Wiley Test Bank
John bought a cabin at the lake and began making renovations to use it as a second home. The cabin cost him $100,000, including $10,000 for the land. While John was working on the cabin, a forest fire destroyed it. The fair market value (FMV) of the property before the fire was $120,000 including $15,000 for the land. After the fire, the FMV was $15,000, the value of the land. John collected $85,000 from his insurance company. What is John's tax-deductible loss?
$0 Correct! John's basis in the cabin was $100,000 and he was reimbursed $85,000, resulting in a $15,000 loss, however, he cannot deduct his loss because it is not resulting from a federally declared natural disaster.
Last year Sherman's office building was destroyed by an earthquake. The building had an adjusted basis of $125,000. This year Sherman's insurance company paid him $200,000 to cover the loss. Sherman then purchased another office building for $205,000. What is Sherman's taxable gain on the transaction?
$0 Correct! Sherman reinvested all the insurance proceeds so there is no taxable income.
Scott received incentive stock options (ISOs) from his employer. The option allows Scott to purchase 100 shares of company stock at $50 per share. Scott exercises the option five years later when the fair market value of the stock is $125 per share. Scott holds the stock for three more years and then sells it for $175 per share. In the year of exercise, Scott has reportable amounts for regular tax purposes and for AMT purposes, respectively, of
$0 and $7,500. Correct! There are no tax consequences for regular tax, but the bargain element from the exercise of the stock options would be an AMT adjustment in the year of exercise. The bargain element is $75 per share, and Scott exercised 100 shares, a total of $7,500.
Calculate the conversion value of the following bond. The conversion price is $35 and the current stock price is currently $36.90 (par = $1,000)
$1,054.29 Correct. The formula is CV = (Par value / CP) × Ps so CV = (1,000/35) × 36.90
Rick is considering a semi-annual bond with a $1,000 par value that matures in 10 years. The bond has a 5% annual coupon rate and current interest rates are 3%. What is the value of this bond?
$1,171.69 Correct. Enter as follows on the HP12c: $1,000 FV; $25 PMT ((1000 × .05)/2); 1.5 I (3%/2); 20 N (10yr × 2) PV = $1,171.69
Jack earns $150,000 annually and would like to purchase life insurance to protect his income for his family. He feels that they will be conservative with any life insurance proceeds and only earn 4%. About 40% of his income goes to expenses and taxes, and he would like use a replacement ratio in the insurance calculation. He feels that inflation is about 2% and is wondering how much insurance is appropriate. Assuming she wants to leave 20 years of income, use the human life valuation approach to calculate the life insurance need.
$1,223,129 CORRECT. This is the proper answer for the human life valuation approach with a replacement ratio. PMT = $150,000 × 60% = $90,000 PVA = (PMT/i) × (1 − (1/(1 + i)n
Jeff is considering buying a bond that is trading at $1,525. The bond is a $1,000 par with a coupon of 7%. It has 10 years until maturity and similar bonds are now trading at 2%. What is the value of the bond based on the given information, and should Jeff buy it.
$1,451.14 and Jeff should not buy it. Correct. Enter as follows on the HP12c: $1,000 FV; $35 PMT ((1000 × .70)/2); 1 I (2%/2); 20 N (10yr × 2) PV = $1,451.14. The bond is trading above PV; do not buy.
Moe earned $10,000 during the year teaching college courses while working on his PhD. He also received a fellowship grant of $2,500. He had the following expenses: Room and board $1,500 Tuition and course fees $1,750 Books $ 250 What income must Moe report on his income tax return?
$10,500 Correct. The grant or scholarship is tax-exempt only up to the amount of tuition, fees, and books. His tuition and books total $2,000, but his scholarship was $2,500, so $500 is taxable.
Mr. G retired this year and received a taxable pension of $10,000 and Social Security benefits of $5,000. He also collected $2,000 in unemployment compensation. He is single. Assuming he has no other income, what is his adjusted gross income (AGI) for the year?
$12,000 Correct! His AGI consists of his pension, $10,000, and his unemployment compensation, $2,000. Incorrect. In this scenario, none of the Social Security income is taxable because Mr. G has less than $25,000 of total income when half of his Social Security benefit is added to his other income.
A simple trust has taxable interest income of $9,000, dividends from a domestic corporation of $20,000, and tax-exempt income of $3,000. What is the trust's taxable income?
$28,700 Correct. The interest and dividends are added together and an exemption of $300 is subtracted. The trust will not pay the tax on this income. It is a simple trust, and the beneficiary will receive a distribution of all income and pay tax on that income.
In the current year Fred invested $25,000 for a 25% interest in a real estate rental partnership where he was a general partner and a material participant. Fred's adjusted gross income (AGI) was $125,000, and his allocated loss from the real estate activity was $30,000. Fred has no passive income this year. What is Fred's deductible loss on his federal tax return?
$12,500 Correct! As a material participant and general partner, Fred would qualify for the special rental real estate loss allowance of $25,000. However, his AGI is over $100,000, so Fred loses $0.50 of loss for each $1 over $100,000 AGI, reducing the potential $25,000 deduction to $12,500.
On August 16 of the current year, Patrick turns 71. He was a participant in his former employer's profit sharing plan. Assume the following: He does not claim the allowed grace period election and that his profit sharing plan had an account balance of $450,000 on December 31 of the prior year, and $500,000 on December 31 of the current year. According to the uniform lifetime table, the factor for age 70 is 27.4, 71, 26.5 and 72, 25.6. What is the amount of Patrick's first required minimum distribution (rounded)?
$16,981 Correct. Because Patrick turned 70½ in the current year, it is a trigger year that creates the required beginning to begin required minimum distributions (RMDs). To calculate his first RMD, we would take the prior year value of all of his retirement plans and divide it into his life expectancy factor (26.5 for a person who will be 71 in the RMD year). $450,000/26.5= $16,981
On August 16 of this year, Ginny turned 71. She is retired and has a traditional IRA. Assume the following: She does not claim the allowed grace period election and that her IRA had an account balance of $450,000 at the end of last year and $500,000 at the end of this year. According to the uniform life expectancy tables, the Life Expectancy factor for age 70 is 27.4, 71, 26.5 and 72, 25.6. What is the amount of Ginny's first required minimum distribution (RMD)?
$16,981 Correct. This question is testing to see if you know the distribution rules based on the uniform life expectancy tables. Ginny will take her first RMD by December 31 of this year. Her life expectancy factor as a 71 year old is 26.5. By dividing the fair market value (FMV) of the account the prior December 31 by the life expectancy factor, we can determine the required minimum distribution. Calculated as follows: $450,000/26.5 = $16,981. Notice the question states that she did not claim the grace period, which is allowed only in her first RMD year. She could have distributed by April 1 of next year, however, she would still be required to make her second distribution by December 31 of next year.
Phil is a professor. He earned a salary of $140,000 from the university. He also received $35,000 in dividends and interest during the year. In addition, he incurred a loss of $25,000 from investment in a passive activity. His at-risk amount in the activity at the beginning of the year was $15,000. What is Phil's adjusted gross income for the year?
$175,000 Correct! The passive losses are not at all deductible in the current year. The losses, however, will be "suspended" until there is passive income to be offset or until the investment is sold.
Calculate the price of EFG stock when the beta of EFG is 1.25, the market risk premium is 5%, and the risk-free rate is 2.5%. EFG recently paid a dividend of $1.25 and is expected to grow at 8% per year.
$180 Correct. First calculate r using CAPM. Since market risk premium is given, (5)1.25+2.5 = 8.75%. Then use the dividend discount model. 1.25(1.08)/.0875−.08) = $180
Mark is 20 years old and a full-time student at State University. His parents claim him as a dependent on their tax return. During the year he has interest income of $1,000, dividend income of $2,000, and wages of $500. He has itemized deductions of $1,500. What is Mark's taxable income for the year?
$2,000 Correct! Add the interest, $1,000, the dividends, $2,000, and the wages, $500, and subtract the itemized deductions of $1,500. Mark's standard deduction is less than his itemized deductions. His standard deduction would be $500 wages (earned income) plus $350 ($850), or $1,100. Determining taxable income is a separate calculation from determining how that income will be taxed under the "kiddie tax" rules.
Conrad is a full-time student in his junior year at college. His expenses include $2,500 for tuition, $600 for textbooks, and $3,000 for room and board. Conrad is a dependent on his parents' income tax return. What is the total amount of the American Opportunity Tax Credit (AOTC) that can be taken this year?
$2,275 Correct. This is the correct answer because 100% of the first $2,000 of tuition plus 25% of the remaining tuition and textbook costs ($1,100 × 0.25 = $275) totals $2,275. Room and board costs are nonqualified expenses and the AOTC can only be taken for qualified education expenses.
On January 15 of last year, Paul, a single taxpayer, purchased stock in Fish Corporation (the stock qualifies as Section 1244 stock) for $10,000. He purchased the stock directly from the company, and it was part of the first $1,000,000 of stock sold. On January 20 of the current year, Paul sold the stock for $7,000. How should Paul treat the loss on his current-year tax return?
$3,000 ordinary loss Correct! This is Section 1244 stock, and the losses, up to $100,000, are ordinary, not capital.
Malcolm had medical expenses of $5,000 last year and took a deduction of $300 after reducing his expenses by 10% of his adjusted gross income. He was reimbursed $500 this year by his insurance company. What amount must be included on this year's tax return as income?
$300 Correct. This is the amount Malcolm was actually able to deduct on his prior year's tax return, and this is the recovered amount he must claim as taxable income.
Matthew currently has $40,000 saved for his son Jonathan's education. In six years, Jonathan's first-year tuition will be $22,000. If it is anticipated that Jonathan will attend school for four years, how much extra will Matthew need to have saved at the start of college if his investments yield 5% and tuition rises at 4%?
$33,000 Correct. First, calculate the future value of the current savings. Next, calculate the cost of four years of tuition, given the increase in tuition and the investment rate of return. The difference between the two values is the additional amount that is necessary to fund school: Step 1 - Step 2 Current Savings - Tuition for College Career PV(40,000.00) - PMT22,000.00 N6 - N4 I/Y5.00% - I/Y*0.96% (*(1.05 ÷ 1.04-1) × 100= 0.96%) PMT0 - FV0 FV53,603.83 - PV Annuity Due 86,752.79 86,752.79Total Needed 53,603.83Total Savings 33,148.96Amount needed
Jack made gifts totaling $380,000 in 2019. What is the total taxable gift amount? -Jack gave his son $45,000 to buy a truck for his business. -Jack transferred $200,000 to an irrevocable trust and gave the trustee discretionary authority to distribute income to the two trust beneficiaries. -Jack transferred $115,000 to an irrevocable trust that gave his father income for life and the remainder interest to his sister. -The income interest was valued at $15,000 and the remainder interest was valued at $100,000. -Jack contributed $20,000 to a political party.
$330,000 Correct. This is the correct answer because the taxable gifts are: (1) $30,000 for the truck after subtracting an annual exclusion of $15,000, (2) $200,000 to the trust which gives the trustee discretionary powers to distribute trust income since this cannot be reduced by annual exclusions, and (3) $100,000 for the split-interest trust since an annual exclusion can be taken for the income interest. The contribution to a political party is not a taxable gift.
Grace earns $200,000 annually and is the primary breadwinner in her family. She is interested in purchasing life insurance to protect the income for her family should she pass away. She believes her family can earn 5% on any life insurance proceeds and that the inflation rate is 2%. Assuming she wants to leave 15 years of income, use the capital retention approach to calculate the life insurance need.
$4,000,000 CORRECT. Dividing the income by the discount rate (5%) gives us the correct answer with this approach, where the original capital is retained or preserved.
Marvin died this year and his executor noted the following expenses of his estate: Unpaid property taxes of $24,500. Gift taxes paid two years ago, totaling $204,000. A bill for $5,000 for the cost of Marvin's gravesite headstone. An unpaid electric bill for $500. A check sent to the local animal hospital for $1,000. A mortgage balance of $640,000 on the condo Marvin owned with his cousin as a tenancy in common. Marvin's interest was 60 percent ownership in the condo. State death taxes of $22,000 that are due this year. Based on these expenses, what is the amount that can be taken as a deduction from Marvin's gross estate?
$414,000 Correct. This answer is correct because deductions from the gross estate include unpaid property taxes, the headstone, an electric bill, and mortgage debt of $384,000 (60 percent). Gift taxes were previously paid, and a gift to charity and state death taxes paid are deducted from the adjusted gross estate.
Janice has retired early at age 55 and has a deferred annuity that she withdrew $50,000 from. She had originally placed $80,000 in this non-qualified annuity, and the account value before the withdrawal was $100,000. Calculate the amount she will be able to keep after taxes, assuming a 30% tax bracket.
$42,000 Correct. She will have to pay tax on the growth that was withdrawn (30% of $20,000) plus an early withdrawal penalty on the growth only (10% of $20,000).
In the current year, Sally had taxable income of $30,000, not considering capital gains and losses. In the current year, she incurred a $5,000 net short-term capital loss and a $5,000 net long-term capital loss. What is her long-term loss carryover to the following year?
$5,000 Correct! Since the $3,000 deductible loss comes first from short-term losses, the entire $5,000 long-term loss from the current year carries over to the next year.
Robert has a $12 million estate and is married to Devon. Robert's executor will make the following transfers into trusts at Robert's death. Which trust will not qualify for the marital deduction in Robert's estate?
$5,490,000 transferred to a testamentary bypass trust with Devon and Robert's son as trust beneficiaries. Correct. This is the correct answer because a marital deduction is not available for Devon's terminable interest in a bypass trust.
Phyllis, age 57, is planning to retire from her teaching job at a public school at age 60. The normal retirement age for staff at Monticello Public Schools is 62. Phyllis has been contributing to both a 403(b) plan and a 457(b) plan for the last 25 years. She would like to know the maximum elective deferrals that she can contribute.
$50,000 Correct. Because Phyllis is over age 50, she is allowed to contribute $19,000 to her 403(b) and $19,000 to her 457(b). In addition, each plan allows a $6,000 catch-up for those attaining age 50 in the contribution year. The total contribution amount for Phyllis is $50,000.
Calculate the amount of LTC insurance needed given the following (rounded): Current daily cost of LTC: $200 per day LTC inflation rate: 5% Client's age: 55 Estimated age that the client will need care: 80 Total number of years of care: 4 Assets designated to pay for LTC care: $100,000 Growth rate of assets: 7%
$522,736 Correct. Find Annual Cost of LTC today $200 x 365 = $73,000 Inflate to cost in 25 years FV = ? I/Y = 5% N = 25 PV = −73,000 FV = Cost of 1 year of care @ age 80 = 247,203.91 Calculate total cost over 4 years FV = ? I/Y = 5% N = 4 PMT = −247,203.91 FV = Total Cost = 1,065.479.76 Dtermine Growth of Funds FV = ? I/Y = 7% N = 25 PV = −100,000 FV = $542,743.26 Subtract Total Cost from Designated Funds $1,065,479.76 −$542,743.26 = $522,736.50
John has a long-term disability policy through his group plan, which he pays for through pretax dollars. He receives an annual salary of $150,000, and his group plan pays a 50% benefit. He also purchased a private disability plan that pays an additional 15% of his salary. If John is in the 30% tax bracket and were to become disabled, calculate how much he would receive monthly on an after-tax basis.
$6,250 Correct. He would receive a 50% benefit from his group plan, which would be taxable, and 15% from his private plan, which would not be taxable.
Colleen and Ryan are married and have executed wills that transfer all of their property interests to one another at death. The couple owns the following assets: -A primary residence worth $1.4 million titled as tenants by the entirety -Colleen's 401(k) worth $440,000, which names Ryan as beneficiary -Ryan's brokerage account worth $1.6 million that is titled TOD with Colleen -Ryan is the owner and beneficiary of a $200,000 life insurance policy on his brother Todd's life, which is valued at $60,000 -A $120,000 index mutual fund account owned by Ryan's revocable trust which will transfer to his son from a previous marriage at Ryan's death -A condo and fishing boat that Ryan owns with Todd as JTWROS worth $300,000 If Ryan were to die today, what is the value of his probate estate?
$60,000 Correct. This answer is correct because Ryan is the owner and beneficiary of the life insurance policy, but he is not the insured. Therefore the value of the policy will be included in Ryan's gross estate and his probate estate.
On June 15, 2017, Eric purchased stock in ABC Corp. (not small business stock) for $8,000. On January 14, 2018, the stock became totally worthless. How should Eric treat the loss in the current year when he files his tax return?
$8,000 long-term capital loss Correct! The loss is long term because with worthless stock, the transaction is treated as a sale on the last day of the year, making it long term.
During the current year, per the divorce decree (finalized before January 1, 2019), John made the following payments to Lisa: The entire mortgage payment on the house, owned jointly $10,800 Tuition for their child's school $ 6,000 Child support $ 4,500 Life insurance premiums on policy owned by Lisa $ 3,000 What is the amount of John's alimony deduction?
$8,400 Correct. Total of half the mortgage payments and the life insurance premiums qualify as alimony for divorces finalized before January 1, 2019.
Your client Jennifer is a 65-year-old widow and she approaches you about long-term care insurance. She knows that it can be expensive to pay for all of the long-term care out of her assets but does not want to buy a policy that will cover all of the expenses (she will self-insure some of the cost). In her area, a semi-private room costs $90,000 per year (increasing by 6% annually) and she would like to cover two-thirds of that expense through insurance. If she needs care in 10 years and is in the 30% tax bracket, approximately how much qualified coverage would satisfy her objective while keeping the premium to a minimum?
$9,000 per month Correct. This is the correct calculation: two-thirds of $90,000 divided by 12 months, inflated by 6% annually.
If interest rates go up by 0.25%, a bond with a duration of seven and a price of $985 will now trade at what approximate price?
$967.76 Correct. The price changes by approximately 1.75% (7 × 0.25) since rates went up the price must go down.
What is included on an income statement? -Deferred Compensation -Realized Capital Gains -Interest Earned on EE bonds -The current ratio
-Realized Capital Gains Correct! The income statement details the financial cash flows of a household over a set period of time, such as month or year, and capital gain realized during that period would be included.
Which of the following is not considered a fiduciary under DOL and ERISA guidelines? 1. A trustee of a large national charitable foundation 2. A plan administrator who provides regulator advice to a 401(k) plan 3. An SEC-registered investment adviser who manages an endowment for a mid-size municipality
1 & 3 The only individuals or firms that fall under DOL and ERISA rules are those who exercise discretionary control or authority over the management of a qualified retirement plan or provide advice regarding plan assets, have discretionary authority or responsibility for the administration of a plan, or provide investment advice to a plan for compensation, or have any authority or responsibility to do so. While trustees and registered investment advisers may also be fiduciaries, they are not considered fiduciaries under DOL and/or ERISA rules.
The value of the annuity grows based upon credits the insurance company issues in which of the following? 1. Excess interest annuity 2. Equity indexed annuity 3. Variable annuity
1 and 2 Correct. Both of these annuities pay interest based upon credits from the insurance company: Excess interest has a guaranteed and a non-guaranteed rate; equity index ties the credits to the performance of an outside index, such as the S&P 500.
Emily's dream is to become a stock broker. She wants to market and sell the widest possible range of investments. Which FINRA licenses does Emily need to hold? 1. Series 7 2. Series 63 3. Series 65 4. Series 66
1 and 2 The Series 7 is the general securities license that will allow Emily to sell a wide range of products, including stocks. The Series 63 is intended to test an applicant's knowledge to become a securities agent which is specific knowledge to become a stock broker. Remember that Emily will need to pass the Securities Industry Essentials (SIE) prior to sitting for the Series 7 and 63 examinations.
Ben believes that ABC Company is going to do extremely well over the next six months. Currently it is trading at $25 per share. Ben has $2,500 in cash and equity of $60,000. If Ben wants to buy as many shares as he possibly can, including using margin, how many shares can he buy? (Assume no margin debt outstanding and initial margin of 50% of equity.)
1,350 Correct. Ben can buy 100 shares with cash. He will then have $62,500 in equity, which allows him to borrow $31,250. This buys 1,250 shares. When you add this to the initial 100 shares, Ben owns 1,350 shares.
Which of the following individuals must disclose their behavior to the CFP Board at this time? 1. Heather, who had her securities license suspended for improper trades in a client's account. 2. Luke, who received a misdemeanor ticket for reckless driving. 3. Terrance, who was accused by a client of excess trading in a managed account.
1. Heather, who had her securities license suspended for improper trades in a client's account. This answer is true, and requires Heather to disclose that her license has been suspended due to the improper trades. She will need to respond to inquiries from the Disciplinary and Ethics Commission.
Which of the following income sources should be included when deciding how much a client needs to maintain as a cash reserve? 1. Social Security benefits 2. Benefits from a personal disability income insurance policy 3. Income from residential rental property 4. Tax refund
1. Social Security benefits Correct! Social Security benefits are guaranteed. If a client is already retired and/or eligible to collect benefits, it would be a stable source of income.
Teresa holds the CFP® marks. She owns a small advisory firm that specializes in providing advice to pre-retirees regarding IRA rollovers and distributions. She does not provide any advice or recommendations on the allocation of assets within someone's IRA. Instead, her recommendations entail advice on how to best facilitate the transfer or distribution of IRA assets. Assuming that this is Teresa's only professional service, which of the following statements is true? 1. Teresa is considered a fiduciary under Department of Labor (DOL) rules. 2. Teresa is considered a fiduciary under SEC rules. 3. Teresa is considered a fiduciary under CFP rules.
1. Teresa is considered a fiduciary under Department of Labor (DOL) rules. Correct. She is considered a fiduciary under DOL rules because she is providing recommendations with respect to rollovers, transfers, and distributions from IRAs.
Marco and Oliva are general partners of a family limited partnership. They transferred $500,000 of appreciating investment property to the FLP and will gift limited partnership interests to their two children. Which statement is correct? 1. The parents can reduce gift taxes on transfers of the limited partnership shares by using two discounts, a lack of marketability discount and a minority discount. 2. General partners can determine the value of the discounted gifts of limited partnership interests. 3. A minority discount is applied to limited partnership interests that do not offer a readily available market for trading. 4. When general partners transfer more than 50% of limited partnership interests to family members they no longer have complete control over FLP assets.
1. The parents can reduce gift taxes on transfers of the limited partnership shares by using two discounts, a lack of marketability discount and a minority discount. Correct. This is the correct answer because both discounts leverage the general partner's annual exclusion when FLP interests are gifted to limited partners.
Five years ago, Carrie created an irrevocable life insurance trust to hold a $1 million cash value life insurance policy. She transferred ownership of the policy to the trust and remained the insured. A Crummey notice was also issued. The trust is the insurance beneficiary. Carrie will transfer payments to the trust each year so that the ILIT trustee can pay the life insurance premiums. What is the correct tax consequence of this arrangement? 1. Transfers to the trust to pay the annual premiums are taxable to the extent they exceed the annual gift tax exclusion amount. 2. Carrie is responsible for paying income taxes on any dividends paid by the life insurance company. 3. The cash value of the policy will be taxed as a capital gain asset at Carrie's death. 4. The face value of the life insurance policy will be included in Carrie's gross estate because she is the insured.
1. Transfers to the trust to pay the annual premiums are taxable to the extent they exceed the annual gift tax exclusion amount. Correct. This is the correct answer because transfers made to irrevocable trusts are subject to gift taxes. Beneficiaries with Crummey powers have a present interest in trust so Carrie may reduce taxable gifts transferred to the trust by annual exclusions for each Crummey beneficiary.
Which of the following is not a reason to use a mutual fund? 1. Transparency 2. Professional management 3. Minimums 4. Diversification
1. Transparency Correct. Mutual funds must age their holdings before providing them to the public. You may have an idea of what the fund holds but you cannot know real time.
Zoe is considering investing in a private equity fund. The minimum investment is $50,000. If she invests that amount it is expected she would need to add another $10,000 one year later. It is expected that Zoe will get $5,000 for the following four years on the anniversary date. At the end of year six, no dividend will be paid but the fund plans to liquidate and give Zoe $80,000. What is the IRR for this investment?
10.17% Correct. It is best to draw a timeline for these questions. If you do, the following becomes clear: CF0 is −50K, CF1 −10K, CF2 +5K, CF3 +5K, CF4 +5K, CF5 +5K, CF6 +80K F IRR = 10.17%. Also be careful on the positive and negative cash flows.
Arthur is an attorney who owns and participates in a separate small business (not real estate) during the current year. He has one employee who works part-time in the business. Which of the following statements is correct? 1. If Arthur participates for 500 hours and the employee participates for 520 hours during the year, Arthur qualifies as a material participant. 2. If Arthur participates for 600 hours and the employee participates for 1,000 hours during the year, Arthur qualifies as a material participant. 3. If Arthur participates for 120 hours and the employee participates for 125 hours during the year, Arthur qualifies as a material participant. 4. If Arthur participates for 95 hours and the employee participates for 5 hours during the year, Arthur probably does not qualify as a material participant.
2. If Arthur participates for 600 hours and the employee participates for 1,000 hours during the year, Arthur qualifies as a material participant. Correct! If Arthur participates more than 500 hours he is a material participant.
Which of the following statements is false? 1. The beneficiary of an estate of trust may be taxed on money required to be distributed in a year, whether or not a distribution is actually made. 2. Money distributed to a beneficiary from an estate is taxed twice, on the estate income tax return, Form 1041, and on the beneficiary's 1040 tax return. 3. Tax-exempt interest distributed to a beneficiary is not taxable to the beneficiary. 4. Losses of estates and trusts are generally not deductible by the beneficiaries.
2. Money distributed to a beneficiary from an estate is taxed twice, on the estate income tax return, Form 1041, and on the beneficiary's 1040 tax return. Correct. This statement is false. The estate's 1041 tax return takes an income distribution deduction for income distributed to the beneficiary(ies) and issues a K-1 form to the beneficiary(ies) to report the beneficiary share of income.
Which statement does not accurately reflect the purpose of each intra-family transfer? 1. A sale lease-back removes business property from an owner's estate and provides income to family members in the form of lease payments. 2. A SCIN is used to prevent inclusion of outstanding installment note payments in a property owner's gross estate when the owner has a short life expectancy. 3. A GRIT transfers property in trust to family members at a reduced gift tax value. 4. A family LLC is structured to give members limited liability while avoiding income tax rules for corporations.
3. A GRIT transfers property in trust to family members at a reduced gift tax value. Correct. This is the correct answer because a GRIT is an unqualified interest therefore the grantor has a retained interest of zero when remainder beneficiaries are family members. The gift tax value is based on the value of the assets transferred to the trust.
Each of the following are ways cash value may grow in a permanent policy except: 1. Declared dividends 2. Applied interest 3. Individual stock growth 4. Subaccount growth
3. Individual stock growth Correct. A client cannot pick individual stocks to be placed into a life insurance policy to build the cash value.
A couple with two young children wants to begin an investment program to provide for their retirement and for their children's education. Which of the following is the least tax-efficient manner of helping them accomplish their goal? 1. Investing in individual Roth IRAs. 2. Investing in the wife's 403(b) plan or husband's 401(k) plan. 3. Investing in a growth and income mutual fund. 4. Investing in education savings accounts for the children.
3. Investing in a growth and income mutual fund. Correct! This is the least tax efficient way to save since contributions are not tax deductible and earnings are taxed each year.
Neville created and funded a revocable living trust two years ago. Neville also serves as the trustee. His niece, Nelda, is the beneficiary of the trust. Which of the following statements is correct? 1. Nelda is responsible for paying all income taxes from earnings on assets held in the trust. 2. Nelda, as trust beneficiary, must pay income taxes on her pro rata share of income distributed from the trust. 3. Neville is responsible for paying all income taxes from earnings on assets held in trust. 4. Neville and Nelda must pay an equal share of taxes on trust earnings.
3. Neville is responsible for paying all income taxes from earnings on assets held in trust. Correct. This answer is the correct answer because Neville as grantor is responsible for paying all income taxes from earnings on assets held in trust.
Sally died last month and her executor Fred must determine the liquidity needs of her estate. Sally made lifetime gifts that exceeded her exemption amount, therefore Fred must ascertain whether any unpaid gift taxes must be paid from a funding source that is identified in Sally's will. Which of the following gifts is subject to gift tax and must be reported on Sally's final gift tax return? 1. A net gift of $300,000 that Sally made to her daughter Cloe this year. 2. A reverse gift whereby Sally's sister Ruth gifted Sally low-basis stock she owned 18 months ago when she learned Sally was seriously ill. The stock was transferred to Ruth at Sally's death by her will. 3. A transfer of $1,500,000 to a skip-person irrevocable trust that Sally made two years ago. At the time the trust was established, Sally allocated $1,500,000 of her GST exemption to the trust and had $2 million of her unified credit remaining after the gift was made. 4. A bargain sale Sally made to her daughter Cloe this year in which she transferred beachfront property worth $1 million to Cloe for a sale price of $400,000.
4. A bargain sale Sally made to her daughter Cloe this year in which she transferred beachfront property worth $1 million to Cloe for a sale price of $400,000. Correct. This answer is correct because Sally owes a gift tax on this transfer. The difference between the sale price and the fair market value of the property ($600,000) is the value of the taxable gift. Sally's executor Fred will report this gift on Sally's final gift tax return and because her unified credit has been depleted, Fred will pay a gift tax from a funding source identified in Sally's will.
Which statement regarding a grantor retained trust is not correct? 1. The gift tax value for the remainder interest is less than the FMV of the assets transferred to the trust because the beneficiaries do not have current use of the trust assets. 2. The grantor, not the trust, pays income tax on the income distributed during the income term. 3. Once a GRAT has been funded, no additional contributions are allowed to the trust. 4. When a grantor survives the income term, a step-up in basis is allowed for the trust property at the grantor's death.
4. When a grantor survives the income term, a step-up in basis is allowed for the trust property at the grantor's death. Correct. This is the correct answer because no step-up in basis is allowed for property transferred to a trust.
Jim and his wife, Charlotte, each age 50, own a consulting business. The business is nonincorporated and cash flows are variable. Each earns $200,000 in net profit from the business. They are looking to maximize their annual contributions to a pretax retirement plan. What plan will provide Jim and Charlotte the maximum deferral?
401(k) profit sharing plan Correct! Based on their net income, the 401(k) profit sharing plan would provide: $25,000 (2019) ($19,000 + $6,000) in elective deferrals plus a profit sharing amount that would cap at the 415(c) limit of $62,000 (2019) ($56,000 + $6,000). The profit sharing/s contribution is calculated identically to the SEP IRA; however, it has the added benefit of an elective deferral.
Prosperity Inc. offers a defined benefit plan for their 200 employees. How many employees of the firm must benefit from the plan? 50 employees 80 employees 2 employees
50 employees Correct. Minimum participation rules for a defined benefit plan require: On each day of the plan year, a defined benefit plan must benefit the lesser of: 50 employees of the employer, or the greater of: 40% of all employees of the employer, or Two employees (or if there is only one employee, such employee).
Calculate the yield to maturity of the following bond: $1,000 par with a coupon of 6% and maturity of 10 years that is currently trading at $962.
6.52% Correct. Enter as follows on the HP12c: $1,000 FV; $−962 PV; 30 PMT ($60/2); 20 N (10yr*2); I = 6.52 (3.26*2).
Your client Bill wants to hedge the risk of XYZ stock, which he currently owns. He is thinking about buying a put option but feels it is too expensive. What is a strategy that you might suggest to Bill?
A collar Correct. By using a collar Bill will buy a put and sell a call. The premium received from the call will offset some or all of the put cost.
Which of the following investments is the best to hold in a non-retirement account based on tax consequences (assume risk tolerance is not an issue)? Zero-coupon bond (pays only at maturity) A dividend-paying stock A corporate bond maturing in three years A REIT mutual fund
A dividend-paying stock Correct. A dividend-paying stock is the best answer because dividends may be treated as qualified, and gains will be paid at the preferred capital gain rate when sold.
Tony is age 70 and Kate is age 64. They are married and file a joint tax return. They have no dependent children. Kate is legally blind. Which of the following does Kate qualify for? Personal exemption of $4,200 Additional personal exemption Additional standard deduction Personal exemption of $4,200 and additional standard deduction
Additional standard deduction Correct! Kate qualifies for the additional standard deduction because she is blind.
Agnes has been giving her granddaughter $15,000 each year for the last five years. The average cost of a nursing home in her state is $5,000 a month. She also gifted her granddaughter $100,000 six years ago. Agnes is in need of long-term care (LTC) and wants to know if she is eligible for Medicaid should she be required to go to a nursing home. If she is not eligible, what is the penalty for violating Medicaid rules?
Agnes will be ineligible for 15 months of coverage and will have to pay out of pocket. Correct. Based on the facts presented, Agnes gifted her granddaughter during the look-back period. As such, Agnes will be ineligible for Medicaid coverage for 15 months based on the amount she gifted, $75,000 divided by the average cost of the state's nursing home stay, which equals $5,000. The look-back period as stated in the fourth option is incorrect, the look-back period is only five years. Take the amount transferred during the look-back period and divide by the state's average cost of a nursing home stay.
Which of the following are characteristics of exchange-traded funds (ETFs)? 1. Real-time trading 2. Transparency 3. Cost 4. Ability to trade derivatives 5. Taxes
All 5. Correct. All of the above are characteristics of ETFs.
Frank has always been a hard worker. He will be attending college in six years. He believes he can cover $15,000 of his tuition (including 3% yearly increases) in various entrepreneurial efforts that will not take away from his studies. If school will cost $22,000 and increase yearly at 3% during his four years, how much will he need to have saved prior to entering if he can grow his investments at 7%?
Approximately $26,500 Correct. First determine what Frank's yearly cost will be. Since he knows the future yearly tuition, and he knows he can offset a large portion of it with his entrepreneurial skills, he will be left with $7,000 per year. Over four years, considering inflation and investment return, he will need approximately $26,500 to be fully funded. Total Cost of College Future yearly cost 22,000.00 Future yearly income (15,000.00) PMT 7,000.00 ========= N 4 7,000.00 I/Y* 3.88% FV 0 PV Annuity Due 26,468.67 *(1.07 ÷ 1.03 - 1) × 100 = 3.88%
Matt has won a $20,000 scholarship to pay for his first year of college, which he will begin in 10 years. He plans to be at school for only three years. The first year of tuition is estimated to be $30,000 when he enters. If tuition is expected to rise 5% while he is in school, and he can earn 6% from the money saved, how much will he need when he enters college?
Approximately $69,000 Correct. The first step is to calculate the total future cost of three years of college. This is done using the future tuition, the number of years in school, tuition inflation, and investment return. Once this is determined, the scholarship will be deducted from the total: Total Cost Of College PMT 30,000.00 N 3 Total Cost 89,153.62 I/Y* 0.95% Scholarship (20,000.00) FV 0 ======== PV Annuity Due 89,153.62 69,153.62 *(1.06 ÷ 1.05 - 1) × 100 = 0.95%
Ben and Liz had lived together as an unmarried couple for 16 years. Ben had purchased their residence before he met Liz and 2 years ago he changed ownership of the home to tenancy in common with Liz. The home was valued at $1.4 million at the time the gift was made. Assume that Ben died this month and the home was worth $1.6 million. What is the taxable gift?
Ben's estate tax return will include $685,000 as an adjusted taxable gift. Correct. This answer is correct because Ben made a gift of one-half of the $1.4 million home minus an annual exclusion of $15,000. The taxable amount of the gift, $685,000 is added to his IRS Form 706 as an adjusted taxable gift.
If the market risk premium is currently 8% and the risk-free rate is 2%, which of the following funds have the best and the worst alpha? Fund 1: Return 11.5% / Beta: 1.10 Fund 2: Return 9.2% / Beta: 0.95 Fund 3: Return 9.4% / Beta: 0.90 Fund 4: Return 13.7% / Beta: 1.20
Best: Fund 4 / Worst: Fund 2 Correct. Alpha = Rp - E(Rp) or Alpha = Rp - (Rf +b(Rm-Rf)) Given this, the alpha for each fund is: Fund 1: 0.70, Fund 2: −0.40, Fund 3: 0.20, Fund 4: 2.10. We want to select the highest alpha as the best and the lowest as the worst.
Jeff and Kristen are in their mid-40s, are married, and have three children. In your conversation with them, you discover that they need substantial life insurance coverage to meet their goals of paying off debts, establishing a college fund, and saving for future goals. They are aggressive investors but are on a premium budget to meet these goals. Which of the following would be most appropriate to present to them? 1. Term life 2. Whole life 3. Universal life 4. Variable universal life
Both I and IV Correct. The term policy will help them cover a large need with minimal premiums, and the variable universal life will allow them to invest in the market as aggressively as they want through the policy's subaccounts.
Government loan limits for college depend on several factors. Which one of the following comments regarding loan limits is correct? -The unsubsidized loan limits for dependent and independent students are the same in undergraduate programs. -The subsidized loan limits for dependent and independent students are the same in undergraduate programs. -Independent subsidized graduate loan levels are higher than undergraduate levels. -There is no aggregate subsidized or unsubsidized loan limit.
Correct! Even though the unsubsidized amounts are different, the subsidized loan limits are the same. The amounts start at $3,500 for year 1, move to $4,500 in year 2, and max out at $5,500 per year for year 3 and beyond.
John is asking what might be some of the differentiating features of a qualified plan as opposed to a tax-advantaged plan. Which of the following statements regarding the nonqualified plans is correct? 1. Some non-qualified plans allow lending features. 2. Nonqualified plans have ERISA protection. 3. Vesting is typically not required in a nonqualified plan. 4. There is no tax deduction for any nonqualified plan.
Correct. Nonqualified plans generally do not have lending features. That is a feature specific to qualified plans. Nonqualified plans do not have the same ERISA protection available to a qualified plan. A qualified plan has an anti-alienation feature, which prevents most creditors from ever garnishing assets inside the plan. The federal government is an exception. Another exception is a qualified domestic relations order when divorced couples might be separating marital property. IRAs, for example, have bankruptcy protection up to a certain limit. Vesting is usually unique to ERISA-based qualified plans. IRAs, including SEPs and SIMPLEs, have no vesting schedule. Traditional IRAs, SEP IRAs, and SIMPLE IRAs, as well as 403(b)s and 457(b)s provide pretax contributions and, thus, tax deductions.
Jen is evaluating a large-cap growth stock mutual fund. The fund has had the same solo portfolio manager running it for the last 20 years. Jen has found that the return of the portfolio is 8.57%, while the risk-free rate is 1.95%. The standard deviation is 9.23% and the beta is 1.07. Jen asks you to help her calculate the Sharpe and Treynor ratios and decide which ration to use.
Correct. Sharpe ratio is best for a single mutual fund managed by a solo manager. Sharpe = Rp−Rf/Std. Dev. = 8.57−1.95/9.23 = .72
Debbie wants to pay for her grandchild's college tuition this year. She has a mutual fund portfolio worth $250,000, which returns 5% a year. She has checking and savings accounts worth $100,000 and $300,000, respectively, that earn minimal interest. Debbie had previously contributed $25,000 to her grandchild's UTMA account established by her son and the account balance is now worth $38,000. As her financial planner, what recommendation would you make to help Debbie meet her gifting goal?
Correct. This is the correct answer because paying tuition directly to a college is not a taxable gift and Debbie should pay from an account that does not provide her with much investment return.
Which of the following credits is refundable? The credit for the elderly and disabled The home energy credit The earned income credit The credit for dependent care expenses
The earned income credit
A traditional split-dollar life insurance arrangement can be a source of liquidity for an employee's estate at death. Which statement regarding this arrangement is not correct? 1. At the employee's death, the greater of the cash value or premiums paid is paid to the employer and the balance of the proceeds is paid to the beneficiary of the policy. 2. The employer pays the portion of the annual premium equal to an increase in the cash surrender value of the policy and the employee pays the balance of the premium. 3. A private split-dollar life insurance arrangement can be used between family members. 4. Employees cannot transfer their share of the policy into an ILIT to protect distributions from being included in his or her gross estate.
Employees cannot transfer their share of the policy into an ILIT to protect distributions from being included in his or her gross estate. Correct. This statement is not correct because an employee can transfer his or her share of the policy into an ILIT to avoid inclusion of the benefit in their gross estate at death.
Widget Company has seen its debt ratios expand each quarter for the last two years. What risk are analysts likely to worry about?
Financial risk and default risk Correct. Financial risk is due to the weakening of the balance sheet and the potential for default risk exists if this continues and the firm cannot pay its debt.. Business risk is a result of the firm operations. Default risk is correct if the balance sheet continues to deteriorate the firm may struggle to repay its debts.
Based on the last five years of return data which of the following 4 mutual funds had the lowest and highest standard deviation? Fund 1: 5, 8, −2, 5, 3 Fund 2: 4, 9, 0, 4, 9 Fund 3: 10, 11, −4, 10, 12 Fund 4: 6, 3, 5, −3, 8
Fund 1 (low) and Fund 3 (high) Correct. Using the E+ function on the HP12C you can enter the returns as R1 E+, R2, E+..... then hit g "." to get standard deviation.
You are evaluating three small-cap stock funds. You want to know which fund has the best manager performance relative to its expected return. Fund ABC returns 12.5% with a beta of 1.15, fund EFG returns 11% with a beta of 1.11, and fund XYZ returns 15% with a beta of 1.5. The Treasury is trading at 2.6% and the expected market return is 8%. Which fund has the best alpha?
Fund XYZ with an alpha of 4.3% Correct. Alpha = Rp - E(Rp) where E(Rp) = (Rf + B × (Rm - Rf)). Fund ABC has an alpha of .0369 or 3.69%. Fund EFG has an alpha of .0241 or 2.41%. Fund XYZ has the highest alpha at .043 or 4.3%. ABC: 0.125 - (0.026 + [1.15 × {0.08 - 0.026}]) = .0369 EFG: 0.11 - (0.026 + [1.11 × {0.08 - 0.026}]) = .0241 XYZ: 0.15 - (0.026 + [1.5 × {0.08 - 0.026}]) = .043
Your client recently graduated from college and is renting an apartment in the city and walking to work. Which of the following policies are you most likely to discuss with this client?
HO-4 Correct. This coverage (tenants and cooperative policies) protects a client's property when renting, as well as providing some personal liability coverage.
Suppose Cliff had $125,000 in taxable income from his business, and mistakenly believes the income was actually a loss. As a result he converts $125,000 from his pretax IRA to a Roth IRA. Which of the following is true about Cliff's options?
He has no options. He must pay the tax from the conversion amount, but there will be no penalty. Correct. Cliff must pay the income tax on the conversion but is not subject to the penalty. Prior to December 31, 2017, Cliff could have recharacterized the Roth conversion, but that option has been eliminated due to tax law changes.
Irene has been working for Action LLC for one year. Action sponsors a SIMPLE IRA plan. Irene elected to defer $13,000 and Action matched 3% of her $300,000 salary. Irene has just been offered a better job at Legacy Outfitters. What are Irene's options when she separates from Action?
If Legacy offers a SIMPLE IRA, she can roll over her SIMPLE from Action to Legacy. Correct. The SIMPLE IRA is an odd plan in that a distribution or transfer made from a SIMPLE during the first two years of participation will incur a tax and an egregious penalty of 25% (not 10%). If Legacy offers a SIMPLE, she can transfer her existing funds to Legacy's SIMPLE. If Legacy does not have a SIMPLE, the only logical recourse that Irene has is to leave the SIMPLE at Action for one more year.
Why is this statement incorrect: Gary and Vickie are married and live in a community-property state. Gary made a QTIP election for the lifetime income interest he gave to Vickie in an irrevocable trust therefore the trust will not be included in Vickie's estate at her death.
Incorrect. The answer is incorrect because a QTIP election allowed Gary to take a gift tax marital deduction on IRS Form 709, causing the tax to be postponed and the trust property included in Vickie's estate at death.
When would a client not pay a deductible in an automobile policy?
Injury to another individual Correct. Deductibles generally do not apply to liability coverage, only property damage.
Omar recently sold his business for a significant amount of money and now he plans to retire. His financial goals for the money include: (1) providing enough income for his personal needs, (2) controlling use of the assets throughout his lifetime, (3) reducing probate costs, and (4) passing his wealth to his family after his death. What trust arrangement is most appropriate to meet Omar's goals?
Inter vivos revocable trust Correct. This is the correct answer because Omar will have complete control over trust income and assets and can appoint family members as beneficiaries to receive trust assets after his death.
Jessica bought a bond on December 1st. The bond was issued on January 1st. The semi-annual coupon is 7% ($1,000 par). What is the coupon amount Jessica will next receive and how much accrued interest will Jessica pay?
Interest to Jessica on 1/1 is $35 and accrued interest when the trade is placed is $29.17 Correct. The bond pays $35 semiannually ((1,000 × .07)/2). Since Jessica is buying the bond after five months, the accrued interest is $29.17 (35 × (5/6)). This is paid and then deducted on Jessica's 1099.
Which source of education savings would result in earnings taxed under kiddie tax rules?
Interest-paying bonds that are gifted to a minor child who is in a lower income tax bracket than her parents Correct. This is the correct answer because bond interest is taxed to a minor under kiddie tax rules.
Your client Dan called you because he had heard about a life insurance policy, called a hybrid policy, that could be used to pay for long-term care. Do the benefits get paid from the death benefit or cash value?
It pays benefits from the death benefit. Correct. This is how the hybrid plan pays benefits, with the same triggers as an individual long-term care policy.
Erin created a trust with $1 million of dividend-paying securities. Her husband Liam has the right to receive all income for life, and at his death, the trust assets will be distributed to Erin's daughter, Addie, who is the remainder beneficiary. Erin has also given Liam a general power of appointment over trust corpus. Which power is a general power of appointment that will qualify the transfer for a gift tax marital deduction?
Liam has the right to appoint trust property to his estate. Correct. This is the correct answer because a general power of appointment allows the holder to appoint property to his or her estate.
Calculate the mean and standard deviation for the following mutual fund: −37%, 27%, 12%, 6%, 15%, 11%, −5%:
Mean: 4.14 / Standard Deviation: 20.53 Correct. Using the E+ function on the HP12C you enter the returns above (remember to us CHS) for negatives. Then hit g "0" and g "."This will give you mean and standard deviation.
Your client Jessica is debating on what bond to purchase in her non-retirement account. She has narrowed it down to the following: a 4.1% agency bond, a 3.9% municipal bond, a 4% zero-coupon bond (Treasury), and a 4% Treasury bond. Assuming all the bonds have the same maturity, what is the best option if Jessica's income is $250,000 per year?
Municipal bond Correct. Based on the information provided, the municipal bond will provide the best after-tax return. Incorrect. The zero-coupon bond will pay phantom income. Incorrect. The Treasury bond is taxable as ordinary income. Incorrect. The agency bond is taxable as ordinary income.
Jessica comes to you seeking advice on whether she should buy a property that just hit the market. The list price is $1.2 million. She has talked to the real estate agent and has the following information. The building has four apartments that rent for $3,000 a month each. Usually one of the apartments is open due to vacancy. The total basic upkeep and maintenance cost is about $20,000 per year. Jessica will pay all cash. What is the net operating income (NOI) and what price should Jessica pay based on a 6.5% capitalization rate?
NOI = $88,000; Value = $1,353,846 Correct. Gross Rental Receipts = $144,000; Vacancy Losses = $36,000 (i.e., $3,000 × 12); Maintenance Cost = $20,000; NOI = $88,000. $88,000/0.065 = $1,353,846
For an investor to access certain alternative investments including hedge funds and private equity, they often need to be accredited. An accredited investor is one with which of the following?
Net worth of $1 million or annual income of $200,000 ($300,000 for married couples)
Hank Bradley was a U.S. citizen whose estate, valued at $6.1 million, was bequeathed to his son John. The largest asset in Hank's estate was his interest in Birchwood Industries, a closely held corporation in Vermont that has been in operation for the past 25 years. The FMV of Hank's stock in Birchwood Industries was $2.8 million, which is 25 percent of the value of all voting shares of Birchwood Industries stock. The corporation has real estate interests worth $6.4 million. The estate has debts totaling $400,000. Does Hank's estate qualify for a special use valuation discount?
No, because the 50 percent test was not met. Correct. This answer is correct because the 50 percent test was not met. The value of real and personal property (less debts or unpaid mortgages) in the decedent's estate must equal at least 50 percent of the decedent's gross estate. In this case, $2,800,000/$6,100,000 = 46 percent.
Are renewals allowed for compensation of a fee-only practice?
No. Renewals are paid by insurance companies on products already sold and are not allowed if a CFP claims to be fee only.
What is the maximum limit in the safe harbor formula?
Only $280,000 in compensation can be applied to the formula.
Income paid to REIT shareholders is taxed as ______, while sales of the property inside the REIT are treated as ______.
Ordinary income; long-term capital gains Correct. Income paid is not taxed at the REIT level and is therefore ordinary income to shareholders. In addition, property sold in the REIT is always treated as long-term capital gains.
What does CFP Rule 1.3 require?
Rule 1.3 requires a written agreement be executed to govern the financial planning services.
Mike and Pam, ages 67 and 65, respectively, filed a joint tax return. They provided all the support for their 17-year-old son, who had $2,200 of gross income. Their 22-year-old daughter, a full-time student until her graduation on June 25 of this year, earned $2,500. Her parents provided her remaining support. Mike and Pam also provided total support for Pam's father, who is a Colombian citizen and a resident of Colombia. Who is a dependent on Mike and Pam's tax return?
Son and daughter
A wheat farmer is long wheat in his field. What should he do in the futures market to hedge against the price of wheat falling before the harvest?
Sell Wheat Futures Correct. If a farmer is long wheat (on the farm), to offset this risk of wheat prices falling, the farmer would open a short position in the future market.
Elizabeth, age 59, is planning to retire from her public school job at age 65. The normal retirement age at Lawrence Public Schools is age 62. She has been contributing to both a 403(b) plan and a 457(b) plan for the last 30 years, however, there have been many years where she didn't max out 457(b) contributions. If she had contributed the max each year to her 457(b) plan, she would have had an extra $30,000 in contributions. She now would like to know her options for maxing out her contributions.
She can make both a $25,000 contribution and a final three-year catch-up contribution to her 457(b) plan. Correct. She is eligible for the final three-year catch-up contribution and can make a total contribution of $38,000. She can still contribute to the 457(b) after the normal retirement age for Lawrence Public Schools if she is still employed.
A ______ allocation is designed to meet a client's long-term investment goals and objectives and is seldom updated with the exception of rebalancing and changes to client goals.
Strategic Correct. Strategic allocations are set up for long-term goals and are generally updated only when rebalancing to the original target is needed or the client circumstances change.
Ben placed $100,000 into a variable deferred annuity. In which of the following situations would there be no tax due? 1. Surrendering the annuity at age 52 when the account value is $90,000 2. Withdrawing $5,000 from the $120,000 account value at age 62 3. Annuitizing the contract at age 65 4. Surrendering the qualified annuity at age 55 when the account value is $90,000
Surrendering the annuity at age 52 when the account value is $90,000 Correct. If the account value is less than the original premium deposited, there will be no tax due. 4. is incorrect because A qualified annuity has all tax-deferred money, so Ben would be subject to both income tax and a 10 percent early-withdrawal penalty
Jim and Dolores Smith have come to you for assistance with selecting the right Medicare policy for their needs. Both are looking for flexibility and full coverage for the plan that they select. They have also informed you that many of their doctors are in the Northeast and the Southeast. In addition, they want a plan that would allow them to select doctors of their own choosing regardless of where those physicians practice. Help Jim and Dolores determine the best plan to select. They have been putting into the Medicare system since they first began work 45 years ago.
The Smiths should select Part B and Part D along with Part A. Correct. A Medicare Advantage, or Medicare Part C plan would not give the Smiths the flexibility that they are looking for. They want to be able to select any physician, anywhere within the United States. Part C or Medicare Advantage, in essence, works as an HMO. The Smiths will need Part A to cover all inpatient needs, Part B to cover outpatient needs, Part D to cover drug needs, and a Medigap or supplemental policy to cover the gaps from Parts A and B coinsurance and copays.
Why is this statement incorrect: Kathryn gifted income-producing real estate to a trust to benefit her husband Jake and their two children. Jake may receive trust income as needed and the trustee may distribute principal to him according to an ascertainable standard. The children will receive the trust corpus at Jake's death. Kathryn can take a marital deduction to offset the taxable gift transferred to this trust.
The answer is incorrect because Jake does not have access to all income and only has a special power of appointment over corpus therefore a marital deduction is not available to Kathryn to offset the tax on this gift.
Why is this statement incorrect: Kevin's will establishes a testamentary bypass trust for the benefit of his surviving spouse, Tara. At Kevin's death, the property passing from the will to the trust will receive a marital deduction in Kevin's estate.
The answer is incorrect because the bypass trust does not give Tara the right to all income for life, therefore property in the trust does not qualify for a marital deduction.
Jorge became subject to AMT for the first time last year. He had to make several adjustments to his regular taxable income to arrive at alternative minimum taxable income. Which of the following AMT items will give Jorge an AMT credit to use in a future year? 1. Real estate taxes paid on his primary personal residence 2. The bargain element in exercise of incentive stock options 3. Interest on private activity municipal bonds 4. Miscellaneous itemized deductions subject to an adjustment for 2% of adjusted gross income
The bargain element in exercise of incentive stock options Correct! This is a deferral item and can generate an AMT credit to use in future years.
When selecting a benchmark for a client's portfolio, you observe the below R2 information for several benchmarks. Based on this information which benchmark has the best explanation of the portfolio? AND what asset class is in this portfolio? S&P 500 R2: 0.87 Russell 1000 R2: 0.90 Barclays Aggregate: R2: 0.10 MSCI EAFE: R2: 0.15
The best benchmark is the Russell 1000 and the portfolio is weighted towards large-cap stocks. Correct. The Russell 1000 has the highest R2; this is potentially the best benchmark. In addition, this question forces you to know the major benchmarks. The Russell 1000 and S&P 500 are both large-cap U.S. stock benchmarks.
Pat has a required return of 9% for all stocks he buys. If XYZ just paid a dividend of $0.95 and is trading at $22, XYZ is expected to grow at 5%. What is the expected return and should Pat buy XYZ?
The expected return is 9.53% and Pat should buy XYZ. Correct. R=D1/V + G so 0.95(1.05)/22 +0.05 = 0.0953 = 9.53%. Since the hurdle rate for Pat is 9% XYZ is expected to exceed his required return so he should buy.
George wants to sell his rental beach home and purchase rental property in the mountains. His friend tells him he can do a nonsimultaneous tax-free exchange as long as the fair market value of the mountain property is equal to or greater than the fair market value of the beach property. How long after selling his beach property does George have to identify and purchase the mountain property?
The mountain property must be identified within 45 days of the closing of the beach property and must be closed within 180 days of the closing of the beach property.
You learn that the market tends to have a negative skew on its returns. Rank in order of smallest to largest the median, mean, and mode of a distribution with negative skew.
The order is: mean, median, mode. Correct. With a negative skew extreme negative returns pull down the mean. This leaves the order a mean, median, mode.
The capital market line (CML) is created by combining what two assets?
The risk-free rate and the risky portfolio along the efficient frontier
Larry's Ad Agency provides a 401(k) profit sharing plan for its employees. Larry provides a generous 6% match and also the potential for a profit sharing contribution. This year profits were substantial, so over the 6% match, Larry will also contribute 10%. Why is the following incorrect advice to give Larry's Ad Agency? Fran, age 60, who earns $300,000 and contributes $25,000 to her 401(k). Fran will receive a total contribution of $72,000. This includes her elective deferrals, match, and profit sharing contribution.
This answer does not factor in the 415(c) limit. In effect, the total of all contributions, pre- and Roth-elective deferrals, after-tax contributions, employer matches, forfeitures, and profit sharing amounts in 2019 cannot exceed $56,000. For those age 50 or older, the limit increases to $62,000 as a result of the $6,000 catch-up. Finally, there is a compensation limit that can be applied to our formula. For 2019, the compensation limit is $280,000. So, although Jane earned $500,000, the employer's contribution is limited to $280,000 × 6% match and $280,000 × 10% profit sharing match. This total is further limited by the 415(c) limit which caps total contributions to $56,000 for those under age 50.
Enos has recently retired and is about to begin receiving his first required minimum distribution (RMD). Enos is in a 24% tax bracket. He has the option of taking his first RMD April 1, next year. The distributions will be over $50,000 each year. Why is the following statement is not proper thinking regarding his RMDs? Enos should simply defer as long as he is able to defer and select the grace period distribution.
This question requires the reader to think about the efficacy of distributing the first RMD into the grace-period year. It's important to think about potential tax consequences when determining whether to defer or distribute at the required beginning date with no grace period. Enos should consider that selecting the grace period distribution now requires him to take two distributions in the same tax year. It is conceivable that this strategy could move him into a higher marginal tax bracket. Enos should perhaps take his first distribution as close to December 31 as possible, thus allowing the time value of money to potentially increase the account value. Enos will be required to satisfy his second distribution by December 31 the second year if he opts to defer distribution to the grace period year.
Cole lives in Texas, a community-property state, with his wife Chantel. Both Cole and Chantel are U.S. citizens. Cole owns $100,000 in separately owned assets and the couple has marital property worth $2 million. How can Cole maximize use of a marital deduction in his estate at death?
Transfer his ownership interest in property to Chantel by will. Correct. This answer is correct because asset ownership does not transfer automatically (as is the case with assets titled JTWROS), therefore a will must be used to transfer separate and community property to a spouse in a community-property state. This allows a decedent spouse to utilize a marital deduction in his or her estate.
Sheila and Josh own rental property on the South Carolina coast. The property has been in Sheila's family for six generations and has been appreciating in value. Sheila is concerned that when the couple dies, the value of the property will subject their estates to an estate tax. Sheila does not want to sell the property or give it away, and she wants the property to ultimately pass to her children. Sheila also wants to contribute to a local conservation charitable organization this year and provide them with financial support for the next four years. What trust can accomplish all of Sheila's objectives?
Transfer the property to a non-grantor charitable lead trust to benefit the conservation organization. Correct. This is the correct answer because the trust will provide income to the charity for a number of years and the children will receive the property in trust after the income period ends. The value of the property will be excluded from the couple's estates.
Arbitrage pricing theory (APT) focuses on which of the following factors Expected inflation Expected changes in industrial production Expected change in the term structure of interest rates Unanticipated changes in risk premiums
Unanticipated changes in risk premiums Correct. Only IV is correct. APT is used to price unexpected changes. Expected changes should already be priced into the market.
What is uncertainty risk?
Uncertainty risk is the risk that an event falls outside of a model or outside of traditional risk model. This can never be accounted for with Monte Carlo analysis.
Which of the following types of insurance has its cash value grow based upon subaccounts? Whole life Universal life Indexed universal life Variable universal life
Variable universal life Correct. The client selects which subaccounts he/she would like to use to grow the cash value inside this contract.
Which level of efficient market hypothesis (EMH) rules out the benefit of technical analysis but NOT non-public information?
Weak form Correct. Weak form rules out use of past price information but not non-public information.
Hank Bradley was a U.S. citizen whose estate, valued at $6.1 million, was bequeathed to his son John. The largest asset in Hank's estate was his interest in Birchwood Industries, a closely held corporation in Vermont that has been in operation for the past 25 years. The FMV of Hank's stock in Birchwood Industries was $2.8 million, which is 25 percent of the value of all voting shares of Birchwood Industries stock. The corporation has real estate interests worth $6.4 million. The estate has debts totaling $400,000. Does Hank's estate qualify for a stock redemption and installment payment of estate taxes?
Yes, because the 35 percent test was met. Correct. This is the correct answer because the value of Birchwood Industries was more than 35 percent of Hank's adjusted gross estate. Hank's adjusted gross estate equals $5.7 million ($6,100,000 - $400,000 in debts). $2,800,000/$5,700,000 = 49 percent.
Bonds with ______ convexity relative to other bonds will _____ in value at a faster pace when interest rates decline.
higher; increase Correct. Convexity is always a benefit to bondholders. Bonds with high convexity will increase faster when rates fall and decrease more slowly when rates rise.
You are evaluating adding one of three investments for your client's portfolios. Based on all the research you have available, you believe the stock market will decline over the next 12 months. If you use a ______ strategy you should use the investment with the lowest _______.
tactical; beta Correct. Tactical investment strategies make investment decisions in the short term, based on the expected return of the market. Lowering the beta is a way to protect in a down market.
Investment returns that are leptokurtic can be a concern because the central tendency has a __________ peak but the tails are __________, this means while it is more likely returns are on average around the center point there are high likelihood of extreme returns in either direction.
taller; larger Correct. Leptokurtic distributions have larger peaks. This means most of the returns center around the average but there is higher likelihood for extreme returns.
Your client John has asked you the total cost of college for his son. His son is 12 years old and will begin school when he is 18. John believes college will grow at a rate of 7% , and that he will get a 10% return on his investments due to the aggressiveness of his portfolio. How much will John need to have for his son on the first day of college to cover five years of tuition that is currently $17,000 per year?
~$121,000 Correct. Per the following calculation, the total for five years of school would be: Step 1 Step 2 Future Cost of First Year of College Cost of 5 Years of College When Entering School PV (17,000) PMT 25,512.42 N 6 N 5 I/Y 7.0% I/Y* 2.80% PMT 0 FV 0 FV 25,512.42 PV Annuity Due 120,799.90 *(1.10/1.07 - 1)÷100 = 2.8% Remember, this is an annuity due, since the tuition will be required before attending school.
