Final Review Quiz #5

Mr. and Mrs. Dodd are retired and live off Social Security retirement benefits and very modest pension income. The Dodd's are in the 12% marginal income tax bracket. Mr. Dodd wants to sell $15,000 worth of stock with a basis of $10,000. He bought the stock 13 months ago after his barber said positive things about the issuing corporation. If Mr. Dodd sells the stock immediately, how much federal income tax will be generated by that sale? A) $0 B) $250 C) $750 D) $1,500

A) $0 0% of $5,000 (long term capital gain when the client is in a 12% marginal income tax bracket)

Your married client, George Generous wants to start a gifting program. Of course, he wants to avoid federal gift tax. He wants to know which of the following gratuitous transfers would constitute a taxable gift for the current tax year. What would you explain to George? A) $32,000 to his son B) $20,000 to a college to cover his best friend's tuition C) $16,000 to his granddaughter D) $32,000 to the Republican party

A) $32,000 to his son Unless it indicates it is a split gift, a gift of $32,000 to your son is a taxable gift. A gift directly to a college for tuition is tax-free gift. Gifts to political parties are exempt. There is no annual exclusion.

Marty and Libby Joseph are married and have no children. Marty is a Canadian citizen. He lives full-time in the U.S. and has no wish to become an American citizen. After Libby dies, he doesn't plan on going back to Canada. Currently, Marty has about $4 million invested in real estate in Canada in his own name. Libby works as the Chief Financial Officer of a micro cap corporation making $500,000 to $600,000 a year. Libby has completed her estate plan by establishing a QDT for Marty should she die first. If Libby dies with an estate of $17,060,000 how much should go into the trust? A) $5,000,000 B) $12,060,000 C) $17,060,000 D) $0, because their joint exemptions protect the entire amount from federal estate tax

A) $5,000,000 $12,060,000 will go to Marty tax free. He gets the exemption amount. The other $5,000,000 would by-pass estate taxes until he dies. If all goes into the QDT she would lose her exemption at her death. This is similar to a question in the Live Review book.

Your client, Susan bought a deluxe refrigerator 10 years ago. It cost Susan $1,200 when new. A current model of the same refrigerator would now cost $1,500. The appliance was expected to last 15 years. However, it was destroyed by a grease fire that started in Susan's kitchen. How much would the insurance carrier pay if Susan's policy provided for actual cash value coverage? A) $500 B) $1,000 C) $1,200 D) $1,500

A) $500 Actual cash value is the current replacement value of $1,500 less depreciation of 10/15 of the current replacement value of $1,500 ($1,000) or $500

Which of the following factors should be considered when deciding whether to purchase or lease an automobile? I. Mileage restrictions II. Business versus personal use of the auto III. Current interest rates on auto loans IV. Required down payment for auto loans V. How long the car will be used A) All the above B) I, III C) I, IV D) II, III E) II, IV

A) All the above A lease usually has mileage restrictions (additional charges). The business use of the auto affects the write-offs for lease payments, loan interest payments, and depreciation. Business use, loan interest rates, required down payment, and term of usage affect both lease and purchase considerations.

Which of the following accurately reflects rules for estimated tax payments? A) Estimated tax payments for individuals are generally due on April 15th, June 15th, September 15th, and January 15th B) Estimated tax payments must be substantial and recurring C) Estimated tax payments are generally required by all officers of publicly traded companies D) Estimated tax payments are generally collected under a pay-as-you-go arrangement.

A) Estimated tax payments for individuals are generally due on April 15th, June 15th, September 15th, and January 15th Estimated taxes include liability for self-employment tax, AMT, or other income (dividends). Estimate taxes have due dates. Income taxes are collected on a pay-as-you-go basis through withholding.

Which of the following statements is correct concerning income in respect of a decedent (IRD)? A) If the income is included in the gross estate, the estate tax attributable to that income item is generally deductible by the recipient of the income. B) The items of income will only be subject to income tax, not estate tax. Double taxation is avoided. C) Income that the decedent was entitled to receive but had not yet received as of the date of death is excludible in his or her gross estate. D) An income tax refund not yet constructively received is treated as IRD.

A) If the income is included in the gross estate, the estate tax attributable to that income item is generally deductible by the recipient of the income. Answer B is incorrect because of Answer A. An income tax refund is not IRD.

Into which of the following types of retirement plans could a sole proprietorship make the maximum annual contribution for the owner? A) Keogh defined benefit plan B) SIMPLE plan C) SIMPLE 401(k) D) SEP E) Roth IRA

A) Keogh defined benefit plan Self-employed persons can have a Keogh defined benefit plan. It would allow up to the maximum "defined benefit" to be deposited each year. There is no contribution limit, only a benefit limit. Under some circumstances, the contribution could be $400,000. There are no 12.12% or 18.59% limits on DB plans for self-employed owners under DB type plans. They only apply to DC and SEP plans.

Mr. Simms is intrigued by international investing. He wants to buy a stock that trades on the Japanese market. He wires $100,000 to a brokerage firm in Japan and buys the stock when the exchange rate is 125 yen to the dollar. In the next year, the stock rises by 50%, and Mr. Simms sells it. The proceeds are then converted to dollars when the exchange rate is 150 yen to a dollar. What is his return? A) 12.5% B) 25% C) 37.5% D) 50% E) 80%

B) 25% First, convert dollars to yen: $100,000 x 125 = $12,500,000 Return x 1.50 = $18,750,000 Then, convert back to dollars: $18,750,000 /150 = $125,000 $25,000 ÷ $100,000 = 25%

Toby feels that he can earn an 8.2% after-tax return on his investment portfolio but is concerned about inflation. He feels inflation will be 3.5%. What would be the "real" return on Toby's investments. A) 3.5% B) 4.5411% C) 4.6503% D) 4.700% E) 8.200%

B) 4.5411% Real return is the same as inflation-adjusted interest rate. It uses the formula: 1 + after-tax rate, divided by 1 + inflation rate, minus 1, times 100.

Clarice, while living, assigns the ownership of a whole life insurance policy to her neice, Clara. How would the Internal Revenue Code classify the policy's value for transfer tax purposes? A) As a gift B) As the interpolated terminal reserve plus the unearned premium C) As a terminal interest. D) As a gift of a future interest

B) As the interpolated terminal reserve plus the unearned premium. Feedback:This is purely a definition question. The gift is not necessarily a taxable gift. It is a gift of a present interest. Answer C doesn't apply to the question

Mr. Todd hired you to create a financial plan for him. He is married. Before you present your plan, he asks you to meet him for drinks after work. By the time you arrive, he is half sloshed. During the conversation, he tells you he has a girlfriend on the side and her financial well-being is one of his most important objectives. What should you do? A) Decline Mr. Todd and his wife as clients B) Consider the financial interests of the girlfriend as you analyze data and create the plan. C) Tell Mr. Todd's wife D) Hope that Mr. Todd was too drunk to remember that he told you about his girlfriend

B) Consider the financial interests of the girlfriend as you analyze data and create the plan. I know many of you do not like this answer, but Answer A is not correct. If Answer A said to decline him only, then it could be a right answer. However, his wife is not a client. Only he is the client. This is not a moral issue, it is a client issue. The only possible answer is Answer B. NOTE: These are practice exam questions - this might be one that you do not agree with me. Move on.

Linda Laundry, a prospective client, wants to give you, a CFP® certificant, $50,000 in cash to invest. She provides you with only minimum required personal data. She requests that you use investments that are less traceable by the IRS. What should you do? A) Have her sign a waiver that relieves you of liability relative to her actions B) Decline to work with Linda going forward C) Report Linda to the IRS D) Invest Linda's money offshore as she has requested. Your role is to enable to achieve their objectives.

B) Decline to work with Linda going forward You do not know whether she has done anything illegal. Personal financial planning process denotes the process which typically includes, but is not limted to the Standards.

Alan Phillips is a widower. He inherited a substantial amount of money from his deceased wife Angela (second marriage for both). Under current estate law, when he dies, his estate is now facing $5 million in federal estate taxes. Alan would like to give the money to charity but receive income for the remainder of his life. He is concerned because his wife wanted all her money to eventually pass to her children. What do you suggest? A) Establish and fund a charitable lead trust with Angela's children as the ultimate beneficiary B) Establish and fund a CRAT with fixed income to him for life and a wealth replacement trust for the children C) Establish and fund a CRUT with variable income to him for a 20-year term with the remainder paid out over the lives of her children D) Make a direct gift of the inherited property to Angela's children

B) Establish and fund a CRAT with fixed income to him for life and a wealth replacement trust for the children The CRAT accomplishes his first purpose: income to him for life. The wealth replacement trust is a life insurance policy on Mr. Phillips, normally equal to the amount that was supposed to be paid to the children and paid for with the charitable tax deductions and some of the income from the CRAT. The exam must be answered this way. In answer B, the children get the life insurance proceeds.

The Walkers are so proud their daughter. Wendy was awarded a full scholarship to an Ivy League University. Of the following benefits from Wendy's full scholarship, which are tax-free for federal income tax purposes? I. Books II. Equipment that is required for courses III. Room and board IV. All expenses if Wendy agrees to work for the federal government in the future V. Tuition A) I, II, III B) I, II, V C) III, IV D) III E) V

B) I, II, V Books, tuition, course-related fees, equipment, and supplies that are required for courses are tax-free. Room, board, and incidental expenses are taxable. The same is true for a graduate student who is paid a stipend for teaching. A scholarship or fellowship given to a degree candidate who agrees to work for the federal government is taxable (Item IV).

A QDRO is generally a court order relative to which of the following types of payment or property? I. An IRA account II. Marital property rights III. Child support IV. Alimony payments A) I, II, III, IV B) II, III, IV C) II D) III, IV

B) II, III, IV This is the definition of a QDRO. QDROs only apply to qualified plans not IRA accounts. Yes, an IRA break-up can be part of the divorce settlement but a QDRO does not

You, a CFP® practitioner, have been investing 401(k) participants deferral and match. Suddenly all weekly 401(k) deposits stop. After one week, you call the company owner, who happens to be your brother-in-law, to ask about the deposits. He informs you that due to a customer not paying for work performed, the company had to use the 401(k) deposits to pay its bills. He says the customer has promised to pay as soon as possible. Your brother-in-law promises he will make up all the deposits plus interest. Given the choices below, what should you do? A) Call your sister and insist that she make your brother-in-law make the deposits. B) Inform the DOL (Department of Labor) C) Inform the 401(k) participants D) Make a loan to your brother-in-law so he can catch up on the deposits. He is a family member.

B) Inform the DOL (Department of Labor) B or C is correct. Who is the client? Who are the partiicipants of the 401(k), not your sister? You have a fiduciary relationship to those participants. Answer B is maybe even a better answer but maybe the participants should know first. Answer D is a loan violation, even though it is a family member. It still is a loan to a client.

Twenty years ago, John bought a universal life insurance policy with a single premium of $25,000. Now he suddenly needs to withdraw $20,000 of cash value. The current contract cash value is $40,000. How will John's $20,000 withdrawal be taxed? A) There is no tax because he is withdrawing his own money from out-of-pocket premiums B) LIFO plus a 10% penalty C) LIFO D) FIFO plus a 10% penalty E) FIFO

B) LIFO plus a 10% penalty The policy is a MEC. There is no indication of age when he bought the policy or his current age. Therefore, he is not 59½. The 10% penalty will apply. MEC distributions are LIFO.

Does the CFP Board consider an engagement to be finanical planning solely because the CFP® professional used the multi-step process? A) Yes, that is how the CFP Board defines financial planning B) No, the CFP Board recognizes that the steps are not unique to the financial planning process C) Yes. Any dialogue between a CFP® professional and a member of the general public is deemed to be "financial planning." D) The CFP Board does not address the issue.

B) No, the CFP Board recognizes that the steps are not unique to the financial planning process The financial planning process steps may occur in connection with other activities. Examples include gathering client data as part of a suitability analysis. Question idea came from CFP Board's frequently asked questions.

Bob Taylor, CFP®, just finished preparing a financial plan for a couple who are his clients. The plan showed the need for a large amount of life insurance on the husband. However, during the initial meeting with the client, the husband said he does not belive in life insurance. What should Bob do? A) Decline to work with the couple beyond this point B) Present the plan and recommend the life insurance on the husband's life C) Advise the wife to apply for the life insurance and not tell her husband D) Find the best and most ethical life insurance agent and take him/her to the meeting at which the financial planning recommendations will be presented.

B) Present the plan and recommend the life insurance on the husband's life Answer A could be a failure to complete the financial planning steps. Answer C will not happen. The carrier will require signatures on various forms, and the husband is a client. He must be informed. It is unethical for a CFP® practitioner to advise a client to do Answer C. Answer D could be an answer. Answer B is the best answer.

Dr. Walters, who is age 64, wants to retire next year. He has asked you, a CFP® practitioner for a retirement income analysis. Given his current assets and risk tolerance, he is asking for an impossible retirement income payout. In order to meet his projections, you would have to factor very high return assumptions into your analysis. What should you do? A) Decline him as a client B) Run the projections using only your normal return assumptions and explain why the client'sassumptions are not realistic. C) Refer him to a colleague CFP®

B) Run the projections using only your normal return assumptions and explain why the client'sassumptions are not realistic.

Tim Brown, a new client, has engaged you, a CFP® practitioner. He is asking for investment advice only. In addition to holding the CFP® certification, you are a registered representative of a FINRA broker-dealer. Tim has a portfolio of stocks he has purchased through dollar cost averaging over the years. The portfolio contains 5 stocks that are equally weighted in very different industries. In reviewing his portfolio, what composite (risk adjusted) measure of portfolio performance should you implement given his existing stocks? A) Treynor B) Sharpe C) Jensen (alpha) D) Coefficient of determination

B) Sharpe Five securities are not a diversified portfolio. Some textbooks say 10-15 securities, or more are generally necessary for a portfolio to be diversified. Therefore, the portfolio has both systematic and unsystematic risk. This is a different type Treynor, Sharpe, Jensen question.

Larry Towne turns age 72 in May. Larry is the sole owner of LT, Inc. Due to slower customer demand, he is only taking wages of $110,000 in the current year. LT, Inc. provides a 401(k) plan, but LT, Inc. only matches elective deferrals at 2% up to the first $100,000 of employee compensation. Larry is deferring the maximum amount under the current year elective deferral limitations. He receives the maximum Social Security retirement benefit each year because his wages are always near or above the Social Security taxable wage base. Larry also has an IRA that he established many years ago. What do you recommend Larry do this year? A) Roll his IRA into a Roth this year to avoid taking RMDs. B) Stop making deferrals into the 401(k) soon because he will turn 72 and must honor RBD rules. C) Take RMD distributions from both the IRA and 401(k) by April of next year for the current year. D) Gather additional data to determine Larry's cash flow needs.

B) Stop making deferrals into the 401(k) soon because he will turn 72 and must honor RBD rules. He will be 72 this year. He must take an RMD from both his IRA and 401(k) but it is not required until next year. He is more than a 5% owner. After he takes his RMD he can roll the IRA into a Roth. Although answer D is true, this question is an RMD question. Answer C would also be acceptable.

Terry is a former teacher who now works for Software, Inc. She has a personal IRA, a 403(b)-account balance from her teaching career, and now participates in a 401(k) plan at Software, Inc. Terry will turn 72 in April of the current year. She plans to continue working for Software, Inc. until she turns age 75. From which plans must she take RMDs before April 1st of next year to avoid the 50% insufficient withdrawal penalty? A) Only the IRA B) The IRA and 403(b) C) All three plans D) None of the plans shown

B) The IRA and 403(b) There is no indication in the question that Terry owns more than 5% of Software, Inc. She can delay distributions from the 401(k) until the year following the year she retires, regardless of her age. This exception does not apply to her IRA. The still working exception does not apply to the 403(b) because she is not currently a teacher. She falls under the IRA rules. She did not roll the 403(b) funds into her employer's 401(k). This is no different than if she had an IRA. She would have to take distributions.

Regarding ABLE 529 arrangements, which of the following statements is accurate? A) A disadvantage to the ABLE account is that its beneficiary is likely to lose eligibility for public benefits such as Medicaid. B) The maximum annual contribution to an ABLE account is pegged to the amount of the annual gift tax exclusion. C) The maximum annual contribution to an ABLE account is pegged to the annual elective deferral limit for 401(k) plans. D) Contributions to an ABLE account may not be made for any beneficiary who is older than age 26.

B) The maximum annual contribution to an ABLE account is pegged to the amount of the annual gift tax exclusion. Answer A is incorrect as amounts up to $100,000 do not affect government benefits. Answer D is wrong. The disability must have occurred before age 26

Tilly put $100,000 into a trust for her grandson. During his high school years (4), college years (4), and graduate school years (2), he will receive all the income from the trust. After the 10 years, the remaining trust assets will be returned to Tilly. Which phrase below most accurately describes who will pay the tax on the trust income and why? 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

B) Tilly as this is a reversionary interest This is a reversionary interest. The trust assets revert to Tilly.

During the current year, XYZ, Inc. bought 1245 property for $150,000. XYZ, Inc. is experiencing an unusually low revenue year and expects to only have a profit of $100,000 by year end. How much 179 deduction will XYZ, Inc. be able to claim for the current tax year? A) $0 B) $50,000 C) $100,000 D) $150,000

C) $100,000 Under 179 the deduction is limited to $100,000 (the profit) 179 cannot create a loss. The extra $50,000 is deducted using MACRS. The 179 maximum is over $1 Million. 1245 property is 5-or 7-year equipment.

Iris works for XYZ, Inc. She is a participant in her company's 401(k) plan. She defers $1,000 at the end of each month, and the company provides a 50% match on her elective deferral. She already has a balance of $10,000 in her 401(k) account. Presuming none of the facts change and if the account grows by an annual rate of 6%, how much will Iris have in the 401(k) in 20 years? A) -$659,959 B) $693,061 C) $726,163 D) $729,629

C) $726,163 Yes, the payment must go in as a negative. This is cash flow out. If you inputted the payment as a positive you got answer D. Pretty hard to retire on a negative FV. End Mode $10,000 ± PV $1,500 ± PMT 6i20 Gold x P/YR FV= $726,163

Harry Stonewall owns HS, Inc. HS is a small manufacturer of perforated metal products sold to larger manufacturers. The cash flow of HS, Inc. varies from month-to-month. Harvey feels that he can train an employee to run a piece of equipment in an hour or so. At times, Harvey fires employees for various legitimate reasons. Most employees stay with HS, Inc. a month or two as a result of firing and layoffs. Harvey is considering the installation of a retirement plan for his company. What would you recommend? A) A defined benefit pension plan B) A profit-sharing plan C) A SEP D) A SIMPLE E) A SIMPLE 401(k)

C) A SEP Without knowing Harry's age or salary the SEP makes the most sense. ERISA only requires 1,000 hours to count as a year of service. But, SEP also says 3 out of the 5 years. No employee will ever make it to 3 years. SIMPLE (answers D and E) are too restrictive and require a match.

Your clients, Mr. and Mrs. Landis live in California, a community property state. They also own a condominium in Florida. They insure the condo with an HO-6 policy providing $300,000 of liability protection. Relative to insurance for the Florida condominium, what would you recommend? A) Acquire an HO-4 policy B) Buy dwelling and contents coverage under an HO-6 policy but do not pay for the liability coverage because community property interests are automatically protected from civil suits under the law of one-half interest C) Buy an umbrella liability insurance policy that provides at least $1,000,000 BI/PD coverage D) Change the HO-6 to an HO-3 to provide the Landis's with better protection

C) Buy an umbrella liability insurance policy that provides at least $1,000,000 BI/PD coverage Answer B reflects renter's insurance. The Landis's need condominium insurance. Condominiums are covered by an HO-6 policy but not by an HO-3 policy (which insures single family dwellings). Umbrella liability insurance policies carry bodily injury and property damage limits that are similar to those found in the Personal Auto Policy (PAP).

What would be the least desirable financial planning conduct in which a financial planning professional would engage? A) Selling a MEC life insurance policy to a client B) Not telling the client to increase the auto liability coverage of $100,000 when the umbrella liability insurance policy does not cover the first $300,000 in auto liability C) Commingling client funds in the financial planner's personal account D) Not selling a 60-year-old client an LTC policy

C) Commingling client funds in the financial planner's personal account None of these scenarios is desirable, but Answer C is the least desirable.

All the following are requirements for real property to qualify for and retain special use valuation (2032A) EXCEPT: A) The decedent must have been a U.S. citizen or resident. B) The real property seeking to be eligible for the valuation discount must pass to a qualified heir. C) Either the decedent or a member of the decedent's family must have materially participated in the operation of the farm or business for at least ten years immediately prior to the decedent's death. D) A written agreement must be filed with the estate tax return (Form 706) and must be signed by all parties having an interest in the real property.

C) Either the decedent or a member of the decedent's family must have materially participated in the operation of the farm or business for at least ten years immediately prior to the decedent's death. Prior to death, the five-out-of-eight-years rule applies.

Mr. and Mrs. Rich bought a home valued at $1,000,000 this year. The current mortgage balance is $750,000. They have decided to purchase a lot in North Carolina having a current FMV of $150,000. If the Richs' took out a $150,000 home equity loan, the home equity loan would be subject to which of the following? A) Passive income limitations B) Active participation rules C) Excess qualified residence limitations D) A capitalization rate limitation E) Interest expense limitations

C) Excess qualified residence limitations New home equity indebtedness is limited to $750,000 including a home equity loan.

Tom Thomas, single age 62, just retired. He is taking Social Security retirement benefits early from which he is receiving $1,500 per month. He also annuitized his pension account from which he will receive a lifetime income of $12,000 per month. His investments are in several dividend paying mutual funds. Tom has asked you about Roth IRAs. He knows there is no 72 rule with Roth IRAs. He is not using all his income and would like to reinvest in an account that would grow tax-free. What would you recommend? A) He could contribute to a non-deductible IRA. B) He cannot contribute to a Roth because his AGI is above the phaseout for single presons. C) He could contribute to a non-qualified annuity. D) He could roll some of his pension distributions into a Roth IRA.

C) He could contribute to a non-qualified annuity. He does not have any compensation to do an IRA or Roth. Answer B is true but it does not answer the question. He has no compensation. The pension distributions cannot be rolled into a Roth. NOTE: The question says grow tax-free. Grow makes a difference.

You are gathering data from your new client, Matt Markham, who is age 50. Matt provides you with the following information regarding his insurance coverages. -No disability insurance -No LTC insurance -A PAP with $100,000/$300,000/$50,000 BI/PD liability coverage -An umbrella liability insurance policy that requires $250,000/$500,000/$100,000 liability limits on the underlying auto policy -Individually owned comprehensive major medical insurance having a $1,000 deductible -$1,000,000 umbrella policy What do you recommend that Matt do first? A) Buy long-term disability income insurance B) Buy long-term care insurance C) Increase the liability limits on the PAP D) Decrease the deductible amount on the comprehensive major medical policy

C) Increase the liability limits on the PAP This 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.

Paul Parker bought a whole life insurance policy 10 years ago. Through an oversight he had a limited pay policy and paid two full premiums in one year. As a result, the policy became a MEC. The insurance company pays dividends each year. Which of the following dividend options would not produce an income tax liability to Paul? A) The dividends accumulate with interest in an account for Paul that is maintained by the insurance company. B) Paul receives the dividends in cash. C) The dividends are used to buy paid-up additions to the policy because Paul is concerned about loss of buying power on the death benefit. D) The dividends are used to reduce upcoming premiums so Paul can use his cash for other purposes.

C) The dividends are used to buy paid-up additions to the policy because Paul is concerned about loss of buying power on the death benefit. Answer A will produce taxable interest. Answer B and D are taxable income under the MEC rules.

The executor of the late Farmer Brown's estate heard that a special election may be available with the potential to reduce both the gross estate and federal estate tax in Farmer Brown's estate. Which of the following requirements for an estate to elect special use valuation under IRC Section 2032(a) could be accurately described to Farmer Brown's executor? A) The maximum amount by which the gross estate can be reduced is based on the total FMV of the real property used for business purposes by the decedent. B) The election is available to the estates of any and all decedents as long as the property for which the special use valuation is elected is located in the United States. C) The election generally allows an executor to elect to value a farm for federal estate tax purposes based on actual current use, as opposed to the fair market value of the property if it was sold for development purposes. D) To make the election, the property must pass to a qualifying heir. A qualifying heir can be a non-family member if the property remains in qualified use for at least ten years.

C) The election generally allows an executor to elect to value a farm for federal estate tax purposes based on actual current use, as opposed to the fair market value of the property if it was sold for development purposes. The applicable base amount is $750,000. It is indexed for inflation. It is over $1 million currently. The decedent must have been a U.S. citizen or resident. The qualified heir must be a lineal descendent.

Melissa purchased some Treasury Inflation-indexed securities (TIPS). She asks you, as her financial planner, about the tax ramifications of the securities. Which one of the following statements is incorrect? A) The interest is subject to federal taxation when received. B) The inflation adjustment to principal is also subject to federal taxation in the year the adjustment is made. C) The interest and inflation adjustment may be deferred until the bond is redeemed or maturity occurs in 30 years. D) The deflation adjustment to principal is also subject to federal tax deduction in the year the adjustment is made.

C) The interest and inflation adjustment may be deferred until the bond is redeemed or maturity occurs in 30 years. Answer C 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 Treasury direct website.

In deciding on a mutual fund recommendation for a client, what should generally be least important? A) Active share classification B) The fund manager's downside capture ratios C) The mutual fund's brand name recognition D) The manager's statistical performance

C) The mutual fund's brand name recognition Being prejudiced toward a particular mutual fund brand, for whatever reason, may appear to violate the duty of sound and objective professional judgement under the CFP(R) Code of Ethics. In a perfect world, it is generally desirable to identify mutual funds with managers who can beat the market consistently.

Mrs. Pell, a widow who has always lived in a community property state, has found out that her deceased husband bequeathed all his community property to a charitable organization without her knowledge. She is quite upset. What sort of relief do community property states provide in this type of situation? A) The Marital deduction B) The 50% rule C) The widow's right to elect against the will D) The Testamentary Transfer exemption

C) The widow's right to elect against the will This allows the surviving marital partner to choose whether to take half the property outright, or to take the benefits provided under the decedent's will.

Connie buys stock for $12,000 and sells it in one year for $18,000. Which of the following expressions of return would be higher? I. Internal Rate of Return (IRR) II. Holding period return A) I B) II C) They would have the same rate of return because of the time element. D) The problem cannot be solved unless we understand the impact of inflation on the total return.

C) They would have the same rate of return because of the time element. 10B - $12,000 ± PV, $18,000 FV, 1 n = 50% (For the 12C the $12,000 is CHS) Holding period $18,000 - 12,000 / $12,000 = $6,000 / $12,000 = 50%

Tommy and Roseanne Burns are a young couple employed in entry level positions in their respective careers. Tommy earns $58,000 per year in sales and Roseanne earns $30,000 per year as a social worker. He participates in a 401(k) plan at work. The Burns' AGI is $73,000. They are currently in the 12% marginal income tax bracket but expect to be in a higher tax bracket when they retire. What else can you recommend they do to further their retirement savings? A) Roseanne should contribute $6,000 to a deductible IRA to get a tax credit. B) Tommy and Roseanne should each contribute $3,000 to two deductible IRAs. C) Tommy and Roseanne should each contribute $3,000 to Roth IRAs. D) Tommy should contribute $3,000 to a non-deductible IRA and $3,000 to a deductible IRA.

C) Tommy and Roseanne should each contribute $3,000 to Roth IRAs. Doing a deductible IRA in a 12% tax bracket creates a tax deduction of only $720 (Answer A). The Roth distributions at retirement will be entirely tax-free and contributions can be removed tax-free at any time. The Roth seems to make more sense with their low tax brackets now and higher tax brackets at retirement. I feel the CFP Board wants you to do a Roth. The question is trying to compare apples to apples. Yes, the $3,000 to a Roth may have confused you. But all the answers use $6,000 in total. Yes, they could have contributed $6,000 each. This is the exam - confusion.

Mrs. Adams is divorcing Mr. Adams. She participates in a money-purchase plan at work. Currently, her husband is named as beneficiary of the defined contribution plan. She wants to change the beneficiary to her daughter as soon as possible. The money-purchase plan will be subject to a QDRO. When will the QDRO be valid? A) When the divorce is finalized B) When Mr. and Mrs. Adams sign the QDRO C) When the plan administrator has approved the QDRO that has been entered with court and signed by the judge. D) When Mr. and Mrs. Adams separate and live in separate houses E) When she gets awarded the custody of her children.

C) When the plan administrator has approved the QDRO that has been entered with court and signed by the judge. The best practice is that a QDRO is entered with the court at the same time as the judgment of divorce and qualified by the plan administrator.

Mr. Teig bought common stock in Company X two years ago. Unfortunately, the insider information he was given turned out to be false. The new drug produced by Company X has yet to be approved by the Food and Drug Administration (FDA). As a result, he is sitting on a large loss. He needs the loss to offset capital gains. However, he is still optimistic about the stock. What can you recommend to avoid a wash sale? A) Sell the stock and buy a deep-in-the-money call. B) Sell the stock and sell a deep-in-the-money put. C) Sell the stock and have Mrs.Teig buy the shares the next day. D) Sell the stock and wait 31 days to buy it back.

D) Sell the stock and wait 31 days to buy it back. The question says it is a deep-in-the-money call. For example, if the market value is $30, then the exercise price must be less, like $15 - 20. He will have to pay at least $10-15 to buy the option. The call and put options leave Mr. Teig in the same position as if he owned the stock. Mrs. Teig's purchase of the stock would probably fall under the related party rules causing it to be a wash sale. Answer D is the best answer.

Mr. Tate died owning a whole life insurance policy under which Mrs. Tate is the named insured. The death benefit of the policy was $250,000, and the cash value was $30,000. Relative to this policy owned by Mr. Tate, what amount will be included in Mr. Tate's gross estate for federal estate tax purposes? 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

D) The interpolated terminal reserve plus the unearned premium 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.

Harry started taking substantially equal payments from his substantial IRA rollover account at age 55. For four years he took the required amount under the annuity distribution method which resulted in a $50,000 fixed annual payment. Then, in year five, when he was older than 59 1/2, Harry withdrew an amount greater than the normal annuity payment of $50,000. What, if any, amount of penalty did he have to pay? A) 10% of $50,000 plus interest B) 10% of the aggregate withdrawals in years 1-4 plus interest C) 10% of the aggregate withdrawals in years 1-4 and the current year distribution of $50,000 plus interest D) There was no penalty because Harry was 59 1/2 when he modified the annuity distribution arrangement.

D) There was no penalty because Harry was 59 1/2 when he modified the annuity distribution arrangement. The penalty only applies to distributions that were made before 59½ (answer B). But the question is only asking about the year five penalty. The penalty only applies to distributions that were made before age 59½. Yes, the first 4 years would be subject to a 10% penalty, but that is not what the question is asking.

Mr. and Mrs. Boone are considering an investment program to fund for their seven-year-old son's college education. They expect to need the money in about 10-years when their AGI will be approximately $175,000. They want to invest at least part of the funds in a tax-exempt account. Identify which investment(s) could be tax-exempt if the proceeds were used to finance their son's secondary and postsecondary education in the current year. I. EE bonds owned by Mr. and Mrs. Boone II. Coverdell Education Savings plan III. Municipal bond in a UTMA account IV. Zero coupon Treasury bonds in a UTMA account V. Qualified tuition program A) I, II, IV B) I, III, IV C) II, IV, V D) III, V E) II, III, V

E) II, III, V The question is asking about secondary (high school). Answers II, III and V are correct. Coverdell plans are tax-free for elementary, secondary, and postsecondary school expenses. Expenses are fees, tuition, tutoring, books, supplies, room and board, uniforms, and certain equipment. The municipal bond (UTMA) would be tax-free. The other answers are for postsecondary expenses (college) or will be taxable.

Which of the following statements about the CFP Board's Financial Planning Practice Standards is correct? A) The Practice Standards require that a CFP® certificant performs comprehensive planning in all his or her financial planning engagements. B) The Practice Standards are not applicable to CFP® certificant whose main occupation is registered representative with a major securities broker/dealer firm even if they perform personal financial planning for customers of the firm. C) Failure to comply with one or more Practice Standards creates a presumption that a legal duty has been breached. D) In order to comply with the Practice Standards, a CFP® certificant must follow the step-by-step procedures specified in the Standards. E) The Practice Standards establish the level of professionalism expected of CFP Board designees engaged in personal financial planning.

E) The Practice Standards establish the level of professionalism expected of CFP Board designees engaged in personal financial planning. E is the only correct answer.

Arthur Smith regularly made elective deferrals into his employer's 401(k) plan because his employer provided generous matching contributions. Arthur's 401(k) plan account had no specified beneficiary. At the time his account was established, he was divorced so he named his estate as the beneficiary. Five years later he married Pamela. He is now retired and has been taking distributions for three years. If Arthur dies, what can Pamela do? A) Take distributions at least as rapidly as the schedule in effect up to the date on which Arthur died. B) Roll over the remaining balance in Arthur's 401(k) account into her own IRA C) Take distributions beginning over her life expectancy by December 31st of the year in which Arthur died D) Distribute the account to herself within 10 years of Arthur's death E) Understand that her rights in Arthur's 401(k) account will be determined under the probate process.

E) Understand that her rights in Arthur's 401(k) account will be determined under the probate process. There is no named beneficiary. The proceeds will be paid to the executor of his estate. They will be subject to the probate process. It never says anything about his will other than he named his estate the beneficiary. Remember this is a profit-sharing plan, not a pension plan. It is not subject to OJSA. Whether he was required to name her as a beneficiary or not is immaterial. You must answer the question as written. All she can do is petition the probate court. The court will decide.

Dan Tedesco, owner of DT, Inc., a $50,000,000 closely held corporation, was granted ISOs by the Board of Directors for $1,000,000 that vest 10% per year over the next 10 years. Which of the following statements is/are correct? I. Only the first $100,000 will be treated as an ISO for federal income tax purposes. II. The company cannot grant ISOs to a greater-than-10% shareholder. III. The company can grant ISOs to Dan providing they vest within 5 years of the grant. IV. Dan may transfer the ISOs to his heirs by will. A) I, III B) I, IV C) II D) III, IV

More than $100,000 of ISOs may be granted to an employee at a time as long as no more than $100,000 of ISOs (based on the FMV of the underlying stock as of the grant date) vest in a given year. Statement II is false. As long as the exercise price is at least 110% of the FMV of the stock at grant date and the options vest within 5 years, a greater-than-10% shareholder may be granted ISOs. Statement IV is correct. However, ISOs cannot be transferred by the option holder during his/her lifetime. That would be a disqualifying event.

Phillips Engineering, Inc. wants to provide an extra incentive for its key employees. They plan to hire a CFP® licensee to present a retirement planning seminar and then have the CFP® certificant prepare a full financial plan for each key employee. Which of the following is true? A) Phillips will have to break down the cost of the seminar and individual planning. The cost will have to be charged to the key employees because it is clearly a discriminatory benefit. B) Only the cost of the individual financial plans must be charged to the employees; the seminar can be expensed by Phillips. C) The program can be provided as a fringe benefit and thus be excluded from the employees' gross income. D) Because of embedded conflicts of interest, it generally violates ERISA fiduciary rules for any CFP® practitioner, who otherwise earns commissions, to provide financial planning seminars to employee groups.

A) Phillips will have to break down the cost of the seminar and individual planning. The cost will have to be charged to the key employees because it is clearly a discriminatory benefit. The Tax Act 2001 Act added a fringe benefit called employer provided retirement planning services. An employee and spouse can exclude from their income the value of certain retirement planning services provided by qualified retirement plans. The exclusion will not be available to highly compensated employees unless the services are also available to each member of the group of employees. Answer A is the best choice to answer the question.The services that may be excluded are not limited to information regarding the employer's qualified plan. It can include general advice.

A nonqualified deferred compensation plan can be used by an employer as a form of "golden handcuffs" because of which of the following? A) The forfeiture of the employee's benefits according to almost any vesting schedule B) The lack of limitations on the amount of stock grants (such as ISOs) C) The lack of ERISA requirements D) The unlimited benefits that can be paid to any one employee

A) The forfeiture of the employee's benefits according to almost any vesting schedule The plan can have a vesting schedule or a provision for any contingency such as going to work for a competitor. This would bind the employee to the company (handcuff). Answer C is a good answer for the same reason. Answer A is more specific than Answer C as to why it is a "golden handcuff." Answers B and D would be other reasons for the employee to stay.

Your client, Clark Crawford, wants to buy stock in the Wonder Widget Company, a regular corporation. However, the stock is not publicly traded. To buy the stock, Clark takes a loan of $100,000 from a bank. The bank requires the stock to be held as collateral. Also, Clark receives substantial investment income from a large, well-diversified corporate bond portfolio. Would Clark be able to deduct the loan interest? A) Yes, as long as he has investment income B) Yes, because he pledged the stock for the loan C) No, because the stock is not publicly traded stock D) No, because Clark does not materially participate in the operations of the Wonder Widget Company, the interest is passive.

A) Yes, as long as he has investment income This is simply a form of margin or investment interest. It doesn't matter that the stock isn't publicly traded.

Jim Harrison, President of Harrison Office Supply and Furniture, Inc. wants to establish a profit-sharing 401(k) plan. He would like to exclude some of the sales staff but is uncertain if qualified plan rules permit this. Jim would like to cover all W-2 (salaried) employees. The office staff consists of 17 W-2 employees (4 are classified as highly compensated and 3 are key employees). The warehouse staff consists of 38 W-2 employees, none of whom are highly compensated. The sales department consists of 6 1099 commissioned salespeople (all on straight commission and all have complete control over their schedule and duties) and 1 W-2 employee, Charles Porter, the sales manager is a highly compensated key employee. Porter receives a salary, bonuses, and commissions on his own sales. Which of the following statements are correct regarding permissible coverage and includable compensation that would generally apply to the 401(k) plan that Jim is considering? I. If the salespeople are deemed to be common-law employees, the plan may exclude them provided either the ratio percentage test or the average benefit test are passed to indicate that the plan is not discriminatory. II. If the salespeople are independent contractors, their participation could cause the plan to be disqualified. III. Commissions may be excluded from includable compensation for elective deferrals and employer contribution purposes. IV. Bonuses may be excluded from includable compensation for elective deferral and employer contribution purposes. A) I, II B) I, II, III C) I, III, IV D) All the above

D) All the above Participation eligibility in a qualified plan is contingent on employee status. (Sole-proprietors and partners may establish their own qualified plan.) An Independent contractor may participate in his own qualified plan but may not participate in another entity's qualified plan unless he is also deemed to be a regular or common law employee of that entity. It is possible to exclude commissions and bonuses from includable compensation provided that doing so does not discriminate against a non-highly compensated participant. For example, if commissions are not counted as includable compensation and the key employees never receive commissions, the non-key employees have been discriminated against because their includable compensation is being reduced (by the amount of commissions earned) while the key employees compensation is not reduced at all. Very involved question and answer

Your client, Dottie Doolittle is an employee of a large corporation. She intends to retire in about 10 years (at age 65). Dottie is concerned about long-term care. She has never been married and has some financial resources but not enough to sustain a long-tern care stay. How would you advise Dottie to prepare for the possibility of long-term care costs during her retirement years? A) Rely on her personal financial resources or rely on family members to act as caregivers or to provide financial support B) If her company has an FSA plan, pay for LTC coverage with pretax dollars through its Section 125 plan. C) When she gets closer to retirement, pay an entrance fee into a life care center D) Buy a long-term care policy or life insurance policy with an LTC rider.

D) Buy a long-term care policy or life insurance policy with an LTC rider. Regarding A, nothing indicates that Dottie has family members on whom she might rely for money or care. B is incorrect because LTC premiums may not be funded through an FSA (Section 125 plan). The cost of a continuing-care retirement community (CCRC) is probably far beyond Dottie's means. At this point, Dottie should buy long-term care insurance. The cost should be reasonable at age 55.

For the plan to be in effect before the employer's fiscal year end, a SEP has to be established before what date? A) Within the tax year for which the employer wishes to take the tax deduction B) On or before the first date by which a contribution is required to be deposited C) By April 15th of the year following the year for which the tax deduction is to be attributed D) By the due date of the business tax return, including extensions

D) By the due date of the business tax return, including extensions Answer A applies to qualified plans. Answer B applies to SIMPLE plans. Answer C applies to IRAs.

Jake Hammond is divorced. The divorce decree requires him to pay alimony and child support. Jake's ex-wife has custody of the children and he has limited visiting rights. When he goes up to pick up his son and daughter for their once a month weekend, he is met by an unshaven curt man. Much to his dismay, he finds out it is his ex-wife's newest boyfriend. Since his ex-wife has already approached the court seeking additional alimony and child support, he wants to set up an education account that he can control and will be tax-free. What would you recommend he set up for each child? A) Establish and fund a 2503(b)-trust naming himself as trustee B) Establish and fund a 2503(c)-trust naming himself as trustee C) Establish and fund an UTMA account naming himself as custodian D) Establish and fund a 529 plan under which he is shown as the account owner

D) Establish and fund a 529 plan under which he is shown as the account owner Answer A is a gift of a future interest and produces unearned income subject to the kiddie tax. Answer B is a tainted trust and the income will be taxed to him. Answer C is not a bad answer, but again it can be subject to the kiddie tax. Answer D is the best answer.

Robert Owen (age 64), owns a small business. He has engaged you, a CFP(R) practitioner to review his business and his personal finances. Robert owns and manages Owens Waste Management, a refuse collecting business with his three sons and would like to start phasing out of the day to day operations of the business to focus on his passion, politics. Owens Waste Management has significant positive cash flow and operates as an S corporation. Owens Waste Management employs 108 workers (including Robert's three sons). Owens Waste Management offers a 401(k)-profit sharing plan with a 3% company match, a high deductable health insurance plan, which includes a health savings account (HSA), and a dental plan. Additionally, Owens Waste Management provides a group term life insurance program to all eligible employees. Robert's income is $250,000 per year. There is a balance of $100,000 remaining on his 15 year mortgage. He and his wife (age 52) built their dream home 9 years ago, at a cost of $750,000 The house is now worth $1,000,000. Robert's qualified account at work is currently valued at $875,000. Before he ventures into politics Robert would like to secure a comfortable retirement and help the employees of Owens Waste Management do the same. Given Robert's objectives, which action shown below would you recommend? A) Transition Owens Waste Management from an S corporation to an LLC. This will allow Robert to claim the Sec 179 deduction on his personal tax return. With the extra money he will be able to pay off his house and save a little for retirement. Move the 401(k) plan to a Safe Harbor 401(k) plan. B) Sell the house and pay cash for a new house, change the 401(k) match to 5%, add life insurance policies to the plan. C) Transition the business from an S corporation to an LLC. Make the 401(k) a Qualified Automatic Contribution Arrangement and add a new comparability profit sharing contribution. In addition, sell the house and pay cash for a new house. D) Increase the 401(k) match, add an Automatic Contribution Arrangement at 6%, make new comparability profit sharing contribution until he retires, and set up an installment sale arrangement to gradually transfer ownership of the business to his sons.

D) Increase the 401(k) match, add an Automatic Contribution Arrangement at 6%, make new comparability profit sharing contribution until he retires, and set up an installment sale arrangement to gradually transfer ownership of the business to his sons. A - Incorrect - The question doesn't give enough information about the business to invoke Sec. 179. The question also doesn't indicate the 401(k) plan has issues with non-discrimination testing. B - Incorrect - Selling the house may not help. C - Incorrect - Not enough information about the business to determine if an S corp or an LLC is the best option. While new comp will help maximize his retirement, the question does not indicate the 401(k) plan is failing the non-discrimination tests; therefore, a QACA feature is not needed. D - Correct - The ACA feature helps the employees save for their retirement along with an increase in the match. In addition, the new comp will maximize his retirement, and he will receive additional retirement income from the installment payments.

Mr. Kool, age 75, collects 1950's cars. He especially likes 57 Chevys. He has an opportunity to buy a red convertable for $50,000. However, the auto does need some restoration which is likely to cost Mr. Kool another $20,000. He feels he could sell the car in the future for $110,000. Knowing a little about the market for collectible cars, Mr. Kool assumes that over time that his return on investment will only be 5%. Nevertheless, he will enjoy driving the car. What will be the effect on Mr. Kool's net worth now if he buys the car using proceeds from a loan? A) Increases $30,000 ($50,000 less resortation cost) B) Increases by $50,000 (cost of the car) C) Increases by $40,000 [$110,000 - (50,000 + 20,000)] D) No change in net worth

D) No change in net worth He is writing a check for $50,000 or taking out a loan. The car is worth $50,000. The net effect is zero.

Mr. Lucky wins a $40 million lottery. If he takes a lump sum award, he will have to pay a substantial amount of taxes. His alternative is to take payments of $2.9 million per year over 20 years. What should Mr. Lucky consider? A) Taxes B) Being an immediate multimillionaire C) A guaranteed annuity D) Opportunity cost

D) Opportunity cost The safety and security of these payments must be balanced against the opportunity cost of potentially gaining a greater overall return by taking his single lump-sum amount and investing it.