRA plans. Topics 56 and 57; Domain 2

Roland Chaffey has been investing in a fund by making annual contributions over the past five years. The purchases and annual results have been as follows: Purchases $1,000 $2,000 $1,500 $2,500 $ 2,500 End of year values $1,100 $2,900 $4,750 $7,100 $12,150 What can the CFP® professional tell Roland are his dollar-weighted return (DWR) and his time-weighted return (TWR)? A) DWR 6.33%, TWR 7.26% B) DWR 7.14%, TWR 6.09% C) DWR 8.26%, TWR 6.22 % D) DWR 9.49%, TWR 6.55%

D is the answer. The dollar-weighted return is the easier of the two calculations so we perform that calculation first. We use the purchases as the cash flows and the last end of year value for the final cash flow. 1,000, +/-, CFj 2,000, +/-, CFj 1,500, +/-, CFj 2,500, +/-, CFj 2,500, +/-, CFj 12,150, CFj Shift, IRR, and the result displayed is 9.487

Define a highly compensated employee.

Highly-compensated employees are those who are greater than 5% owners or who earn at least $125,000 (in 2019) and are among the top 20% highest-paid employees.

Paul DiGiacomo is 48 years of age and has a successful law practice. Paul is risk tolerant and has been aggressive in his investments. He has set up investment accounts with his CFP® professional that have been allocated 80% in stock and 20% in bonds. Paul has also set aside a separate fund of $50,000 for more speculative investments. Paul would like to invest a portion of the money from this fund in a company that he has heard is working on an important new product. Paul expects the product to make large profits for the company if it is successful. If the product is not successfully developed, then the company will lose money and may fail. So either this company's ship comes in or it sinks. What should the CFP® professional recommend as a technique for Paul's investing in this company? A) Buy a straddle B) Buy a call C) Create a collar D) Buy the stock and sell a call

Rationale A is the answer. A long straddle is a combination of buying a put option and a call option on the same stock and is used when a very volatile market is expected. In this case, the investor expects widely different outcomes, so the straddle provides the possibility of gain from either outcome. The client can gain from the call if the new product is successful, and the client can gain from the put if the new product is a failure. The client will only lose with the straddle if the stock does not rise or fall much. A collar is created by selling a call and buying a put. The collar is used typically when an investor wants to lock in a price and does not expect the stock to move much higher. The investor locks in the gain by purchasing the put, and the investor gains premium income from selling the call. The collar strategy would not be recommended to the client in this case because if the product is successful, the investor will lose money from the sale of the call. Similarly, buying the stock and selling a call will not provide gains if the stock rises substantially. The purchase of a stock and sale of a call is only designed to make the investor a small gain and premium income. It provides little protection against the possibility that the new product is unsuccessful. Topics 33 and 40; Domain 4 or 7

Sarah has a disability income policy provided by her employer. The definition of disability is "own occupation," and the policy will pay 50% of her gross pay after a 90-day elimination period. The annual premium is $450, and the employer pays one-half, and Sarah pays one-half. Which of the following statements concerning Sarah Loudon's disability income insurance policy is correct? A) The policy includes the most stringent definition of disability. B) Sarah should change policies to one that includes an "educated and trained for" definition of disability. C) Sarah would receive disability benefits equal to her current salary. D) Disability benefits Sarah would receive would be 100% income-tax-free.

Rationale A is the answer. Own occupation is the most generous type of coverage because the definition is the most stringent. If the insured does not fit the very narrowly defined specifics of his or her occupation, then the insured can collect benefits and continue to work in another area if need be. Any occupation is the most restrictive type of coverage because the insured will receive no benefits if he or she can hold any job. Sarah's disability policy only pays 50% of her monthly gross salary. Since the premium payments are split between Sarah and the employer, benefits would not be 100% income-tax-free. Topic 25; Domain 3

A CFP® professional is reviewing tax documents provided by a client for her various business interests. The CFP® professional would expect to find estimated tax payments reported for all of the following, EXCEPT: A) Partnership B) Sole proprietor C) Corporation D) Trust

Rationale A is the answer. Partnerships are not taxpaying entities and pass through their income and losses to the partners. The partners file individual estimated tax reports and make individual estimated payments. Sole proprietors file individual estimated taxes, and corporations, trusts, and estates must pay estimated taxes. Topic 44; Domain 2

James Carlisle operates a successful construction company named Carlisle Developments, Inc., which is an S corporation. He and his wife Sandy each own fifty percent of the stock in Carlisle Developments, and both are officers of the corporation. Both spouses are 45 years old, but recent health problems have caused Mr. Carlisle to consider retiring at the end of this year. He currently owns several pieces of investment real estate that generate rental income of $8,000 per month after mortgage payments, including interest and principal. Now that the Carlisles' two older children are married and on their own, they have only 16-year-old Joshua at home. As a result, their current residence is much larger than the family needs since they have lived there for almost 15 years. They estimate that the family's present home would sell for $700,000 (after selling expenses). They paid $325,000 for their present home and currently owe $135,000 on a first mortgage. Mr. Carlisle has come to you to determine how he could best structure his affairs to provide income for his early retirement, pay for Joshua's college education, and pass on the business to his children. Currently, Mr. Carlisle has approximately $200,000 invested in his name in a tax-deferred Individual Retirement Account. Which of the following techniques will help the Carlisles to reduce their income for this year so they can make a contribution to a Coverdell Education Savings Account for their son Joshua? A) Delay closings for houses built until next year. B) Defer needed repairs or improvements to real estate into next year. C) Pay their January home mortgage payment in the middle of December. D) Postpone paying salary to Mr. Carlisle until after the beginning of next year.

Rationale A is the answer. Postponing salary will not reduce income because profits from the S corporation are passed through to the shareholders, and the amount that profits would go up would exactly equal the amount of salary received by Mr. Carlisle. By postponing closings, the S corporation would report lower income, and postponing capital gains reduces AGI. Accelerating repairs (rather than deferring repairs) can lower income from rental properties. Advance payment of the mortgage on the Carlisle's home would not reduce AGI because the mortgage interest deduction is an itemized deduction subtracted from AGI to compute taxable income. Note that advance mortgage payments for the rental property can reduce the income from the rental property and can reduce AGI. Topic 47; Domain 4

Peter Piper established a revocable living trust which provides for income to be paid annually to his wife Pat for life, and at her death, the corpus will be paid to their three children per stirpes. Peter's will was written before the trust was created and provided for a credit bypass trust with the residue going into a marital trust. Peter transferred to the revocable trust the title to three investment properties valued at $250,000 each and his $400,000 stock brokerage account. In addition, four years before he died, Peter transferred a $500,000 life insurance policy to the revocable trust and kept his wife as the designated beneficiary. Peter's home with his wife, valued at $300,000, was titled in tenancy by the entireties. Peter's account balance in a defined-contribution retirement plan through his employer was $400,000. Peter's wife is named as the beneficiary. Peter also had bank CDs with a combined value of $50,000, and he had a joint checking account worth $10,000 with his wife. Which of the following statements is correct if Peter dies today and his wife dies 10 months later? A) All assets passing under Peter's will go to the credit bypass trust. B) Peter's use of the revocable trust will help reduce his estate taxes. C) Peter's estate will avoid probate due to the revocable trust. D) Peter's life insurance policy will not be included in his gross estate since he transferred it four years before his death.

Rationale A is the answer. The only assets passing under the will are the CDs. Since they are less than the unified credit equivalent, Peter's entire estate passing under the will goes to the credit bypass trust. These CDs will require the probate process, so Peter's estate will not be able to avoid probate entirely. The $50,000 from the CDs will be the only assets to fund the credit shelter trust. These assets are passing to the children, subject only to a life estate in Peter's wife, so these assets do not qualify for the marital deduction. The revocable trust is, in effect, a bypass trust. The revocable trust does not reduce Peter's estate taxes because the assets are includible in Peter's gross estate. Revocable trusts are not used to reduce estate taxes, but to avoid probate. The life insurance policy will be included in Peter's gross estate because he transferred the policy to a revocable trust, rather than to an irrevocable trust. Topics 66 and 68; Domain 3

A CFP® professional is working with a sophisticated investor who holds numerous types of investments. The client has inquired about what types of securities he might own that were not obligated to follow the registration requirements of the Securities Act of 1933. All of the following are exempt from the Act of '33, EXCEPT: A) Open-end companies B) Rule 144 securities C) Sales to accredited investors D) Securities of municipal, state, and federal governments

Rationale A is the answer. The securities of open-end investment companies (commonly called mutual funds) must be registered under the '33 Act. The other securities are exempt. Topic 5, Domain 8

A CFP® professional wants to present a financial plan to her client with an explanation of the selection of the optimal asset allocation for the client. Which of the following statements can the CFP® professional use in explaining the differences between the security market line (SML) and the capital market line (CML)? (1) The SML shows the relationship between risk and return for a particular asset, whereas the CML shows that relationship for efficient portfolios of assets. (2) In the SML, risk is measured by the beta coefficient; whereas in the CML, risk is measured by the standard deviation. (3) The risk-free rate of return is an element of the SML, whereas the risk-free rate of return is not an element of the CML. A) (1) only B) (1) and (2) only C) (1) and (3) only D) (2) and (3) only

Rationale B is the answer. (3) is not a correct statement because the risk-free rate of return is an element of both the SML and the CML. Topic 35; Domain 5

During the year, Mr. Chambliss paid $1,800 in margin interest on his brokerage account. His brokerage records show that he realized $5,450 in long-term capital losses during the year, earned $2,400 in municipal bond interest, and had taxable interest income of $950. These were his only investment activities. His AGI was $85,000, and he had itemized deductions of $13,500 before considering his investment activities. How much investment interest can Mr. Chambliss deduct on his return? A) $0 B) $950 C) $1,450 D) $1,800

Rationale B is the answer. He can deduct the interest paid, to the extent of his investment income. That includes his taxable interest income of $950, but not his nontaxable municipal bond interest. Topic 43; Domain 3

A CFP® certificant has provided a client with financial planning services, including investments and income tax planning. The CFP® certificant is preparing an income tax return as part of the on-going services for the client and has been provided with the client's tax information. The client is single and has a salary of $55,000. The client has received dividends of $3,000 and has capital gains of $2,500. In addition, the client has a $35,000 loss on a residential rental unit that he owns and manages. What is the client's AGI? A) $25,500 B) $35,500 C) $55,000 D) $60,500

Rationale B is the answer. The AGI will include the client's salary, the dividends, and the capital gains. The client can also deduct above the line the amount of the loss on the residential rental unit but only up to a maximum of $25,000. The client can deduct the full $25,000 because the client's AGI is below $100,000. The client's AGI, therefore, will be $55,000 + $3,000 + $2,500 - $25,000 = $35,500. Topic 43 and 49

A CFP® professional has been consulted for financial planning by Sam Clover and his wife Margery. Sam is 50 years old and Margery is 46, and they have two children. Sam explained to the CFP® professional that they have not been able to save any money to invest for retirement and were always spending more than they earned. Margery pointed out that they did not have any need to save because they would inherit from Sam's family a substantial amount of money. Sam did not want to rely on the inheritance since he did not know how much he would inherit and wanted to leave some of the inheritance for their children. Margery did not see a need to leave any inheritance to their children and expected they would have a large inheritance anyway. The Clovers provided the CFP® professional with information on their current investments and retirement plans and mentioned that they needed to discuss education planning. The Clovers have assets of about $500,000 most of which is in their 401(k) plans and IRAs. Their income is approximately $170,000 annually. What action should the CFP® professional take first with the Clovers? A) Assess the clients' level of knowledge and experience with financial matters B) Assess the CFP® professional's ability to meet the clients' needs and expectations C) Prepare a cash flow statement for the clients D) Obtain from the clients their current education plan and resources

Rationale B is the answer. The CFP® professional will need to assess his ability to meet the Clovers' needs and expectations because Sam and Margery each have different needs and expectations. The services that can be offered may be limited to education planning or to a few areas where the Clovers are in agreement as to their needs and expectations. The CFP® professional will need to discuss the financial planning process with the Clovers and the importance of getting agreement on the goals and needs before proceeding. Topic 8, Domain 1

Which of the following statements describe advantages of a profit-sharing plan? (1) The employer's stock can be owned by employees. (2) Employees know the amount of the benefit they will receive at retirement. (3) 25% of participants' compensation can be contributed by the employer. (4) The employer can account for past service. A) (1) and (2) only B) (1) and (3) only C) (3) and (4) only D) (1), (2), (3), and (4)

Rationale B is the answer. Two advantages of a profit-sharing plan are that the plan can invest in employer stock, and the contribution limit is 25% of compensation. With a profit-sharing plan, an employer cannot account for past service, and employees are not assured of any particular level of benefits. Topic 59; Domain 4

A CFP® professional is reviewing the property and casualty insurance coverage for his clients Dale and Louisa Luongo. The Luongos have been married for 24 years and have a daughter who is in college and another daughter in high school. The Luongos have insured their home for $250,000 and the policy provides $125,000 of coverage for personal property. Dale and Louisa have estimated their personal property to be valued at $100,000, plus Louisa has jewelry worth $12,000 and furs valued at $5,000. Dale has a stamp collection that he values at $4,000, and their daughter has a stereo worth $1,500 that she has taken to college. Which of these items should the CFP® professional recommend to the Luongos for obtaining additional coverage? A) Jewelry B) Jewelry and furs C) Jewelry, furs, and stamp collection D) Jewelry, furs, stamp collection, and stereo

Rationale C is the answer. Under homeowners coverage, jewelry and furs are subject to a special limit for loss by theft of $1,500, and stamps are also subject to a separate special limit for loss by theft of $1,500. The stereo is covered worldwide under personal property coverage, and the special limits do not apply to this electronic equipment. Topic 32; Domain 3

What is the usual reason for a CFP® professional to recommend a QTIP, rather than other marital deduction transfers? A) A continuing income can be provided to the spouse for life. B) The decedent's estate can achieve reduced federal estate taxes. C) The decedent can obtain management by a trustee for estate assets. D) The estate owner can direct the remainder after the spouse's death.

Rationale D is the answer. With a QTIP, the estate owner can direct the disposition of the estate assets after the spouse's death. The management by a trustee can be obtained with other kinds of marital trusts, so the QTIP is not necessary to obtain this management. Other marital transfers can provide the same reduction in federal estate taxes. Other marital trusts can provide a life income to the spouse. Topic 69; Domain 4

A client is discussing a buy-sell agreement with three other owners of the business. During the data gathering for his financial plan, the client asks the CFP® professional about the advantages of the different kinds of buy-sell agreements. The CFP® professional could recommend the cross-purchase agreement as compared to the entity agreement for which of the following reasons? A) Fewer insurance policies are required. B) Premiums are deductible. C) Premium payments are more assured. D) Survivors will get an increased basis.

Rationale D is the answer. With a cross-purchase plan, the insurance death benefit is used to buy the business interest of the deceased owner, and the surviving owners will make purchase payments for the interest. These purchase payments increase the basis of the survivors in their interests in the business. The cross-purchase agreement will require more insurance policies than the entity agreement because each owner must buy life insurance on every other owner. The entity agreement only requires the business entity to buy a policy on each owner. Premiums for a buy-sell agreement are not deductible. Premium payments for the life insurance funding the buy-sell agreement are more assured when the entity makes the premium payments under an entity agreement. Sometimes an owner may forget to make the premium payment or may skip a payment due to cash flow problems. The entity is not as likely to skip payments. Topics 29 and 67; Domain 2

Are you penalized when withdrawing from an IRA for education?

The IRS allows you to withdraw your IRA funds to pay for higher education expenses for yourself, spouse, child, stepchild, grandchild or step-grandchild without the standard 10 percent early distribution penalty. You would take a pro-rated split. (Ex. $40K contributions that grew to $120K, now a $10K withdrawal) = $3,333 tax-free and $6,667 taxed as ordinary income

Irene Divorsky is 77 years of age and lives in a retirement community. Her husband has recently died, and Irene has a very different risk tolerance from her husband. Although Irene and her husband invested in a portfolio appropriate for a couple with a moderate risk tolerance, she is risk averse and would like a financial planner to help her with setting up her portfolio with more safety and protection of her capital. She would like income from her investment as well. Which of the following portfolios should a CFP® professional recommend to Irene? A) 10% stock fund, 80% short-term bond fund, 10% cash B) 10% stock fund, 80% long-term bond fund, 10% cash C) 40% stock fund, 40% long-term bond fund, 20% cash D) 40% stock fund, 40% short-term bond fund, 20% cash

Rationale A is the answer. For an elderly investor who is risk averse and seeking stability and income, the portfolio should avoid most equity investments so the 10% allocation to stock will be more appropriate than a higher allocation. The short term bond fund will provide more safety and protection of capital and more stability than a long-term bond fund. Topic 37; Domain 4

Ethan and Sarah Stolzfus are both 56 years of age and have consulted a CFP® practitioner for comprehensive financial planning. The Stolzfuses have a valuable transportation business and have assets of approximately $2.5 million. They are conservative investors with a portfolio of bonds and blue chip stocks. During the discussion of their retirement goals, Ethan stated that he was opposed to long-term care and to the government's Medicaid program. He insisted that their family would take care of their members as they always had done in the past. They had three children and would not need any long-term care insurance because they would not be going to a nursing home or hospice. Sarah quietly acceded to Ethan's statements and said that they had taken care of elderly family members years ago and thought that their family would do the same if the need arose. What should the CFP® practitioner present as recommendations to Ethan and Sarah Stolzfus? (1)Discuss long-term care with their children and family (2)Purchase life insurance with an indemnity-style long-term care rider (3)Purchase long-term care insurance for both Ethan and Sarah (4)Plan for moving to assisted living housing A) (1) and (3) only B) (3) only C) (1), (2), and (3) only D) (1) and (4) only

Rationale C is the answer. The CFP® practitioner should recommend that Ethan and Sarah Stolzfus discuss long- term care with their children and family to see that the family members are prepared to take care of Ethan and Sarah in the event of incapacity. The CFP® practitioner should also present the alternative choices of purchasing a life insurance policy with an indemnity-style long-term care rider or purchasing traditional long-term care insurance. The final choice of which product is used to provide funding for long-term care will likely depend on the results of the discussion with children and family members. If the family does, in fact, plan to provide for their care the life insurance with indemnity-style long-term care rider might be attractive because, unlike a reimbursement-style policy, the money paid out to them each month after meeting the requirements of the rider can be used for any purpose, including needs like making changes to the home (e.g. ramp access) or even providing payment to the family care-giver, which would typically be prohibited by a traditional LTC policy unless the family member is a licensed care-giver. If the family members are reluctant to commit to providing care, perhaps due to other commitments or due to their own health issues, the traditional long-term care policy might be more favorable. Should the clients decline both options, the planner will need to note that two options were presented and that funding using one of these options was recommended and document it in the file so that family members do not later assert a claim against the practitioner for failing to advise Ethan and Sarah of the benefits of long-term care insurance. There is no indication of a need for assisted living housing yet, so the recommendation to prepare to move to assisted living housing is premature. Topics 8, 26, and 28, Domains 2 and 4

When Terry and Sandy Metier arrived for the annual review of their financial plan, they told their planner that Terry had lost his job and was doing consulting work now to earn some money but was making less than one third of his previous income. Sandy was working part time to help out, but their income was now substantially less than at their last review. They informed the planner that they have not been able to save or make retirement contributions for over 6 months. The Metiers' plan required them to make contributions to their IRAs and Roth IRAs for another 9 years when they would retire at age 65. The loss of Terry's job means that they are paying for health insurance under COBRA and have lost some life insurance and disability coverage previously provided by Terry's employer. Their youngest child has two more years of college, and they have depleted their 529 plan. They have put their house up for sale to reduce expenses. How should the planner proceed with the review for the Metiers? A) Determine the college costs for their child and the amount of these costs that could be obtained by financial aid. B) Request that the Metiers help the planner to create a new balance sheet and cash flow statement. C) Consider investment reallocation and other alternatives for meeting the Metiers' goals and objectives. D) Explore with the Metiers the time horizon and priorities for each of their financial goals.

Rationale D is the answer. The change in circumstances for the Metiers will require a new financial plan, and the planner will need to start with gathering new information. The planner must determine whether the clients' goals have changed and what the goals are. As part of this information gathering, the planner will need to find out the time horizon for each goal and the Metiers' priorities. Answer choice B is incorrect because the creation of the new balance sheet and cash flow statement occurs in step 3 of the planning process. When the client's situation changes, the planner must determine which step in the planning process he or she must return to first. If the parties to the engagement or the scope of the engagement have changed, the planner would return to step 1. If the scope has not changed, the planner should determine if a return to step 2 is appropriate, and so on. In this question, the earliest step for the planner to return to is step 2. Topics 8, 9, 17, 19, and 37; Domain 2

A CFP® professional wants to measure the investment results from a client's portfolio. The portfolio contains 8 uncorrelated stocks from different industries. The CFP® professional will use an index of risk adjusted performance to evaluate the portfolio's returns. How should the CFP® professional proceed with the evaluation? A) The CFP® professional should use the Sharpe ratio because the portfolio is not diversified. B) The CFP® professional should not use the Treynor ratio because the portfolio is not diversified. C) The CFP® professional should use the Sharpe ratio because the portfolio is diversified. D) The CFP® professional should use the Treynor ratio because the portfolio is diversified.

Rationale D is the answer. The CFP® professional should use the Treynor ratio because the portfolio is diversified. The Sharpe ratio is used when the portfolio is not diversified. A portfolio with 8 uncorrelated stocks will be sufficiently diversified to permit evaluation with the Treynor ratio. Topic 36; Domain 3

Assume a four-stock portfolio with the following characteristics: Stock % of Total Beta Rate of Return F 20% .9 -3.6% G 25% 1.2 7.0% H 30% 1.4 9.0% I 25% 1.5 -2.2% What is the standard deviation of the above portfolio? A) 3.11 B) 6.37 C) 6.92 D) Answer cannot be determined from the information given.

Rationale D is the answer. The standard deviation of a portfolio cannot be known without information on the degree of correlation among the returns on the stocks making up the portfolio. The provided formula sheet does provide the formula to calculate the standard deviation of a two-asset portfolio, and a look at that formula reveals the need for information regarding the covariance (or correlation coefficient) between the assets. To calculate the standard deviation of the portfolio in this question, you would need to know the covariance between each and every asset (what is the covariance between Stock F and G, between F and H, between, F and I, between G and H, etc.). Had the question simply provided historical returns for a single security, the simplified calculation using the ∑+ key on the calculator could be utilized to determine the standard deviation of that security. Topic 35; Domain 3

Elaine Anderson purchased five corporate bonds, each with a $1,000 par value, for a total of $4,225. The bonds have a ten-year maturity date and a 7% annual coupon rate, payable semiannually. If Elaine holds the bonds till they mature, what will be her annual yield to maturity? A) 4.65% B) 5.88% C) 9.43% D) 9.65%

Rationale C is the answer. Enter -$845 as the PV (that is, $4,225 ÷ 5), 20 as the N (that is, 10 years x 2), $35 as the end-of-period payment (that is, $70 ÷ 2), and $1,000 as the FV. Solve for the interest rate, which is 4.714% per six-month period. Double this, to an annual basis of 9.43%. Topic 36; Domains 2 and 7

A CFP® professional meets with a married couple who want advice on what to do with the assets in a 401(k) plan. The husband has worked for his employer for 25 years and has accumulated an account balance of $802,000. This retirement account contains $620,000 worth of appreciated employer stock. The couple is planning to retire and would like to know whether they should sell the employer stock. What should the CFP® professional recommend to these clients? A) Roll over the account balance to a Roth IRA B) Roll over the account balance to an IRA to take advantage of the NUA tax rules C) Roll over the account balance to an IRA and reduce the employer stock to 15% D) Roll over some of the employer stock and all of the other assets to an IRA and sell the employer stock in the IRA.

Rationale D is the answer. Under the NUA rules, the husband will not be taxed on the net unrealized appreciation contained in the employer stock that is distributed in a lump-sum to him. This NUA will be taxed at long-term capital gains rates. If the stock is rolled over to an IRA then the benefits of the NUA rules will be lost because all distributions from the IRA will be ordinary income. The husband will want to have some of the employer stock distributed to him so it can be retained in a taxable account, such as his brokerage account; therefore, the capital gains can be deferred. The adverse consequences are that the husband will have ordinary income to the extent of the original cost of the stock when contributed to his account. The employer stock that is rolled over to an IRA can be sold to allow for diversification. The tax on gains from these sales of employer stock will be deferred until it is distributed to the couple. The rollover to the Roth IRA would not afford tax deferral because the assets would be subject to tax at the time of the rollover. Topic 60; Domain 4