Missed questions from Final

Sid Thomas works for TTI, Inc. Sid makes $120,000 per year. TTI contracted with a disability insurance company to buy long-term disability for its key employees. The carrier agreed to insure up to 50% of salary. In Sid's case, that is up to $5,000 per month. However, TTI only agreed to pay for 60% of the $5,000 per month coverage with the provision that Sid would elect to pay for the remaining 40%. Which of the following statements is/are true? I. If Sid elects not to pay for the additional coverage, the disability benefits ($3,000) will be taxable as income. II. If Sid elects to pay for the additional coverage, 60% of the disability benefits are taxable as income, and 40% are tax-free. III. If Sid elects not to pay for the coverage, the disability benefits ($5,000) will be taxable as income. IV. If Sid elects to pay for the coverage, the disability benefits ($5,000) will be tax -free. A. I, II B. I C. II D. III E. IV

The correct answer is: A 60% of the benefits are taxable as income (the company-paid portion of the premium), and 40% of the benefits are tax-free (if Sid pays the premium). The question says Sid would pay, not had to pay, which makes Answer I correct.

Your client, Frank, currently 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 is and 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

The correct answer is: A A one-year inflation rate does not constitute an inflation rate for a long-term goal achievement. Remember that the 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.

Jim joined a tech firm four years ago. Due to some of his R&D, he was awarded some company ISOs. The tech firm has been very successful since its IPO. The stock is up 50% this year. Jim's first chance to exercise some ISOs is December 1st of this year. He is questioning you whether he should exercise now (12/1) or wait until January 2nd of next year. How would you advise him? A. If he exercises on January 2nd of the next year he will have 363 days to decide to hold and be liable for the AMT or not. B. If he exercises on December 1st of this year he will have more than one year (LTCGs) to decide if he will be liable for the AMT or not. C. It really does not make any difference, he will always be liable for AMT. D. If he exercises and sells, he will not be liable for AMT.

The correct answer is: A Although Answer D is true, it is not the advice that the exam would want as an answer. Answer B is false. He only has 30 days to decide. If you exercise January 2nd, you have 363 days to decide to hold and be liable for the AMT or not. If you exercise on December 1st, you have only 30 days; why would anyone not want to optimize this choice? Because the exercise of an ISO starts a new holding period, many employees try to hold the shares for at least 12 months after exercise in order to get a long-term gain instead of a short-term gain. But, in order to do that, you would have to hold through year-end exposing oneself to the AMT. The perfect plan for ISOs should be to exercise on January 2nd, then if you still hold the shares on December 31st, measure the gain to be realized upon sale. If there is a decent sized long-term gain to be realized, then wait until the next year to sell, even though you will be liable for the AMT. If the gain is not so large - or if it is a loss - then maybe you should sell before the end of the year. The goal is to not pay an AMT unless you know there is a good reason to hold over year-end. Yes, if you exercise and sell in the same calendar year you avoid AMT but then you are subject to ordinary income (compensation) and FICA. NOTE: It is still an answer on the exam to avoid AMT.

William Smith, a very conservative investor, has come to you. He wants to squeeze out as much yield as possible from his bond portfolio with a barbell approach. He believes by the end of next year the Federal Reserve will begin to raise interest rates. How would you respond? A. It is a good idea if you anticipate higher interest rates. B. It is a good idea if interest rates stay at the current level. C. It is not a good idea if interest rates stay at the current level. D. It is not a good idea because short-term bonds are practically paying nothing.

The correct answer is: A Answer C, although true, is not the best answer. Mr. Smith believes in higher interest rates. Answer B is false. In this case the yield curve will steepen and the longer-term bonds would suffer. Answer D is true currently but again it does not answer the question. The basic premise of a barbell strategy involves overweighting longer-term bonds, which are more sensitive to interest rate hikes, as well as overweighting shorter-term bonds on the other end of the curve. The strategy also underweights exposure to intermediate-term, 5- to 7- year bonds. Thus, a hypothetical barbell is created. Barbells are implemented to take advantage of a rising rate environment. Be careful sometimes barbell is tested. You may not agree with the answer.

A 401(k) plan fiduciary's responsibilities are which of the following? I. Acting solely in the interest of the participants and their beneficiaries II. Acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan III. Carrying out duties with the care, skill, prudence and diligence of a prudent person familiar with such matters IV. Following the plan documents V. Diversifying plan investments A. All of the above B. I, III, IV C. II, IV, V D. III, V E. IV

The correct answer is: A For all contributions, employee and employer (if any), the plan must designate a fiduciary, typically the trustee, to make sure that contributions due to the plan are transmitted. If the plan and other documents are silent or ambiguous, the trustee generally has this responsibility. The plan document will need to be updated from time to time for changes in the law.

What is in the CFP Board's financial planning disclosure sample document? I. Contact information II. Services to be provided III. Sources of compensation IV. Conflicts of interest V. Client signature A. All of the above B. I, II, IV C. I, III, IV D. II, IV E. III, IV

The correct answer is: A Granted this is never covered in the material, but we recommend that you review the CFP Board website. If you have not reviewed the document, please find it on the CFP Board website. This could be on the exam.

Alice Adams, age 65, is single. She has no living relatives. Ever since the company she works for established a 401(k), she contributed the maximum. The company has varied on a match through the years and plan returns have been low due to her conservative allocation. Some years ago the company established an MSA, and that was ultimately changed to an HSA. She has accumulated a sizable savings account because her health is excellent. At NRA next year she plans to retire, take Social Security, and some distributions from her 401(k). She will have to sign up for Medicare A at 65 even though she will not take Social Security. This will make her ineligible to make HSA contributions. As a result she is electing Medicare B and D. What can her HSA account pay for? I. Medicare B premiums II. Medicare D premiums III. Long-term care insurance premiums IV. Medigap insurance premiums A. I, II, III B. I, II C. I, III, IV D. All of the above

The correct answer is: A HSAs cannot pay Medigap premiums. Answer III is especially important because an FSA account cannot be used to purchase a long-term care policy, whereas an HSA can.

Mrs. Rose, age 75, has estate tax problems. She has been reading about irrevocable life insurance trusts. She has four children (married) and eight grandchildren. Although she has plenty of estate liquidity, she is interested in a trust because it passes the estate tax free. What information would you need first to determine whether the trust applies to her situation? A. Mrs. Rose's medical history B. Policy illustrations C. Her attorney's name and permission to speak to him or her D. The number of beneficiaries she plans to use under Crummey provisions

The correct answer is: A Health is the first issue. Everything else follows. The attorney comes before Answer B. The trust must be established before the policy is applied for to avoid the 3-year rule. Answer D comes after Answer C, but Answer A is first. Can she be insured?

Larry is disabled due to a job-related injury. He is being paid benefits under workers compensation, Social Security, and his private disability plan (employer paid). Which of the disability benefits could be taxable? I. Workers compensation disability benefits II. Social Security disability benefits III. Private disability plan benefits paid by his employer (salary continuation) A. All of the above B. I, II C. I, III D. III

The correct answer is: A If his MAGI is above certain levels, the Social Security benefits could be taxable. The private disability plan benefits are taxable because the employer paid the premiums. It does not say it was a taxable bonus. If the question said Larry paid the premiums on the private disability plan, then what would be the answer? Workers compensation may be taxable when that same person gets Social Security disability. If you know II and III are true, then Answer A is the only possibility.

What are the purposes of immunizing a bond portfolio? I. To reduce the bond portfolio's market losses II. To earn a specific rate of return from the bond portfolio over a given period of time, regardless of what happens to market interest rates III. To offset interest rate risk with reinvestment rate risk IV. To avoid buying zero coupon bonds A. I, II, III B. I, II, IV C. II, III, IV D. II, III E. III, IV

The correct answer is: A If interest rates rise, interest rate risk causes the value of the bonds to drop, but the client can earn more on coupon payments that are reinvested. If interest rates decline, interest rate risk causes the value of the bonds to rise, but the client will earn less on coupon payments that are reinvested. The typical method of immunizing involves assembling and appropriately managing a diversified portfolio of bonds.

Mrs. Lager is interested in a donor advised fund. She has asked you some questions because of what she has been told by a brokerage firm. Which of the following are true? I. She will get a tax deduction based on the date she turns the money over to the fund, but she has almost an unlimited amount of time to decide which charities to support. II. She cannot take back her donations. III. She should transfer cash rather than highly appreciated securities to get a higher tax deduction. IV. She can distribute money among several charities. Grants can be as little as $50 or $100. A. All of the above B. I, II, IV C. I, III D. II, III E. III, IV

The correct answer is: A If she gives highly appreciated assets, the tax deduction is based on FMV and she never has to pay the capital gains on the appreciation. Answer III is true. She can gift cash up to 60% of AGI.

Tom Jennings has asked you about 1040 income. Which of the following is considered 1040 income? A. Long-term capital gains B. Private placement municipal bonds interest C. IRA rollover into another IRA D. Deductible IRA contribution

The correct answer is: A Long-term capital gains are taxed differently but are 1040 income. Private placement income affects AMT but not 1040 income. The IRA is a direct rollover. The IRA contribution is an adjustment to income. It is not income.

"Fee only" is strictly defined in the CFP Board's Standard of Professional Conduct as follows: A certificant may describe all of his or her practice a "fee-only" if, and only if, all of the certificant's compensation form all of his or her client work comes exclusively from the clients in the form of which of the following? I. fixed fees II. flat fees III. hourly fees IV. percentage or performance-based fees A. All of the above B. I, II C. II, III, IV D. III E. IV

The correct answer is: A Per CFP Board email 9/20/13

ABC Company, Inc. currently pays $1.25 per share in dividends yearly. Investors expect dividends to grow at a rate of 3% a year for the foreseeable future. An investor's required rate of return is the T-bill rate of 2% plus 800 basis points. Would you recommend that the investor buy ABC, Inc. if it is trading at $16 per share? HINT: You will need to use the investment formulas below (on CFP Board formula sheet). V = D1 = DO (1 + q) and Er = D1 + q = DO (1 + q) + g r-q r-q p p A. Yes, the growth rate does meet the investor's required rate of return. B. No, the growth rate does not meet the investor's required rate of return. C. No, the stock is undervalued. D. No, the growth rate of 3% is substantially under the required rate of return of 10%.

The correct answer is: A Price: 1.25 (1 + .03) = 1.2875 = $18.39 .10 - .03 .07 Er = 1.2875 + .03 = .0805 + .03 = 11.05% 16 If you could see that Answers B and C are the same, then Answer A does not need to be calculated. Answer D is nonsense. The T-bill rate of 2% plus 800 basis points equals .10 required rate of return.

Which of the following statements about a mutual fund prospectus is most accurate? A. The SEC considers projections in a mutual fund prospectus to be misleading. B. Returns used in performance projections must accurately reflect historical performance. C. The prospectus requirement applies to both closed-end and open-end funds. D. SEC rules prohibit graphs showing past performance in a mutual fund prospectus

The correct answer is: A The SEC prohibits projections of mutual fund future performance. If performance return assumptions are not achieved, prospective buyers may be mislead. Historical (past) performance graphs are permitted. Other than at the initial offering, the prospectus requirement does not apply to closed-end funds. Mutual fund prospectus questions do appear on the exam.

A premature distribution penalty tax applies to which one of the following IRA distributions? A. A distribution made to the owner ($10,000 lifetime limit) for the purchase of a primary residence B. A distribution made to the owner for qualified higher education expenses furnished to the owner C. A distribution made after the death of the owner D. A distribution attributable to the owner's disability

The correct answer is: A The distribution must be for the purchase of a first home, not necessarily a primary residence.

Which investment provides the maximum leverage and the maximum hedge against inflation? A. Improved land B. Common stock C. A mortgage REIT D. An LP

The correct answer is: A The improved property can be purchased using a bank loan. Improved property is a hedge against inflation. Common stock generally loses value during inflationary times. Mortgage REITs are highly leveraged but do poorly during times of high inflation since underlying can only be raised as leases renew. LP? What kind of LP?

Bob has retired. His company had an ESOP. Stock with a basis of $50,000 was contributed to it. Stock with a market value of $125,000 was distributed at Bob's retirement. Six months after retirement, Bob is selling all the shares for $150,000. What is Bob's tax situation? A. $50,000 was taxed as ordinary income at the time of retirement; $75,000 will be taxed at LTCG rates at the time of sale, and $25,000 will be taxed at STCG rates at the time of sale. B. $150,000 will be taxed at LTCG rates at the time of sale. C. $100,000 will be taxed at LTCG rates at the time of sale. D. $50,000 was taxed as ordinary income at the time of retirement; $100,000 will be taxed at LTCG rates at the time of sale.

The correct answer is: A The net unrealized appreciation is taxable as long-term capital gain to the recipient when the shares are sold, even if sold immediately. If the recipient holds the shares for a period of time after distribution, any additional gain (above the net unrealized appreciation) is taxed as long or short-term capital gain, depending on the holding period. The $25,000 gain between distribution ($125,000) and the sale ($150,000) is STCG because only 6 months went by.

Mr. Sims purchased a $500,000 life policy 32 years ago (at age 27) with a single premium of $50,000. The contract cash value has grown to $110,000. He has decided to surrender the contract this year. Which of the following is true? A. $50,000 of the $110,000 will be income tax free; the remaining $60,000 will be subject to tax at ordinary income tax rates. B. $50,000 of the $110,000 will be income tax free; the remaining $60,000 will be subject to tax at capital gains rates. C. $60,000 will be subject to tax at ordinary income tax rates plus a 10% penalty. D. $110,000 will be subject to tax at ordinary income tax rates.

The correct answer is: A The policy is not a MEC; therefore, the cash value in excess of basis ($50,000) will be subject to tax at ordinary income tax rates, but not the 10% penalty. 2018 - 32 years ago is 1986. It was purchased before 1988. Single premium policies before 1988 are not considered MEC policies. They were grandfathered.

Mr. and Mrs. Jackson had a net worth of $25 million. They met with an insurance agent who suggested buying $5 million of whole life insurance (2nd to die/survivorship). Mr. and Mrs. Jackson applied for and purchased the life insurance. Now, a year later, they met with an estate attorney because their net worth increased to $28 million. The attorney agrees on the life insurance but wants the insurance to be in an ILIT. Mr. and Mrs. Jackson's health is unchanged (preferred non-smoker). What do you suggest they do with regards to the existing life insurance based on current estate tax law? A. Roll the existing policy into the ILIT. B. Cancel the existing policy and have the ILIT buy a new policy. C. Roll the existing policy into the ILIT and have the ILIT buy some additional life insurance. D. Let them keep the existing life insurance (personally owned) and have the ILIT buy a new policy.

The correct answer is: A There is a risk with Answer A but only if both of them die within 3 years. They have paid the upfront cost of the policy. Answer B could have another upfront cost but avoid the 3-year rule. Answers C and D both indicate increasing the amount of life insurance but the question does not indicate a need for more life insurance. In fact $5 million is enough [$28,000,000 - (2 x 11,180,000)] x 40% = $2,260,000. If you do not understand, read about ILITs and life insurance (3-year rule) on the internet to better understand the concepts. Remember, both of them have to die for the policy to be included, and their assets could continue to grow.

Mrs. Jane Underwood, age 64, is a widow. Her husband died two years ago. Both Jane and her husband, John, worked for 40+ years. Through the years they worked for numerous companies. These companies had retirement plans, but no defined benefit plans. Some retirement money is still in the retirement plans which also include SEPs and SIMPLE plans. Being frugal, they also established IRAs and Roth IRAs. They deposited money into these IRAs whenever their incomes allowed them. They never made non-deductible IRA contributions. When John died, she rolled all his retirement assets into a variety of IRA and Roth IRA accounts in her name. To provide some liquidity she has been doing numerous 60-day distributions (rollovers). Now she has read the recent IRS announcement on rollovers from separate IRAs within a year. She asked you what she can do? I. Once a year distribution and rollover from one IRA to another IRA (including all her SEP and SIMPLE) plans II. Once a year distribution and rollover from one Roth IRA to another Roth IRA (including all Roth accounts) III. One IRA-to-IRA distribution and rollover per 365 days and one Roth IRA to another Roth IRA rollover per 365 days IV. A rollover from an IRA to a Roth IRA A. All of the above B. I, II C. III, IV D. III E. IV

The correct answer is: A You can do as many rollovers as you want per year. You cannot take more than one IRA distribution per year. In Answer III the Roth is a rollover to another rollover account not a distribution. It is a direct rollover. Answer IV is a Roth conversion. As soon as you know Answer I and IV are true, the answer is A.

A CFP® certificant may be found liable (or negligent) in which of the following occurrences? I. Divulging confidential information about a client to the IRS in response to a subpoena II. Not discussing property and casualty insurance coverage in a comprehensive financial plan III. Not preparing the financial plan as promised in the planning contract IV. Not reviewing advice prepared by his/her paraplanner A. All of the above B. II, III, IV C. II, IV D. III E. IV

The correct answer is: B A CFP® certificant must respond to an IRS subpoena. He/she is not a priviledged person. See Rule 3.1.

Barry retired a few years ago from Belmont, Inc. at age 65. He is turning age 70 in March of this year. He is planning to return to work at Belmont toward the end of the year on a full-time basis. Out of which of the following accounts does Barry have to take a mandatory distribution from by April 1st of next year? I. Simple IRA II. SEP IRA III. Roth IRA IV. Traditional IRA V. Belmont 401(k) plan (account from retirement at age 65) A. All of the above B. I, II, IV, V C. I, II, III D. I, II, IV E. I, II

The correct answer is: B A minimum distribution is required for the year in which the participant attains age 70½. The way the question is phrased, Barry will still be retired when he reaches age 70½ September. He will be back to work at the end of the year and may not be eligible to participate in the 401(k) until next year. He is not working for Belmont when he turns 70½. Tough.

Bobbie Langer is single. He owns a small company, a regular corporation. This year he earned $200,000. The company also paid him $25,000 in dividends and made a contribution of $50,000 to his account in the company profit-sharing plan. He is saving about 40% of his earned income and has built up an investment account of $1.5 million. Last year, he made some short-term trades that netted him $50,000. How much did he pay in 2018 FICA taxes? A. $7,960.80 B. $10,860.80 C. $10,786.40 D. $15,300.00

The correct answer is: B Bobbie owns a corporation. He is not self employed. He gets FICA wages. The calculation is 6.2% up to $128,400 and 1.45% unlimited. The .9% does not start until $200,000 for single and $250,000 for married individuals. There will be no questions above $200,000.

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

The correct answer is: B Clearly, the in-cash referral fees must be disclosed to the pertaining clients. However, "de mimimus" gifts like fruit or candy need not be disclosed.

After doing a lot of research on a mutual fund you are ready to present your analysis. The mutual fund is highly correlated to the market (R is 90%). The fund has a realized return of 8% with a standard deviation of 12%. The return on the market is 8% with a risk-free rate of 4% with a standard deviation of 10%. Which of the following statements would you make? HINT: Is the R2 high? Can you solve for beta? Is there enough information to solve for beta? Yes! A. The fund should be purchased because the Sharpe ratio is high. B. The fund should not be purchase the alpha is negative. C. The fund should be purchased because the Treynor ratio is high. D. With a realized return of only 8% the standard deviation will cause the fund to underperform correlated funds.

The correct answer is: B First you have to solve for beta. R is .9. R is the correlation coefficient. You have to square it. It is still above .6 or 60%. Beta = .9 (12%) = 10.80% = 1.08 10% 10% Beta = correlation (mutual fund SD) market SD Then solve for alpha Alpha = α = Rp - [Rf + (Rm - Rf) β] = 8% - [4% + (8% - 4%)1.08] = 8% - [4% + 4.32] = 8% - 8.32 = -.32% With a high R2 you should always select the alpha answer. You cannot use Sharpe with high a R2. Treynor by itself is meaningless. Even though the alpha is only slightly negative this is probably a large cap fund. Other large cap funds will probably have positive alpha numbers.

A worker will be entitled to Social Security disability benefits if which of the following is true? I. 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. is NRA (normal retirement age) or over III. is insured for disability benefits IV. has filed an application for disability benefits V. 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

The correct answer is: B For disability, he/she must be under NRA (normal retirement age). Answer V is correct because of the "or". Yes, it starts in 5 months if it is known that death will result. If not, then there is a year waiting period. At that time the 7 months in arrears is paid. There is no other answer than can be right except Answer B.

Arthur is in a 35% income tax bracket. He has decided to buy a $40,000 car with cash. He needs to sell an investment to raise cash. Which one of the following assets would generate the least amount of tax liability if sold? NOTE: LTCGs rate is 15% for this question A. An annuity worth $30,000 with a basis of $28,000 B. A stock bought 6 months ago for $27,500, now worth $30,000 C. A stock bought 13 months ago for $24,000, now worth $30,000 D. A baseball card bought 2 years ago for $26,000, now worth $30,000

The correct answer is: B In regards to the annuity, you cannot assume he is over age 59½. The question must tell you the person is over 59½. You must assume it is a deferred annuity because it is worth more than he bought it for originally. It cannot be an immediate annuity. The tax is calculated as follows for each answer: A. $2,000 ordinary income at 35%, plus 10% penalty on $2,000 = $900 (under 59½) B. $2,500 STCG at 35% = $875 C. $6,000 LTCG at 15% = $900 D. $4,000 at 28% = $1,120

Mrs. Todd, age 70, has been working since her husband died 20 years ago. The jobs have always been low paying but at least the last one provided a pension of $1,000 a month since she waited to age 70 to retire. Social Security at 70, provides her with another $1,500 per month. She feels she needs another $4,000 per month of income. She is debt free with a nice basic house near her daughter. If inflation is averaging 2.5%, what kind of yield would she need to attain based on $700,000 of investable assets without using up principal? A. 2.57% B. 6.86% C. 7.12% D. Without knowing her life expectancy the question is not solvable

The correct answer is: B It really is just basic math since the principal and income remain constant; this is not a time value of money question. The $4,000 is the needed income. There is no mention of solving for "todays dollars" so inflation does not matter.

Scott Harding died recently (at age 74), with a taxable estate of roughly $8 million. Some years ago he had seen an estate tax attorney and completed an extensive estate plan with a variety of trusts. Among his assets is a stone-constructed New England farm house having a current fair market value of $2 million. Scott's will bequeathed the home to Clarisse who, due to authoring a best-selling mystery novel, is worth approximately $20 million in her own right. Nevertheless, when Scott died, Clarisse, (under the guidance of her tax advisor), did not want to own the home outright, fearing it would become part of her already substantial gross estate. Nevertheless, she wishes to live in the home where she can continue to write and enjoy her grandchildren for the rest of her life. The home had been in the Harding family since their arrival in America in 1789. At the time of his death it was owned fee simple by Scott. There is great sentiment associated with the home: Scott and his wife, Clarisse (age 66) were married in the home and raised their two children Rebecca and Jonah (now adults) there. What technique, if any, will accomplish Clarisse's goals? A. Clarisse cannot have her cake and eat it too; if she disclaims ownership of the home, she may not live there without paying fair market rent. B. With a proper provision in Scott's will, if Clarisse disclaims ownership of the home, it can be transferred to a disclaimer trust, the terms of which permit Clarisse to live in the home for her lifetime. This would be a family trust. C. With a proper provision in Scott's will, if Clarisse disclaims ownership of the home, it can be transferred to a disclaimer trust, the terms of which permit Clarisse to live in the home for her lifetime. This would be a marital trust because Clarisse has a life interest in the home. D. A qualified personal residence trust (QPRT) should accomplish Clarisse's dual goals of not including Scott's home in her gross estate and the right to live in the home for her entire lifetime.

The correct answer is: B Many well written wills include disclaimer trust provisions which give the surviving spouse the ability to put specific disclaimed assets into the trust by disclaiming ownership of a portion of the estate. Disclaimed property interests are transferred to the trust without being taxed. Provisions can be written into the trust that provide for regular payouts from the trust to support survivors, or in the case of the Hardings, the right to occupy (but not own) property. The trust can also be written so that surviving minor children can also be provided for, as long as the surviving spouse elects to disclaim inherited assets, passing them on to the trust. To keep the assets from being included in Clarisse's estate, the trust would have to be a family trust rather than a marital trust. If a disclaimer trust is used, the full extent of the tax planning occurs upon the death of the first spouse. At that point, the surviving spouse can either accept the trust assets or disclaim them. If he or she disclaims them into the disclaimer trust, the trust will function like a credit shelter trust that will "shelter" the assets from inclusion in the surviving spouse's estate. But if there is no tax reason to use credit shelter planning, the spouse can simply receive the assets outright. This allows tax-planning flexibility without creating unnecessary complication. Using Answer D will mean for the life of the QPRT it could be brought back into her estate. With Answer B, the house uses the exemption. Suggestion: The questions are not too long to read. We would recommend reading the question first.

Mrs. Tuttle spent 110 days in a skilled care facility. She qualified for her stay under Medicare. The facility cost was $367.50 per day and the Medicare specified amount is $167.50 per day. How much did Medicare pay? NOTE: The Medicare specified amount will be given on the exam if they ask you for this type of calculation. A. $16,000 B. $23,350 C. $29,400 D. $36,750

The correct answer is: B Medicare will pay the first 20 days in full @ $367.50 plus $200 (everything above $167.50) for the next 80 days. There is no coverage after 100 days. 20 days @ $367.50 = $7,350 80 more days @ $200 = $16,000 TOTAL $23,350

Mr. Smith purchased and sold the following stocks during a two-year period. Which purchase/sale created a "wash" sale? NOTE: All transactions are 100 shares. I. March 1st purchased ABC @ $15; December 1st purchased ABC @ $10; December 29th sold ABC @ $12 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 @ $52; March 16th purchased XYZ at $50 A. I, II, III B. I, III C. I D. II E. III

The correct answer is: B No loss deduction is allowed for any loss from any sale or other disposition of stock within a period beginning 30 days before and ending 30 days after the date of the sale or disposition. For example, in Answer A the $12 sale (12/29) goes against the $15, purchase (3/1). That is because there was a purchase 12/1 within 30 days for $10. The loss is disallowed ($15 versus $10). Answer II creates a gain not a loss.

Qualified charitable distributions apply to which of the following? A. Basis transfer IRAs B. After-tax Roth IRAs C. Distributions from employer plans D. Roth IRAs

The correct answer is: B QCDs apply to IRAs and after-tax Roth IRAs. Covered in the Live Review Income Tax (see QCDs) and refer to Roth earnings flow chart in Retirement. After tax Roth IRA refers to when Roth distributions are subject to income tax

You are a Registered Investment Advisor. You have a website which includes a link by which prospective and current clients may view and download Part 2 of the Form ADV that you submitted to the SEC. Are you in compliance with the Advisors Act? A. Yes, because you have made all disclosures available that are current and up-to-date. B. No, because prospects and clients must be provided with a written disclosure document. C. No because you have no means to confirm that your prospects and client have actually gone online and reviewed the document. D. No, because the SEC disallows any online viewing on the current Part 2.

The correct answer is: B The SEC website says you are required to provide advisory clients and prospective clients with a written disclosure. The documents should be delivered to your prospective clients before or at the time of entering into an advisory contract (under certain conditions you can comply with the delivery requirements through electronic media). It still must be written and delivered, not just a website they could overlook

Your client, Martha, requested a meeting with you. Martha is married to Glen. Glen is a workaholic. You only met him once to set up their joint account. Martha always makes all the investment decisions. Glen makes a lot of money, but Martha saves a majority of it through frugal living. As the meeting starts, Martha is quite blunt. Glen has taken up with one of the girls at the plant. Cash flow to Martha from Glen has ceased. He set up a separate bank account in his name. She wants your advice on how to handle the assets in the investment account. A. Tell her to break the joint tenancy account and retitle as tenants in common. B. Tell her you need to secure statements from both her and Glen to proceed with any changes. C. Tell her to see a divorce attorney before you can proceed to change the account into her name. D. Call up Glen and ask him to come into your office.

The correct answer is: B The account is in joint names, both are clients. She never says she wants to divorce him. Also to do Answer C, she has to get a divorce before you can proceed with the account titling. Do you have enough of a relationship with Glen to select Answer D? Doubtful. Answer A depends on Answer B. You need to secure a release to act for both of them. Brokerage account: On the exam either spouse can request the distribution but the distribution must come out as a joint check. It cannot come out as an individual check to one of them. Checking account: One spouse can remove the money by just writing a check. There is a difference in where the money comes from.

Chris Towns is self-employed. His business has 10 employees. He is successful enough to fund various employee benefits for him and his employees. Which of the following existing benefits are either added to the front of his 1040 as gross income or as deductions on the front of the 1040 to determine his AGI? NOTE: All the answer data is correct. The question is asking which of the answer data do you use? I. Group life insurance benefit of $200,000 for him II. SEP contribution for him III. Net profit from his business of $250,000 IV. A $5,500 IRA contribution by his wife V. Group health contribution for him and his wife of $7,200 A. All of the above B. I, II, III, V C. I, II, III D. II, V E. III

The correct answer is: B The group life is in excess of $50,000. The contribution excess is taxable compensation. The SEP deduction and self-employed health contribution are deductions for AGI. The net profit is taxable income. She is above the spousal phaseout for the IRA deduction. Yes, Answer III, net profit $250,000 (given) triggers the IRA phaseout. It is part of the data on the client. The group health premium was deductible as an adjustment to AGI on the front of his 1040. On the exam the whole question and the answer could apply. Expect the unexpected.

XYZ business wants to do a retirement plan for employees. The employees are requesting plan loans be made available. Which of the following plans would allow plan loans? I. Defined benefit plan II. Money purchase plan III. SIMPLE IRA IV. SEP IRA V. Profit sharing plan A. I, II, III B. I, II, V C. II, III, V D. II, V

The correct answer is: B The qualified plans including DB, allow for plan loans. IRAs do not allow plan loans.

You, a fee based financial planner, have been referred to a very wealthy client. In the initial meeting his language was filthy. You have weathered that to get to his need for financial help. As you proceed he makes reference to his attorney. He makes a racial slur about his attorney. You realize he does not know that is your race also. What should you do? A. Finish the initial meeting and tell him you will send him a fee for the planning proposal B. Finish the initial meeting and tell him the planning is beyond your capabilities C. Ask him to leave D. Refer him to another financial planner

The correct answer is: B There is no requirement in the initial meeting to take on a client. He is never a client. This feels like a morality issue. His standards of conduct are unacceptable to you the planner. Answer C could affect your relationship with the existing referring client. Answer D does not have a reason. You are not terminating a client, he never was one.

Mrs. Lucy, age 80, is in reasonable health. Five years ago, her husband died leaving her $5 million and placing $5 miillion in a bypass trust for her benefit. In addition, their home was in JTWROS. The home has a FMV value of $1,500,000 and the $10,000,000 of investments has a high basis of $8,000,000. Mrs. Lucy has two married children and 5 grandchildren and wants to keep her estate under $11,000,000. What type of asset do you recommend she give and to whom? A. Low basis, high dividend paying investments to both children and grandchildren. B. High basis, high dividend paying investments to both children and grandchildren. C. Low basis, growth investments to children and high basis, growth investments to grandchildren. D. High basis, growth investments to children and low basis, growth investments to grandchildren.

The correct answer is: B Think ages. The grandchildren have to be age 30 maybe age 40. With high basis, they can sell the investment with little or no tax or keep it and get big dividends. They could be taxed a 0% or at most 15%. Low basis investments would be subject to capital gains. If she keeps the low basis stocks until death, her estate will get a full step-up in basis. She does not have an estate tax situation. There is no one right answer. All you can do is to select the one that accomplishes the best purpose of the gift.

Tilly put $100,000 in trust for her grandson. During his high school years (4), college (4), and graduate school (2), he will receive all the income from the trust. After completion of the 10 years, the remaining trust assets will be returned to Tilly. Taxation of the yearly income will be the responsibility of whom? A. Tilly as this is a remainder man interest B. Tilly as this is a reversionary interest C. The grandson as he is a remainder man D. The grandson as he received the income

The correct answer is: B This is a reversionary interest. The trust assets revert to Tilly. It is a double tainted trust.

Harry and Pat Nelson (37% tax bracket taxpayer) have a daughter, Pam, age 12. They have failed to save for Pam's education needs at a 4-year university. Which of the following investments makes the most sense and why? A. A series of taxable zero coupon bonds owned by Pam (UTMA account) because they can provide appropriate funds at correct times and are taxed at Pam's tax rate. B. An S&P 500 Index fund owned by Pam (UTMA account) because it provides the best return and could be taxed at long-term capital gains rates. C. A series of CDs owned by Harry and Pat because they can provide appropriate funds at correct times and are very safe. D. A single premium variable life policy on Pam's life because the growth is tax-deferred and Pam can remove funds as needed for college

The correct answer is: B This is a time horizon question. The solution is also based on paying low taxes versus the parent's 37% bracket (Answer C), The time horizon for this question could be 6-10 years. The S&P 500 Index fund will be tax efficient and have the possibility of growth. The taxation could be subject to the kiddie tax, but the tax could be at 10% (trust rates) then the qualified dividends and capital gains could be taxed at 0% or 10%. Six years is long enough for a stock investment on the exam. This is the best answer and somewhat subjective. Answer A is wrong because the zero coupon bonds produce phantom income. With the kiddie tax up to age 24, phantom income could be taxed at 10-37%%. You may have picked A as an answer. NOTE: If the time horizon to college was 4 years, then use that answer to get safety of principal and maybe pay a little tax. Answer C is wrong because the CD earnings will be taxed at the parents' rate rather than Pam's trust rate. Answer D is wrong because distributions will be taxable (MEC) and subject to a 10% penalty.

A QDRO is any judgment, decree, or court order relating to which of the following? I. Child support II. Alimony payment III. Marital property rights IV. An IRA account A. I, II B. I, II, III C. III, IV D. IV

The correct answer is: B This is the definition of a QDRO. It affects Answers I, II, and III. QDROs only apply to qualified plans not IRA accounts (Answer IV). Yes, an IRA break-up can be part of the divorce settlement, but the QDRO does not trigger the break-up.

Mrs. Thomas is concerned. She and her husband have about $3.2 million in assets. Her husband is in a coma and requires full-time care. She is concerned if something happens to her. What do you recommend she do first? A. Buy a long-term care (LTC) policy B. Consult an attorney and at the very minimum do a will and durable power of attorney C. Invest all their assets in CDs D. Transfer all assets to an irrevocable trust

The correct answer is: B What she should do first is a will and a DPOA.

Terry Hand is an old college friend and a client of yours for years. His account is in his name. For some strange reason you do nothing social with him and you have never met his wife. On a late Friday afternoon he comes by to ask if you could join him for a drink. Your relationship has always been as a financial adviser. At a quiet bar he starts belting down drinks. You sip yours. Finally, he says he has a problem. He has two families with children by both his wife and girlfriend. The girlfriend knows he is married. He is worried if he dies how to set up his estate plan. You quickly order a second drink. How would you respond? A. He should place all his assets in a revocable trust to keep all transactions private. B. He should see an attorney. C. He needs to find another financial adviser because you have a conflict of interest. D. You need to get his wife's consent to do an estate plan.

The correct answer is: B You do not have a conflict of interest or a need to get his wife's consent because she has never been a client. But an attorney can represent him, you cannot. Any jointly held property with his wife will pose a conflict of interest. Should you terminate the relationship? Not with only separate assets.

Which of the following plans can be integrated with Social Security? I. 401(k) plan (no match or company contribution) II. Money purchase plan III. ESOP IV. Stock bonus plan V. Defined benefit plan A. All of the above B. I, II, III, IV C. II, IV, V D. III, V E. II, V

The correct answer is: C 401(k) with no match and ESOPs cannot be integrated with Social Security. Profit sharing plans can be integrated. It does not ask whether or not a profit sharing 401(k) can be integrated. But, Answer I does indicate it is a pure 401(k) with no match or profit sharing contribution. There is nothing to integrate in the 401(k) plan. So Answer I is out, but Answers II and V can be integrated. Even if you did not know about the ESOP, the only possibilities are Answers C and E. Stock bonus plans can be integrated.

Question 26 Uncle Bill wants to fund his two nephew's college tuition. The boys are 16 and 8. The 16 year old seems to have the intellect to go to college or better yet obtain an advanced degree. Bill is unsure of the 8 year old. All the 8 year old seems to want to do is play sports and goof-off. Bill's sister says Bill cannot just give money to the 16 year old. She feels the 8 year old is just a healthy growing boy. What would you suggest? A. Open two 529 plans with him as the owner using age-sensitive mutual funds B. Just wait until they attend college and pay the tuition for both boys C. Open an UTMA account for the 16-year old funded with zeros that mature in 2, 3, 4, and 5 years and a 529 plan for the 8-year-old with Bill as the owner using equity funds. D. Do not do anything, let his sister pay for college since she does not agree with his analysis of her children.

The correct answer is: C Answer A just does not fit a 16 year old who might go to college at 17. Answer B is not bad. But it says Uncle Bill wants to fund. Sounds like "now". Answer C will have funds available when the 16 year old goes to college and Bill will control the 529 for the 8 year old. Since no dollars are given, the UTMA may or may not create a kiddie tax or it could be 10%. This is similiar to questions in the Live Review (education planning). These are decisions you will have to make.

Mr. and Mrs. Landis live in California, a community property state. They have a condo in Florida. They insure the condo with an HO-6 with $300,000 of liability protection. What do you suggest they do with the condo? A. Sell it as Florida swampland property will always be worthless B. Nothing as community property interests are automatically protected from civil suits because of the law of one-half interest C. Buy an umbrella with at least $1,000,000 BI/PD D. Change the HO-6 to an HO-3 to afford them more protection

The correct answer is: C Answer B is totally made up. Condos are covered by an HO-6 policy but not by an HO-3 policy. Umbrellas have BI/PD limits like auto.

Marty purchased some Treasury inflation-indexed securities (TIPS). He is questioning the tax ramifications of the securities. Which one of the following statements is true? I. The interest is subject to federal taxation when received. II. The inflation adjustment to principal is also subject to federal taxation in the year the adjustment is made. III. The interest and inflation adjustment may be deferred until the bond is redeemed or maturity is reached in 30 years. IV. The deflation adjustment to principal is also subject to federal tax deduction in the year the adjustment is made. A. All of the above B. I, II, III C. I, II, IV D. I, II E. III

The correct answer is: C Answer III is referring to I bonds. Tax reporting is similar to EE bonds. TIPS are adjusted for deflation as well as inflation. In deflation, the principal is adjusted downward and interest payments are less than they would be. This answer, as written, came from the "Treasury direct" website.

Mr. T is interested in a particular stock. In reviewing the stock he found a report indicating that the correlation of the stock to the S&P 500 Index was only .5. What does that reveal about the stock? I. It will have a lower beta. II. It will have a lower volatility than the S&P 500 Index. III. Nothing, it is not material in that an individual stock cannot be explained by the S&P 500 Index IV. It is 50% less volatile than the S&P 500 Index A. I B. II C. I, II D. III E. IV

The correct answer is: C Beta is directly related to correlation. A correlation of less than 1 would mean a lower beta. Correlation is not exactly volatility percentage. Beta is the volatility percentage. Correlation is used in the beta formula. The question really relates to understanding the formula.

Childhood pals Stu and Lou had always wanted to spend time together, so shortly after graduating high school, they opened a hamburger joint which they called Good Guys Burgers. The business has been quite successful over the past forty some years and has grown into a chain of 33 stores. Stu and Lou estimate that the business is worth $9 million and plan to engage a business valuation specialist to peg an accurate fair market value for the business. Stu and Lou, now in their early sixties, recently had their first discussion about business succession planning. Although Stu has a son, Mark, in his late twenties, Mark tours with a rock band and has no interest in stepping into his father's shoes. Lou has no children and his wife has serious health problems so she could not assume his business responsibilities if Lou dies. On the advice from their insurance agent, Lou and Stu decide to enter into an insurance-funded cross purchase death buy/sell agreement. Each owner acquires life insurance on the other. If this agreement is executed and funded and Lou dies, who, if anyone, would experience a stepped up basis relative to the buy/sell transaction? A. Lou only (estate) B. Stu only C. Both Lou's estate and Stu D. Neither Lou nor Stu

The correct answer is: C Both Lou's estate and surviving owner Stu experience a basis step up. Lou's estate gets an increase in basis to the date-of-death fair market value (unless the AVD was selected which is not indicated in the data) due to the post mortem sale. Stu is buying Lou's stock for the agreed to price. Sounds like buying and selling shares on the market for a gain. Stu receives basis step up due to contributing additional capital (the life insurance death benefit) to the business (Good Guys Burgers) to buy out Lou's equity in the business. Death causes a step-up in basis. Stu got a step-up in basis because he bought the insurance policy for a fraction of the death benefit. Sounds like a step-up to me.

Your typical client is a very wealthy business owner. The clients own private companies or work for public companies. Earlier this morning you placed a large order for the CFO of Big, Inc. at market opening. You know that their earnings announcement should occur within days. Before the market opens, you get another call from another client to buy a substantial number of shares of Big, Inc. The client, Jane, is the CEO of a company that is a competitor of Big, Inc. Over drinks one night the CFO mentioned his relationship with Jane. Jane is very adamant that her order be placed in front of the CFO's order. How do you proceed? A. You tell her you cannot place the order because the earnings announcement is not public. B. You enter the order per Jane's trust. C. You tell Jane you cannot do as she requests. D. You inform Jane that you must speak with your compliance department before you can take any action.

The correct answer is: C Clearly you cannot place the order ahead. Is she an insider? We do not know. What kind of relationship exists between Jane and the CFO of Big, Inc. Does she have insider information? Why contact your compliance department if you cannot place the order per the client request?

Can a corporation that issues qualifying stock options (ISOs) receive a tax deduction for the ISOs at any time? A. Never B. Always C. Yes, if the ISO is disqualified D. Yes, if the ISO is qualified E. Yes, if $100,000 worth of ISO stock is granted

The correct answer is: C If the stock is sold before the two year/one year holding period, the excess of the fair market value of the shares at the time of exercise over the exercise price is treated as compensation (a deduction by the corporation). If the ISOs are disqualified, they become NSOs. The bargain element of NSOs have income tax charged, therefore the company is allowed a tax deduction. ISOs only have capital gains charged so the company cannot take a tax write off.

During the year, Fred Smith had the following expenditure for his rental house. The expenditures are listed below. Fred has a full-time job and files a Schedule E (active participation) for the rental house. Which of the expenditures must be depreciated rather than deducted as an expense on his Schedule E? I. Replaced a screen in a window II. Replaced the air conditioning system III. Built a swimming pool IV. Installed a new water heater V. Hired a lawn service to cut the grass A. I, II, V B. I, IV, V C. II, III, IV D. III, IV E. III

The correct answer is: C Items I and V are expenses. The others are improvements even though II says replace and IV says install. There is no list of what are expenses and what are improvements. The dollar amount determines the difference. A screen may be a $100. The air conditioning system could be $3,000-$10,000.

Alice Smith, age 50, has been your client for 20 years. Alice, a widow, has asked you to do an interview for TV with her daughter Jana. Her daughter works for a local TV station. The financial planning interview is done on tape during an afternoon for a local broadcast. Everything goes well. After you finish and everyone leaves, Jana goes into a hissy fit. She starts ranting and raving about how her mother, who is wealthy, made her take out student loans to get her basket weaving degree. Now she is saying she can only make $2,000 a month and she is living on food stamps. Finally, she says she is going to burn her mother's house down and stomps out of the room. What should you do? A. Call the police B. Ignore it, Jana was just blowing off steam C. Call her mother, Alice D. Call Alice's brother (Jana's uncle)

The correct answer is: C Jana is not your client. This is serious enough that you should take some action with your client. In regards to Answer A if you call the police what proof do you have? This sounds like a perfect liability suit against you. You have no proof.

Jane Morrow married Tom Tucker late in life. As part of their planning before marriage they signed pre-nupital agreements to keep their assets separate. Jane wants to buy 100 acres of farm land. Tom feels it will be a good investment but only wants a 30% interest. This is okay with Jane. If they buy the 100 acres for $250,000, how much will be included in Tom's probate estate if he dies first and the 100 acres of farm land is value at $300,000? A. $0 B. $75,000 C. $90,000 D. $125,000 E. $150,000

The correct answer is: C Just his 30% interest based on the FMV of the property at the time of death is subject to probate. This purchase is not JTWROS. It is tenancy in common (30% interest) the question said they wanted to keep their assets separate. Answer E would be correct if the land was held JTWROS. JTWROS between two spouses is always 50%.

Luke inherited a parcel of land. His parents purchased the land for $10,000. At the time of his inheritance, it was worth $100,000. It is now worth $200,000. The insurance, taxes, and maintenance are costing him more than the land is appreciating. He is considering various alternatives. Which of the following is true? A. A local charity (public) wants to hold various activities (fairs, etc.) on the land (rent free). Luke feels that he could write off the use of the land as a charitable deduction. B. If he gifts the land to the local charity (public), he can deduct its value ($200,000) up to 50% of AGI. C. If he gifts the land to the local charity (public), he can deduct its value ($200,000) up to 30% of AGI. D. If he gifts the land to the local charity (public), it is use unrelated (limited to the basis of $100,000 and 50% of AGI).

The correct answer is: C Long-term capital gain property is limited to 30% of AGI. A gift to charity of rent-free use of space will not entitle the donor to a charitable deduction for the value of that use. Land is not use-unrelated; it is always use-related. Only artwork and collectibles can be use-unrelated.

Harry Honda, age 45, has approached you for advice. He is a sole proprietor and is contributing the maximum to his SEP this year. The stock market has been very volatile, but he is a high risk taker. He has given you four investment selections for his new contribution. Which investment is the worst choice? A. Private placement municipal bonds B. Junk municipal bond fund with a duration of 8 C. Master limited partnership D. Leveraged and inverse ETFs

The correct answer is: C Master limited partnerships do generate income. But that income is partnership/business income. It is considered UBTI, and as such his SEP IRA has to file an income tax return. This creates a lot of costly paperwork and potential taxability. Remember the question asks for the worst. Answer A is also a bad choice but does not create UBTI income. Subjective. There is very limited information on UBTI (Retirement R-21) but the usual answer is limited partnerships.

Question 58 Corporate annual reports do not include which of the following? A. Depreciation methods B. Stock options C. Profitability projections D. Inventory methods

The correct answer is: C Profitability projections are not included.

An employer can self-fund certain benefits under a 501(c)(9) voluntary employees' beneficiary association (VEBA). Which of the following may be funded? I. Death benefits II. Medical benefits III. Unemployment benefits IV. Retirement benefits V. Deferred compensation benefits A. All of the above B. I, II, III, IV C. I, II, III D. I, II E. IV, V

The correct answer is: C Retirement and deferred compensation benefits may not be funded through the vehicle. Reference: Live Review Insurance

Tom is a participant in an HSA. He wants to pay for LTC premiums with distributions from an HSA. Is he allowed to do that? A. No, the HSA can only pay for LTC expenses, not premiums. B. No, the HSA can only pay for qualified medical expenses. C. Yes, the HSA can pay for qualified LTC premiums (age-based). D. Yes, the HSA can pay for all LTC premiums and expenses.

The correct answer is: C The amount of qualified long-term care insurance premiums that constitute qualified expenses is allowed. However, the LTC premiums are still limited to age-based limitations (as adjusted annually). Answer B does not specifically answer the question. This is an HSA not an FSA. Premium payments are not allowed in FSAs but are allowed in HSAs. Answer D does not limit the premium payment to age-based. HSAs have the same limitations as medical itemized deductions.

Mr. Frank has become incompetent. Some years ago he obtained a complete package of estate planning documents. He signed them but never funded the revocable living trust. Which document can be used to fund the living trust? A. None, it's too late now that he is incompetent. B. Non-durable power of attorney C. Durable power of attorney D. Living will E. Living trust

The correct answer is: C The attorney-in-fact has the power under a durable power of attorney to fund the living trust. The non-durable ceases at incompetency

Harry started taking substantially equal payments from his IRA at age 55. For three years, he took the required amount. Then, in year four, due to a substantial hardship, he withdrew an amount greater than the normal substantial equal payment. He took the additional $50,000 as a hardship. What penalty did he have to pay on the $50,000? A. None, because he did a hardship withdrawal of $50,000 B. None, because he did a qualified loan of $50,000 C. 10% of $50,000 D. 10% of the withdrawals in years 1, 2, and 3, and $50,000 in year 4 E. There was no penalty because he was 59½

The correct answer is: C The question is only asking about the $50,000, not the withdrawals from years 1-3. Yes, the withdrawals from years 1-3 would be subject to the 10% penalty, plus interest, but that is not what the question asked. The question says he is 55, not 59½. If it does not say 59½, then the person is not 59½. Hardship withdrawals full under 401(k) plans, not IRA. Here a hardship withdrawal is just a withdrawal from an IRA due to hardship.

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

The correct answer is: C The type of question is typical of the nasty asset allocation questions on the exam. This question is not one of their questions, it is totally made up. Answer D is the best choice for a riverboat gambler, but Harry will not do it. Answer A is not bad, but he cannot sleep at night. Answer B is invested 75% in the U.S. market. Subjective.

Sam was terminally ill. He sold his $250,000 life policy to a qualified viatical settlement company for $175,000 a year ago. In the past few days, he found a medicine that will prolong his life for 5-10 years. How is the $175,000 affected? A. He will have taxable income of $175,000. B. He will have to return the $175,000. C. The viatical settlement company is in deep do-do. D. The viatical settlement company can return the policy to Sam per the settlement agreement.

The correct answer is: C The viatical company's return will suffer if Sam lives too long. People living longer than expected greatly affects the profitability of viatical settlement companies. Sam is not affected. He was terminally ill. Deep do-do is my humor.

Your client, Mrs. Cates died 6 months ago. Her family inherited almost $5 million tax free with a step-up in basis. One family member, her son, got $2 million. The son, Robert Cates, placed the money in an existing joint account with his wife. Robert and his wife, Cindy, had been clients before Mrs. Cates died. The account, with previous assets, is now worth $3.5 million. Robert just stunned you this morning. He said he needed $100,000 cash, not a check from the account. This is not a normal request, then he proceeds to tell you he needs it to pay his mistress off. What should you do? A. Call up Cindy to get authorization. B. Tell him it is impossible to pay out $100,000 in cash. C. Tell him you have a conflict of interest and cannot handle the transaction without Cindy's consent. D. Terminate the relationship based on moral questions. E. Make arrangements to pay him $100,000 in the form of a joint check.

The correct answer is: C There is a conflict of interest because you were hired by Robert and Cindy. The account is considered joint. He cannot take the money except Answer E. The truth of Answer B is unknown. Can one joint tenant can remove assets without consent of the other joint tenant? If nothing makes sense pick a soft answer. You should not have asked him why he needed the money. He could ask for a check made out in joint names and then forge her signature and cash it (humor).

Mrs. Hanes, age 65, has just applied for Medicare coverage. She asks you if she elects Parts A, B, and D is there any significant gap in coverage other than the deductibles and 80% copay? A. No, she will get critical care coverage. B. No, she will get coverage for traveling even outside her state of residency. C. Yes, she will have to get coverage if she takes a Viking River Cruise in Europe. D. Yes, she will have to get coverage for dental care, eye glasses, or hearing aids.

The correct answer is: C There is limited coverage for services in Canada, Mexico, and the Caribbean. Answer D is also a limitation, but Answer C is more significant. Skilled nursing home care up to 100 days is also a limitation but is not an answer. An international emergency could be life threatening and would be uncovered. Answer D would probably not be life threatening. Subjective

Todd and Belinda are prospective clients. During the initial interview (to establish a client-planner relationship), Belinda tells you that Todd gambles and that she does not want him to know what is in the joint money market account. She told you this while Todd was out of the room. What should you do? A. During the data gathering step, let her lie to you. B. Do what she says. C. Do not take them on as clients. D. Tell her that she must tell the truth about the joint money market account or you cannot assist them.

The correct answer is: C They are both going to be clients, not just her. This is the initial interview (going to be clients). Although Answer D is a good answer, she says she does not want to tell him. If she does tell the truth, what will he say? You might not want to take them on as clients because if you cannot get accurate data to do a plan. The account could be $1,000 or $500,000. Somewhat subjective.

John and Jody decided to refinance their 5.5% 30-year $1,000,000 mortgage. They have lived in the home for 10 years and plan to live there for the foreseeable future. Analyze and evaluate which of the following options would be best for them? A. A 15-year VA mortgage at 3% fixed with no points B. A 15-year FHA mortgage at 3.25% fixed with no points C. A 30-year fixed mortgage at 4% with one point D. A 15-year adjustable mortgage starting at 3.5% with no points

The correct answer is: C They will not qualify for the VA and FHA loans. A fixed rate mortgage is safe if interest rates rise quickly in the future. Also one point on a $1 million mortgage could be a factor. You may have elected Answer D especially if the following was emphasized. However, if the question stressed increasing their payments, paying a lower interest rate, paying off the mortgage quicker, paying less interest over time, and no points, then the answer could be D. Go with the flow do not fight the exam.

A 50-year-old client has the following insurance situation: No disability insurance No LTC insurance An auto policy with $100,000/$300,000/$50,000 BI/PD coverage when the umbrella required $250,000/$500,000/$100,000 $1,000 comprehensive major medical deductible $1,000,000 umbrella policy What do you recommend the client do first? NOTE: Think simple A. Buy long-term disability insurance B. Buy long-term care insurance C. Increase the auto policy liability limit D. Decrease the comprehensive major medical deductible

The correct answer is: C This answer is the simplest and fastest recommendation. Increasing the auto liability will allow the umbrella to work properly. We don't know enough about the client to do A, B, or D. Is he/she working, retired, married, etc? What is his/her health? The client is 50 years old. Disability insurance is subject to both health and financial underwriting. It will take time to accomplish. There was a subtle hint.

Mrs. Smith, age 80, is reviewing five different portfolios. Her main concern is about loss of principal. Income is a secondary concern. Which of the following portfolios would best meet her concerns? A. 10% money market, 10% common stocks, 80% long-term bonds B. 50% CDs, 50% long-term bonds C. 10% money market, 10% common stocks, 80% short-term bonds D. 10% money market, 40% CDs, 50% long-term bonds

The correct answer is: C This is the best answer on the basis of the short-term bonds (80%) and only 10% in common stock. All the other answers have long-term bonds. This is a duration question/answer. The long bonds are risky and the prices could be quite volatile. Answer C is the best choice.

Larry Town turned 70 in June of this year. He has come to you before he turns 70½ to make an IRA deposit. He has $5,000 of compensation (1099 income) and wants to make a $5,000 deductible IRA contribution. How would you respond? A. As long as he makes the contribution before turning 70½, the $5,000 IRA contribution is deductible. B. He should have made the contribution before June of this year. C. He cannot do an IRA this year. D. He can make a Roth contribution this year.

The correct answer is: C When he turns both 70 and 70½ during the year he cannot make a contribution for that year (even before June). He has to take a distribution. Although Answer D is true it does not answer the question. Answer D is typical of the CFP Board exam. Although very true, the question is asking about a deductible IRA contribution not a Roth contribution. Do not add Roth to the answer.

Your newest client, Tiffany, is age 23. Her favorite uncle, Uncle Donald, has given her $5,000 as a college graduation present after receiving her BA degree in Communications. Tiffany tells you that she would like to invest the full $5,000 into a Roth IRA. After college, and given the current economic environment, it took her some time to find a job. She has only been working for six months and has no spare cash. You tell Tiffany that she should analyze her cash flow and establish an emergency fund before investing for retirement. Tiffany, who enjoys reading financial magazines and listening to financial experts on morning talk shows, is adamant about wanting the Roth. What should you do now? A. Refuse to continue the relationship with Tiffany, clearly you and she do not see eye-to-eye. B. Assist Tiffany in opening the Roth IRA. C. Educate Tiffany as to why she needs to have an emergency fund before saving for retirement. D. Recommend that Tiffany acquire cash-value life insurance because it will provide her with both tax-deferral and survivor benefits.

The correct answer is: C While it is true that Tiffany could have penalty-free access to a Roth IRA, arguably, the financial planner's main function is that of an educator. Does the exam want "educate" as an answer? Yes, that plus suggesting an emergency fund overrides her being adamant about doing a Roth IRA. There is no need to end the client/planner relationship at this point. There is little, if any information in the question to indiciate a need for life insurance before dealing with other financial matters.

You are an experienced CFP® practitioner. Your client, Mrs. Pate is approaching age 70. Which of the following persons or parties would be responsible for seeing that Mrs. Pate met her RBD requirements and subsequent RMDs? A. The Internal Revenue Code B. Your client (taxpayer) C. You and your client D. Your client's accountant

The correct answer is: C While the Tax Code would say the compliance with RMDs is the taxpayer's responsibility, under the CFP Code of Ethics and Professional Responsibility's Principle of Integrity, it is the financial planner's responsibility, along with the client's to see that the client's interests are served above all (Principle of Integrity). The planner should do what she can to see that the client complies with the tax rules such as required distributions from retirement plans.

Harvey Stonewall owns HS, Inc. HS is a small manufacturer of parts sold to larger manufacturers. Harvey's business varies from month-to-month. Harvey feels he can train an employee to run a piece of equipment in a matter of an hour, sometimes minutes. Harvey fires employees for various legitimate reasons. Most employees only last a month or two due to firing and layoffs. Harvey wants a retirement plan for his company. What would you recommend? A. Defined benefit pension plan B. Profit sharing plan C. SEP D. SIMPLE E. SIMPLE 401(k)

The correct answer is: C Without knowing Harvey's age or salary the SEP makes the most sense. ERISA only requires 1,000 hours to count as a year of service. But, SEPs also say 3 out of the 5 years. No employee will ever make it to 3 years. Why do an ERISA plan with administration if you do not have to? Profit sharing is not a bad answer. SIMPLE (Answers D and E) are too restrictive and require a match.

Loretta started receiving substantially equal annual payments from her IRA at age 58. Loretta stopped receiving payments at age 61 (a total of three payments). What will be the amount of the recapture tax she will be subject to? A. None, she has attained age 59½. B. None, she ceased receiving payments. C. The recapture amount will be 10% of the total annual payments received before she attained age 59½ , and interest. D. The recapture amount will be 10% of the three payments, and interest. E. The recapture amount will be 10% of the value of the IRA, and interest.

The correct answer is: C Wow. You probably selected Answer D. But this is a textbook answer (covered in Live Review R-24). The penalty only applies to distributions that were made before age 59½.

You are a CFP® practitioner working a regional brokerage firm. Your brother is an independent CPA. During tax season many clients call you about the huge hits in taxes due to 1099 dividend and capital gains reports. From time-to-time to you refer these contacts to your brother for tax advice. Does this represent a conflict of interest that under the CFP Board Code of Ethics must be disclosed? A. There is no conflict of interest. There is no financial planning involved. B. There is no conflict of interest your brother is not a CFP® practitioner. C. There is a conflict of interest. Under Rule 5, obligations to employers, the referrals should be reported to the regional brokerage firm. D. There is a conflict of interest. The fees paid by clients to your brother represent additional income to a family member.

The correct answer is: C You are an employee/agent of the firm. You should perform professional services with dedication to the lawful objectives of the employer. Think of it this way, who do you work for? The regional brokerage firm. So a client of the firm calls you with a question and you refer it to your brother. Is that not a conflict of interest? Answer D? Who knows if its true? It is possible it is compensation to any third party as it does not say it should be reported.

John and Abby Kerry are married with 3 young children. They are referred to you for planning through an existing client. You have scheduled a meeting at 5 pm. You expect to see them both but only John shows up. John tells you Abby could not be bothered because she had a bridge club meeting that afternoon. John wants to proceed with the planning. Two hours later you have gotten every little detail. You ask for his priorities. His number one priority is 529 plans for his 3 children. Then he gives you her priorities. They are almost the same but she has written that she does not want to do any educational funding for the children. You ask him why. He says she had to pay her way through college, therefore they should. What should you do next? A. Terminate the relationship B. Ask for a meeting with her to resolve this education issue C. Write up a scope of engagement that addresses their other priorities D. Show him other methods to fund for education

The correct answer is: C You have completed Step 1 and Step 2. She has stated her position on education (Answer B). Answer D is a Step 4 answer. The exam wants you to proceed by outlining the scope of engagement so they can accept or decline. Is educational funding that important to stop all the other agreed to planning? Every other priority is the same.

Jeri Brinson, age 49, received a divorce from Rick Brinson, age 47, several years ago. As part of the divorce proceeding, a QDRO was issued giving Jeri rights with respect to Rick's entire defined benefit pension plan. Last month Rick remarried and named Patricia, his new wife, as the primary beneficiary of his pension plan. Rick's DB plan does not allow early distributions for any reasons except death or disability. The plan's normal retirement age is 65. If Rick dies, how will Jeri's and Patricia's rights as beneficiaries be affected? Additional Information QPSA: Qualified pre-retirement survivor annuity QJSA: Qualified joint and survivor annuity I. The QDRO notwithstanding, Jeri cannot be treated as Rick's surviving spouse under a QPSA or a QJSA. II. Rick's plan may treat both Jeri and Patricia as surviving spouses if a QDRO specifies that Jeri will only be treated as Rick's current spouse with respect to benefits accrued prior to the divorce. III. If, because of the QDRO, both Jeri and Patricia are treated as surviving spouses, the plan may limit the amount of benefit under a QPSA or a QJSA to an amount that would be no greater than if there was only one surviving spouse. IV. Jerri's QDRO could prevent Patricia from being treated as Rick's current spouse with respect to Rick's pension. A. I B. II C. II, III D. II, III, IV

The correct answer is: D A QDRO may provide that a previous spouse will be treated as the current spouse for a part or all of the QPSA or QJSA. To the extent that Jeri is treated as Rick's current spouse by reason of a QDRO with respect to Rick's entire accrued benefit, Patricia will not be treated as Rick's current spouse.

Mr. and Mrs. Iverson sold their home for a $400,000 gain. They excluded the gain under Section 121. They used the proceeds of the 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? A. -0- B. $12,500 C. $37,500 D. $50,000 E. $450,000

The correct answer is: D After keeping the second residence more than two years, the exclusion would become available again. It does not say they sold because of a job change, divorce, or unforeseen circumstance. You cannot assume any unforeseen circumstance. If it was due to a job change, etc. then you could prorate the exclusion, but none is shown. The first home used the 121 exclusion. It is asking about second home.

Gail Goodrich, single, owned a small corporation, GG, Inc. Due to business reversals, she had to close the business, and the stock became worthless. Which of the following is true if the loss is $120,000? A. If she meets the requirements of Section 1244, she can take an ordinary loss of $100,000 and a capital loss of $3,000. The remaining $17,000 is a carry-forward loss. B. She can take a $103,000 short-term loss. C. She can take a $53,000 long-term loss. D. None of the above

The correct answer is: D Answer A is wrong because she is single, not married. Section 1244 allows for a $100,000 ordinary loss for married filing jointly and a $50,000 ordinary loss for single persons. Answers B and C are wrong because we do not know how long she was in business. The correct answer for single is $50,000 ordinary loss plus $3,000 capital loss and a $67,000 carry forward.

Ted, a regional sales manager, is always on the road. He is concerned that he missed taking advantage of the rising real estate market. He makes about $150,000 after business expenses. What would you suggest he do? A. He should purchase rental property. B. He should purchase a non-publicly traded limited partnership (real estate). C. He should buy a home to get the tax advantages of home ownership. D. He should rent an apartment; the market may still be overpriced.

The correct answer is: D Do we have enough information to select Answer C? He may be better off to take a standard deduction based on new tax law. We do not know if he is married. Does he have other investments, a down payment, what size or cost of a home? Answer B would not allow him to take losses (non-publicly traded - passive losses). Lastly, he is always on the road.

Bob, age 63+, is debating retirement and taking Social Security benefits 36 months early. He is a fully insured worker. Which of the following is true? I. He will be eligible for Medicare. II. He will receive 80% of his normal retirement age benefit. III. If he works part-time, his benefits will be reduced by 20%. IV. If he works part-time now, his benefits will be reduced $1 for every $3 he earns above a specific earnings threshold. V. If he does not work now, 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. V

The correct answer is: D He will not be eligible for Medicare until age 65 (Answer I). If he works part-time, his benefits will be reduced $1 for every $2 he earns above a specific threshold before the year of him full retirement age (Answer III and IV). His benefits will be subject to federal income tax if his AGI plus ½ of his benefits exceed $25,000+. Answer V is right because of "may". We do not have his AGI. If V said "will", then the answer would be incorrect. You need to back into the answer. Answers I, III, and IV are incorrect. 36 months is 80% (36/180).

Dr. Hill, a 50-year-old divorced dentist, is incorporated as a personal service corporation. He is interested in increasing employee retention. Dr. Hill's corporation currently has a 401(k) plan in force. He only matches $.50 on the dollar up to 3% of salary. As a result of this formula and employee turnover, he has been severely limited in the amount he can contribute as a key employee. If he elects to adopt a pension plan in lieu of the 401(k), which of the statements is true regarding his benefits in 2018? I. He will be able to contribute 25% of his salary if he elects a money purchase plan. II. He will be able to deposit $220,000 (2018) if he elects a defined benefit pension plan. III. The money purchase and defined benefit plan will be covered by the PBGC. IV. If he elects a defined benefit plan and cannot maintain the contribution level, he could switch to a cash balance plan. V. Money purchase and profit sharing plans are subject to the minimum funding standards. A. I, II, IV, V B. II, IV, V C. III, IV D. IV E. V

The correct answer is: D I. Money purchase has a contribution limit of $55,000 (2018). Without the limit or his salary being shown, the statement is false. II. This statement uses the word deposit rather than benefit. $220,000 is the maximum benefit, not the contribution. III. Only defined benefit plans are covered by PBGC. V. Profit sharing 401(k) plans are not subject to the minimum funding standards.

Mark Spout created an irrevocable trust for the benefit of his dependent children. Mark named the local bank as trustee of the trust and authorized it to invest in stocks, bonds, and negotiable certificates of deposit. Included in the investment authority is the right to use trust income to purchase insurance on Mark's life. All funds are currently invested in high-yield bonds paying 7% semiannual interest on a par value of $100,000. Twenty-five percent of the bond investment income is being used to pay the premium on a policy on Mark's life. Which taxpayer must pay tax on the income of the trust and why? A. The bank because of its broad authority as trustee B. The children because the income is paid by them C. The trust because it is irrevocable with no benefits to grantor D. Mark because of the grantor rules

The correct answer is: D If any portion of the trust income is, or may be, used to purchase insurance on the life of the grantor or grantor's spouse, then the trust is a grantor trust. The trust is/was also used to benefit his dependent children (support). 25% is to purchase insurance and the remainder is used for support. It is a tainted trust so all the income is taxed to him. It is covered in the Prestudy and to a limited extent in the Live Review.

Dr. Jameson, a 50-year-old divorced dentist, is incorporated as a personal service corporation. He is interested in increasing employee retention. Dr. Jameson's corporation currently has a 401(k) plan in force. He only matches $.50 on a dollar up to 3% of salary. As a result of this formula and employee turnover, he has been severely limited in the amount he can contribute as a key employee. Dr. Jameson has heard that you can have a qualified plan and still make a deductible IRA contribution. He has asked you what combinations of events would allow him such a deduction in 2018. I. If there are no annual additions for the year, he can do a deductible IRA. II. If Dr. Jameson has a modified AGI of less than $63,000, he can do a deductible IRA. III. If Dr. Jameson provides the same IRA benefit to all his existing employees, he can do a deductible IRA. IV. If Dr. Jameson retires at age 55, takes annual distributions from his pension plan, and then works part-time (self-employed) making $121,000, he can do a deductible IRA. V. Dr. Jameson pays alimony. He was divorced in 2016 and his ex-wife has him deposit $5,500 directly into her IRA as part of his alimony payment. He can declare the $5,500 as a deductible IRA. A. I, II, III, IV B. I, II, IV, V C. I, III, V D. I, II E. II, V

The correct answer is: D If no annual additions are added to his account, he can do a deductible IRA. Yes, currently he is deferring and there is a match that is active. But the question is asking about events that would allow him to do a deductible IRA. You must answer the question as written. Remember annual additions include forfeitures (Section 415) by definition. The 2018 IRA threshold for single is $63,000. Dr. Jameson is divorced. He can do a deductible IRA. Although IV is true, it does not answer the question. The question is asking about a deductible IRA in 2018, not 5 years from now. Picky. V is wrong. Alimony is alimony. His wife will get to deduct the IRA contribution.

Mr. Hallas owns 80% and his daughter 20% of Hallas, Inc. (a corporation). Hallas, Inc. grosses $20 million per year or more. He and his daughter also own a partnership worth $5 million. Mr. Hallas owns a $3 million life insurance policy outright. He wants to remove the life insurance policy from his estate. What do you recommend? A. Sell the policy to the corporation for buy/sell purposes B. Sell the policy to the partnership for buy/sell purposes C. Transfer the policy to the partnership for buy/sell purposes D. Gift the policy to his daughter

The correct answer is: D If the corporation owns the policy, the proceeds may be considered in valuing the decedent's interest unless there is a valid agreement fixing the price (very difficult because they are father and daughter). Answers B and C have similar problems. There is no partnership if Mr. Hallas dies. The partnership dies. Remember, he wants to remove the policy from his estate. This is the simplest answer. Yes, it is subject to the 3-year rule, but we do not know Mr. Hallas' age or possible health problems. His daughter will have the insurance liquidity to buy assets from his estate.

Jane Thompson, age 40, is divorced. Alex Thompson, her ex-husband, is remarried to Lola, age 25. Alex has been a bit tardy on making alimony payments since he married Lola. Jane wants you, her financial planner, to meet with Alex. Jane is willing to pay for your services and Alex is willing to meet with you. What should you do? A. Tell Jane there is a conflict of interest B. Make sure Alex learns nothing about Jane's financial affairs that you handle for her if you see Alex. C. Tell Jane you want to think about it. D. Tell Jane you want to refer Alex to another financial planner

The correct answer is: D Jane and Alex want help. Answer D is a helpful answer that fits more with your ethical responsibility. Yes, there could be a conflict of interest, but that does not solve the problem. The answer needs to provide a solution.

Which statement(s) is(are) true about an existing Health Savings Account (HSA)? I. An HSA may receive contributions from any person, including an employer or family member, on behalf of an eligible person. II. Contributions, other than employer contributions, are deductible on the eligible person's individual tax return only if that person itemizes. III. Employer contributions are not included in the eligible person's income. IV. Both the employer and eligible person may contribute to the HSA in the same tax year. A. I B. I, II C. II, IV D. I, III, IV E. All of the above

The correct answer is: D Statement II is wrong because the contributions are deductible on the eligible person's tax return even if that person does not itemize. They go on the front of the 1040 (adjustments to income).

Which of the following is not an exception to early distributions (before age 59½) from an IRA? A. First home expense up to $10,000 lifetime B. Qualified education expense (tuition fees, books, supplies, and equipment) C. Distributions for medical care that exceed 7½% of adjusted gross income D. Distributions in accordance with a QDRO

The correct answer is: D The QDRO exclusion is for qualified plans only

While on a trip, Sandra's wedding ring disappeared. The ring was worth $10,000. She has an HO-3 policy. Which one of the following statements is true? Think simply to answer A. The coverage on the ring is limited to $1,000. B. The coverage on the ring is limited to dollar amount ($1,000 - $1,500) if the loss is due to theft. C. If she has more than $10,000 personal property coverage, the ring is covered for its full value. D. The ring is not covered.

The correct answer is: D The ring is only covered if its disappearance is due to theft. The dollar amount shown is not important. It is a concept question (theft). There is no coverage unless a theft occurred. The theft must be reported to the police. It is a common sense question/answer. The ring just disappeared. Some policies cover jewelry up to $5,000.

r. Tate died owning a whole life policy on Mrs. Tate. The death benefit of the policy was $250,000, and the cash value was $30,000. What amount will be included in Mr. Tate's estate? A. $250,000 B. $30,000 C. The replacement value D. The interpolated terminal reserve plus the unearned premium E. The interpolated terminal reserve less the unearned premium

The correct answer is: D This is the correct way to answer the question. The amount will be greater than the cash value. Replacement value isn't a correct answer. He died owning a policy on his wife. She was the insured, he was the owner.

Judith Everet, age 55, has been your client for years. She was divorced 10 years ago with generous marital settlement and is very conservative with a low risk tolerance. Her asset portfolio for the past years since the 2007 market downturn has been 70% in bonds, 20% in money market, and 10% in growth and income funds. As a result of inflation and life style changes, travel to Europe and the Far East, her portfolio has gone down. She has taken all the income. She comes to you today to take 40% and invest it in an emerging growth fund. She is taking 20% from her bonds and all of the money market as her source of investment. What should you do? A. Make the investment. B. Make the investment and document her decision. C. Do not make the investment, explain to her that the risk is beyond her profile. D. Do not make the investment immediately and try to educate her on the risk associated with emerging growth.

The correct answer is: D Very tough question/answer. All the answers are good, but educating her is best. There is no immediate buy issue at the market opening. It is a fund not a stock.

Lacy Summers has come to you because you handle her taxable investment accounts. She has not been able to do either deductible IRAs or Roth IRAs because of her AGI and participation in a company 401(k). She has been deferring the maximum to the 401(k) and the firm she works for stopped the match in 2008 and then resumed it in 2014. Today the firm admitted it was declaring bankruptcy and will cease doing business within a month. She wants to know what are the requirements to terminate the 401(k)? I. Amend the plan document II. File a final form 5500 III. Distribute all assets IV. Notify all employees that the plan will be discontinued A. All of the above B. I, III C. I, IV D. II, III, IV E. IV

The correct answer is: D You might want to go to the DOL website on 401(k) plans. Amending the plan is not required.

Due to very extreme inflation, the yield curve is inverted. Short term bonds are yielding 20% and long term bonds only 14%. If the government and the FED intend to reduce inflation to under 10%, what do you suggest your client buy assuming all the following bonds have the same quality? A. 2-year bond B. 7-year bond C. 12-year bond D. 20-year bond

The correct answer is: D You want to lock in that 14% return for as long as possible. This is covered in the Live Review IV-41. The FED is going to attack the 20% and reduce it. Last time this happened was 1981. The inverted curve will change to a normal curve and the client can lock in a high long-term yield for a longtime.

Which of the following plans is not subject to FICA and FUTA on employee deferrals? A. Profit sharing 401(k) B. SIMPLE C. SARSEP D. 403(b) E. Section 125

The correct answer is: E A 125 is a flexible spending account (FSA). All the other plans require FICA and FUTA on employee deferrals.

Baker, Inc. has an ERISA retirement plan (employer funded). The plan lost 50% due to poor investment decisions last year. What can the employees do? A. Sue the plan officials for 100% of the investment losses B. Sue plan officials for 50% of the 50% loss C. Nothing D. Sue the plan officials for 100% of the losses plus punitive damages E. Sue the plan officials for losses to the plan

The correct answer is: E Errant plan officials can be held personally liable for losses to the plan. Answer E is the best answer because there could be additional factors involved (i.e., a reasonable return). ERISA prohibits monetary punitive damages for claims.

Holly, the daughter of Mr. and Mrs. Golightly, is going to college. She plans to get her Masters at a state university. Unfortunately, due to economic conditions, her parents never set up a 529 plan. She can qualify for some state scholarships. Her parents, both professionals, earn well over $100,000 each, but spend almost all they make. Which of the following may generate federal income tax credits for undergraduate as well as graduate education? A. American Opportunity Credit B. Lifetime Learning Credit C. Coverdell (ESA) D. PLUS E. None of the above

The correct answer is: E The American Opportunity Credit may work during the undergraduate years, but not for the graduate years. The Lifetime Learning is subject to a phaseout at $114,000. The Coverdell and PLUS do not generate federal income tax credits.

Mrs. Tilley has the following income. How much of it is compensation income? I. Wages from an S corporation of $40,000 II. Corporate dividends of $5,000 III. K-1 income of $10,000 from an S corporation where she is more than a 2% owner (active) IV. Sale of a collectible for a $5,000 gain V. Tips from a 2nd job at night (part-time) of $10,000 A. $70,000 B. $65,000 C. $60,000 D. $55,000 E. $50,000

The correct answer is: E The salary and tips are compensation income (earned income). K-1 income from an S corporation is unearned income not compensation.

Charter, Inc. is owned 50% by John Tillman and Brad Porter. Currently, the company has a stock redemption plan funded with insurance but John and Brad want to do a cross-purchase buy/sell plan funded with insurance. Which of the following is true? I. The company owns and is the beneficiary of the stock redemption plan insurance policies. II. John owns and is the beneficiary of Brad's stock redemption plan insurance policy. III. Brad will own and be the beneficiary of John's insurance policy for the cross-purchase buy/sell plan. IV. The company will own and be the beneficiary of Brad's insurance policy for the cross-purchase buy/sell plan. V. The current stock redemption policies on John and Brad can be sold to Brad and John to fund the cross-purchase buy/sell plan. (example - John can buy Brad's policy and Brad can buy John's policy) but it will violate transfer-for-value rules. A. I, III, IV B. II, III, V C. I, IV D. II, IV E. I, III, V

The correct answer is: E Under corporate (Charter, Inc.) stock redemption, the company owns the policies (Answer I). Under cross-purchase, the owner buys a policy on the other owner (Answer III). Answer V is a violation of "transfer for value" rules but is a true answer. They still can do it. Only Brad can buy Brad's policy.

Which of the following assets get a step-up in basis when the client dies? A. A $100,000 CD now worth $105,000 (bought 5 years ago) B. A municipal bond purchased at a discount ($95,000) two years ago now worth $100,000 C. Stock purchased 6 months ago for $50,000 that has a $10,000 STCL D. An annuity purchased as an investment 10 years ago for $100,000 now worth $115,000

Which of the following assets get a step-up in basis when the client dies? A. A $100,000 CD now worth $105,000 (bought 5 years ago) B. A municipal bond purchased at a discount ($95,000) two years ago now worth $100,000 C. Stock purchased 6 months ago for $50,000 that has a $10,000 STCL D. An annuity purchased as an investment 10 years ago for $100,000 now worth $115,000