Final Review Quiz #3

Matt Williams' yearly compensation is $80,000. He electively defers $10,000 to his employer's 401(k). Matt's wife Cindy Williams does not work outside the home. The Williams' have no other taxable income. How much can they contribute to an IRA and deduct in the 2022 tax year? A) $6,000 B) $7,000 C) $12,000 D) $13,000 E) $14,000

C) $12,000 It is reasonable to assume that the Williams' AGI falls under the $109,000 active participation phase out limit for deductibility because no other taxable income numbers is indicated in the question. Therefore, Matt can make a deductible IRA contribution. Cindy can contribute to a spousal IRA ($6,000) because her husband has compensation. The Williams' AGI falls under the spousal contribution $204,000 phaseout that applies when the other spouse is an active participant. Do not assume that the Williams' are age 50 or older.

Joan Thomas sells her term life insurance policy which has a face value of $200,000 to Linda Bell for $1,000. Joan dies five years later. Linda, who immediately named herself as the beneficiary of the policy, paid $4,000 in premiums over the past five years. To what extent, if any, will the insurance policy proceeds be subject to federal income tax? A) None of the death benefit proceeds will be subject to federal income tax because a term life insurance policy does not trigger "transfer for value" rules. B) $199,000 will be taxable to Linda for federal income tax purposes. C) $195,000 will be taxable to Linda for federal income tax purposes. D) The $200,000 face value of the policy will be included in Joan's gross estate for federal estate tax purposes.

C) $195,000 will be taxable to Linda for federal income tax purposes. When Joan sold the life insurance policy to Linda, the sale triggered transfer for value rules making the death proceeds in excess of the basis taxable to the beneficiary who is now Linda. Linda will receive the death proceeds subject to federal income tax. When Joan dies, nothing attributable to the life insurance policy will be included in her gross estate. The 3-year throwback rule does not apply when a life insurance policy is sold.

Joan purchased a single premium whole life insurance policy in 2005. She paid one $30,000 premium for the coverage. The policy's death benefit is $100,000. Today, the contract is worth $50,000 (represented by $40,000 guaranteed cash value and $10,000 of dividend cash value). If Joan takes out a policy loan of $30,000, which of the following is true? A) She can receive the $10,000 of dividends tax-free, and $20,000 will be subject to ordinary income tax plus a 10% penalty. B) She can borrow $20,000 tax-free, but $10,000 will be subject to ordinary income taxes plus a 10% penalty. C) $20,000 will be subject to ordinary income tax plus a 10% penalty, and $10,000 will be a tax-free return of basis. D) The entire $30,000 will be subject to ordinary income tax plus a 10% penalty.

C) $20,000 will be subject to ordinary income tax plus a 10% penalty, and $10,000 will be a tax-free return of basis. A single premium policy purchased after 1988 is a MEC. Current CV $50,000 - basis $30,000 = $20,000 gain. Dividends in a MEC become taxable when borrowed or withdrawn. Joan's gain is $20,000; $10,000 is her true basis in the policy. Dividends under a MEC are generally taxed. Only the gain is subject to the 10% penalty in addition to tax at ordinary rates.

Your client, Jeremy owns the following investments: 1.) A 2% interest in a non-publicly traded partnership His initial investment was $100,000. The partnership sent him a K-1 showing a $10,000 loss. 2.) A 30% active interest in a limited liability company. His basis is $100,000. The LLC sent him a K-1 showing a $30,000 loss. What amount of the losses can Jeremy claim for the current tax year? A) $10,000 B) $20,000 C) $30,000 D) $32,000 E) $40,000

C) $30,000 A loss from a non-publicly traded partnership is a passive loss. The loss is not deductible until the limited partner sells the interest or dies. A loss from an LLC in which the investor is an active participant is deductible up to basis.

At age 55, Harry started taking substantially equal payments from his IRA. For three consecutive years, he took the required amount. Then, in year four, due to a qualified hardship (to prevent forclosure on his home), he withdrew $50,000 more than the normal substantial equal payment under the annuity method of distribution he had selected. What, if any, amount of penalty did Harry have to pay on the $50,000? A) None, because the $50,000 excess withdrawal was for a bona fide financial hardship. B) None, because Harry made a qualified, self-directed loan of $50,000 C) 10% of the $50,000 excess distribution D) 10% of the distributions received in years 1, 2, and 3, and the E) $50,000 excess distribution in year 4 There was no penalty because he was 59 ½

C) 10% of the $50,000 excess distribution The question specifically addresses the $50,000 excess withdrawals rather than the compliant withdrawals from years 1-3 (which will also incur penalty). Hardship withdrawals are never available from IRAs as they are from 401(k) plans and certain 403(b) arrangements. The question says Harry is 59, not 59 ½

Harry is concerned about U.S. Government (Treasury) debt. He subscribed to a newsletter that indicates a default of government debt. The newsletter reports how government is having to keep the printing presses running 24 hours a day, 7 days a week to keep up with its obligations to pay interest and principle on its debt. Harry cannot sleep at night. He currently has 100% of his investable assets in a money market fund paying minimal interest. The fund has a substantial holding in Treasury securities. Which of the asset allocation would you suggest for Harry? A) 25% in equity REITs, 25% in an international equity fund, 50% in a gold fund B) 25% in Canadian bonds, 25% in a global equity fund, 50% in real estate LPs C) 20% in gold bullion, 20% in natural resources, 25% in an international equity fund and 35% cash D) 100% in a short position on government bonds

C) 20% in gold bullion, 20% in natural resources, 25% in an international equity fund and 35% cash This type of question is typical of the subjective asset allocation questions on the CFP exam. Choices A and D seem too aggressive for Harry who can't sleep at night. Answer B is also too risky. Subjective.

SEC registered advisers with AUM at least $100 million - are required to file annual updates to their ADV within _____ days of the end of their fiscal year. A) 30 B) 60 C) 90 D) The number of days following the end of the adviser's fiscal year depends on the state in which the firm maintains its office.

C) 90 Federal covered advisers must update their ADV forms no later than 90 days following the close of their fiscal year. Smaller advisers that have registered with states securities regulators will comply with state specific deadlines for annual updates to their ADV equivalents

Law school classmates, Mr. Ball and Mr. Desmond are both attorneys. At this time, their law practice which specializes in personal injury law, BaDe, PC (Professional corporation) does not provide any retirement plan. The two counselors want to establish a qualified plan. They want a plan that requires no employee contributions nor mandatory contributions. BaDe currently has only two other employees who are part-time paralegals. The practice plans to hire another attorney. Which of the following plans would you recommend for BaDe, Attorneys at Law? A) Given the current cash flow of BaDe and the objectives of its owners, no plan is recommended at this time. B) A SEP C) A Profit-sharing plan D) A Profit-sharing 401(k) plan E) A Defined-benefit plan

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

Your client, Bob Brubaker died three months ago. Which of the following items must be included in his gross estate for federal estate tax purposes? A) A life insurance policy owned by Bob's daughter, Roberta. She is the beneficiary of the policy which has a death benefit of $10 million. B) $6 million of taxable gifts that Bob made to others during his lifetime. C) A general power of appointment Bob had on his deceased mother's trust. D) Stocks and bonds gifted to his ex-wife who is a resident alien

C) A general power of appointment Bob had on his deceased mother's trust. Property subject to general powers of appointment are included in the gross estate of the holder of that power. The life insurance policy is owned by Roberta. The taxable gifts are added to the taxable estate. Transfers to Bob's ex-wife may or may not be taxable gifts however, they are added to the taxable estate rather than included in the gross estate.

Bobby Blake, age 37, is married with 3 children. Bobby owns BB, Inc. a small auto repair and restoration shop. The restoration business has been successful and Bobby earned $400,000 last year. All of a sudden, Bobby has excess cash flow. His insurance agent referred Bobby to you for financial advice. Bobby has limited life insurance and a Health Savings Account through BB, Inc. BB, Inc. has 10 employees with some of whom are very well paid body refinishers. Which of the recommendations should Bobby address first? A) Establish a 401(k) with a 3% match to begin retirement savings and obtain a current year income tax deduction. B) Establish and contribute to 529 plans for the 3 children before they get too old. C) Buy a term insurance policy with a substantial face value and acquire individual disability income insurance. D) Establish a deferred compensation plan for himself and his key employees.

C) Buy a term insurance policy with a substantial face value and acquire individual disability income insurance. Bobby has a family. His death or disability would leave Bobby's family without income. He needs to obtain life and disability insurance first. The other items of implementation are sensible but they can wait. It is doubtful, however, that the IRS would not scrutinize a non-qualified deferred compensation plan for an owner/employee.

Which of the following is (are) not a qualified retirement plan? I. Defined-benefit plan II. Profit-sharing plan III. Target-benefit plan IV. SEP plan V. 403(b) plan with no match A) I, II, III B) I, IV, V C) IV, V D) V

C) IV, V Qualified plans are those plans subject to Code section 401(a) and include defined-benefit, cash-balance, money-purchase, target-benefit, profit-sharing, 401(k), stock bonus, and ESOPs. While SEPs and 403(b) plans are indeed retirement plans, they are not "qualified" plans.

Monetary policy refers to activities in which the Federal Reserve engages to influence the amount of ______________ and _____________ in the U.S. economy. A) Interest and debt B) Currency and gold reserves C) Money and credit D) Taxes and revenues E) Debt and cash

C) Money and credit Activities of the Federal Reserve Board (FRB) seek to influence the domestic supply of money which, in turn, affects interest rates. Money is like any commodity: shrink the supply and the cost, in this case interest, rises.

Corporate annual reports would generally not include which of the following? A) Depreciation methods B) Stock options C) Profitability projections D) Inventory methods E) Outlook for the firm's products in various industries in which it operates

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

Your wealthy client, Mark Parker is in the 40% federal gift and GST tax brackets. He transferred $1 million into an irrevocable trust. The trust instrument provides that all income will go to his son with the remainder to pass to his granddaughter. At the time of this transfer no GSTT exemption remains because Mark has already claimed his full exemption. Relative to the GSTT, what will happen at his son's death? A) No GSTT is due. Because Mark Parker paid it at the time of transfer. B) The GSTT will come out of the son's estate. C) The GSTT will be paid before the trust assets are distributed to Mr. Parker's granddaughter. D) Any GSTT would be paid by Mark's granddaughter.

C) The GSTT will be paid before the trust assets are distributed to Mr. Parker's granddaughter. This is a taxable termination. When the beneficiary having the life interest dies, in this case, Mark's son, the trustee pays the GSTT from trust assets then makes the remainder available to the skip person(s), in this case, Mark's granddaughter.

Mrs. Teal has come to you, a CFP® practitioner, for advice. She is age 75 and in excellent health. Mrs. Teal's mother lived to 94. She is unsure about her father's life expectancy because he died in the war. Mrs. Teal is concerned because her husband died about 3 months ago. He handled all of their financial affairs. Now widowed, she has tried over the past 3 months to figure out her financial future but the information on her account statements is overwhelming. Which of the following items should Mrs. Teal worry about least? A) Being able to continue to live in her current home. B) Whether cash flow will cover her expenses C) Whether she can keep the vacation home on the lake for summer outings to spend with her children and grandchildren. D) Her investment risk tolerance

C) Whether she can keep the vacation home on the lake for summer outings to spend with her children and grandchildren. Although Mrs. Teal will be disappointed if she can't maintain the summer vacation home, the other issues are more pressing. Her cash flow (income) must consider whether she can continue to live in her current home. Her risk tolerance will affect the amount of income her investments would generate.

Several years ago, Mrs. Pike purchased XYZ stock for $100,000. The stock was such a good investment that she bought additional shares from year to year. The additional purchases were for $10,000, $25,000, $35,000, and $20,000 respectively. On the day when Mrs. Pike died, the stock had a FMV of $500,000. Mrs. Pike's grandson, Paul, inherited the stock. He then invested his yearly performance bonus of $15,000 in the same stock. Six months later, he has decided to sell all the stock. What will be the taxable event if the stock Mrs. Pike bequeathed to Paul has a FMV of $600,000 and the stock that he purchased has a FMV of $25,000? A) $110,000 of long-term capital gains B) $410,000 of long-term capital gains and $10,000 of short-term capital gains C) $110,000 of short-term capital gains D) $100,000 of long-term capital gains and $10,000 of short-term capital gains

D) $100,000 of long-term capital gains and $10,000 of short-term capital gains Paul's gain from the sale of the stock bought with his performance bonus produces a short-term capital gain of $10,000. The gain on the amount of the stock that Paul inherited is inheritance is LTCG.

Mr. and Mrs. Iverson, who file their federal income taxes jointly, sold their home for a $400,000 gain. Under Section 121, they were eligible to exclude the entire gain from their gross income. They used the proceeds of the (first) home sale to purchase another home. Now, a year and a half later, they sold the second home for a $50,000 gain. How much of the gain must they report for federal income tax purposes? A) -0- B) $12,500 C) $37,500 D) $50,000 E) $450,000

D) $50,000 The Section 121 exclusion may be elected every two years. The Iversons only owned their second home for a year and a half. Since the question did not indicate that the Iversons sold their second home because of a job change, divorce, or unforeseen circumstance they could not prorate the exclusion amount.

David and Rose Caldwell own a four bedroom home having a current FMV of $450,000. They purchased the home 20 years ago for $125,000. The land is now worth $100,000. The home is partially destroyed by fire causing damages of $100,000. Under a HO policy, the home is insured for $250,000. The Caldwells purchased replacement cost coverage. Ignoring deductible, what amount of benefit should the Caldwells receive from their Homeowner's insurance policy? A) -0- B) $55,556 C) $71,143 D) $89,286 E) $100,000

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

Due to impressive growth rates in recent years, T Max, Inc. is concerned about it exposure to the corporate AMT. The company owns four substantial life insurance policies which fund a stock redemption buy-sell agreement. The officer owners have decided to switch to a cross purchase buy-sell agreement. What can or should be done with the life insurance policies that are now owned by T Max, Inc.? A) Use the existing life insurance policies to fund for the cross purchase buy-sell agreement(s) B) Retain the policies for key-person coverage C) Sell the policies to the insured, if they are interested, or surrender the policies D) Do not worry about it since the new tax law eliminated the corporate AMT

D) Do not worry about it since the new tax law eliminated the corporate AMT If the owners who had been covered under the corporation's stock redemption (entity) buy-sell agreement wish, they may buy the policies on their own lives that were acquired to fund that arrangement. Since the sales of the policies will be to the insureds, there is no exposure to transfer-for-value income taxation of the death proceeds. Answer A will trigger transfer for value problems. In Answer C, surrendering the policies is not an option as they still need the buy/sell policies. Answer D is true, the new tax law eliminated the corporate AMT.

Hal, age 63+, is trying to decide whether he should being taking Social Security benefit 36 months before his FRA. He is a fully insured worker. Regarding Hal's situation, which of the following statements is correct? I. Once Hal begins taking Social Security Retirement benefits he will be eligible for Medicare. II. Hal will receive 80% of his PIA that would apply at his FRA. III. If Hal works part-time, his benefits will be reduced by 20%. IV. If Hal works part-time, his benefits will be reduced $1 for every $3 he earns above a specific earnings threshold. V. If Hal does not work, his benefits may or may not be subject to federal income taxation. A) I, II, III, IV B) II, IV, V C) III, IV D) II, V E) IV, V

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

The Wonder Widget Company operates as a C Corporation. Its officers are concerned about their personal liability exposure on becoming appointed as trustees for the company's pension plan. How should their concerns be minimized? A) Provide four different families of funds for participant investment choices B) Provide eight different mutual funds for participant investment choices C) Offer mutual funds that range in risk level and composition from money market accounts to sector funds D) Interview then hire an investment manager to manage their plan's portfolio

D) Interview then hire an investment manager to manage their plan's portfolio If a suitable investment manager has been appointed, generally the trustee will not be liable for the acts or omissions of that investment manager. However, this relief does not totally excuse from liability the named fiduciary who appointed the investment manager.

A client wants to buy a mutual fund that will move in a direction that is nearly opposite to the overall market. Which fund should he/she select? A) Mutual Fund A: Alpha +2, Beta 1.5, R2 (squared) 15 B) Mutual Fund B: Alpha +1.9, Beta 1, R2 (squared) 100 C) Mutual Fund C: Alpha +1, Beta .1, R2 (squared) 40 D) Mutual Fund D: Alpha -1, Beta -1.3, R2 (squared) 1.5

D) Mutual Fund D: Alpha -1, Beta -1.3, R2 (squared) 1.5 If a mutual fund has a beta of -1, this means that when the market (as a whole) moves higher, this mutual fund moves down at the same rate. For example, a counter cyclical mutual fund such as gold fund would fall into this category. R2 affects whether Alpha, Treynor, or Sharpe is the most appropriate measure of risk-adjusted return. R2 does not affect the answer to this particular question.

Terry began a new business, Merry Terry, Inc., as an S corporation with startup capital of $1,000. He also personally lent the corporation $50,000. It is clear that Merry Terry, Inc. needs additional capital. If the corporation applies for a commercial loan and Terry personally endorses it, will the commercial loan increase his basis? A) Yes, but only by $51,000 B) Yes, by the amount of the commercial loan C) Yes, by the amount of the commercial loan because he personally endorsed it D) No, because the loan would not be a direct loan to Terry. The loan would be made to the business.

D) No, because the loan would not be a direct loan to Terry. The loan would be made to the business Basis for an equity owner in an S corporation includes capital contributed to the business and personal loans to the business. It does not include third party loans even if the owner assumes personal liability for the debt. When an S corporation incurs a debt, no shareholder has any personal liability for the debt. Had Terry obtained a personal loan, then lent the loan proceeds to his S corporation, the direct loan would increase his basis.

Your client, Tom Adkins, is concerned about his disability income insurance policy. When he bought the policy, the agent told him the company would not change the premium at any time. What should he look for in the policy provision? A) Loss of income benefit determination B) Guaranteed renewability C) Own occupation definition of total disability D) Non-cancelable continuation E) Unilateral contract application

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

An employee contribution to which of the following plans is not subject to FICA and FUTA taxes? A) Profit sharing 401(k) B) SIMPLE IRA C) SARSEP403(b) D) Section 125 plan

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

Millie Tilley has the following income. How much of it would be treated as earned income for federal income tax purposes? I. $50,000 in wages from Plant Parenthood, an S corporation. Millie works for Plant Parenthood as a landscaper. II. $5,000 in dividends from stock held in Millie's investment account (non-qualified) III. K-1 income of $10,000 from an S corporation in which Millie owns 20% of the equity and is an active participant in the business IV. Proceeds from the sale of an oil painting inherited from her great aunt that generated a $5,000 long-term capital gain A) $70,000 B) $65,000 C) 60,000 D) $55,000 E) $50,000

E) $50,000 Only Millie's salary would be classified as earned income. The other answers indicate investment income which is, by nature, unearned. Note: K-1 from an S corporation represents a distribution of profits and thus, is treated as investment income. Although Millie is an active participant in the S Corporation's activity, this is true.

Both of Rusty Whitman's parents recently died in an auto accident. Rusty is 12 years old. Before their death, the Whitman's had established various trusts including revocable living trusts (each parent), an irrevocable life insurance trust, and a 2503(c) minor's trust. While Rusty is younger than age 21, the trust earnings will support his normal living needs. Into which of the following trusts will Rusty's parents' assets ultimately pass? A) A revocable living trust B) A 2503(c) trust C) A Crummey trust D) A standby trust E) A family trust

E) A family trust The revocable trust will become irrevocable and will turn operate as a family trust for Rusty's benefit thereafter. It is rare that a revocable trust would name its beneficiary as a 2503(c) children's trust. 2503(c) trusts generally terminate when the minor beneficiary turns age 21.

Charter, Inc. is owned 50% by John Tillman and 50% by his brother-in-law, Brad Porter. Currently, the company maintains a stock redemption buy sell arrangement funded with insurance. Now that John and Brad better understand step up in basis rules, they would like to change to do a cross-purchase buy-sell plan funded with insurance. In light of their situation, which of the following statements is true? I. Charter, Inc. owns and is the beneficiary of the stock redemption plan insurance policies. II. John owns and is the beneficiary of the life insurance policy on Brad's life that funds the stock redemption buy sell agreement. III. Brad will own and name himself as the beneficiary of John's insurance policy that will fund the cross-purchase buy-sell arrangement. IV. Charter, Inc. will own and be the beneficiary of the insurance policy on Brad's life that will fund the cross-purchase buy-sell plan. V. To fund the new cross purchase arrangement, the current stock redemption policies on John and Brad should be sold to Brad and John respectively. John would the policy under which Brad is the insured and Brad would buy the policy under which Joh is the insured. A) I, III, IV B) II, III, V C) I, IV, V D) II, IV, V E) I, III

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

Dr. Perkins is a wealthy neurosurgeon who works for the Brain Trust Practice Group. He is the named insured on the following life insurance policies. 1.$200,000 Whole Life; $25,000 current cash value Dividends pay premium due. Mr. Perkins is the owner. Mrs. Perkins is the primary beneficiary; their two daughters are the contingent beneficiaries. 2. $500,000 Universal Life; $50,000 current cash value As a key person policy, the premium is paid by the Brain Trust Practice Group (employer). The Brain Trust Practice Group is both owner and beneficiary of the key person policy. Dr. Perkins is about to retire. The Brain Trust Practice Group is willing to transfer the key person policy to him for its current fair market value. Dr. Perkins has concerns about the gift income and estate tax ramifications relative to these life insurance policies under which he is now insured. Which of the following strategies is (are) the best option(s) for Dr. Perkins if he lives for at least three more years? I. Establish an irrevocable life insurance trust to purchase the employer-paid policy. II. Have his wife purchase the employer-paid policy. III. Gift the personally owned life insurance policy to his wife IV. Gift the personally owned policy to his life insurance trust (His wife and two daughters its beneficiaries.) V. Buy the employer-paid key person life insurance policy and then gift the policy to his life insurance trust A) All of the above B) II, III C) II, IV, V D) III, IV E) IV, V

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

Bill has retired. His company provided an ESOP. Stock with a basis of $50,000 was contributed to Bill's ESOP account. At Bill's retirement, stock having a market value of $125,000 was distributed to him. Six months after retirement, Bill sold all of the shares for $150,000. Which statement below best describes Bill's tax situation? A) $50,000 was taxed as ordinary income when Bill retired; $75,000 will be taxed at LTCG rates at the time of sale, and $25,000 will be taxed at STCG rates when Bill sells the stock. B) $150,000 will be taxed at LTCG rates when Bill sells the stock. C) $100,000 will be taxed at LTCG rates when Bill sells the stock. D) $50,000 was taxed as ordinary income when Bill retired; $100,000 will be taxed at LTCG rates when Bill seels the stock.

A) $50,000 was taxed as ordinary income when Bill retired; $75,000 will be taxed at LTCG rates at the time of sale, and $25,000 will be taxed at STCG rates when Bill sells the stock.

George and Linda gifted $106,000 to an irrevocable living trust that includes Crummey provisions. The trust has named their two twin nephews, Larry and Barry as its beneficiaries. George and Linda consent to gift splitting. When George or Linda dies, how much, if any, of the gift will be brought back into their gross estate(s)? A) -0- B) $23,000 C) $46,000 D) $106,000

A) -0- A gift of cash to an irrevocable living trust is irrevocable. The gift is removed from their gross estates for federal estate tax purposes. While both George and Linda will have made a taxable gift of $21,000, that is not reflected in their gross estate(s). Rather, it is added to their taxable estate(s) to arrive at the tax base.. ($106,000 - [64,000 (16,000 x 4)] = $42,000 42,000 / 2 = 21,000 each

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

A) Advice should be implemented Both B and C are true statements, but Answer A is the best planning. The UTMA invested in municipal securities appears to be sensible. While the transfer of the $50,000 to Jimmy's custodial account is a taxable gift, Uncle Joe can use his gift tax property exemption of $12,060,000 to avoid the current gift tax. Under kiddie tax rules, earnings generated by the UTMA may be taxed at 37% plus the 3.8% Medicare investments tax. In that light, tax free interest from municipal bonds make sense. The tax-free income should enable the account to have a FMV of $65,000 in 10 years.

Your client, Alan Stephens, is a loving father, age 45. He is about to co-sign a mortgage ($300,000) for a home his daughter, Tiffany, plans to acquire. You are aware the daughter has a history of financial problems since graduating from college. As Alan's planner, you should: A) Ask for a meeting with both Alan and Tiffany B) Advise him not to co-sign the loan with Tiffany C) Be silent regarding your concerns. it is not appropriate for you to meddle in family business. D) Recommend family counseling for Tiffany

A) Ask for a meeting with both Alan and Tiffany Some dialogue about finances between Alan and his daughter would make sense and you can facilitate the discussion. Answer B makes better sense after the joint meeting. Is being silent about your concerns serving the needs of your client, Alan? Your concern is Alan. Tiffany is not your client.

Your client, Frank, age 44, believes that the business cycle is about to turn sharply and that an 8% inflation rate is a necessary assumption in the construction of his retirement plan. You, a CFP® certificant, strongly believe that inflation will continue to be substantially lower averaging between 3 and 4 percent in the long run. Which inflation rate from the choices below would you reject first? A) Current year's inflation rate B) Frank's inflation rate assumption C) The 10-year average inflation rate per the CPI D) The 100-year average inflation rate

A) Current year's inflation rate A one-year inflation rate does not constitute an inflation rate for a long-term goal achievement. Remember that client and planner must mutually agree on plan assumptions. While the client's 8% assumption may not end up as the one used in the plan, it should be considered. It might make sense for the planner to run the numbers using both his personal inflation assumption and run them again using the client's so the client can see that his assumption would probably be less workable.

Which situation described below seems to indicate financial enmeshment? A) Fourth grader Bobby has been having bad dreams after hearing his parents discuss their worries about staying in their apartment because housing prices are increasing dramatically. B) Mom and Dad said they would stop giving their son spending money three months after he earned his bachelor's degree. C) Grandma and Grandpa will only discuss their finances with their financial planner; they think money should be a personal, private matter. D) Linda and Larry Larson, a married couple hold all their assets in joint tenancy.

A) Fourth grader Bobby has been having bad dreams after hearing his parents discuss their worries about staying in their apartment because housing prices are increasing dramatically.

Which of the following statements is (are) true about profit-sharing plans? I. They may be integrated with Social Security. II. They may receive contributions for individual employees in excess of 25% of that participant's eligible compensation. III. They generally peremit the employer to make flexible contributions. IV. They may be age-weighted. A) I, II, III, IV B) I, II, III C) I, III D) I, IV E) III and IV

A) I, II, III, IV Qualified profit-sharing plans feature flexible employer contributions. They may be age-weighted and integrated with Social Security. While the employer may contribute and deduct up to 25% of its overall payroll, the contribution for an individual participant may exceed that percentage.

Lamar and Abby Sanford, who have three teenage and pre-teen children, are confused about the difference between the American Opportunity Credit (AOC) and the Lifetime Learning Credit. How would you answer the Sanfords? A) If you elect a full Lifetime Learning Credit, you cannot claim an AOC for the same expense in the same year. B) The maximum amount of AOC is $2,000 plus 25% of the next $2,000 for a total of $2,500 per tax year. The maximum amount of the Lifetime Learning Credit is $2,000 per year. C) The Lifetime Learning Credit is no longer available after the student turns age 30. D) The AOC is available for both undergraduate and graduate post-secondary education.

A) If you elect a full Lifetime Learning Credit, you cannot claim an AOC for the same expense in the same year. Answer B is incorrect. The AOC is per eligible student per year. If a family has three children in college in the same year, each is eligible for the full AOC. Lifetime is maximum per year. The AOC is available only for the first four years of post-secondary education. No age limitation applies to the Lifetime Learning Credit.

Mr. and Mrs. Grandparent have paid $50,000 into their granddaughter's "prepaid tuition program." The arrangement qualifies as a Section 529 program. Which of the following is true? A) Prepaid tuition plans may only pay for tuition and mandatory fees. B) Prepaid tuition plans do not affect the expected family contribution for determining available financial aid. C) Prepaid tuition plans do not allow the beneficiary to attend a private or out-of-state college. D) Prepaid tuition plans provide a rate of return that is linked directly to the return on the securities in which the prepaid tuition plan invests. E) If the qualified higher education expenses (QHEE) are less than the total distributions, all the distributions from the prepaid plan are then treated as taxable income.

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

Bob wants to convert his IRA which today has an approximate FMV of $1,000,000) to a Roth IRA. Bob is age 72 and will be taking an RMD of $40,000 in the current tax year. Bob estimates his other taxable income for the year to be $70,000. Can he convert the IRA to a Roth IRA? A) Yes, there is no limit on the dollar amount of the conversion. B) No, Bob cannot take a RMD and convert in the same year. C) Yes, RMDs are considered income for income tax purposes. D) No, Bob can only convert up to the amount of his taxable income. E) No, it is too late for Bob to make a conversion to a Roth because he is now over age 70 1/2.

A) Yes, there is no limit on the dollar amount of the conversion. There is no limit as to the dollar amount that may be converted from a traditional IRA to a Roth. Bob is taking his RMD first, then he will convert the remainder of his balance in the traditional account. Answer C is true, but it does not answer the question which is about conversion.

Following three days in the hospital for hip replacement surgery, Mrs. Tuttle spent 110 days in a skilled care facility. She qualified for her stay under Medicare. The cost of the facility was $394.50 per day and the Medicare specified coverage amount is $194.50 per day. How much did Medicare pay for Mrs./ Tuttle's extended care? A) $7,890 B) $23,890 C) $39,450 D) $50,000

B) $23,890 Medicare will pay for the first 20 days of rehabilitative skilled nursing home care in full @ $394.50. It will also cover $200 (the daily charge exceeding $194.50) for the next 80 days. After 100 days there is no Medicare coverage for extended care. 20 days @ $385.50= $7,890 80 more days @ $200= $16,000 TOTAL= $23,890

Your client, William Smith, age 35, is divorced with no children. He has just won a local $5 million LOTTO. The LOTTO administrators have given William 4 choices as to how to receive his winnings. Consdering investment opportunities that might be available to William, which distribution would you recommend to William? A) $3,500,000 cash immediately (subject to tax) B) $250,000 in annual payments made at the beginning of the year for the next 20 years (subject to tax) C) $400,000 in annual payments made at the beginning of each of the next 10 years (subject to tax) D) One $5,000,000 lump sum delayed cash payment 10 years from today (subject to tax)

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

Your client, Sam Glover, purchased a property for $2,000,000. Sam did not maintain the property particularly well. He claimed depreciation deductions and the adjusted basis is now $1,116,000. Sam has now decided to gift the property to his son. Sam has already used his full gift tax exemption. He had to pay $440,000 in gift tax (40% bracket). His son, who is very handy and a hard worker, just sold the property for $1,500,000. What amount of gain will his son have to report from his sale of the property? A) $85,000 B) $384,000 C) $440,000 D) $885,000 E) -0-

B) $384,000 Because this is not loss property, the son's basis will be Sam's adjusted basis ($1,116,000). (The basis is lower than original due to the CRDs not the market value of the property) The son's gain is $384,000. The annual gift exclusion never affects basis. The gift taxes paid would only adjust basis if the property had appreciated. This is depreciated property. The gift taxes paid only increase the basis when the FMV of the property as of the date of the gift exceeds the donor's original cost basis.

Tom, age 51, works for a not-for-profit organization. He contributes $19,500 annually to a 403(b) provided by his employer. Tom's wife, Melinda (age 48), works for another not-for-profit organization. She contributes $5,000 annually to her employers 457 plan. If he earns $100,000 and Melinda earns $50,000 in the current year, how much can they contribute to a traditional IRA that would be deductible on their 2022 tax return? A) $2000 B) $6,000 C) $7,000 D) $12,000 E) $13,000

B) $6,000 The 403(b) retirement plan makes Tom an active participant for the purposes of deducting an IRA contribution. Given that Tom is an active participant and the amount of Tom and Linda's AGI, Tom's IRA contribution is not deductible. Contributing to the nongovernmental 457 does not classify Melinda as an active participant for purposes of deducting her IRA contribution. Their combined AGI is $150,000. Under the "spousal rules," Melinda can make a deductible IRA contribution because the joint AGI is less than $204,000.

Roger owns an investment portfolio having a current FMV of $1,000,000. Roger's portfolio consists of the following four stocks: 1. $200,000 ABC @ 1.5 beta 2. $250,000 DEF @ 2.0 beta 3. $150,000 GHF @.5 beta 4. $400,000 JKL @ 1.2 beta The weighted beta coefficient of Robert's portfolio is? A) 1.30 B) 1.36 C) 1.42 D) 1.46

B) 1.36 First, identify the percentage that each stock represents of the $1,000,000 portfolio total. 1.) 20% x 1.5 = .30 2.) 25% x 2.0 = .50 3.) 15% of .5 = .08 4.) 40% of 1.2 = .48 Then add the individual betas to arrive at the weighted portfolio beta of 1.36.

Mary Todd is a single female, age 29. This year she earned $44,000 in wages that were subject to FICA, FUTA and federal withholding tax. Since Mary's job is in the downtown area, she is spending almost 50% of her earnings on rent. She is fortunate not to have any remaining student debt but between living expenses and taxes, she isn't saving any money. You have been helping her, on a pro bono basis, to com up with a reasonable budget. Mary asked you to prepare her income filing that must be submitted this April. What forms would you use for filing Mary's federal income tax? A) 1040 EZ B) 1040 C) 1040 with Schedule A D) 1040 with Schedule SE

B) 1040 From the information in the question stem, Mary has only earned income that would be reported by her employer on Form W-2. Form 1040 makes sense for Mary. She has no dependents or investment income gains. Nor does it appear that she has costs that could be itemized deductions. The 2017 TCJA eliminated the 1040 A and 1040 EZ.

Brad participates in his employer's SIMPLE plan at work. He is not an owner of the company. He plans to continue working indefinitely and continue making contributions to the SIMPLE. His birthday is February 16. What is his latest permissible required beginning date for distributions? A) August 16 of the year in which he turns 72 B) April 1st of the year following the year in which he turns 72 C) April 1st of the year following the year when he turns age 72 or actually retires

B) April 1st of the year following the year in which he turns 72 As in other IRA-type arrangements, for SIMPLE plans, the RBD is always the April 1st of the year following the calendar year in which the covered participant attains age 72. Although he continues to work for the employer providing the SIMPLE plan, Brad may not delay his first distributions beyond that date.

Which of the following is true about QTPs (Qualified Tuition Programs)? A) When determining the expected family contribution for financial aid purposes, only prepaid tuition is considered a parent or grandparent's asset. B) College saving programs are more suitable for risk-tolerant investors than are pre-paid tuition plans. C) Prepaid tuition programs typically include expenses for room and board. D) Under college savings programs, the choice of a particular college or university is likely to affect investment returns.

B) College saving programs are more suitable for risk-tolerant investors than are pre-paid tuition plans. The account balance is a Section 529 college savings plan at the time when a distribution will be needed from the plan is uncertain. The amount depends on investment results in the plan over time. Thus, the owner of the 529 college savings plan assumes the investment risk. A parent or grandparent (or another) not wishing to assume investment risk may be more comfortable with a prepaid tuition arrangement.

Chris Towns is the self-employed owner of Chris Craft Stores. He reports profits or losses from his business on Schedule C. Chris Craft Stores has 10 employees. The business is very successful - enough to fund various employee benefits for Chris and his employees. Which of the following current benefits are either added to the front of Chris's 1040 as part of gross income or are shown as deductions on the front of the 1040 to determine AGI? I. Group life insurance having a death benefit of $200,000 under which Chris is the named insured II. A SEP contribution for Chris III. Net profit from Chris Craft Stores of $350,000 IV. A spousal IRA contribution by Chris to his wife's account V. Group health insurance premiums for himself and his wife A) All of the above. B) I, II, III, V C) I, II, III D) II, V E) III and IV

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

Which of the following are amounts received by the owner of a life insurance policy that would be treated as income-first distributions under a MEC contract? I. Cash dividends II. Interest accrued on a policy loan (added to the loan balance) III. Dividends retained by the insurer to purchase "paid-up" additions IV. Dividends retained by the insurer as principal or interest to pay off a policy loan A) All of the above B) I, II, IV C) II, III D) III, IV

B) I, II, IV When policy dividends from modified endowment contracts (MECs) are used like cash, they are distributed under FIFO rules such as those applicable to annuity distributions. Cash distributions and dividends used to pay off policy loans are considered to be income first distributions. The interest accruing from a policy loan on a MEC is treated the same way for federal tax purposes. Dividends used to buy paid up (permanent) additions are not treated as income-first distributions. The loan interest was not distributed. It was added to the outstanding loan balance.

Your client, Mr. Smith, purchased and sold the following stocks during a two-year period. Which situation or situations below created a "wash" sale? NOTE: All transactions are 100 shares round lots. I. March 1st purchased ABC @ $15; December 1st purchased ABC @ $10; December 31st sold ABC @ $10 II. November 30th purchased LMN @ $50; December 15th purchased LMN @ $52; December 29th sold LMN @ $54 III. January 1st purchased XYZ @ $60; February 15th sold XYZ @ $50; March 16th purchased XYZ at $52 A) I, II, III B) I, III C) I, II D) II E) III

B) I, III The deduction is disallowed for any loss from any sale or other disposition of stock within a period beginning 30 days before and ending within 30 days after the date of the sale or disposition. A gain cannot create a wash sale.

Mrs. Roberts, age 60, is about to purchase a life insurance policy for estate planning purposes. She wants you to help her determine which policy she should buy. Various life insurance agents have proposed that she acquire one of the following policies: 1.) A whole life insurance policy with Company A. The illustration shows premiums are paid in full with dividends in 10 years. (They vanish.) 2.) Universal life insurance policy with Company B. The illustration shows the death benefit will be zero at age 95 based on current interest assumptions 3.) Whole life insurance policy with Company C. The illustration shows premiums are paid in full with dividends in 15 years. (They vanish.) On what criteria would you base your advice to Mrs. Roberts? I. Review the insurance company's ratings (A. M. Best etc.) II. Review the size of the insurance company III. Review the insurance company's past history of paying claims and its future ability to pay IV. Review the insurance agents' competence, knowledge, and reliability V. Review whether the whole life insurance premiums will vanish and whether the universal life policy will pay the death benefit to the insured's age 95 A) All of the above B) I, III, IV, V C) I, III, IV D) III, IV, V E) II, V

B) I, III, IV, V High ratings from two or three rating agencies should indicate that the insurance company is well able to pay its claims. The size of an insurance company is not necessarily an indicator of its financial strength. The experience and reliability of the insurance agent matters. The NAIC prohibits language indicating that the whole life premiums will vanish or the UL will last to age 95.

A FICA covered worker will be entitled to Social Security disability benefits if which of the following conditions apply? I. The worker has been disabled for 12 months or is expected to be disabled for at least 12 months or has a disability that is expected to result in death II. The worker has attained FRA or is older III. The worker is insured for disability benefits IV. The worker has filed an application for disability benefits V. The worker has completed a 5-month waiting period or is exempted from this requirement A) All of the above B) I, III, IV, V C) II, III, IV D) III, V E) IV, V

B) I, III, IV, V To be eligible to claim Social Security disability income benefits, the FICA covered worker must be younger than full retirement age (FRA). At and after FRA, only retirement benefits are available.

As a CFP® certificant and busy practitioner, you frequently refer clients to CPAs and attorneys. Most of your attorney referrals are to Randall Porter Esq., and most of your accountant referrals are to Marcy Stone CPA. Randall typically sends you $200 in cash for each client referral. Marcy Stone does not pay referral fees but sends a large fruit basket to your office each year at holiday time. Regarding this situation, which of the following statements best reflects the regulatory and ethical implications of this situation? I. You must disclose the referral fees from Porter to any clients you referred and for whom such fees were paid. II. You must disclose the gift from Stone to any clients you referred to her. III. You need not disclose the referral fees from Porter because they have no impact whatsoever on the client's financial plan. IV. You need not disclose the gift from Stone because it is minimal and consumable. A) I, II B) I, IV C) II, IV D) II, III

B) I, IV Clearly, the in-cash referral fees must be disclosed to the pertaining clients. However, minimal gifts like fruit or candy need not be disclosed.

Ted is an unhappy taxpayer. He just learned that he will be subject to AMT. As Ted's financial planner, what suggestions would you make that might help him mitigate or eliminate his exposure to the AMT? I. Purchase municipal bonds II. Purchase public purpose municipal bonds III. Purchase private purpose (private activity) municipal bonds IV. Purchase high-yield taxable corporate bonds A) I, III, IV B) II, IV C) III, IV D) I and II E) II, III

B) II, IV The taxable corporate bonds increase taxable income thus reducing Ted's AMT exposure. "Municipal bonds" could indicate either public and private purpose bonds. This is too vague to answer the AMT issue. The public purpose municipal carry tax free interest, interest from private purpose (private activity) bonds is a preference item and are subject to AMT. Additional taxable income reduces exposure to AMT. Public purpose municipal bonds are tax neutral. They do not create taxable income for regular 1040 purposes nor do they create AMT income.

During the first interview with your client, Charles, he says he lives an alternative lifestyle. While he tells you that he will not look you in the eye and is fidgeting with his cell phone. What would be the most appropriate response, from you, the CFP® practitioner under this circumstance? A) Charles' " alternative lifestyle" would have little, if any impact on his finances. It doesn't matter. B) In a nonjudgmental tone, ask Charles to explain what he means by "alternative lifestyle". C) Research " alternative lifestyle" on the Internet to learn what Charles was communicating. D) Ask a mutual acquaintance of yours and Charles' to explain his self-stated " alternative lifestyle".

B) In a nonjudgmental tone, ask Charles to explain what he means by "alternative lifestyle". It is important that client and planner understand and respect each other. The client should understand that the planner is there to serve and not to judge. Charles' lifestyle could indeed impact the financial plan relative to asset ownership, beneficiary designations, incapacity planning, and more. Discussing with third parties information Charles shared with you in your capacity as his financial planner clearly violated the Duty of Confidentiality.

You are an insurance agent and a CFP® practitioner. A client is referred to you. The client started a fire that ultimately spread to his neighbor's house. The police are investigating the fire. The client wants to disclose all the facts to you to get insight on how his and his neighbor's property insurers are likely to react when the truth comes out. How should you respond to this situation? A) Tell the client he has no coverage for intentional acts B) Tell the client you do not have advisor-client privilege and terminate the relationship immediately C) Tell the client why he should document the event with photographs and diagrams D) Tell the client to remain silent about his role in causing the fire. Investigators may not be able to identify him as its cause.

B) Tell the client you do not have advisor-client privilege and terminate the relationship immediately A CFP certificant shall treat information as confidential except as required in response to proper legal process. Although you are also an insurance agent, you should respond as a CFP® practitioner.

Former college roomates, Barbara and Kathy, are 50/50 owners of BK, Inc. When they started BK, the corporation acquired two $1,000,000 face value key-person term life insurance policies. Barbara is the named insured in one policy and Kathy in the other. Over the years, the company has paid $5,000 in premium on Barbara's policy and $4,000 in premium on Kathy's policy. Barbara and Kathy have decided to use the policies to back a new cross purchase buy-sell agreement. If Barbara buys the policy in which Kathy is the named insured paid by BK, what will be the tax outcome if Kathy dies within one year following Barbara's acquisition of the policy? A) Barbara will receive $1,000,000 income tax-free (term insurance exclusion). B) The policy will be subject to the transfer for value rules making the death benefit net of basis subject to federal income tax. C) The policy will be included in Kathy's gross estate for federal tax purposes (3-year rule). D) The policy death proceeds will increase the fair market value of BK, Inc. by $1,000,000.

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

Which of the following statements is true regarding differences between time-weighted return or dollar-weighted return? A) The time-weighted return and the dollar-weighted return are essentially different words that express the same calculation. They are interchangeable. B) The reason to calculate the time-weighted return rather than the dollar-weighted return is to evaluate the performance of the portfolio manager. C) The reason to calculate the dollar-weighted return rather than the time-weighted return is to evaluate the performance of the portfolio manager. D) The reason for calculating the time-weighted return rather than the dollar-weighted return is identify the strategy that would eliminate reinvestment rate risk in the portfolio.

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

Loretta started receiving substantially equal annual payments from her IRA at age 58. After a total of three payments, Loretta stopped receiving payments at age 61. What will be the amount of the recapture tax to which Loretta's distributions will be subject? A) None, because she has attained age 59½.None, because she has stopped receiving payments. B) The recapture amount will be 10% of the total annual payments received before Loretta attained age 59½, plus interest. C) The recapture amount will be 10% of the three payments that were actually distributed to Loretta, plus interest. D) The recapture amount will be 10% of the year end FMV of the IRA, plus interest.

B) The recapture amount will be 10% of the total annual payments received before Loretta attained age 59½, plus interest. The recapture amount will be 10% of the total annual payments received before Loretta attained age 59½, plus interest.

Mrs. Tilden, a widow, has gifted extensively to her daughter, Sally. She used her entire gift property exemption amount and actually paid federal gift tax on her most recent gifts. Mrs. Tilden recently married Bill Widner. She is considering gifting him $1,000,000 with the written understanding that he will then gift the $1,000,000 to Sally. How would you respond after she explains her strategy? A) This is an effective way to accomplish effective gift tax planning. B) The transfer of $1,000,000 reduced by one annual gift tax exclusion from Mrs. Tilden to Bill Widner will be a taxable gift. C) Mrs. Tilden and Bill Widner need to be married for one year for this technique to work. D) The transfer of $1,000,000 reduced by one annual gift tax exclusion from Mrs. Tilden to Bill Widner will be a non-taxable gift.

B) The transfer of $1,000,000 reduced by one annual gift tax exclusion from Mrs. Tilden to Bill Widner will be a taxable gift. It appears that the gift will not qualify for the marital deduction. To qualify for the deduction, the donee spouse must be given the property outright or must have at least a right to the income from the property and a general power of appointment over the principal. The IRS would consider this to be a step transaction and thus a fraudulent transfer.

Your client, Bob, made an investment in a commercial property. Given the risk this investment carries, he had a required rate of return of 10%. He recently sold the property and has asked you whether the investment was profitable. Was it? A) Yes, the investment was profitable but only if the NPV of its cash flows was positive B) Yes, the investment would meet Bob's required rate of return if the NPV was zero. C) No, the investment would not be profitable if its NPV was negative D) Yes, the investment was profitable presuming that its NPV was greater than Bob's 10% required rate of return

B) Yes, the investment would meet Bob's required rate of return if the NPV was zero. When, given the cash flows of an investment, its NPV is zero, the investment met the buyer's required rate of return. An investment can be profitable even if its NPV is negative. A positive or a negative NPV tells us whether the client achieved his required rate of return, but not the amount of the profit.