CFP Remediation
bypass trust (B trust) [Summary 6, pg. 333]
1. The purpose of a bypass trust is to take advantage of the applicable credit amount when the first spouse dies. 2. The property does not qualify for the marital deduction and is included in the estate of the first spouse to die. There is no estate tax because the trust is covered by the applicable exclusion amount. 3. A common scenario is for the first spouse to leave everything at death to the surviving spouse except for the applicable exclusion amount, which is transferred into a bypass trust. (The trust can be designed to allow the surviving spouse to invade the trust for health, education, maintenance, and support [HEMS]. When the surviving spouse dies, assets in the B trust are not included in the gross estate and pass directly to the children [without estate taxation]) 4. A bypass trust can be used instead of an outright bequest to nonspouse heirs who are not sophisticated or mature enough to handle the property. The choice of the trust over an outright bequest does not save any tax dollars; it simply provides the transferor with some peace of mind. 5. Often, highly appreciating assets are placed in a bypass trust to freeze the value for estate tax purposes at the death of the first spouse. This is especially true of life insurance policies such as second-to-die policies. 6. Also called a credit equivalency trust, a credit shelter trust, a family trust, or a B trust.
Step 4: Developing the financial planning recommendation(s)
A CFP® professional then develops the financial planning recommendation(s) in Step 4 by selecting, among the potential courses of action, one or more recommendations designed to maximize the potential for meeting the client's goals, needs, and priorities.
conversion provision
After the conversion provision is exercised with a convertible term life insurance policy, the premium for the new policy will be based on current age and will be a permanent life policy.
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A PAP with limits of 200/500/50 provides liability coverage of up to $200,000 for bodily injury to one person, coverage of up to $500,000 total for all persons injured in an accident, and $50,000 for property damage, all based on a single accident.
beneficiary (Summary 5, pg. 270)
All being a beneficiary does is allow the person or entity to receive the retirement assets after the death. However, if a person or entity is only a beneficiary, then the RMD rules are the most severe. The rules for a situation without a designated beneficiary were not changed under the SECURE Act. The primary examples are estates and charities. A major point is that an estate or charity is not a person with a measurable life. Thus, the old rules apply.
Consumer Credit Protection Act (Truth in Lending Act)
Also known as the Truth in Lending Act, the Consumer Credit Protection Act requires lenders, before extending credit, to disclose both the dollar amount of finance charges and the annual percentage rate (APR), as well as other loan terms and conditions. The Act also limits consumer liability for a lost or stolen credit card to the amount charged or a maximum of $50 per card, whichever is less. The requirements of this Act are often encountered when a consumer enters into a mortgage agreement with a lender and closes on a personal residence.
standard deviation (Summary 3, pg. 97)
An absolute measure of the variability of returns (outcomes) around the mean. Observations will tend to cluster around the mean, and standard deviation is the measure of this dispersion. Standard deviation measures total risk, whereas beta only measures systematic risk. Because outcomes tend to cluster around the mean, a bell shaped curve is often used to represent the dispersion of outcomes. The benefit of a bell shaped curve, or normal distribution curve, is that the curve may be used to determine probabilities of outcomes.
revocable trust
Assets in a revocable trust are included in the grantor's gross estate. When the grantor dies, the assets receive a stepped-up basis unless they are IRD.
Chapter 11 bankruptcy (reorganization)
At the conclusion of Chapter 11 proceedings, a corporate debtor has negotiated with creditors for most of the debts of the business. Exceptions to negotiated debts include debts that are provided for in the plan of reorganization (approved by the creditors and the court) and certain nondischargeable debts.
coefficient of determination (R^2) [Summary 3, pg. 97]
Calculated by squaring the correlation coefficient (R). Describes the percentage of variability of the dependent variable that is explained by changes in the independent variable. For instance, if the coefficient of determination is 70% between ABC stock and the market, then 70% of ABC's movement in price can be explained by changes in the market. The remaining 30% of the movement in price is caused by other variables and is conceptually named unsystematic risk. The coefficient of determination is an important concept because unless it equals one, beta will not measure total risk (total risk = systematic + unsystematic risk). Beta does not capture the unsystematic risk within a portfolio.
Section 401(k) plan
A Section 401(k) plan allows plan participants the opportunity to defer taxation on a portion of compensation simply by electing to defer compensation to the plan instead of receiving it in cash. Section 401(k) elective deferrals are immediately 100% vested and cannot be forfeited. A Section 401(k) plan may allow in-service distributions. Plans may allow loan provisions. The maximum elective deferral contribution for 2022 is $20,500 with an additional $6,500 catch-up for individuals age 50 or older. /// Most 401(k) plans restrict in-service withdrawals to hardship withdrawals. They will also allow in-service withdrawals after attaining age 59 1/2. Employer contributions to a profit sharing plan do not require the firm to make a profit. Also, a profitable employer is not required to make a contribution to the profit sharing plan for any particular year. However, the contributions must be "substantial and recurring." Next, salary reductions elections must be made before the money is earned. Finally, there are safe harbor provisions that apply to the ADP/ACP tests.
voluntary employee benefit association (VEBA)
A VEBA is a type of organization (trust or corporation) established by an employer or through a collective bargaining agreement to hold funds used to pay benefits under an employee benefit plan. Income is exempt from regular income tax if the VEBA meets the requirements of Section 501(c)(9). Unrelated business income is income from a trade or business that is not substantially related to a nonprofit organization's tax-exempt purpose and that is regularly carried on by the organization.
capital asset
A capital asset is any asset that is not a copyright or creative work, accounts or notes receivable, depreciable property used in a trade or business or for production of income (such as a computer), or inventory.
designated beneficiary (Summary 5, pg. 270)
A designated beneficiary is a person or see-through trust. These people have a life expectancy. Prior to the SECURE Act, a designated beneficiary was the person whose age was taken into consideration when determining how long the retirement account could be stretched. For deaths in 2020 and later, the SECURE Act retained the term designated beneficiary but untethered it from using life expectancy to determine the length of the stretch unless the beneficiary is an eligible designated beneficiary. Being a designated beneficiary (only) means the retirement account can only be stretched to December 31 of the year containing the 10th anniversary of the decedent owner's death. The identity of a designated beneficiary is still determined on September 30th of the year following the year of death. The RMD for a designated beneficiary is December 31 of the year containing the 10th anniversary of the death.
leptokurtic
A distribution that has a greater percentage of small deviations from the mean and a greater percentage of extremely large deviations from the mean will be leptokurtic and will exhibit excess kurtosis (positive). The distribution will be more peaked and have fatter tails than a normal distribution.
gifting long-term capital gain property (Book 4, pg. 66)
A gift of long-term capital gain property to a 50% organization ([1] Religious, public, education, governmental institutions, [2] private operating foundations, [3] some private nonoperating foundations) is based on the FMV of the property, with the deduction for the current year limited to 30% of AGI.
noncancelable disability income insurance policy
A noncancelable disability income insurance policy is a continuous term contract guaranteeing the right to renew for a specified period with a guaranteed premium. Therefore, all noncancelable disability income insurance policies are also guaranteed renewable. Guaranteed renewable contracts allow for automatic renewal but permit the insurance company to raise the premium for an entire class of insureds. Noncancelable disability income insurance policies do not necessarily have more liberal benefits.
spousal consent
A participant of a qualified plan must have spousal consent to change the beneficiary. Spousal consent is not required when changing the beneficiary of an IRA.
Social Security eligibility
A person is fully insured for purposes of receiving Social Security retirement benefits if the worker has 40 Social Security credits. Old-age insurance benefits are based on a worker's primary insurance amount (PIA) which is a function of the worker's average indexed monthly earnings (AIME) on which Social Security taxes have been paid. A worker who is fully insured is eligible to receive monthly retirement benefits as early as age 62. A worker is eligible for retirement benefits under the old age provisions of Social Security if the client is fully insured under Social Security.
risk tolerance
A planner should never make assumptions about the client's risk tolerance merely based on the client's objectives. A planner should always attempt to assess the client's actual risk tolerance.
liability automobile coverage
A split-limit basis coverage of 100/300/50 means there is coverage up to $100,000 for bodily injury to one person, coverage up to $300,000 total for all persons injured in a single accident, and coverage up to $50,000 for property damage, all based on a single accident.
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A standard homeowners insurance policy will not protect clients against mudslides or flooding. Earth movement and water damage are among the eight perils that are excluded from all homeowners policies; however, water damage resulting from a pipe bursting is covered.
state tax refund
A state tax refund is not offset against the state income tax itemized deduction.
tenancy in common vs. joint tenancy with right of survivorship
A tenancy in common is not treated the same way as a joint tenancy with right of survivorship because a tenancy in common does not provide a right of survivorship. Joint tenancy is not limited to spouses, and the treatment of joint tenancy for estate tax purposes is different for spouses and nonspouses. Spouses are always defined as having each contributed half towards the purchase of the property. For estate taxes, non-spouse decedents are initially assumed to have contributed 100% and thus will be estate taxed on 100% of the property unless the other JTWROS can be shown as having made an actual contribution to the purchase of the JTWROS property.
vesting schules
A vesting schedule delays employee ownership of retirement plan benefits derived from employer contributions to a qualified plan. Benefits become 100% vested upon a plan's termination. Defined benefit top-heavy plans must vest at least as rapidly as the either of the accelerated vesting schedules. A vesting schedule of 100% after 4 years is permissible in a defined benefit pension plan because it is more liberal than a 5-year cliff schedule. Defined contribution plans must use an accelerated vesting schedule even if they are not top-heavy.
qualified terminable interest property (QTIP) trust (also C or Q trust) [Summary 6, pg. 332]
1. Allows a terminable interest to be passed to a surviving spouse and still qualify for the marital deduction. 2. Election regarding the use of the marital deduction is made on Form 706. 3. Income from the trust must be payable to the surviving spouse at least annually for life. 4. The value of any assets remaining in the trust when the surviving spouse dies must be included in the surviving spouse's gross estate. 5. Surviving spouse is not usually given a general power of appointment. 6. Usually the first spouse to die has specified in the trust provisions the ultimate disposition of the property. 7. Reverse QTIP election—if the remainder beneficiary for the QTIP trust subjects the remainder interest to GSTT rules, the executor may make a reverse QTIP election. This allows the trust to be treated as part of the gross estate and take advantage of the GSTT exemption amount without losing the marital deduction. 8. QTIP trusts are often used for second marriages.
power of appointment trust (A trust) [Summary 6, pg. 333]
1. Allows a terminable interest to be passed to the surviving spouse and still qualify for the marital deduction. 2. No election required as with QTIP. An A trust automatically gets the marital deduction. 3. Income from the trust must be payable to the surviving spouse at least annually for life. 4. Any assets remaining in the trust when the surviving spouse dies must be included in the surviving spouse's gross estate. 5. Surviving spouse is given a general power of appointment over the trust property during life or at death. 6. The first spouse to die does not control the ultimate disposition of the property. 7. Sometimes called an A trust.
defined contribution plans
Defined contribution plans require employers to contribute at least 3% of each nonkey employee's compensation during top-heavy years unless the contribution for key employees is less than 3%, in which an equal percentage for all participants may be used. Defined benefit pension plans require employers to contribute at least 2% of average compensation times each employee's years of service, up to 20%. Average compensation used for this test, generally, is based upon an employee's highest three years of compensation. Top-heavy defined benefit pension plans must use accelerated vesting schedules.
Black-Scholes Option Valuation Model (Summary 3, pg. 90)
Determines the value of a European call option based on certain underlying factors. 1. Current Market Price ↑ (premium increases as current market price increases) 2. Exercise Price ↓ (premium decreases as exercise price increases) 3. Time to Expiration ↑ (premium increases as time to expiration increases) 4. Volatility of Returns ↑ (premium increases as volatility of returns increases) 5. Risk-Free Rate of Return ↑ (premium increases as the risk-free rate of return increases)
collateralized mortgage obligations (CMOs, a form of REMIC) tranches (Book 3, pg. 48)
Each tranche may have different principal balances, coupon rates, pre-payment risks, and maturity dates. Investors of the first tranche receive all principal payments until their principal has been completely repaid. Once the obligations of the first tranche are satisfied, all principal payments are made to the second tranche, and so on, until all of the tranches are repaid.
mandatory employer contributions
Employer contributions are mandatory for ALL pension plans (defined benefit pension plan, money purchase pension plan, cash balance pension plan, target benefit pension plan) and SIMPLE plans.
exchange funds
Exchange funds allow investors with concentrated portfolios of publicly traded stock to contribute stock to the exchange fund and then receive an interest in the overall fund. Because the exchange fund holds numerous publicly traded securities, the investor receives an interest in a diversified portfolio.
alternative minimum tax (AMT)
Exercising nonqualified stock options (not incentive stock options) would help avoid the individual AMT in the current year. Exercising such options would result in regular income tax and could, therefore, avoid the imposition of AMT because the taxpayer would pay the greater of regular income tax or individual AMT. Gain on Section 1202 QSBS purchased prior to September 27, 2010 is not included in regular income or AMT income. Prepaying real property taxes and purchasing private activity bonds issued prior to January 1, 2009 are positive AMT adjustments or tax preference items.
eligible designated beneficiary (EDB) [Summary 5, pg. 270]
For this very important category of beneficiaries, the EDB's age may play a part in determining the stretch. Also, only an EDB can stretch the retirement account longer than 10 years. There are two categories of EDB: surviving spouses and people who are not surviving spouses. Essentially, the SECURE Act did not change the rules for these people. Also, the eligibility for an EDB is established on the decedent's date of death, even though the designated beneficiary portion is still determined on September 30 of the year following the year of death.
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From the perspective of the employer, because Section 457 plans are sponsored by tax-exempt entities, deductibility of plan contributions is not an issue.
futures contracts
Futures contracts may be written on financial assets or commodities. Purchasing a contract for future delivery is considered taking a long position. A short position will increase in value if the underlying commodity or asset declines in value. To complete the futures contract, delivery of the commodity may be made, but usually the holder will purchase an offsetting contract and cancel the original position.
bond volatility
Generally, a low coupon bond is more susceptible to price fluctuations than a high coupon bond and a long-term bond is more susceptible to price fluctuations than a short-term bond. The bond with the lowest coupon and highest maturity is subject to the greatest price volatility.
Section 1202 qualified small business stock (QSBS)
If Section 1202 qualified small business stock is held for more than 5 years, and purchased after September 27, 2010, 100% of the gain can be excluded.
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If a participant separates from service after the attainment of age 55, they can take a penalty-free withdrawal from the employer's qualified plan without incurring the early withdrawal penalty.
Step 1: Understanding the client's personal and financial circumstances
In Step 1, the financial planner strives to gather information about the client. A thorough collection of qualitative and quantitative data during this step provides the planner with a "complete picture" of the client that includes their financial situation, personal values, and challenges. These details inform future planning decisions and assist the planner in establishing an optimal course of action for the client. Any missing information that is pertinent to the client must be identified by the planner at this time.
gift loan
In a gift loan, the amount of the imputed interest constitutes a gift from the lender to the borrower. For gift loans greater than $10,000 and less than or equal to $100,000, no interest is imputed if the borrower's investment income for the year does not exceed $1,000. For a gift loan of more than $100,000, the prevailing federal rate of interest will be imputed.
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Insurance is designed to manage risks (transfer) which have a potentially high severity of loss and low probability of occurring in the future.
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Losses from oil and gas working interests for which the taxpayer is personally liable are deductible against active or portfolio losses without limit and without respect to the taxpayer's AGI.
correlation coefficient (R) [Summary 3, pg. 95]
Measures the extent to which the returns on any two securities are related; however, it denotes only association, not causation. If the movement between the securities is identical, in rate and direction, the correlation coefficient equals +1. If the securities move in opposite directions at the same rate, the correlation coefficient equals -1. The range for the correlation coefficient is from +1 to -1. The correlation coefficient between securities is rarely equal to 1. When securities are not perfectly, positively correlated, combining the securities will reduce the overall portfolio risk by offsetting the risks of the individual securities. The highest level of diversification will occur when the correlation coefficient is closest to −1. Combining securities that have low correlations with each other is the best way to diversify a portfolio and lower the portfolio's risk.
modified whole life policy
Modified whole life policies are designed for individuals, such as young professionals, who want permanent insurance but are not yet able to pay the higher premiums of traditional whole life insurance. The increase to an ultimately higher premium should match an anticipated increase in the premium payor's income.
rule-of-thumb debt ratios
Monthly housing costs include principal, interest, taxes, fees, and insurance, and should be no more than 36% of the prospective borrower's net income. Keeping all debt payments under 36% is important in order to qualify for reasonable rates on credit. Helping clients understand what will make future debt more costly can give them motivation to stay within the guidelines. Monthly housing costs should be no more than 28% of the prospective borrower's gross, not net, income. For these ratios, the minimum payments should be used in the calculations.
covariance (Summary 3, pg. 95)
Nonstandardized version of correlation coefficient. Measures the extent to which two variables (the returns on investment assets) move together, either positively (together) or negatively (opposite).
surviving spouse EDB (Summary 5, pg. 270)
Only the surviving spouse has the option to move the decedent's retirement account into a retirement account owned by the surviving spouse, thus treating it as if the surviving spouse was the original owner of the money. The surviving spouse EDB also has essentially the same other options as other EDBs.
price to earnings ratio (P/E ratio)
P/E ratio = market price per share ÷ earnings per share (EPS)
partnership loss
Partners can claim their share of the partnership's loss, but not beyond their adjusted basis in the partnership. Remaining losses may be carried over to a future year when there is an increase in basis in the partnership through either earnings or investment.
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Regarding RMDs (required minimum distributions) from IRAs and qualified retirement plans: For lifetime distributions, all single participants will use a uniform life expectancy table. The amount is determined by dividing the participant's aggregate account balances as of December 31 of the preceding year by his life expectancy. RMD calculations underwent major changes starting in 2020 because of the SECURE Act. To calculate RMD, divide the participant's aggregate account balance as of December 31 of the preceding year by the joint life expectancy of the participant and designated spouse beneficiary if the spouse is more than 10 years younger that the participant.
beta (Summary 3, pg. 96)
Relative measure of systematic risk. If total risk is the combination of systematic and unsystematic risk and unsystematic risk is eliminated through diversification, beta will be an effective measure of total risk within this perfectly diversified portfolio. The market has a beta of 1. As a relative measure of risk, a security or portfolio with a beta of 1.25 would be considered 25% more volatile than the market (aggressive). Securities with a beta less than 1 are considered less risky than the market (defensive). A negative beta means that the investment will move in the opposite direction from the market. Therefore, if the market is declining, then the security should increase in value, thereby increasing the value of the portfolio in a bear market.
rental and real estate passive losses
Rental and real estate passive losses are allowed up to $25,000 for taxpayers not filing as MFS, which can be used to offset non-passive income. The $25,000 is reduced (but not below zero) by 50% of the amount by which the taxpayer's AGI exceeds $100,000.
life estate
Retaining a life estate includes the residence in the deceased's gross estate at fair market value as of their date of death. The residence still recieves a step-up in basis.
SEP contributions for self-employed owners
SEP contributions for self-employed owners require two adjustments. First, net self-employment income after deducting half of self-employment income tax must be calculated. Second the contributions rate must be adjusted by dividing the rate by 1 + the contribution rate. The maximum rate for a SEP is 25%. Thus, the adjusted contribution rate is 20% (.25 ÷ 1.25). Now the adjusted contribution rate is multiplied times the adjusted self-employment income.
special-use valuation rule (Book 6, pg. 115)
Special-use valuation requires that either the decedent or a family member must have owned and used the property as a farm or business for at least 5 of the 8 years immediately before the decedent's death.
Charitable Remainder Annuity Trust (CRAT) [Summary 6, pg. 349]
Split interest gift where noncharitable beneficiary (often the donor) receives a fixed annuity and remainder goes to charity. Usually created during life. Contributions at setup only. Must receive an annuity income of at least 5%, but no more than 50%, of the original value of assets transferred into trust. Can be for life or term up to 20 years. Good for clients who desire certainty of fixed income. As government interest rates go up, the deductible charitable remainder interest goes up. Donor is eligible for an immediate charitable contribution deduction for income tax purposes if created during life. The value of the property is included in the gross estate but an equivalent charitable deduction reduces the taxable amount to zero.
Charitable Remainder Unitrust (CRUT) [Summary 6, pg. 349]
Split interest gift where noncharitable beneficiary (often the donor) receives a variable annuity and remainder goes to charity. Contributions after initial setup are permitted. Must receive an annuity income of at least 5%, but no more than 50%, of the current fair market value of assets. Can be for life or term up to 20 years. Appeals to clients who want to hedge against inflation. Donor is eligible for an immediate charitable contribution deduction for income tax purposes if created during life. The value of the property is included in the gross estate but an equivalent charitable deduction reduces the taxable amount to zero.
Fiduciary Duty
Standard A.1, Fiduciary Duty, must be upheld when Financial Advice or Financial Planning are occurring. NOT at all times.
Step 5: Presenting the financial planning recommendation(s)
Step 5 requires the CFP® professional to look at how the recommendation takes into account other aspects of the Client's life) professional to present to the client the recommendation(s) and the information that was required to be considered when developing the recommendation(s). This does not always require a written plan. Rather, CFP® professionals must exercise professional judgment in determining how best to present recommendations to clients.
Step 7: Monitoring progress and updating
Step 7, monitoring progress and updating, occurs throughout the client-planner relationship. For existing client relationships, this step may occur over many years, or even decades.
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Target benefit pension plans typically favor older employees. SEP plans favor younger employees as do all non-age-weighted, defined contribution plans. Defined benefit plans favor older employees.
actual deferral percentage (ADP) test
The ACP test is required for all plans that provide employer-matching contributions or employee after-tax contributions. The ACP test is required for plans that permit employees to make after-tax contributions. The actual deferral percentage (ADP) test is applicable to plans that allow employee elective deferral contributions.
American Opportunity Tax Credit
The American Opportunity Tax Credit is not available for convincted felons. This restriction does not apply to the Lifetime Learning Credit.
Crummey provision
The Crummey provision provides a right of withdrawal equal to the lesser of (1) the gift tax annual exclusion amount or (2) the value of the gift transferred. If there is no contribution to the trust, there can be no withdrawal from the trust.
child care tax credit
The child care tax credit cannot exceed 35% of eligible expenses incurred by a taxpayer with an adjusted gross income of $15,000 or less. The percentage allowed is reduced by 1% for each $2,000 of adjusted gross income greater than $15,000, with a minimum of 20%. The maximum limit on the eligible expenses to which the percentage can be applied is $6,000 for 2 or more dependents.
delayed retirement credits on Social Security benefit
The delayed retirement credit is 8/12th of 1% for each month past FRA until ending when the person reaches 70 (Each year will accrue an 8% payment increase).
intrinsic value
The intrinsic value of a call option is the excess (if any) of the stock's market price over the exercise price of the option.
limit on investing in employer securities
The only plans that are exempt from the 10% limit on investing in employer securities are profit-sharing plans, stock bonus plans, thrift/savings plans, and any other profit-sharing plan.
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The period for reinvestment is two years from the end of the year in which the realization took place for conversion events caused by nature (e.g., fire, earthquake). The reinvestment period for conversion acts caused by the government (eminent domain) is three years from the end of the year in which realization of the conversion took place. Gain may be deferred if the taxpayer reinvests in another property the amount realized from the converted property. If the conversion is into cash, the taxpayer may elect to postpone the recognition of the gain if the replacement property is purchased within the specified replacement period.
private annuity
The private annuity does not allow collateral, is appropriate for someone who is in poor health, and will provide income on which to live.
Step 3: Analyzing the client's current course of action and potential alternative course(s) of action
The process of identifying, setting, and prioritizing goals offers the client and planner the opportunity for candid discussion about the client's current financial circumstances and the likelihood of success in achieving their goals. At this point, the planner pivots into Step 3 to analyze the current course of action and examine potential alternate courses of action.
dependent standard deduction
The standard deduction for a dependent is limited to the greater of (1) $1,150, or (2) earned income + $400 (limited to the regular standard deduction).
insured
The term insured includes the named insured, family members of the named insured, and any other person occupying or alighting from the vehicle.
time value
The time value of a call option is the excess of the option's price over the option's intrinsic value.
Step 6: Implementing the financial planning recommendation(s)
Throughout Step 6, a CFP® professional must communicate the recommendation(s) to the client and specify who will be responsible for implementation. The CFP® professional is assumed to have implementation responsibilities, unless otherwise stated. A CFP® professional with implementation responsibilities must identify and analyze actions, products or services, noting advantages and disadvantages compared to alternatives.
Section 410
Under Section 410, the following classes of employees may be excluded from nondiscrimination testing: (1) Collectively bargained (union) employees. (2) Part-time employees who work less than 1,000 hours per year. (3) Employees under age 21. (4) Employees with less than 1 year of service (2 years of service if the plan offers 100% immediate vesting).
endorsement split-dollar method
Under the endorsement split-dollar method the employer owns the policy and is primarily responsible to the insurance company for paying the entire premium. Should the employee die while the plan is in effect, the split beneficiary designation provides for the employer to receive a portion of the death benefit equal to its premium outlay with the remainder of the death proceeds going to the employee's designated beneficiary.
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When properties are traded and the use for the newly acquired property is the same as for the old property, the Code does not require the taxpayer to recognize any gain received in the exchange. However, the property that is traded cannot be treated this way if it is property held primarily for sale. Dealers in real estate who hold properties that are primarily for sale must recognize any gain or loss of an exchange. The gain in this case is the value of the building received less basis in the building given.
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When the Fed buys securities, it receives paper evidencing debt owed to it from the federal government, and it transfers cash to the sellers of those securities. This increases the money supply, causes interest rates to decrease and bond prices to rise, and encourages consumers and businesses to borrow money for purchases. The increasing demand for goods and services, in turn, causes stock prices to increase.
Step 2: Identifying and selecting goals
With a robust file of client information on hand, the planner collaborates with the client to identify, select, and prioritize goals in Step 2. By conducting this process, the financial planner gains awareness of where the client aspires to be in the future, personally and financially. Ideally, goals are crafted with a specific purpose, time horizon, and amount (e.g., Client X will retire in 25 years at age 70 with an annual distribution that is 85% of his current income, adjusted for inflation). During Step 2, any goals the client has selected that the CFP® professional believes are not realistic must be discussed.
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Withdrawals from annuities purchased on or after August 14, 1982, are subject to the last in, first out (LIFO) method of taxation. Under LIFO, withdrawals are treated as coming from earnings first and are taxed to the extent of earnings. Premature distributions (before age 59½) are also subject to a 10% penalty. In addition, the taxable gain is also subject to the 3.8% Medicare contribution tax that applies to net investment income of single taxpayers with MAGI exceeding $200,000.
collision automobile coverage
collision coverage provides for losses that result from collisions (with inanimate objects)
comprehensive automobile coverage
comprehensive coverage is open perils coverage that provides for any insurable peril other than collision
health savings account (HSA) [Book 2, pg. 98]
contributions to an HSA are not deductible to the extent that they exceed the contribution limits; in addition, if excess contributions exist on the contribution deadline, a 6% excise tax is imposed on the excess
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coverage limit / (coinsurance requirement = replacement value * 80%) = insurer's portion
margin call
debit balance / (1 - maintenance margin) = margin call
appreciated property gift tax paid allocation (Summary 4, pg. 176)
donor's basis + ([FMV - donor's basis] / [FMV - annual exclusion]) * gift tax paid (gain basis and loss basis are the same when the FMV of the property exceeds the donor's adjusted basis at the time of the gift)
weak form EMH (Summary 3, pg. 109)
holds that current stock prices have already incorporated all historic publicly available market data (i.e., prices, trading volume, and published financial information) /// A person who believes that fundamental analysis can result in superior performance believes in the weak form of the EMH. The weak form states that all historical price information is fully reflected in the stock price, therefore technical analysis will not produce superior results.
strong form EMH (Summary 3, pg. 109)
holds that stock prices reflect all public information and most private (insider) information. Therefore, even traders using inside information are unlikely to consistently outperform the market /// The strong form states that all information, including insider knowledge, is already reflected in the stock price.
non-surviving spouse EDB (Summary 5, pg. 270)
include a beneficiary who is not more than 10 years younger than the decedent owner (for example a sister who is two years older or a friend who is eight years younger); a person with a disability; a chronically ill person; or the decedent's minor child (until the child reaches the state-set age of majority, at which time the 10-year rule kicks in). Note that the definition of the decedent's minor child is limited to the next generation down. The decedent's "minor child" never applies to a grandchild or great-grandchild unless this person is actually adopted by the decedent.
tactical asset allocation (Book 3, pg. 83)
involves choosing various sectors that you believe will do best, and changing as you believe is necessary
strategic asset allocation (Book 3, pg. 82)
involves re-balancing back to the original allocation and adjusting the allocation based on changing client circumstances
vicarious liability (Book 2, pg. 9)
one person may become legally liable for the torts of another (e.g., parent/child, employer/employee, principal/agent)
coinsurance clause
provision in a homeowners policy that requires the insured to insure the property for a stated percentage of its replacement cost to assure that the insurer will fully cover partial losses to the property up to the policy limit
unsystematic risk
related to risk of a particular stock or industry
semistrong form EMH (Summary 3, pg. 109)
the current stock price not only reflects all past historical price data but also data from analyzing financial statements, industry, and the current economic outlook /// The semi-strong hypothesis states that neither fundamental nor technical analyses deliver superior performance.
systematic risk
the performance of the market
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to calculate net capital gains for the year, aggregate the long-term and short-term gains/losses
