Zahn Practice Sets

Question 28 Jed has the following financial positions on January 1st ("He paid" column) and the following positions at year end (12/31 value). He Paid Dividend paid for the year 12/31 value 200 ABC $ 8 per share -0- $ 6 per share 200 DEF $12 per share $30 $14 per share 200 XYZ* $15 per share $120 $12 per share *XYZ split 2:1 in June. What is his December 31st financial position relative to his January 1stfinancial position if the dividends are saved? a. -$450 b. +$350 c. +$1,890d. +$1,950

The correct answer is: D

Question 5 Mrs. Elbert, an existing client, has just turned 70 years old. She has $10,000 in the bank and a modest yearly income of $20,000 (retirement plus Social Security benefits). She averages $10,000 a year in medical and disability-related expenses. She is generally opposed to living in a nursing home and wants advice on long-term care insurance policies. What should a CFP® professional do? a. Sell her the best LTC policy available there is a duty to honor her stated objective. b. Investigate long-term care policies and explain her options under Medicaid and Medicare, and let her make a decision. c. Explain that Medicare will automatically cover her up to 100 days in a LTC facility. d. Tell her the LTC premiums will be too expensive at her age, and there is no way to help her. The correct answer is: B

Answer C is only correct if she is diagnosed to improve, Answer B is the best answer. The question says you are a CFP® practitioner and she wants advice on long-term care insurance policies. You should give her all the alternatives and let her make the decision. The CFP Board wants us to educate clients. She asked about LTC, therefore you should advise her about LTC. Can she afford or qualify for LTC insurance? That is another issue.

Question 7 Mr. Sims purchased a $500,000 life policy 35 years ago (at age 27) with a single premium of $50,000. The contract cash value has grown to $110,000. He has decided to surrender the contract this year. Which of the following is true? a. $50,000 of the $110,000 will be income tax free; the remaining $60,000 will be subject to tax at ordinary income tax rates. b. $50,000 of the $110,000 will be income tax free; the remaining $60,000 will be subject to tax at capital gains rates. c. $60,000 will be subject to tax at ordinary income tax rates plus a 10% penalty. d. $110,000 will be subject to tax at ordinary income tax rates.

The correct answer is: A The policy is not a MEC; therefore, the cash value in excess of basis ($50,000) will be subject to tax at ordinary income tax rates, but not the 10% penalty. 2022 - 35 years ago is 1987. It was purchased before 1988. Single premium policies before 1988 are not considered MEC policies. They were grandfathered. In addition, Mr. Sims is over 59½, so there would be no 10% penalty if the policy was a MEC.

Question 29 Which of the following plans cannot effectively be integrated with Social Security? a. 401(k) plan (no match or company contribution) b. Money purchase plan c. Stock bonus plan d. Defined benefit plan

The correct answer is: A A 401(k) with no match or profit sharing cannot be integrated with Social Security. Profit sharing plans can be integrated. It does not ask whether or not a profit sharing 401(k) can be integrated. But, Answer A does indicate it is a pure 401(k) with no match or profit sharing contribution. There is nothing to integrate in the 401(k) plan. So Answer A is out, but Answers B and D can be integrated. Stock bonus plans can be integrated.

Question 12 Frank, currently age 44, believes that the business cycle is about to turn sharply and that an 8% inflation rate is a necessary assumption in the construction of his retirement plan. His CFP® certificant, strongly believes that inflation is and will continue to be substantially lower averaging between 3 and 4 percent over the long run. Which inflation rate from the choices below should the CFP® professional reject first? a. The current year's inflation rate b. Frank's inflation rate assumption c. The 10-year average inflation rate per the CPI d. The 100-year average inflation rate

The correct answer is: A A one-year inflation rate does not constitute an inflation rate for a long-term goal achievement. Remember that the client and planner must mutually agree on plan assumptions. While the client's 8% assumption may not end up as the one used in the plan, it should be considered and discussed based on his concerns. It might make sense for the planner to run the numbers using both his personal inflation assumption and run them again using the client's so the client can see that his assumption would probably be less workable.

Question 18 Jake and Louise Wallen have been margining their portfolio. They have active income of $100,000. Their portfolio has $25,000 of investment interest. They have portfolio income of $40,000. However $30,000 is from qualified dividends. How should they treat the qualified dividends? a. Leave them alone as qualified dividends b. Elect out of the qualified reduced rates to get an investment income deduction c. Deduct the other $10,000 of portfolio income since it is not qualified and just use investment interest deduction d. Just take the standard deduction

The correct answer is: A Although Answer C could be true, there is actually no mention of what the other portfolio income is. It could be long-term gains. Remember the question is only asking about the qualified dividends. There is no mention of any other itemized deductions. Therefore the investment income deduction is less than the standard deduction and they have to pay ordinary rates on the dividends. Although Answer D is true, it does not answer the question (qualified dividends).

Question 30 Jim joined a tech firm four years ago. Due to some of his R&D, he was awarded some company ISOs. The tech firm has been very successful since its IPO. The stock is up 50% this year. Jim's first chance to exercise some ISOs is December 1st of this year. He is questioning you whether he should exercise now (12/1) or wait until January 2nd of next year. How would a CFP® professional advise him? a. If he exercises on January 2nd of the next year he will have 363 days to decide to hold the stock and be liable for the AMT or not. b. If he exercises on December 1st of this year he will have more than one year (LTCGs) to decide if he will be liable for the AMT or not. c. It really does not make any difference, he will always be liable for AMT. d. If he exercises and sells, he will not be liable for AMT.

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

Question 43 Terrie Cross and Brenda Davis have decided to close their business. They have cross-purchase life insurance policies in force. Both Terrie and Brenda are married. How should they handle the split-up of their policies? a. Each should purchase her own policy from the other person. b. No change. c. Terrie should transfer Brenda's policy to Brenda's husband, and Brenda should transfer Terrie's policy to Terrie's husband. d. Same as Answer C, but to opposite husbands.

The correct answer is: A Answer B makes no sense regarding the situation. Answers C and D trigger transfer for value. The insured can always buy their own policy and not trigger transfer for value.

Question 44 Alice and Bob are the proud parents of a new baby. They want to fund for college over the next 18-20+ years. They want to avoid filing any tax returns or paying any taxes until the funds are used. Which of the following investments should a CFP® professional recommend? a. EE bonds in an UTMA account b. A series of zero coupon bonds in an UTMA account c. An S&P 500 Index mutual fund in an UTMA account d. A growth mutual fund in an UTMA account

The correct answer is: A Because of the tax wording, this is the best way to answer. You must answer the question as written. The question says "without paying any taxes until the funds are needed." The UTMA/UGMA allows them to do that with EE bonds. The bonds are not EE education bonds. They would have to be owned by the parents. You must answer the question, nothing more or less. Even growth funds would pay some dividends and capital gains in 18-21 years.

Question 19 Mr. Treble is interested in a particular stock. In reviewing the stock he found a report indicating that the correlation of the stock to the S&P 500 Index was only .5. What does that reveal about the stock? a. It will have a lower beta than the S&P 500 Index. b. It will have a higher volatility than the S&P 500 Index. c. Nothing, it is not material in that an individual stock cannot be explained by the S&P 500 Index d. It is 50% less volatile than the S&P 500 Index

The correct answer is: A Beta is directly related to correlation. A correlation of less than 1 would mean a lower beta. Correlation is not exactly the same as the volatility percentage. Beta is the volatility percentage. Correlation is used in the beta formula. The question really relates to understanding the formula. Can a single stock have a meaningful beta? Yes, GE and the S&P 500 tracked almost perfectly together for many years. Look at the formula sheet and you will see the connection.

Question 24 Which of the following statements about disability payments and benefits are true? I. Employer contributions to employee group disability insurance plans are deductible. Benefits will be taxable income to the employee. II. When an employee pays for an individual disability policy, or the plan is contributory, the employee pays for the plan with after-tax dollars. Then the benefits will be tax-free to the employee. III. The employer uses an executive bonus (Section 162) to purchase an individual disability policy for an employee. The premium is deductible by the employer as a bonus, and the benefits are tax-free to the employee. IV. 2% or greater owners of S corporations always get tax-free disability benefits. a. All of the above b. I, II, III c. I, II d. II, III e. III, IV

The correct answer is: A Employer contributions for group disability insurance will result in no taxable income to the employee. However, the payment of benefits will result in taxable income (Answer I). If the plan is contributory (executive bonus - Section 162) and the employee is charged with the insurance premium (bonus), then the benefits are tax-free. Please refer to the Live Revie

Question 33 Linda Sanders has been a financial advisor specializing in seniors. Today, her client Mrs. Laver, asked to withdraw a sizable sum to fund a younger foreign friend's new business. How should Linda handle the request? a. Request the compliance department approve the withdrawal b. Be creative to stall the withdrawal request c. Submit a request for a check to be made out to the client d. Investigate the young foreign friend's background and experience

The correct answer is: A First, it does not say sell investments. It could be just removing cash. Answer B is debatable. Compliance may be involved (Answer A). We do not think you can do Answer D (investigate). Is Answer C in the client's best interest? One large national firm has said that its advisors would stop financial transactions in which they suspect there might be elder fraud going on - even if they do not have the legal authority to do so, according to company's managing counsel. Sometimes you have to take the risk of being sued for improperly withholding money to protect senior customers. Covered in General Principles in the Live Review book.

Question 4 What does the Fed do in deflationary times? a. It lowers the reserve rate b. It raises interest rates c. It increases the discount rate d. It sells securities

The correct answer is: A It is asking about deflationary times not inflationary times. Answers B, C and D are inflationary times, If the Fed lowers the reserve rate, the amount of cash banks must have on hand increases. The banks can lend out more money and increase spending.

Question 60 ABC Company, Inc. currently pays $1.25 per share in dividends yearly. Investors expect dividends to grow at a rate of 3% a year for the foreseeable future. An investor's required rate of return is the T-bill rate of 2% plus 800 basis points. Would a CFP® professional recommend that the investor buy ABC, Inc. if it is trading at $16 per share? HINT: You will need to use the investment formulas below (on CFP Board formula sheet). V = D1 = DO (1 + g) and Er = D1 + g = DO (1 + g) + gr-g r-g p p a. Yes, the growth rate does meet the investor's required rate of return. b. No, the growth rate does not meet the investor's required rate of return. c. No, the stock is undervalued. d. No, the growth rate of 3% is substantially under the required rate of return of 10%.

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

Question 37 "Fee only" is strictly defined in the CFP Board's Code and Standards as follows: A certificant may describe his or her practice as "fee-only" if, and only if, all of the certificant's compensation from all of his or her client work comes exclusively from the clients in the form of which of the following? I. Fixed feesII. Flat feesIII. Hourly feesIV. Percentage or performance-based fees SHOW ANSWER a. All of the above b. I, II c. II, III, IV d. III e. IV

The correct answer is: A Standard A.12

Question 42 A client would like a fair level of income but also some long-term growth. Which of the following securities would a CFP® professional suggest? a. Convertible bonds b. Preferred stock c. Blue chip stocks d. Commercial paper

The correct answer is: A The client will accept a lower interest rate in exchange for the potential price appreciation based on converting the bonds if stock prices rise. Preferred stock is almost fixed, there is very little growth. Many blue chip stocks still have a low level of dividend income. Subjective.

Question 4 A premature distribution penalty tax applies to which one of the following IRA distributions? a. A distribution made to the owner ($10,000 lifetime limit) for the purchase of a primary residence b. A distribution made to the owner for qualified higher education expenses furnished to the owner c. A distribution made after the death of the owner d. Medical expenses in excess of 7.5% of AGI

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

Question 21 Childhood pals Stu and Lou had always wanted to spend time together, so shortly after graduating high school, they opened a hamburger joint which they called Good Guys Burgers. The business has been quite successful over the past forty some years and has grown into a chain of 33 stores. Stu and Lou estimate that the business is worth $9 million and plan to engage a business valuation specialist to peg an accurate fair market value for the business. Stu and Lou, now in their early sixties, recently had their first discussion about business succession planning. Although Stu has a son, Mark, in his late twenties, Mark tours with a rock band and has no interest in stepping into his father's shoes. Lou has no children and his wife has serious health problems so she could not assume his business responsibilities if Lou dies. On the advice from their insurance agent, Lou and Stu decide to enter into an insurance-funded cross purchase death buy/sell agreement. Each owner acquires life insurance on the other. If this agreement is executed and funded and Lou dies, who, if anyone, would experience a stepped up basis relative to the buy/sell transaction? a. Lou only (estate) b. Stu only c. Both Lou's estate and Stu d. Neither Lou nor Stu

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

Question 38 Bob has retired. His company had an ESOP. Stock with a basis of $50,000 was contributed to it. Stock with a market value of $125,000 was distributed at Bob's retirement. Six months after retirement, Bob is selling all the shares for $150,000. What is Bob's tax situation? a. $50,000 was taxed as ordinary income at the time of retirement; $75,000 will be taxed at LTCG rates at the time of sale, and $25,000 will be taxed at STCG rates at the time of sale. b. $150,000 will be taxed at LTCG rates at the time of sale. c. $100,000 will be taxed at LTCG rates at the time of sale. d. $50,000 was taxed as ordinary income at the time of retirement; $100,000 will be taxed at LTCG rates at the time of sale.

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

Question 56 If a retiring client expects to live on 50% of their current pre-retirement income adjusted for inflation, what do they need to consider least? a. Their income taxes b. Their investment performance c. Their risk tolerance d. Their life expectancy

The correct answer is: A They will probably be in a lower tax bracket than when they were working, but the question says 50% of their income. The amount of income they actually receive will be based on investment performance and risk tolerance. Receiving income is likely more important than paying taxes. Life expectancy is also important.

Question 26 When compared to traditional economic and financial theories, behavioral finance tends to view investors as: a. Normal rather than rational b. Emotional rather than irrational c. Rational rather than emotional d. Irrational rather than normal

The correct answer is: A Traditional view investors as rational. Answer D implies investors react in a manner beyond logic, and that is not true. Their reactions are very logical to themselves and therefore normal.

Question 9 Sidney is very displeased with his CERTIFIED FINANCIAL PLANNER™ professional's recommendations believing they were unsuitable and resulted in unnecessary risk and losses. Further, Sidney later learned that the planner did not provide him with anything near adequate disclosure of conflicts of interest and other matters. To which the following parties should Sidney send his letter of complaint? a. CFP Board b. The planner's supervisor c. FINRA d. The SEC

The correct answer is: A We know that the planner is a CFP® professional. Nothing in the question indicates FINRA registration. Nor does the question indicate that the planner is a federally covered advisor regulated by the SEC. The planner may or may not have a direct supervisor. The culture of the exam is that the CFP Board wants to know of the complaints, then they can investigate them.

Question 37 Sally has asked CFP® practitioner to evaluate the following bonds. She is in a 37% marginal tax bracket. On a tax-equivalent basis, which of the bonds provides the best return? NOTE: Unless it says the investment is subject to the 3.8% Medicare tax, do not use the 3.8% in any calculation. a. Municipal bond paying 5.0% b. Corporate zero bond paying 7.8% c. Treasury zero bond paying 7.6% d. Corporate bond paying 7.9%

The correct answer is: A\ The zero's interest is taxable each year. It is not deferred. The tax-equivalent yield of the municipal bond is 5.0% : 63% = 7.9365%. This way you only have to do onecalculation and can compare all four bonds (apples-to-apples). Treasury bonds, even zero coupon bonds, are subject to federal tax, but not state or local tax like a step-up.

Question 30 Harry Long established a business many years ago which he sold for $15 million net of taxes. That, plus various investments, pension plans, and Roth IRAs have built his net worth with his wife's assets to $32 million. The first thing he and his attorney did was equalize the assets between Harry and his wife Martha. Martha now has $16 million in her name. Now Harry is working with his attorney to set up a trust in which Martha could only invade the corpus if she had dire circumstances. Which type of trust should a CFP® professional recommend? a. A dynasty trust for Martha b. An accumulating B trust with HEMS provisions for Martha c. An irrevocable trust with income provisions for Martha d. A QTIP trust with HEMS provisions for Martha

The correct answer is: B Harry will want to take advantage of the $10+ million estate exemption. By restricting the "B" trust to accumulating and giving the trustee discretion over any distributions (HEMS), this trust meets his objectives. In both Answers C and D, she will get income distributions. This will add to her estate and potential tax. The "B" trust, no matter what it grows to, will pass estate tax free. Yes, the irrevocable trust will pass estate tax free, but it does not have any HEMS provisions. The QTIP passes estate tax free at his death but then is subject to estate tax at her death. The dynasty trust is for his children and grandchildren not his wife Martha.

CASE Mr. Taylor CaseMr. Taylor, age 52, purchased a $250,000 universal life policy (option A) four years ago. He paid a single premium of $50,000. The policy has a current cash value of $56,000. His wife is the primary beneficiary and his revocable trust is the contingent beneficiary. Question 2 If he made a loan of $26,000 from the policy, what would be the tax ramification? a. None, it is less than the premium paid. b. $6,000 would be subject to ordinary income tax plus a 10% penalty, and $20,000 would be tax-free. c. $20,000 would be subject to ordinary income tax plus a 10% penalty, and $6,000 would be tax-free. d. $26,000 would be subject to ordinary income tax plus a 10% penalty.

The correct answer is: B A MEC is subject to LIFO on the taxable portion ($56,000 - 50,000 = $6,000). The gain (LIFO) comes out first. The $20,000 is a return of basis (the premiums he paid). You are never taxed on the basis nor is basis ever subject to a 10% penalty.

Question 51 Lana Turner, age 68, caused an auto accident. She claimed she did not see the other car. She was found at fault. Under what parts of her auto policy will her medical claims be covered? a. None, she caused an at fault accident b. Under Part A (BI/PD) the BI (bodily injury) will cover her c. Under Part B (Med Pay) her medical claims would be covered d. Under Part C (uninsured motorist) her medical claims would be covered

The correct answer is: C Both Part A and Part C cover liability claims. Please review these sections if you are unsure. Part C could indirectly reimburse her for her medical claims if she was not at fault. If she was not at fault and the at fault driver did not have insurance, then under Part C she could claim all her expenses not just medical claims.

Question 55 Barry retired a few years ago from Belmont, Inc. at age 65, leaving the balance in his 401k plan. He is turning age 72 in March of next year (2023). He is planning to return to work at Belmont toward the end of next year on a full-time basis. Out of which of the following accounts does Barry have to take a mandatory distribution by April 1st of 2024? I. SIMPLE IRA II. SEP IRA III. Roth IRA IV. Traditional IRA V. Belmont 401(k) plan (account from retirement at age 65) a. All of the above b. I, II, IV, V c. I, II, III d. I, II, IV

The correct answer is: B A minimum distribution is required for the year in which the participant attains age 72. The way the question is phrased, Barry will still be retired when he reaches age 72 in March of 2023 He will be back to work at the end of the year and may not be eligible to participate in the 401(k) until next year. He will not be working for Belmont when he turns 72. Tough. He will be marked by the plan as terminated when his 1st RMD is calculated, thus requiring an RMD for the 1st year. He may not need to take subsequent RMDs as he remains employed.

Question 13 Coverdell Education Saving Accounts can pay for which of the following qualified education expenses (including elementary and secondary education expenses) tax free? I. Academic tutoring II. Special needs services III. Books IV. Expenses for room and board V. Uniforms a. None of the above b. All of the above c. II, III, IV d. I, II e. III

The correct answer is: B After the Tax Relief Act of 2001, all these items are covered including expenses at the elementary and secondary education levels. Coverdells used to be known as Education IRAs.

Question 2 Which of the following assets get a step-up in basis when the client dies? a. A $100,000 CD now worth $105,000 (bought 5 years ago) b. A municipal bond purchased at a discount ($95,000) two years ago now worth $100,000 c. Stock purchased 6 months ago for $50,000 that has a $10,000 STCL d. An annuity purchased as an investment 10 years ago for $100,000 now worth $115,000

The correct answer is: B Answers A, C, and D are ordinary income property. Bonds are investments, like stocks. They get a step-up in basis at death. Yes, income from a bond is ordinary income. The stock has a capital loss, not a gain.

Question 34 Which of the following is considered self-employment income? a. Rental income from an office building b. Board of director's fees c. Furnishing heat, electricity, water, and garbage collection to tenants d. Capital gains from the sale of propertye. Paycheck from a solely owned S corporation

The correct answer is: B Any wages or distributions from an S corp are not self-employed income.

Question 3 After doing a lot of research on a mutual fund, a CFP® professional is ready to present her analysis. The mutual fund is highly correlated to the market (R is 90%). The fund has a realized return of 8% with a standard deviation of 12%. The return on the market is 8% with a risk-free rate of 4% with a standard deviation of 10%. Which of the following statements should the CFP® professional make? HINT: Is the R2 high? Can you solve for beta? Is there enough information to solve for beta? a. The fund should be purchased because the Sharpe ratio is high. b. The fund should not be purchase the alpha is negative. c. The fund should be purchased because the Treynor ratio is high. d. With a realized return of only 8% the standard deviation will cause the fund to underperform correlated funds.

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

Question 40 Alan Newsome has a net worth of $300,000. He is married with two children. His investment advisor is suggesting a private placement issue. He is only suggesting using 20% of his net worth. Alan's only investments are in low risk type CDs, mutual funds, and ETFs. Alan has worked hard, sometimes two jobs since high school to accumulate his net worth. What is Alan's situation? SHOW ANSWER a. Dire b. He is considered a non-accredited investor c. He is considered an accredited investor d. As a low risk investor the broker/dealer will not allow the purchase

The correct answer is: B He does not have the net worth nor income (not shown) to be an accredited investor. Dire is not an answer. This is a Regulation D question. With regards to Answer D, not enough information is known about the private placement to make that judgment.

Question 21 Richard Daley, age 35, is employed by ABC, Inc. He makes $130,000 per year. What type(s) of retirement plan should the CFP® professional recommend to him? SHOW ANSWER a. SEP at 18.59% b. A Roth IRA and/or a deductible IRA c. A Roth IRA and/or a nondeductible IRA d. A Roth IRA

The correct answer is: B He is an employee. He is not self-employed so SEP is not an answer. Nothing indicates ABC, Inc. has a retirement plan. Unless the question indicated the employee is active, then the employee is not active. He is not subject to the IRA phaseout rules. His income is under Roth phaseout. Yes, Answer C is also an answer, but why not choose a deductible IRA?

Question 26 What are differences between TIPS and I-bonds? a. They are both government securities that are indexed to inflation b. TIPS purchases are unlimited per year; I bonds purchased by an individual in a given year is limited to $10,000 c. TIPS trade like ordinary Treasuries; Saving bonds cannot be sold until maturity d. TIPS income is taxed as ordinary income; I bond taxation occurs when the bonds reach maturity or are redeemed

The correct answer is: B I bonds can be sold after one year (Answer C). Answer A is not a difference. Answer D should say interest income. Phantom income is charged the appreciation on face value of TIPS. It is not collected until the TIPS are sold or it mature.

Question 4 If the policy was an option B universal life policy, would the death benefit change (his wife is alive)? a. No, it would still pass by the marital deduction. b. Yes, it would be $300,000. c. Yes, it would be $306,000. d. Yes, it would be $250,000 plus $56,000 would be subject to ordinary income tax plus a 10% penalty.

The correct answer is: C Option B increases the death benefit by the cash value. NOTE: A lot of the wrong answers are pure nonsense.

Question 15 Barbara and Kathy are 50/50 owners of BK, Inc. When they started BK, Barbara and Kathy had the company take out two $1,000,000 key-person term life insurance policies. Over the years, the company has paid $5,000 in premium on Barbara's policy and $4,000 in premium on Kathy's policy. Barbara and Kathy have decided to use the policies to do a cross purchase buy-sell. If Barbara buys Kathy's policy for the premium paid by BK, what will be the result if Kathy dies within one year? a. Barbara will get $1,000,000 income tax free (term insurance exclusion). b. The policy will be subject to transfer for value. c. The policy will be included in Kathy's estate (3-year rule). d. The policy will increase the value of BK, Inc. by $1,000,000 (3-year rule).

The correct answer is: B It does not matter whether the policy is term or permanent insurance. Transfer for value makes the policy income taxable above basis. The 3-year rule doesn't apply when transfer for value occurs. Only Barbara can buy Barbara's policy, and only Kathy can buy Kathy's policy. This is a corporation entity, not a partnership entity. A partnership is an exception to the transfer for value rules.

Question 14 Mrs. Barnes, age 75, has no family members that she wants to inherit her money. Her doctors have given her a 3-year life expectancy. Her assisted living facility gave her a one-time payment offer based on her life expectancy. So she currently has no monthly expense. She is getting the maximum Social Security benefit (husband's benefit) and income from her investments. She wants to give to the Humane Society. If she gives $25,000 in cash and $50,000 in stock (basis $15,000), how much can she deduct this year if her AGI is $80,000? a. $35,000 b. $40,000 c. $49,000 d. $75,000

The correct answer is: B It does not matter whether you use the cash first ($25,000) and then the stock (30% AGI) to calculate or not. The cash is eligible up to 60% of AGI. But because it is a combination of cash and stock the 50% of AGI ($80,000) rule is the maximum. You may have selected Answer C, but $49,000 exceeds 50% of AGI.

CASE Mr. Taylor CaseMr. Taylor, age 52, purchased a $250,000 universal life policy (option A) four years ago. He paid a single premium of $50,000. The policy has a current cash value of $56,000. His wife is the primary beneficiary and his revocable trust is the contingent beneficiary. Question 1 If he dies how much is included in his gross estate? a. $0, his wife is the beneficiary b. $250,000 c. $300,000 ($250,000 plus the premium paid) d. $306,000 ($250,000 plus the cash value)

The correct answer is: B It is an option A policy. The cash value disappears at death. He is the owner/insured. The proceeds are included in his gross estate. Yes, they pass by the marital deduction, but the question is asking about the gross estate not the taxable estate.

Question 53 Your client is a 70-year-old man about to retire. If he annuitizes the benefit from his retirement plan, which of the following will achieve the highest payment in his first year of retirement? a. Lifetime income with a 5-year certain b. Life annuity c. Lifetime joint income with his son (age 49) d. Lifetime joint income with his wife (age 71)

The correct answer is: B Life annuity achieves the highest payout.

Question 23 Mrs. Tuttle spent 110 days in a skilled care facility. She qualified for her stay under Medicare. The facility cost was $394.50 per day and the Medicare specified amount is $194.50 per day. How much did Medicare pay? NOTE: The Medicare specified amount will be given on the exam if they ask this type of calculation. a. $16,000 b. $23,890 c. $31,560 d. $39,450

The correct answer is: B Medicare will pay the first 20 days in full @ $394.50 plus $200 (everything above $194.50) for the next 80 days. There is no coverage after 100 days. 20 days @ $394.50 = $7,890 80 more days @ $200 = $16,000 TOTAL $23,890

Question 34 Sidney started working at BND, Inc 25 years ago. Sidney is single and even after 25 years has not progressed much at BND due to only having a high school education, at best a average intelligence, and no real ambition. BND has a unit benefit formula defined benefit plan with a 1% per year of service to a maximum of 30 years. BND hired you to help employees close to retirement. What would you recommend to Sidney if he is 62 and wants to retire now? SHOW ANSWER a. Let him retire; he has no ambition b. Show him the differences of benefits from the pension plan and Social Security at age 67 c. Ask him about his lifestyle, savings, and retirement plans d. Ask the company if they want to retain him as an employee

The correct answer is: B Money may make the only difference to Sidney. Answer C is not bad. Answers A and D go against why the company hired you.

Question 4 Mr. Smith purchased and sold the following stocks during a two-year period. Which purchase/sale created a wash sale? NOTE: All transactions are 100 shares. I. March 1st purchased ABC @ $15; December 1st purchased ABC @ $10; December 29th sold ABC @ $12II. November 30th purchased LMN @ $50; December 15th purchased LMN @ $52; December 29th sold LMN @ $54III. January 1st purchased XYZ @ $60; February 15th sold XYZ @ $52; March 16th purchased XYZ at $50 a. I, II, III b. I, III c. I d. II e. III

The correct answer is: B No loss deduction is allowed for any loss from any sale or other disposition of stock within a period beginning 30 days before and ending 30 days after the date of the sale or disposition. For example, in Answer A the $12 sale (12/29) goes against the $15, purchase (3/1). That is because there was a purchase 12/1 within 30 days for $10. The loss is disallowed ($15 versus $10). Answer II creates a gain not a loss. Both I and III would create a loss if they were not deemed a wash sale. A gain is never a wash sale, only a loss. In Answer III there was a purchase at $50 within 30 days of a sale at $52. The loss of $8 ($60 versus $52) is disallowed. February only has 29 days or 30 if it says it is a leap year.

Question 45 Qualified charitable distributions apply to which of the following? a. Basis transfer IRAs b. After-tax Roth IRAs c. Distributions from employer plans d. Roth IRAs

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

Question 5 Tom, age 51, works for a not-for-profit organization. He contributes $20,500 annually to a 403(b). Tom's wife, Melinda (age 48), works for another not-for-profit organization. She contributes $5,000 annually to a 457. If he earns $110,000 a year and Melinda earns $50,000 a year, how much can he and she contribute and deduct to a regular IRA in 2022? a. $500 b. $6,000 c. $7,000 d. $12,000 e. $14,000

The correct answer is: B The 403(b) retirement plan makes him an active participant. The nongovernmental 457 does not trigger active participation for her. She is not active. Their combined AGI is $134,500 after their deferrals. Her income counts. She can contribute to a deductible IRA under the spousal rules (less than $204,000). He is subject to phaseout ($109,000 - $129,000). He is active.

Question 55 Tony Adams after being laid off for over a year was hired by a new firm. Tony had just about exhausted all of his savings and retirement funds. The new firm has a 401(k) profit sharing plan with a 6 month wait. Tony realizes he is way behind the retirement savings curve so he plans to enroll as soon as possible. What is the first thing that will happen when he is eligible? a. The employer will notify him. b. He will be given a 401(k) profit sharing summary plan description per the DOL/ERISA rules. c. He will be allowed to defer which will reduce his taxable income but not his FICA taxes. d. He can defer a maximum of $20,500 plus $6,500 in the first year using make-up provisions.

The correct answer is: B This document must be given to participants when they are eligible to participate in the plan. It also defines when beneficiaries will receive benefits. Among other things, the SPD must include information about: When and how employees become eligible to participate in the 401(k) plan; The contributions to the plan; How long it takes to come vested; When employees are eligible to receive their benefits; How to file a claim for those benefits; and Basic rights and responsibilities participants have under the Federal retirement law and the Employee Retirement Income Security Act (ERISA). Answer A is not bad, it is just incomplete. The SPD should include an explanation about the administrative expenses that will be paid by the plan. SPDs must also be redistributed periodically during the life of the plan.

Question 12 Joe Jones works for Take-A-Boat. The company rents boats. The company has a SIMPLE plan which Joe participates in. As he approaches 72, he plans on working less hours. He still plans to participate in the SIMPLE plan. Which of the following can he do? a. He can only contribute to a non-deductible IRA. He cannot contribute to a SIMPLE IRA after 72. b. He can continue to contribute to a SIMPLE. c. Since he is a more than 5% owner he must take distributions from the SIMPLE when he reaches 72 and stop contributing. d. He can contribute to a Roth IRA.

The correct answer is: B We do not know his AGI. AGI affects Answer D. It may or may not be true. There is nothing that indicates he is an owner. Either way, as an employee or as an owner he has to take distributions from the SIMPLE when he reaches 72, but he can still contribute whether he is just an employee or he is an owner. Answer B answers the question.

Question 31 Bob and Sally Everheart, ages 34 and 33, have four children between 3 and 11. Bob earns $90,000 a year. The company he works for has only medical and limited life insurance benefits. Sally is a stay at home mom. They have done no planning. They have listed their priorities. What should a CFP® professional advise is the most important? a. Establish 529 plans for their children b. Try to save 10-15% for retirement c. Establish an emergency fund d. Buy term life insurance on him and her to cover living, education, and mortgage needs

The correct answer is: C Very subjective exam type question. At this point in their lives retirement issues are least important. Answers A, C, D should come before Answer B. Usually emergency funds and guardianships come first, but it always depends on the scenario given. In the real world the answer would be a combination of Answers C and D first, but that is not an option. He already has some level of life insurance at work, so Answer D is at least partially addressed. This leaves Answer C as the biggest issue. With no mention of life insurance at work, Answer D would be correct.

Question 9 Which of the following are amounts received that will not be treated as income-first distributions under a MEC contract? a. Cash dividends b. Interest accrued on a policy loan (added to loan balance) c. Dividends retained by the insurer to purchase paid-up additions d. Dividends retained by the insurer as principal or interest on a policy loan

The correct answer is: C "Income first" simply means taxes are owed on the income since it is not viewed as a return of principal. Answer C dividends are not treated as income-first distributions. The loan interest was not paid. It is added to the existing loan. It is like you made a loan against the loan. Answer C does not cause a MEC problem. They buy additional amounts of paid-up insurance each year. They are not distributed to the client but are in fact reinvested in the contract. Please review life insurance MEC contracts involving dividends. NOTE: Interest paid on accumulated dividends does not affect a MEC answer. This is interest due on a loan from a MEC.

Question 2 Susan, age 45, is the wife of Harry, age 66. Harry just qualified for Social Security payments of $1,500 a month. Harry's pension plan is minimal. Harry cannot work any more due to physical limitations. Susan and Harry got married just 10 years ago. She wanted children and they have two in gradeschool. Can she qualify for Social Security benefit? a. No, she is under 62 b. No, Harry is not disabled c. Yes d. No, but the children can

The correct answer is: C A spouse of a retired worker qualifies for Social Security benefits at any age if they have a child in care under the age of 16. Answer D only applies if Harry is deceased.

Question 25 Adam and Jane Smith have come to you with the following tax information for the current year: Adam's salary [net of his 401(k) deferral] $130,000 Jane's income 1,000 Real estate income (active participation) 5,000 Dividend income 1,000 Adam's contribution to IRA 6,000 Jane's contribution to IRA 6,000 What is their AGI? a. $117,000 b. $125,000 c. $131,000 d. $137,000

The correct answer is: C Adam $130,000 Jane 1,000 Real estate 5,000 (income)Dividend income +1,000 Jane's IRA contribution - 6,000 * AGI $131,000 *Adam has a 401(k) and is above phaseout ($109,000 - $129,000) for IRA deductibility. Jane can contribute and deduct the $6,000. The spousal IRA phaseout is at $204,000. Adam's contribution of $6,000 is nondeductible. If you picked Answer B, you deducted his IRA as well.

Question 39 Lilly Baker, age 75, is trying to reduce her expenses. She has two life insurance policies. She wants to keep some coverage but stop paying the premium. She expects to live at least 20 years and may end up in debt at death due to health and other related issues. She feels the death benefit of the policies could help clear her estate of these debts. Which policy provision should a CFP® professional recommend? a. Purchase paid-up additions b. Use the 5th dividend c. Reduced amount of paid-up insurance d. Paid-up term insurance

The correct answer is: C Answers A and B are dividend options. Answers C and D are nonforfeiture options. In Answer C the face amount will be reduced but no additional premium is due. At age 75, Answer D may not last very long. The cash value of the policy pays for the term insurance generally for just a period of years.

Question 32 Mr. Hart, married, has a son, Robert. Robert is now starting college. Mr. and Mrs. Hart are very happy that Robert has turned his life around. Robert was convicted of a felony for distributing a controlled substance. What can they do to save taxes in regards to education funding if their AGI is $100,000? a. Claim an American Opportunity Credit b. Make a deductible charitable gift of tuition to the college c. Claim a Lifetime Learning Credit d. Make a tax-free gift by paying Robert's tuition

The correct answer is: C Both the American Opportunity Credit and Lifetime Credit programs spell out certain exclusions. An eligible student can be excluded if convicted of a drug related felony (distributing a controlled substance) under the American Opportunity Credit only. Lifetime Learning does not have that restriction. Their AGI qualifies them for a Lifetime Learning Credit. Answer D is an answer, but Answer C gives them a tax write-off. No, you cannot get a charitable deduction for a tuition gift to a school; there are just no gift tax implications. Answer D does not generate a tax write-off.

Question 10 Larry Town turned 72 in June of this year. He has $5,000 of compensation (1099 income) and wants to make a $5,000 deductible IRA contribution. How would a CFP® professional respond? a. As long as he makes the contribution before turning 72, the $5,000 IRA contribution is deductible. b. He should have made the contribution before he turned 72 c. He can do a deductible IRA this year. d. He can make a Roth contribution this year.

The correct answer is: C IRA contributions can continue after age 72. Answer D is true, but he asked about a deductible IRA, not a Roth.

CASE Mr. Taylor CaseMr. Taylor, age 52, purchased a $250,000 universal life policy (option A) four years ago. He paid a single premium of $50,000. The policy has a current cash value of $56,000. His wife is the primary beneficiary and his revocable trust is the contingent beneficiary. Question 3 If his wife predeceases him, what would be the major change to the death proceeds? a. There would be no change from the Question 1 answer. b. The proceeds would be subject to income tax plus a 10% penalty above basis ($250,000 - 50,000 = $200,000). c. The proceeds would not pass by the marital deduction. d. The proceeds would be taxed at 40% (estate tax percentage).

The correct answer is: C If his wife predeceases him, there will be no marital deduction. This is the major change. Answer A is true, but that is not a change at all. He did not die. Without additional data, it may or may not be subject to estate tax (Answer D).

Question 21 Can a corporation that issues qualifying stock options (ISOs) receive a tax deduction for the ISOs? a. Never b. Always c. Yes, if the ISO is disqualified d. Yes, if the ISO is qualifiede. Yes, if $100,000 worth of ISO ever stock is granted

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

Question 7 Tommy and Sally Long, both age 55, have realized they will never have enough to retire. Both realize they will work until they die. To maintain their lifestyle they need both of their salaries. They both have some group life insurance at work and decided to purchase individual policies to supplement the survivor should one of them die. If Tommy dies first how much of the insurance death benefit will be included in his gross estate? — Group life policy of $200,000 on Tommy with Sally the beneficiary — 30-year term policy insurance of $1 million on Tommy with Sally the beneficiary — 30-year level term policy insurance of $1 million on Sally with Tommy the beneficiary — Group life policy of $150,000 on Sally with Tommy the beneficiary — First to die universal life policy of $1 million on Tommy and Sally with the survivor the beneficiary. The cash value is $5,000. a. $1,200,000 b. $2,000,000 c. $2,200,000 d. $2,205,000

The correct answer is: C Included is the group life on Tommy of $200,000 plus the 30-year term of $1 million on Tommy. Since he has an incident of ownership on the 1st to die, it is included. But only $1 million. Unless it says the policy is an option B increasing death benefit, it is an option A. The cash value is not included. When no ownership of a policy is mentioned, the insured is assumed to be the owner of the policy. NOTE: Group life is normally company paid. Tommy has an incident of ownership. He can change the beneficiary. It will be included in his estate.

Question 20 Luke inherited a parcel of land. His parents purchased the land for $10,000. At the time of his inheritance, it was worth $100,000. It is now worth $200,000. The insurance, taxes, and maintenance are costing him more than the land is appreciating. He is considering various alternatives. Which of the following is true? a. A local charity (public) wants to hold various activities (fairs, etc.) on the land (rent free). Luke feels that he could write off the use of the land as a charitable deduction. b. If he gifts the land to the local charity (public), he can deduct its value ($200,000) up to 50% of AGI. c. If he gifts the land to the local charity (public), he can deduct its value ($200,000) up to 30% of AGI. d. If he gifts the land to the local charity (public), it is use unrelated (limited to the basis of $100,000 and 50% of AGI).

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

Question 7 Harry Honda, age 45, is seeking investment advice. He is a sole proprietor and is contributing the maximum to his SEP this year. The stock market has been very volatile, but he is a high risk taker. He is looking at four investment selections for his new SEP contribution. Which investment is the worst choice? a. Private placement municipal bonds b. Junk municipal bond fund with a duration of 8 c. Master limited partnership d. Leveraged and inverse ETFs

The correct answer is: C Master limited partnerships generate income, but that income is partnership/business income. MLPs will trigger UBTI if more than $1,000 of income is generated, and as such his SEP IRA will have to file an income tax return. This creates a lot of costly paperwork and potential taxability or disqualification of the IRA. Remember the question asks for the worst. Answer A is also a bad choice but does not create UBTI. Subjective. There is very limited information on UBTI in the Live Review book but the usual answer is limited partnerships.

Question 8 Lara Jones was an elementary teacher in the public school system for 35 years. Age caught up with her. The young children in class wore her down every day. She decided to retire 12 years ago at age 60. Through the school system she accumulated a sizable 403(b). After retiring for a year, she got bored and went back to work with a firm that sells education books to schools. It turned out she is excellent at selling books to schools. The firm does not want her to retire, nor does she want to retire. The firm has a 401(k) with an excellent match and even profit sharing contributions. She is turning 72 in January of next year. She wants to know her RMD situation for next year? a. There are no required minimum distributions next year since she is still working. b. She will have to take required minimum distributions from the 403(b) based on the total year-end assets in the 403(b) plus 401(k). c. She will have to take required minimum distributions from the 403(b). d. She should roll the 403(b) into a Roth this year so she does not have to take distributions next year.

The correct answer is: C She can delay the 401(k) distributions but not the 403(b). She is no longer active in the 403(b). Answer D, considering her tax bracket, would cause a high tax bill [sizable 403(b)].

Question 32 Mr. Ball and Mr. Desmond are both attorneys. Their business, BaDe, PC (professional corporation) does not have a retirement plan. They want to establish a qualified plan. They want a plan that no one will personally contribute to and that BaDe, PC would not have to contribute to each year. They currently have only two other employees (part-time at 400 hours/year) and plan to hire another part-time attorney. Which of the following plans should a CFP® professional recommend? SHOW ANSWER a. No plan fits b. SEP c. Profit sharing plan d. Profit sharing 401(k) plan e. Defined benefit plan

The correct answer is: C Since no ages or salaries were given, the defined benefit plan can be eliminated. You cannot do DB unless the question indicates excessive profits. The wording may be poor in that "no one will have to contribute" means they did not want to defer personal income. This eliminates the 401(k). The SEP was eliminated based on the wording: qualified plan and having part-time employees. The profit sharing plan gives the company the flexibility of not having a contribution each year. It fits the question. The ERISA 1,000-hour rule would eliminate the part-time employees.

Question 47 A Registered Investment Advisor has a website which includes a link by which prospective and current clients may view and download Part 2 of the Form ADV that was submitted to the SEC. Is the advisor in compliance with the Advisors Act? a. Yes, because all the disclosures are available current, and up-to-date. b. No, because prospects and clients must be provided with a hard copy written disclosure document. c. No, because there is no means to confirm that prospects and clients have actually gone online and reviewed the document. d. No, because the SEC disallows any online viewing on the current ADV Part 2.

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

Question 51 Mr. Frank has become incapacitated. Some years ago he obtained a complete package of estate planning documents. He signed them but never funded the revocable living trust. Which document can be used to fund the living trust? a. None, it is too late now that he is incompetent. b. Non-durable power of attorney c. Durable power of attorney d. Living will e. Living trust

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

Question 17 A man, age 55, has a fair amount of assets. He is concerned about long-term care beyond 100 days. Which statements are correct? I. Medicare may pay for more than 100 days of care after a 20-day deductible. II. If he purchases a LTC policy, the policy may pay if he qualifies (ADLs). III. Medicaid may pay if he uses up his assets to below the state threshold. IV. His major medical insurance may pay if he qualifies. a. All of the above b. I, II, III c. II, III d. II e. III

The correct answer is: C The key word is "may" in Answers II and III.

Question 57 Clyde invested heavily in TIP securities. He did this because the treasury guarentees that the principal for TIPS will not fall below the original issue. Now after a period of years of deflation, what can Clyde expect if inflation (CPI) becomes an issue? a. TIPS rely on the CPI and the face value of the TIPS will increase b. TIPS prices could become volatile due to market conditions c. Upward adjustments due to inflation will be taken back by prior years of deflation d. TIPS work well in inflationary times

The correct answer is: C The main issue is the way the government designed the deflation floor for TIPS. Later upward adjustments can be taken back if deflation occurs. Answers A, B, and D are true, but the key is he bought TIPS years ago and a period of deflation has occurred.

Question 44 Mrs. Cates died 6 months ago. Her family inherited almost $5 million tax free with a step-up in basis. One family member, her son, Robert got $2 million. Robert Cates placed the money in an existing joint account with his wife. Robert and his wife, Cindy, had been clients before Mrs. Cates died. The account, with previous assets, is now worth $3.5 million. Robert just stunned his CFP® professional this morning. He said he needed $100,000 cash, not a check from the account. This is not a normal request. He then proceeds to say he needs it to pay his mistress off. What should the CFP® professional do? a. Call up Cindy to get authorization. b. Tell him it is impossible to pay out $100,000 in cash. c. Tell him there is a conflict of interest and the transaction cannot be handled without Cindy's consent. d. Terminate the relationship based on moral questions. e. Make arrangements for a $100,000 check payable to him

The correct answer is: C There is a conflict of interest because the CFP® professional was hired by Robert and Cindy. The account is considered joint. He cannot take the money except as a check made out to both of them. The truth of Answer B is unknown; if the CFP® professional works at a bank, it might be possible. Can one joint tenant can remove assets without consent of the other joint tenant? If nothing makes sense pick a soft answer. He could ask for a check made out in joint names and then forge her signature and cash it (humor). None of the other answers are possible, so you were forced into Answer C.

Question 8 Mrs. Kalish, age 82, gifted the following assets over the past three years. 3 years ago: She gifted a stock portfolio with a basis of $1 million and a FMV of $1.5 million currently worth $2 million 2 years ago: She placed $2 million in a 5 year GRAT with a gift tax value of $1.25 million, currently worth $2.4 million. 1 year ago: She gifted a whole life policy with a face value of $1 million and an interpolated terminal reserve plus unearned premium of $100,000. Mrs. Kalish passed away today. Which of the following is true? a. All the assets will be included in her gross estate at FMV. b. If her daughter sells the stock, she will have to pay tax on $500,000 at LTCG rates. c. $3.4 million of the assets will be included in Mrs. Kalish gross estate. d. The stock is not included in her gross estate because she lived 3 years.

The correct answer is: C There is no 3-year rule with the stock. It is a taxable gift, but it is added to the taxable estate. It is not in the gross estate. The stock was a gift. The daughter's basis is $1 million and the gain is $1 million. The GRAT (5 year) and the life insurance (3-year rule) are included in the gross estate. The GRAT at FMV and the life insurance at face value are included.

Question 31 The 37% tax rate is expected to increase to 50%. What would happen to the price of municipal bonds if this happens? a. No change in price of new bonds would occur. b. No change in price of old bonds would occur. c. Old bonds would sell for more. d. Bonds would be issued with higher coupons. e. Old bonds would sell for less.

The correct answer is: C There would be more demand for municipal bonds which would increase their price. New bonds could be issued with lower coupons due to this demand.

Question 3 Todd and Belinda are prospective clients. During the initial interview (to establish a client-planner relationship), Belinda tells the CFP® professional that Todd gambles and that she does not want him to know what is in the joint money market account. She told the planner this while Todd was out of the room. What should the CFP® professional do? a. During the data gathering step, just let her lie. b. Do what she says. c. Do not take them on as clients. d. Tell her that she must tell the truth about the joint money market account or they cannot be taken on as clients.

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

Question 53 John and Jody decided to refinance their 5.5% 30-year $1,000,000 mortgage. They have lived in the home for 10 years and plan to live there for the foreseeable future. Analyze and evaluate which of the following options would be best for them? a. A 30-year VA mortgage at 3% fixed with no points b. A 30-year FHA mortgage at 3.25% fixed with no points c. A 30-year fixed mortgage at 4% with one point d. A 10-year ARM starting at 3.5% with no points

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

Question 23 Mrs. Smith, age 80, is reviewing four different portfolios. Her main concern is about loss of principal. Income is a secondary concern. Which of the following portfolios would best meet her concerns? a. 10% money market, 10% common stocks, 80% long-term bonds b. 50% CDs, 50% long-term bonds c. 10% money market, 10% common stocks, 80% short-term bonds d. 10% money market, 40% CDs, 50% long-term bonds

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

Question 48 A new client, Tiffany, is age 23. Her favorite uncle, Uncle Donald, has given her $5,000 as a college graduation present after receiving her BA degree in Communications. Tiffany says that she would like to invest the full $5,000 into a Roth IRA. After college, and given the current economic environment, it took her some time to find a job. She has only been working for six months and has no spare cash. The CFP® professional tells Tiffany that she should analyze her cash flow and establish an emergency fund before investing for retirement. Tiffany, who enjoys reading financial magazines and listening to financial experts on morning talk shows, is adamant about wanting the Roth. What should the CFP® professional do now? a. Refuse to continue the relationship with Tiffany, clearly the planner and her do not see eye-to-eye. b. Assist Tiffany in opening the Roth IRA. c. Educate Tiffany as to why she needs to have an emergency fund before saving for retirement. d. Recommend that Tiffany acquire cash-value life insurance because it will provide her with both tax-deferral and survivor benefits.

The correct answer is: C While it is true that Tiffany could have penalty-free access to a Roth IRA, arguably, the financial planner's main function is that of an educator. Does the exam want "educate" as an answer? Yes, that plus suggesting an emergency fund overrides her being adamant about doing a Roth IRA. There is no need to end the client/planner relationship at this point. There is little, if any information in the question to indiciate a need for life insurance before dealing with other financial matters. It is also arguable that it is not possible to determine if Answer A or B would be better if you are not seeing eye to eye.

Question 20 Loretta started receiving substantially equal annual payments from her IRA at age 58. Loretta stopped receiving payments at age 61 (a total of three payments). What will be the amount of the recapture tax she will be subject to? a. None, she has attained age 59½. b. None, she ceased receiving payments. c. The recapture amount will be 10% of the total annual payments received before she attained age 59½ , and interest. d. The recapture amount will be 10% of the three payments, and interest. e. The recapture amount will be 10% of the value of the IRA, and interest.

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

Question 11 Dr. Hill, a 50-year-old surgeon, is incorporated as a personal service corporation. He is interested in increasing employee retention. Dr. Hill's corporation currently has a 401(k) plan in force. He only matches $.50 on the dollar up to 3% of salary. As a result of this formula and employee turnover, he has been severely limited in the amount he can contribute as a key employee. If he elects to adopt a pension plan in lieu of the 401(k), which of the statements is true regarding his benefits in 2022? a. He will be able to contribute 25% of his salary if he elects a money purchase plan. b. He will be able to deposit $245,000 (2022) if he elects a defined benefit pension plan. c. The money purchase and defined benefit plan will be covered by the PBGC. d. If he elects a defined benefit plan and cannot maintain the contribution level, he could switch to a cash balance plan. e. Money purchase and profit sharing plans are subject to the minimum funding standards.

The correct answer is: D Answer A: Money purchase plans have a contribution limit of $61,000 (2022). Without the limit or his salary being shown, the statement is false. He is a surgeon and could be making a high income. Answer B: This statement uses the word deposit rather than benefit. $245,000 is the maximum benefit, not the contribution. Answer C: Only defined benefit plans are covered by PBGC. Answer E: Profit sharing 401(k) plans are not subject to the minimum funding standards.

Question 35 Robert and Dee Henderson are facing tough times. Robert never completed high school. He married Dee right after she graduated from high school. Both of them worked low paying jobs, and, over time, they had 3 children. Saving money has been tough. Through the years they bought 529 savings plans through a local stock broker friend. This year Dee lost her job and her unemployment payments are about to end. None of their credit cards work and they could lose their house. Although the housing market has improved, they are still slightly upside down on their mortgage. They are desperate for cash to continue their mortgage payments. What should a CFP®professional suggest they do? a. Unwind the 529 savings plans to solve the problem immediately b. Let the bank foreclose--maybe they can find the funds in the next 30 days c. Sell the house for a loss d. Try to refinance

The correct answer is: D HARP (Home Affordable Refinance Program) ended in 2018. However, HIRO (High Loan to Value Refinance Option) from Fannie Mae and FMERR (Freddie Mae Enhanced Relief Refinance) have replaced HARP for couples like Robert and Dee who are upside down on their mortgage. Answer B provides no solution. Answer C provides no cash. The 529 plans are safe if they file for bankruptcy. In addition, removing money from the 529 plans will cause tax problems. Note that only Dee lost her job, not Robert, so they do still have income.

Question 8 Alice Adams, age 65, is single. She has no living relatives. Ever since the company she works for established a 401(k), she has contributed the maximum. The company has varied on its match through the years and plan returns have been low due to her conservative allocation. Some years ago the company established an MSA, and that was ultimately changed to an HSA. She has accumulated a sizable savings account because her health is excellent. At NRA next year she plans to retire, take Social Security, and some distributions from her 401(k). She will have to sign up for Medicare A at 65 even though she will not take Social Security. This will make her ineligible to make HSA contributions. As a result she is electing Medicare B and D. What can her HSA account not pay for? a. Medicare B premiums b. Medicare D premiums c. Long-term care insurance premiums d. Medigap insurance premiums

The correct answer is: D HSAs cannot pay Medigap premiums. Answer C is especially important because an FSA account cannot be used to purchase a long-term care policy, whereas an HSA can. An HSA can be used to pay for Medicare Part B, C (Medicare Advantage), and Part D premiums.

Question 35 Robert Zimmerman owns his own company (X). The company (X) has a profit sharing 401(k). He defers the maximum, and with the company match and usually some forfeitures, annual additions range between $20,000 - $25,000. He has started another company (Y) with some friends, and they are considering a profit sharing 401(k) plan. He is considered a controlling shareholder of the new company (Y). Which of the following is true? a. He cannot be a participant in the new company's (Y) profit sharing 401(k) plan. b. Since he is fully participating in X's plan, he cannot participate in Y's plan (related employers). c. He is limited to the lesser of 25% of covered compensation or $60,000 for annual additions provided by both X and Y. d. He cannot defer any income into the new company's (Y's) 401(k) plan.

The correct answer is: D He can be a participant of Y's plan for profit sharing contributions but not make any more deferrals. Answer C is incorrect because his annual additions limit (for both plans combined) is 100% of compensation or $61,000 (controlling shareholder). He can be a participant in Answer A because he is not maxed out at $61,000. He is currently at around $40,000. You do not know if he is over age 50.

Question 16 Todd wants to defer his money purchase distributions as long as possible. He works for RJ, Inc. RJ wants him to stay beyond their mandatory retirement age of 65. If he continues to work beyond 72 and contribute to the plan, what is the very latest he can take a distribution and not be penalized? a. Starting at age 72 per the SECURE Act b. By April 1st of the year after he turns 72 c. When he retires d. By April 1st of the year after he retires

The correct answer is: D He is a participant in a qualified plan and not a 5% owner. This is the best answer considering the words "very latest." It is the only possible answer based on the information.

Question 54 Mr. Hallas owns 80% and his daughter 20% of Hallas, Inc. (a corporation). Hallas, Inc. grosses $20 million per year or more. He and his daughter also own a partnership worth $5 million. Mr. Hallas owns a $3 million life insurance policy outright. He wants to remove the life insurance policy from his estate. What should a CFP® professional recommend? a. Sell the policy to the corporation for buy/sell purposes b. Sell the policy to the partnership for buy/sell purposes c. Transfer the policy to the partnership for buy/sell purposes d. Gift the policy to his daughter

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

Question 36 T.T. Long owns Long Manufacturing, Inc. Due to paying low wages, he is always experiencing high employee turnover. Only a few employees ever have four years of service. He has been able to retain key employees by offering them above normal wages for simple basic responsibilities. He wants to adopt a 401(k) plan, but he does not want to provide employees with benefits for short service years. He would like the key employees to stay longer. Which of the following vesting schedules would a CFP®professional recommend to T.T. Long in light of his objectives? a. 2-year eligibility 100% benefit b. 3-year cliff with one year eligibility c. 5-year cliff with one year eligibility d. 2-6 year graded with one year eligibility

The correct answer is: D In general, an employee must be allowed to participate in a qualified retirement plan if he or she meets both of the following requirements: Has reached 21 Has at least 1 year of service A traditional 401(k) plan may require 2 years of service for eligibility to receive an employer contribution if the plan provides that after not more than 2 years of service the participant is 100% vested in all plan account balances. However, the plan must allow the employee to participate by making elective deferral contributions after no more than 1 year of service. Answer A is referring to eligibility, not vesting. Answer C is only available in a non-top heavy DB plan. You may want to keep this simple using the 3-year cliff (0% or 100%) but that may not help to retain employees as they may all leave after 3 years. Answer D will help retain employees. This is covered in the Prestudy.

Question 22 Jane Thompson, age 40, is divorced. Alex Thompson, her ex-husband, is remarried to Lola, age 25. Alex has been a bit tardy on making alimony payments since he married Lola. Jane wants her financial planner to meet with Alex. Jane is willing to pay her CFP® professional for their services and Alex is willing to meet. What should the CFP® professional do? a. Tell Jane there is a conflict of interest b. Make sure Alex learns nothing about Jane's financial affairs in the meeting. c. The CFP® professional think should about the potential conflict of interests further. d. The CFP® professional should refer Alex to another financial planner

The correct answer is: D Jane and Alex want help. Answer D is a helpful answer that fits more with the CFP® professionals ethical responsibilities. Yes, there could be a conflict of interest due to Alex's late payments harming Jane, but that does not solve the problem. The answer needs to provide a solution.

Question 50 Alice has four funds: Growth fund $30,000 Emerging market fund $14,000 S&P 500 fund $45,000 High quality fund $20,000 Alice is concerned about her overall risk. She has some additional money to invest. Which fund should a CFP® professional suggest she add money to based on her overall risk concern (standard deviation)? a. Growth fund b. Emerging market fund c. S&P 500 fund d. High quality fund

The correct answer is: D Morningstar suggests this is the best antidote to equities. This would also reduce the portfolio's overall risk. The correlation coefficient is highly important for the exam. What is a high quality fund? It is low cost, consistent long-term gain, distinct investment philosophy, and tax efficiency. Subjective and typical of an exam question. When this type of question appears on the exam, answer it and move on. There is no way to know what is in the question writer's head.

Question 14 Which of the following will qualify as itemized deductions for a personal home? a. Mortgage payments b. Property insurance and taxes c. Non-reimbursed casualty losses due to storm damage d. Mortgage interest

The correct answer is: D Mortgage payments are not deductible; mortgage interest is deductible. Property insurance is never deductible for individuals. Casualty losses are no longer deductible unless the President declares a national disaster.

Question 28 An employer can self-fund certain benefits under a 501(c)(9) voluntary employees' beneficiary association (VEBA). Which of the following may not be funded? a. Death benefits b. Medical benefits c. Unemployment benefits d. Retirement pension benefits

The correct answer is: D Retirement income pension and deferred compensation benefits may not be funded through the VEBA.

Question 16 Which of the following is not an exception to early distributions (before age 59½) from an IRA? a. $10,000 for the purchase of a second home (first home was sold in 2010) b. Payment of a medical bill ($5,000) c. A single life annuity payment starting at age 40. d. Distribution in accordance with a QDRO

The correct answer is: D The QDRO exclusion is for qualified plans only. The other answers are difficult, but you should know QDROs are not associated with IRAs. Answer A qualifies as a first time home since it has been more than two years since they have owned a home. A single life annuity will be 72(t). Answer B may or may not be an exception, but Answer D definitely is not.

Question 29 Bill, a CPA, charges his clients a fee when he prepares their income tax returns. If the client is in a high tax bracket, he advises them to invest by saying, "You should buy municipal bonds." Bill should do which of the following? a. Register as an investment advisor b. Hold a securities license (Series 7) c. Do both A and B d. Do neither A nor B .

The correct answer is: D The advice is incidental to the CPA's occupation. He is not selling any products (he prepares taxes)

Question 16 Mr. Able, age 75, arrived at Selina's office with a pile of his investment data. He is very confused and concerned by all the investments his advisor has sold him. He is basically asking which investments have performed better over the last 10-15 years. Selina tells him that this will take some time but that she can do it for a fee. He agrees. As she proceeds she realizes the investments are either common stocks or bonds. The data turns out to be the traditional 70/30 split. Although the years 2008-2009 are in the analysis, the stock portion returned 9% and the bond portion 6%. How should Selina respond as a CFP® professional? a. The investments should be rebalanced to a 60/40 split due to his age. b. The bond return indicates a lot of risk for a client age 75. c. You should evaluate the client's health because the returns are good. d. Mr. Able should keep his advisor.

The correct answer is: D The covered years are 2005+ to 2022. Are 9% and 6% not good returns? Why would you want him to go to another advisor? He is confused. This could be an elder care question (Answer C).

Question 28 Chris Towns is self-employed. His business has 10 employees. He is successful enough to fund various employee benefits for him and his employees. Which among the following existing benefits would not be added to his gross income or subtracted as a deduction on the 1040 to determine his AGI? a. Group life insurance benefit of $200,000 for him b. SEP contribution for him c. Net profit from his business of $250,000 d. A $6,000 IRA contribution by his wife e. Group health contribution for him and his wife of $7,200

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

Question 18 A home has a FMV of $450,000. The land is worth $100,000. The home is partially destroyed by fire. Damages are $100,000. The home is insured for $250,000 with replacement cost coverage. How much will the homeowner get (ignore the deductible)? SHOW ANSWER a. -0- b. $55,556 c. $71,143 d. $89,286 e. $100,000

The correct answer is: D The land is not insured. The replacement value of the home is $350,000. ($450,000 FMV less $100,000 land) Homeowners always uses 80% of replacement value unless the exam uses a different percentage. $250,000 divided by 80% of $350,000 ($280,000) multiplied by $100,000 equals $89,286. The ACV answer depends on the amount of depreciation. Without depreciation you cannot calculate ACV.

Question 3 63 year old mother divorced from your father for retirement needs a. CD b. Growth mutual fund c. Zero municipal bonds maturing in 4-5 years d. Government bond mutual fund

The correct answer is: D The mother would appreciate the income.

Question 31 Terry starts a business as an S corporation with cash (capital of $1,000). He also personally lends the corporation $50,000. The business is now in need of additional capital. If the corporation applies for a commercial loan and he personally endorses it, will the commercial loan increase his basis? a. Yes, but only by $51,000 b. Yes, by the amount of the commercial loan c. Yes, by the amount of the commercial loan because he personally endorsed the loan d. No, because it is not a direct loan

The correct answer is: D When an S corporation incurs a debt, no shareholder has any personal liability for the debt. Accordingly, no S corporation debt is included in a shareholder's stock basis, even if the shareholder has personally guaranteed the debt. If he personally took out the loan and then he lent the money to the S corporation, his basis would increase (direct loan).

Question 41 A CFP® certificant, is having a first meeting with Will, an energetic, young client. He is 28 and a promising entrepreneur. He says, "I do not want a whole song and dance. I just want to invest some money. Can you help me with that?" What should the CFP® professional do next? a. Invest his money in something suitable after completing a risk tolerance survey. b. Because he has a business, recommend that he open an IRA or some other type of retirement plan. c. Gather more data to ensure his insurance coverages are adequate. d. Learn and analyze his cash flow.

The correct answer is: D While Answer C may be a somewhat supportable answer, Answer D is a better choice. If Will turns out to have negative cash flow, he should be addressing that before he invests. Answer A depends on Answer D. The insurance answer is too vague, especially without knowing more about Will's cash flow and family situation.

Question 36 Jack has an expensive wood framed house in the Blue Ridge mountains. With all the fires out west, what do you recommend he do? a. Sell the house b. Obtain the maximum homeowners insurance c. Increase the homeowners part A to the maximum d. Call and work with his property and casualty agent to obtain the best coverage available

The correct answer is: D Yes, Answer C is a good answer. Only a property and casualty agent can make the change. It could involve a change of carriers. Answer A is too extreme for Blue Ridge mountain properties. West properties are debatable on what to do.

Question 25 Due to very extreme inflation, the yield curve is inverted. Short term bonds are yielding 20% and long term bonds only 14%. The government and the Fed intend to reduce inflation to under 10% by trying to move the curve from inverted to normal. What should a CFP® professional suggest their client buy assuming all the following bonds have the same quality? a. 2-year bond b. 7-year bond c. 12-year bond d. 20-year bond

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

Question 19 Mr. and Mrs. Perkins are wealthy. Mr. Perkins is the insured on the following policies. 1.$200,000Whole Life $ 25,000 Cash Value Dividends pay premium due. Mr. Perkins is the owner. Mrs. Perkins is the primary beneficiary; his two daughters are the contingent beneficiaries. 2.$500,000Universal Life $ 50,000Cash Value Premium paid by employer. Employer owns the policy (key man). Mr. Perkins is about to retire. His employer is willing to transfer for value the policy to him. He is concerned about the gift, income, and estate tax ramifications of life insurance. Which of the following are the best options for reducing their estate if he lives three years? I. Have his life insurance trust purchase the employer-paid policy. II. Have his wife purchase the employer-paid policy. III. Gift his personal policy to his wife. IV. Gift his personal policy to his life insurance trust (his wife and two daughters are beneficiaries). V. Buy the employer-paid policy and gift the policy to his life insurance trust. SHOW ANSWER a. All of the above b. II, III c. II, IV, V d. III, IV e. IV, V

The correct answer is: E Answers I and II will trigger transfer for value and make the policy income taxable. Gifting the policy to his wife will include it in her estate. She is wealthy. This will increase their potential estate tax at the second death. Answer E is the best answer to get the policies out of his wife's estate. The exact amount of taxable gift less exclusion is not part of the answer. Since his wife is a beneficiary she may not be able to split gift, but he can use his exclusion. The question states that he will live 3 years.

Question 46 Baker, Inc. has an ERISA retirement plan (employer funded). The plan lost 50% due to poor investment decisions last year. What can the employees do? a. Sue the plan officials for 100% of the investment losses b. Sue plan officials for 50% of the 50% loss c. Nothing d. Sue the plan officials for 100% of the losses plus punitive damagese. Sue for losses to the plan due the plan officials' negligence

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

Question 15 A company has 18 full-time employees participating in their group health plan, and 4 full-time employees who are not participating in the plan. Joe, a participating employee with family coverage, just divorced Sara. How long will COBRA cover Sara and Debbie (his 12-year-old daughter)? V. Debbie is still covered under the plan. a. Sara and Debbie gets 18 months. b. Sara and Debbie gets 36 months. c. Sara gets 36 months and Debbie gets 18 months. d. Sara gets 18 months and Debbie is still covered under the plan. e. Sara gets 36 months and Debbie is still covered under the plan.

The correct answer is: E Sara will get 36 months (due to divorce). Debbie is still Joe's daughter and will continue to be covered by his group health plan (family plan). The plan is subject to COBRA (22 employees).

Question 20 Holly, the daughter of Mr. and Mrs. Golightly, is going to college. She plans to get her Masters at a state university. Unfortunately, due to economic conditions, her parents never set up a 529 plan. She can qualify for some state scholarships. Her parents, both professionals, earn well over $100,000 each, but spend almost all they make. Which of the following may generate federal income tax credits for undergraduate as well as graduate education? a. American Opportunity Credit b. Lifetime Learning Credit c. Coverdell (ESA) d. PLUSe. None of the above

The correct answer is: E The American Opportunity Credit may possibly work during the graduate years, but they are still above the $180,000 phaseout. The Lifetime Learning is subject to a phaseout at $160,000 - $180,000. The Coverdell and PLUS do not generate federal income tax credits.

Question 25 Charter, Inc. is owned 50% by John Tillman and Brad Porter. Currently, the company has a stock redemption plan funded with insurance but John and Brad want to do a cross-purchase buy/sell plan funded with insurance. Which of the following is true? I. The company owns and is the beneficiary of the stock redemption plan insurance policies. II. John owns and is the beneficiary of Brad's stock redemption plan insurance policy III. Brad will own and be the beneficiary of John's insurance policy for the cross-purchase buy/sell plan .IV. The company will own and be the beneficiary of Brad's insurance policy for the cross-purchase buy/sell plan. V. The current stock redemption policies on John and Brad can be sold to Brad and John to fund the cross-purchase buy/sell plan. (example - John can buy Brad's policy and Brad can buy John's policy) but it will violate transfer-for-value rules. a. I, III, IV b. II, III, V c. I, IV d. II, IV e. I, III, V

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

Question 52 Mrs. Jane Underwood, age 64, is a widow. Her husband died two years ago. Both Jane and her husband, John, worked for 40+ years. Through the years they worked for numerous companies. These companies had retirement plans, but no defined benefit plans. Some retirement money is still in the retirement plans which also include SEPs and SIMPLE plans. Being frugal, they also established IRAs and Roth IRAs. They deposited money into these IRAs whenever their incomes allowed them. They never made non-deductible IRA contributions. When John died, she rolled all his retirement assets into a variety of IRA and Roth IRA accounts in her name. To provide some liquidity she has been doing numerous 60-day distributions (rollovers). Now she has read the recent IRS announcement on rollovers from separate IRAs within a year. She has asked what she can do. How should a CFP® professional respond? a. Once a year distribution and rollover from one IRA to another IRA (including all her SEP and SIMPLE) plans b. Once a year distribution and rollover from one Roth IRA to another Roth IRA (including all Roth accounts) c. One IRA-to-IRA distribution and rollover per 365 days and one Roth IRA to another Roth IRA rollover per 365 days d. A rollover from an IRA to a Roth IRAe. All of the above

The correct answer is: E You can do as many direct rollovers as you want per year. You cannot take more than one IRA distribution per year for an indirect rollover. In Answer C the Roth is a rollover to another account not a distribution. It is a direct rollover. Answer D is a Roth conversion.

Question 3 A fee based financial planner has been referred to a very wealthy client. In the initial meeting his language was filthy. The planner has weathered that to get to his need for financial help. As he proceeds he makes reference to his attorney. He makes a racial slur about his attorney. The CFP® professional is the same race as the attorney. What should the CFP® professional do? a. Finish the initial meeting and tell him you will send him a fee for the planning proposal b. Finish the initial meeting and tell him the planning is beyond the CFP® professionals capabilities c. Ask him to leave d. Refer him to another financial planner T

he correct answer is: B There is no requirement in the initial meeting to take on a client. He is not a client. This feels like a morality issue. His standards of conduct are unacceptable to the planner. Answer C could affect the CFP® professional's relationship with the existing referring client. Answer D does not have a reason why another planner would be appropriate. This is not terminating a client, he never was one. The ideal answer is to not take him on as a client. Answer B is the only answer close to that. There was no plan completed, so Answer A is incorrect. It is unknown whether or not Answer B is the truth or a lie; it could be an honest response given that the conversation turned towards his attorney. Without knowing exactly what planning was needed, there is no way to know if it was in the planners skillset or not.