CFP Exam 2020

Covered Perils: Open

"All risk" - the insurer pays for all damage EXCEPT specific exclusions

2503(b) trust

"Bad boy trust" - requires that income be distributed to child annually. Doesn't require access at age 21, parents can hold onto principal indefinitely.

Grantor Trust (5 examples)

"Tainted" or "Defective" Trust where the grantor holds too much control and therefore pays taxes on the trust income. 1. If the trust income is paid to grantor or spouse. 2. If trust income discharges legal obligation or legal support of grantor 3. If the power to control enjoyment is held by grantor or spouse. 4. If the trust income pays life insurance premiums on grantor or spouse. 5. If a reversionary interest of >5% of the original value is retained by the grantor.

Earned income deduction for a child is the greater of:

$1,100 unearned income OR $350 + earned income (the deduction caps at the normal amount of $12,400)

Is there a phaseout AGI for educational bonds? Coverdell? 529?

$123,550 for EE bonds, $190k for Coverdells, no limit for 529s

Community property example: a couple has $1M in investments, $500k basis. If one dies, what is the new basis?

$1M. Appreciated community property gets a full step up in basis.

Social Security lump sum death benefit

$255 to a spouse living with the deceased or a dependent child (one, not both)

How much can you deduct in rental losses? What's the AGI phaseout?

$25k cap, $100k -$150k AGI phaseout, the $25k is reduced by .50 for every dollar you earn above $100k so that at $150k there is no deduction allowed

What is the salary cap for employer matching for a 401k? 403b? SIMPLE IRA? SIMPLE 401k?

$285,000 for 401k, 403b, SIMPLE 401k. NO SALARY CAP FOR A SIMPLE IRA!!!

Qualified plan annual compensation limit

$285k - used to calculate the amount deductible from employer when assessing total payroll (contributions must be <=25% of payroll)

A widow inherits stock with a date of death FMV of $70,000. She and her husband held the stock jointly before his death (basis $20,000). She sells it nine months later for $80,000. What is the amount of capital gain and is it STCG or LTCG?

$35,000 LTCG. His half of basis is stepped up. When you inherit assets, they will always be considered long term, no matter how long you hold them for.

What is the catchup for a SIMPLE?

$3k catchup for age 50+

What is the intrinsic value of a call option if the exercise price is $40 and the market price is $45? What about if the exercise price is $45 and the market price is $40? If in the first scenario, the call option is priced at $7, what does that mean?

$5 - the option is in the money $0 - value can't be negative The $7 option has a time premium of $2 above the intrinsic value.

What is the credit for someone older than 17 who is still a dependent?

$500 dependent credit if they make less than $4300

Qualified plan defined contribution limits

$57k or 100% of compensation, whichever is less

If a simple trust gets $10k in capital gains and $5k in dividends, how much must it pay out?

$5k - all of the income. The capital gain is not income and gets added to the corpus.

What is the limit for a dependent FSA?

$5k/year

What is the catchup for a SARSEP?

$6.5k catchup for age 50+

Stock risk premium

(Market Return-Risk free Return)*beta

Child Tax Credit - how much, how much is refundable, phaseout?

- $2k tax credit per child <17 years old (bio kid, stepchild, foster) - $1400 of that is refundable - MAGI phaseout $200k/$400k

Childcare Credit - how much, limit?

- 20% of expenses - Limit $3k expenses for one dependent, $6k for 2+ So max credit per family would be $600 or $1200

How long do you have to select and close on a 1031 property?

- 45 days from selling to select a specific property - 180 days from selling to closing

Rollover rules (5)

- 60 day deadline for IRA rollovers; can do once per 12 month period - 20% mandatory withholding if not directly rolled over - RMDs can't be rolled over - Hardship distributions can't be rolled over - 457s must roll into another 457

Why would you use a 2503b vs a 2503c vs a Crummey trust? Which allow the $15k exclusion? Which gets the money out of the donor's estate?

- A 2503b is used if you want to control the assets past age 21, but it doesn't allow the $15k exclusion (gift of future interest). - A 2503c is more flexible (allows beneficiary to access principal) and allows the $15k exclusion (gift of future interest). - The Crummey trust is like the 2503b in that it can be extended past age 21, and like the 2503c in that it allows the $15k exclusion (is a gift of present interest). However, unlike the 2503b and 2503c, a Crummey trust can accumulate income without having to distribute it. And it can have multiple beneficiaries. The main disadvantage is that it counts as a kid asset for financial aid, as well as the costs and complications of setup and notification requirements. All three will get the $$ out of the donor's estate, as long as the donor/donor's spouse is not the trustee. You can convert a 2503c to a Crummey at age 21 if desired.

10% Tax Penalty Exceptions for IRAs (including SEPs, SIMPLEs, SARSEPs) (8)

- Age 59.5 - Death - Disability - SEPP if you leave work - Qualified higher education expenses - First time homebuyers (up to $10k) - Medical expenses >7.5% AGI - Health insurance premiums when unemployed Note: NO age 55+ exception when unemployed

10% Tax Penalty Exceptions for Qualified Plans (9)

- Age 59.5 - Disability - Death - Divorce (QRDO) - SEPP if you leave work - Age 55+ if you leave work - Medical expenses >7.5% AGI - Beneficiary distributions for inherited plans - Up to $5k for birth/adoption costs

Who is covered under Social Security? (2)

- Anyone who has 40 credit quarters with substantial income - Members of the armed services

Profit Sharing Plan Keys (6)

- Appropriate when employees are young and well paid - Used to motivate employees to make company profitable - Flexible contributions (must be substantial and recurring) - 401k provisions (FICA, hardship provisions) - SIMPLE 401k exempt from creditors - Up to 25% employer deduction

Who does not have to register with the SEC as an RIA if their advice is incidental? (6)

- Bankers - Accountants - Lawyers - Teachers - advisors whose only clients are insurance companies - a family office

Kinds of FSAs (2)

- Dependent care FSAs - Qualified medical expenses FSAs (vision/dental)

What annual additions to a 401k make you an active participant (subject to the active IRA deduction phaseout)? (3)

- Elective deferrals - Employer contributions - Reallocated forfeitures

ESOP Keys (5)

- Employee stock ownership plan to broaden ownership - MUST invest primarily in company stock - Creates a market for company stock and provides liquidity for shareholders - Used in business continuity planning - Can be used to borrow $ to finance the company

Match rules for a SIMPLE (2)

- Employees defer up to $13.5k - Employers must have a match: 100% contribution for 1-3% salary, OR 2% contribution for everyone, even those not contributing.

Misc Expenses that are not deductible past 2018? (5)

- Entertainment expenses (except company picnics, 50% of employee travel meals) - Investment management fee - Tax prep fee - Safety deposit box - Job educational costs

Securities Investors Protection Act of 1970

- Established the SIPC to protect investors for losses resulting from brokerage firm failures. - Does not protect investors from incompetence or bad investment decisions

Cons of Whole Life Insurance (2)

- Expensive - Inflexible [They make you pay dearly, and then you can't get out without paying even more dearly.]

Who is not covered under Social Security? (7)

- Federal employees since before 1984 - Some work abroad - Student workers - RR workers - Minors employed by their parents - Ministers and other religious exemptions - Members of tribal councils

Money Purchase Pension Plan Keys (3)

- Fixed contributions by employer - Benefits young, highly paid employees. - Retains key employees

Life insurance settlement option: Interest only

- Flexible if you're not sure what to do - Insurer holds onto the $ and pays out interest while you decide on another option

When would you need a Rabbi trust? (3)

- If ownership might change before deferred compensation was paid (takeover/acquisition) - If new management might be hostile to the key employee - If litigation to enforce compensation payout was too costly to be practical.

What could make a policy become a MEC? (2)

- Increase DB by more than $150k - Increase DB by *any amount* if they require proof of insurability

What investment income is taxed as ordinary income? (5)

- Interest income - STCG - Ordinary dividends - LTCG if you opt out of reduced rates - dividends if you opt out of reduced rates

Qualified plan loan rules (4)

- Must be <50% of balance or $50k, but can do up to $10k regardless of balance - Pay back loan <=5years unless buying a house or taking a <1yr leave of absence - Must pay in level installments, at least quarterly. - If you miss a payment, the WHOLE BALANCE DUE is a taxable distribution (plus the 10% penalty for early distribution if you're <59.5)

What are eligibility requirements for Social Security Disability? (3)

- Must be insured and under age 65 - Must be terminally ill, have been disabled for 12 months, or expect to be disabled for 12 months - Filed the paperwork and did the 5 month waiting period

What must apply for a patient to get Medicare skilled nursing? (5)

- Must require skilled nursing - Must be in hospital for at least 3 days - Must be admitted within 30 days of being in hospital - For the same condition that requires skilled nursing - Must have a doctor's note

Dependent Life Insurance

- Not included in $50k exclusion for taxability - Tax free up to $2000

What is covered under Medicare Part B? (8)

- Outpatient care - Unlimited home health visits - Doctor's services including house calls - Free preventative care - Non-self administered drugs - Limited mental health - Diagnostic tests - Blood transfusions (after first 3 pints)

Life insurance settlement option: Installments (2)

- Over a fixed period (up to 30 years), or - In a fixed amount for however long it lasts This is the "spendthrift" option - can't be touched by creditors.

What is excluded under Medicare Part B? (5)

- Prescription drugs - Immunizations (except 1 free flu shot/year) - Dental - Glasses - Hearing aids

What assets are not counted but still affect financial aid? (2)

- Pretax contributions to a retirement account - Distributions from retirement accounts

What are the AMT preference items you add back in last? (3)

- Private munis - %age of depletion (not cost depletion!) of oil/gas interests, intangible drilling rights - Depreciation (ACRS/MACRS, not straight line depreciation)

Qualified plan rule: Benefits can't be touched by creditors EXCEPT: (2)

- QRDO (divorce order) - if the plan doesn't allow for an immediate cash transfer, then the funds will be segregated out into a subtrust until the transfer is possible - to collect federal taxes owed

Gifts exempt from the annual exclusion limit (5)

- Qualified direct tuition payments - Qualified direct medical payments - To a spouse (not a terminable interest) - To a qualified charity - To a political organization

2 Types of Passive Activity

- Real estate - Businesses (LPs) where you don't materially participate

How can retirement plan forfeitures be used? (4)

- Reduce future employer contributions - Pay reasonable plan expenses - Allocate among participants as additional contributions - Restore previously forfeited accounts

What kinds of Social Security are there?

- Retirement - Survivor - Disability

What is considered investment income? (6)

- Royalties - Kid's investment income if included on your tax return - Ordinary dividends - Qualified dividends if elected to be taxed as ordinary income - STCG - LTCG if elected to be taxed as ordinary income

What are non-AMT deductible items you add back in? (3)

- SALT (state and local tax) - ISOs - Property tax

What programs are covered by the Social Security Act? (4)

- Social Security - Medicare - Unemployment - SSI: Supplemental Security Income

Social Security Dependent Benefits eligibility requirements (3)

- Unmarried and - <19 years old and full time student (not college), or - disabled (disability must have started before age 22)

Key Employee (3)

- greater than 5% owner OR - officer and makes >$185k OR - greater than 1% owner and makes >$150k

What is excluded from auto liability insurance?

- intentional "accidents" - anyone other than family who uses the car without permission

457 Plan rule

- limited to HCEs Otherwise like a normal qualified plan. Can roll into a Roth or Trad IRA.

What are disallowed expenses for dependent FSAs? (6)

- overnight camps - education/tuition - clothes/food/transportation - field trips - advance payments - late fees

What kind of benefits can you offer to full time employees and exclude part-time? (4)

- profit sharing plan - group health insurance - 401k - any ERISA plan NOTE: Not a SEP (only requires 3 years employment)

What kinds of property can be transferred into an FLP? (5)

- real estate - bonds - securities (<=80% of the FLP property as a whole) - life insurance on the GP - stock of the closely held company (but not voting shares)

Who gets the Section 199A QBI deduction? (5) Who is phased out?

- sole props - Schedule E rental income - LLCs - S corps - Trusts/REITs/MLPs (publicly traded LPs) Service trade or businesses are phased out completely - stuff like doctors, attorneys, artists, financial pros, skilled trades. Phaseout is $326k-$426k. For non-service based business, phaseout is the same, but you are limited to the lesser of: 20% of QBI or 50% of W2 wages

What kind of property can NOT be transferred into an FLP? (4)

- voting shares of stock of a closely held company - S corp shares - family residence - qualified retirement assets

UGMA/UTMA

-ASSET OF THE CHILD for financial aid purposes -UNEARNED INCOME: a. taxed at child's rate if greater than 19 b. MAY be taxed at parent's rate if less than 19 -ASSETS: a. UTMA: real estate, stocks, mutual funds, and bonds b. UGMA: same but NO REAL ESTATE -RISK: -child uses assets for something other than education - UTMA released up to age 25 - UGMA released at age of maturity (18 or 21)

What nouns are approved to follow "CFP (R)"? (6)

-professional -practitioner -certificant -certification -mark -exam

Simple Trusts vs Complex Trusts

-simple trusts MUST distribute all income earned during the year received -complex trusts may accumulate income, permitted deductions for distributions

Chapter 7 means test for income

1 . Monthly income >$10k: NOT allowed 2. Monthly income <$6k: Allowed 3. Monthly income btw $6-10k: Allowed only if income < 25% of unsecured debts

Catch up contributions to 403b (2)

1. $6,500 catchup for age 50+ AND 2. $3,000 catchup for 15 years of service

Max limit on personal use with a rental (2)

1. 14 days or 2. 10% of rental use, whichever is bigger

Who is a skip person? (2)

1. A related person 2 generations below the transferor 2. Unrelated person who is >37.5 years younger than the transferor NOTE: If a generation dies, succeeding generations move UP one generation (e.g. a grandson whose parents are both dead is NOT a skip person)

Qualified Plan Requirements (2)

1. Age and service: age 21 and 1 year of service (1,000 hours in first 12 months or part time 500 hours/year for 3 consecutive years) 2. Coverage requirements: Ratio percentage test - % of NHCEs covered >70% of HCEs covered, OR Average benefit test- avg benefit for all NHCEs >70% of HCEs

Roth distributions ordering and taxation (3)

1. All contributions (never taxable) 2. All conversion amounts (tax free after seasoning for 5 years, or if there's a special purpose) 3. Earnings (tax free after seasoning for 5 years, before 5 years special purpose is still taxed but no penalty, before 5 years is taxed and 10% penalty)

Educational Funding Coordination: Pick one of (4)

1. American Opportunity Credit 2. Lifetime Learning Credit 3. Coverdell withdrawal 4. Qualified 529 distribution/UTMA/UGMA

Which autos are covered by insurance? (4)

1. Any vehicle listed in policy declarations 2. Newly acquired autos that replace existing autos. 3. Trailers- including farm wagons and equipment being towed 4. Temporary substitute vehicles - "loaners". Only insured for parts A,B,C

FINRA Series License exam procedure (4)

1. Associate with broker/dealer 2. Register with FINRA through B/D on form U4 3. Pass appropriate exams 4. Register with CRD - Central Registration Depository - makes FINRA requirements uniform across states

How can a tenancy by the entirety be severed? (4)

1. By mutual consent of both spouses 2. By joint creditors. 3. By death 4. By divorce (property becomes tenancy in common)

PAP (Personal Auto Policy) Rules (4)

1. Can be written on autos owned/leased by individuals or spouses living in the same household. (or college kids away while at school) 2. Rental cars (Lyft) not eligible - need commercial policy 3. Delivery cars (pizza) not eligible - need commercial policy 4. Car must be a private passenger auto (cars, vans, trucks, SUVs)

529 Rules (5)

1. Can change beneficiary to family of original beneficiary. 2. $15k/yr or $75k bunching 3. Rollover to same generation -> no taxable gift; Rollover to skip generation -> taxable gift 4. Treated as a parental asset 5. Can use $10k max to pay off student loans

Life insurance Dividend options

1. Cash (usually not taxable as dividends are returns of premium paid) 2. Paid up additions - buy more little whole life policies that add onto the DB and cash value 3. "5th Dividend" - Buy 1-year term insurance equal to policy base value 4. Accumulated with interest - sits in a separate account earning interest, and is added to the death proceeds or cash value. The interest is taxable. 5. Reduction of premiums - Buy down the remaining premiums by applying the dividends immediately to the premiums.

Types of Accounting Methods (4)

1. Cash - for service, not goods 2. Accrual - for inventory heavy businesses. 3. Hybrid 4. Percentage of completion - for long term contracts like construction

Life insurance non-forfeiture options (3)

1. Cash - lump sum payout, ordinary income 2. "Extended term" - buy a paid-up term life plan with the cash balance. At the end of term, it expires worthless. 3. Paid up reduced - you get a lower face amount of policy, but still insured forever with no more premiums due. DB is whatever DB you can buy paying a net single premium.

What are the best ways to/why should you gift these types of property? 1. Highly appreciated property 2. Property likely to appreciate 3. Income-producing property 4. Loss property 5. Out of state property 6. Property subject to depreciation 7. Life insurance

1. Charity or donee in low tax bracket 2. Gift to remove future value 3. Gift to low-income donee 4. Don't gift: sell, take the loss, give cash 5. Gift to avoid ancillary probate 6. Don't gift: keep and take the depreciation 7. Almost always good to gift

MEC Taxation Rules (4)

1. Distributions and loans taxed as income 2. Under 59.5 is 10% penalty tax 3. Dividends are taxable if used as cash (withdrawn, used to pay premiums, or used to pay back loan) 4. Death benefit is NOT taxed

Chapter 7 Bankruptcy NOT EXEMPTED assets (3)

1. ESA/529s if contributions are within 2 years of bankruptcy 2. Inherited IRAs 3. IRA assets over $1M

Powers of Attorney Exclusions - You can't give away the power to: (2)

1. Execute or revoke a will. 2. Execute a living will.

3 Types of Fiduciaries

1. Executor/Personal Representative - named in will, appointed by court to manage probate estate 2. Trustee - follows the trust instrument and manages trust assets to benefit beneficiary 3. Guardian/conservator - manages assets/expenditures, makes annual reports to court

Gift value: 1. For gift tax purposes, 2. For income tax purposes

1. FMV of gift 2. Use lesser of FMV or donor's adjusted basis

Types of conduct that violate CFP practice standards (5)

1. Felony or relevant misdemeanor 2. Fraud, theft, misrepresentation, other dishonesty 3. Bankruptcy 4. Federal tax lien 5. Other lien or civil judgment that has not been satisfied

Graduate School Funding (6)

1. Fulbright Scholarship 2. Graduate PLUS Loans 3. Stafford Loans 4. Lifetime Learning Credit 5. 529 withdrawal 6. Coverdell withdrawal (<30 years old)

Taxablity of gifts and donor's estate rules (4)

1. Gifts are taxable to the extent they exceed the annual exclusion 2. Adjusted taxable gifts added to taxable estate 3. Any gift taxes paid are saved to use against the tentative tax. 4. Can't get out of paying estate taxes by overpaying gift taxes on your deathbed - any gift tax paid within 3 years of death is added back to your gross estate

Steps to go from Gross Estate to Net Estate Tax (6)

1. Gross estate -> minus funeral expenses, debts, taxes, casualty losses: 2. Adjusted gross estate -> minus marital, charitable deductions: 3. Taxable estate -> plus taxable gifts: 4. Tax base -> minus $11.58 exclusions, then 40% of remainder: 5. Tentative tax -> minus gift taxes already paid: 6. Net estate tax

Code of Ethics (6)

1. Honesty, Integrity, Competence, Diligence 2. Act in client's best interest 3. Due care 4. Avoid/disclose/manage conflicts of interest 5. Confidentiality/privacy 6. Act in a manner that reflects positively on CFP and financial planning

When must form 709 be filed? (3)

1. If more than $15k is given to a non-spouse 2. A gift of FUTURE interest is given 3. A gift where splitting election is taken (only one 709 needs to be filed if it's only $30k, both spouses must file 709s if they give >$30k. NO 709 must be filed if it's a gift of only $30k from a joint account)

When is life insurance included in an estate? (3)

1. If you had insurance on yourself (or gifted it to your spouse and named yourself beneficiary) (or the value if you own a policy on your spouse) 2. If proceeds were paid to your executor 3. If you gift your policy away within 3 years of death.

Kinds of Student Loan Forgiveness (4)

1. Income-based 2. PSLF - Public Service Loan Forgiveness 3. Perkins Loan 4. Teacher Loan

Who is covered by auto insurance? (3)

1. Insured + spouse (living together) 2. Family members living with you 3. Anyone using your car with your permission

Disclaimer of an Interest (5)

1. Irrevocable refusal to accept the interest. 2. Must be in writing. 3. Must be no later than 9 months after the later of: the transfer happening / you turning 21 4. You can't have any accepted interest in the benefit 5. Then the interest will pass to someone else.

Types of term life insurance (5)

1. Level term - premiums are the same throughout the term 2. Annual Renewable Term or Yearly Renewable Term - can renew every year, but premiums will increase 3. Re-Entry term - like annual, but for when you need to duck out and duck in again easily. Can renew with simplified underwriting. 4. Decreasing term - The value of the death benefit decreases over time (used for mortgages) 5. First to die/Joint life - used for buy/sell agreements or mortgage protection

What is excluded from an estate? (3)

1. Life insurance owned by others 2. Completed gifts 3. A non-retained life estate (for your own life only to use and enjoy) - usually a home

Duties of Fiduciary (4)

1. Loyalty to beneficiaries 2. Must not self-deal 3. Must preserve property and keep it productive 4. Must be impartial to all beneficiaries Breach of fiduciary duty may result in civil/criminal action against the fiduciary.

How do you avoid AMT? (3)

1. Make more money so regular tax >AMT. By: - increasing income - exercising NSO 2. Decrease income to get below threshhold 3. Reduce preference and addback items - reducing itemized deductions - buying public, not private munis

Workers Compensation Benefits (4)

1. Medical expenses: unlimited, no deductible 2. Disability income with SHORT waiting period 3. Death benefits payable to family 4. Rehab - both medical and vocational

What is included in a "life insurance illustration"? (5)

1. Name of insurer 2. Name, address of producer 3. Name, age, sex of insured 4. Initial DB 5. Underwriting and rating classification

What are the required components for Part 2 of Form ADV? (4)

1. Narrative format responding to each item 2. Plain English 3. Disclosure Obligations as a fiduciary 4. Full and Truthful disclosure

Contract Requirements (5)

1. Offer 2. Acceptance 3. Consideration 4. Lawful Purpose 5. Principal must have legal capacity (no incompetent/intoxicated adults, minors can only contract for necessities) NOTE: Contract is valid but voidable by the incompetent party only

Disability Provisions/Riders (3)

1. Partial disability benefits - starts after total disability runs out, lasts 6 months, usually half of regular payout 2. Residual disability (proportional) - only for an OWN OCCUPATION policy. Pays out based on loss of earnings, proportionally. 3. Social insurance substitute benefit (SIS) - for total disability. Pays out full value minus any Social Security disability payments received

If you hit age 65 and are still working, what are your options for enrolling in Medicare? (3)

1. Postpone Medicare enrollment as long as you are actively working for a company that gives you health insurance. 2. Decline employer coverage and enroll in Medicare. 3. Enroll in Medicare as a secondary coverage after your employer's coverage.

Chapter 7 Bankruptcy Exemptions (7)

1. Primary homestead 2. Vehicle (limited) 3. Retirement savings/pension 4. Wages to provide for dependents 5. Limited personal property 6. Life insurance/annuity 7. Disability

What are the steps to elect COBRA? (4)

1. Qualifying event happens 2. Notice of event to beneficiary by plan administrator 3. Electing coverage (within 90 days) 4. Paying the premium (within 45 days of election)

What are two important term life provisions?

1. Renewability - guarantees right to renew (for higher premiums) for a limited number of years 2. Convertability - you can exchange for permanent insurance (whole life, etc). Must convert within a certain time frame and can do it without evidence of insurability.

To sell variable annuities, what licenses do you need? (2)

1. Series 6 OR 7 2. appropriate state variable life insurance license

IRA beneficiary options and rules (5)

1. Spouse: rollover into own IRA or keep in old IRA and keep old RBD (but new life expectancy based on beneficiary) 2. Non-spouse: 5 years to liquidate 3. Minor child: Custodian must oversee money until they reach age of majority. 10 years to liquidate. 4. Trust: 10 years to liquidate 5. Beneficiary OR Trust beneficiary who is chronically ill, disabled, or <10 years younger than the deceased: 5 years to liquidate or distributed based on beneficiary life expectancy

AMT Calculation - what are the steps? (3)

1. Start with regular AGI post deductions 2. Add back non-AMT deductible items 3. Add back preference items

How do you calculate deductible casualty losses?

1. Start with the *lesser* of basis or FMV. 2. Subtract insurance coverage 3. Subtract $100 4. Subtract 10% AGI 5. YOU MUST ITEMIZE TO USE THIS DEDUCTION

Chapter 7 Bankruptcy non-dischargeable debt (3)

1. Student/gov loans 2. Child support + alimony 3. Wage withholding/ tax due "You can't get rid of your ex or the government through bankruptcy"

Who regulates banks? (3)

1. The OCC (Office of the Comptroller of Currency) 2. The Federal Reserve 3. The Federal Deposit Insurance Corporation (FDIC)

Basic parts of a Trust (4)

1. Trust property - "principal" or "corpus" 2. Grantor - "trustor" is the person who makes and funds the trust 3. Trustee - The grantor give the property to the trustee along with rules (the trust "instrument") for how to deal with trust. Holds legal title. 4. Beneficiary - holds equitable title and receives income and/or principal. NOTE: Only grantor and trustee must be legally competent

Pre-College Funding Years Strategies (4)

1. UGMA/UTMA 2. EE Educational Bonds 3. Coverdell ESA ($2k/year per child) 4. 529 Savings/ Prepaid tuition ($15k/year per child)

Contribution Limits for an MPP

1. Up to 25% payroll is an employer deduction 2. Fixed contributions required stable cash flow 3. Max contribution: Lesser of 100% salary OR $57k 4. Salary cap of $285k to figure out employer contribution

Casualty Losses Calculation (4 steps)

1. Use lesser of basis or FMV 2. Subtract insurance coverage 3. Subtract $100 (floor) 4. Subtract 10% of AGI

What are qualifying events for COBRA? Who must be offered coverage and for how long? (4)

1. Voluntary/involuntary termination or change to part time. Offered to employees + dependents for 18 months. 2. Death, Divorce, or Eligible for Medicare. Offered to spouses and dependents for 36 months. 3. Loss of dependent status. Offered to children for 36 months. 4. Disability. Offered to employees and dependents for 29 months.

What is the penalty for signing up late for Medicare Part B?

10% increase in the premium every year you delay signing up

ACA income limitations (2)

100%-400% of poverty level gets ACA subsidies under 100% of poverty level gets Medicaid (unless state opted out)

When is ACA open enrollment?

11/1 to 1/31: All of November, December, and January.

1244 stock gain or loss - how is it taxed?

1244 is small business stock. If it's a gain, just as regular capital gain. If it's a loss, the first $50/100k is counted as ordinary income loss.

Property classes - 1245 vs 1250

1245 Property: short term 5 year: autos, light trucks, computers 7 year: office furniture and equipment 1250 Property: long term 27.5 year: residential rental properties 39 year: nonresidential properties

179 deduction: what kind of property?

1245 property used in a business, or *improvements* to 1250 property

After final order of discipline has been given by CFP Board, how long do you have to appeal?

15 days

How long do you have to appeal a suspension from CFP Board?

15 days

If you're terminated, how long is COBRA offered for? To whom?

18 months to employee and dependents

Securities Act of 1933 and Securities Exchange Act of 1934

1933: Regulates IPOs 1934: Created SEC to enforce laws, regulates secondary market, defines stock "sales"

How long must you live in a house to get the full capital gains exclusion?

2 of the last 5 years (both spouses must live there). If less, can prorate the exclusion but only if the move is: - >50 miles away - required for good reasons like health, change of work, unforeseen circumstances

How long do you have to live in a house to qualify for the $250/$500k exclusion? What are the exceptions? (3)

2 of the last 5 years. Exceptions: - moving for a job >50 miles away - health reasons - unforeseen circumstances like marriage

How long do you have to respond to a CFP complaint? An investigation?

20 days, 30 days

Penalty for using an HSA for non-medical stuff?

20%

How big must a company be for COBRA to be mandatory?

20+ employees, must provide group or self-funded healthcare

Regular C Corp taxation - what is the tax rate?

21% flat rate since TCJA

What are FINRA Rules 2165 and 4512?

2165 allows a b/d to place a temporary hold on disbursement of funds if they reasonably believe exploitation is happening 4512 requires a b/d to TRY to obtain trusted contact info when an account is opened

If a couple lives in a house for 6 months before selling it to move for a new job >50 miles away, how much exclusion do they get?

25% of the normal exclusion, since they lived there 6 months out of the required 2 years. $125k exclusion.

What kind of trust should you set up for your minor children to avoid taxable gifts? (2)

2503(c) trust - this is a gift of present interest, so you can do annual exclusions Irrevocable trust with Crummey provisions

If you're disabled, how long is COBRA offered for? To whom?

29 months to employee and dependents

Emergency Fund guidelines

3 or 6 months' expenses 3 months if there are two sources of income (e.g. 2 wages, alimony, trust income, investment income)

How long do you have to file a written response to a notice of investigation by the CFP board?

30 days

How long do you have to notify the CFP board of a conviction?

30 days

Tax deduction of stock donation is limited to what % of AGI? What if you use basis for the donation value?

30% AGI unless you use basis, then 50% AGI

If you lose your dependent status (get married or get too old), how long is COBRA offered for?

36 months for children of employees

Mrs. Jackson died and left $150,000 to her grandson (a skip person). She had already used $11,580,000 of her GST tax exemption. How much GST tax will be due at her death in 2020 if her maximum estate tax rate is 40%? HINT: The estate tax offsets the GST tax like in the practice questions.

36,000: $150,000 x 60% = $90k left after gift tax is paid, $90k x 40% = $36k

What is the federal withholding for a retirement plan distribution? For an IRA distribution?

401k withholding is 20% MANDATORY, IRA is 10% unless you elect otherwise

Elective deferral limits for multiple plans (more than 1 employer)

401k/403b/SEP/SARSEP/SIMPLE: $19.5k + $6.5k catchup Multiple SIMPLE accounts: $13.5k + $3k catchup

How much do CRATs and CRUTs pay out?

5%. A CRAT is 5% fixed payment of the initial value. A CRUT 5% is revalued annually depending on corpus.

Disparity Limit on Retirement Contributions

5.7% allowed difference between benefit accruals/contributions from employer for HIGHLY PAID vs LOWER PAID employees (justified as "integration with Social Security" since higher paid workers get less SS as a percent of comp)

What is the excise tax on a RMD not taken?

50%

What's the AGI limit when donating cash plus noncash?

50% of AGI for the total. The total would be all of the cash plus the noncash FMV (30% AGI limit) or basis (50% AGI limit)

Spousal PIA is what percent?

50% of the spouse's PIA

Is a 529 a parent or student asset? An UTMA/UGMA?

529 is parent-owned, UTMA/UGMA is student-owned

What is the limit for charitable donation deductions of cash? Noncash contributions? Unrelated use contributions? Capital gain property?

60% of AGI for cash 50% for non-cash contributions - can use FMV for related use, basis for unrelated use. 30% for capital gain property using FMV, or 50% if you use basis

If you have a 2-6 vesting period and you've worked there for 5 years, how much of your account is vested?

80%.

Child tax credit age and amount, phaseout?

<17 years old, $2k per child, $200k/$400k phaseout

Claims-made policy

A "claims-made" professional liability insurance policy provides coverage only if an incident occurs, AND the claim is reported to the insurance company, during the active policy period or during an uninterrupted extension of the policy ("policy tail endorsement").

A retained interest of any kind is included in gross estate, except what specific asset?

A 529

If an employer wants to put in a retirement plan for the previous year, what may be the best bet?

A SEP IRA since you can create it/fund before the tax filing deadline.

How big must a company be for a SEP?

A SEP is only for companies with <100 employees. It is cheap and easy to establish. Must establish before tax filing deadline.

Pay-on-Death Bank Account (POD)

A bank account utilizing a beneficiary designation to keep assets out of court. (TOD Transfer on Death)

5 By 5 Power In Trust

A common clause included in many trusts allowing for beneficiary withdrawals from the trust. Specifically, '5 by 5 Power' or the '5 by 5 clause', gives the beneficiary power to withdraw the greater of: a) $5,000 or b) 5% of the trust's FMV from the trust each year. For income tax purposes, should the beneficiary not exercise the '5 by 5 Powers', the greater of the "5 or 5" would be included in their gross estate (although it remains in the trust). Over time the beneficiary could become the owner of the trust and become liable for taxes on the trust's capital gains, deductions and income.

Hardship Distributions

A distribution from a 401(k) plan because the employee has an immediate and heavy financial need and the withdrawal is necessary to satisfy the need. The distribution is taxable and subject to penalties to the extent the participant has other resources to have satisfied the financial need.

General Power of Appointment

A donee can appoint to herself, her creditors, or her estate as if donee owns the property himself. This precludes a special power like HEMS for a trust.

What is the GSTT rate?

A flat 40%

Unemployment Insurance (UI) and taxability

A government program that partially protects workers' incomes when they become unemployed. Benefits are usually taxable income.

Pell Grant rules

A grant (up to $6,345) awarded based on financial need by the U.S. federal government to help students pay for higher education. Does not have to be repaid. Students must carry 12 credit hours and be full-time, or grant will be prorated down.

Grantor Retained Annuity Trust (GRAT)

A grantor irrevocably transfers assets to a trust and retains a specified annuity income for a stated number of years. The value of the taxable gift is the remainder interest. If the grantor survives the annuity period the assets will be completely removed from his or her estate and no additional taxes will be due. If the grantor dies during the annuity period the trust assets will be included in the grantor's gross estate, but the adjusted taxable gift will be removed from the estate tax calculation -- so there is little downside risk. This is a gift of FUTURE interest, no $15k exclusion.

Controlled Groups (4)

A group of corporations owned by the same individual shareholders: - Brother-sister corporations: <=5 people own 80%+ of both companies - Parent-subsidiary corporations: Parent company owns 80%+ of subsidiary company - Affiliated service: rules for professional services (Health, Law, Accounting, Engineering) - Employee Leasing: to avoid letting companies lease employees rather than hire them

Refund Annuity

A guaranteed-minimum annuity that, on the annuitant's death, pays the beneficiary back the total price of the annuity (purchase price - monthly payments already paid out). Can be refunded in lump sum or installments. Refund is tax-free up to basis.

S Corp

A legal entity that offers limited liability with single taxation. Must be <=100 shareholders, only one kind of stock but it can be voting or nonvoting. Nonresident aliens can't hold stock. Can only take losses up to basis (bank loans don't count as part of basis, only direct loans - unlike a partnership)

Accelerated Benefit Rider

A living benefit or terminal illness (<2 years to live) rider - if you have terminal illness, you can use the money before you die and it reduces the overall death benefit (by up to 50%). - if you are chronically ill, you can exclude $380/day for LTC services

Lifetime Learning Credit

A nonrefundable credit equal to 20% of the first $10,000 of qualified higher education tuition and fees or job training paid during the year on behalf of the taxpayer, his spouse, or his dependents. Undergrad and grad school, can be part time.

What is participating vs non participating life insurance?

A participating policy pays out dividends.

Taxable Distribution to a skip-person

A payment from a trust to a skip person is a taxable distribution. No $15k exclusion, you must elect the exemption. Even though the distribution is not subject to estate or gift taxes, the GSTT will be imposed at the time of distribution and must be paid by the skip-person.

Whole Life Insurance Policy/ "Ordinary Life"

A permanent life insurance policy that guarantees that the policy will remain in force as long as the premium is paid, for the WHOLE LIFE of the insured. Level premium based on life expectancy. The life insurance policy has a cash account that grows (interest) tax deferred.

Power of Appointment

A power of appointment is the power to decide who will receive certain property at a given point in time.

Ancillary Probate

A probate for real property located in a state other than the domicile of the deceased.

Suicide clause

A provision stating that if the insured dies by suicide during the first two years the policy is in force, the death benefit will equal the amount of the premium paid. After two years, you can commit suicide without penalty.

Top heavy plan

A retirement plan in which more than 60% of the plan assets are in accounts attributed to key employees. These plans have a faster vesting schedule.

Totten Trust

A revocable trust in the form of a bank account with a beneficiary clause - Payable upon death

Coverdell Education Savings Account (ESA)

A savings account that allows you to make an annual non-deductible contribution of up to $2,000 per year/per person to a specially designated investment trust account. Earnings are tax free if used for qualified educational expenses: El-Hi, college, grad, room & board, transport, extended day programs, tutoring, any charges by the school. Use before age 30 or roll over to a family member.

Simple Trust

A separate tax entity that uses conduit principle for distributions. Trust gets a deduction for distributions: the lower of what is actually distributed or the Distributable Net Income Limits the portion of distribution that is taxable to the beneficiary. Keeps the same character (ord. income vs cap gains) as was in the trust. No double taxation of trust income.

Qualified Personal Residence Trust (QPRT)

A special form of a GRIT in which the grantor transfers his home to the QPRT and receives "use" of the personal residence as the annuity. The remainder interest of the trust passes to a non-charitable beneficiary. - Can do primary home, vacation home, or primary + one vacation home - Gift of future interest (no $15k exclusion) - If grantor dies before term is up, the property goes back into estate and the taxable gift (the present value of the remainder interest) is voided.

Target Benefit Pension Plan Keys (4)

A special type of money purchase pension plan that determines the contribution to the participant's account based on the benefit that will be paid from the plan at the participant's retirement rather than on the value of the contribution to the account. Requires an actuary at inception. 1. Fixed contributions 2. Up to 25% employer deduction 3. Stable cash flow 4. Favors older employees

Incentive Stock Options

A stock option that gives an employee the opportunity to buy the employer corporation's stock at a fixed price for a certain period of time, and that offers favorable tax treatment (cap gains rates when sold) to the first $100k/year if certain conditions are met. Corporations don't get a deduction.

Low income housing tax credit - how much? Spread over how many years?

A tax credit allowed for investors as an incentive for the development and preservation of multifamily rental housing that is affordable to low- and very-low-income households. Any losses can be taken as a tax credit up to basis. (credit = losses up to $25k x marginal rate). The credit is allowed annually over 10 years.

403(b) plan (TDA/TSA)

A tax-deferred annuity or tax-sheltered annuity plan is a retirement plan for 501(c)(3) organizations. Can invest in annuities or mutual funds.

2503(c) Trust

A trust for the benefit of a minor designed to qualify the contribution to the trust for the annual exclusion. A 2503(c) trust must give the minor the right to receive the trust assets when he reaches age 21, but is not required to pay the income to the minor at any earlier time.

Charitable Lead Trust (CLT)

A trust in which a charitable organization receives the income interest and a non-charitable beneficiary (usually a family member) receives the remainder interest. No 5% rule.

What are the A, B, and C trusts?

A trust is the marital trust/ Power of Appointment trust - assets pass by unlimited marital deduction, no tax. B trust is the bypass trust - assets pass by the exemption (always fund the bypass trust up to the exemption), no tax. C trust is the QTIP trust - "Current interest" - assets pass by marital deduction, no tax. Can have HEMS and 5 or 5 provisions.

Complex Trust

A trust that accumulates income over time and is not required to make scheduled distributions to its beneficiaries.

QTIP trust

A trust that grants the surviving spouse a lifetime right to the income of the trust while transferring the remainder interest to individual(s) of the grantor's choosing, typically created at the death of the first spouse to die.

Support Trust

A trust that instructs the trustee to spend only as much income and principal (the assets held in the trust) as needed for the beneficiary's support.

Stock Bonus Plan

A type of profit-sharing plan in which the employer rewards employees with stock instead of cash - MAY be company stock, but doesn't have to be.

zero-cost collar

A zero cost collar is a form of options collar strategy to protect a trader's losses by purchasing call and put options that cancel each other out. Good for a concentrated position that is highly appreciated in order to diversify.

CFP Standards of Conduct Sections (6)

A. Duties owed to clients. B. Fin. Planning and Application of Practice Standards C. Practice Standards for Fin. Planning Process D. Duties owed to firms/subordinates E. Duties owed to CFP Board F. Prohibition on Circumvention

Coverage for HO-6 Parts

A: Some coverage for installed carpet/cabinets, plus $5k loss assessment coverage (can buy more if needed) B: none C: Open D: Broad 50% of C

Coverage for HO-4 Parts

A: none B: none C: Broad D: Broad 30% of C

Bypass Trust

AKA "Nonmarital" "B" "Family" trust - Allows postmortem control over trust property - Can give stream of income to surviving spouse AND/OR others (unlike a QTIP) - As long as spouse is not given more than 5 by 5 or HEMS, the trust will not be included in surviving spouse's estate

Workers Compensation

Absolute liability (does not need someone to be at fault). A form of insurance paid by the employer providing cash benefits to workers injured or disabled in the course of employment.

What are ADLs? (6)

Activities of daily living: - eating - bathing - dressing - getting from bed to chair - using the toilet - being continent

Living will

Advance directive that allows a person to document specifically what life sustaining medical treatment they wish, or do not wish to have.

Taxation of Annuities (Withdrawals)

After 1982, taxed LIFO. A withdrawal is taxable interest until you hit your basis investment. Early withdrawals (<59.5) have a 10% penalty tax.

How long can children be on parent's provider in an HMO?

Age 26

When can defined benefits plans begin?

Age 62 - this counts as retirement income even if not retired from work

How are fine art/antiques valued for insurance purposes? FMV?

Agreed value - usually from an appraisal

What are the tax consequences if divorced in 2018 or before?

Alimony before 2018 was deductible/taxable. After 2018, it's not.

Which are true about Coverdells? - the beneficiary must be under 18 when contributions are added - contributions are treated as a gift of a present interest - religious elementary school expenses are qualified

All are true.

What could be a passive activity? 1. 40% ownership of an S corp 2. 25% ownership of limited partnership 3. 5% ownership in a RELP 4. 100% ownership of a rental

All could be passive. Any active or material participation would make them not passive.

Who must be covered by a SEP?

All employees with 3+ years of service, must earn >$600 per year.

Disability provision - how does it apply to whole life?

All future premiums are waived and the cash balance is credited as normal, as though you were paying the premium.

What is considered community property and what is excluded? (4)

All property acquired during marriage. Exceptions: - Gifts to a single person - Assets and income from before the marriage - Inheritances to a single person - Interest on any single-owned assets

When do you use the half year convention for MACRS? What is the half year convention?

All property unless mid-quarter applies. (Not residential or real property). It treats all property bought or sold in a year as being bought or sold on the midpoint of that year.

What retirement plans does the 55 year old age rule apply to? (can take money out without penalty if you leave after age 55)

All qualified plans, but not IRAs.

Which retirement plans can do loans?

All qualified plans. Not: SEPs, SIMPLEs, IRAs.

reverse mortgage/home-equity conversion loan

Allows a homeowner 62 and older to continue living in the home and to borrow against the equity in a home that is fully paid for and to receive the proceeds as a combination of: - a lump sum - monthly payments - a line of credit The repayment is the amount of loan or home value, whichever is lower. Once the loan is repaid, any remaining equity is distributed back to borrower or to their estate.

Rabbi trust

Also known as a grantor trust. Nonqualified deferred-compensation plan designed to provide retirement income for officers, directors, and highly compensated employees (HCEs).

AVD

Alternate Valuation Date - the executor can elect to use FMV up to 6 months after death only if: 1. It would reduce the gross estate 2. It would reduce the federal tax liability 3. It is applied to ALL estate property 4. It isn't depreciating property (like an annuity payout) If distribution is early, use FMV at date of distribution. If sale is early, use FMV at date of sale.

Deduction for ordinary income property donations - what counts? (5) When do you use FMV or basis?

Always use basis. Includes: - inventory - STCG property - work of art created by taxpayer (use cost of materials) - copyright - use-unrelated property

ADR

American Depository Receipts are a way for US investors to own foreign stocks without investing directly in a foreign exchange. Price and dividend paid in US $, dividends are *declared* in foreign currency. There is exchange risk.

Educational Credits (2)

American Opportunity Credit, Lifetime Learning Credit

Do ESOPs or Stock Bonus Plans have to invest in company stock?

An ESOP must invest primarily in company stock; a stock bonus plan MAY invest in the company

Period Certain Annuity

An annuity income option that guarantees a definite minimum period of payments, even if the person dies early.

Expected Family Contribution (EFC)

An estimate of the parents' and/or student's ability to contribute to post-secondary expenses. In general, the lower the EFC, the higher the financial aid award from the college may be. 20% of child's assets and 5.64% of parents' assets (excluding primary residence or retirement savings).

Special Use Valuation (Section 2032A)

An executor may elect to value real estate used in a closely held business or for farming for its actual use rather than its highest and best use -Max reduction in value is $1,180,000 in 2020 -Real estate must be at least 25% of the gross estate -Farm or closely held business must be at least 50% of the gross estate -The property must pass to qualifying heirs (immediate family members) -Qualified use of the property required for 5 out of 8 years before death and continued use during a 10 year period after death

Wealth Replacement Trust (WRT)

An irrevocable trust that owns and holds life insurance on its grantor's life. A WRT is also known as an Irrevocable Life Insurance Trust (ILIT)

Taxation of Annuities (Distributions)

Annuity payments are broken into 2 parts: 1. Accumulated earnings (taxed as ordinary income) 2. Return of premium (non-taxable) Use the annuity exclusion ratio - percentage of contribution basis to total - to determine taxability.

Variable Annuity Pros and Cons

Annuity that has a varying rate of return based on the mutual funds in which one has invested. Premiums are invested in separate accounts (fixed and variable) PROS: - Keeps up with inflation/the market CONS: - Payouts vary - Usually expensive

Who is covered by a SIMPLE?

Any employee who earned $5k in any 2 previous years.

Taxation of Annuities (held by a non-natural person, such as a trust)

Any income received OR accrued is treated as ordinary income immediately. (or ordinary loss, if a variable annuity goes down in value)

Community property survivor basis

Appreciated community property gets a FULL step up in basis, including the survivor's share. (not ordinary income property, just LTCG)

How much can you gift tax-free to the President of the United States?

As much as you want.

How are HSAs inherited by a spouse? By others?

As their own HSA. By others as ordinary income.

What does a Marital Trust consist of?

Assets (income & corpus) intended for the sole use, enjoyment, or benefit of the surviving spouse.

Guaranteed Purchase (Insurability) Option

At 3 year intervals up to a max age, you can buy additional insurance guaranteed, regardless of insurability.

When do you fund a CLAT/CLUT? How big of an estate makes sense?

At death, since they are grantor trusts, to save on estate taxes. Otherwise, you would have to pay income tax on the money distributed each year. This is for huge estates to save millions on estate tax.

APL provision - what is the major pro?

Automatic Policy Loan - if you can't pay premium, it automatically loans you the money from the cash balance Pro: You don't have to reinstate policy and prove insurability like other nonforfeiture options

Income based loan forgiveness

Balance after 20/25 years forgiven, counted as taxable income.

In what step in the financial planning process do you give the Form ADV to a client?

Before or at the time you enter into an advising agreement. When establishing the client relationship/scope of relationship.

Social Security earnings limits below and above FRA

Below FRA: Deduct $1 for every $2 earned over $18,420 Above FRA: Deduct $1 for every $3 earned over $48,600 [If you're not FRA, they really don't want you working and also collecting SS. If you're above FRA and you still need to work, they are nicer with letting you work more.]

Taxability of Workers Compensation

Benefits are tax-free to employees. Employer can deduct premiums.

Difference between things that are liquid and things that are marketable?

Both can be sold quickly, liquid assets also have stable price.

CRAT and CRUT similarities

Both must pay out >=5% of corpus annually Max term of 20 years allowed if it's not a lifetime trust.

What kind of risk do brokered CDs have that regular CDs don't? What kind of risk do GICs have?

Brokered CDs have interest rate risk (they act like bonds traded on the market). CDs and GICs have no interest rate risk, but they have reinvestment and inflation risk. GICs also have default risk.

Commercial Property Insurance (BOP)

Business Owner's Policy: Covers commercial building and property losses resulting from fire, storms, accidents, theft, and vandalism. For small/medium businesses; premiums are deductible. Does NOT cover professional liability!

What can the Fed do to directly increase the money supply?

Buy government securities. Lowering the discount rate or reserve requirements does not DIRECTLY increase the money supply.

CRAT vs CRUT

CRAT: Annuity trust, no additions, payment fixed (lifetime or term certain), remainder interest to charity (must be >10%) CRUT: Unitrust, additions allowed, payments variable (revalued annually)

CRAT vs. Charitable Gift Annuity

CRAT: the property goes into a trust (5% rule) CGA: the property goes right to the charity (no 5% rule)

Perkins Loan forgiveness

Can be discharged through: Peace Corps, Americorps, Armed Forces, Teaching, Medicine, Social Service, Law Enforcement

Active real estate loss deduction - limit, phaseout

Can deduct expenses on Schedule E (passive loss) - Up to $25,000 - MAGI phaseout from $100-$150k - Can't have losses greater than basis - Can't carry losses over to 1040 income

Dynasty Trust

Can last for the lives in being plus 21 years and 9 months or as long as local law allows. Beneficiary interests are limited to life estates. The rule of perpetuities would be violated if a number of years is stated. Free of estate, gift, or GST taxes

179 deduction: can you create a loss or carry over the deduction?

Can't create a loss, limited to income. Can depreciate the rest of the deduction using MACRS.

What is the cost of COBRA?

Can't exceed 102% of the normal cost of the plan.

Is an art painting sold for a gain ordinary income or capital gain? What tax rate?

Capital gain, but taxed at 28% like all collectibles

How is whole life insurance taxed?

Cash balance above cost basis is ordinary income, DB is tax free.

Types of Bankruptcy (3)

Chapter 7 (liquidation-closes business), Chapter 11 (reorganization -stays in business - if you exceed debt limitations for Ch 13), Chapter 13 (adjustment-arranges payment plan with debtors and tries to stay in business)

How is variable life insurance classified? Who regulates it and variable life insurance agents?

Classified as securities. Regulated by the SEC and anyone selling it must be FINRA licensed (Series 6) and also life insurance licensed (by state).

Cliff vs Graded Vesting

Cliff is 100% vested after 3-5 years of service (usually) Graded is used to retain employees, usually the first year or two are ineligible.

Buy-Sell Agreement Stock Redemption (Entity Purchase)

Company (entity) is the owner and beneficiary of life insurance for each shareholder. Can't deduct premiums, so DB is tax-free. When a person dies, the company gets the life insurance money and buys the dead person's stock to reallocate among the other shareholders. Pros: Simpler than cross purchase if there are many shareholders. Cons: Creditors can go after this life insurance. Also, there is no step up in basis this way (dead person's stock retains same basis).

Controlled group limits to retirement plans

Company contributions (not deferrals) are limited to 100% compensation or $57k: - in aggregate by related employers, OR - separately by unrelated employers i.e. You can't use multiple companies to contribute extra to your retirement plans.

How big must a company be for a SARSEP? How many must participate?

Company must have <25 employees. At least 50% of employees must participate.

COBRA

Consolidated Omnibus Budget Reconciliation Act; law to provide terminated employees or those who lose insurance coverage because of reduced work to be able to buy group insurance for themselves and their families for a limited amount of time.

Who buys preferred shares?

Corporations with extra money to invest. Dividends from PS have at least a 50% tax exclusion.

Grace Period Provision

Coverage remains in effect for 31 days past premium due date; benefits paid during grace period would be deducted from sum.

What kind of educational trust should you set up for your kid if you think they might not go to college?

Crummey Trust

Medicare Part D

D for drugs - pays for 50% of prescription drugs. Must have both Medicare Part A and B

What kinds of risk do bonds have? What risks do corporate bonds have? EE bonds? Munis? STRIPS? TIPS? Zero coupons?

DRIP: Default risk Reinvestment risk Interest rate risk Purchasing power risk Corporate: DRIP EEs: IP Munis: DRIP STRIPS: IP TIPS: RI Zeros: DIP

Auto Insurance Part D

Damage to Auto 1. Collision 2. Other than collision ("Comprehensive") covers open perils such as: - glass - missiles - falling things - fire, theft, larceny - flood - earthquake - windstorm, hail - vandalism, riot - hitting an animal (this is NOT collision) - explosion NOTE: Towing IS included

HO-3 Policy Outline

Declaration Page - name, address Section I: A-Dwelling, B-Other structures, C-Personal Property, D-Loss of Use Section II: E-Personal Liability, F-Medical Payments

Auto Policy Framework

Declarations page - name, address, auto description Part A Liability Part B Med Pay Part C Uninsured and Underinsured Part D Damage to your Auto: Collision, Other than Collision Insureds Duties Following a Loss General Provisions

Student Loan Interest Deduction

Deduct up to $2500 of interest paid on student loans, with AGI phaseout after $70k/$140k

How are margin interest expenses deductible?

Deductible against ordinary income.

Section B of CFP Standards of Conduct

Definition and standard for compliance when practicing financial planning: Financial Planning is a collaborative process that helps maximize a Client's potential for meeting life goals through Financial Advice that integrates relevant elements of the Client's personal and financial circumstances. Must limit scope of engagement if only giving financial ADVICE, not financial PLANNING.

Federal Funds

Deposits that private banks hold on reserve at the Federal Reserve Bank.

What kinds of investments are in a hedge fund?

Derivatives and short positions.

3 Types of Transfers to Skip Persons

Direct Skips, Taxable Terminations, Taxable Distributions

What qualified plan distribution is exempt from the 10% early withdrawal penalty?

Distribution due to separation from service at age 55+

For C Corps, how are dividends taxed?

Dividend deductions that are excluded: - 50% of dividends excluded if the receiving company owns <= 20% of the distributing company - 65% of dividends if 20% to 80% - 100% of dividends if >=80%

If a mutual life insurance company has increased investment profits, what could increase or decrease? (Cash value, dividends, premiums, death benefit?)

Dividends of a whole life policy could increase, since a mutual life insurance company is owned by shareholders. The premiums could also be reduced.

Pooled Income Fund

Donor places property into a common trust fund, the assets are commingled with other donor's property. The assets are controlled by the public charity. After the income distributions terminate, the charity gets the remainder. Donor can't change their mind on who gets the remainder. -commingled -cant invest in tax exempt securities -upon death, the remainder interest vests with the charity -donor receives an income tax deduction for the PV of the remainder interest. Additionally, the donor receives a gift tax deduction for the property gifted. -donor cant be a trustee of the funds -kind of like a mutual fund ran by a public charity -no 5% rule

Durable vs nondurable POA

Durable continues after incapacity

Section E of CFP Standards of Conduct

Duties owed to CFP Board: Cannot engage in conduct that reflects adversely on CFP marks or upon the profession. 5 types of conduct that violate CFP standard, 14 reportable events. - Must report to CFP board within 30 days - Provide Board with a narrative statement - Cooperate with Board and comply with Certification and TM license and terms

Section A of CFP Standards of Conduct

Duties owed to Client: 1. Fiduciary Duty 2. Integrity 3. Competence 4. Diligence 5. Disclose and Manage Conflicts of Interest 6. Sound and Objective Professional Judgment 7. Professionalism 8. Comply with the Law 9. Confidentiality and Privacy 10. Provide information to client 11. Duties when communicating with a client 12. Duties when representing compensation method 13. Duties when recommending/working with other persons 14. Duties when selecting/using Technology 15. Refrain from borrowing money/ commingling assets

Section D of CFP Standards of Conduct

Duties owed to Firm/Subordinates (3): 1. Use Reasonable Care when Supervising 2. Comply with Lawful Objectives of the Firm 3. Provide Notice of Public Discipline to the Firm

Coverage for HO-3 Part A (5)

Dwelling: open perils 1. House 2. Attached garage 3. Decks 4. Fences for construction 5. Building materials intended for house

Buy-Sell Agreement Cross Purchase

Each shareholder buys life insurance on each other shareholder. When someone dies, the others get life insurance money to buy back the dead person's stock. Pros: Can't be touched by creditors. You get a step up in basis because you bought the dead person's stock at FMV. Cons: Cumbersome if there are a lot of shareholders

Community Property rule of ownership

Each spouse holds a 1/2 interest in the property. NOTE: There is a full step up in basis on all community property when spouse dies, including the survivor's share.

179 deduction

Election to expense up to $1.04 M of qualifying property in the year of acquisition.

ERISA - what is it and who enforces it?

Employee Retirement Income Security Act of 1974 - defines fiduciary conduct for ppl associated with qualified corporate retirement plans - the DoL enforces ERISA

Carve Out Plan types (3)

Employer can "carve out" highly paid employees from group life insurance and give them their own individual plan (not deductible by the employer). 1. Split dollar plan 2. Section 162 bonus plan 3. DBO (death benefit only)

Cash balance pension plans

Employer guarantees contributions and a minimum rate of return. Like a money purchase plan + guaranteed ROI.

Qualified plan deduction limits

Employers can only DEDUCT a max of 25% of all participants' eligible compensation. They can contribute more to one employee as long as total company contributions are <=25%.

Endorsement vs Collateral Split Dollar Policy

EndoRsement: EmployeR owns policy, employee chooses beneficiary. Employee must pay income taxes on premiums since employer is paying them. Collateral: Employee owns the policy and the employer pays the premiums as an "interest-free loan". If the employee dies, they take the loan amount out of the face value, and pay any remaining proceeds to the beneficiary.

Estate/Gift tax and GSTT ordering

Estate and gift tax are due first, then GSTT. (The estate/gift tax will reduce the amount of GSTT owed)

What expenses are deductible for a company? Workers comp, FUTA, BOP, key man insurance, federal unemployment, FICA?

Everything but key man insurance - this is only deductible if the employee is the owner and beneficiary, as under a Sec 162 bonus arrangement

Covered Perils: Broad (4)

Everything in basic plus RAFF: - Ruptured pipes - Artificially generated electricity - Falling objects - Frozen pipes

Who regulates securities brokers?

FINRA (Financial INdustry Regulatory Authority)

What is the best intra-family technique for someone to share the income from their business without losing control?

FLP

If I have a farm business and I want to gift assets to my kids to reduce my estate, how could I do that?

FLP would be good - you can discount the valuation allowing for more estate reduction. Also you can retain control. Could also do a gift leaseback, where I gift fully depreciated tractors to them and lease them back to push income to them (this would only work if kids are >=24 years old).

Donating stock with a loss - what donation value does it have?

FMV [You can't donate a beanie baby you bought for $2k that's now worth a dollar and have "donated $2k"]. But don't donate loss stock, sell it and take the loss, then donate cash instead.

What are fast vs slow vesting schedules?

Fast: 3 year cliff or 2-6 year graded Slow: 5 year cliff or 3-7 year graded

Vesting schedules: when must they be fast or slow?

Faster: Top-heavy, defined contribution plans Slower: Non-top-heavy, defined benefit

Federal Funds Rate vs. Prime Rate vs. Discount Rate

Federal Funds Rate - rate that banks charge each other for overnight loans (set by auction) Prime Rate - rate that banks charge their corporate clients (related to FFR, set by banks) Discount Rate - rate that the Fed charges banks for overnight loans (set by Fed as part of monetary policy)

FICA

Federal Insurance Contributions Act - the Social Security/Medicare Act

FOMC

Federal Open Market Committee - "The Fed"

Pension Protection Act of 2006 (rule for nonspouse beneficiaries)

Federal law that imposes additional funding and disclosure requirements on employers who have employee pension plans. Nonspouse beneficiaries of 401k/403b/457 can transfer to an IRA and withdraw: - over 5 years OR - over their life expectancy NOTE: must be a direct transfer to an INHERITED IRA - not a 60 day rollover indirectly transferred, or it will be all taxable

How does an RIA withdraw from SEC?

File form ADV-W

FINRA

Financial Industry Regulatory Authority. Self imposed regulation agency of NYSE NASDAQ and CFTC (Commodities Futures Trading Commission)

How do you solve for the total cost of a car purchase or lease?

Find present value using payments and THEN add the down payment in.

How much does Medicare skilled nursing cost?

First 20 days are free. Next 80 days are $176/day copay

Gift of life insurance - how do you calculate the value included in the estate?

First figure out the prorated cash balance between premium payments (interpolate). Then add any unearned portions of the last premium payment.

Property Loss Calculation when Underinsured

First, the required insurance = replacement cost x coinsurance percentage (80% for homes, sometimes 90% for commercial property) Then the amount paid out is the fraction of the loss that was insured minus the deductible. Amt paid = Loss x (Insurance carried/Insurance required) - Deductible

When is Medigap open enrollment?

For 6 months after you sign up for Medicare Part B or turn 65, whatever is later.

When must you take an RMD for IRA-type plans or Qualified plans?

For IRAs/SEPs/SIMPLEs/SARSEPs Required beginning RMD is April 1st on the year after you turn 72, then Dec. 31st in following years. RMD is based on the amount in the plan on Dec 31st of the prior year. For Qualified plans, you can postpone taking an RMD until April 1st of the year after you RETIRE. (No solo 401k workarounds - if you are >5% owner, you must take RMDs at 72 regardless)

What is the difference in contribution limits between a profit sharing plan and a SEP IRA?

For a profit sharing plan, company can put 100% of compensation up to $57k. If a business doesn't make a ton, this may be a better option to max the account. For a SEP, you can only put in 25% of compensation up to $57k.

What is the difference in employee eligibility between a profit sharing plan and a SEP IRA? Do they have to be full time?

For a profit sharing plan, employees must work 1,000 hours/year (full time). For a SEP, they only have to make $600 for 3 of the last 5 years. (part timers will be eligible)

When would you set up a private foundation? How much do you have to distribute to charity?

For scholarships, for travel, study, prizes, etc. Very broad - doesn't have to be charity. You can run your own foundation and pay yourself to do it. You must distribute at least 5% to charity annually to avoid the penalty.

When would you use a QTIP?

For second marriages to make sure your children from the first marriage remain the beneficiaries of the trust, while still providing for your surviving spouse. When a surviving spouse is a spendthrift.

What form do you file for the estate tax?

Form 706

What form do you file for gift tax /GSTT?

Form 709

Tenancy in common

Fractional ownership. You get all income from your share. You can transfer your share to anyone. No survivorship rights - your share goes through probate.

What are the types of Disability Insurance Continuance Provisions? (3)

From best to worst: 1. Noncancellable - flat premium until age 65, can't be canceled by company 2. Guaranteed Renewable - must have the option to renew, but premium may go up- you're "guaranteed to pay more when you renew" 3. Conditionally renewable - usually a 2-year benefit. Can continue past age 65 if you are still employed.

What is the contribution to a cash balance plan?

From the employer: A set percentage of compensation plus interest. Limits are based on age and can be over $200k

Split Dollar Plan - how does it work, for whom?

Funding mechanism whereby employer & employee share cost of premium. Upon death, benefit is shared between employer & beneficiary. Common with key employees but not rank and file.

Which are securities guaranteed by the government? GNMA? GIC? FNMA? FHLMA? FHA?

GNMA are the only securities backed by the government. GICs have default risk from insurance companies. FNMA/FHLMA are under federal conservatorship but are not guaranteed. FHA are mortgages, not securities.

Which estate planning techniques are "freezing" techniques? (4)

GRAT or QPRT - assets are frozen when transferred into the trust as a taxable gift. Annuity sale or SCIN - the assets are transferred in exchange for a stream of income.

Installment Sale - how is the gain taxed? What are exceptions? (4)

Gain on sale is recognized as spread out over the life of the note (gain is prorated). Exceptions: - If all payments are received in one year. - If it is a loss, not a gain - If the property is publicly traded stock - If the property is sold to a related party who sells within 2 years. If they do, the sale "collapses" and everything is due the first year.

General vs. Special Power of Appointment

General: - No conditions or restrictions - Included in gross estate Special: - Under certain conditions - Only for a certain group of beneficiaries - Only for a limited period of time - Not included in gross estate

Direct Skip (GST)

Gift directly to a skip person. $15k exclusion, automatically uses exemption unless you opt out. Transferor pays GST tax.

Net Gift Technique

Gift is made, on the condition the donee pays the gift tax. Discounted gift that benefits the donor and donee. Limitations: -$5,490,000 exemption must first be exhausted before there is any gift tax payable by the donee -The decedents gross estate includes the amount of gift tax paid by the donees on net gifts made by the decedent in the past 3 years -The amount paid by the donee in tax can be used as a credit to the donor's estate -Used when the donor has a liquidity problem and cannot afford the gift tax. Ex. Amount gifted x 40% = N N / 1.4 = amount of gift tax donee pays

Gift Leasebacks and Sale Leasebacks

Gifting or sale of business or trade property to a lower-income family member. Following the property transfer, lease payments in proper amounts are made by the former owner to the new owner. The payment is deductible by the former owner as a business expense, and taxable to the new owner as unearned income. The transfer of fully depreciated property is particularly advantageous because the new owner may claim depreciation on the acquired property. The lease payments and selling price must be realistic to avoid challenges by the IRS. To avoid the kiddie tax, gifts should be to people >=23 years old.

GRIT

Grantor Retained Income Trust - Irrevocable - Grantor retains a right to the income produced - No discount on the taxable gift like a GRAT has (remember, the GRAT is valued minus the present value of the annuity) - GRITs are only useful for non-related parties or for QPRTs.

GRUT

Grantor Retained Unitrust Fixed PERCENTAGE of assets (revalued annually) paid to grantor for a term of years Remainder passes to the named beneficiary Additional Contributions Allowed Use if -Grantor wants inflation protection -Have easy to value assets -Assets are expected to fluctuate/appreciate in value -Grantor wants to share in the appreciation of the trust assets rather than having it go to the remainder beneficiary

What kind of investments should go in an UTMA for a 10 year old?

Growth stocks - not bonds (since they produce income) or other income-producing assets

Guardianship or Conservatorship

Guardian of a person - makes health care, other personal decisions Conservator of property - makes financial decisions Both are court-appointed and subject to supervision

Homeowners Insurance Forms

HO-1: Basic coverage for all parts HO-2: Broad coverage for all parts HO-3: (Most common) Open coverage except C HO-4: Renters'. Covers C and D HO-5 or HO 3-15: Open coverage for all HO-6: Condo HO-7: Mobile home HO-8: Basic coverage for older homes

Match each homeowners form to the appropriate name: HO-2, HO-3, HO-4, HO-5, HO-6, HO-7 comprehensive contents unit owners modified special broad

HO-2 broad HO-3 special HO-4 contents HO-5 comprehensive HO-6 unit owners HO-7 modified

Which FSAs have rollovers allowed?

Health FSAs possibly. Dependent care FSAs cannot have rollovers.

HCE (2)

Highly Compensated Employee: - greater than 5% owner OR - makes >$125k

HELOC rules

Home Equity Line of Credit - deduction limited to interest on first $750k - interest deductible for any loan used to buy, build, or improve your house

What is the basis for the cash value in a whole life plan?

How much you paid in premiums, minus dividends paid out already.

What do you need to pay to avoid the underpayment penalty for taxes?

If AGI <$150k for prior year, pay the lesser of 90% this year or 100% prior year If AGI >$150k for prior year, pay the lesser of 90% this year or 110% prior year

Social Security Taxation rules for MAGI

If MAGI > $25k/$32k, 50% tax rate If MAGI > $34k/$44k, 85% tax rate

Transfer-for-Value Rule and Exceptions (4)

If a life insurance policy is transferred from one owner to another for valuable consideration, the death proceeds will be subject to federal income taxation. Exceptions: 1. Xfer to partner in a partnership 2. Xfer to corporation where insured is a shareholder/officer 3. Xfer to spouse due to divorce settlement 4. Xfer to insured (like when you buy it out from a company)

Taxation of Disability Insurance Premiums and Benefits (3)

If employee owns plan & pays premiums = premiums are not deductible, but benefits are tax free If employee owns the plan, but the employer pays the premiums (employer uses bonus money Section 162 to pay premiums) = premiums are deductible to employer, and benefits are tax free If employer owns plan, & pays the premiums ("salary continuation") premiums are deductible to employer and tax-free to employee, but benefits are taxable to the employee

Do you have to file a 709 if you and your spouse gift $30k as a split gift?

If it's from a joint/community property account, no 709 needed for $30k or less. If it's from a single account between $15k and $30k, they file the 709 and the other spouse signs it. If it's more than $30k, then they both will have to file 709s to show who is using up the taxable gift.

When do you need to use the mid-quarter convention for MACRS?

If more than 40% of the property is placed in service during the last quarter of the tax year. NOT for residential or real property, or property bought and sold within the same year.

When must a company use the accrual method of accounting?

If the avg annual gross is >$26M for 3 years.

How is the correlation coefficient of two stocks related to standard deviation?

If the correlation coefficient (rho) = 1, the std dev (sigma) is the weighted average of each std dev/"risk". If the correlation coefficient =-1, the std. dev is ZERO.

What happens if a grantor survives the annuity period of their GRAT? What if they die before the annuity term is up?

If the grantor survives the annuity period the assets will be completely removed from his or her estate and no additional taxes will be due. If the grantor dies during the annuity period the trust assets will be included in the grantor's gross estate, but the adjusted taxable gift will be removed from the estate tax calculation -- so there is little downside risk.

Section 6166 Installment Payments

If the value of an interest in a closely held business which is included in determining the gross estate exceeds 35% of the adjusted gross estate, the executor may elect to pay part or all of the tax imposed in 2 or more (but not exceeding 10) equal installments, beginning 4 years after death. - 2% interest rate on first $1M of tax deferred - Only tax attributable to business can be deferred.

Taxation of Group Life Insurance

If total coverage exceeds $50k, the employee is taxed on the cost of coverage over $50k, minus what they pay in. If it's a discriminatory plan, there's no $50k exclusion for key employees. They must include the actual cost or table cost, whatever is greater.

Working After Retirement - Earnings Test

If you are >= FRA, NO BENEFIT REDUCTION! Benefits reduced by $1 for every $2 earned over $18,240 in 2020 for workers less than FRA. Benefits reduced by $1 for every $3 earned over $48,600

If you borrow money to buy investments, can you deduct the interest on your taxes?

If you itemize, you can deduct investment interest expenses up to the amount of investment income.

When would you do a charitable gift annuity rather than a CRAT?

If you knew exactly which charity you wanted it to go to.

Teacher Loan Forgiveness

If you teach full-time in low-income schools, up to $27.5k of Perkins or $17.5k of Direct/Stafford loans can be forgiven.

What is the main difference between the A marital trust and the C QTIP trust?

In the C trust, the deceased has postmortem control of the trust. The deceased chooses the beneficiary and only gives income from the trust to the surviving spouse.

Disability Waiver of Premium Rider

Included in most guaranteed renewable policies, this rider to a DI policy waives all future premium obligations to an insurer if the insured becomes permanently and totally disabled. All future premiums required to maintain the DI policy are waived while the insured is receiving DI benefits; however, this requires the insured to be totally and permanently disabled for at least 3 - 6 months before such waiver becomes effective, at such point it retroactively waives all premium payments from the insured.

What is the conduit theory for trusts?

Income distributed from the trust is just passed on to the beneficiary, while retaining the same character as was in the trust.

How are TIPS taxed?

Income is taxed annually as imputed income (phantom income) even though you have not received it. The inflation increase is taxed annually as ordinary income (and added to basis), even though the bond has not matured. Any extra over basis at sale would be a capital gain.

What are indemnity and managed care dental plans?

Indemnity - fee for service (like PPO) Managed care - monthly fee prepaid (like HMO)

Umbrella policy coverage when the underlying insurance is insufficient

Insurer will only pay the amount it WOULD HAVE been required to pay if the underlying insurance had been in force.

How do you calculate adjusted basis? What is excluded? (3)

Investment plus fees and improvements, minus deductions. Excluded: repairs, taxes, normal expenses.

What is an ILIT and when do you use it?

Irrevocable Life Insurance Trust - owns a life insurance policy as the asset in the trust. No estate taxes are due on the DB proceeds. Usually the proceeds are used to pay estate taxes.

How much can you transfer from a 401k or IRA as a QCD? Age limit? Cash or stock okay?

It MUST be an IRA, $100k counts. Must be 70.5+. Must be in cash.

What step up in basis does real property get under tenancy by the entirety?

It gets a half step up in basis, since it's LTCG property.

What is reported as gift exclusions in the first year if you megafund a 529 for $60,000?

It is ratable over the 5 years, so you would be reported as having gifted $12k each year.

What happens to the basis of transferred property as alimony?

It retains the original basis.

What does it mean if someone buys a single premium life insurance policy (not term)? How will withdrawals be taxed?

It's a MEC - it will be taxed LIFO, interest first (as ordinary income), the rest not taxable since it's a return of premium.

What is a cash balance plan? Pros/cons?

It's a defined-benefit pension plan with an option of taking a lifetime annuity OR a lump sum rollover distribution. Pros: For older business owners to turbocharge their pretax retirement savings. Cons: Company takes on investment risk (must increase funding if market dips), requires actuary certification each year.

What is a money purchase plan?

It's like a profit sharing plan, but the contributions are a fixed mandatory contribution from the company, not variable.

How does a disclaimer trust work?

It's set up by the will (testamentary trust). Then if the surviving spouse disclaims the property, it goes into the disclaimer trust. Spouse gets HEMS from income of trust, but no more.

When do you use Jensen (alpha), Treynor, or Sharpe?

Jensen (alpha)/Treynor is measured in terms of beta (systematic risk). Look for a diversified portfolio or a high correlation coefficient R^2 = 60+. We want a high alpha, or a high Treynor. Sharpe is measured in terms of std dev (variability, total risk). Look for a non-diversified portfolio or low R^2 <60. We want a high Sharpe number.

Joint Life vs. Joint-and-Survivor Annuities

Joint life: Payments stop at 1st death. BAD! Joint-and-survivor: Keeps paying after 1st death.

When does Medicare coverage begin?

July. We celebrate with fireworks.

How are annuity withdrawals taxed? How about normal annuity payments? How about if it is owned by a company/trust?

LIFO, interest is ordinary income, then the rest is not taxable. Normal annuity payments use the inclusion/exclusion rule to get taxed pro rata. (Figure out their total payment of the annuity term and divide their basis by that to get what's excludable). Annuities held in a trust: everything is ordinary income.

What is a bad investment in an IRA? ETFs, bonds, LPs, Real Estate

LPs are bad because they will throw off UBTI that will be taxed outside of the IRA

Investment Advisers Act of 1940

Legislation governing who must register with the SEC as an investment adviser. Defines "investment advice."

Dependent FSAs can be used for kids of what age?

Less than 14 years old OR an incapable dependent

Auto Policy Part A

Liability - Protects against bodily injury/property damage (BI/PD) caused by the insured

Rules for Life insurance in Retirement Plans (2)

Life insurance must only be incidental. This means: 1. Premiums must be less than: Ordinary/whole life: 50% of DB Term: 25% Universal: 25% This rule is usually used for DC plans. Or: 2. Insured DB must be <=100x monthly benefit. This rule is usually used for DB plans.

Health FSA limit? Grace period? Rollover allowed?

Limit is $2750/year Grace period can be up to 3 months OR Rollover up to $500 but not both

Coverage for HO-3 Part D

Loss of Use: pays for additional living expenses arising from house damage, such as temporary housing, eating out, etc.

What is a benefit of group insurance over individual insurance policies for a company? Are part time employees eligible?

Lower premiums. No, part timers are usually ineligible.

Social Security Taxation rules - what is MAGI for this?

MAGI = AGI + 1/2 Social Security + tax exempt interest

Which plans can (7) and can't (4) integrate with Social Security?

Mainly plans where the employer contributes. Can integrate: - Defined benefit - Cash balance - Money purchase - Profit sharing - Target benefit - Stock bonus - SEP Can't integrate: - 401k safe harbor/match only - ESOP - SIMPLE - SIMPLE 401k

Why would you set up a Crummey trust intentionally as a grantor trust? And how?

Make the donor/donor's spouse the trustee to taint the trust. This will make the donor responsible for paying the taxes of the trust (which essentially is an extra gift to the beneficiary). Without this, the trust income is taxed to the kid (possible kiddie tax).

What does a pour over will do?

Makes sure that all of your assets get transferred into a trust upon your death.

Professional Liability Insurance: Malpractice vs E&O?

Malpractice covers bodily injury (doctors, dentist) Errors and Omissions covers property damage (lawyers, brokers)

You have $20,000 worth of securities bought using 50% initial margin. When the margin requirement is 30% and the value of the securities drops to $12,000, what happens? How much would you have to deposit or sell?

Margin call! Your maintenance margin requirement is 30% of $12k = $3600. You borrowed $10k and now the value of your stock is $12k - this means you only have $2k of equity. You must deposit another $1600 into the account or sell off some of the stock so that your cash equity is >30% of the value. OR: You can sell stocks from your margin, increasing the percentage of equity. X = the amount of stocks you should sell to cover the call. 30% of [($10,000 - X) + $2,000] = $2,000 X = $5,333.3

What does a beta of 1 mean? <1? >1? Negative?

Market beta is always 1. A single stock's beta = 1 means the stock moves exactly the same as the market. <1 means it fluctuates less. >1 means it fluctuates more. There is no such thing as negative beta.

Which is stricter, material participation or active participation?

Material participation has stricter rules.

American Opportunity Credit - how much, how much refundable, what qualifies

Max of $2,500 per student - 100% of first $1k, 25% of next $1k. 40% or $1k max is refundable credit. First 4 years of a secondary education tuition, fees, course equipment. Cannot be used for room + board

Auto Policy Part B

Medical Payments - pays for reasonable and necessary medical expenses of the insured (only expenses within 3 years of accident) Who is covered? - insured + family while in a car or struck by a car as a pedestrian - any other person injured while in a covered vehicle

Medicare Part C

Medicare Advantage Plans - private insurance providers that cover Part D stuff, also vision and dental

MEC

Modified Endowment Contract -a cash value life insurance policy that fails the 7-pay test because too much premium is paid during the first seven years (annual and aggregate limits apply) -Tax law changes in 1988 limited premiums to only the amounts that would fully pay a life policy in seven annual premiums; any additional amount over funds the policy and causes it to be an MEC -An MEC becomes an investment contract for tax purposes - single premium policies and converted SPPs are MECs

When can you take casualty losses?

Must be a presidentially declared disaster.

What are the limits for an HDHP deductible?

Must be over $1400 individual, $2800 family

How do you buy out of a company life insurance plan?

Must convert to permanent insurance. Under the endorsement method, you will have to pay the higher of cash value OR the premiums paid.

Estate Tax Filing Requirements

Must file form 706 if you have more than the exemption in your gross estate (+ taxable gifts). Or if you want to elect marital portability.

If you donate STCG stock, how is the tax deduction limited?

Must use basis for the donation value (can do up to 50% AGI)

Electing Social Security before NRA - how is benefit reduced?

N = number of months Benefit reduction is 1/180 x N of your PIA for each of the first 36 months under your NRA.

Can you use 529s for non-tuition? How about Coverdell ESAs?

NO - 529 tuition only. YES - Coverdell can be used for almost all school related expenses

NAIC regulations for life insurance (4)

National Association of Insurance Commissioners 1. "Life insurance illustration" must be sent to insurer along with policy application 2. Copies must be signed by both applicant and agent 3. Policy must be represented as life insurance only 4. Can't use terms "vanish" or "vanishing premium"

Subsidized Stafford Loan

Need-based; interest paid by govt. until student leaves school. Available aid calculated after EFC, Pell Grant, other aid.

NUA taxation

Net Unrealized Appreciation - the difference between the stock basis and the FMV when the stock is distributed. Always taxed as LTCG no matter how long it's held. Tax must be paid immediately on the basis amount as ordinary income. The NUA will be taxed as LTCG only upon sale of the stock, and any extra earnings will be taxed just like normal capital gains.

How to calculate self employment tax

Net earnings x .9235 x .153 (subtract out half of the self employment tax first.

If you get awarded damages in a medical settlement, are the payments taxable in lump sum? As monthly payments?

Never taxable.

Can community property be owned by people other than spouses?

No

Can you use "CFP" in your email address or website URL?

No

Does homeowner's insurance cover land?

No

Is child support taxable (by payee) and deductible (by payor)?

No

Are IRAs split using QRDOs?

No - only qualified plans, pensions, etc are split using QRDOs. IRAs are split according to the divorce agreement or domestic order.

Can GSTT paid be added back into the estate?

No - unlike the gift tax, there is no 3 year rule for GSTT

If I want to give my CFP business to my daughter, should I do an S corp stock transfer? An FLP?

No S corp - this is a service business, so the IRS will deem it income transfer and I'll still get all the income assigned to me. I could do an FLP.

Is an UTMA exempt from FAFSA? Retirement assets?

No UTMAs are not exempt, Yes, all retirement assets are exempt.

Is there a early withdrawal penalty or mandatory withholding for a QRDO distribution from a qualified plan?

No early withdrawal penalty, Yes mandatory 20% withholding.

Does the death benefit become taxable with a MEC? Does the cash value? What kind of tax?

No tax on DB. Ordinary income tax on the interest in the cash value.

Can you megafund a 529A with $75k?

No, an ABLE plan can only be funded $15k/year

Does a GRAT get the $15k exclusion?

No, because it is a gift of future interest.

If your spouse dies, can you disclaim their half of assets held in tenancy by the entirety?

No, because tenancy by the entirety must be held by a married couple. You can't disclaim it to someone other than your spouse.

Is cash value of life insurance included in the gross estate?

No, cash value of a policy ceases at death. Only the death benefit is included in the gross estate.

Does a trustee receive powers and/or instructions from the probate court?

No, from the trust instrument itself.

Can you manage the assets in a 529?

No, if you want active management an UTMA/UGMA would be better.

Do you have to pay taxes on payments from a reverse mortgage?

No, it is considered taking out a loan so it's not taxable.

Does a 529 ABLE account disqualify you from Medicaid or other services?

No, it's excluded.

Does a reverse mortgage preclude Medicaid?

No, it's not necessarily a barrier. You can have home equity and still get Medicaid.

Can you take a loan from an IRA?

No, not permitted. And if you use your IRA as collateral, it becomes a distribution in its entirety and you lose IRA status on the account.

Are taxable gifts included in the taxable estate?

No, they are ADDED to the taxable estate to get to the tax base.

Does the Fed control the prime rate?

No, they control the discount rate - the minimum interest rate set for lending to other banks from the Federal Reserve Bank. The prime rate is the rate that commercial banks use to charge corporate customers.

Can you use the $15k annual gift exclusion on gifts of future interest?

No, they must be present interest.

Can you set a CRAT or CRUT to last for 30 years and then terminate?

No, you can define the number of years up to 20. After that, it has to be for life.

Would you ever intentionally taint a trust for estate tax purposes?

No, you might taint it for income tax purposes (so that the income is taxed at a lower personal rate than a trust rate). But tainting a trust will always bring it back INTO the estate.

Can you create a loss with a home office deduction?

No.

Can you modify a disability insurance policy?

No.

Does Medicare skilled nursing cover Alzheimers?

No.

Is S-corp income subject to self employment tax?

No.

Non Grantor vs Grantor Charitable Lead Trust

Non-grantor trust: gift tax deduction, appreciation of assets is free of estate/gift taxes Grantor trust: up front income tax deduction If the trust is established at death, the estate can take the present value of the payment stream as an estate tax deduction (since it is a charitable gift).

Private Foundations Pros and Cons (2,2)

Non-profit organization (separate legal entity) PROS: - Keeps control of $ - Can gift to individuals for study, travel, scholarships/awards, skill/talent improvement CONS: - Must spend 5% on charitable activities (or pay a 30% penalty) - Must pay 2% income as an excise tax

457 Plan

Non-qualified, deferred compensation plan established by state and local governments for tax-exempt government agencies and tax exempt employees. NOT churches.

Can passive losses offset ordinary income gains or capital gains?

Nope, passive losses can only offset only passive gains.

If you have depreciated assets, should you do an installment sale or a SCIN? Why?

Not an installment sale - you will have to recapture all of the depreciation in the first year of sale.

Unsubsidized Stafford Loan

Not need-based; govt. does not pay interest for you while in school; can be undergrad or grad, must fill out FAFSA.

Can a company skip contributions to a profit sharing plan? Can they skip contributions to a SEP IRA?

Not really - contributions must be "recurring and substantial". For a SEP, yes - there is no requirement for the company to make contributions.

Homeowners Insurance Exclusions (8)

OPENN WIF Ordinance or law Power failure Earthquake Neglect (NOT carelessness) Nuclear hazard War Intentional Loss Flood

OASDI

Old Age, Survivor, and Disability Insurance

Which retirement plans favor older workers? Which favor younger workers?

Older: Target Benefit Pension, Defined Benefit Pension Younger: Cash Balance, Money Purchase, Profit Sharing

Which are allowed or prohibited? CFP(R) or (TM) C.F.P. (R) or (TM) CERTIFIED FINANCIAL PLANNER (R) or (TM) RIA Natural Bridges CFP (R)

Only correct usage: CFP (R) CERTIFIED FINANCIAL PLANNER (TM) Registered Investment Advisor/ Advisor Firm

Is alimony taxable (by payee) and deductible (by payor)?

Only for divorces before 2018, after 2018 they are nondeductible and nontaxable.

When can you use special use valuation?

Only for real property (including real estate). Not just a business.

Does a gift to a trust qualify for the annual gift exclusion?

Only if it's a gift of present interest - that is, if it has Crummey provisions.

SEP IRA company plan - can employees contribute?

Only if there's a 401k program or a SARSEP program. Otherwise, SEP plans are funded by company money.

Will the assets in a GRAT/GRUT come back into the donor's estate at death? What kind of assets would you want to put into a GRAT/GRUT?

Only if they die before the term of the trust is up. You want to put in high growth assets since the taxable gift is only [amount of assets - annuity PV] and the remainder and growth will be out of your estate.

If you get a gift of stock and sell it, will it always be LTCG?

Only if you hold it for more than a year. Inherited stock is always LTCG, not gifted stock.

What can an HSA pay for? Cannot?

Only insulin, Rx drugs, no OTC drugs. Can pay for Medicare, COBRA, LTC Cannot pay for Medigap premiums since it's private companies.

Is life insurance payout taxable? (for term, whole life, etc)

Only the pure death benefit is tax-free. The cash balance counts as ordinary income.

Universal Insurance types ("type 1" and "type 2")

Option A: Level death benefit - constant DB, cash value increases. Once cash value hits a certain benchmark, the DB must increase (required by 1984 Tax Act) Option B: Increasing death benefit - as the cash value increases, the DB increases proportionally

Disability provision - how does it apply to universal/variable life? (2)

Options from worst to best: 1. Company only waives charges for mortality/admin expenses. Doesn't increase cash balance since premium isn't being paid. 2. Company waives full premium.

What kind of property does NOT get a step up in basis on death? Examples? (2)

Ordinary income property (CDs, Annuity)

OID bonds - how do they work, how are they taxed?

Original issue discount bonds - usually zero coupon bonds sold at a discount from par. The discount is accreted over time as taxable interest (phantom interest).

Coverage for HO-3 Part B (5)

Other structures: 1. Pools 2. Detached garages 3. Fences 4. Patios 5. Detached ADUs

Biggest Con of an HMO?

Outside providers not covered. You call 911 and get charged in full for an outside of network ambulance.

At what age should you apply for LTC insurance?

Over age 50 and before 65 when the premiums increase.

Living expenses rule of thumb

PITI or Rent =< 28% of Gross Income

Kiddie tax

Passive income, such as interest and dividends, that is recognized by a child under age 19 (or under age 24 if a full-time student) is taxed to him or her at the rates that would have applied had the income been incurred by the child's parents, generally to the extent the income exceeds $2,200 for 2020. First $1100 is at 0%, next $1100 is at 10%, then the rest is subject to the parent's marginal rate.

Medicaid definition and asset/income limits

Pays for LTC for poor people. Assets <=$2000 Income limits vary by state

PBGC

Pension Benefit Guaranty Corporation insures payment of defined benefit and cash balance pension plan benefits as promised. Can terminate a DB plan.

Cafeteria Plan examples of benefits (5)

Permits employees to pick and choose from benefits like: - health care - disability - term life insurance - 401k - CASH (must be offered as an option)

Coverage for HO-3 Part C inclusions/exclusions

Personal Property: has internal limits of liability - $1k for boats - $1500 for jewelry/furs - $2500 for silverware Excludes: - animals - cars/planes - renter's property - property in the room of the renter (furniture)

During College Funding Strategies (2)

Pick One: [Rich] - Parent Loan to Undergraduate Student (PLUS) [PooriSh <$60k AGI] - Pell grants, Subsidized Stafford Student Loans, Supplemental Educational Opportunity Grant

Crummey Powers

Powers that give trust beneficiaries the right to withdraw each year the money that is contributed to the trust OR the annual exclusion, whichever is lesser. Usually used to gift money to children into a trust for them and bypass the gift tax by only gifting $15k each year.

Section C of CFP Standards of Conduct

Practice standards for the FP process (7): 1. Understand Client's Personal and Financial circumstances 2. Identify and Select Goals 3. Analyse Current Course of Action and Potential Alternatives 4. Develop FP Recommendations 5. Present FP Recommendations 6. Implement FP Recommendations 7. Monitor Progress and Update

PPO

Preferred provider organization. Paid on a fee-for-service ("Pay Per Occurence") A prepaid health insurance plan in which providers agree to deliver services for discount fees; patients can go to any provider, but using nonparticipating providers results in higher costs to the patient

How are group dental insurance premiums and benefits taxed?

Premiums are deductible by employer, and the benefits are tax-free to the employee.

How do you find the cost basis for life insurance?

Premiums billed MINUS dividends (a return of unused premium)

What is the cost basis of life insurance?

Premiums paid minus dividends received.

Gift tax on gifts of present vs future interest

Present interest (may be enjoyed immediately): $15k exclusion Future interest (possession delayed): does not qualify for exclusion, taxed in whole (except 529s, some trusts)

PIA

Primary Insurance Amount - what you get from Social Security when you turn FRA

Probate (4) vs Nonprobate (4) Assets

Probate: 1. Singly owned assets 2. Community property 3. Tenancy in common 4. Estate as beneficiary Nonprobate: 1. JTWROS/ entirety 2. General powers 3. Life insurance 4. Last 3 years of gift taxes

Section F of CFP Standards of Conduct

Prohibition on Circumvention Cannot act indirectly or through another person to violate CFP Practice Standards

Bargain Sale

Property sold to charity for less than FMV. The sale basis of the gift is determined as the fraction of the transaction that was a gift.

Transfers with a retained life estate + one exception

Property transferred is included in the estate if you retain the right to use/enjoy the property or the right to designate who can use/enjoy it. Exception: you can give a 529 plan without it being in your gross estate.

QLAC pros (3) and cons (3)

Pros: - value excluded from RMDs, reducing taxes - lower investment risk - allows early SS benefits which lowers portfolio withdrawals Cons (much like cons for any annuity): - Inflation risk - Loss of control - Acts more like insurance when interest rates are low - bad returns

Pros and cons of using an FLP for intra family transfer of a business

Pros: GP keeps control, able to discount property inside FLP, protection from creditors, keeps company 99% out of the estate, Cons: GP responsible for all debts, cost of setting up and running an FLP

Pros/Cons of converting a DB plan to a cash balance plan?

Pros: if your company can't cover a DB plan, this is a good thing to convert to. Cons: hurts older employees b/c lump sum paid is usually less than the pension value.

Portfolio Immunization

Protects bond portfolio from interest rate risk and reinvestment rate risk. Balances price risk and reinvestment risk. The duration of a portfolio should match the investor's time horizon Rebalance every 6 months to one year, matching time horizon and duration

Group Life Insurance

Provides lower rates for the employer or employee and includes all employees, including new employees, regardless of health or physical condition.

Presumptive Disability Provision - in what cases is it assumed you're disabled? (4)

Provision found in most disability income policies that specifies the conditions that will automatically qualify for full disability benefits: 1. Loss of sight 2. Loss of hearing 3. Loss of speech 4. Loss of both hands, both feet, or one hand and one foot. "It has to cost an arm and a leg."

"Provisional Income"

Provisional income (MAGI) is AGI plus tax exempt interest + 1/2 SS income. Used to determine taxation of SS benefits.

PSLF

Public Service Loan Forgiveness - work in public service for 10 years/120 payments

QLAC

Qualified Longevity Annuity Contract; individual purchases contract. Allows individual to delay withdrawing money from retirement account. Must start by distributions by age 85; Amt of QLAC is not included in amount determined for an RMD

QLAC

Qualified Longevity Annuity Contract; individual purchases contract. Allows individual to delay withdrawing money from retirement account. Must start by distributions by age 85; Amt of QLAC is not included in amount determined for an RMD. The QLAC premium must be <25% of the IRA account value OR $135k, whichever is lesser.

What plans can buy life insurance?

Qualified plans, not IRAs.

What is the FHA loan maximum?

Ranges from $331,760-$765,600 by state, only for low-middle income people

What kind of property can be exchanged in a 1031? Can residential real estate be exchanged?

Real estate only, not personal property. Can only exchange for residential property if it will be used as a rental.

What are the realized and recognized gain in a 1031?

Realized gain: the inherent economic gain of the swap Recognized gain: what gets taxed. It's the lesser of the realized gain or the boot received (if no boot, then pay zero taxes).

Endorsement Method

Requires that the beneficiary change (from employer to another beneficiary) be typed or affixed directly to the policy - insured must make a written request and mail the request along with the policy to the insurance company.

How do you calculate risk adjusted return?

Return divided by beta.

What are the differences in taking losses between S Corp and LLC/LLP?

S Corp: Limited losses up to basis (only direct loans by shareholder, cash contributed) LLC/LLP: Losses up to basis (which includes ALL loans as well as cash contributed). Can also deduct unlimited loan interest.

What's the major disadvantages of an S Corp? A partnership? A sole prop? A C corp? An LLC/LLP?

S corp limits losses to basis, only has one kind of stock Partnership - unlimited personal liability, no continuity Sole Prop - unlimited personal liability, no continuity C Corp - double taxation, extra tax return LLC/LLP - one general partner, limited partners cannot actively participate

SARSEP

SAlary Reduction SEP *(no longer available, grandfathered in)*

Who regulates mutual funds?

SEC (Securities and Exchange Commision)

FINRA Licenses (6)

SIE (Securities Industry Essentials - prerequisite to 6 or 7) Series 6 - can sell mutual funds, new UITs, variable life ins, variable annuities Series 7 - can sell all securities except commodities Series 63 - meets requirement to be licensed in states other than state of residence Series 65 - RIA (state req) Series 66 - Uniform Combined State Law exam (combines Series 63 and 65)

Life insurance settlement options for life income

Same options as under an annuity settlement. - pure/single life - joint & survivor - period certain - refund

SIMPLE - limit, catchup, and contribution rules

Savings Incentive Match Plan for Employees employee contributes max of $13,500 + $3,000 catchup employer contributes a 2% comp fixed contribution (nonelective - company MUST make the contribution) or a match 1-3% of compensation

What tax schedule does partnership income/losses get recorded on? Can you use $3k of the loss to offset income?

Schedule E. No, can't take $3k loss unless it's from Schedule D.

SCIN

Self-Cancelling Installment Note - installment sale but the balance of payments is cancelled if the seller dies. -An owner can accept an SCIN installment note in a sale of assets when seeking an income stream, income tax deferral, and estate tax deduction -The buyer can depreciate assets based on the purchase price -The buyer can deduct the interest paid on the SCIN installment sale (unlike a private annuity) -The value of the installments canceled at the note holder's death is not included in the gross estate -The buyer pays a premium and the seller pays more income tax while living (increases the installment payment) -Only for family or loved ones when family member is in poor health - Payments cancelled will trigger capital gain on the estate's income tax return (which is a lower rate than the estate tax)

Series EE vs Series I bonds

Series EE has fixed interest rate, doubles face value at 20 year mark Series I has fixed rate plus inflation adjustment Both are exempt from state and local taxes. I bonds may also be exempt from federal taxes if used for education.

QDOT (Qualified Domestic Trust)

Similar to QTIP, but for when one spouse is not a US citizen: -there is no unlimited marital deduction -jointly held property between the spouses is not considered one half owned -limited gift amount between spouses ($157k in 2020) -The tax exemption ($11.58M in 2020) is available UNLESS the spouse is a non resident alien -Use the QDOT to get the marital deduciton to the non US citizen spouse by passing property into the trust.

SEP

Simplified Employee Pension Employer contributes up to 25% salary or $57k All employees get the same %age of salary contributed.

SPIA or SPDA

Single Premium Immediate (or Deferred) Annuity - Purchased with a single premium up front - In a deferred annuity, earnings accumulate tax-deferred until distributed

When do you use single life insurance and when do you use survivorship/second to die? (2, 2)

Single life: - for the primary income provider - needing to pay off debt/education Survivorship: - For a couple (double earners), it's lower cost - For estate liquidity

How much is the FICA tax?

Social Security (6.2% up to $137,700) + Medicare (1.45% unlimited) = 7.65% [Double that for self-employed people]

CFP exam - what clues help you eliminate business entities as answers? sole prop, LLC/LLP, partnership, limited partnership, S corp, C corp

Sole prop - profits or continuity LLC/LLP - big profits Partnership - if business is risky Limited partnership - bad answer, active S Corp - profits, risk: usually LLC/LLP is a better answer C corp - losses

Do you pay taxes on group disability benefits?

Sometimes. You pay for whatever fraction of the premiums your employer was paying (the fraction you didn't pay taxes on). If they paid for 60%, then 60% of the benefits will be taxable.

Spousal Benefits for Social Security - who is eligible? (3)

Spouse of a disabled/retired worker must be: - 62 or older - have a child <16 or disabled child <22 Spouse of a deceased worker must be: - 60 or older - have a child <16 or disabled child <22 Divorced spouse who had been married 10+ years and has not remarried. Same requirements as above.

Who can be the beneficiary on a pension plan?

Spouse only, unless they waive their right.

If you die, divorce, or get Medicare, how long is COBRA offered for? To whom?

Spouses and dependents for 36 months

Standard deviation vs Beta

Std Dev measures variability of returns in a nondiversified portfolio (total risk) Beta measures volatility of a diversified portfolio (systematic risk)

SSI

Supplemental Security Income. Covers poor people who are aged, blind, or disabled.

What IRA beneficiary is best for income tax efficiency purposes?

Surviving spouse is best.

Who should buy STRIPS?

Tax-advantaged accounts like pensions. STRIPS are zero coupons so they produce phantom interest.

501(c)(3) organizations (6)

Tax-exempt charitable groups that are prohibited from lobbying or campaigning for a party or candidate. - private schools - qualified public schools (most schools are governmental entities) - colleges - churches - hospitals - charities

Distributable Net Income (DNI)

Taxable income from a trust that determines the amount of income that may be taxable to beneficiaries.

If you need immediate student loan payment relief, what can you do? PSLF? Teach at a low income school? Peace Corps?

Teaching is the only immediate option that forgives multiple types of loans. PSLF takes 10 years. Peace Corps will only discharge a Perkins loan.

Family Limited Partnership

Technique to shift income from parents to children. Allows business owners to pass assets to heirs with a minimum of income and estate tax costs while retaining control of assets during their lifetime. - Income must be distributed pro rate by ownership - GPs may be paid for service to partnership - must be CAPITAL-SENSITIVE - not a service business - Can have a 50% valuation discount for gifts due to lack of control/marketability - Basis for gifts remains the same (no step-up)

What kind of assets stay out of probate?

Tenancy by the entirety Revocable trusts Direct beneficiaries (IRAs, 401ks) General powers

Taxable Termination (GST)

Termination to an interest in trust property where a skip person becomes a trust's only beneficiary. No $15k exclusions, and the trustee must ELECT to use the exemption. The trust pays GST tax.

Form 709

The United States Gift (and Generation-Skipping Transfer) Tax Return is filed on Form 709.

Substitute basis

The basis in a property acquired in a qualified Section 1031 Exchange is reduced by deferred gain and becomes the substitute basis. For example, if the market value of property given up is $200,000, and the basis in that property was $75,000, then realized gain equals $125,000. Assume the market value of property acquired through a tax-deferred exchange is $350,000, then subtracting the unrecognized gain of $125,000 equals the substitute basis of $225,000. The effect of this adjustment to basis is to build in the deferred $125,000 gain into the property acquired. If the new property were sold the next day for $350,000, a $125,000 gain would be reported.

How should the beneficiary of life insurance be named to use the $$ for the executor to pay any estate bills?

The beneficiary should be named as the estate of the insured.

Why fund the bypass trust first before the QTIP C trust?

The bypass trust uses the exemption, so assets are not taxed on the second spouse's death. In a QTIP trust,

Bob and Mary are living together (not married). They have a common-law marriage. Bob dies intestate. Who will get Bob's assets?

The court will decide.

What is the deduction for a Charitable Gift Annuity?

The deduction is the value of the property gifted to the charity MINUS the value of the annuity which will be paid to beneficiaries.

What could happen to the excess if an employer accidentally exceeds retirement plan contributions? (3)

The excess contributions: - can be reallocated to other employees - can be suspended for later years - can reduce future plan contributions

What is the federal funds rate? How does it relate to the prime rate?

The federal funds rate is the overnight rate that banks use to lend to one another. It largely determines the prime rate, which is what banks charge to corporate customers.

Section 1244 Stock

The first $1 million of stock issued by a corporation for cash or property. $50k/$100k of the loss on the disposition of Section 1244 stock is ordinary to individual investors. The gain is still capital gain.

If a skilled nursing facility costs $500/day and the Medicare co-pay is $100, how much will you have to pay for a 130 day stay? How much will Medicare pay?

The first 20 days are completely covered by Medicare ($10k), the next 80 you will have to pay the co-pay ($100x80=$8k) and Medicare will pay the rest ($400x80 = $32k). The 30 days after you will have to pay full price ($500x30 = $15k). In total, you will pay $23k, Medicare will pay $42k.

Which student loan forgiveness is taxable income?

The income based loan forgiveness.

Incontestable Clause and exceptions (3)

The insurer cannot contest the policy after it has been in force two years during the insured's lifetime. Exceptions are for fraud by the insured: - No initial insurable interest. - Intent to murder - Impersonating someone for the medical examination

Federal Funds Rate (FFR)

The interest rate that a bank must pay on an overnight loan from another bank. Set by auction.

Tenancy by the Entirety

The joint ownership, recognized in some states, of property acquired by husband and wife during marriage. Upon the death of one spouse, the survivor becomes the owner of the property.

What is the maximum loan limit from a qualified plan?

The lesser of $50k or 50% of your account balance, but you can always take out at least $10k

If you have a wash sale, what happens to the loss?

The loss is disallowed if you buy stock within 30 days of the sale. The amount of the disallowed loss is added to the basis of the "replacement" shares. So you get to capture loss eventually (when you sell the replacement shares for a higher basis), you just don't get to take the loss now.

Maintenance Margin Requirement - if the MMR is 30% and the stock value is $10k, what does that mean?

The margin requirement on any day other than the first day of a transaction. That means you have to have $3k of your own cash deposited in the account.

Medicare Part A

The part of the Medicare program that pays for: - hospitalization - 100 days in a skilled nursing facility - unlimited home health care - hospice care.

Why does the private annuity intra-family technique not work anymore?

The private annuity creates phantom income because all the gain is taxed in the first year.

Viatical Settlement

The sale of a life insurance policy by a terminally ill insured to another party. - Can do this is there is no accelerated benefit rider on the policy. - Payments are not taxed.

If some of the assets in a QTIP are not producing income, can the surviving spouse do anything?

The surviving spouse can try to get the trustee to reposition the assets. If there is no income, they could go to court to try to break the trust.

What happens to Social Security when a spouse dies?

The survivor can take over the spouse's full benefits.

Bargain Sale example: Bob sells land (FMV $500k, basis $100k) to charity for $300k. What is his taxable gain?

The transaction is 2/5 gift, 3/5 sale. The basis is split the same way, so the sale basis is 3/5($100k) = $60k. The taxable gain is $240k, and he will get a charitable deduction for the $200k gift.

If you're the income beneficiary of a trust (5 or 5 power) and you die, is any part of the trust included in your estate?

The trust corpus is not; if you haven't exercised your 5 or 5 power and the income is still in the trust, that part of the trust would be included in your estate.

Who holds legal title in a trust? Equitable title?

The trustee holds legal title, the beneficiary holds equitable title.

Example of umbrella coverage: You have $1M umbrella that requires $300k underlying, but you only have $100k underlying coverage. If you get sued for $1M, what happens?

The umbrella insurer treats it as though you had $300k in coverage - only pays $700k out. Underlying will pay $100k. You will have to cover the gap in coverage ($200k) yourself.

After death, when do IRA distributions to a beneficiary begin?

The year AFTER death. The year of death, there is no required distribution.

How are viatical settlements taxed? How are life settlements taxed? To whom?

There is no tax paid for a viatical settlement by the person. The viatical company will have to pay ordinary income on everything over their basis when the person dies. Life settlements are taxed to the person as capital gains - the only time life insurance is ever taxable as capital gain.

What is the main disadvantage to gifting S-corp to children (over doing an FLP)?

There is only one class of stock, so it would be hard to keep control if you wanted to gift most of a company.

Life insurance dividend taxability

They are not usually taxable, as they are a return of the premium already paid. [Why do we call them dividends? That seems misleading.]

Life Insurance Settlement and Taxation of Proceeds (3)

This is a way to get life insurance money out which is almost always better than just surrendering the policy. The insured is usually healthy and over age 65 (no longer working). 1. The premiums paid get taken out tax-free as basis 2. The cash-value is taken as ordinary income 3. The rest is LTCG - calculated as net proceeds minus cash value OR basis, whichever is higher NOTE: This is the only time life insurance gets taxed at capital gains rates.

What are the Medicare Part A hospital stay deductibles? (3)

Three different deductibles: First 60 days, then 30 days, then 60 days.

How are the 162 premiums paid? Will the benefit be taxable?

Through a bonus. You will owe taxes on the bonus (the company may give you a double bonus to cover the taxes). The benefits won't be taxable because you already paid the taxes on the premiums.

What is the ACA "employer mandate"?

To force big companies to give employees healthcare, companies with 50+ employees must offer healthcare or they must pay a penalty for any employee getting a subsidy.

What is total risk? Beta? What are the 5 parts of beta?

Total risk is systematic plus unsystematic risk. Beta is systematic (nondiversifiable) risk: PRIME Purchasing power Reinvestment Interest Rate risk Market risk Exchange rate risk

Three Year Rule and exceptions (2)

Transfers made within 3 years of death are still included in the estate. Exceptions: real estate, cash

Is half-year or mid-quarter convention used for MACRS depreciation of residential rental property?

Trick question, neither! - residential real estate or real property uses the mid-month convention.

5 or 5 right (5 by 5 clause/power)

Trust provision: Can take $5000 or 5% of the trust's FMV each year.

For C Corps, how are distributed earnings taxed?

Twice - once as corporate earnings and again at the owner level.

What is CML and SML?

Two components of CAPM: CML uses std dev (total risk) and SML uses beta (systematic risk) Capital Market Line - specifies the relationship between risk and *portfolio* return Security Market Line - values any asset, whether individual stocks or portfolios as a whole.

educational savings bonds rules and taxability

U.S. bonds whose proceeds are used for qualified higher educational expenses for the taxpayer, the taxpayer's spouse, or a dependent. - Purchased in name of the parent (or other adult) - Must be redeemed DURING college, only for tuition and fees (NOT room and board) - The interest may be excluded from gross income, provided the taxpayer's adjusted gross income does not exceed certain amounts.

What's the difference in ownership and taxation for value increase/interest of EE bonds in an UTMA/UGMA vs. "education" bonds?

UGMA/UTMA: owned by a child, added value taxed as ordinary income as redemption (*not recommended for education savings*) Education bonds: owned by parents, increased value not taxable if used for education (AGI phaseout). Interest for EEs can be elected taxable every year or accrued and taxable on sale.

1031 Exchange

Under Internal Revenue Code section 1031, a tax-deferred exchange of "like kind" properties.

Auto Policy Part C

Uninsured Motorist - pays for bodily injury when the other (uninsured) driver is at fault - covers medical expenses, lost wages, pain & suffering Anybody in a covered vehicle is insured.

UBTI

Unrelated business taxable income - income from a limited or general partnership interest (not real estate)

How long can you keep your child on your health plan?

Until they are 26 (the limit age of dependency)

American Opportunity Tax Credit

Up to $2500 per year per student for tuition expenses incurred in the first 4 years of post-secondary education. 100% of the first $2000, and 25% of the next $2000, subject to AGI phaseouts. Expenses cannot be for room, board, or textbooks. The student must be enrolled at least half time in a program that leads to a degree or certificate.

CFP suspension of marks is for how long?

Up to 5 years

A stock returns 8%, 12%, 0%. What is the mean and std dev?

Use the sum button to input values. 6.67% mean, 6.61 rho

What's the difference in donating use related and use unrelated stuff?

Use unrelated must use basis. Use related can be FMV.

Section 303

Used for estate liquidity. Allows a corporation to make a distribution of a portion of the stock of a decedent that will not be taxed as a dividend. -The business must be a regular corporation or an S corporation (closely held) -The value must be more than 35% of the adjusted gross estate -Only an amount of stock equal to a total of all estate taxes and administration expenses can be redeemed

Are survivorship annuities included in an estate? (2)

Usually fully included if survivor opts to take the lump sum. If survivor opts for periodic payments, the present value of the annuity is included.

Are life insurance dividends taxable?

Usually no - they are generally a return of unused premium

VEBA

Voluntary Employee Beneficiary Association Contributions are deductible for employee. Could include: - Death benefits - Medical expense benefits - Disability - Childcare - Legal expenses - Unemployment/severance - Education

What is Medicare Part B?

Voluntary Insurance Program

What is something to look for in questions when you buy and sell multiple lots of stock?

WASH SALE, FOOLS

Covered Perils: Basic (10)

WHLF STARVE: Windstorm Lightning Fire Hail Smoke Theft Aircraft Riot Vehicles Explosion

What is the difference between a warrant and a call option? Which is longer term?

Warrants - issued by companies, longer term, not standardized terms

When does a gift of property occur? (+ 2 exceptions)

When a transfer of title is executed. Exceptions: 1. In a joint tenancy account, a gift arises on WITHDRAWAL of funds. 2. In a joint tenancy US savings bond, a gift arises when the bond is redeemed.

When do gifts to grandchildren avoid having to pay GSTT?

When the parents are dead - the grandchildren "step up" a generation for GSTT purposes.

When is income from a trust taxable to the grantor?

When the trust is tainted.

When can heirs not use the 6-month alternate valuation for assets? What value is used for basis?

When there is no estate tax due. Assets step up in basis to FMV on date of death.

When is someone chronically ill?

When they are unable to perform 2+ ADLs for 90 days

When should you ever fire a client?

When they do stuff that's illegal or if they lie to you.

Partnership Loss Taxation - how are income and losses treated when you have multiple public MLPs? Multiple nonpublic LPs?

When you own multiple public MLPs, the income/losses cannot be netted against each other. All net income flows out. All losses are held until there is income from that specific MLP to net against (or if it is sold). When you own multiple nonpublic LPs, losses can be taken up to income. [Mix things up in private, nobody will know]

When do you sign up for Medicare Part B?

When you retire (must have job health coverage) or age 65, whichever is later. Within 8 months of retiring or penalty Within 3 months of age 65 or penalty

How is real estate depreciation taxed?

When you sell a real estate investment, you get depreciation recapture at 25%.

When can you not contribute to an HSA?

When you're enrolled in both Medicare Part A and B

When can you use a joint life expectancy table for your RMD?

When your spouse is more than 10 years younger than you.

When does a CFP act as a fiduciary?

Whenever providing financial advice (not just financial planning)

Monetary Policy Who, Why, and What (3)

Who: Federal Reserve Board Why: The Fed increases liquidity to create economic growth. It reduces liquidity to prevent inflation. What: 1. Set the discount rate: lower rate = increased liquidity 2. Set reserve (margin) requirements: lower req. = increased liquidity 3. Open market operations: buy bonds (short term US Treasuries) = increased liquidity

Fiscal Policy Who, Why, and What

Who: Office of Debt Management Why: stabilize the economy What: government spending and taxes

When can you enroll in Medicare?

Within +/-3 months of your 65th birthday, or 1/1 to 3/31: All of January, February, and March. Overlaps January with ACA open enrollment, "because seniors are slower".

What are some examples of absolute liability?

Workers comp, product defects, keeping dangerous pets, storing explosives, ultrahazardous activities

If you get awarded damages in a medical settlement, is that included in your gross estate?

Yes

Do STRIPS produce taxable income?

Yes (unless held in a tax-deferred account) Even though there is no coupon payment, taxes are due on the interest earned each year. ("phantom interest")

Are newly acquired cars insured automatically?

Yes for parts A,B,C when replacing an old vehicle in a policy. You must notify the insurance within 14 days to get Part D coverage.

Can you put real estate into an IRA? Can you rollover cash from one IRA and put real estate into another one?

Yes, No. You can't take out one kind of investment and put in a different kind as a rollover.

Is disability benefits' taxability also affected by MAGI like Social Security benefits?

Yes, OASDI - old age, survivor, and disability are all 50%/85% taxable based on MAGI

Can you claim the AOC if you are only enrolled part time?

Yes, as long as it's a degree program.

If a company has 40 employees, but only 10 of them are in the company health plan, does the company still have to offer COBRA? To everyone?

Yes, as long as the company has over 20 employees, they must offer COBRA. But *only* to the 10 employees who were in the health plan.

In a salary continuation disability plan, will the benefits be taxable?

Yes, because you don't pay taxes on the premiums up front - the company simply buys a policy for you.

For dependent care FSAs, do both parents have to be working?

Yes, both spouses must earn income

Do you need to file form 709 for a split gift to megafund a 529?

Yes, both spouses must file a 709 form.

Are loaner cars automatically insured?

Yes, but only for parts A,B,C.

Can you have both an HSA and an FSA?

Yes, but the FSA must be a limited purpose FSA (vision/dental only)

If you're still working, would you ever HAVE to take a RMD from a 401k before retiring?

Yes, if you own >5% of the company (no skirting RMDs with a solo 401k)

Can you roll over an IRA into an HSA?

Yes, once, and it's irrevocable. For if you have a big health event.

Can a creditor come after payments from a medical settlement?

Yes, since the person has unfettered access to the funds.

Is a revocable trust included in your gross estate?

Yes, since you control it up until death.

If you use Section 179 to write off the cost of equipment, do you pay depreciation recapture when you sell it?

Yes, the basis reduction is recaptured as depreciation recapture (ordinary income, usually 25% rate).

Is your spouse covered by auto insurance if they leave you?

Yes, they are covered until: - 90 days - they get their own insurance - the end of the original insurance policy, whichever is earliest.

If you had a $1M loan from 2017 and you refinance, is all of the mortgage interest still deductible or just the amount under $750k?

Yes, you can, as long as you only refinance for what you owe (no taking cash out to max the previous limit)

Does COBRA cover vision and dental?

Yes.

Does COBRA coverage have to be identical to the previous plan?

Yes.

Can you continue group life insurance after leaving an employer?

You can convert to individual life insurance when coverage stops. Must convert to permanent life insurance, not term.

If you buy a beanie baby for $2k and donate it (FMV $2), how much do you get to deduct? If you buy a beanie baby for $2 and donate it (FMV $2k), how much do you get to deduct?

You can deduct only $2 each time. For unrelated use items, the deduction is the LESSER of FMV at time of donation or basis.

Passive Activity Loss Rule

You can only net passive losses against passive income.

Reinstatement clause for life insurance - what will you need to reinstate the policy? (2)

You can reinstate the policy with - proof of insurability - paying all the lapsed premiums plus interest

When and how does an investment advisor register with the SEC?

You can start registering at $100M AUM. *Required* for RIAs >$110M AUM, must keep 5 years of records 1. File ADV form 2. Pay $150 fee 3. File ADV Part 1 updates annually with SEC

Can you convert EE bonds to HH bonds and why would you want to?

You can't anymore. People used to do this to defer taxes and get more income (unlike EEs, they pay out a coupon).

How could you use a CRAT and an ILIT together to donate more than the $1M you have?

You donate $1M to a CRAT and get a tax deduction and income stream. You then use that money to fund an ILIT for another $1M.

What is the IRD deduction? If there's no estate tax, does IRD still apply?

You get an income tax deduction for the estate taxes already paid. Say you inherit a $2M IRA, you pay ordinary income on it. If that IRA already got taxed for $500k of estate taxes, you only have to pay income taxes on $1.5M instead.

When do you have to recapture depreciation? Can it be avoided?

You must pay for depreciation recapture when you sell, ALWAYS. You can delay it with a 1031 exchange. You can avoid it only by selling the property for a loss or by dying (cost basis is stepped up). But if you use depreciation on Schedule C or E or by Section 179, you MUST recapture it.

Estate Planning for Nontraditional Relationships

You should suggest using different planners - conflict of interest in repping both parties. - Unmarried partners have fewer rights (no elective share of will) - They do not get unlimited marital deduction - Previous partners' children may present a guardianship problem Best plans include: revocable trust; tenancy in common; GRIT

When would you use a Pooled Income Fund or a CGA rather than a CRAT/CRUT? What is the difference between them? Do they still pay out 5% like a CRAT/CRUT?

You would use these if you have one specific charity in mind. For Pooled Income, the payments are variable (like a CRUT). For a CGA, payments are fixed for life (like a CRAT). For both, there is no 5% minimum (no guaranteed payout).

Dependent Care Credit

a credit based on the taxpayer's cost of caring for dependents either under age 13 or physically or mentally incapable of caring for themselves. 20% of expenses up to $3000 for one kid or $6000 for more. The max credit is therefore $1200

Medigap

a private insurance policy that pays the difference between the medical charge and the amount that Medicare pays. You must be in both Medicare A and B

Occurrence Policy

covers liability claims arising out of occurrences that take place during the policy period. The policy covers those incidents FOREVER, no matter when a suit is brought.

Accidental Death Benefit Rider (Double Indemnity)

doubles the face amount of life insurance if death occurs as a result of an accident

Trust Companies

financial institutions that specialize in managing the money and property of others - They act as "trustee", fiduciary, executor - For someone incapable of doing it themselves (minors, cognitively impaired)

HMO Keys (2)

health maintenance organization ("Have Monthly Only" "Have One Medic") 1. Capitation - one monthly fee to provider, get all required medical care. 2. Gatekeeper - PCP is responsible for referrals to specialists

Three Year Rule

if an individual gratuitously transfers ownership of a life insurance policy on his life, or any incident of ownership in a policy on his life within three years of his date of death, the death benefit of the policy is included in his federal gross estate

Grandfathered Life Insurance Rules

if the death benefit increases by more than $150k then the contract becomes subject to material change rules and may lose its grandfathered status (become a MEC)

Grandfathered Life Insurance Rules

if the death benefit increases by more than 150k then the contract becomes subject to material change rules and may lose its grandfathered status (become a MEC)

Section 197

intangible assets like goodwill, franchises. Can be depreciated.

Keogh plan contribution limits

lesser of 25% x profit sharing of net earnings after SE tax deduction (.9235 x 0.153/ 2 x gross earnings) or $57,000. NOTE: to calculate 25% rate, use .25/1.25 to get the actual contribution rate

Whole life insurance (permanent insurance)

life insurance that continues to provide insurance as long as premiums are paid; not only provides benefits to the beneficiary but also has a cash value

I bonds

like EE bonds just with an inflation kicker

Life insurance settlement option: Cash

lump sum payout

Universal Life Insurance

permanent cash-value insurance that combines term insurance (death benefits) with a whole life insurance: cash value (tax-sheltered savings/investment account that pays interest, usually at competitive money market rates). Like whole life but more flexible - you can change the premium/cash value/ DB. The interest to cash value is at current interest rates, while for whole life it's a fixed interest rate.

QJSA

qualified joint survivor annuity -post retirement death benefit for the plan participant's spouse. -Qualified pension plans are required to provide a QJSA. -Currently, survivorship annuity must not be less than 50% or more than 100% of the annuity payable during the joint lives of the participant & spouse

QPSA

qualified pre-retirement survivor annuity -preretirement death benefit for the plan participant's spouse upon the death of the participant who dies before the starting date of the QJSA. -Survivorship annuity cant be less than what would be payable under the plans QJSA.

nonqualified stock options and taxation

similar to qualified options, except that they are subject to a less favorable tax rate - ordinary income when exercised, capital gains when sold.

incident of ownership in a life insurance policy

the ability to exercise any economic right in a life insurance policy, like changing the beneficiary - having an incident of ownership makes the policy includable in your estate. (Note: payor of premium is NOT considered an incident of ownership - just because a company you own paid the premiums doesn't mean you have an incident of ownership in the policy)

What is the coefficient of variation?

the ratio of the standard deviation to the mean expressed as a percentage. Risk per unit of return.

market risk premium

the slope of the SML - the difference between the expected return on a market portfolio and the risk-free rate

UITs

unit investment trusts - you hold units and redeem them. No new additions to assets, and the fund is self-liquidating since it distributes all funds instead of reinvesting.

Variable Life Insurance

whole life insurance that invests the cash value of the policy in a separate account, and the stocks or other high-yielding securities in the general account. The separate account won't be frozen if the company fails.