Final Review Quiz #7
After meeting with several doctors, Mr. Lang now understands that he only has a few years to live. With an eye toward minimizing federal estate taxes, he would like to transfer appreciated assets to his children. If he died today, part of his estate would be subject to the 40% estate tax. Of course, Mr. Lang would also like to avoid gift taxes or use the full exclusion. He would like to receive income from the assets transferred, and he would like to minimize the income tax on any distributions. Mr. Lang is in the maximum income tax bracket. Which of the following wealth transfer methods should he consider? A) A SCIN (self-cancelling installment note) B) A Private annuityA GRUT (grantor retained unit trust) C) Family limited partnership (FLP) D) GRIT (grantor retained income trust)
A) A SCIN (self-cancelling installment note) Until Mr. Lang dies, under the SCIN, capital gain may be recognized in installments. The SCIN removes the property and any unsatisfied payments from Mr. Lang's estate. UNder a private annuity, all gain would have to be recognized (be attributed) to the year of sale. Under a FLP he can only gift away $30,000 per beneficiary per year (presuming a 50% discount which may be too aggressive). The question does not specify how many children Mr. Lang has. Unless he has many children and considerable time, the family limited partnership strategy would not be effective.
Which one of the following surviving spouses of a deceased insured worker would not be eligible for Social Security benefits? A) A surviving spouse, age 59, with a 17-year-old daughter in high school B) A surviving spouse, age 62 (no living children) C) A surviving spouse, age 57, with a child who became disabled before age 22 D) A surviving spouse, age 62, who is still working
A) A surviving spouse, age 59, with a 17-year-old daughter in high school For a surviving spouse to receive Social Security "in care" benefits, the child has to be under age 16. The question asked about the surviving spouses, not the children. Regarding Answer D, there is no indication that the individual earns over the benefit phaseout threshold.
Mrs. Basic, a widow, is concerned about her son, Zach, age 13. Her husband died when Zach was only 6. Her only brother, Atilla has repeatedly demonstrated dishonest behavior and poor money habits. Mrs. Basic owns about $1 million in assets plus insurance life insurance policy. Being somewhat uncomfortable with lawyers, Mrs. Basic wants a simple arrangement. You have suggested that she establish a revocable trust, but Mrs. Basic thinks that entails too much fuss. Presuming that Zach seems to be a very responsible young person who has demonstrated good money habits, which of the strategies below might Mrs. Basic consider? A) At death, transfer her propertty to an UTMA account anming a large bank as custodian B) Leave everything to a Testamentary trust naming her brother, Atilla, as trustee C) Wait and see whether Mrs. Basic is likely to live long enough that Zach would be able to be able to manage his financial affairs D) Leave the money outright to Zach through a bequest in her will
A) At death, transfer her propertty to an UTMA account anming a large bank as custodian An UTMA allows a donor to make a gift at death by permitting Mrs. Basic's executor to establish a custodianship account at the death of the transferror. The bank will serve as custodian until Zach turns 21. The brother is untrustworthy.
Samuel Hall, age 69, is about to retire. He participates in his not-for-profit employer's 403(b) plan. However, Samuel would like to avoid taking RMDs as he has cash set aside for retirement. He would like the proceeds of the 403(b) to pass to his children. Which of the following strategies would be available to Samuel? A) At retirement, roll the 403(b) into a Roth IRA B) At retirement, take RMDs with his children as primary beneficiaries C) At retirement, roll the 403(b) into an IRA and then into a Roth IRA D) At retirement, take distributions
A) At retirement, roll the 403(b) into a Roth IRA Under current rules, distributions from tax-qualified retirement plans, TSAs [403(b)] and governmental 457s may be rolled directly into a Roth IRA. Samuel will have to pay tax on the amount that is rolled over. There would be no penalty because rollovers do not incur penalty and because Samuel is well over age 59½.
Tom and Estell Singer have been referred to you by a current client. The Singers have already prepared their own financial statements. As you review their cash flow statement you become confused. The statement shows they are saving money. However, their statement of financial condition shows an only small amount in their checking account and some 401(k) (his) and 403(b) (hers) accounts. In reviewing their mortgage you find out it was taken out some years ago. You then discover they have $30,000 in credit card debt that had not been posted on their personal balance sheet. They confess, with some embarassment that they are spending more than they are making. What would you suggest they do? A) Create a budget a to reduce their spending and pay off the credit card debt. B) Suggest they refinance their mortgage at new 30-year low interest rates, pay off their credit cards and begin funding savings. C) Find out which spouse is the spender and cut up his or her credit card. D) Suggest that they meet with a mortgage broker.
A) Create a budget a to reduce their spending and pay off the credit card debt. The Singers need to address their continuing negative cash flow. They need to spend less. Refinancing will probably reduce their payments. Then the credit cards could be paid off. However, lenders probably are not going to lend money to a borrower with poor spending habits. Answer C may not solve the spending problem. Given their continuous negative cash flow, a mortgage broker may not be able to help the Singers.
Which of the situations shown below seem to indicate the endowment effect? A) Emily presumes that all the antiques she owns would command higher than market prices at Antiques Roadshow. B) When the Andersons decided to sell their four-bedroom home they checked local listings for similar properties to help them determine a reasonable asking price. C) Jack checks out the price to earnings ratio of stocks that he intends to buy to determine whether they are undervalued. D) Deborah only buys items that are on sale.
A) Emily presumes that all the antiques she owns would command higher than market prices at Antiques Roadshow. Emily presumes that her antiques will sell for above market value simply because she owns and feels attached to them. The Andersons and Jack check out real world fair market values before they determine appropriate prices at which to buy or sell. Emily will only pay LESS than what she perceives to be the going market price for the goods that she wants.
Under Coverdell ESAs, which of the following are qualified (non-taxable) elementary and secondary school expenses? I. Academic tutoring II. Extended day programs III. Uniforms IV. Computer software primarily involving sports V. Intramural sports equipment A) I, II, III B) I, III C) II, III, IV, V D) II, IV, V E) IV, V
A) I, II, III Computer software will only qualify if it is educational in nature. Uniforms are covered but not intramural sports equipment.
From the statements below, accurately identify the similarities and differences relative to post death RMD rules for traditional IRAs versus Roth IRAs when the beneficiary is a child? I. The traditional IRA distributions would generally be taxable; the Roth distributions would generally be income tax free if the requirements have been satisfied. II. For both the traditional IRA and the Roth IRA, the child may elect to take distributions over a period not to exceed his or her own life expectancy. III. For both the traditional IRA and the Roth IRA, the child must deplete the IRA within 10 years of the owner's death. IV. The traditional IRA distributions can be delayed until the parent would have reached age 72; the Roth distributions can be delayed until the child will reach age 72. A) I, III B) II, III C) II D) II, IV E) IV
A) I, III Statements I, and III accurately reflect post-mortem distribution choices that are available to a child or the owner as beneficiary. T he option of delaying distributions until the IRA-owning parent would have attained age 72 is not available to a child beneficiary.
This year Joan began helping her mother, Emma, with cash payments (totaling $10,000). Emma lives on a limited fixed income plus Social Security benefits ($6,000 yearly). May Joan claim any tax deductions for the direct cash payments? A) No, the cash payments are considered to be gifts. B) No, only gifts to a public or private charity are tax deductible. C) Yes; Joan can claim the dependency exemption for Emma if her mother's limited fixed income is gross taxable income and less than $4,300 yearly (2021). D) Yes, Joan may claim the dependency exemption for Emma as long as she provides more than half of her mother's support
A) No, the cash payments are considered to be gifts. The money is a gift. Personal exemptions have been eliminated after 2017.
In year 2000, your mother bought a stock at the height of the dot.com market boom for $100 per share. Today, that same stock is trading at $50 per share. Your mother, who is now age 75, is in poor health. What would you suggest that she do relative to this stock position? A) Sell the stock at a loss and invest the proceeds in CDs. B) Sell the stock at a loss and invest the proceeds in REITs. C) Gift the stock to her favorite charity and then claim a charitable income tax deduction based on the original purchase price. D) Gift the stock to you so that you can then sell it and realize what was once the donor's capital loss.
A) Sell the stock at a loss and invest the proceeds in CDs. This choice reflects the conservative outlook that is often associated with elderly clients. The REITs carry more principal isk than do the CDs. Answer C is incorrect because the charitable income tax deduction would be based on the stock's value (FMV) today. Given dual basis rules for gifted loss stock, you may not be able to realize the loss.
Your client, Barbara Barrington, owns a business worth $2,000,000. If she requires a 12% return based on recent offers to buy the business, what is Barbara's business actually worth? Offer 1 (beginning of year)--->Offer 2 (end of year) $300,000----> $400,000 $400,000----> $450,000 $500,000----> $550,000 $600,000----> $600,000 $700,000----> $700,000 A) $1,795,131 B) $1,885,869 C) $2,112,173 D) - $114,131
B) $1,885,869 Because we do not know what Barbara initially paid to acquire the business, use a zero in the first year to solve for the present value. 0 CFj 400,000 CFj 450,000 CFj 550,000 CFj 600,000 CFj 700,000 CFj 12 I gold NPV
Alex Hamilton, now age 57, quit his job 2 years ago. After being married for 30 years. Alex and his wife decided to split when he quit his middle management job and started developing web-sites for the handicapped. His now ex-wife took half of their money and moved to France. Alex's websites went viral and his annual income went from around $90,000 in a typical year to $300,000. He has no formal employees but some of his fraternity brothers help him and are paid under a 1099 arrangement. Alex wants to establish a retirement plan. You ask him about his lifestyle and his expenses. He says he is now dating lovely Fifi, who is age 39. To compete with her other boyfriends, he leased a Mercedes-Benz and takes Fifi to fine restaurants and the theater where he buys main floor seats. From the choices below, which type of retirement plan would you suggest? A) A SEP B) A Uni-(k) C) A defined benefit Keogh D) An age-weighted target benefit Keogh
B) A Uni-(k) The catch-up provision available with the Uni (Solo) 401(k) allows Alex to contribute a total of $67,000 for the current tax year. Given that they do not offer a catch-up contribution opportunity, the SEP and target benefit only allow $61,000. The Uni-(k) will be an ERISA plan. Fully funding actuarially determined contributions to a defined benefit plan will require more money than his current expenses allow.
A contribution to a Coverdell ESA is: A) Deductible like an IRA contribution (Coverdell ESAs were originally called "educational IRAs.") B) A completed gift qualifying for the annual gift tax exclusionA completed gift of a future interest C) An exempt gift (educational purpose) D) Deductible if the donor's AGI is under the annual threshold
B) A completed gift qualifying for the annual gift tax exclusionA completed gift of a future interest A contribution to aCoverdell ESA is not deductible. AGI is a factor in the phase out (or not) of the contribution, but not in its deductibility. The contribution to a Coverdell ESA is a gift of a present interest but not an exempt gift.
Advance Tech, a closely held S corporation, wants to provide an employee benefit that will help it to retain employees (100+). The company is profitable but typically has no extra cash. The owners are comfortable to permit the employees to share in the company's growth. What employee benefit would you recommend? A) A profit-sharing/401(k) plan B) A non-contributory stock purchase plan (ESOP) C) A Simple plan D) A SEP plan E) A Money-purchase pension plan
B) A non-contributory stock purchase plan (ESOP) Advance Tech does not have the means to make cash contributions. But the corporation could contribute stock. The owners are comfortable to have employees share in the growth of the company. The profit sharing plan would require a substantial and recurring (although not annual) cash contribution. The 401(k) provision would generally entail employer matching contributions of cash. NOTE: The 100+ employee population eliminates the SIMPLE.
Jill's estate will be subject to federal estate tax at its current 40% rate. She is considering transferring appreciated stock to a charitable remainder annuity trust (CRAT). Jill plans to retain a 5% annuity interest for herself. After her death, the assets would pass to the charity or charities that are named in the trust. If she had not created the trust, her heirs would have inherited her estate. However, the main disadvantage to the plan is the loss of the inheritance to her family. What type of additional planning would you recommend to Jill? A) A CRUT B) A wealth replacement trust C) A CLUT D) A revocable trust
B) A wealth replacement trust A wealth replacement trust is an irrevocable life insurance trust (ILIT) that is generally established for the children of parents with charitable remainder trusts. Under CRT arrangements, the parents receive the trust income and the charity(s) take the remainder. The wealth replacement trust provides the children with money when the parent(s) die. The insurance benefit would ultimately be distributed to family members to replace the wealth given to charity. Some of the income paid by the CRAT can be used to pay premiums on insurance on the donor's life.
Mrs. Able established a Generation Skipping Trust. When Mrs. Able dies, $23,400,000 will be put into the trust. After her death, the trust will pay income to her son. At her son's death, all remaining principal will be distributed to her grandchildren. From the choices below, identify the party with the responsibility to pay the GST tax? A) At Mrs. Able's death, when the GSTT is due. Her estate will pay the tax. B) At her son's death, the GSTT is due. The trustee will pay the tax. C) The grandchildren will pay the tax when they have constructive receipt of the principal of the trust. D) Mrs. Able will have to pay the GSTT now.
B) At her son's death, the GSTT is due. The trustee will pay the tax. Mrs. Able's trust will create an indirect skip (taxable termination because the assets in the trust will exceed the GSTT exemption. The trustee will pay the GST tax from the trust assets when her son's life interest terminates and the assets will be transferred to the grandchildren (skip persons).
Your ad on the internet for financial planning services is producing mixed results. The latest inquiry is a married couple, the Bakers. When they meet with you, the Bakers ask you to develop a retirement plan presuming they both retire at 62, some foreign travel, a small vacation home in the mountains. They have IRAs and qualified plan assets. In reviewing the Bakers' net worth and applying conservative inflation assumption, you realize that their combined goals are impossible to achieve. You share this concern with the Bakers. In response, Mrs. Baker says that her mother is terminally ill and she will soon inherit about $500,000 tax-free. They request you adjust your analysis assuming that the $500,000 will become available shortly. How should you best handle this situation? A) Perform your analysis without the $500,000 but change the date of their retirement to age 66. B) Based on the Bakers' request, perform your analysis presuming the availability of the $500,000. C) Communicate with Mrs. Baker's mother to talk about her health and her estate plan. D) Courteously terminate your professional relationship with the Bakers
B) Based on the Bakers' request, perform your analysis presuming the availability of the $500,000 It is reasonable in this situation to do what the client asks. You cannot contact Mrs. Baker's mother. With Answer A, you are ignoring client data. The inheritance is expected soon. It is not necessary to terminate the relationship. However, you may wish to note in the plan and in your files that your analysis was based on an expected inheritance, the timing of which could be uncertain.
Mrs. Andrews is referred to you by a current client who happens to be her employer. The referring client is a physician and Mrs. Andrews works as the Medicare billing administor in his office. She is divorced and her income barely covers her living expenses. She wants to talk with you about her daughter. She asked you to meet with her daughter and son-in-law. You agree. Her daughter, Leslie, and her husband Tommy meet with you. Both are employed in hourly-wage jobs and have no savings. Fortunately their employers provide them with group health insurance. Leslie is pregnant and the expected due date is 2 months away. That is all the financial information they can provide. What do you recommend that Leslie and Tommy do? A) Establish an emergency fund to cover 6 months of fixed and variable expenses. B) Buy term life insurance on Tommy's life with a death benefit of at least of at least $500,000. C) Suggest that Mrs. Andrews tighten her belt so she can help them with money. D) Help Leslie and Tommy determine whether they qualify for any local or state financial assistance, like food stamps.
B) Buy term life insurance on Tommy's life with a death benefit of at least of at least $500,000. This growing family will need life insurance. This is especially true because Leslie and Tommy can't rely on Mrs. Andrews for financial help. With term coverage they should be able to obtain a reasonably high death benefit. With two months before the baby comes and limited wages, a six-month emergency fund does not seem reasonable. Further, they will have extra cash needs for baby-related expenses. Answer C is incorrect because Mrs. Andrews is not the client for whom the recommendation in the question is to be made.
For a while you have sensed that Edwin Edwards is no longer mentally competent. While monitoring his investment activities, you learn that he is considering giving his power of attorney to an individual with a history of elder abuse. Whom should you call? A) The compliance officer (registered principal) at your broker-dealer B) Edwin's attorney C) Edwin's children D) His investment advisor
B) Edwin's attorney Edwin's attorney enjoys "client priviledge" and cannot be forced to discuss Edwin's condition with third parties. The question does not indicate that his investments are with your broker/dealer. Edwin's children are not your clients. You do not want to violate Confidentiality in that way. Discussing Edwin's condition with the investment advisor also breaches Confidentiality. You could speak with Edwin's physician but that is not among the answer choices.
In order to sell her property, your client, Diana Draper, must have the property graded level, seeded, and surveyed. The total cost for these services is $20,000. Which of the following can you accuartely tell Diana about the $20,000? A) The $20,000 can be expensed. B) The $20,000 must be capitalized. C) The $20,000 can be expensed by making a Section 179 election. D) The $20,000 can be expensed by making a Section 197 (amortization) election.
B) The $20,000 must be capitalized. Improvements that add to the value of land (in this case by making it more marketable) or adapt it to new uses are capital improvements. Capital improvements generally increase basis.
Which of the following assets are liquid? A) A S&P 500 ETF B) A CMO C) A GIC D) A 1-year CD
D) A 1-year CD In the absence of early withdrawal, the CD would not be expected to lose principal. The S&P ETF and CMO are marketable but there could be substantial change in price. The GIC isn't liquid.
You are advising top management of the Royal Ribbon Corporation. Royal Ribbon recently hired James White, a promising information technology executive. James fits the company need and Royal Ribbon wants to retain h him. However following a background check the company learned that James had filed for Chapter 7 bankruptcy and lost his house to foreclosure. Royal Ribbon Corporation has engaged you to counsel James regarding his financial affairs. In your first meeting with James you learn that he is married with 3 small children.His wife is currently staying at home but she hopes to return to work as a systems analyst as soon as they can afford day care. They are renting a two-bedroom apartment. There are no investments. The money in the White's checking account is enough to cover monthly expenses. You are reviewing the company benefits with James. The health insurance program offered to employees through Royal Ribbon, Inc. is a PPO plan.The cost of family coverage is $900 per month.The group disability insurance program provides total disability benefits under a split definition that reflects a 5-year own occupation, then modified any occupation to age 65 based on a $5,000 per month maximum benefit.The plan is 40% contributory (by James). Royal Ribbon, Inc. provides employees with the opportunity for a 6% maximum deferral into their 401(k) program which also offers a 3% match. How would you suggest that James prioritize his financial activities? I. Enroll in the PPO plan. II. Enroll in the group disability income insurance plan. III. Participate in the 401(k) plan. IV. Establish a 6 month emergency fund. A) I, II, III, IV B) I, II, IV, III C) II, IV, I, IIII D) IV, III, I, II
B) I, II, IV, III With a wife and 3 small children above all, James needs medical insurance. The last priority is contributing to the 401(k). Disability insurance is the next highest priority because as of the moment, James is the only income earner. Yes, the emergency fund is also important.
Tilly recently inherited a significant amount of personal property from her mother. She is concerned about her property insurance coverage. Which item(s) do you suggest that she talk with her insurance agent about full protection? I. Gold coins II. Old furniture and workable TVs that are used in what the family calls "The Shack" that is 500 feet away from the main house III. Silver - flatware service for twelve IV. Paintings bought on Amazon.com A) I, II, III B) I, III C) II, III D) III, IV E) II
B) I, III Under the HO forms, coins are covered for no more than $200. While the question does not indicate the coins are collectible, given that they are gold the $200 limit applies. Silver has an internal limit of $2,500 in coverage for theft only. The personal property in a separate structure ("The Shack") is covered. Artwork bought on the internet would be covered as normal personal property rather than collectibles.
Which of the following benefits would be covered under Medicare Part A? I. Home health services that are part of a treatment plan II. First 3 units of blood in a calendar year III. Oral anti-cancer drugs IV. Care in an extended care facility (maximum 100 days) V. Emergency care while in Europe A) I, II, V B) I, IV C) II, IV D) III, V
B) I, IV Medicare Part A will cover home health visits that are part of a treatment plan and up to 100 days in an extended care facility for rehabilitative purposes. The patient must pay the hospital cost for the first 3 units of blood in a calendar year or have blood donated by the person or someone else. Answer III is covered by Part B. Answer V is not covered by Medicare
Martha's husband, Alex, died last month in February. Which of the following income tax filing statuses are available to Martha for the current year? I. Single II. Married filing jointly III. Married filing separately IV. Head of household V. Qualifying widow A) I, III, IV, V B) II, III C) I, IV, V D) III, V E) I, V
B) II, III The return due in the year after death is the return for the year in which the husband died. Martha may file married, jointly or married, separately. She is not eligible to file as a qualifying widow until the year after Alex died (the next year). Martha may file as a qualifying widow if she meets one of the following four tests. 1) She maintains a home 2) She has a dependent child 3) She filed a joint return the prior year 4) She did not remarry. Martha may also file as head of household, but she would have to have children actually living in the home.
When seeking to educate a client, what should you stress as the greatest risk associated with investing in bonds? A) Market interest rates B) Price volatility C) Call protection D) Bond rating
B) Price volatility While many investors erroneously presume that investing in bonds does not carry risk to principal, that is not so. Bond prices fall with rising interest rates. If an investor cannot hold the bond to maturity and thus sells it when rates are higher relative to the coupon rate of the bond, that bondholder is likely to lose principal. If interest rates have risen sharply the loss of principal can be significant.
The Federal Reserve Board (FRB) has the means to affect the supply of money in the U.S. economy. If the federal government wanted to increase the money supply, what would it most likely do? A) Sell Treasury securities B) Reduce federal income taxes C) Buy Treasury securities D) Reduce M1
B) Reduce federal income taxes The question asks what the federal government would do and not the activities of the FRB. This represents fiscal, rather than monetary policy. The other answers which are incorrect, represents monetary policy.
Which of the following bonds is not subject to default risk? A) Zero-coupon bond B) STRIPs C) CATs D) TIGRs
B) STRIPs STRIPs are issued directly by the US Treasury and thus cannot default because the Treasury prints money. The CATs and TIGRs are not government issued bonds and can be subject to default risk (While the CATs and TIGRs are backed by Treasury securities, they are created by brokerage firms that could fail). The zero-coupon bond does not specify that it is a Treasury security, so default risk is present.
Mrs. Caldwell, age 56, went through a messy divorce. Mr. and Mrs. Caldwell never saved much. Mrs. Caldwell does own the balance in her 401(k) account from her prior employer. The strain of the divorce caused Mrs. Caldwell to be unable to work. Due to physical and mental impairments, she is considered disabled under Social Security standards and now qualifies for Medicare. She hopes to go back to work eventually but she is not sure when. Mrs. Caldwell needs additional income. What do you suggust that she do? A) Find an occupation she can perform from home to make additional income B) Take distributions from her 401(k) account C) Take substantially equal payments from the 401(k) account to avoid the 10% penalty D) Apply for food stamps, unemployment insurance, and other public benefits
B) Take distributions from her 401(k) account If Mrs. Caldwell takes a distribution from her 401(k) account, although she is not yet age 59 1/2, no penalty will apply because she is disabled. Yes, she may recover from her disability, but currently, she meets the strict standards of disability under Social Security guidelines. If Mrs. Caldwell is paid too much earned income, she could lose her Social Security (she is disabled). If she elects substantially equal payments, under IRC Section 72(t) rules she is locked into equal payments for 5 years. She can apply for unemployement insurance benefits as well as other public benefits but they may or may not be forthcoming.
Arthur is looking to buy RST common stock for $100. The current dividend is $2. The stock is expected to grow its dividend by 6% for three years, and then by 8% thereafter. Arthur's required rate of return on this stock is 10%. Should he buy the stock? V= D1 / r-g A) No, based on the DDM, the stockappears to be overvalued. B) Yes, based on the DDM the stockappears to be undervalued. C) Yes, based on the DDM, the stock will satisfy Arthur's required rate of return. D) Yes, because the dividends would only be taxed at 15%.
B) Yes, based on the DDM the stockappears to be undervalued. By simply factoring the DDM, we know that the current market price of $100 is less than $108.00. V= $2 (1 + .08) / .10-.08 = $108 In the formula above the 2nd growth rate is used to calculate the intrinsic value with an adjustment upward or downwardrelative to whether the early years' dividend is lower or higher than the later years' dividend.
Marty purchased a zero-coupon bond for $650. The bond will mature at its $1,000 par in 6 years. What is the YTM of Marty's bond? A) 3.66% B) 6.068% C) 7.31% D) 7.44%
C) 7.31% Assume semiannual compounding (which is the norm for bonds). Solve in the end mode.
Lenny was divorced. He has two daughters with his first wife. A few years before his death, he married Marilyn (second wife). Lenny established a trust for Marilyn. The trust provisions gave Marilyn the right to trust income limited to the ascertainable standards of health, education, maintenanc and support (HEMS). The trust agreement also provides Marilyn a discretionary right to principal, limited to the same HEMS standard, but which had to be preceeded by the exhaustion of Marilyn's other resources. After Marilyn's death, the remainder of the trust passes to Lenny's children. What type of trust does it appear that Lenny established? A) A qualified terminable interest property (QTIP) B) A qualified domestic trust (QDT) C) A Bypass trust D) A power of appointment trust E) An estate trust
C) A Bypass trust The provisions for Marilyn reflect a bypass trust (b trust). The right to income limited to HEMS is not a right to all income from the trust as would apply with a QTIP trust. Also, the QTIP cannot use the $11,180,000 exemption.
James and Denise Williams want to make one or more split gifts from their money market account which is registered in TBE. They have agreed that some of their wealth could help various individuals. With an eye toward minimizing federal gift tax, the Williams' have asked you which of the following gifts would be taxable. How would you respond? A) A gift of a car with a Blue Book value of $30,000 to "Pops" who does maintenance and odd jobs at their vacation home. B) A gift of $40,000 for tuition at a private college for their favorite niece, Cindy. C) A gift of $70,000 to their son and his wife to make a down payment on a new home D) A gift of $32,000 to a medical clinic to pay for care of an old friend who had no medical expense insurance.
C) A gift of $70,000 to their son and his wife to make a down payment on a new home After subtracting the split gift tax annual exclusion times two donees, the $70,000 gift to the Williamses son and daughter-in-law becomes a taxable gift of $10,000. The amount of the gift to "Pops" reflected in Answer A is not taxable because it does not exceed two multiples of the annual gift tax exclusion. Answer B indicates that the gift for tuition is paid directly to the college. Answer D indicates that the gift is paid directly to the clinic for medical care
Mr. and Mrs. Pond want to establish a scholarship program for needy students. They would like to be eligible to claim tax deduction for their contributions to the scholarship program. They would also like to control to the investments and distributions to the fullest extent that is permitted. Which of the following strategies would best accomplish the objectives of Mr. and Mrs. Pond? A) A revocable trust in their name B) A GRAT C) A private foundation D) A CRAT E) A CRUT
C) A private foundation A scholarship program may be established through a private foundation. Care must be taken to insure that the program satisfies numerous reporting and distribution requirements. With a GRAT or a CRAT, the income beneficiary is normally the donor. There is no indication that the Ponds are seeking income.
According to the CFP Code of Ethics, a certificant shall disclose to a prospective client or client the following information in an accurate and understandable description of the compensation arrangements being offered which must include: I. Information related to costs and compensation to the certificant and/or the certificant's employer. II Terms under which the certificant and/or the certificant's employer may receive any other sources of compensation, and if so, what the sources of these payments are and on what they are based. A) I only B) II only C) Both I and II D) Neither I nor II
C) Both I and II Both statements I and II are correct. CFP® certificants are required to disclose compensation to prospective and current clients.
Suzanna York, age 5, was injured on a playground. The playground equipment was found to be defective and her parents sued the manufacturer on Suzanna's behalf. Suzanna was awarded $1,000,000 compensatory structured settlement to be paid out over 40 years. Unfortunately, Suzanna died during the early stages of the settlement process. What would generally happen in regards to the structured settlement? A) It ceases at Suzanna's death. B) Payments continue, but they change from being income tax free to being income taxable. C) The present value of the remaining periodic payments would be included in Suzanna's estate for federal estate tax purposes. D) Payments continue to Suzanna's estate for the remainder of the 40-year term.
C) The present value of the remaining periodic payments would be included in Suzanna's estate for federal estate tax purposes. Although Suzanna's applicable credit would probably exceed any tentative tax, the present value of the yet unsatisfied payments would be included in her gross estate for federal estate tax purposes. Nothing indicates the settlement ceases at death (Answer A).
Elise Hawkins, age 60 single, suffers from several chronic health problems. By only working 4 days per week (32 hours) and using all of her sick and vacation time Elise has been able to keep her job. It is important to Elise that she continues to participate in her employer's group health insurance plan. In addition to Elise the company she works for employs an additional 18 full-time and 8 part-time workers. Elise's goal is to work until age 62½. She plans to elect COBRA until age 65 when she will qualify for Medicare. However, Elise is concerned because her employer has experienced uncertain revenues. Its employee census has varied through the years. Which of the following situations may indeed jeopardize the COBRA option available to Elise when she turns 62½? I. The company fires certain full-time employees and simultaneously replaces them with some part-time employees. II. Elise's position is changed from full-time to part-time employment. III. The company goes out of business. IV. The number of part-time employees increases. V. Before Elise retires Affordable Care Act provisions for COBRA increase the employer COBRA requirement from 20 to 50 full time equivalent employees. A) All the above B) I, II, III, V C) I, II, III D) II, III E) III, V
C) I, II, III If a company goes out of business, its medical insurance plan stops so there is no opportunity to continue coverage under COBRA. Part-time status may eliminate Elise's eligibility to participate in the group plan. Answer V is nonsense. Answer IV does not indicate that the number of full-time employees has decreased.
Mr. Baldwin receives 10,000 ISOs from his employer to purchase LMN Corporation stock at $10 per share. Within two years of the grant date, he exercises them at $25 per share. Several years later, Mr. Baldwin sells the 10,000 shares of LMN for $100 per share. Regarding federal income tax as it applies to this situation, which of the following statements are true? I. There is no taxable event on the grant of the options. II. Mr. Baldwin will realize $150,000 of additional income for tax purposes upon exercise. III. Mr. Baldwin will realize a long-term capital gain of $900,000 when he sells the stock. IV. Mr. Baldwin will realize a long-term capital gain of $750,000 when he sells the stock. A) I, II, III B) I, II, IV C) I, III D) I, IV
C) I, III The two required holding periods to create long-term gain relative to an ISO reflects 1) grant to sale (2 years); 2) exercise to sale (1 year). Before selling the exercised ISO shares, Mr. Baldwin held them at least one year from the date of exercise and at least two years from the grant date. This is a qualified disposition. Mr. Baldwin exercised the ISOs at $10 per share creating a basis of $100,000. Nothing in the question indicates that the bargain element (an AMT preference item) actually triggered AMT to Mr. Baldwin. The long-term capital gain at the time of the sale is $90 per share.
How would the Federal Reserve Board and Congress generally be expected to respond when unemployment is rising, consumer spending is declining, and stock prices are rising? I. Decrease interest rates II. Decrease margin requirements III. Increase repo (repurchase) agreements - (Buy securities) IV. Decrease repo (repurchase )agreements - (Sell securities) V. Increase government spending A) I, II, III, V B) I, II, IV, V C) I, III, V D) I, IV, V E) I, II, IV
C) I, III, V To stimulate the shaky economy, the Federal Reserve Board would pursue expansionary monetary policy (easy money). It would thus be expected to decrease interest rates and buy securities from the banking sector. Congress would increase spending with the intent to stimulate the economy. . Decreasing margin requirements (30% versus current 50%) would just increase stock market speculation. If the Reg. T initial margin requirement is 50%, a decrease to 30% would allow margin investors to buy more stock. However, that does not necessarily stimulate the economy.
A Section 179 election is best describesd as: I. A depreciation method II. An eection to expense III. Available for tangible personal property IV. Available for intangible personal property A) I, III B) I, IV C) II, III D) II, IV
C) II, III It is an election to expense to tangible personal property (1245).
Thomas Tomlinson has been a client of yours for years. He owns a small jewelry business. Thomas contributes to a SEP program irregularly due to business cash flow variations. In addition to the SEP account, Thomas he has some additional nonqualified investment accounts with you. You recently learned that Thomas's oldest daughter, Terrie just got divorced. Terrie has a teenage son. It appears that Thomas now has to support his daughter and her son. He says to you "I cannot take this anymore. What about my own retirement"? How should you proceed? A) Review Thomas' current and potential income streams to identify ways to solve his immediate cash flow problem. B) Change Thomas' investment asset allocation to produce more income and suggest he move his daughter and her son into his home. C) Review Thomas' goals and prioritize them. D) Make Thomas aware that his retirement goals are unrealistic that he will never be able to stop working
C) Review Thomas' goals and prioritize them. Under the Practice Standards, it seems clear that Thomas needs to reassess his priorities. If his priorities have truly changed, you may need to perform another analysis of his data. Answer A does not solve Thomas' problem: At this point, his income is what it is. Moving the daughter and grandson into Thomas' home may be uncomfortable for all parties concerned. However, that certainly could be explored. Answer D is too extreme and not necessarily true.
Paul Pomeroy, age 40, has just changed jobs and has a 401(k) to rollover in the amount of $1,200,000. Paul has engaged you, A CFP(R) professional, to discuss investments. You agree that it is best to rollover the distribution into an IRA. Because Paul says he does not have time to follow individual securities, he is only interested in a diversified mutual fund portfolio. After discussing his goals, risk tolerance (moderate), and time horizon (20 years), you recommend the following portfolio: ABC Growth Mutual Fund 20% ABC Bond Fund 20% ABC World Mutual Fund 20% XYZ Dividend Growth Fund 15% XYZ World Bond Fund 15% XYZ Real Return Fund 10% Which of the following is incorrect about the above recommendation? A) The portfolio is well diversified among the various asset classes B) The recommendation to rollover the distribution assets into an IRA account is appropriate C) The portfolio diversification is enhanced by using different mutual fund companies and share classes D) Greater investment flexibility is available with the IRA rather than leaving the $1,200,000 in the former employer's 401(k) plan E) $94,400
C) The portfolio diversification is enhanced by using different mutual fund companies and share classes Different share classes and fund companies does not provide asset class diversification. The recommended portfolio is invested in both domestic as well as international equities and domestic as well as international fixed income securities. As Paul is age 40, the recommendation to roll the distribution to an IRA account is appropriate sound. If Paul approaching retirement and in his mid-fifties or older it may be more suitable to maintain the funds in the 401(k) plan.
When they graduated from State University, five college sorority sisters pooled their resources to open a flower shop called Florist Gump. Florist Gump is now a chain of twenty retail stores and has been valuated at $15 MM. With an eye toward continuing the business even if one of the owners die, the owners of Florist Gump are exploring buy-sell agreements. Given the circumstances and from the statements below, which accurately reflects an advantage of the cross-purchase buy-sell agreement versus an entity purchase buy-sell agreement? A) The cost of the life insurance that will fund the buy-sell agreement is more. B) Fewer life insurance policies need to fund the agreement. C) The surviving owners will get a step-up in basis. D) Life insurance that each owner would buy on the others would not be subject to transfer-for-value tax rules.
C) The surviving owners will get a step-up in basis. The clear advantage to the funded cross purchase buy-sell agreement is that the survivors will enjoy increased (stepped-up) basis because each uses the life insurance proceeds to acquire the equity of the deceased co-owner. Due to the need for fewer policies, the cost of insurance could be lower. With multiple owners, more policies need to be purchased (a disadvantage). Life insurance that is used to fund a cross purchase buy-sell agreement can be subject to transfer-for-value rules if policies are later sold to parties other than the insured.
Ida is considering the purchase of a municipal bond that pays 3.5% interest. Assuming she is in the 35% marginal income tax bracket, would you suggest that rather than buysing the municipal security Ida should buy a corporate bond that pays 5.5% interest? A) No, due to Ida's high marginal income tax rate, the corporate TEY (5.5%) is not appropriate. B) No, a taxpayer in the 35% marginal income tax bracket should buy tax-free bonds C) Yes, due to Ida's high marginal income tax rate the corporate bond paying 5.5%is appropriate D) Yes, an investor in the 35% marginal income tax bracket should buy tax-free bonds
C) Yes, due to Ida's high marginal income tax rate the corporate bond paying 5.5%is appropriate TEY= r/ (1-t) 3.5%/1-.33 = 5.22% Given Ida's marginal income tax bracket, the taxable equivalent yield (TEY) of the municipal is only 5.38% versus the corporate bond paying 5.5%. Answer D does not support what the question asks at to whether Ida should buy the corporate bonds.
Three years ago, Lori purchased a house in California. Lori married Bob this year. After their wedding, Lori sold her house because they moved to Florida. Her gain from selling the house was $300,000. Will her gain be taxable? Why or why not? A) No gain will be recognized. When Lori married Bob, the property became community property, allowing for an exclusion of up to $500,000. B) No gain will be recognized. If Lori files jointly with Bob this year, she will be allowed an exclusion of up to $500,000. C) Yes, however she will only be allowed an exclusion of $250,000. D) Yes, Lori will have to recognize all of the gain because she did not own the home for five years. E) Yes, Lori will only be allowed a $250,000 exclusion because the special exception "unforeseen circumstances" would not include relocation due to marriage.
C) Yes, however she will only be allowed an exclusion of $250,000. The home is owner by Lori rather than by the couple. Under IRC Section 121, Lori would be entitiled to exclude up to $250,000 in gain. The requirement is that Lori had to own the home for two years (which she did). That makes answers D and E incorrect.
Adam Brooks, who was age 60 and married, died yesterday. He owned a $500,000 universal life insurance policy with a death benefit that increases along with growth in the cash savings account (Option B). Adam bought the policy 6 years ago by making a $50,000 single premium payment. The carrier at the time of the purchase had informed Adam that the policy was a MEC. At the time of Adam's death, the cash value had grown to $70,000. His wife Jane, age 59, is the primary beneficiary. Jane has asked you how much of the death proceeds will be included in Adam's gross estate. How would you accurately respond to Jane? A) Nothing would be included in the Adam's estate because the policy passes by the marital deduction to Jane free from federal estate tax. B) $20,000 ($70,000-$50,000) would be in Adam's gross estate plus a 10% penalty because the policy is a MEC and Jane, the beneficiary is under 59½. C) $550,000 D) $570,000
D) $570,000 Under the increasing B option for universal life insurance, the amount in the cash savings account is added to the base death benefit to, in this example produce a total benefit of $570,000. Because Adam owned the policy at the time of his death that amount would be included in his estate for federal estate tax purposes. MEC rules only affect distribution other than death benefits.
The American Opportunity credit reflects which of the following? A) 100% of the first $1,200 of qualified expenses and 50% of the next $1,200 of qualified expenses incurred during college B) $2,000 maximum C) Applied to the first $2,500 of qualified expenses incurred for the first two years of college D) 100% of the first $2K of qualified expenses and 25% of the next $2K qualified expenses incurred during college
D) 100% of the first $2K of qualified expenses and 25% of the next $2K qualified expenses incurred during college The American Opportunity Credit is limited to 100% of the first qualified expenses up to $2,000 and 25% of the next $2,000 of qualified expenses incurred for post-secondary education. Answer A is wrong because it is referring to Hope credit numbers. The Hope Credit is no longer available. Answer B is wrong because the AOC is currently a maximum of $2,500. Answer C is wrong because the AOC applies to the first $4,000 of expenses during all 4 years of undergraduate school.
Given the information shown, what would be an investor's required rate of return if: R = rf + (rm - rf) B -- Rf is 4% -- the market risk premium is 3% -- the security has a beta of 1.5? A) The problem cannot be solved because no standard deviation is required B) 6% C) 7% D) 8.5% E) 10.5%
D) 8.5% Using the CAPM formula: R = rf + (rm - rf ) B 4% + (3%)1.5 = 8.5%
A few weeks ago, your client, Lilly Van Cliff, inherited an original Van Cliff painting from her mother. Her mother's basis, inherited from her father, was $100,000. The appraised value (FMV) at her mother's death was $350,000. Lilly maintains an HO-5 policy on her five bedroom home. How should Lilly insure the painting if she is going to display it in the living room of her house? A) Lilly should acquire a BOP with $350,000 of contents coverage B) Only Lloyds of London insures fine art. She should contact them regarding coverage C) Since Lilly has an HO-5 the policy will automatically cover the painting as contents D) Although Lilly has an HO-5, she should insure the painting under a scheduled personal property endorsement floater. E) No, there is no Medicare provision for home health care.
D) Although Lilly has an HO-5, she should insure the painting under a scheduled personal property endorsement floater. HO policies provide very limited coverage on collectibles and fine art. Lilly needs to insure the painting by endorsement. The endorsement will provide coverage based on the appraised value. The BOP is for business owners. Lloyds is not the only insurer that would cover fine art of the value of Lilly's painting.
Under Medicare Part B, which, if any, of the following shots (vaccinations) are generally covered at no cost to the patient? A) None because preventive care is not generally covered B) One annual flu shot is covered. C) A pneumonia shot is covered. D) B and C E) No, only drugs administered by a physician are covered.
D) B and C Under Medicare Part B both annual flu shots and pneumococcal shots are covered at no cost to the patient.
The late Ronald Carlisle, a Canadian citizen was married to Judith, a U. S citizen. He was wealthy and owns a substantial portfolio of stocks which trade in both Canadian and American markets. He also owned precious metals and substantial real property (resorts) in both Canada and in Michigan. When Ronald died, can the U.S. impose estate tax on Ronald's estate? Why or why not? A) Because Ronald was not a U.S. citizen the U.S. has no right whatsoever to impose federal estate tax on his estate. B) Although Ronald was not a U.S. citizen because he was married to a U.S. citizen (Judith) the U.S. may levy federal estate tax on his entire estate. C) If Ronald had established a qualified domestic trust (QDOT) all U. S. federal estate tax could have been avoided. D) Because Ronald owned real property in the U.S. as well as U.S. stocks U.S. federal estate tax may be levied relative to those specific properties.
D) Because Ronald owned real property in the U.S. as well as U.S. stocks U.S. federal estate tax may be levied relative to those specific properties. Although Mr. Carlisle is not a U. S. citizen, any real property he owns that is situated in the U.S., as well as, any U.S. stocks he owns may be subject to federal estate tax in the U.S. A QDOT is appropriate when the transferor is a U.S. citizen. Ronald is not a U.S. citizen.
What is an advantage of buying preferred stock? A) Warrants can be attached, adding long-term value to the preferred stock. B) Rights can be attached, adding short-term value to the preferred stock. C) 50% of the dividends received by a domestic corporation are tax exempt. D) Both A and C
D) Both A and C A subscription warrant may be issued with a bond or preferred stock offering. A warrant is usually used as a sweetener to make the issue more attractive. It entitles the holder to buy a proportionate amount of the issuer's common stock at a specific price. Presuming the corporation buying the preferred shares has no ownership in the distributing corporation, 70% of the dividends received are tax exempt. Preemptive rights are availalbe to common, rather than to preferred shareholders. If the corporation wishes to issue more shares, common stockholders have the right to buy these shares before they are offered to the public.
Mr. and Mrs. Pell established a Charitable Lead Trust (CLUT) funding it with $2,000,000. The trust assets increased by 7% this year. What percent of teh annually revlaued principal must the trust pay out to the charitable beneficiary to avoid tax penalties? A) Not less than 5% of the initial trust value B) Not less than 5% of the trust assets each year C) Not less than 7% of the trust assets each year D) Can be any percentage including skipping the distribution entirely
D) Can be any percentage including skipping the distribution entirely Unlike the CRT (which requires a 5% minimum annual distribution to the grantor), there are no minimum or maximum required distribution percentages with a charitable lead trust. It is genereally permissible to select any percentage, including less than 5%.
Your client, Mr. Harris is about to retire at age 65. He is covered under his employer's group health insurance plan. He wants to enroll in the most cost effective health insurance coverage. But, of course, he wants excellent benefits. Which of the following coverages would you recommend that he consider? A) Enroll in Medicare Part A and keep the group coverage his former employer under his COBRA rights B) Enroll in Medicare Part A and purchase a Medigap policy C) Enroll in Medicare Part B and obtain a Medigap policy D) Enroll in Medicare Parts A and B and obtain a Medigap policy
D) Enroll in Medicare Parts A and B and obtain a Medigap policy Mr. Harris should enroll in both Parts A and B of Medicare and purchase a Medigap policy. Answer A would be the most expensive (COBRA at 65). Mr. Harris must apply for Medicare Part A. Applying for B does not always translate into enrollment in Medicare Part A. However, it is unlikely that Mr. Harris can be covered under Part B without also being enrolled in Medicare Part A.
Mr. Pate, a widower, is age 65. He is in poor health due to emphysema and a heart condition. Unless his neighbors pick up Mr. Pate's mail at the post office, it just piles up. He is concerned about the premium for his life insurance policy. Which of these life insurance contract provisions will help keep the policy in force? I. Renewability II. APL III. Reinstatement IV. Disability waiver of premium V. Grace period A) I, III, IV B) I, V C) II, III, V D) II, V E) III, IV, V
D) II, V APL is the abbreviation for the automatic premium loan. This provision will pay the premium if it remains unpaid beyond the grace period. If Mr. Pate had claimed disability waiver, there would be no premium due notice. A disability waiver of premium provision generally means that the insurer will then pay premium for the life of the contract with no future premium notices. Exercising the reinstatement provision would mean that Mr. Pate would have to provide proof of insurability (medical information) to reinstate the policy if it lapses. Due to Mr. Pate's health, reinstatement will probably not be available.
Kevin Connors is an industrious fourteen-year old. This year he will earn about $4,000 heling neighbors install computers and fix computer problems. Kevin is also the beneficiary of an UTMA account that was established by his grandfather, Curtis Connors. Investments in the UTMA include investment grade municipal bonds issued in the state where Kevin and his grandfather live. Additional investments in the account include AAA rated corporate bonds and growth stocks paying no dividends on average. Which of the following types of income is most likely to trigger "kiddie tax" relative to Kevin? A) The income from installing and fixing computers B) The municipal bond interest C) Income from the stocks D) Interest on the corporate bonds
D) Interest on the corporate bonds Interest on the corporate bonds is most likely to trigger the kiddie tax. It is taxable unearned income. The earned income from installing computers is not subject to the kiddie tax. The municipal bond interest is not taxable. The stocks pay no dividends.
You are a financial planner specializing in divorce-related matters. Linda Lovely has been referred to you by an attorney to whom you often refer clients. Linda's third husband divorced her to marry another woman. Knowing how eager her ex was to move on, Linda's attorney obtained an unusually large property settlement for her. Between three prior divorce settlements Linda is now worth approximately $5 million. The $5 million is reasonably high basis quality investments. She has studied divorce law and income taxes. She let all her prior husbands keep the IRA and qualified plan assets. In the initial meeting, Linda communicated clearly that the scope of the engagement was for you to manage her investments. However, at the second meeting, she is accompanied by a 60-year old man. They are physically affectionate. After introducing him to you, she asks him to wait outside. Linda grins and says "Sheldon is so cute ... and he's rich! Bet I'd end up with a lot if we divorce." How should you proceed? A) Advise Linda to the best of your ability. You can certainly advise her on how to invest her $5 million. B) Decline Linda as a client. She clearly violates the Duty of Integrity and appears to be treating Sheldon badly. C) Suggest an attorney to represent Sheldon. D) Make clear that you will help her within the legal limits of your profession and the original scope of the engagement.
D) Make clear that you will help her within the legal limits of your profession and the original scope of the engagement. You and Linda agreed that you would handle her investments. It is reasonable that you continue to do so. While Linda is not held to the Duty of Integrity, you are. Answer B has you assisting Linda in misusing another person. That said, it is not your place to advise Sheldon. Sheldon is not your client. While Answer A is acceptable, I would go with Answer D.
John and Pamela Underton wrote a check for $500,000 to their daughter, Bunnie, on January 1st of the current year. It was a gift. They wrote the check out of their joint money market account. John called his CPA to inform him that the gift had been made and requested that the CPA prepare two Form 709's to report the gift splitting. Before the 709 was filed, John died. Bunnie had not cashed the check as of the date of her father's death. Given these events, what tax results would be expected? A) The amount of the check would be considered a gift of a future interest. B) Because Bunnie had not cashed the check as of the date of her father's death, the transfert will be considered an incomplete gift. C) The gift will be presumed to have been made by Pamela alone. D) The transfer will still be presumed as a split gift.
D) The transfer will still be presumed as a split gift. Gifts made before one spouse dies may be split even if that spouse dies before signing the appropriate consent and election on Form 709; On behalf of the deceased spouse his executor can make the appropriate election. This is not pre se an incomplete gift. The check was written from a joint checking account and Pamela (the mother) is still living.
Mr. and Mrs. Pathe are proud of their two children and six grandchildren. They want to make a maximum gift to 529 plans using the annual exclusion. What is the maximum amount of total excluded gift 2022? A) $32,000 B) $80,000 C) $160,000 D) $640,000 E) $1,280,000
E) $1,280,000 $80,000 x 8 x 2 = $1,280,000
Which of these positions or strategies is least risky if the price of a stock remains flat? A) Buying a straddle B) Buying a call C) Buying a put D) Buying a spread E) Buying a warrant
E) Buying a warrant Warrants typically have significant time value due to maturities of several years. In contrast, listed calls generally expire within nine months. An options spread, like an options straddle, will not be profitable if the price of the underlying stock does not move. If the stock remains flat, all the options will expire unexercised and the buyer loses the entire premium.
Josh Turner calls you first thing Monday morning and he is in a panic. He has been your client for the past 5 years. Josh needs cash immediately to help his unemployed daughter, his entrepreneurial brother whose business is on the brink, and to replace the air conditioning system in his home. His FICO credit score is low. Josh's bank has declined to make loans to him. It appears that Josh has a small IRA, his wife' has a medium-sized Roth IRA, and his 401(k) vested account balance at work is $100,000. In the background, you can hear Josh's wife yelling at him. You are a CFP® certificant. What would you suggest for Josh to get the money? A) Josh, try to understand the real reason behind these needs and why you can't say no to financial demands from others. B) Josh, is this financial crisis a one-time event or is it a frequently occurring systemic pattern? C) Josh, if your need for additional cash will continue, consider making a tax-free distribution from your wife's Roth IRA representing the aggregate amount of her regular contributions. D) Josh, there is money in your own IRA. Close the account and use the cash distribution to cover your pressing financial needs. E) Josh, contact the 401(k) plan administrator to arrange for a maximum loan from your account.
E) Josh, contact the 401(k) plan administrator to arrange for a maximum loan from your account. A participant loan enables Josh to receive cash up to $50,000 representing 50% of his account balance. He must repay the loan within 5 years. The distribution of the loan amount is not taxable. Answers A and B do not solve his today problem but are worthwhile to explore going forward. The distribution of contributions from Mrs. Turner's regular ROTH contributions would be tax-free. However, we do not know the dollar amount of contributions. The information does not indicate that Josh is age 59 ½ or older. Thus the distribution would be subject to ordinary income tax rates plus a 10% penalty.
