Practice Exam 1

The Sierra Blanca apartment complex contains 60 two-bedroom apartments renting for $650 per month. In addition, the complex generates $625 per month from laundry and vending machines. Vacancy and collection losses have averaged 8% of potential gross income (PGI) and are expected to continue at about the same rate in the future. Annual operating expenses are as follows: Property taxes $22,000 Property management 15,000 Maintenance and utilities 36,000 Swimming pool 13,000 Professional fees 8,000 Other expenses 23,000 Total$117,000 The property is financed by a mortgage with a remaining balance of $750,000. The original cost of the complex was $2.1 million and was financed by a $1.5 million mortgage for 360 months at 5% annual interest. The value of the land at purchase was $400,000. Assuming a cap rate of 9%, what is the market value of the Sierra Blanca complex? A) $3,560,667 B) $2,884,140 C) $3,983,333 D) $1,951,422

A) $3,560,667 PGI is rental income (60 × $650 × 12 = $468,000) plus laundry fees ($625 × 12 = $7,500) = $475,500 PGI Subtract 8% of PGI for vacancy and collections losses, which is $38,040, and $117,000 in expenses to come up with net operating income (NOI) of $320,460. V= NOI/Cap rate= 320,46/0.09 =$3,560,667

The risk-free rate is 3%, the market rate of return is 10%, the standard deviation of XYZ stock is 20, and the beta of XYZ stock is 1.40. Given this information, and using the capital asset pricing model, what is the expected return of XYZ stock? A) 12.80% B) 13.20% C) 9.17% D) 12.20%

A) 12.80% .03 + (.10 - .03) 1.40 = .03 + .098 = .128 = 12.8%

Dan has bonds maturing in two weeks. Since he bought the bonds, interest rates have fallen. To which one these risks are Dan's bonds most likely to be subject? A) Financial risk B) Default risk C) Interest rate risk D) Reinvestment rate risk

D) Reinvestment rate risk Reinvestment rate risk is the risk associated with reinvesting interest and/or principal payments when interest rates have fallen.

David sells his commercial rental property, a warehouse, in the current year for $575,000. The neighborhood where the warehouse is located has suffered from urban blight, and properties in the area have lost a tremendous amount of their value. David had purchased the warehouse in May 2012 for $985,000 and has been depreciating it using the straight-line method for realty, under MACRS. Assume that the amount of depreciation taken is $200,000. David has no other transactions that may affect capital gains and losses. What is the income tax result of the sale of the commercial property? A) The $410,000 loss is treated as an ordinary loss, and may be deducted in full against David's ordinary income (wage income, for example). B) Of the $410,000 loss, $3,000 may be used to offset ordinary income in the current year, and the remainder may be carried forward. C) Of the $210,000 loss, $3,000 may be used to offset ordinary income in the current year, and the remainder may be carried forward. D) The $210,000 loss is treated as an ordinary loss, and may be deducted in full against David's ordinary income (wage income, for example).

D) The $210,000 loss is treated as an ordinary loss, and may be deducted in full against David's ordinary income (wage income, for example). The commercial rental property has a basis of $785,000 (the original cost of $985,000, reduced by the depreciation claimed of $200,000). This is subtracted from the sale price of $575,000 to give us a $210,000 loss. This loss is a Section 1231 loss, not a capital loss. The Section 1231 loss is treated as an ordinary loss and is available to offset ordinary income, without limit.

Which of the following is NOT a concern regarding the changing landscape of college sports and the rise of NIL collectives? A) The NCAA's recent actions doing little to stop collectives and only bringing about new rounds of litigation B) A lack of uniform standards among individual states and schools leading to confusion, poor oversight, and questionable practices C) The NCAA's authoritative power being significantly crippled by the Supreme Court's Alston decision D) The potential for collectives to violate federal antitrust laws by limiting their ability to engage in NIL

D) The potential for collectives to violate federal antitrust laws by limiting their ability to engage in NIL The potential for collectives to violate federal antitrust laws by limiting their ability to engage in NIL is not a concern mentioned in the module. Rather, the module discusses the potential for collectives to make claims stating that any limits the NCAA places on their ability to engage in NIL would violate federal antitrust laws.

You have a client who you suspect is being coerced into making large, unusual distributions from his account. As an adviser, what should you do first? A) Attempt to contact a listed "trusted person," possibly gathered through the requirements of FINRA Rule 4512 B) Assume the best and do nothing C) Use the Senior Safe Act to put a temporary hold on distributions from the account D) Use the tenets of the Elder Justice Initiative to put a temporary hold on distributions from the account

D) Use the tenets of the Elder Justice Initiative to put a temporary hold on distributions from the account The Department of Justice's Elder Justice Initiative beefs up enforcement of elder abuse laws, also supporting local efforts. The Senior Safe Act requires education of employees of financial institutions in recognizing and reporting suspected elder abuse. FINRA Rule 4512 requires employees of a financial institution to attempt, with reasonable effort, to get contact information for a "trusted person." FINRA Rule 2165 allows advisers to put a temporary hold (up to 25 days) on distributions from an elder account if elder abuse is suspected

Which of these is a behavioral concern particular to high net worth individuals? A) Overconfident about not falling prey to scams B) Very trusting in new relationships C) Overconfident that investing mistakes can be easily covered by other funds D) Very private about and understate their wealth

D) Very private about and understate their wealth The top concern for high net worth individuals is others finding they are rich, leading to being judged and/or losing money through scams. All participants in the affluent study underreported their wealth, even underestimating the value of properties. Participants were also afraid of losing wealth through investing and not having enough to tide them over.

he most important stated life goal of wealthy individuals is A) leaving an estate to heirs. B) maintaining good health. C) assuring retirement lifestyle. D) protecting wealth.

B) maintaining good health. The most-stated life goals for wealthy individuals are maintaining good health, travelling the world, and achieving financial success. To achieve financial success, the most common financial goals are protecting wealth, assuring retirement lifestyle, minimizing taxes, and leaving an estate to their heirs.

If ABC Corporation has net profits of $100,000 and distributes $50,000 as dividends, what is its taxable income? A) $100,000 B) $50,000 C) $25,000 D) $0

A) $100,000 The net profits of a corporation are subject to federal income taxation. This tax is levied on corporate taxable income before payment of dividends to common and preferred shareholders. Thus, if ABC Corporation has net profits of $100,000 and distributes $50,000 as dividends, its taxable income is still $100,000. Distribution of profits as dividends does not reduce taxable income for a corporation.

For the current tax year, Paul, an individual taxpayer with an AGI of $265,000, has $3,500 of investment interest expense and $38,500 of investment income. He paid investment adviser fees of $6,800. How much investment interest expense, if any, may Paul deduct in the current tax year? A) $3,500 B) $0 C) $37,000 D) $38,500

A) $3,500 Investment interest expense is deductible up to the amount of net investment income. Net investment income is simply the investment income of $38,500. However, the amount deducted may not exceed the amount of actual interest expense incurred ($3,500). The investment adviser fees are not deductible and do not enter into the calculation.

Wilson has a $20,000 portfolio of four different stocks. The distribution of this capital and the betas of these stocks are shown below. % of Portfolio Value Beta Stock A 10% 1.1 Stock B 20% 1.15 Stock C 30% 1.3 Stock D 40% 1.25 What is the weighted-average beta of Wilson's stock portfolio? A) 1.23 B) 1.20 C) 1.25 D) 1.27

A) 1.23 (.1 × 1.10) + (.2 × 1.15) + (.3 × 1.3) + (.4 × 1.25) = 1.23 (We recommend setting your calculator to four decimal places for this course.)

Which of these are common employee benefits and retirement plans offered by sporting and entertainment unions? I. Health, disability, and life insurance II. 401(k), 403(b), and pension retirement plans III. Annuity, tuition, and severance plans IV. Individual brokerage and savings accounts A) I and III B) I, II, III, and IV C) I, II, and III D) I, III, and IV

A) I and III 403(b) are governmental or nonprofit retirement plans not typically offered by privatized sporting and entertainment unions. Individual brokerage and savings accounts can be a type of retirement benefit used by athletes and entertainers, but is not normally offered by unions since they are considered individual accounts.

Which statement correctly distinguishes a Section 2503(c) minor's trust from a support trust? A) The gift tax annual exclusion is available for transfers to a Section 2503(c) trust, but is not available for a support trust. B) A support trust must be distributed to the beneficiary by the age of 21 years, while a Section 2503(c) trust may be continued indefinitely. C) A support trust is a revocable trust, while a Section 2503(c) trust is an irrevocable trust. D) Gifts to a support trust are considered a present interest, while gifts to a Section 2503(c) trust are considered a future interest.

A) The gift tax annual exclusion is available for transfers to a Section 2503(c) trust, but is not available for a support trust. A Section 2503(c) trust is an irrevocable trust that requires the assets to be distributed by the time the beneficiary attains the age of 21 years. A gift to a 2503(c) trust is defined by law as a present interest, and the gift tax annual exclusion is available. A support trust is an irrevocable trust, and gifts to the trust are considered a future interest, so the gift tax annual exclusion is not typically available.

Which statement regarding the funding of buy-sell agreements with life insurance is correct? A) The owner of each policy should also be the primary beneficiary. B) The estate of the insured under each policy should also be the primary beneficiary. C) The insured, owner, and primary beneficiary of each policy should be the same person. D) The insured under each policy should also be the owner of the policy.

A) The owner of each policy should also be the primary beneficiary. The person or entity obligated to purchase under this agreement should be both owner and primary beneficiary. The person or entity obligated to purchase should be the owner to have control over naming the beneficiary. This same person should be the beneficiary in order to receive the death benefit so that the obligation to purchase can be met. The insured should be the person from whom the purchase will be made. Therefore, the insured cannot also be the owner and beneficiary.

For the current tax year, Bob, an individual taxpayer filing a joint return, has $6,000 of investment interest expense and $11,000 of net investment income (interest income and dividends). How much investment interest expense, if any, may Bob deduct in the current tax year? A) $0 B) $6,000 C) $5,000 D) $11,000

B) $6,000

According to guidelines developed by Gerald Perritt, which of these best describes a sound small stock investment strategy? A) 12 issues or more, 1- to 3-year holding period, sell when institutional ownership reaches 40% B) 20 to 30 issues, 3- to 5-year holding period, high ownership stake by management C) 12 or more carefully selected issues, 1-year holding period or longer, turnover of 30% or less D) 30 issues or more, 5- to 8-year holding period, buy and hold

B) 20 to 30 issues, 3- to 5-year holding period, high ownership stake by management Perritt's guidelines for buying small stocks include 20 to 30 issues, a 3- to 5-year holding period, and high ownership stake by management. Perritt recommends selling small stocks when 40% or more of the shares become owned by institutional investors.

Which of these describes the type of market directional hedge fund that takes a corporate governance approach when investing? A) Event-driven B) Activist C) Relative value arbitrage D) Equity market-neutral

B) Activist Activist funds take a very active role in the corporate governance of a company, which can include working with the board of directors and other officers of the company, including the CEO. If necessary, the hedge fund will work for the removal of directors and/or the CEO.

Which statement generally represents the tax consequences to an employer and employee under a nonqualified deferred compensation plan? A) An employer will receive a deduction when contributions are made to informally fund a plan, and the employee must recognize an identical amount as income at the same time and for the same reason. B) An employer will receive a deduction when the employee recognizes income. C) An employer will receive a deduction for plan contributions when paid, and the employee will not be taxed on the contribution until withdrawn. D) An employer will not receive a deduction for plan distributions when paid, but the employee will recognize income when the amount credited to his or her account is nonforfeitable.

B) An employer will receive a deduction when the employee recognizes income. As a general rule, an employer-sponsor of a nonqualified deferred compensation plan will receive a deduction for benefits paid by the plan when such benefits are taxable income to the participant.

According to the investment pyramid, which one of these sequences is correct in terms of increasing safety of principal (least to most safety of principal)? A) Gold, high-grade municipal bonds, growth mutual funds B) Futures contracts, balanced mutual funds, EE bonds C) Limited partnerships, Treasury securities, high-grade corporate bonds D) Variable annuities, puts and calls, money market accounts

B) Futures contracts, balanced mutual funds, EE bonds In terms of increased safety of principal, of the four sequences given, the investment pyramid in the study materials shows futures contracts (least safety), balanced mutual funds, EE bonds (most safety with principal guaranteed by the U.S. government) is the correct sequence.

Joseph, age 60, is a taxpayer who has a considerable amount of income that is not subject to withholding. He has not made any estimated payments during the year. At a planning review session in mid-December, his adviser informs him that he's approximately $25,000 underwithheld. What course of action might Joseph follow to avoid an underpayment penalty? A) No exceptions to the underpayment penalty are available. B) Initiate a $25,000 distribution from his IRA account, and direct that 100% of the distribution be withheld for federal income tax before year-end. This will make up for any underwithholding. C) Make an estimated tax payment before the end of the year. This will make up for any underwithholding. D) Make an estimated tax payment in December and another before the January 15 deadline for the fourth quarter. This will make up for any underwithholding.

B) Initiate a $25,000 distribution from his IRA account, and direct that 100% of the distribution be withheld for federal income tax before year-end. This will make up for any underwithholding. Withholding from IRAs, qualified plans, wages, and other income sources is treated as having been made evenly throughout the year, even if the actual withholding is a lump sum at year-end. Thus, it is possible for Joseph to "catch up" by having extra federal income tax withheld at the end of the year.

The administration of ERISA is divided among all of these government entities except the A) Internal Revenue Service. B) Securities and Exchange Commission. C) Department of Labor. D) Pension Benefit Guaranty Corporation.

B) Securities and Exchange Commission. Administration of ERISA is divided among the Department of Labor, the Internal Revenue Service of the Department of Treasury, and the Pension Benefit Guaranty Corporation.

What is the primary reason why the factor-based approach outperforms the traditional approach in achieving diversification? A) The traditional approach uses only one type of risk factor, while the factor-based approach uses multiple types of risk factors. B) The traditional approach accounts only for equity exposure, while the factor-based approach prioritizes diversification across risk factors. C) The traditional approach invests in only one asset class, while the factor-based approach invests in a variety of asset classes. D) The traditional approach does not prioritize diversification, while the factor-based approach does.

B) The traditional approach accounts only for equity exposure, while the factor-based approach prioritizes diversification across risk factors. The traditional approach accounts only for equity exposure, while the factor-based approach prioritizes diversification across risk factors.

Regulation Best Interest does all of the following except A) requires establishing, maintaining, and enforcing policies reasonably designed to address conflicts of interest B) creates new private rights and protections for retail clients, including the right of rescission. C) requires broker-dealers to act in a retail client's best interest, including exercising reasonable diligence, care, and skill. D) requires the creation and distribution to clients of Form CRS that is limited to two pages, must be in plain English, and must disclose the firm's standard of conduct.

B) creates new private rights and protections for retail clients, including the right of rescission. Regulation BI requires broker-dealers to look out for the best interest of retail clients, and this includes establishing and enforcing policies designed to deal with conflicts of interest. Form CRS is a new requirement that is meant to be a brief two-page document that requires certain disclosures, such as what sort of client relationships the firm enters into, fees, conflicts of interest, and the standard of conduct of the firm. Regulation BI does not create any new private right of action or right of rescission. The best interest obligation applies at the time the recommendation is made and does not extend beyond a particular recommendation.

Taxation of S corporation net income is incurred at the A) C corporation tax rates. B) personal tax rate of the individual shareholders. C) partnership entity tax rate. D) S corporation tax rates.

B) personal tax rate of the individual shareholders. Profits of an S corporation are taxed only once. Net income of an S corporation flows through to the shareholders and is taxed to them at their individual tax rates. There is no corporate level of taxation for an S corporation; profits and losses flow through to the shareholders.

Changes that have occurred since investment firms changed from private partnerships to publicly traded companies include all of these except A) partners no longer share in both the profits and losses of the firm. B) there is greater individual accountability. C) risk taking has increased. D) profits can be privatized (bonuses) and losses socialized (bailouts).

B) there is greater individual accountability. The repeal of Glass-Steagall accelerated the conversion of investment firms that had been structured as partnerships into publicly traded companies that took on more risk. This transferred much of the risk and accountability from general partners to public shareholders.

Reece is a single taxpayer. In the current year, his AGI is $240,000, including a net long-term capital gain of $50,000. What is the amount of Medicare contribution tax that he must pay? A) Unknowable since Reece's taxable income has not been provided B) $0 C) $1,520 D) $1,900

C) $1,520 He will pay the 3.8% Medicare contribution tax on $40,000. This is the lesser of the net investment income ($50,000) or the AGI in excess of the threshold amount ($240,000 − $200,000, or $40,000). In this situation, only $40,000 of the net investment income is subject to the Medicare contribution tax. Reece will pay a $1,520 Medicare contribution tax (3.8% on $40,000).

A company is planning to borrow large amounts of money to finance a major expansion. This company is increasing which type of risk? A) Market risk B) Interest rate risk C) Financial risk D) Systematic risk

C) Financial risk An increase in debt increases a company's financial risk, which is a form of unsystematic risk. Systematic risks, including interest rate risk and market risk, are not company specific risks.

What is the size premium in the stock market? A) The difference between the average annual return of mid-cap stocks and the average annual return of large-cap stocks B) The difference between the average annual return of mid-cap stocks and the average annual return of micro-cap stocks C) The difference between the average annual return of small-cap stocks and the average annual return of large-cap stocks D) The difference between the average annual return of small-cap stocks and the average annual return of micro-cap stocks

C) The difference between the average annual return of small-cap stocks and the average annual return of large-cap stocks The size premium is defined as the difference between the average annual return of small-cap stocks and the average annual return of large-cap stocks.

Sarah reported an income tax liability of $95,000 (on AGI of $400,000) on her tax return for the prior year. This year, Sarah expects to have an income tax liability of $120,000. She also has estimated that the amount of income tax withheld from her wages will total $85,000. What is the minimum amount of estimated tax payments that Sarah must pay for this year? A) $23,000 B) $10,000 C) $35,000 D) $19,500

D) $19,500 For a taxpayer with a prior-year AGI exceeding $150,000, the total amount required to be withheld is the lesser of 90% of the current year's tax liability, or 110% of the prior year's tax. 90% of the current year liability is $108,000, and 110% of the prior year's liability is $104,500. The lesser of these amounts, $104,500, is compared to the actual withholding of $85,000, to leave $19,500 of required estimated payments.

arcela has owned 1,000 shares of Appalachian Inc. stock since March 17, 2016. Her basis in the 1,000 shares is $200,000. This year she sold these shares on July 22nd, for $160,000. After reading about a large contract Appalachian was about to execute, she purchases 1,000 shares of Appalachian on August 7th for $155,000. What is Marcela's basis in the Appalachian stock she owns? A) $105,000 B) $160,000 C) $155,000 D) $195,000

D) $195,000 This is a wash sale since shares were repurchased within 30 days of selling the original shares at a loss. The basis of the substantially identical securities acquired in a wash sale is increased by the loss that was disallowed. The disallowed loss of $40,000 is added to the $155,000 purchase price to give a basis in the new shares of $195,000. The holding period of the Appalachian stock began on March 17, 2014.

Which statement correctly distinguishes a net gift from a reverse gift? A) The goal of the net gift is to remove appreciation from the donor's taxable income, and the goal of the reverse gift is to avoid paying gift tax out of pocket. B) The purpose of a net gift is to take advantage of a stepped-up income tax basis, while the purpose of a reverse gift is to take advantage of the gift tax payable credit. C) The gift tax of a net gift is paid by the donor, and the gift tax of a reverse gift is paid by the donee. D) A net gift is most commonly used when the donor has fully utilized their gift/estate tax exclusion amount, while a reverse gift is not.

D) A net gift is most commonly used when the donor has fully utilized their gift/estate tax exclusion amount, while a reverse gift is not. A net gift means the donor conditions the gift on the donee paying the gift tax so that the donor avoids paying gift tax out of pocket. This is commonly used when the donor has already fully utilized their exclusion amount and the donor wants to retain cash. The purpose of a reverse gift is to gift an appreciated, low basis asset to a person who is likely to be deceased soon in order to re-obtain that asset in a bequest. The original donor would then receive a stepped-up basis to reduce or eliminate any capital gains tax. For a reverse gift to work, the donee must live more than a year from the date of the gift. If the donee dies a year from the date of the gift or less, the gifted asset will not receive a stepped up basis.

The CAIA divides hedge funds into four main categories. Which of strategy is one of these four main approaches? A) Mezzanine financing B) Business development companies C) Stable value D) Opportunistic

D) Opportunistic The four main hedge fund categories are market directional, corporate restructuring, convergence trading, and opportunistic. Mezzanine financing is a private equity strategy.

Which statement below does not correctly describe a concept related to nonqualified deferred compensation? A) An example of substantial risk of forfeiture provisions would be the employee's loss of rights to the plan benefits at death or disability. B) Substantial risk of forfeiture exists when the employee's receipt of deferred compensation benefits is contingent upon performance of substantial services in the future. C) The employee's receipt of anything that can be assigned a cash value results in economic benefit and taxation. D) The availability of deferred compensation plan funds to the employee, without substantial restriction, generally result in constructive receipt.

A) An example of substantial risk of forfeiture provisions would be the employee's loss of rights to the plan benefits at death or disability. Substantial risk of forfeiture requires that the employee's right to receive benefits is contingent upon performance of substantial services. Death and disability do not create substantial risk of forfeiture, since they do not involve performance of services.

Which statement is true regarding the duties required of broker-dealers under Regulation BI, and of advisers under SEC Release IA-5248? A) Broker-dealers are held to the duty of care, and advisers to the duty of loyalty. B) None of these are true. C) Both broker-dealers and advisers are held to the duty of care and duty of loyalty. D) Broker-dealers are held to the duty of loyalty, and advisers to the duty of care.

A) Broker-dealers are held to the duty of care, and advisers to the duty of loyalty. Under Regulation Best Interest, broker-dealers have four obligations: disclosure, care, conflict of interest, and compliance. The duty of loyalty is not required of broker-dealers. As fiduciaries, advisers are held to the duty of care and duty of loyalty when working with clients, and additional guidance for each of these duties is found in SEC Release IA-5248.

An investor in improved land (with an office building) is concerned most with which factor? A) Cash flow expected to be generated by the property B) Reselling the property within three years C) Commissions paid to purchase the property D) Net income of the investment

A) Cash flow expected to be generated by the property Cash flow is much more important than net income to a real estate investor. Net income includes the depreciation deduction, which is a noncash item. Many real estate investors like to have a net loss for taxes, but do not want to have a net economic loss on a cash basis. Real estate is a long-term investment, generally requiring a holding period greater than three years. Although the commissions paid on a property are important, most real estate investors know that the commissions are high and accept that fact in their financial projections. The commissions on purchase and sale are relatively unimportant compared to the property's cash flow during the holding period.

Which of these options describe characteristics of a performance incentive plan? I. A phantom stock plan is a valuable motivational tool since benefits are based on the performance of the company. II. When benefits in a restricted stock plan become forfeitable, they are included in the employee's income and are deductible by the employer. III. With both a phantom stock plan and a performance award plan, the value of the payout from the plan is taxed to the employee and is deductible by the employer in the year of receipt. IV. The Section 83(b) election is available with a phantom stock plan; thus, the employee can choose to recognize taxable income in the year the stock is granted rather than at the time of sale. A) I and III B) II and III C) I and II D) II and IV

A) I and III The executive benefits from a phantom stock plan depend on how successful the executive is in meeting his or her performance objectives. Benefits to the employee are based on the value of the company stock, which generally reflects the company's performance; however, the executive does not actually own or entitled to any actual shares of stock. Both phantom stock and performance award plans have the same tax consequences; i.e., the employer deducts the benefits paid, and the employee must include such amounts in income in the year received. When benefits in a restricted stock plan become nonforfeitable (meaning they can no longer be taken away from the employee), then they would be included in the employee's income and deductible by the employer.

Which of these options are factors that undermine investment strategy? I. Risk aversion II. Inadequate time horizons III. Rigid investment discipline IV. Unrealistic expectations A) II and IV B) I and III C) I and II D) III and IV

A) II and IV Inadequate time horizons and having unrealistic expectations are two common factors that undermine investment strategy. A third common factor that can undermine investment strategy is having an emotional, undisciplined client.

Which types of income received by an individual taxpayer are subject to the self-employment tax? I. Net income from a real estate rental II. Investment income from a general partnership III. Net income from a sole proprietorship IV. Flow-through of income from an S corporation A) III only B) I and III C) II and III D) I, II, III, and IV

A) III only Options I, II, and IV are specifically excluded from the self-employment tax. The net income from a sole proprietorship is certainly self-employment income.

Which is the best insurance against a public relations crisis? A) Prevention B) An employment practices liability policy C) An endorsement to the homeowners insurance policy D) A liability umbrella policy

A) Prevention High net worth business owners have worked hard to build their business. In the process, they have also built their brand and it is often closely tied to their name. It takes years to build a good reputation and only moments to destroy it. That can be more financially devastating than any other risk if your livelihood depends on the success of your business. Care needs to be taken with the use of social media. One embarrassing photo or emotional rant can greatly damage one's reputation. In this world of instant information, reputation management has become an industry unto itself. These services keep an eye on their client's web footprint and reduce or eliminate negative history. Prevention is the best insurance against a public relations nightmare.

Which statement regarding disclosure is most accurate? A) Research has shown that disclaimers are generally ineffective in alerting investors to the potential costs of conflict of interest. B) Generally, the fiduciary standard can be met with just full and adequate disclosure through documents such as Form ADV Part 2. C) In order to meet the fiduciary standard, the more thorough the disclosure the more effective it becomes. D) Research has shown that disclaimers are generally effective in alerting investors to the potential costs of conflict of interest.

A) Research has shown that disclaimers are generally ineffective in alerting investors to the potential costs of conflict of interest. Full and adequate disclosure is required, but it is only one component of the fiduciary standard. A fiduciary must still carry out the duties of loyalty and care—always doing what is in the best interest of the client—and this cannot be met with disclosure alone. Even though disclosure is important, research has shown that more disclosure and information is not necessarily better, and can actually harm the people it is designed to protect. With disclosure it is very important what information is delivered, how it is delivered, and how it is utilized by its receivers.

Dewayne is married to a noncitizen spouse. He would like to gift half of his property to her this year outright. Which statement correctly evaluates the gift tax implications of a gift transfer to a noncitizen spouse? A) The transfer will qualify for the gift tax super annual exclusion. B) The estate tax marital deduction is not permitted for transfers to a noncitizen spouse. C) The transfer will qualify for the unlimited gift tax marital deduction. D) The transfer will qualify for the gift tax annual exclusion and the gift tax super annual exclusion.

A) The transfer will qualify for the gift tax super annual exclusion. A super annual exclusion is available for completed gifts of a present interest that would otherwise qualify for the marital deduction. The super annual exclusion replaces the gift tax annual exclusion. Transfers to a noncitizen spouse do not qualify for the unlimited marital deduction. Use of a QDOT (qualified domestic trust) would qualify for the estate tax marital deduction, but not a gift tax deduction.

Which of these describes the specialized role of a liquidity manager? A) To handle large assets, such as yachts, multiple homes, and private aircraft B) To monitor bond investments for liquidity C) To monitor alternative investments for liquidity risk D) To keep cash and cash equivalent percentage of the portfolio at a specified amount

A) To handle large assets, such as yachts, multiple homes, and private aircraft A liquidity manager handles the likely large assets of a high net worth client, such as yachts, multiple homes, and private aircraft.

Personal service corporations (PSCs) are subject to unique tax rules. including A) a flat tax rate equal to 21% that is applied to any undistributed income at year-end. B) a flow through of income from the PSC to the underlying shareholder employee that is subject to self-employment taxes. C) a requirement to distribute at least 95% of income to annually and requirement of a fiscal calendar tax year. D) a potential/additional personal holding company tax equal to 30% that is applied to any undistributed income.

A) a flat tax rate equal to 21% that is applied to any undistributed income at year-end. PSCs are subject to a flat tax equal to 21% applied against undistributed income at year-end. The PSC may also face an additional "personal holding company tax" equal to 20%. A PSC must also generally distribute 95% of its income on an annual basis, but can adopt either a calendar or fiscal calendar year. PSCs are not flow-through entities nor subject to self-employment taxes. Instead, the PSC and shareholder employee both pay their portion of payroll taxes.

Business owners need adequate liability coverage because they may be sued by A) all of these. B) competitors. C) customers. D) their employees.

A) all of these. Business owners are at risk for lawsuits from customers who may allege injury while on the premises or as a result of work performed, competitors may sue for unfair business practices and employees may file lawsuits for unfair employer practices.

Your client tells you she wants to quickly establish a charitable organization in which she will be a private donor and have the best tax benefit between a private foundation and donor-advised fund. Which of these options would you suggest to her? A) Both funds equally match the client's interests B) Donor-advised fund C) Neither fund has all the qualities the client desires D) Private foundation

B) Donor-advised fund Setting up a donor-advised fund is easier than doing the same for a private foundation; also, a DAF keeps the donors private (private foundation does not), though the beneficiaries are published. A donor-advised fund earns investment income tax-free and for a higher percentage of gross income.

You have arranged to meet with a prospective high net worth client. In order to build trust with this client, which level of trust is most important to establish first? A) Empathic skills and maturity of the adviser B) Ethical conduct and character of the adviser C) Technical competence and know-how of the adviser D) Revelation of fee structure

B) Ethical conduct and character of the adviser According to State Street Global Advisors, there are three levels of trust that should be covered in order for clients to trust advisers, in this order: ethical conduct and character, empathic skills, and technical competence. Ethical conduct makes the client first feel safe with the adviser, then an adviser's empathic skills allow the client to like the adviser, and, finally, technical knowhow shows the client that the adviser is relevant.

Which statement regarding hedge funds and their characteristics is the most accurate? A) Hedge funds attempt to beat a benchmark. B) Hedge funds seek to profit from market inefficiencies. C) Hedge funds are often as diversified as mutual funds. D) Hedge funds can use leverage, but are limited to 10 times their asset base.

B) Hedge funds seek to profit from market inefficiencies. Hedge funds attempt to profit from market inefficiencies rather than relying purely on economic growth to drive returns. They strive for absolute return and are not tied to a benchmark. They are often leveraged, and their leverage is only limited by the amount financial institutions are willing to lend. Hedge funds are rarely as diversified as mutual funds, and typically have heavily concentrated positions.

Which of these options are characteristics of unfunded supplemental executive retirement plans (SERPs)? I. The employee has no secured rights in the benefits to be paid. II. These plans are often referred to as top hat plans because they are provided to top executives of the company. III. The plan must establish substantial risk of forfeiture provisions to assure tax deferral. IV. The plan is subject to most of the ERISA nontax requirements. A) III and IV B) I and II C) I, II, and III D) II, III, and IV

B) I and II Supplemental executive retirement plans (SERPs) provide no security to the employee. An unfunded SERP is also often referred to as a top hat plan. The employee has nothing more than the employer's promise to pay future benefits. These plans generally are subject only to the reporting and disclosure requirements of ERISA. Top hat plans must be unfunded. SERPs can be funded, although they are normally unfunded. Substantial risk of forfeiture provisions generally are not necessary in unfunded plans.

Which of these statements accurately describe characteristics of using life insurance for the informal funding of a nonqualified deferred compensation plan? I. It represents an asset that may be purchased to fund the employer's unsecured promise to pay deferred amounts to the employee. II. It offers the advantage of being able to fund a death benefit immediately. III. It offers the advantage of various settlement options. IV. It offers the advantage of simplified administration since death proceeds are paid directly to an employee's surviving spouse or other beneficiary. A) I and II B) I, II, and III C) II and IV D) I and III

B) I, II, and III Life insurance is used to informally fund a nonqualified deferred compensation plan because it can immediately fund a death benefit and offers several settlement options. However, the proceeds from the policy are paid to the employer.

Georgia has told you, her wealth management adviser, that she is interested in selling her local chain of six fabric stores, of which she is the sole owner. She doesn't have any children working in the business, and is considering selling the business to her management team. She asks you what possible advantages may exist to such a sale. Which of these options are advantages that you might tell Georgia regarding an insider sale? I. An insider transfer is the quickest way for Georgia to sell her business. II. She could realize greater overall income than from a third-party sale or a sale to an ESOP. III. She could structure the deal to ensure that she did not give up control before reaching her financial security goal. IV. Her managers are all natural succession owners since they already work in and know the business. A) I, II, and III B) II and III C) III only D) II and IV

B) II and III An insider transfer is a lengthy process compared to a third-party sale, and is not the quickest route to exit a business. The insider transfer can lead to greater overall income from the transaction, but there is less upfront money than other methods. One of the advantages is the insider sale can be structured so that Georgia does not give up control until her financial goals are met. Employees oftentimes do not make good owners, even though they are good at their employee role.

Simon recently entered into a pure nonqualified deferred compensation agreement with his employer. Simon's nonqualified plan benefits are subject to the claims of his employer's creditors; however, they are not subject to a substantial risk of forfeiture. Simon expects to be in a lower tax bracket when he retires. Which of these are correct statements about the advantages of this arrangement for Simon? I. Deferrals to the plan are not subject to payroll taxes. II. A major advantage of a nonqualified plan is deferral of taxation on income until a later date. III. Some of the benefits are funded by his employer. IV. There is no limit on the amount of compensation that may be contributed to the plan. A) I and III B) II and IV C) III and IV D) I and II

B) II and IV Even though nonqualified plans may defer income taxation, payroll taxes (FICA) are not postponed. Rather, FICA is payable on deferred compensation at the later of (a) the time the services are performed, or (b) the time when the employee no longer has a substantial risk of forfeiting the money. A major advantage of a nonqualified plan is the deferral of taxation on income until a later date, when it may be taxed at a lower rate. Simon's nonqualified plan benefits are not subject to a substantial risk of forfeiture; therefore, his deferred compensation is subject to payroll taxes at the time the services are performed. A pure deferred compensation plan is funded with employee salary deferrals only. There is no cap on includible compensation that can be considered in nonqualified plan contributions (as in qualified plans).

All of the following are special issues affecting athletes and entertainers except A) physical and mental health issues as a result of playing and performance demands B) cybersecurity, ransom insurance, fraud, and scams. C) transitioning to a second career after first retirement and building the necessary skills and education. D) maximizing career earnings, longevity, and maintaining lifestyle.

B) cybersecurity, ransom insurance, fraud, and scams. Cybersecurity, ransom insurance, fraud, and scams are all special issues that equally affect athletes, entertainers, and other high net worth individuals such as executives or business owners. The remaining answers are all special issues that are more commonly found with athletes and entertainers.

Which statement correctly summarizes the Big Five personality traits as they relate to the differences between financial salespeople and financial planners? A) Salespeople ranked higher in agreeableness and planners higher in conscientiousness. B) Salespeople ranked higher in extraversion and planners higher in agreeableness. C) There is very little difference between the extraversion and agreeableness rankings of salespeople and planners. D) Salespeople ranked higher in openness and planners higher in extraversion.

B) Salespeople ranked higher in extraversion and planners higher in agreeableness. Both financial salespeople and financial planners generally rate higher than the overall population in the Big Five personality traits. Salespeople rank higher in openness and significantly higher in extraversion. Financial planners rank significantly higher in both conscientiousness and agreeableness.

John owns all the shares of a C corporation that manufactures computer peripherals. The firm employs 280 full-time workers. Though he has been unable to find a buyer for his stock, John would like to sell some of his shares each year and be completely bought out by the end of 12 years so that he can retire to spend some time with his family and also do some traveling. Which one of the solutions shown below solves his problem in the most efficient and tax-wise manner? A) Working out a redemption buy-sell agreement with family members B) Setting up an ESOP C) Setting up a SEP-IRA D) Taking his company public

B) Setting up an ESOP Selling stock to an ESOP can allow John, one of the owners of the corporation, to cash out without paying income tax and, at the same time, provide the business with tax incentives that make the purchase more economically feasible than it might be otherwise. As a result, ESOPs can be extremely attractive vehicles for disposing of some or all of a closely held corporation. Assuming the requirements of IRC Section 1042 are met, John can use the cash to buy "qualified replacement property" (defined as stocks or bonds issued by U.S.-based operating companies) to provide retirement income.

Assume the following asset classes have the correlations to U.S. large-cap stocks shown below: Commodities: .53 Emerging market stocks: .80 Bonds: −.26 Small stocks: .26 Which statement correctly identifies the relative impact of diversification between when these assets are added to U.S. large-cap stocks? A) Emerging market stocks provide greater diversification than commodities. B) Small stocks provide less diversification than bonds. C) Bonds provide less diversification than commodities. D) Small stocks provide greater diversification than bonds.

B) Small stocks provide less diversification than bonds. The asset that provides the most diversification from U.S. large-cap stocks is the one furthest from +1.0, moving toward −1. In this case the correct statement is that small stocks (+.26) provide less diversification than bonds (−.26), which have a negative correlation to U.S. large-cap stocks.

Which of these is an advantage of goals-based planning? A) The client can leave goal monitoring to the adviser. B) The client will create goals and be engaged in meeting those goals. C) The client will diligently watch the market's ups and downs. D) The client can direct investments to gain the highest returns possible.

B) The client will create goals and be engaged in meeting those goals. Goals-based investing puts emphasis on reaching a goal, not on beating investment returns. This method easily shows clients their progress toward a goal and can forestall some of the panic as the market rises and falls. This method can actually engage the client in meeting goals and, in that case, the planner has the benefit of buy in to reach any client aspirations.

Baby boomers and older Gen Xers, as compared to millennials and younger Gen Xers A) are likely to be advised by a millennial adviser. B) have financial planning needs that have stayed relatively the same over many years. C) are generally seeking many more technological options in financial planning. D) have not experienced significant bear markets.

B) have financial planning needs that have stayed relatively the same over many years. Older wealthy investors (mostly baby boomers) have financial planning needs that have stayed relatively the same over many years. Younger high net worth individuals are, generally, seeking fresh approaches to financial planning, including more technological options.

According to John Brown in his book Exit Planning: The Definitive Guide, when ranking the four most commonly used exit planning strategies from most utilized to least utilized, the order is A) ESOP, transfer to children, third-party transfer, insider transfer. B) insider transfer, third-party transfer, transfer to children, ESOP. C) insider transfer, transfer to children, third-party transfer, ESOP. D) transfer to children, insider transfer, third-party transfer, ESOP.

B) insider transfer, third-party transfer, transfer to children, ESOP. Insider transfer = 41% of the time, third-party transfer = 29% of the time, transfer to children = 24% of the time, and ESOP transfers = 1.2% of the time.

The relationship between investment strategy and investment policy is one in which A) investment policy is established once the investment strategies to be used are agreed upon. B) investment strategy is subservient to investment policy. C) investment policy is determined by investment strategy. D) investment strategy dictates the asset categories to be incorporated into the investment policy.

B) investment strategy is subservient to investment policy. Investment policy provides the guidelines to be used in managing a portfolio, including investment strategies that may be employed. In other words, investment strategies are subservient to investment policies.

Ken and Mary are married taxpayers filing a joint tax return. In the current year, they have an adjusted gross income of $370,000, and their capital gain income (included in the AGI) is $100,000. They have investment interest expense of $4,000 and state income tax attributable to the investment income of $2,000. They also have a qualified distribution from a Roth IRA of $20,000. What is the amount of Medicare contribution tax they must pay? A) $4,560 B) $3,800 C) $3,572 D) $4,332

C) $3,572 Ken and Mary will pay a $3,572 Medicare contribution tax (3.8% on $94,000). This is the lesser of the net investment income ($94,000) or the AGI in excess of the threshold amount ($370,000 − $250,000, or $120,000). The net investment income is the investment income of $100,000, reduced by the allowable investment expenses of $6,000. In this situation, the $94,000 of the net investment income is subject to the Medicare contribution tax.

Assume you own XYZ Stock Fund that returned 14% over the past five years, during which the stock market returned 12%. This fund has a beta of 1.1 and the risk-free rate of return is 4%. What is Jensen's alpha for this fund? A) 2.0 B) 9.1 C) 1.2 D) 6.0

C) 1.2 14 − [4 + (12 − 4) 1.1] = 14 − [4 + 8.8] = 14 − 12.8 = 1.2. This positive result indicates that the fund manager outperformed the market by 1.2% on a risk adjusted basis.

Which statement best explains the unauthorized practice of law? A) A non-attorney who advises a client of potential "red flags" in their estate plan B) A non-attorney who discusses with a licensed attorney whether provisions in their client's will are necessary C) A non-attorney who advises a client to take actions that will affect their property or legal rights D) A non-attorney who advises a client to have their estate plan updated

C) A non-attorney who advises a client to take actions that will affect their property or legal rights There are two actions that constitute the unauthorized practice of law in every state: drafting documents that will affect the property or legal rights of someone else, and advising another person to take actions that will affect their property or legal rights. The other choices are authorized actions by a non-attorney.

Susan, age 50, is the sole shareholder of Market Designs Inc., a small consulting firm. All of the employees of Market Designs are considerably younger than Susan, and turnover is relatively high. Susan is paid more than three times the salary of the next highest paid employee and wants to install a retirement plan for the company. Excluding Susan, the oldest employee is 32. Which type of plan would be most appropriate, assuming she wants to maximize the contributions for her account and minimize the cost of the other employees? A) Target benefit plan B) SARSEP C) Age-weighted profit sharing plan D) Cross-tested ESOP

C) Age-weighted profit sharing plan An age-weighted profit sharing plan is a type of qualified plan that allocates proportionately larger employer contributions to individuals who are relatively older than the other plan participants. In other words, an age-weighted profit sharing plan allocates employer contributions based on compensation and age. An age-weighted profit sharing plan can be used to increase the amount of employer contributions made on Susan's behalf because she is considerably older than the other employees.

Marvin would like to make a transfer of $5 million and receive the gift tax charitable deduction for the transfer. His goals are to benefit a qualified charity while keeping the assets in the family at his death and maximizing the amount of his income tax deduction. Which charitable transfer technique should Marvin utilize? A) Pooled income fund B) Qualified conservation easement C) Charitable lead trust D) Charitable remainder trust

C) Charitable lead trust A charitable lead trust allows him to benefit the charity with the income interest, while retaining the remainder interest for his family. A charitable remainder trust, pooled income fund, and qualified conservation easement will all distribute the remainder interest to the charity.

Which trait is most important in order for a fiduciary to properly exercise the fiduciary duty of care? A) Reliability B) All are equally important C) Competency D) Diligence

C) Competency The duty of care requires a fiduciary to have the competency to be providing fiduciary advice in the first place. Fiduciaries have to be competent enough to provide professional advice, and to know when to consult others as needed—good intentions alone are not enough. When consulting others, a fiduciary adviser must make sure that whomever they are working with is also competent and able to provide sound and reasonable advice.

Which statement correctly explains an action related to the estate planning objective of maximizing premortem flexibility? A) Retaining a closely held business interest in the estate to utilize estate tax valuation elections B) Retaining a life insurance policy that is payable to the estate C) Creating a payable on death (POD) designation for a bank account D) Creating a testamentary trust whereby the executor has the discretion to make a qualified terminable property interest (QTIP) election

C) Creating a payable on death (POD) designation for a bank account Creating a payable on death (POD) designation maximizes premortem flexibility, as the account owner will maintain sole control over the account assets. Creating a testamentary trust that gives discretion to the executor to make a QTIP election is a postmortem technique that allows for flexibility in determining the necessary marital deduction. Retaining a business interest to use estate tax valuation discounts can provide liquidity to the estate and lower the estate tax liability, which are postmortem considerations. Retaining a life insurance policy payable to the estate will provide postmortem liquidity to the estate.

An athlete or entertainer is trying to determine whether a donor-advised fund (DAF) or private foundation is better for their charitable and philanthropic needs. They would prefer discretion over how funds are invested and distributed to charities and also want something low cost and easy to maintain. They also want to maximize tax deductions as much as possible. Based on this information, which is the best option for them? A) Neither a donor-advised fund nor private foundation B) Operating private foundation C) Donor-advised fund D) Non-operating private foundation

C) Donor-advised fund Donor-advised funds do not maintain 100% control over investments and distributions like private foundations, but generally their wishes are granted by sponsoring organizations and thus maintain discretion. DAFs typically also have lower startup and maintenance costs compared to private foundations. They also allow for tax deductions of up to 50%-60% of AGI, whereas private foundations are limited to 20%-30% of AGI.

Emotional intelligence is important for an adviser to develop in order to empathize and communicate well with clients, creating trust. Which of these is the level at which individuals start to fully comprehend emotions and the behavioral consequences? A) Emotional perception B) Emotional regulation C) Emotional understanding D) Emotional facilitation

C) Emotional understanding An individual reaching emotional understanding starts to fully comprehend, at an advanced level, emotions and the behavioral consequences. Those with emotional perception are just realizing consequences of their emotions, and with emotional facilitation, individuals can start to manipulate scenarios for the best emotional outcome. Emotional understanding is the next level, and emotional regulation—the ability to manipulate your own and other individual's emotions—at the highest level.

David Smith and Jim Dahl were partners. Their printing business had been doing well after surviving three hard start-up years. One day David decided to order $114,000 worth of ink, paper, and a new small press. Prior to this purchase there was no debt and none intended by mutual agreement. The partnership agreement required that each partner had to sign off on each purchase. Which statements correctly indicate the status of the partners? I. Jim is liable for the debt. II. David is liable for the debt. III. Only David is liable since he violated their agreement. IV. Only the partnership and David are liable. A) II and III B) III only C) I and II D) IV only

C) I and II Both are separately liable for the actions of the other; therefore, each is fully liable for the debt. This is known as joint and several liability.

Which of these risks is far greater overseas than inside the United States? A) Cyberattacks B) Damage to the primary residence in Colorado C) Kidnapping D) Loss of a diamond ring

C) Kidnapping Personal security issues such as kidnapping and extortion are most prevalent in foreign countries because anti-American sentiment and terrorist activity are greater risks. Taking the necessary precautions to reduce these risks and owning kidnap and ransom insurance can provide some peace of mind when traveling overseas.

Which statement comparing the suitability and fiduciary standards is correct? A) Both approaches are primarily solution-driven and require the adviser to be a fiduciary. B) Disclosure requirements are the same for both standards. C) Legally, suitability disputes are often resolved in arbitration whereas fiduciary disputes are ultimately resolved in the courts. D) Professionals subject to either standard answer to the same regulators.

C) Legally, suitability disputes are often resolved in arbitration whereas fiduciary disputes are ultimately resolved in the courts. Broker-dealers, who are held to the suitability standard, require arbitration agreements with clients, and disputes are normally settled in arbitration. The fiduciary standard for investment advisers has been well established by the courts and codified recently by the SEC. Fiduciary disputes can be more easily litigated in the court system.

On January 5th, two years ago, Jody was granted 5,000 incentive stock options on the company stock at an exercise price of $18 per share, the price of the stock on that date. She exercised the options on November 1st of last year when the price was $28 per share, and she wants to preserve the ISO status. What is the earliest date she can sell? A) Any time after March this year B) January 5th of this year C) November 2nd of this year D) January 5th of next year

C) November 2nd of this year The holding period for ISOs is two years from the date of grant and one year form date of exercise.

Three years ago, Charlene, an employee of Hardware Supply Inc., was granted 2,000 incentive stock options (ISOs) with a strike price of $15, and 6,000 nonqualified stock options (NSOs) with a strike price of $15. Both grants occurred when the market price of the stock was $15. In February of this year, Hardware Supply Inc. traded for $80 per share on the day Charlene exercised 1,000 ISOs and 1,500 NSOs and held the shares in her portfolio. Which statement is true regarding Charlene's current income tax situation resulting from the exercise of her stock options? A) She has ordinary income of $97,500 and an alternative minimum tax (AMT) adjustment of $65,000. B) She has ordinary income of $65,000 and no other tax implications apply. C) She has increased W-2 income of $97,500, subject to FICA, FUTA, and federal withholding and also has an alternative minimum tax (AMT) adjustment of $65,000. D) She has ordinary income of $120,000 and an alternative minimum tax (AMT) adjustment of $15,000.

C) She has increased W-2 income of $97,500, subject to FICA, FUTA, and federal withholding and also has an alternative minimum tax (AMT) adjustment of $65,000. ISOs are not subject to payroll taxes, but the bargain element (market value less cost to exercise) at exercise is subject to an AMT adjustment. NSOs are not subject to AMT, but the value of the grant, if ascertainable at the time of grant, is taxed as wages subject to FICA, FUTA, and federal withholding or, if not ascertainable at grant, the bargain element is taxed as wages, subject to FICA, FUTA, and federal withholding at the time of exercise. The employer receives a deduction for the same amount the employee receives as increased wages. Gain at the point of sale for ISOs is taxed as long-term capital gain. For NSOs gain is taxed as long term or short term, depending on the stock holding period. The value of an NSO at grant is almost never ascertainable since such options do not typically trade on the open market. The 1,500 NSOs have a gain of $65 per share ($80 − $15 grant price), which results in $97,500 in W-2 income. The bargain element on the 1,000 ISOs is also $65 per share resulting in an AMT adjustment of $65,000.

Which statement regarding a qualified plan is correct? A) Certain plans are partially exempt from ERISA requirements. B) Distributions from pension plans are taxed at capital gains rates if contributions have been in the plan for more than 12 months. C) The employer's deduction is available in the year that a contribution is made. D) The plan may discriminate.

C) The employer's deduction is available in the year that a contribution is made. With a qualified plan, the employer may deduct plan contributions in the year that those contributions are made. All qualified plans are subject to all of the rules found under ERISA, whereas nonqualified deferred compensation plans may only be subject to ERISA reporting and disclosure rules.

Bill has an estate worth $20 million and is unmarried with two children and four grandchildren. He would like to transfer $16 million to a trust for the benefit of his children and grandchildren. The trust will be irrevocable, and the trustee may distribute income to the children for their lives with the remainder to be distributed to the grandchildren. Which statement correctly analyzes the transfer tax implications of this arrangement? A) The trust is not subject to the generation-skipping transfer tax because Bill's children have an interest in the assets. B) Bill will owe generation-skipping transfer tax for this transfer, but not gift tax. C) The trust is an indirect skip and generation-skipping transfer tax will be due upon a taxable termination. D) Bill will owe generation-skipping transfer tax at the time the trust is funded because this is a direct skip.

C) The trust is an indirect skip and generation-skipping transfer tax will be due upon a taxable termination. Bill will owe generation-skipping transfer tax on this indirect skip trust upon a taxable termination since the children have an income interest for life. This is not a direct skip because his children have an interest. This transfer will be subject to the gift tax as well as eventually being subject to the generation-skipping transfer tax when the trust is terminated.

Which statement regarding a foreign situs trust is correct? A) These trusts are used because there are no states with debtor friendly trust laws. B) The foreign jurisdiction allows access to trust assets only by creditors who register in the jurisdiction. C) These trusts are often costly to establish and maintain. D) All assets of the trust must be physically located in the foreign jurisdiction.

C) These trusts are often costly to establish and maintain. While some assets may have to be physically present in the foreign jurisdiction, most will not. A creditor does not have to register, and doing so would not help the creditor's cause. Several states, such as Alaska and Delaware, have trust laws that make it difficult for a creditor seeking to attack a trust settled in any of those states. Foreign trusts are often costly because of the fees charged by the jurisdiction and the distances involved.

Which of these is a responsibility of FINRA? A) To examine prospectuses for full disclosure regarding the securities offered B) To provide insurance of members' accounts C) To review advertising and sales literature of member firms D) To monitor the trading activities of "insiders"

C) To review advertising and sales literature of member firms One of the responsibilities of FINRA is to evaluate members' communications with the public to assure that they are fair and not misleading. Therefore, FINRA does review and evaluate advertising and sales literature of member firms.

When working for a financial institution and advising high net worth clients, being able to work as part of a team is essential. To be most successful, an adviser in a financial institution is also expected to A) hand off implementation and monitoring of client recommendations to a specialist. B) cultivate new wealthy clients only from external leads. C) actively participate in professional and community organizations. D) handle all areas of financial planning for clients.

C) actively participate in professional and community organizations. A financial institution looks for an adviser to build client relationships within and external of the institution. Institutions would prefer that advisers actively participate within professional and community organizations. In addition, a financial institutional adviser should collaborate with a customized team of specialists and client third-party advisers (e.g., estate planning attorney, accountant) and implement and monitor client recommendations.

Under the Employee Retirement Income Security Act of 1974, a prohibited transaction is a transaction that A) must be reversed and the plan participant made whole again as if the transaction had never taken place. B) is not allowed and will result in a fine and/or administrative action. C) has a substantial conflict of interest and must be avoided or an exemption must be met. D) is not allowed under any circumstances.

C) has a substantial conflict of interest and must be avoided or an exemption must be met. Prohibited transactions under ERISA are transactions that have such potential conflicts of interest that advisers must either avoid the transaction altogether, or meet the requirements of an exemption. If the requirements of an exemption are met, then a prohibited transaction is allowed under ERISA. Under the vacated Department of Labor fiduciary rules introduced in 2017, the Best Interest Contract Exemption was one such exemption.

Which of these trusts will best protect its assets from the grantor's creditors? A) An irrevocable living trust that pays income to the grantor on a mandatory basis B) A revocable living trust C) An irrevocable testamentary trust for the benefit of the grantor's family D) An irrevocable living trust in which the grantor has not retained a beneficial interest

D) An irrevocable living trust in which the grantor has not retained a beneficial interest A creditor can exercise any rights that the grantor has in the property. Therefore, a revocable trust would allow the grantor's creditors to revoke the trust and seize trust assets. Likewise, if it is mandatory that income be paid to the grantor, a creditor could seize each payment. If the trust is irrevocable, and the grantor has no further beneficial interest in the trust, the grantor's creditors cannot seize trust assets unless the transfer to the trust was a fraud upon creditors. Because a testamentary trust is funded with the decedent's probate estate, the grantor's creditors can seize the assets prior to death, and can file a claim against the estate after death.

How do collectives differ from traditional boosters in terms of their ability to facilitate NIL opportunities for student-athletes? A) Traditional boosters are able to communicate with student-athletes year-round without the limitations faced by schools and coaches. B) Collectives are more heavily regulated by the NCAA than traditional boosters. C) Traditional boosters have access to more funding than collectives. D) Collectives operate independently and utilize indirect compensation methodologies to avoid many of the restrictions faced by traditional boosters.

D) Collectives operate independently and utilize indirect compensation methodologies to avoid many of the restrictions faced by traditional boosters. Collectives operate independently and utilize indirect compensation methodologies to avoid many of the restrictions faced by traditional boosters.

Fritz recently shopped at a store he really liked, and he wanted to invest in the company once he found out that it was publicly traded. He began researching the company and came across several negative news and research reports, which he dismissed without really reading because of his positive experience with the company. He subsequently found a report written by a large shareholder that was very favorable regarding the company, which he read from front to back. Which behavioral bias is Fritz demonstrating? A) Mental accounting B) Status quo C) Framing D) Confirmation bias

D) Confirmation bias Fritz is demonstrating confirmation bias, which is also called rationalization bias. He is searching for information that supports his opinion, and is dismissing any bad news or information does not support his point of view.

Which of these is an advantage of equity REITs over mortgage REITs? A) Equity REITs have the right to repossess the underlying property if the mortgage REIT fails to make its mortgage payments. B) Equity REITs retain the right to the potential appreciation of a property, but mortgage REITs retain the right to only the property's rental income. C) Equity REITs participate in the capital gains of the mortgages, whereas mortgage REITs receive only the coupon payments. D) Equity REITs can participate in the appreciation of the underlying properties.

D) Equity REITs can participate in the appreciation of the underlying properties. Equity REITs own the underlying real estate properties, giving the owners an opportunity to participate in the net cash flows from the operation of the properties and in any appreciation in the market price of the properties.

This year, you worked with Jim Stowe in establishing a money purchase plan at Stowe Inc. Stowe Inc. is a closely held C corporation, with Jim owning 75% of the stock. The company's money purchase plan provides for contributions of a flat 20% of compensation. You also determined that Jim's annual retirement savings need was $30,000. His current annual income is $180,000. Jim is the only 5% owner-employee, but there are three other highly compensated employees at Stowe Inc. He is now in the process of getting a divorce, and his retirement savings need has increased to $47,000. Although Jim feels that he can save the additional $17,000 per year, he is interested in finding the most tax-favorable means to do so. Jim's personal income tax rate is higher than the corporation's tax rate. Also, he does not feel that Stowe Inc. can make a significant increase in the contribution to the money purchase plan with 57 employees currently participating. Which statement describes the most tax-favorable recommendation for Jim? A) Stowe Inc. could add a profit sharing 401(k) plan for Jim to defer part of his earnings. B) The plan can be evaluated to see if moving to Social Security integration would incr

D) Establish an offset SERP that would be designed to provide his retirement income need, minus the benefit provided under the qualified plan. Although an excess benefit plan could increase the future benefit for Jim, he needs more than the 20% specified in the plan. Through a SERP, the total benefit can be greater than the formula provided under the money purchase plan.

Portfolio A has a Treynor ratio of 1.22 while Portfolio B has a Treynor ratio of .61. Assuming both portfolios are diversified, which statement is correct? A) Portfolio A has worse overall performance than Portfolio B. B) Portfolio A has better overall performance than Portfolio B. C) Portfolio A has twice the performance of Portfolio B. D) Portfolio A has better performance than Portfolio B on a risk-adjusted basis.

D) Portfolio A has better performance than Portfolio B on a risk-adjusted basis. The Treynor ratio is a risk-adjusted measure—and the higher the better—so the logical conclusion would be that Portfolio A had better risk-adjusted performance than Portfolio B