Final Review Quiz #8
Lawrence Letterman died with a gross estate of $20 million. His adjustments to his gross estate are $1,000,000. He was single and his estate bequeathed all his assets to his daughter, Lulu. Lawrence's major asset was a cattle ranch that operates as a corporation. As of the date of Lawrence's death, the corporation was worth $15 million, and the land owned by the corporation is worth $5 million. Lulu will own 100% of the corporation and plans to continue operating the ranch for the foreseeable future. Which of the following postmortem planning techniques may Lawrence's estate elect? NOTE: This is a concept question. I. Section 303 stock redemption II. Section 6166 installment payment of federal estate taxes III. Section 2032A special use valuation IV. Alternative valuation date A) Lawrence's estate is eligible for all the elections shown. B) I, II, III C) III, IV D) IV E) Lawrence's estate is not eligible for any of the elections shown.
B) I, II, III 35% of Lawrence's $19 MM adjusted gross estate is $6,650,000. Thus, his estate qualified for 303 and 6166 (35% rule) at $15 million. Section 2032A requires that the real and personal property of the business represent 50% of his gross estate rule ($9.5 million) and 25% of his gross estate in respect to the real property ($4.75 million). Lawrence's estate does meet the requirements for a Section 2032A election. The Alternate Valuation Date (AVD) is not appropriate because there is no indication of a decline in value of the ranching corporation.
Chris Towns is self-employed. His business employs 10 workers. He is successful enough to fund various benefits for himself and for his employees. To determine AGI, which of the following benefits are either include in gross income or deducted on the front of Form 1040 to determine AGI? I. The premium for the group life insurance benefit of $220,000 for Chris II. The annual SEP contribution for Chris III. Net profit from the sole proprietorship business of $250,000 IV. The IRA contribution by Chris V. The group health insurance plan premium for Chris A) All of the above B) I, II, III, V C) I, II, III D) II E) III
B) I, II, III, V The face value of the group life insurance for Chris is in excess of $50,000. The employer-provided premium that funds the excess is deemed to be compensation. The SEP contribution and the self-employed health insurance premiums are deductions for AGI. The net profit is taxable income. Chris's IRA contribution is non-deductible because he is an active participant in the SEP and AGI is above the IRA contribution deductibility phaseout.
According to the CFP Board Rules of Conduct, what should the certificant do first if he or she cannot obtain the information necessary to fulfill his or her obligations relative to the process of financial planning? A) Decline the client. B) Inform the prospective client of any and all material deficiencies. C) Limit the scope to specific activities that can be performed with the information available. D) As the relationship proceeds, recognize that its scope may change by mutual agreement.
B) Inform the prospective client of any and all material deficiencies. When a client does not provide the information that you have requested in order to develop the financial plan, the first response would be to inform that client of the deficiency. If the client then is not forthcoming, limiting the scope of the relationship or terminating the relationship might follow.
Lloyd has been your client for years. Through various market cycles. Lloyd's portfolio has weathered downs (2008-2009) and experienced ups (2009-2021). These last few years the return has been almost flat. Now Lloyd wants to buy an expensive car. The trade-in-value of the car he owns now is minimal relative to the cost of the new car cost. Lloyd asked you whether he should pay cash or lease the car under a 3-year agreement. How would you respond if he would have to sell some stocks to make the cash payment and you anticipate that the market will be flat for the next year or so? A) Lloyd should pay cash because he probably will keep the car for more than 3 years. B) Lloyd should consider the cost of the lease agreement versus the likely return (opportunity cost) of investing the money. C) Lloyd should pay cash because the lease agreements have restrictions on miles and cost to purchase after 3-years. D) Lloyd should lease the car because his investments will outperform the lease cost of the car.
B) Lloyd should consider the cost of the lease agreement versus the likely return (opportunity cost) of investing the money. The buy versus the lease decision is generally based on opportunity cost. If Lloyd's investment return will outperform the breakeven return, he should keep his investments in place and lease the car.
Mr. Nice Guy contributes more than half of the support for his wife's mother, Christine. Mrs. Nice Guy divorced Mr. Nice Guy, but Mr. Nice Guy continues to contribute more than half the support of his former mother-in-law. Christine has taxable income of only $1,200. Can Mr. Nice Guy continue to claim his former mother-in-law as a dependent on his separate return? A) Yes B) No C) He never could claim her. D) Only if he was married to his former wife for more than half of the year for which he claims the dependency exemption for his former mother-in-law
B) No Exemptions have been eliminated after 2017
Jack and Jill Jones are divorcing. In exchange for her release of all marital rights that she has or may have in his estate Jack understands that he will, under the terms of the divorce decree give Jill $1,000,000 as a lump-sum settlement. Under this circumstance, is the $1,000,000 subject to federal gift tax? A) No B) No, if the payment occurs within a specific 3-year period after the divorce C) Yes D) Yes, if it is a gift of a future interest E) Yes, if it is required under the divorce decree
B) No, if the payment occurs within a specific 3-year period after the divorce The $1,000,000 transfer is not subject to gift tax if the transfer of funds occurs within three years of the date of the divorce decree. It is still regarded as a marital gift and thus it is not subject to federal gift tax.
Delores Delmar established a special needs trust for her developmentally disabled child. Which of the following is true? A) Delores should serve as the trustee of the trust. B) The trustee can reposition the assets in the trust. C) A family member may serve as trustee of the trust. D) Investment income cannot be used to buy life insurance on Delores.
B) The trustee can reposition the assets in the trust. In general, trustees may reposition trust assets. If Dolores serves trustee, that she is controlling the beneficial enjoyment of the trust's assets will taint the trust for income and estate taxes. A family member can be a co-trustee with an independent trustee. Life insurance can be purchased. However, using income from the trust to pay the premiums will taint the trust for income tax purposes. Life insurance on the grantor of a special needs trust that is held within that trust is a typical occurrence.
You have been advising Amy and Cal Campbell for years. At a monitoring meeting in your office, they sit as far apart as possible. They seem to be avoiding eye contact with each other. Amy speaks up first. She tells you that they have been in marriage counseling for 6 months without progress. She wants to retain you as an advisor. Cal glares at her and says that you must make a decision as to which one of them you will work with. What would be your most appropriate response in this situation? A) Terminate the relationship B) Understand that they may divorce. However, until they are divorced you may represent both of them. C) Have them sign separate contracts with you. D) Recommend that each of them interviews other advisors. That way each can receive separate financial counseling.
B) Understand that they may divorce. However, until they are divorced you may represent both of them. At the point, you represent both spouses. After the divorce and the assets are split you could represent both of them with separate contracts.
Mrs. Weathly donated $2,000,000 of appreciated blue chip stocks (basis $1,000,000) to a public charity six years ago when her AGI was $600,000. Her AGI has remained constant over the six years. Now in the seventh year, what amount of the remaining charitable contribution she can use against her $1,000,000 AGI? A) $0 B) $180,000 C) $300,000 D) $920,000 E) $460,000 because in the 7th year she must evaluate the gift at basis
A) $0 No charitable income tax deduction carryforward is available in the seventh year following a charitable gift.
David bought 100 shares of XYZ stock at $45 per share. The stock value increased to $50 per share. David would like to own more shares of XYZ but he does not have cash to purchase additional shares. Instead he buys an out-of-money $60 XYZ call option for $1. He decides to sell the stock and the option when the stock reaches $65 per share. He received $5 for the option. How much gain will David have to recognize? A) $2,400 of gain B) $1,500 of long-term gain and $400 of short-term gain C) $2,000 of long-term gain and $400 of short-term gain D) $2,000 of long-term gain and $500 of short-term gain
A) $2,400 of gain The stock has a gain of $20 per share times 100 shares or $2,000. The option has a gain of $4 per share times 100 shares or $400. The information does not indicate whether the stock was held for the long-term or the short-term. The stock gain is $2,000 which eliminates B.
Janice is age 51. She is single. She plans to continue to work until age 62. She works for a not-for-profit association which permits employees to participate in 403(b) and 457 plans. Janice wants to contribute to only one plan. Which plan will allow for Janice to make the largest tax-deductible contribution? A) 403(b) plan B) 457 plan C) They are both the same. D) It depends on how much she makes with either employer. E) She should contribute to both plans up to to the maximum.
A) 403(b) plan Both the 403(b) and the 457 plans offer the same deferral limits. However, because the 457 plan is not provided by a governmental employer no catch-up contribution is available. Janice may make a catch-up contribution to the 403(b) plan. She can only contribute to one plan. Answer D is wrong because there is only one employer.
The written disclosures that are required under Conduct Code of Ethics can be made in which of the following ways? I. Disclosure using the Form ADV II. Disclosure under the rules and requirement of any self-regulatory organization. III. Disclosure using multiple written documents IV. Disclosure used in compliance with state or federal laws. A) All of the above B) II, IV C) III, V D) III
A) All of the above Under the CFP Code of Ethics, written disclosure to prospective clients may be provided through any of the means shown.
After finding that a CFP® certificate violated the CFP® Code of Ethics, the CFP Board's Disciplinary and Ethics Commission can impose which form of discipline? I. Private censure II. Public letter of admonition III. Suspension IV. Revocation A) All the above B) II, III, IV C) III, IV D) None of the above answers
A) All the above Presuming a deemed violation of the CFP® Code of Ethics and Professional Responsibility, the Disciplinary and Ethics Committee may impose all the forms of discipline that are shown.
Lana has a choice between two different diversified mutual funds. The fund data is as follows: Fund X: Portfolio return: 17% Beta: .72 Standard Deviation: .9 Fund Y: Portfolio return: 20% Beta: 1.2 Standard Deviation: 1.6 If the risk-free rate is 6%, which fund should she purchase and why? A) Fund X should be purchased because of its higher Treynor number. B) Fund Y should be purchased because of its higher Treynor number. C) Fund X should be purchased because of its higher Sharpe number. D) Fund Y should be purchased because of its higher Sharpe number.
A) Fund X should be purchased because of its higher Treynor number. Tx= .17 - .06 / .72= .15 Ty= .20 - .06 / 1.2 =.12 Both funds that Lana is considering are diversified. When the portfolio is diversified the Treynor ratio is a more reliable expression of risk-adjusted return than is the Sharpe ratio.
Carl and Susan Matthews are considering contributing to respective IRAs this year. Both Carl and Susan work. They expect their AGI to be approximately $130,000 - $135,000. Carl's company permits employees to participate in a 401(k) program. Carl participates in the plan contributing 6% of his salary. His employer provides a 3% matching contribution. Susan works for a non-profit organization that provides a 457 plan. She normally defers the maximum amount permitted annually. Which of the following is (are) true? I. Only Susan can make a deductible IRA contribution. II. Both Susan and Carl can contribute to Roth IRAs. III. Neither Susan nor Carl can make deductible IRA contributions IV. Only Susan can contribute to a Roth IRA A) I, II B) II C) III D) IV
A) I, II Carl's active participation plus phase out rules disallows him from deducting his IRA contribution. However, participation in the 457 plan does not disqualify Susan from deducting her IRA contribution. Because 457 plans are technically nonqualified deferred compensation arrangements, Susan is not deemed to be an active participant for purposes of deducting her IRA contribution. The Matthews' AGI is well under the phaseout for Roth IRAs.
Mark Thomas hired you to be his financial planner. Mark maintains 2503(c) trust for his 2-year-old daughter, June. Mark named himself as trustee because he wants discretion over the distribution income and principal. The trust instrument includes the provision that any undistributed income and principal will be distributed to June when she turns age 21. After reviewing the trust agreement what is the most serious concern that you would share with Mark. A) Mark should consult with an attorney and have the trust amended to remove himself as trustee. B) The trust needs to invest in growth securities because trust income tax rates hit 37% at relatively low levels of income. C) That he should confirm whether he really wants his daughter to get the trust principal when she reaches age 21. D) That the trust is actually at 2503(b) trust and not a 2503(c) trust.
A) Mark should consult with an attorney and have the trust amended to remove himself as trustee. If Mark continues as trustee of the trust into which he has transferred his own the 2503(c) is a tainted trust for both estate and income tax purposes The notion of minimizing income and subsequent tax is important, but the trustee situation is more worrisome. The trust document needs to be amended or voided. This is a 2503(c) trust.
Charles divorced Ruth. Under the QDRO that was part of their property settlement, Ruth she received one-half of his profit sharing 401(k) plan account having a date of divorce value of $300,000. Those funds are now in Ruth's own IRA. Before the divorce, Charles and Ruth had a net worth of about $1,500,000. Ruth has about $750,000 which includes a house worth $250,000. Ruth has been taking distributions from the IRA which, due to the ongoing withdrawals is declining in value. Concerned, Charles designated Ruth as the beneficiary of his portion of the profit sharing 401(k) plan. Charles recently remarried. If Charles died yesterday, what would you advise Ruth to do if the contingent beneficiaries are their children. A) Ruth should roll his plan into an inherited IRA. B) Ruth should roll his plan into a Roth IRA in her name. C) Ruth should leave the money in the employer's plan until she needs it. D) Ruth needs to understand that the only valid beneficiary for Charles' 401(k) account is his current spouse. E) Ruth needs to understand that the only valid beneficiary for Charles' 401(k) account is his current spouse.
A) Ruth should roll his plan into an inherited IRA. During his first marriage, Charles named Ruth as the beneficiary of his 401(k) account. Nothing indicates that he has changed the beneficiary. Ruth appears to need cash regularly. The Roth conversion would create a large tax bill she likely cannot afford at this time. Because the 401(k) is not a pension plan, there is no requirement that Charles' current wife be its beneficiary.
John has invested $110,000 in a single bond debenture. The yield to maturity on the bond is 5.5%. The bond has a duration of 15.7. What can John expect to happen to the value of his bond portfolio if (market) interest rates decrease by 1%? A) The value of the bond will increase by $16,370 +/- 1 B) The value of the bond will decrease by $16,412 +/- 1 C) The value of the bond will be $126,412 +/- 1 D) The value of the bond will be $93,588 +/- 1
A) The value of the bond will increase by $16,370 +/- 1 -15.7 x (.01 / 1+ .55) = 14.88% 14.88 % of $110,000 is $16,370
Joey and Sally World are both approaching 60. Both Joey and Sally have always worked at low paying jobs. As a result, they are always in a 10 or 12% income tax bracket. They have saved sporadically through the years through personal IRAs and non-qualified investment accounts. They never had an opportunity to participate in a company sponsored retirement plan. They have never been to a financial planner for advice. You, a CFP practitioner, are serving them pro bono. They asked you what type of return on their investments would be most meaningful to them. How would you respond? A) Time weighted return B) Real rate of return C) IRR (internal rate of return) D) Nominal rate of return
A) Time weighted return Internal rate of return (IRR) expresses the effective return on an investment considering all cash flows. Time weighted return expresses manager performance. Real return adjusts nominal return for inflation. Nominal return often fails to accurately express a particular investor's return.
George Able, age 60, enjoys working and has no wish to retire. He is researching businesses he could buy. Given that entrepreneuring is risky George's required rate of return is 7% to 8%. If a business earned an annual net profit of $100,000, what should George pay for the business? A) $1,000,000 B) $1,250,000 C) $1,333,333 D) $1,428,571
B) $1,250,000 Using the higher rate 8% produces a lower number ($1,250,000). George would prefer to pay less to acquire the risky business. Using the 7% produces a maximum number. ($1,428,571) $100,000/.08 = $1,250,000 If this is a risky investment, he should get a higher return, and pay the minimum amount. Subjective due to interpretation of the wording minimum (smaller) / maximum (larger). But given a choice of $1,250,000 or $1,428,571 for exactly the same house. What would you pay? This drives a lot of people crazy because it says maximum but you select the smaller number. So, go ahead and pick the bigger number if it is on the exam.
Pamela Paul makes a gift stock to her daughter. Several years ago, Pamela bought the stock for $100,000. At certain times while Pamela held the stock the position had been worth as much as $250,000. Pamela who is quite generous has exhausted her annual gift tax exemption and has already made taxable gifts to various family members which now total over $12 million. If she gifts the stock to her daughter, Penny today when it is worth $100,000, Pam will have to pay a gift tax of $40,000. If her Penny sells the stock, what will be her basis for federal income tax purposes? A) $86,000 B) $100,000 C) $114,000 D) $134,400
B) $100,000 Pamela made a gift of the stock to Penny when the stock was priced at $100,000. That matches Pamela's basis. Since at the time the stock was gifted it has not appreciated, Penny may not increase her basis due to the gift tax that had been paid by her mother.
To generate extra cash for daily needs, Ken's mother should sell some of her stock. Ken's mother bought the stock years ago for $25,000. It is now worth $50,000. If Ken buys the stock from his mother for $50,000 and sells it three months later for $62,000, what amount of gain, if any, does he have to report? A) $0, he gets an additional $15,000 annual exclusion B) $12,000 STCG C) $37,000 STCG D) $12,000 LTCG E) $37,000 LTCG
B) $12,000 STCG Ken purchased the stock. He owned it for 3 months. His gain is $12,000 STCG. This is a sale rather than a gift.
Corporation X, Corporation Y and Corporation Z are all members of the same controlled group. X and Y jointly sponsor a profit sharing plan covering their eligible employees. Corporation Z does not participate in the profit-sharing plan nor does it have a plan of its own. Chris works for all three of the corporations and receives $40,000 in compensation from each (total $120,000). How much may be contributed for Chris in the current year? A) $0 B) $20,000 C) $30,000 D) $40,000 E) $49,000
B) $20,000 The Section 404(a) limit on deductible contributions relative to Chris would be $20,000 ($80,000 x 25%). The $80,000 represents $40,000 in compensation from Corporation X and $40,000 from Corporation Y. You cannot consider the salary from Corporation Z because it does not provide a plan.
Tommy (age 51) and Susan (age 51) Baldwin have been saving for retirement through their 25 years of marriage. They have no children and plan to retire in 4 years. They have provided you with the following information for the current tax year. Tommy's W-2 income: $200,000 Susan's W-2 income: $175,000 Tommy's IRA contribution: $7,000 Susan's IRA contribution: $7,000 Dividends (qualified & non-qualified): $50,000 Short and long-term gains: $75,000 Presuming they file jointly, what is the amount of the Baldwin's AGI? A) Without knowing the breakdown of the dividends ( qualified vs. non-qualified) and capital gains (short vs. long) there is no solution. B) $486,000 C) $500.000 D) $361,000
B) $486,000 Total W-2 income: $375,000 Dividends: $50,000 Capital Gains: $75,000 Less total IRA Contribution -$14,000 =$486,000 There is no indication that either Tommy or Susan is an active participant in a workplace retirement plan. Thus, their AGI does not cause their IRA contributions to phase out for deductibility. Although dividends and capital gains have lower tax rates than most other sources of income they are part of AGI.
In 1990, Adam Quincy purchased universal life insurance policy with a single premium of $100,000. In 2005 the policy's cash value was $170,000. Adam took a $50,000 loan against the policy. While he paid the annual interest each year, Adam never repaid the loan. This year he died at age 60. If the face value of the universal life (option A level) policy is $1,000,000 and the cash value is $200,000, what amount will his beneficiary be paid? A) $900,000 B) $950,000 C) $1,000,000 D) $1,050,000$1,150,000 less a 10% penalty on $50,000
B) $950,000 Because this is an option A policy that provides a level death benefit, the amount in the cash value account is immaterial. The insurance company pays only the stated death benefit. The death benefit ($1,000,000) less the existing loan. He paid the penalty when he took out the loan.
Given the following data of ABC stock and the return on U.S. treasury securities for the past four years, what is the Sharpe measure of performance for ABC stock? Year 1: ABC Stock: 10% Treasury Returns: 2% Year 2: ABC Stock: 12% Treasury Returns: 4% Year 3: ABC Stock: 18% Treasury Returns: 1% Year 4: ABC Stock: -20% Treasury Returns: 3% Hint: You must first calculate the x42 mean and standard deviation. Then you have to use the Sharp formula. Difficult, but tested. A) .1298 B) .1471 C) .1875 D) .2941
B) .1471
With the uncertainty of investments, which of the following married couples would you recommend purchase LTC insurance? A) Mr. and Mrs. Able, ages 52 and 51, respectively have a combined net worth of $600,000. Mrs. Able suffers from severe rheumatoid arthritis and Mr. Able from end stage emphysema B) .Mr. and Mrs Banker, ages 65 and 60, respectively have a combined net worth of $1,000,000. C) Mr. and Mrs. Carefree, ages 59 and 57, respectively have a combined net worth of $5,000,000. D) Mr. and Mrs. Doubtful, ages 41 and 39, respectively have a combined net worth of $500,000.
B) .Mr. and Mrs Banker, ages 65 and 60, respectively have a combined net worth of $1,000,000. The Bankers need to acquire the insurance while they are insurable. The Ables appear not to be insurable. The Carefrees can probably self-insure. At this point the Doubtfuls are too young to buy long-term care insurance.
What is the arithmetic mean return of the following investment? Year 1: +20 Year 2: +15 Year 3: -10 Year 4: -15 A) 1.36 B) 2.5 C) 10 D) 15
B) 2.5 The arithmetic rate of return is a simple average of annual returns. (20 + 15) - (10 + 15) / 4 = 2.5
Doc Holiday owns a dude ranch that operates as an S corporation. He employs about 5-6 full-time and 6-7 part-time employees. His business includes a bed-and-breakfast operation. He operates Holiday, Inc. as an S corporation. One employee, Jesse, not only breaks in the wild horses but is a wiz at picking the right horse for each dude ranch guest. He cannot afford to lose Jesse as an employee. Other than health insurance Doc provides no other benefits for employees. Doc only takes $2,000 a month as salary and the profit comes out to him as K-1 income. He wants a recommendation from you as to what kind of benefit should he offer to Jesse. What would you suggest? A) Establish a non-qualified deferred compensation plan for Jesse using a variable annuity. B) Establish a 162 "double bonus" arrangement using a fixed annuity or life insurance. C) Establish a SEP presuming that the 3 out of 5 years of service eligibility rule would eliminate most of the employees. D) Establish a nonqualified deferred compensation arrangement that would operate through secular trust.
B) Establish a 162 "double bonus" arrangement using a fixed annuity or life insurance. With the 162 double bonus arrangement, the first bonus would go into the annuity/life insurance and the second would pay Jesse's phantom tax. Due to its conduit taxation, an S corporation cannot offer a non-qualified deferred compensation plan. Since we know little about how long other employees have worked for Doc, it is uncertain as to whether the SEP would eliminate most of the full and part-time employees. The deferred compensation arrangement through a secular trust would create undesirable phantom income for Jesse.
Bob Long is a junior executive with Advanced Knowledge Inc. He is granted ISOs to buy 10,000 shares of his employer's stock at $10 per share. Bob exercised the options when the FMV of the stock was $20 per share. The exercise caused him to pay $28,000 of AMT. What will be Bob's basis in the stock when he sells the shares? A) $0 B) $100,000 C) $128,000 D) $200,000
C) $128,000 Bob had an out of pocket cost of $10 per share (the grant price). He also paid $2.80 per share in AMT. The AMT paid increases his basis. Thus, his basis becomes $12.80 per share or $128,000.
Your uncle, Jim, a cash-method taxpayer, died and left you a $1,000 series EE bond. He bought the bond for $500 and had not chosen to report the increase in value each year. As of the date of Uncle Jim's death, interest of $94 had accrued on the bond and the value of $594 had been included in your uncle's estate. Uncle Jim's personal representative chose to include the interest earned on the bond in your uncle's final income tax return. if you cash in the bond at maturity, how much income will you have to report on your own income tax return? A) $0 B) $94 C) $406 D) $594 E) $1,000
C) $406 You would report the difference ($1,000 - $594) at the maturity of the EE bond.
Tom turned 72 in January of the current year. This year, he received the minimum RMD from his IRA. He took the distribution on January 1. Before the distribution, the value of the IRA was $1,000,000. If the remaining assets grow at 6% during the current year, what is the minimum RMD that Tom will be required to receive next year? Age of Participant :: Disribution Period 72 :: 25.6 73 :: 24.7 74 :: 23.8 75 :: 22.9 A) $39,063 B) $40,486 C) $41,239 D) $42,915
C) $41,239 Tom is 72. Use age 72 which produces a divisor of 25.6 $1,000,000 / 25.6 = $39,062.50 $1,000,000 - $39,062.50 = $960,937.50 $960,937.50 x 1.06 = $1,018,593.75 The Second Year: $1,018,593.75 / 24.7 = $41,238.61
Bill works for two related employers. Each employer provides a 401(k) plan. With his compensation from his night job is $50,000 and his compensation from his day job is $60,000. If the plan for each company allows a 6% deferral and provides a 3% match, how much can Bill defer in the current tax year? A) $3,000 B) $3,300 C) $6,600 D) $13,200 E) $20,500
C) $6,600 6% of $110,000 An employer plan document can put a limit on the Elective deferral. The plan limits elective deferrals to 6% of Bill's compensation. Thus, $20,500 is not a supportable answer because of the plan limitation of 6%.
A BBB rated bond with a 20-year maturity can be called in 10 years. The bond has a 5% coupon when comparable bonds are paying 5.5%. It is currently selling for $990. If the bond can be called for $1,050, what is the duration of the bond based on its callability? A) 5.62 B) 7.24 C) 8.07 D) 10 E) 12.85
C) 8.07 To estimate the duration on this callable bond, find the years to call (10) then pick the next lowest number. For exam purposes this is more efficient than calculating duration algebraically. Answer E is the duration based on maturity rather than on callability.
Joan Lundy and Judy Baker own a successful business together. They want to create a buy-sell arrangement funded by life insurance. They are both in their early fifties and in good health. They want the arrangement to cover death, retirement, or one of them leaving the business. Which of the arrangements and policies make the most sense? A) An entity purchase buy-sell agreement funded with whole life insurance policies B) An entity purchase buy-sell agreement funded with universal life policies featuring Option A C) A cross-purchase buy-sell agreement funded with whole life insurance policies D) A cross-purchase buy -sell agreement funded with universal life policies featuring Option A E) A handshake agreement that is funded with 20-year level term insurance.
C) A cross-purchase buy-sell agreement funded with whole life insurance policies The only way the surviving owner will receive a step-up in basis is to implement the cross-purchase buy-sell arrangement. Whole life insurance has a level premium which will build the cash value for one owner to the buy stock of the (other) retiring or departing owner. Joan and Judy are both in good health. They indicate no immediate plans to retire or leave the business, so the policy may have to last until they reach age 80 or 90).
Jack married Carla in 2016. It is a second marriage for both spouses. Carla has limited assets but is not poor. Jack did not enter into a pre-nuptial agreement with Carla, but they have agreed to basic estate planning goals including: - Provide income for her through her remaining lifetime - Leave the principal balances of his assets /accounts to his children Jack is worth approximately $20 million of which $12 million is in an IRA rollover account. How would you advise Jack to handle his IRA in his estate plan? A) The IRA should be allocated entirely to a QTIP trust. B) The IRA should be allocated entirely to a by-pass (B) trust. C) An amount from the IRA equal to the current estate exemption amount should be allocated to a by-pass (B) trust with the remainder to a QTIP trust. D) Leave the IRA outright to Carla naming his children as the contingent beneficiaries.
C) An amount from the IRA equal to the current estate exemption amount should be allocated to a by-pass (B) trust with the remainder to a QTIP trust. It makes sense that up to the exemption equivalent amount is allocated to the B trust. Carla may receive the IRA distributions through the trust. Amounts in the IRA that exceed the exemption equivalent, may then be allocated to a QTIP (C) trust. If $12 million from Jack's IRA is allocated to a by-pass trust, that trust will be overfunded. Allocating the entire IRA to the QTIP misses the opportunity to maximize the exemption equivalent. If Carla receives the IRA outright, she can transfer it to her own name and change the beneficiary.
What are the exceptions to the CFP Board Code of Ethics (a certificant shall not borrow money from a client)? I. The client is a member of the certificant's immediate family. II. The client is an institution in the business of lending money and the borrowing is unrelated to the professional services performed by the certificant. A) I B) II C) Both I and II D) Neither I nor II
C) Both I and II While the general rule is that the CFP® certificant should not borrow from clients, exceptions are available for loans between immediate family members and lending institutions.
Mr. and Mrs. Couch have been referred to you. You find out that another financial planner told them that they could retire at age 60. Now at age 55 Mr. Couch realizes that the investment advisor did not get them out of the market in the 2008 decline. Then in 2009 until now the advisor tried make up for the negative year with aggressive decisions that produced both positive and negative returns for specific years. After reviewing the Couch's data, it is clear to you that retirement at age 60 is no longer a realistic goal. As a CFP® professional, how should you proceed? A) Tell Mr. Couch to hire an attorney and go to arbitration against the prior advisor B) Tell the Couches that you will construct a budget to help them save more money every month C) Discuss various financial alternatives that could be acceptable to increase returns and savings to figure out the best course of action. D) Suggest that Mr. Couch extend his intended retirement date and ask for the client's thoughts.
C) Discuss various financial alternatives that could be acceptable to increase returns and savings to figure out the best course of action. A CFP® professional should explore all possible alternatives in order to help the client identify and achieve reasonable retirement objectives. This analysis might include a budget, comparing alternative investment vehicles, extending the retirement date and more. Pursuing arbitration is a long shot in increasing the Couch's retirement income.
Your client Clara Bow, age 80, has enjoyed a full life. Oscar, her husband of 60 years recently died. Because he had several serious health issues, his death it was not unexpected. During the last years of Oscar's life, they traveled extensively and stayed at 5-star hotels. Oscar was an inventor. His patent royalties produce more income than she can spend. Clara's charitable wishes focus on the church she has attended throughout her lifetime. She was both baptized and married there. Clara's family includes two married children plus 4 sets of married grandchildren. Oscar did extensive investing with you and after he died you continued to advise Clara regarding investments and financial matters generally. Before he died, Oscar told you that many of the family members relied on gifts and loans from their parents. Oscar had been frustrated that his children and grandchildren had not been more self-reliant. Now Clara wants advice from you as to gifting to family members. What would you recommend to Clara? A) Limited gifting to the excess money she is not spending. B) Clearly understand the annual gift tax exclusion limits, the overall limit on tax-free lifetime giving and how the Form 709 works. C) Gather more data including a current and detailed Statement of Cash Flows. Design and implement uniform gifting allocation to all family members. D) Explain to her the $12,060,000 gift tax exemption and how it is factored into transfer tax on Form 706.
C) Gather more data including a current and detailed Statement of Cash Flows. Design and implement uniform gifting allocation to all family members. A gifting strategy should be preceeded by careful cash flow analysis. Clara may have health problems, where the excess cash flow would be needed. There is no indication of Clara's net worth or how long the patent rights will continue. Given her age, Clara may need some of her income for health related and other reasons.
Helen is age 57. Over the years she has fulfilled her own 40-credit/quarter requirements to achieve fully insured status for Social Security benefits. Her husband, Sam, age 59, has also achieved fully insured status. He is currently collecting Social Security disability benefits .Helen had to retire. Her son is unable to work due to physical problems. He is deemed disabled by Social Security since childhood. Which of the following is true? A) Helen would not be eligible for Social Security benefits because her husband is only 59 and currently receiving Social Security benefits. B) 85% of her son's Social Security benefits will be subject to federal income tax. C) Helen is eligible to receive Social Security benefits because her son is disabled. D) Helen cannot receive Social Security benefits until she is 62.
C) Helen is eligible to receive Social Security benefits because her son is disabled. Helen has a child "in care". "In care" means that the mother performs personal services for child under age 16 or a disabled child. She is also the spouse of a disabled uninsured worker. Helen and her son are entitled to benefits. The information presented does not indicate whether her benefits will be tax-free or subject to federal income tax.
Which of the following is true about Coverdell ESAs? I. It operates as a trust or custodial account created for the purpose of paying the qualified educational expenses of the designated beneficiary of the account. II. If the annual exclusion is used to fund a 529 plan, then the deposit of $2,000 more into the ESA is a gift of a future interest. III. Qualified expenses include tuition at a religious school for grades K-12. IV. The beneficiary of the ESA must be under age 18 in those years when the contributions are made into the account. A) All of the Above B) I, II, III C) I, III, IV D) II, III E) II,IV
C) I, III, IV Statement II is incorrect because the $2,000 is a gift of a present interest rather then a gift of a future interest. The other statements are accurate.
Alice received a substantial inheritance from her aunt. Alice, who is age 50 and single, has decided to retire and travel extensively. She wants to invest the inheritance prudently so as to provide her with income with little risk. In addition to supplementing her income, she wants to take distributions from her IRA incurring as little income tax or penalty as is possible. What would you recommend to Alice? A) Invest the IRA in a qualified immediate annuity. Then start taking distributions up to basis which would be entirely tax free. B) Sign up for an around-the-world education course and take distributions tax free based on tuition expenses. C) Take substantial equal payments on a carved-out portion of the IRA based on Alice's income needs. D) Make a $100,000 gift to a favorite public charity from the IRA then claim the charitable income tax deduction.
C) Take substantial equal payments on a carved-out portion of the IRA based on Alice's income needs. Distributions from an IRA are generally subject to income tax at ordinary rates. Alice can avoid the 10% penalty by taking substantial equal payments on the carved-out portion IRA. The $100,000 gift does not create a charitable income tax deduction. It enables the account holder to avoid taking taxable RMDs. Alice would not be able to elect the charitable IRA rollover until she is age 70½ (not 72) or older.
ABC Corporation has purchased individual disability policies for its key employees. ABC pays the premium under a salary continuation agreement. It deducts the premiums as ordinary business expense. If one of the insured key employees becomes disabled and collects disability benefits, are the benefits taxable to the employee? A) The benefits are tax-free income. C) The benefits represent taxable income. C) Disability benefits under an employee salary continuation agreement are a tax-free benefit. D) Because ABC deducted the premium, the benefits are tax-free to the employee.
C) The benefits represent taxable income. Under salary continuation agreements the benefits are usually taxable to the employee. ABC paid and deducted the premium. However, the key employee was never charged. This is a group plan.
Which of the following statements is true about a medical expense flexible spending account (FSA)? A) If there is money left in the account at the end of the year, it can be used for dependent care. B) An FSA can discriminate in favor of HCEs if less than 70% of the employees participate in the plan. C) The employee must elect in writing the amount of the salary reduction in the calendar year prior to the year in which that reduction is to take effect. D) Funds that are forfeited when an employee fails to withdraw them during the allotted time revert directly to the employer for general operations.
C) The employee must elect in writing the amount of the salary reduction in the calendar year prior to the year in which that reduction is to take effect. A participant in an FSA plan must elect in writing the amount of the salary reduction in the calendar year prior to the year in which it that reduction is to take effect. Unused funds in medical expense FSAs cannot be used for dependent care. An FSA must not discriminate in favor of HCEs. However, there is no 70% participation testing. Forfeited funds in an FSA may not go directly to the employee for general operations but they can be used to defray future administrative expenses of the FSA itself.
Rosemary wants to help her adult son. She pays a part of the son's living expenses, occasional mortgage payments, and gives him cash every month. Has Rosemary made taxable gifts? A) No, because her son is an immediate family member B) No, because Rosemary is providing basic support to her son (HEMA) C) Yes, if the amount that Rosemary gives to her son exceeds the applicable annual gift-tax exclusion amount. D) Yes, because the gift is a gift of a present interest.
C) Yes, if the amount that Rosemary gives to her son exceeds the applicable annual gift-tax exclusion amount. Payments made to or on behalf of adult children are taxable gifts to the extent that they exceed the annual exclusion amount.
In a homeowner policy such as forms HO-3 or HO-5 is earth movement excluded from coverage? A) Yes, but only in a HO-3 B) Yes, but only in a HO-5 C) Yes, in both a HO-3 and a HO-5 D) No, not in a HO-3 E) No, not in a HO-5
C) Yes, in both a HO-3 and a HO-5 Under the HO forms, earth movement which includes earthquake, is an excluded peril.
It is unusual that referred clients are not cooperative, but Tess is quite difficult. She glares after every recommendation you make. She makes comments like, "You're just trying to make money off me, because I am a woman". You are very uncomfortable. What should you do? A) You can suggest alternative strategies to Tess B) You can suggest Tess talks to another planner in the office. C) You should terminate the relationship in a polite manner. D) Continue working with Tess because she was referred to you by someone you respect.
C) You should terminate the relationship in a polite manner. Nothing in the CFP® Code of Ethics requires you to continue serving a client who is impossible to please or who is rude.
Sarah Benson died leaving her son Tom 1,000 shares of common stock in Company X with an FMV of $250,000 (basis $100,000). Since Sarah's death the stock has paid dividends to Tom of $10,000. Years ago, Tom bought stock in Company Z for $10,000 and then continued to buy $10,000 of stock in Company Z for 6 consecutive years. Tom's position in Stock Z is now worth $100,000. Tom just read that Company Z is merging with Company X. Following the merger, what will be Tom's basis in stock X? A) $160,000 B) $170,000 C) $310,000 D) $320,000 E) $350,000
D) $320,000 When Sarah Benson died her shares of stock X enjoyed a step-up in basis to $250,000. Her son Tom acquired Company X stock over 7 years (initial plus 6 more) $70,000. His basis is $250,000 + 70,000 = $320,000. The dividends were paid to him rather than being reinvested. Dividends would not increase basis when they are paid out rather than reinvested.
Twenty-five years ago, Mr. Montain purchased an annuity for $600,000. He annuitized the contract 20 years ago when it was worth $800,000. The contract factored a 20-year single life expectancy paying him $5,000 per month. How much of the monthly payment will be included in Mr. Montain's gross income this year (21st year)? A) $1,650 B) $2,500 C) $3,350 D) $5,000
D) $5,000 After 20 years, Mr. Mountain's entire payment is taxable. He has already recovered his basis in full.
Mr. and Mrs. Pitchford started a business many years ago. Both were semi-retired when Mr. Pitchford died at age 72. Mrs. Pitchford, age 70, has been approached by an interested buyer. She received the following offers. A) $5.0 million in cash B) $2.5 million plus $300,000 starting the second year for 10 years C) $1.0 million plus $500,000 starting the second year for 10 years D) $750,000 per year for 10 years
D) $750,000 per year for 10 years The only way to compare answers B, C, and D to A is to use an assumed interest rate and calculate PV. Answer A is the key. Answer A is the PV. The beginning of the 2nd year is the same as the end of the first year. B: $300,000 PMT 10N 6i (assumption) = $2,200,026 PV $2,500,000 + $2,200,026= $4,700,026 PV C: $500,000 PMT 10N 6i =$3,680,043 PV $1,000,000 + 3,680,043 = $4,680,043 PV D: $750,000 PMT 10N 6i =$5,520,065 PV With answer A she will have to pay taxes on $5.0 million. With answer D income and taxes are spread over 10 years. Answer D is the best choice. This is the subjectiveness of the exam. If a client walked into your office and wanted a projection into the future, what would you use?
Mr. and Mrs. Delmar, ages 58 and 56 respectively, plan to retire in 7 years. What is the most appropriate estimate of the time horizon for their retirement investment portfolio? A) 7 years B) To age 65 C) To age 72 D) 20+ years
D) 20+ years The question is addressing years in retirement. Mrs. Delmar probably has at least a 20-year life expectancy.
The privilege of gift splitting only applies when: A) A gift is made by a man and woman living together. B) A gift is made by a woman (single) before she is married later that same calendar year. C) A gift is made after the spouses are legally divorced. D) A gift is made before one spouse dies later in that calendar year.
D) A gift is made before one spouse dies later in that calendar year. Only married couples may split gifts. If one spouse dies in the year of the gift, the split is generally allowed if the gift was made before the decedent actually died.
Jane Wilson and Gloria Vanderbilt established a corporation many years ago. Unfortunately, Gloria has been battling metastatic breast cancer and has a shortened life expectancy. Gloria is working part-time and spending as much time traveling with family members as possible. Jane is seriously concerned because she does not want Gloria's husband (who made a pass at her) to become an owner. Jane realizes that purchasing life insurance on Gloria to fund for a buy-out or buy sell agreement is now impossible. What kind of arrangement would you recommend? A) Establish a stock redemption buy sell agreement using future corporate profits to buy Gloria's interest over 10 years. B) Establish a stock redemption buy sell agreement with Jane agreeing to purchasing Gloria's stock in installments over 10 years. C) Establish a cross-purchase buy sell agreement with the corporation using future profits to buy Gloria's interest over 10 years. D) Establish a cross-purchase buy sell agreement with Jane agreeing to purchase the stock on an installment basis over 10 years.
D) Establish a cross-purchase buy sell agreement with Jane agreeing to purchase the stock on an installment basis over 10 years. The cross-purchase arrangement enables Jane to enjoy stepped up basis. Her basis would not step up under the entity/stock redemption arrangement. . In Answer B, Jane does not buy the stock, the corporation buys the stock. In Answer C, the corporation does not buy the stock, Jane buys the stock.
Mrs. Adams, widow, has a HO-3 policy with a HO-15 endorsement. She owns the following property: -Her wedding ring recently appraised for $2,000 -Her late husband's gold coins currently valued at $2,000 -Her fur coat valued at $3,000 For which of the above properties, if any, should Mrs. Adams add an endorsement to her properties and for what amount? A) I, II B) I, II, III C) III D) IV
D) IV Because a HO-15 endorsement provides increased limits on property and higher sublimits on jewelry and furs, the items shown would be covered without additional endorsement. For example, under a HO 15 endorsement coverage for collectible coins carries a $5,000 limit.
Cindy Luck is age 50 and single. Twenty years ago, she bought a universal life insurance policy. Cindy read in a consumer magazine that the cost of the insurance is higher, and the interest paid on the policy is lower than for other similar policies. Cindy wants to exchange the policy into a different type of policy with another life insurance carrier. Cindy feels she still needs life insurance to cover her final expenses, debts as well as money for her 75-year-old mother. She asked you what options she should consider. How would you respond to Cindy? A) Exchange your current policy for a 20-year term policy with the same carrier to cover her mother's life even if her mother lives to age 95. B) Exchange the current policy for a variable universal life insurance policy with another carrier. This Section 1031 exchange would be tax free. C) Exchange the current policy for a whole life insurance policy with another carrier. This Section 1035 exchange would be tax free. D) Surrender the current policy electing the paid-up non-forfeiture option on the Then buy a 20-year term life insurance policy with another carrier.
D) Surrender the current policy electing the paid-up non-forfeiture option on the Then buy a 20-year term life insurance policy with another carrier. It makes sense that Cindy exchanges the current policy for a whole life insurance policy with another carrier. This Section 1035 exchange would be tax free. Because the new policy has no cash value the tax-free exchange will not be available under Section 1035. A Section 1031 exchange is only for property exchanges rather than for exchanges of insurance contracts. Answer D has Cindy buying a term policy.
Terry owns a vacant lot next to the church he attends. He permits worshipers to park on the lot while they attend church services. The church wants to expand and wants to purchase Terry's land. A certified appraiser reported that the land has a FMV of $1,000,000. Terry is willing to sell the land for $750,000 to the church and claim a $250,000 charitable income-tax deduction. If the basis of the land is $200,000, how much gain will Terry be required to report on the sale of the land? A) $50,000 B) $250,000 C) $500,000 D) $550,000 E) $600,000
E) $600,000 $750,000 proceeds/$1,000,000 FMV x $200,000 basis = $150,000 The $750,000 in sales proceeds less $150,000 adjusted basis equals $600,000However, under a bargain sale to charity the basis is adjusted because the difference between the FMV of the property ($250,000) represents a charitable gift rather than a sale.
Which of the following retirement plans cannot offer plan loans to participants? A) A 401(k) plan with no employer matching contributions B) A 403(b) plan with no employer matching contributions C) A stock bonus plan D) A defined-benefits pension plan E) A SEP
E) A SEP A SEP is an employer funded IRA. IRAs cannot provide plan loans. Loans from stock bonus plans are rare but permissible. Defined-benefits plans may offer loan provisions.
Edward, who is married and age 50 has the following financial resources: -$500,000 of diversified mutual funds -A defined benefit pension plan guaranteeing him 50% of his current $120,000 salary. The company is behind on funding the plan. -A non-qualified unfunded deferred compensation plan. It is informally funded using annuity contracts. Given his situation, what type of risk affects Edward the most? A) Purchasing power risk B) Reinvestment rate risk C) Interest rate risk D) Market risk E) Business risk
E) Business risk If the company that employs Edward fails, the deferred compensation plan is subject to the company's creditors. The DB plan would be insured by the PBGC, but Edwin will only be covered for the money that is now in the plan. That the company is behind on its pension funding indicates a shaky future. His mutual funds are diversified.
Which of the following income items are generally not included in gross income? A) Awards B) Back pay C) Bargain purchases of goods from the employer to the extent that the discount exceeds the employer's gross profit percentage D) Death benefits, employer paid E) Incentive stock options
E) Incentive stock options ISOs create AMT income, rather than gross income for Form 1040 purposes . Employer-provided death benefits are not life insurance benefits. The employer will pay and deduct the expense. The other items would be included in a taxpayer's gross income.
Joanne, age 27 is a young business owner. She wants to establish a profit-sharing plan for his employees. The ages of the employees ages range from 22 to 47. The business will make the contribution. The employees will be able to direct their accounts into one or more of four allocations. Which four accounts would you select for Joanne? A) Money market fund, intermediate-term corporate bond fund, long-term corporate bond fund, and STRIPs B) GICs, long-term corporate bond fund, international growth fund, and emerging market fund C) Money market fund, intermediate-term corporate bond fund, international growth fund S&P 500, and emerging market fund D) Money market fund, REITs, long-term corporate bond fund, S&P 500 and a precious metal fund
JoAnne is young and given that she is a business owner would not be particularly risk averse. The mix of the money market fund, intermediate term corporate bond fund, international growth fund, and S&P 500 fund is a suitable choice. Answer A choices are all debt funds. A GIC is a contract with an insurance company with principal guarantee but low return. Answer D has two sector funds.
