Final Review Quiz #1
Your client, Mrs. Thomas is going through difficult times. Her husband is in a coma and requires full-time care. His prognosis is poor. The Thomas's own approximately $3.2 million in assets. She is concerned about whether a serious health problem might affect her as well. What do you recommend she do first? A) Buy a long-term care (LTC) policy. B) Consult with an attorney and execute both a will and a durable power of attorney. C) Invest all their assets in CDs. D) Transfer all of their assets to an irrevocable trust.
B) Consult with an attorney and execute both a will and a durable power of attorney. What Mrs. Thomas should do first is to execute a will and a DPOA.
Mr. and Mrs. Bailey have been advised by their financial planner that they can afford to make $650-a-month payments on a mortgage loan for a home. The current rate on a new 30-year mortgage is 6.75%. How much can they afford to borrow? A) $80,173 B) $98,213 C) $100,216 D) $111,351 E) $125,270
C) $100,216 12 PMT/YR 650 PMT 6.75i 30 gold N PV= $100,216 Mortgages are paid at the end of the month.
The top marginal federal income tax rate is expected to increase to 50%. What is the likely effect on the price of municipal bonds if this happens? A) No change in price of new bonds would occur. B) No change in price of prior issued bonds would occur. C) Prior issued bonds would sell for more. D) New bonds would be issued with higher coupons. E) Previously issued bonds would sell for less.
C) Prior issued bonds would sell for more. Raising the top marginal income tax bracket would create more demand for municipal bonds because they carry tax exempt income. Greater demand would push up their price. Municipalities could issue new bonds with lower coupons due to this increased demand.
Todd wants to defer the distributions from the money purchase plan in which he participates for as long as possible. He works for RJ, Inc. RJ wants him to continue working beyond the plan's stated retirement age 65. If he continues to work beyond 72 and contribute to the plan, what is the latest time when he can take his first distribution and not be penalized? A) When he attains age 72 B) By April 1st of the year after he turns 72 C) When he retires from his job with RJ, Inc. D) By April 1st of the year following the year when he retires from his job with RJ, Inc.
D) By April 1st of the year following the year when he retires from his job with RJ, Inc. Todd is a rank-and file-participant in the money purchase plan and clearly not a 5% owner. Thus, he may delay his required beginning date (RBD) from the plan until April 1 of the year following the year when he retires from service with his employer.
The minimum distribution required from Clarence's IRA was $5,000. Clarence only took a $3,000 distribution this year. What is the amount of the penalty that Clarence must pay? A) $1,000 B) $1,500 C) $2,000 D) $3,000
A) $1,000 50% of $2,000
Tim began purchasing a mutual fund several years ago. He has followed a dollar-cost averaging approach by investing $1,000 each year for 5 years. If his average cost per share is $111.58, what will be his taxable gain if he sells 10 shares for $150 per share? A) $384.20 B) $500.00 C) $1,115.80 D) $1,500.00
A) $384.20 Sells 10 @ 150= $1,500.00 Cost 10 @ 111.58 = 1,115.80 Gain= $ 384.20
Alice and Bob Klein are the proud parents of a new baby boy. They want to fund for his college over the next 18 -20+ years. They want to avoid filing any tax returns or paying any taxes until the funds are used. Which of the following investments would you recommend? A) A 529 primarily in stocks. B) A series of zero coupon bonds in a UTMA account C) An S&P 500 index mutual fund in a UTMA account D) A growth mutual fund in a UTMA account
A) A 529 primarily in stocks. The Kleins want to avoid paying any taxes until the funds are needed. The 529 would accomplish that goal. The other answers could produce kiddie tax.
Sidney is very displeased with a particular CFP® practitioner's recommendations. He strongly believes that they were unsuitable and resulted in unnecessary and losses. Further, Sidney later learned that the planner did not provide him with adequate disclosure of conflicts of interest and other matters. To which the following parties should Sidney send his letter of complaint? A) CFP Board B) The planner's supervisor C) FINRA D) The SEC
A) CFP Board We know that the planner is a CFP®. Nothing in the question indicates FINRA registration. Nor does the question indicate that the planner is a federal covered advisor regulated by the SEC. The planner may or may not have a direct supervisor. The culture of the exam is that CFP Board wants to know of the complaints, then they can investigate them.
What is not an attribute of a Coverdell ESA? A) Contributions are generally deductible (above the line). B) Contributions are limited to $2,000 per year, per student. C) Tax free distributions for expenses are not limited to qualified higher education expenses. D) Qualified elementary education expenses can be paid tax-free
A) Contributions are generally deductible (above the line). The contribution to a Coverdell ESA is not deductible.
Your client, Dennis Hart explains to you that he wants a reasonable level of income but also some long-term growth. If you beleive that he can address both of his investment objectives, which of the following securities would you suggest to Dennis? A) Convertible bonds B) Preferred stock C) Blue chip stocks D) Corporate commercial paper
A) Convertible bonds Most logical investors will accept a lower interest rate in exchange for the potential price appreciation from converting the bond if the prices of the issuer's stocks rise above the bond's conversion price. Preferred stock is regarded as a fixed income investment with little growth potential. Many blue chip stocks distribute small dividends and they can be skipped in a profit-less year.
A QDRO is any judgment, decree, or court order relating to which of the following? I. Child support II. Alimony payment III. Marital property rights IV. An IRA account A) I, II, III B) I, II C) III D) IV E) All of the above
A) I, II, III QDROs specify items I, II and III. QDROs apply to qualified plans but not to IRAs.
Which of the following benefits are generally provided through workers compensation? I. Disability income benefits II. Rehabilitation benefits III. Tax-free benefits IV. Sick pay benefits A) I, II, III B) I, II, IV C) I, III D) II, III, IV E) IV
A) I, II, III Workers compensation benefits generally include medical care, disability income, death benefits, and rehabilitation benefits. Benefits are received tax-free. Sick pay would be benefits provided by an employer directly.
When you met with John and Jodi Adams for your regular monitoring meeting, they provided you with information about new developments in their lives. After you congratulate them, they ask you to help them prioritize the reasons for making changes to the original financial plan that you wrote for them. How would you rank the changes listed below in order of importance from highest to lowest? I. They inherited money from Jody's mother II. Jody is expecting a second child in 2 months III. John just received a new job promotion, which entails a move to an adjacent state (50 miles away). IV. The adjacent state has a high state income tax A) I, II, III, IV B) II, III, IV, I C) III, I, IV, II D) IV, II, I, III
A) I, II, III, IV Identify the most important and the least important reasons to modify the original plan. The Adams's will need a plan for the inherited money. The state level income tax differential is likely to be small. If the Adams's itemize, it may produce an itemized deduction. Because the new baby is a second child, they have already considered the finanical planning that accompanies parenting. (In ranking questions, identifying the "most" and "least" generally leads you to the answer. The middle choices are often too similar to differentiate.
If a taxpayer is subject to AMT, which of the following could reduce the AMT payable? I. Exercise nonqualified stock options II. Take short-term capital gains III. Delay until next year the payment of a property tax bill IV. Exercise and sell an ISO in the year of exercise A) I, II, III, IV B) II, III, IV C) III, IV D) II and III E) I and IV
A) I, II, III, IV Increasing taxable income (Answers I and II) for regular tax purposes until it reduces or eliminates AMT exposure. Delaying certain itemized deductions such as medicl expenses, charitable gifts and local property tax creates more regular income. An ISO exercise adds to AMT income, but that addition is nullified by a disqualifying disposition such as a sale in the year of exercise.
Todd is the CFO for a 20 person insurance company, XYZ Inc. Due to two employees who had to go out on medical leave, XYZ Inc. is considering disability benefits. XYZ, Inc. received two proposals from a disability insurance carrier. The first is that each employee will have an individual policy with a maximum benefit of 50% of salary capping at $5,000 per month. The second is a group policy. The insurance company provided an explanation of the differences to the employees. Because the individual policies have more liberal definitions of total disability and base premiums on the age of the insured, XYZ management has indicated that there is a maximum premium they will pay per month. Todd's illustration indicates he would have to pay about 30% of the premium indicated for the individual policy. How would you analyze his situation and help him make a recommendation for XYZ? I. Under the individual plan if he was disabled, 30% of the benefits would be tax-free. Under the group, all the benefits would be taxable. Thus, he should elect an individual plan. II. Under the group insurance, XYZ would pay the entire premium. Although the benefits would be taxable, he has a low probability of being disabled. He should choose the group plan. III. Under the individual plan he would get a more liberal definition of total disability. This is the most important consideration when buying a disability policy. He should elect an individual plan. IV. The group plan would entail simpler underwriting. The individual plan would subject Todd to financial and medical underwriting. He should elect the group plan. A) I, III B) II and IV C) III and IV D) II
A) I, III Although the premium for the individual policy would come from Todd's pocket, the individual policy would provide a more generous definition of total disability and produce partially tax-free benefits.
A CFP® certificant may generally be found liable (or negligent) in which of the following occurrences? I. Divulging confidential information about a client to the IRS in response to a subpoena II. Not addressing property and casualty insurance coverage in a comprehensive financial plan III. Not preparing the financial plan as promised in the planning agreement IV. Not reviewing advice prepared by his/her paraplanner A) II, III, IV B) II, IV C) III D) IV E) All of the above
A) II, III, IV A CFP® certificant must respond to an IRS subpoena. The other situations indicate questionable behavior.
If interest rates and inflation react positively (running parallel), what is the spread between them called? A) Real return B) Risk free return C) Risk premium D) Inflation indexed return
A) Real return The spread between rates and inflation is known as real return.
Harry and Pat Nelson (highest tax bracket, married, filing jointly) have a daughter, Pam age 12. As of today, they have failed to save for Pam to attend a 4-year university. Under the circumstances, which of the following investments makes the most sense and why? A) A series of taxable zero coupon bonds owned by Pam (UTMA account) because they can provide the right amount of money when it will be needed and would be taxed at Pam's tax rate. B) A S&P 500 Index fund owned by Pam (UTMA account) because it generally provides the highest inflation-adjusted return and is taxed at long-term capital gains rates. C) A series of laddered CDs owned by Harry and Pat because they can provide appropriate funds at correct times and have virtually no principal risk. D) A single premium variable life insurance policy on Pam's life because growth is tax-deferred and Pam can remove funds as needed for college thorugh policy loans.
B) A S&P 500 Index fund owned by Pam (UTMA account) because it generally provides the highest inflation-adjusted return and is taxed at long-term capital gains rates. Consider the relatively short time horizon. The time horizon for this question could be 6-10 years. Also consider the advantage to paying low taxes. The S&P 500 index fund will be tax efficient and probably grow. Yes, kiddie tax could apply but the ultimate tax rate would be at a maximum of 20% (dividends and capital gains) rather than as ordinary income. Answer A is wrong because the zero coupon bonds produce phantom income. You may have picked A as an answer. NOTE: I think that if the time horizon to college was 4 years, then A or C could have worked. This is the best answer and somewhat subjective. Answer C is wrong because the CD earnings will be taxed at parent's rates rather than Pam's over $2200. Answer D is wrong because distributions will be taxable (MEC) and subject to a 10% penalty.
Which of the following is considered self-employment income for purposes of determining self-employment tax? A) Rental income from an office building owner by the taxpayer B) Board of directors fees C) Furnishing heat, electricity, water, and garbage collection to tenants D) Capital gains from the sale of property E) Wages from an S corporation
B) Board of directors fees Rental income from real estate and capital gains from the sale of property, and wages are not self-employment income. Furnishing heat to tenants is an expense (not income).
Your client, Bill, is single. He will report a current year MAGI of $110,000 and wants to work for many more years. He is in his late 60s. He is concerned about his upcoming RMDs and the potential tax they will generate for the rest of his life. What would you suggest that Bill do with his $500,000 IRA if he is now in the 24% tax bracket? A) Annuitize the payouts using a single life expectancy B) Convert some of his traditional IRA to a Roth IRA. C) Start taking distributions this year (before his RBD). D) Continue to work so he will not have to take RMDs until he actually retires. E) Take a full distribution now and purchase a single premium life insurance policy.
B) Convert some of his traditional IRA to a Roth IRA. A Roth will avoid RMDs. Bill's concern is with upcoming RMDs. I should try to solve his concern. He will still have to pay income tax on the conversion, but he can avoid taking some RMDs. He will be in the 37% bracket above $500,000. Answer C does not solve his concern. The conversions may only be taxed at 25%. Subjective - client case/evaluation question. There is no indication of a life insurance need (Answer E). Answer C isn't a bad answer but it will cause taxes. Answer D is false. This is IRA money, not a qualified plan.
Your client, Alice owns the following four different diversified mutual funds: Growth fund: $45,000 Emerging market fund: $14,000 Government bond fund: $50,000 Corporate bond fund: $35,000 Alice is concerned about overall portfolio risk. She is concerned about standard deviation and other factors. Due to a recent inheritance, she has additional money to invest. To which among her currently held mutual funds do you suggest she add money? A) The growth fund B) The emerging market fund C) The government bond fund (Treasury securities) D) The corporate bond fund
B) Emerging market fund The emerging market fund currently represents the smallest percentage of the portfolio allocation and likely has the lowest correlation coefficient relative to the other funds. Reducing correlation coefficient would reduce the portfolio's overall risk. The correlation coefficient is highly important for the exam. (Somewhat subjective)
You are an experienced, fee-based financial planner. A very wealthy client, Butch, has been referred to you by your second cousin. In the initial meeting, Butch repeatedly used offensive language. You have weathered that because you still want to help him attain his financial objectives. As you proceed, he makes an ethnic slur about his attorney. You realize he does not know that you share the same ethnicity as the attorney. You are seriously offended. How should you proceed? A) Complete the initial meeting and tell him you will send his plan by mail. B) Finish the initial meeting and tell him you don't think he would be a good fit for the firm. C) Tell him his behavior is unacceptable and demand he leave immediately. D) Refer him to a fellow CFP® certificant.
B) Finish the initial meeting and tell him you don't think he would be a good fit for the firm. In the step during which the relationship is to be established by mutual agreement between planner and client, there is no requirement that you accept as a client someone you find to be offensive. There is no reason to make the situation more uncomfortable. Why would you wish an unpleasant individual on a fellow financial planner?
Paul Harding, CFP® has been traveling often to see his elderly mother whose health is failing. With each trip, he is not sure how long he will be away. He recently completed writing a plan for Mr. and Mrs. Walters, who are new clients. The Walters are very eager to get their plan underway and call often for a presentation/recommendation appointment. After briefing an intern on the plan he wrote for the Walters, Harding tells the intern to set up an appointment with the Walters and tells the intern to present the plan. In this situation, which action applies to Harding ? A) Harding violated the Duty of Confidentiality under the CFP® Code of Ethics. B) Harding violated the Duty of Professionalism under the CFP® Code of Ethics. C) Harding violated the Duty to comply with the law under the CFP® Code of Ethics. D) Harding adhered to the CFP® Code of Ethics.
B) Harding violated the Duty of Professionalism under the CFP® Code of Ethics. Allowing an intern to present a plan to clients without supervision clearly violates the Duty of Professionalism. Sharing information within a firm generally does not violate the Confidentiality Principle if it is necessary for a business reason and all parties understand that client confidentiality is still honored beyond the firm. For example, a planner assigning an assistant to enter client data into financial planning software would not violate confidentiality.
A CFP® professional meets a prospective client who is prepared to discuss his retirement accounts that were provided through a former employer. The client is concerned that the investments in those accounts are too aggressive. He states that he and his wife would like to retire when they are 65 and that they have recently been writing many checks from their account to support their adult son who can't seem to find a job. After further analysis, the CFP® professional determines that the client does not have enough cash flow to retire when they are 65 while continuing to support their son. How should the CFP® professional proceed? A) Communicate to the clients that their retirement goals are unrealistic and that they should plan to work until age 70, and that they should stop giving money to their son. B) Help the clients to review and prioritize their goals. C) Review the client's current and potential income streams to identify ways to solve the immediate cash flow shortfall. D) Recommend a conservative asset allocation model to reduce the risk in his retirement accounts and suggest that they stop giving money to their son.
B) Help the clients to review and prioritize their goals. The CFP Board would feel that it is important to encourage the client to reassess priorities before making specific recommendations. Answer C is wrong because it assumes the client has established new goals. Answers A and D are arguable.
The CFP Board urges certificants to avoid the practice of borrowing from or lending to clients. Which of the following factors would generally be considered by the Board of Professional Review? I. Whether the CFP® certificant is a financial planning practitioner II. Whether the client is a family member of the planner or a financial institution III. Whether the terms and conditions of the loan are reasonable and fair to the client IV. Whether the client lent from his/her own account A) I, II, III B) II, III, IV C) II, III D) III, IV E) All of the above
B) II, III, IV Borrowing and lending between the planner and clients who are not family members can compromise the financial planning relationship.
Mrs. Spellman has come to you for advice. Her current net worth is about $450,000. She says she could use more "spending money." Which of the following techniques would increase Mrs. Spellman's cash flow? A) Take an equity loan against her home ($150,000 FMV with a basis of $30,000) B) Sell her vacation home and invest the net proceeds in municipal bonds C) Sell investment property that is producing minimum net income ($8,000/yr.). ($200,000 FMV, original cost $100,000 but fully depreciated D) Sell non-income producing land ($100,000 FMV, basis $150,000)
B) Sell her vacation home and invest the net proceeds in municipal bonds In Answer A, the loans produce a negative cash flow because they carry interest. The sales of the home and the investment property do not increase cash flow. We do not know how the money will be invested. The question focuses on increasing cash flow.
When, if ever, can a corporation that issues qualified stock options (ISOs) receive a tax deduction for the ISOs? A) NeverAlways B) Yes, if the ISO is disqualified C) Yes, if the ISO is qualified D) Yes, if no more than $100,000 worth of ISO stock is granted that vests in a specific year
B) Yes, if the ISO is disqualified If the stock that was acquired under the option (right to buy) is sold before the two year /one year holding period, the excess of the fair market value of the shares at the time of exercise over the exercise price is treated as compensation to the option holder. That creates a corresponding deduction for the issuing corporation.
Joe and Sue Rogers, a married couple in their early forties are concerned about the lack of growth in their investment bank-issued CDs. Because both spouses are professionals they are in the highest margin income tax bracket. Which of the investment below is the least appropriate for them? A) Salary reduction plan (401k) B) Zero coupon investment grade corporate bonds C) Municipal bonds D) Growth stock mutual fund
B) Zero coupon investment grade corporate bonds The zero coupon bonds will produce phantom income at the Rogers' top marginal income tax rate. The question cites "least appropriate and high income tax bracket." The other choices give them a tax break and/or growth.
Your married clients, Adam and Jane Smith, have provided you with the following tax information for the current year. Adam's salary (net of his 401(k) deferral): $135,000 Jane's income (from babysitting): $1,000 Real estate income (active participation): $5,000 Dividends: $1,000 Adam's IRA contribution: $6,000 Jane's IRA contribution: $6,000 What is the amount of their current year AGI? A) $124,000 B) $130,000 C) $136,000 D) $142,000
C) $136,000 Adam: $135,000 Jane: 1,000 Real estate: 5,000 (income) Dividend income: 1,000 IRA: - 6,000* AGI: $136,000 * Adam has a 401(k) and is above phase out ($109,000 - 129,000) for IRA deductibility. However, Jane can contribute and deduct the $6,000. The spousal IRA phase out is at $204,000.
Quinn, a registered nurse, who is age 33, wants to arrange monthly systematic withdrawals from his checking account to fund a $5,000 Roth IRA. Which plan would you suggest? A) $250 to a balanced mutual fund, $160 to a growth mutual fund B) $250 to a balanced mutual fund, $125 to a growth mutual fund C) $250 to a growth mutual fund, $166 to an international mutual fund D) $150 to a balanced mutual fund, $225 to a growth mutual fund
C) $250 to a growth mutual fund, $166 to an international mutual fund Choose the answer that fully funds the Roth ($5,000 per year). The type of investment doesn't matter because the question does not ask about it. The question says $5,000 not $6,000. Read carefully.
Mrs. Smith, age 80, is comparing different investment portfolios. The thought of losing principal makes her very uncomfortable. While she would appreciate some income from her investments, that is a secondary concern. After listening to her carefully, which of the following portfolios would you suggest? A) 10% money market mutual funds, 10% blue chip common stocks, 80% long-term bonds B) 50% bank issued CDs, 50% long-term investment grade corporate bonds C) 10% money market mutual funds, 10% blue chip common stocks, 80% investment grade short-term bonds D) 10% money market mutual funds, 40% bank issued CDs, 50% investment grade long-term bonds
C) 10% money market mutual funds, 10% blue chip common stocks, 80% investment grade short-term bonds Due to their high durations, the long-term bonds carry significant principal risk if interest rates rise. The short-term bonds (80%) along with only 10% in quality common stock seems reasonable given her fear of principal loss and desire for income.
Following the death of the grantor (trustmaker) which of the following strategies should be the most effective to reduce GSTT? A) An irrevocable trust B) A revocable trust C) A reverse QTIP D) A dynasty trust
C) A reverse QTIP The decedent can still use the GSTT exemption when the reverse QTIP is elected by the executor (after death). The dynasty trust is generally implemented before death.
Your client, Bob Hill, is still bristling over his divorce in 2018. Under the divorce agreement, he made alimony payments to his ex-wife of $50,000 in the first post-separation year, $20,000 in the second year, and nothing in the third year. Considering the Internal Revenue Code, which of the following statements can you accurately explain to Bob? A) Payments to date do not qualify as alimony. Bob needed to pay his ex-wife for at least three full years. B) Under the divorce decree, of the payment of $50,000, only the $20,000 would be treated as alimony. The remaining $30,000 would be regarded as a property settlement. C) Bob would be required to recapture $32,500 of what he has already paid to his ex-wife and report it as income at the end of the third year. His wife would probably file amended returns as well. D) That portion would be treated as part of the property settlement rather than alimony. E) Bob would be required to recapture $20,000 of the first year payment and would not be eligible for any deduction in the second year.
C) Bob would be required to recapture $32,500 of what he has already paid to his ex-wife and report it as income at the end of the third year. His wife would probably file amended returns as well. The alimony appears to be front-loaded and thus subject to recapture. Both Bob and his ex-wife will file amended returns. Payment year #1 and Year #2: $70,000 minus constant -37,500 = Recapture $32,500
Smokestack, Inc. voluntarily terminated its defined benefit plan. Your client, Homer Connors, age 61, has been a long-term employee of Smokestack, Inc. and a participant in this pension. The "termination" has made Homer quite anxious. What might you tell Homer that may make him feel less anxious? A) The 10% penalty (59-1/2 year rule) will not apply to distributions. B) The account balance must be rolled over into an IRA account. C) Homer is 100% vested. D) The plan is fully funded. There is no need to worry.
C) Homer is 100% vested. The 10% penalty will not be imposed on Homer because he is over 59½ and is a possible answer. The plan is fully funded at normal retirement age, not necessarily at a premature termination. Homer would get the account balance that is attributable to him and fully vested.
Luke recently inherited a parcel of land. Many years ago, his parents purchased the land for $10,000. At the time of his inheritance, it had a FMV of $100,000. Today it is worth $200,000. The Insurance, taxes, and maintenance are costing Luke more than the land is appreciating. He is considering various alternatives. Which of the following is true? A) A local public charity wants to hold various activities (fairs, etc.) on the land (rent free). Luke feels that he could claim the use of the land as a charitable deduction. B) If he gifts the land to the local charity (public), he can deduct its value ($200,000) up to 50% of his AGI in the current tax year. C) If he gifts the land to the local charity (public), he can deduct its value ($200,000) up to 30% of AGI in the current tax year. D) If he gifts the land to the local charity (public), it is use unrelated. Thus, his current year charitable income tax deduction is limited to the basis $100,000 and 50% of his AGI.
C) If he gifts the land to the local charity (public), he can deduct its value ($200,000) up to 30% of AGI in the current tax year. The charitable income tax deduction for gifts of long-term capital gain property is limited to 30% of AGI. A gift to charity of rent-free use of space will not entitle the donor to a charitable deduction. Land, by nature, is use-related. Only artwork and other collectibles can be use-unrelated relative to the charitable income tax deduction.
A CFP® certificant offers advice on specific mutual funds and charges a fee for this advice. Which of the following is true? A) The CFP® certificant can distribute a business card printed with both CFP® and RIA following her name. B) If the CFP® certificant is securities licensed (Series 7), the licensee will not have to register as a registered investment adviser. C) If the CFP® certificant is an Investment Adviser Representative, then the licensee will not have to register individually. D) The CFP® certificant will not have to complete additional regiatrations.
C) If the CFP® certificant is an Investment Adviser Representative, then the licensee will not have to register individually. The CFP® certificant will have to register individually as an advisor or as an Investment Adviser Associate through an advisory firm.
Sally Lewis, age 31, is the associate curator for the Museum of Science which is a 501(c)(3) organization. The Museum sponsors a 403(b) program. Sally is enjoying a serious relationship with Jack Moore. They have plans to marry and have children in the future. Will Sally be able to take a loan from the TSA for college education purposes? A) She would qualify for a hardship loan. B) No. Loans are only available from qualified plans and are not permitted in TSAs. C) Probably. Loans are permitted from many TSAs. D) Yes, but the loan will be treated as a taxable distribution.
C) Probably. Loans are permitted from many TSAs. 403(b) arrangements may offer participant loans. Qualified plan loan rules apply to TSAs.
Sally Adams age 39 is divorced. Her ex-husband died 3 years ago after the divorce became final. Obviously, this stopped all alimony and child support. Sally decided to buy life insurance to protect her children if she dies prematurely. At first one policy seemed enough--but as college education costs skyrocketed, she bought two more additional policies. All three policies are term life insurance. This year, her youngest child will graduate and already has a job offer. She has come to you, her financial planner, for advice on how to decide what to do with the insurance policies? A) Cancel two policies and keep the one with the smallest death benefit. B) Cancel two policies and convert one into a variable universal life policy. C) Review her personal and financial situation going forward. D) Ask her insurance agent to review her alternatives.
C) Review her personal and financial situation going forward. You are Sally's financial planner. Life insurance is part of comprehensive financial planning. Her future situation could entail debt, unforseen expenses, the wish to make charitable gifts, or to provide financial benefits for her children.
Bill and Tom owned a private taxi service called Chariots of Hire. Due to fierce competition from companies such as Uber and Lyft they have closed their business and declared bankruptcy. Bill and Tom had established a cross-purchase buy/sell agreement that was funded by life insurance. What can Bill and Tom do with the life insurance policies now? A) Nothing as the policies were owned by the business B) Cancel them as there is no longer any insurable interest C) Sell them to each other presuming they have a personal need for insurance D) Leave the life insurance policies in force for business reasons
C) Sell them to each other presuming they have a personal need for insurance With an insurance funded cross-purchase buy/sell agreement, each owner owns a life insurance policy on the other. Bill and Tom may likely want life insurance to benefit their loved ones or a charity. In that light, Tom can sell his policy under which Bill is the insured to Bill. Because the insured is buying the policy for which he is the named insured, there is no trigger of transfer-for-value rules. There is no indication of any business reason to leave the policies in force. Their business is closed.
Lara Jones, age 71, taught history in the public schools for 35 years. As she got older, the young children in class wore her down. She decided to retire 10 years ago. Through the school system Lara accumulated a sizeable 403(b) account. After retiring for a year she got bored and went back to work with Learn and Love, Inc. a firm that sells books to schools. She has been the top salesperson for the past few years. Learn and Love doesn't want Lara to retire, nor does she want to retire. The firm provides a 401(k) program with an excellent match and, typically, profit sharing contributions. Lara is turning 72 in January. She wants to know her RMD situation for the next year? A) There are no required minimum distributions next year since she is still working. B) She will have to take required minimum distributions from the 403(b) based on the total year-end assets in the 403(b) plus the 401(k) accounts. C) She will have to take required minimum distributions from the 403(b) only. D) She should roll the 403(b) account balance into a Roth IRA this year so she does not have to take distributions next year.
C) She will have to take required minimum distributions from the 403(b) only. Lara can delay the 401(k) distribution but not the 403(b). Answer D would create significant tax liability in the current year. Lara wants to minimize tax.
You are a CFP ® certificant. Todd and Belinda Harding are you new clients. During the initial interview Todd excuses himself for a restroom break. Belinda whispers to you that Todd is a compulsive gambler. She confides in you that she has managed to squirrel away a significant amount of cash that, at the moment, is in a money market account. Belinda asks you not to tell Todd about the account and says that she wants to call you the following morning to discuss allocation options for the money. How should you best handle this awkward situation? A) When Todd returns to the room and as you begin to gather data, act as if you have no awareness of the account that Belinda mentioned. B) Speak to Belinda the following morning to discuss her allocation choices. C) Terminate the relationship before you proceed to the data gathering step of the financial planning process. D) When Todd returns from the bathroom, tell him about the account.
C) Terminate the relationship before you proceed to the data gathering step of the financial planning process. Who is the client? The presumption was that both Todd and Belinda would become your clients (not just Belinda). This is the initial interview (going to be clients). Regarding Answer D, Belinda makes clear that she does not want her compulsove gambler husband to know about the account. Further, without the disclosure of the value of the assets, including the money market account, the data is too vague for meaningful financial planning.
Sally donates several bags of old clothes to the Salvation Army. Which statement below best reflects the documentation that Sally would need in order to claim a charitable income tax deduction? A) Deduction of up to $250 does not require a receipt. B) Deduction of $250 but less than $1,000 must be documented. C) The deduction is the lesser of fair market value or the donor's basis (substantiated). D) The deduction is limited to basis (unsubstantiated).
C) The deduction is the lesser of fair market value or the donor's basis (substantiated). For charitible gifts less than $250, a dated receipt is proof for purposes of an income tax deduction. The receipt should include a description of the property. A written receipt would list the items donated with a corresponding value. Sally should keep records showing the fair market value and her cost basis. For charitable gifts exceeding $250, Sally must substantiate the deduction by written acknowledgement from the charity. Cash donations up to $300 single/$600 joint do not have to be documented for 2021 if you take the standard deduction
Sadly, your client, Mr. Frank has become incompetent. Some years ago he saw an estate planning attorney for a complete package of estate planning documents. He signed them but never got around to funding the revocable living trust. Which among the documents below, which he did sign, may enable the living trust to be funded now? A) None, now that he is incompetent, it's too late. B) The non-durable power of attorney C) The durable power of attorney D) Living will E) Living trust
C) The durable power of attorney Under a durable power of attorney, the attorney-in-fact holds the power to fund the principal's living trust. The non-durable power of attorney ceases when the principal becomes legally incompetent.
You are a CFP® practitioner working with your client, Sharon Baker. During which step in the financial planning process would it be most appropriate to explain which types of insurance policies might be the most effective to meet Sharon's objectives? A) The data gathering step B) The processing and analyzing information step C) The plan recommendation step D) The plan implementation step
C) The plan recommendation step It does not make sense to make recommendations until sufficient financial and personal data has been gathered and analyzed in light of Sharon's goals.
Brad and Gloria Prior are married. Brad, age 71, and Gloria, age 69, have retired on his pension of $48,000 per year and their Social Security retirement payments. Brad is an adjunct instructor at the local community college and is paid $10,000 per year. How much can the Priors contribute to Roth IRAs in the current year? A) $ -0- B) $5,500 C) $6,500 D) $10,000 E) $13,000
D) $10,000 Brad has earned income. Each spouse can fund a Roth IRA, contributing a total of $10,000. Had brad earned $14,000 (not $10,000), then the catch-up contribution would have been $1,000 each for a total of $14,000.
You, a CFP® practitioner, and your new client, George Howard established the scope of your professional relationship by mutual agreement. You are now ready to gather data from George who provides the following information. What is George's net worth? Salary: $ 50,000 Personal Property: $10,000 Car Payment: $600 Credit Card Debt: $3,000 Savings Acct: $20,000 Rent/Mortgage: $400 Car Loan: $20,000 Value of Real Estate: $10,000 Automobile: $25,000 A) $17,500 B) $65,000 C) $30,000 D) $42,000
D) $42,000 Assets: Personal Property: $10,000 Savings Acct: $20,000 Real Estate: $10,000 Automobile: $25,000 Total: $65,000 Liabilities: Credit Card Debt: $3,000 Car Loan: $20,000 Total: $23,000 $65,000-$23,000= $42,000 Salary, which is an inflow and car payments, which are outflows, are used to calculate cash flow rather than net worth.
Jed has the following stocks in his portfolio as of January 1st of the current year that has changed in value as of year end (12/31 value). 200 ABC: 1/1= $8/share 0 dividends paid this year. 12/31 Value= $6/share 200 DEF: 1/1= $12/share $30 dividends paid this year. 12/31 Value= $14/share 200 XYZ: 1/1= $15/share $120 dividends paid this year. 12/31 value= $12/share * XYZ split 2:1 in June. What is the amount in Jed's portfolio on December 31st financial position relative to January 1st ? A) - $450 B) + $350 C) + $1,890 D) + $1,950
D) + $1,950 ABC: 1/1: $1,600 ($8 x 200) 12/31: $1,200 ($6 x 200) Change: -$400 DEF: 1/1: $2,400 ($12 x 200) Dividend: $30 12/31: $2,830 [($14 x 200) + 30] Change: +$430 XYZ: 1/1: $3,000 ($15 x 200) Dividend: $120 12/31: $4,920 [($12 x 400) + 120] Change: $1,920 *The split occurred in June and the stock continued to appreciate to its 12/31 value. Total Change= $1,950 (-400 + 430 + 1,920= 1,950)
Tom wants you to calculate his required rate of return using the T-bill rate plus 600 basis points. If the T-bill rate is 5%, what is Tom's required rate of return? A) 5.006% B) 5.06% C) 5.6% D) 11%
D) 11% One basis point is .01% of yield/interest. 600 basis points is 6%. Answer: .05 + .06 = .11 or 11%
You, a CFP® certificant, are having a first meeting with Will, an energetic, young client. He is 28 and a promising entrepreneur. He says, "I do not want a whole song and dance, I just want to invest some money. Can you help me with that?" What should you do next? A) Create an asset allocation model for Will. B) Because he has a business, recommend that he open an IRA. C) Check that his insurance coverages are adequate. D) Calculate and analyze his cash flow.
D) Calculate and analyze his cash flow. While Answer C may be arguable, D is a better choice. If Will turns out to have negative cashflow, he should be addressing that before he invests. Answer A depends on Answer D. The insurance answer is too vague, especially without knowing more about Will's family situation.
Bill, a CPA, charges his clients a fee when he prepares their income tax returns. If the client is in a high tax bracket, he advises them to invest in municipal bonds and tax deferred annuities. Which of the following should Bill do? A) Register as an investment advisor B) Obtain a securities license (series 7) C) Do both A and B D) Continue to make investment suggestions when appropriate.
D) Continue to make investment suggestions when appropriate. The advice is incidental to the CPA's occupation. He isn't selling any products (prepares taxes).
Dr. Hill, a 50-year-old divorced dentist, has incorporated his practice as a personal service corporation. He is interested in increasing employee retention. Dr. Hill's corporation is currently maintaining a 401K plan. The corporation only matches $.50 on each dollar of elective deferral up to 3% of salary. As a result of this formula and employee turnover, he is severely limited as to the amount he can contribute as a key employee. Dr. Hill has heard that an individual can participate in a qualified plan and still make a deductible IRA contribution. What combinations of events would allow him such a deduction this year? I. If there are no annual additions to his account for the tax year, he may deduct his IRA contribution. II. If Dr. Hill has a modified AGI of less than $68,000, he can deduct his IRA contribution. III. If Dr. Hill provides the same IRA benefit to all of his current employees, he can deduct his IRA contribution. IV. If Dr. Hill retires at age 55 and takes required minimum distributions from his pension plan, and then works part-time (self-employed) making $128,400, he can deduct his IRA contribution. V. Under the divorce decree from 2012, Dr. Hill must pay alimony. His ex-wife has asked him to deposit $6,000 directly into her IRA rather than pay her directly. He can claim the $6,000 as a deductible IRA. A) I, II, III, IV B) I, II, IV, V C) I, III, V D) I, II E) II, V
D) I, II If no annual additions are made to his account for a given tax year, Dr. Hill can deduct his IRA contribution. The 2022 IRA threshold for a single taxpayer is $68,000. Because Dr. Hill is divorced, his tax filing status is single. Thus, his IRA contribution is deductible. Although IV is true, it does not answer the question. The question is asking about a deductible IRA in the current tax year, not 5 years from now. Regarding statement V, alimony is alimony. His ex-wife may be able to deduct the IRA contribution, but not him.
Which of the following will qualify as itemized deductions for a taxpayer in the 35% tax bracket in conjunction with owning one's personal residence? I. Mortgage payments II. Mortgage insurance III. Non-reimbursed casualty losses due to a federally declared disaster IV. Mortgage interest V. Property taxes up to $10,000 A) I, II, III, IV, V B) I, III, IV, V C) II, III, IV, V D) III, IV, V
D) III, IV, V Mortgage payments are not deductible. However, mortgage interest is deductible. Mortgage insurance is not deductible. Within limits, unreimbursed casualty losses are generally deductible.
Dr. McGillicutty, a 50-year-old divorced dentist, has incorporated his practice as a personal service corporation. He is interested in increasing employee retention. He has approached you with the following question for the new tax year. Dr. McGillicutty's's corporation currently provides a 401(k) plan. The practice only matches $.50 on a dollar of elective deferral up to 3% of eligible compensation. As a result of this formula and employee turnover, the doctor has been limited in the amount he can contribute as a key employee. If he elects to adopt a pension plan in lieu of the 401(k), which of the statements is true regarding his benefits? A) He will be able to contribute 25% of his salary if he elects a money purchase plan. B) He will be able to deposit $230,000 (2021) if he elects a defined benefit pension plan. C) The money purchase and defined benefit plan will be covered by the PBGC. D) If he elects a defined benefit plan and becomes concerned about guaranteeing benefits, the practice could later switch to a cash balance plan. E) Money purchase and profit-sharing plans are subject to the minimum funding standards.
D) If he elects a defined benefit plan and becomes concerned about guaranteeing benefits, the practice could later switch to a cash balance plan.
Mr. Johnson died in April of the current year. Generally, which way should Mrs. Johnson file her taxes the year of his death? A) Married for four months, single eight months B) Single C) Married filing separately D) Married filing jointly
D) Married filing jointly Mrs. Johnson was married at the beginning of the tax year and may file jointly for the year of her husand's death. There are advantages to filing jointly in the year of death including the opportunity to net capital gains and maximize the charitable income tax deduction.
John Jefferson has a current net worth of $10 million. When John's wife died 5 years ago, on her death bed, she made John promise that he would cater to their son, John Jr.'s wants and needs under all circumstances. John is dismayed that Junior never made it past his sophomore year of college ultimately flunking out. Junior has not been able to keep a job. Now, at age 30, Junior has decided to go back to that same college to complete his degree. Under its liberalized admissions policy, the school has agreed to his re-enrollment. At this point in time, which among the strategies below would you recommend that John Sr. implement for Junior's education costs? A) Establish a Coverdell ESA B) Establish a 529 plan C) Execute a 2503 (b) trust D) Pay the college costs including tuition directly E) Nothing, it is too late at age 30 for any educational planning.
D) Pay the college costs including tuition directly John Jefferson Sr. can pay the full tuition (exempt gift) for Junior as long as the check is made out to the school. He may also gift $16,000 for other college expenses. John made a promise. There's not enough time to make the tax deferral associated with the 529 plan meaningful. The Coverdell ESA requires distribution when the beneficiary attains age 30 and Junior is already that age. A 2503(b) trust only distributes income. It may not be enough to cover Junior's college costs.
Your client, Jane Thompson is divorced. Her ex-husband, Alex Thompson, is now married to Lola, age 25. Lola is an exotic dancer. Since he married Lola, Alex has been a bit tardy on making alimony payments. Jane wants you, her financial planner, to meet with Alex. Jane is willing to pay for your services and Alex is willing to meet with you. What should you do? A) Tell Jane you cannot meet with Alex because there is a conflict of interest. B) If you do see Alex, do not discuss Jane's financial affairs with him. C) Tell Jane that Lola needs to be included in the conversation. D) Tell Jane that the best solution is to refer Alex to another financial planner.
D) Tell Jane that the best solution is to refer Alex to another financial planner. Jane and Alex want help but you don't want to be in an awkward situation. Answer D does provide help regarding the situation. Lola is not a party to the alimony agreement between Jane and Alex.
You are a CFP® certificant. Your client, Sam Watson, is confused by the menu of "K plan" alternatives [401(k) type plans] offered by his employer, Fleaopatra Medicated Dog Shampoos, Inc. Which of the following can you accurately share with Sam about differences between these plans? I. For traditional and safe harbor 401(k) plans, elective deferral contributions are limited to $20,500 (2022). For SIMPLE 401(k) arrangement, the maximum elective deferral is $14,000. II. Traditional 401(k) plans must pass both the ADP and ACP tests; Alternatively, SIMPLE or safe harbor 401(k) plans require contributions at a level that is deemed to satisfy the nondiscrimination requirement. III. In traditional 401(k) plans, the employer has the option of not providing matching contributions; safe harbor 401(k) plans are generally required to provide a matching contribution that is equivalent to 4% of participant compensation; SIMPLE 401(k) plans can satisfy requirements with a 3% match. IV. Traditional 401(k) plans can permit a vesting schedule for matching contributions; SIMPLE and safe harbor plans must provide 100% immediately. A) I, II B) I, IV C) II, III D) III, IV E) All of the above
E) All of the above All the statements are true. Where does the 4% safe harbor come from? The statutory contribution using a match is $1/$1 on the first 3% employee deferral and $.50/$1 on the next 2% employee deferral 3% + 1/2 of 2% is 4%. Please reference the prestudy for information. It's a picky question - answer.
Your client owns the following three bonds: Bond A: AA rated, 6-year maturity, 4.76 duration 6% coupon selling for $954 Bond B: AAA rated, 8-year maturity, 5.76 duration 6.75% coupon selling for $982 Bond C: AA rated, zero-coupon, 7-year maturity, selling for $700 Comparable debt is yielding 6.9%. Which of the following correctly reflects the effect of a 1% decline in interest rates? A) The percent change in the price of a bond is independent of the duration of a bond. B) It is not possible to determine the percent change price of Bond A versus Bond C because the duration of Bond C is not given. C) Bond A would experience a greater percent change in price than Bond C because it has a shorter duration. D) The percent change in the price of Bonds A and C is equal since duration generally does not affect the price change of a bond. The price change for a bond is a function of interest rate risk. E) Bond C, having a longer duration than Bond A, would have rise in price more than would Bond A.
E) Bond C, having a longer duration than Bond A, would have rise in price more than would Bond A. Given the choices presented, the longer the duration, the greater the change in the bond price.
The following irrevocable trusts are producing annual income. From which of the trusts below will the income not be taxable to the grantor? A) Trust income is retained to discharge a legal obligation of the grantor. B) Trust income is retained then used to pay premiums on life insurance on the life of the grantor. C) Trust income is distributed to the grantor for 5 years, and then distributed to another trust beneficiary. D) Trust income is distributed to the grantor until death, and then distributed to the other trust beneficiary(s). E) Trust income is accumulated for later distribution to the other trust beneficiary(s).
E) Trust income is accumulated for later distribution to the other trust beneficiary(s). The income will be taxed to the trust. The grantor has no beneficial enjoyment. The other answers violate the grantor trust rules that make the income taxable to the grantor.
Jane Thomas, CFP®, has been served with a subpoena to appear in court to testify because Jane's client, Pam, is being sued. In the data gathering step of Pam's financial plan, she shared personal financial information with Jane. Pam called Jane yesterday insisting that she not share her finances with third parties (Principle of Confidentiality). What should Jane do? A) Claim the right to be silent under the 5th Amendment Not divulge the information (Principle of Confidentiality) B) In court, answer all questions truthfully C) Try to avoid answering any direct questions. In order to keep Pam out of trouble, tell the court answers that are not quite true. D) In order to keep Pam out of trouble, tell the court answers that are not quite true.
In court, answer all questions truthfully Jane, a CFP® certificant, must tell the truth. She does not enjoy attorney/client privilege (as would apply to an attorney).
