AWMA Exam 1

With a profit sharing plan, the employer A)need not make contributions each year, but must make substantial and recurring contributions. B)has a defined benefit plan. C)must make contributions each year. D)may contribute no more than 15% of covered payroll.

A) One advantage of a profit sharing plan for the employer is that the employer need not make contributions each year. With a profit sharing plan, the employer may contribute up to 25% of covered payroll. Mod 4

Which act repealed a prohibition that had been in place preventing financial institutions from offering a combination of commercial banking, investment banking, and insurance services? A) USA Patriot Act of 2001 B) Gramm-Leach-Bliley Act of 1999 C) Securities Acts Amendments of 1975 D) Commodity Futures Modernization Act of 2000

B) The Gramm-Leach-Bliley Act of 1999, also known as the Financial Services Modernization Act, repealed the part of Glass Steagall that had previously prohibited financial institutions from consolidating and offering a combination of commercial banking, investment banking, and insurance services. Mod 8

A top hat plan A) provides current benefits for key employees. B) may be funded or unfunded. C) is subject to the reporting and disclosure requirements of ERISA. D) is intended to provide benefits to all employees of a company.

C) Although not subject to the other provisions of ERISA, a top hat plan must comply with that law's reporting and disclosure requirements. Mod 6

Which one of the following indicators would a contrarian investor interpret as a bearish indicator? A) decreased short-interest ratio B)A high put-call ratio C)Large cash positions in mutual funds D)Bearish investment adviser sentiment

A) A decreased short-interest ratio indicates the consensus view that the market will rise, so contrarians would view this as a bearish indicator. Mod 3

Which one of the following accurately represents the general tax consequences to an employer and employee under a nonqualified plan? A) An employer does not receive a deduction for a contribution to an employee until the employee recognizes the income upon receipt. B) An employer receives a deduction when asset investments are made to informally fund an employee's nonqualified plan benefit and the employee recognizes an identical amount as income at the same time. C) An employer receives a deduction for a contribution to an employee when paid, and the employee will not be taxed on the contribution until it is withdrawn. D) An employer receives an immediate deduction for a contribution when made, and the employee will recognize income when the amount credited to his or her account is nonforfeitable.

A) An employer receives a deduction for a contribution when an employee recognizes the income, and not before that. Mod 6

Which one of the following statements is correct? A)Jensen's alpha may be used by itself to judge an investment. B)The Treynor ratio uses standard deviation as its measure of risk. C)The Sharpe ratio uses beta as its measure of risk. D)A negative alpha indicates the investment lost money.

A) Beta is the risk measure for Jensen's alpha, but the Sharpe ratio uses standard deviation as its risk measure. Therefore, the reliability of beta is relevant for Jensen's alpha. Jensen's alpha can be used by itself to judge an investment; the Sharpe ratio must be used in comparison with another Sharpe ratio in judging an investment. A negative alpha indicates the investment did not perform as well as expected given the risk taken. For example, an alpha of -1 means the investment underperformed by 1% compared to what it was expected to return. Accordingly, a negative alpha does not necessarily mean the investment lost money. The Treynor ratio uses beta as its measure of risk. Mod2

Which characteristic is common to both the federal gift tax and the federal estate tax? A) The ability to shield qualifying transfers to a qualified charity from the tax B) The ability of one spouse to assume one-half of the transfers made by the other spouse C) The tax exclusive nature of the tax D) The property receives a stepped-up income tax basis in the hands of the recipient of the transfer

A) Both the gift tax and estate tax allow a charitable deduction for qualifying transfers. Mod 7

The risk-free rate is 1.25%, the market rate of return is 8%, the standard deviation of XYZ stock is 20, and the beta of XYZ stock is 1.10. Using the capital asset pricing model in conjunction with this information, what is the expected return of XYZ stock? A)8.68% B)12.2% C)12.1% D)7.7%

A) CAPM is the risk-free rate plus beta times excess return, or Rs = 1.25% + (8% − 1.25%) 1.1 = 8.68%.

All of the following are potential personal security risks except A) serving on a board. B)kidnapping. C)extortion. D)home invasion.

A) Home invasion, kidnapping, and extortion are all personal security risks that high net worth people need to be concerned with. Serving on a board presents personal liability risks, but not to one's security merely from serving on the board. Mod 4

If a high net worth (HNW) business owner came to your office, what would you expect her financials to show, as compared to a HNW non-business owner? A) About the same income, with more assets and higher net worth B) About the same income with more assets, yet lower net worth C) Higher income, with fewer assets and lower net worth D) Lower income, with fewer assets and lower net worth

A) Income is similar between all HNW professions; however, assets and net worth include business assets, so more assets and higher net worth are common for HNW business owners. Many business owners are exposed to a large amount of unsystematic risk because a significant amount of their capital is often tied up in their business. Mod 1

A potential client, Ross Walker, is contacted by Amy Taylor, an investment professional. Ross is interested in trading complex options and is willing to open an account if Amy is knowledgeable about options. Amy implies to Ross that she is an expert in option trading but, in fact, knows only the basic elements of it. Looking solely at Amy's lack of competency in this area, which fiduciary duty has not been met? A) Duty of care B) Duty to keep current C) Duty to consult D) Duty to disclose

A) Lacking the competency to provide advice in the best interest of the client falls under the fiduciary duty of care. Mod 8

As compared to younger high net worth individuals, older wealthy individuals describe their financial needs as more geared toward A)managing cash and credit. B) digital meetings. C)investing outside of equities. D) obtaining and using credit.

A) Older clients describe their needs as straightforward: managing cash and credit, and growing investments. Younger clients indicate more complex needs, such as a reluctance to invest in equities, interest in digital meetings, and a propensity toward using credit. Mod 1

Partnership income is taxed at the A)personal tax rates of the individual partners. B)C corporation rate. C)estates and trusts rate. D)S corporation rate.

A) Partnership income is taxed at the personal income tax rates of the individual partners, because it is taxed to the partners. Mod 4

For purposes of the Medicare contribution tax, a type of income that is specifically excluded from net investment income is A) qualified Roth distributions. B) income from annuities. C) net royalties. D) passive business income.

A) Qualified Roth distributions are not included as part of the net investment income for purposes of the Medicare contribution tax. Net investment income that may be subject to the Medicare contribution tax includes annuity income. The tax also applies to income from interest, substitute interest, dividends, substitute dividends, passive business income, net capital gains, net royalties, and net rental income. Mod 5

Which one of the following statements is true regarding sustainable and responsible investments (SRIs)? A) Shareholder activism is a part of SRIs. B) Baby boomers are the most likely demographic to invest in SRIs. C) SRIs provide lower returns, but are a "feel-good" option for investors. D) SRIs provide only a negative filter of staying away from certain assets.

A) Shareholder activism also plays a part in getting companies to listen by passing shareholder resolutions. Sustainable and responsible investing has been found to be of importance to Gen Xers and millennials. Several studies have now shown taking into account ESG factors actually increases long-term returns. For SRI investments, the adviser needs to set up a series of filters to determine a client's specific wants for a sustainable fund. For instance, tobacco may be a main prohibition for one client, while religious aspects may be a positive filter for that same or another client. Mod 1

Which one of the following is a disadvantage of a REIT investment? A)No flow-through of tax benefits B)No limited liability for the REIT shareholder C)A lack of knowledgeable professionals as managers D)Double taxation of REIT income

A) Tax losses cannot be passed on to REIT investors. Mod3

Regulatory and industry developments regarding fiduciary advice provided by investment advisers, and the enactment of Regulation Best Interest will most likely A) increase client expectations of brokers and advisers and put downward pressure on fees. B) decrease client expectations of brokers and advisers and fees will stay about the same. C) increase client expectations and will likely result in higher fees being charged. D) have very little impact on client expectations of brokers and advisers or on any fees being charged.

A) The bar is being raised since there is increasing public awareness of the differences between fiduciary and nonfiduciary advice. The enactment of Regulation Best Interest has raised the bar and increased expectations of broker-dealers. The SEC has also released guidance on the fiduciary duties that advisers owe to their clients. These developments will increase client expectations of brokers and advisers and put downward pressure on fees and the sale of certain products, especially complex high fee products that are now being discouraged. Mod 8

Tax deferral in an unfunded plan A) may be achieved if plan assets are subject to company creditors. B) may be achieved if the deferral is agreed upon at any time prior to the compensation being paid. C) depends on whether an executive's right to compensation is subject to a substantial risk of forfeiture. D) may be achieved even if an executive's compensation is subject to constructive receipt.

A) The employer's promise must be merely a naked promise and must not be secured in any fashion. Mod 6

Which of these is not one of the obligations required of broker-dealers under Regulation Best Interest? A) Loyalty B) Disclosure C) Care D) Conflicts of interest

A) The four obligations found under Regulation Best Interest are disclosure, care, conflict of interest, and compliance. The fiduciary duty of loyalty is not required under Regulation Best Interest. Mod 8

Miguel and Leya are married taxpayers filing a joint tax return. In 2020, their AGI is $350,000, and their investment income (included in the AGI) is $90,000. They have investment interest expense of $6,000 and state income taxes attributable to the investment income of $4,000. What is the amount of Medicare contribution tax that they must pay? A)$3,040 B)$3,420 C)$3,800 D)$13,300

A) They will pay the 3.8% Medicare contribution tax on $80,000. This is the lesser of the net investment income ($80,000) or the AGI in excess of the threshold amount ($350,000 − $250,000, or $100,000). The net investment income is the investment income of $90,000, reduced by the investment expenses of $10,000. In this situation, all $80,000 of the net investment income is subject to the Medicare contribution tax. Miguel and Leya will pay a $3,040 Medicare contribution tax (3.8% on $80,000). Mod 5

Ophelia is considering the purchase of the Quest Mutual Fund, which has a beta of 1.2, standard deviation of 15, and a return of 11%. The current risk-free rate is 4%, and the market risk premium is 7%. Should Ophelia purchase the fund? A)No, because the fund has a negative alpha. B) Yes, because the fund has an 11% return. C)Yes, because of the fund's Treynor ratio. D)No, because of the fund's Sharpe ratio.

A) This question can be answered with or without a calculation. Sharpe and Treynor cannot be used because we have nothing to compare Quest Mutual Fund to, and both Sharpe and Treynor are comparative measures. Mod2

One of the most important financial goals of wealthy individuals is A)leaving an estate to their heirs. B)having good health. C)none of these. D)travelling the world.

A) To achieve financial success, the most common financial goals are protecting wealth, assuring retirement lifestyle, minimizing taxes, and leaving an estate to their heirs. The most frequently stated life goals for wealthy individuals are having good health, travelling the world, and achieving financial success. Mod 1

Which one of the following characteristics is more correct concerning younger wealthy individuals (millennials and GenXers)? A) Younger wealthy individuals are seeking more technological options in financial planning. B) Younger wealthy individuals have not experienced significant bear markets. C) Younger wealthy individuals have directly opposite financial needs as compared to baby boomers. D) Younger wealthy individuals likely want to be advised by one of their own generation.

A) Younger wealthy investors (millennials and GenXers) are seeking fresh approaches to financial planning, including more technological options. In addition, young clients also have been through fewer years of investing but have experienced several significant bear markets. Mod 1

Which one of the following investment strategies is the one to follow if markets are truly efficient? A) Dollar-cost averaging B)Buy-and-hold C) Low P/E D)Contrarian

B) A buy-and-hold strategy supports the efficient market hypothesis.Mod 3

Fine Inc. is a small publicly traded corporation. The company wants to provide an incentive for Ian Good, its vice president of sales, to continue with the company. However, the company does not want to deplete its much-needed cash account. Based on the objective of providing the greatest incentive without depleting cash, Fine Inc. should establish A) all of these choices would deplete cash. B) a restricted stock plan. C) a quarterly bonus plan. D) an executive bonus plan.

B) A restrictive stock plan uses no cash, and it also provides an incentive for Ian to stay with the company. Mod 6

Which one of the following best describes the requirements of an investment strategy? A)Ability, method, opportunity B)Competencies, resources, goal, method C)Method, opportunity, commitment D)Opportunity, cooperation, goal

B) Competencies, resources, goal, and method are requirements of an investment strategy. Mod 3

All the things that make a high net worth business owner's business unique, including the knowledge, experience, relationships, and human resources that create value can be categorized as their A)trade secrets. B)intellectual capital. C)business secrets. D)inventions.

B) Intellectual capital consists of all the things that make the business owner's business unique, including the knowledge, experience, relationships, and human resources that create value. It may also consist of trademarks and patents as well as brand names that the business has developed. If a business owner client has invented a product or a process that is unique, it may be the business's most valuable asset. Mod 4

Which statement regarding qualified domestic trusts (QDOTs) is NOT correct? A) A QTIP election is not available for distributions from a QDOT. B) The trustee or trustees must all be U.S. citizens or corporations. C) The trust must be one that would qualify for the marital deduction if the recipient spouse were a U.S. citizen. D) The personal representative of the estate of the first spouse to die must elect on the estate tax return to have the trust treated as a QDOT.

B) Only one trustee must be a U.S. citizen or U.S. corporation. A QTIP election is available for distributions from a QDOT. Mod 7

Which of the following best describes real estate investment trusts (REITs)? A)Mortgage-backed securities B)Mutual funds that own real estate C)Corporate bonds issued by real estate firms D)U.S. Treasury securities for real estate

B) REITs have been called mutual funds that own real estate. Mod 3

Which one of the following is NOT an allowable itemized deduction in computing the alternative minimum taxable income? A)Investment interest expense B)State and local income taxes C)Qualified housing interest D)Charitable contribution deduction

B) State and local income taxes are not an allowable itemized deduction for the AMT. Thus, clients in states with high income taxes (and property taxes) are more likely to be affected by the AMT than those in states with lower taxes. Remember that only $10,000 of taxes may be deducted as an itemized deduction. Mod 5

In October of 2020, Jennifer sold her residential rental property for $325,000. Jennifer acquired the property in December 2007 for $225,000, and has been depreciating it using the straight-line method for realty. Assume that the amount of depreciation taken is $90,000. Jennifer is in the 35% marginal income tax bracket. What is the amount and character of the gain or loss resulting from the sale? A)$90,000 loss B)$90,000 unrecaptured Section 1250 income, $100,000 Section 1231 gain C)$90,000 Section 1231 income, $100,000 unrecaptured Section 1250 income D)$90,000 Section 1245 gain and $100,000 of Section 1031 gain

B) The $325,000 sales price is compared to the adjusted basis to compute the gain realized. The adjusted basis is the cost basis of $225,000, reduced by the depreciation deductions taken of $90,000 to equal $135,000. Thus, there is gain recognized of $190,000. The first $90,000 gain is created by the straight-line depreciation. Gain attributable to straight-line depreciation on realty is known as unrecaptured Section 1250 income. This is a type of Section 1231 gain, treated as long-term capital gain, and is taxable at a maximum rate (a ceiling) of 25%. There is also $100,000 gain, created by actual appreciation of the property. The gain created by appreciation of the property is potential long-term capital gain, also under Section 1231. 1245 gain is not applicable to real estate. Mod 5

An investment professional who reads investment journals is complying with the A) duty to disclose. B) duty to keep current. C) duty to consult. D) duty to diagnose.

B) The duty to keep current requires an investment professional to be up to date with subjects relating to his or her job. Mod 8

The alternate payee's interest in retirement plan benefits subject to a qualified domestic relations order (QDRO) may be distributed in all the following ways except A) in periodic payments to the alternate payee after the plan participant reaches retirement age. B) to a qualified charity on behalf of the alternate payee. C) to an IRA owned by the alternate payee. D) directly to the alternate payee.

B) The plan benefits may not be paid directly to a qualified charity under a QDRO. Mod 7

When considering the social impact goals of a high net worth client, wealth planners should expect those clients to A)not want their planner to be involved in the charitable concern. B)want their children to also develop charitable tendencies. C) only want the charitable concern in order to reduce tax exposure. D) overwhelmingly donate assets and not volunteer their time.

B) The reasons high net worth individuals make charitable donations are largely humanitarian in nature—only half of these individuals donate to reduce tax exposure as a secondary concern. It is important for advisers to be aware of and research any social impact their clients find important. In addition, the preferred methods of accomplishing social impact in the U.S., as compared to worldwide, are more religious and also include more aspects that are nonfinancial, such as volunteerism. Mod 1

The provision that certain mutual fund policies cannot be changed without shareholder approval is addressed in the A) Securities Exchange Act of 1934. B) Investment Company Act of 1940. C) Investment Advisers Act of 1940. D) Securities Act of 1933.

B) The regulation of mutual funds is covered in the Investment Company Act of 1940. Mod 8

Which one of the following currently is the most common form of business organization? A)Partnership B)Sole proprietorship C)Limited liability company D)C corporation

B) The sole proprietorship is the most common form of business organization, with over 70% of U.S. businesses filing income tax returns indicating they are sole proprietorships. Partnerships account for less than 10% of all U.S. businesses, and approximately 20% of all U.S. businesses are corporations. Mod 4

Bill Dunston is the sole shareholder of Dunston Press, a small publishing company. All of the employees of Dunston Press are considerably younger than Bill, turnover is relatively high, and 12 of his 20 employees are part time. He is considering implementing a retirement plan for the company and wants to avoid fixed contribution obligations. He also wants to receive the maximum benefit possible. Which one of the following plans would be most appropriate, considering Bill wants to maximize contributions on his behalf relative to those of the other employees? A)Cross-tested profit sharing plan B)Salary reduction SEP plan C)Age-weighted profit sharing plan D)Money purchase pension plan

C) An age-weighted profit sharing plan allocates contributions on the basis of age, which would work to Bill's advantage since he is the oldest employee. Money purchase plans and SARSEPs require the same contribution percentage for all employees. A cross-tested profit sharing plan is used to allocate contributions on the basis of compensation. Mod 4

An equity REIT typically A)has no debt financing. B)pays a fixed dividend. C)owns property. D)invests in mortgage loans.

C) An equity REIT owns property. Mod3

Assume each of the asset classes below has the following correlation to long-term government bonds: •Treasury bills: .67 •Corporate bonds: .81 •Large stocks: .37 •Small stocks: .12 Which one of the following correctly states the impact of diversification on a portfolio of long-term government bonds? A)Treasury bills provide more diversification than small stocks. B)There is no diversification effect because all of the correlations are positive. C)Small stocks provide more diversification than large stocks. D)Corporate bonds provide more diversification than large stocks.

C) Because the correlations of small stocks to long-term government bonds are less than that of large stocks (even though both are positive), small stocks provide more diversification than large stocks. Mod2

Which one of the following industries would be expected to perform well in the early stage of an economic expansion? A)Equipment manufacturers B)Chemicals C)Consumer credit D)Food

C) Consumer credit is one industry that would be expected to perform well in the early stage of an economic expansion. Mod 3

Which of the following is frequently used to informally fund a deferred compensation plan? A) Corporate-owned term life insurance B) None of these are used as a means of informal funding C) Corporate-owned cash value life insurance D) Corporate-owned mutual funds

C) Corporate-owned cash value life insurance is typically used to informally fund a deferred compensation plan because the cash value increase is not currently taxed and the cash value can be borrowed against. Mod 6

Concerning control of assets in a private foundation versus a donor-advised fund, which one of the following aspects is true for a donor-advised fund? A)Remains with founder's values B) Needs lengthy IRS approval C) Easier and less expensive to launch D) Must pay out a certain percentage each year

C) Donor-advised funds (DAFs) are growing in popularity and have the advantage of being easier and cheaper to launch and not requiring the lengthy IRS approval that private foundations need. Values may change with a DAF, as major contributors have input into this type of charitable fund. In addition, only private foundations must make payouts each year; DAFs have flexibility with this. Mod 1

The Employee Retirement Income Security Act (ERISA) was primarily passed because of concern regarding the integrity and safety of A) employee working conditions. B) employer-sponsored insurance benefits. C) employer-sponsored retirement plans. D) employee wages and benefits.

C) ERISA was the direct result of concern over the safety and integrity of workers' company retirement plans. Mod 8

A client who expects her portfolio of intermediate-term government bonds to earn 12% a year suffers from which one of the following? A)Inadequate time horizons B)Overreaction to market events C) Unrealistic expectations D)Overconfidence bias

C) Historically, intermediate-term government bonds have had an annual return of between 5% and 6%, so this client has unrealistic expectations. Mod 3

A funded deferred compensation plan A) does not avoid current income taxation. B) will provide an immediate deduction to an employer. C) will be taxable to an employee if nonforfeitable. D) must be made available to all employees.

C) If the employee has constructive receipt of plan compensation (funds are nonforfeitable), such compensation will be taxable to the employee. Mod 6

Which statement is true with regard to a rabbi trust? A) Rabbi trust assets are excluded from general creditors in bankruptcy proceedings. B) Distributions from a rabbi trust can be rolled over to an IRA. C) The employer is taxed on taxable earnings in the plan as they accumulate. D) The trust assets may be available for general use by the employer.

C) In a rabbi trust, as plan earnings accumulate they are taxed to the employer. (Mod 6)

Which statement regarding excess benefit plans is correct? A) None of these is correct. B) Employees recognize income when an unfunded plan is established. C) Both management and non-management employees may be covered by a plan. D) The plan must be funded.

C) In contrast to a top hat plan, an excess benefit plan may cover both management and non-management employees. Mod 6

In March of 2020, Jennifer sold her residential rental property for $925,000. Jennifer acquired the property in May 2007 for $225,000, and has been depreciating it using the straight-line method for realty. Assume that the amount of depreciation taken is $90,000. Jennifer is in the 35% marginal income tax bracket. What is the amount and character of the gain resulting from the sale? A) $0 unrecaptured Section 1250 income, $700,000 "regular" long-term capital gain B) $700,000 unrecaptured Section 1250 income, $90,000 "regular" long-term capital gain C) $90,000 unrecaptured Section 1250 income, $700,000 "regular" long-term capital gain D) $90,000 recaptured Section 121 gain and $700,000 unrecaptured Section 1250 gain.

C) In this situation, there is total gain of $790,000. The first $90,000 gain is created by the straight-line depreciation. Gain attributable to straight-line depreciation on realty is known as unrecaptured Section 1250 income. This is a type of Section 1231 gain, treated as long-term capital gain, and is taxable at a maximum rate of 25%. There is also $700,000 gain, created by actual appreciation of the property. The gain created by appreciation of the property is potential long-term capital gain, also under Section 1231. This "regular" long-term capital gain will be subject to the 15% and/or 20% long-term capital gain rates. Section 121 applies to personal residences, not business properties. Mod 5

Incentive stock options A) typically must be exercised within five years. B) generate income recognition when the options are exercised. C) are a form of deferred compensation. D) are subject to the provisions of ERISA.

C) Incentive stock options provide a company with one way to set up deferred compensation for an executive. Mod 6

George's bonds fell in price on news of higher interest rates. To which one of the following risks are George's bonds most likely to be subject? A)Financial risk B)Reinvestment risk C)Interest rate ris D) Default risk

C) Interest rate risk centers on the inverse relationship of interest rate changes and bond prices, so, in this situation, if interest rates go up, the price of George's bonds go down. Mod2

According to the Barnewall study, which one of the following would be a likely candidate for complex and risky investment opportunities? A)Corporate executives B)Individuals with inherited wealth C)Surgeons (medical and dental) D)Non-surgeons (medical and dental)

C) Medical and dental surgeons fall into what Barnewall described as "active investors" who are measurably less risk averse. The category also includes small business owners who started their business, independent CPAs and lawyers, and entrepreneurs. Mod2

Even if the host is not held liable for the damages as a result of entertaining guests, there can still be significant expense due to A)out-of-court settlements. B)event preparation. C)defense costs. D)insurance premiums.

C) Most people occasionally entertain guests. People who host events have a risk of lawsuits from guests who may be injured or may injure others. While most of the time everyone has a wonderful time and no one gets hurt, all it takes is one person who is careless or intoxicated and a significant liability exposure occurs. Even if the host is not held liable for the damages, the defense costs can be quite high. Mod 4

Which of the following are characteristics of the Sharpe ratio? I. It adjusts the return for variability by using standard deviation as the measure of risk. II. It assumes that the portfolio being evaluated is well diversified. III. Both alpha and beta appear in the ratio formula. IV. It indicates by how much the realized return differs from the return required by the capital asset pricing model. A) III and IV B) I and II C) I only D I, II, and IV

C) Options II, III, and IV are true of Jensen's alpha; option II is true of the Treynor ratio. Mod2

What is the minimum percentage of total assets that REITs must invest in real estate? A)85% B)50% C)75% D)95%

C) REITs must invest at least 75% of total assets in real estate. Mod3

Which one of the following lists the investments in order of least risk to most risk? A) High-grade municipal bonds, high-grade preferred stock, limited partnerships, growth mutual funds B)Money market accounts, puts and calls, high-grade convertibles, future contracts C)Treasury securities, high-grade convertibles, REITs, collectibles D)Fixed income annuities, Treasury securities, high-grade convertibles, REITs

C) Ranked from least risk to most risk in the investment pyramid are Treasury securities, high-grade convertibles, REITs, and collectibles. Mod2

Jack is a participant in his company's stock bonus plan. Over the years, the company contributed 1,000 shares of its stock to Jack's plan account. The total value of these shares at the time of contribution to Jack's account was $60,000. Jack took a lump-sum distribution from the plan on July 1 of the current year. His 1,000 shares were each worth $300. If Jack sells all 1,000 shares for $300,000 on June 5 of the following year, what is the income tax result? A)$60,000 capital gain income in the current year; $240,000 ordinary income next year B)$0 income in the current year; $300,000 ordinary income next year C)$60,000 ordinary income in the current year; $240,000 long-term capital gain income next year D)$60,000 ordinary income in the current year; $240,000 ordinary income next year

C) The employee-recipient is taxed on the cost, or basis, of the securities received in the year of distribution, at ordinary income rates. In this scenario, Jack would include $60,000 in his ordinary income for this year, i.e., the year in which he took the distribution. The amount that the taxpayer includes as income becomes the taxpayer's basis in the stock. The NUA, however, is not taxed until the recipient actually sells the shares. When these shares are sold, however, the NUA that has been deferred is taxed as a long-term capital gain. Mod 5

Walter has the following items of income for 2020: Sole proprietorship income $160,000 General partnership income $5,000 Interest income $1,200 What is the amount of self-employment tax Walter owes? Round your answer to the nearest dollar. A)$25,245 B)$25,429 C)$21,494 D)$22,460

C) The flow-through of net income from a general partnership is subject to the self-employment tax. The interest income is not subject to the self-employment tax. Actual earnings $165,000 Less 7.65% (12,623) Net earnings from self-employment $152,377 Less wage base (137,700) $14,677 Medicare rate × 2.9% 426 Add 15.3% of $137,700 21,068 Self-employment tax $ 21,494 Answers may very slightly due to rounding. OR Schedule C net profit (business profit) $165,000 Less 7.65% of Schedule C income ($12,623) Self-employment earnings subject to self-employment taxes $152,377 Social Security Tax Calculation (OASDI) Medicare Tax Calculation (HI) Earnings subject to self-employment tax $137,700 $152,377 Times tax rate 12.4%(OASDI tax rate) = 2.9% (HI tax rate) = Equal self-employment taxes $17,075 (Social Security taxes) $4,419 (Medicare taxes) Total self-employment tax $21,494 (Rounded) Mod 5

Which statement regarding a net gift transaction is NOT correct? A) The donee may be asked to pay the gift tax due on the gift. B) The donor's estate can claim any gift-tax paid by the donee as a credit against the donor's estate. C) The gift is included in the donee's estate tax calculation as an adjusted taxable gift only if the donor pays the gift tax out-of-pocket. D) If the obligation assumed by the donee exceeds the donor's adjusted basis in the property, the donor will realize a capital gain to the extent of the excess.

C) The gift is included in the donor's estate tax calculation as an adjusted taxable gift even if the donee pays the tax. The donor's estate can claim a credit against the federal estate tax for gift tax paid by the donee. Of course, any appreciation after the date of the gift is not in the donor's gross estate, nor would this appreciation be a part of the adjusted taxable gift. Mod 7

Which one of the following top overall concerns was the same for those wealthy clients under 30 and above 60? A)Understanding of risk tolerance B)Fee transparency C)Strong investment performance D)Ensuring children's well-being

C) The top wealth concerns of wealthy clients under 30 and above 60 differ greatly, but one area of agreement is wanting strong investment performance. Under-30 clients generally want efficiency and transparency—they want to understand what is being proposed and the costs and risks involved. They also will not hesitate to go to other individuals or sources in order to better understand their options. This is not the case with a typical over-60 client, who will work with just one adviser whom they trust, and will want that adviser to have a strong understanding of their needs and risk tolerance. In addition, younger investors are more concerned with child care and older investors with obtaining advice about risk tolerance. Mod 1

Which statement regarding charitable remainder trusts that are qualified to receive the estate tax charitable deduction is NOT true? A) The charity must be given the remainder interest in trust assets. B) The trust may last for one or more persons' lifetimes. C) The charity must be given either an annuity or a unitrust interest. D) The charity must be qualified.

C) These terms are used to describe the income interest in such trusts; the charity gets the remainder interest. Mod 7

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

C) With a qualified plan, the employer may deduct plan contributions in the year that those contributions are made. Mod 6

Assume a growth stock mutual fund has a beta of 1.3. If the stock market increases by 9%, you would expect this mutual fund to A) decrease by 9%. B)increase by 9%. C)increase by 11.7%. D)decrease by 11.7%.

C) You would expect any fund with a beta of 1.3 to increase by 11.7% (1.3 × 9%). Mod2

Which one of the following statements is true with regard to self-employment taxes? A)Net earnings from self-employment must be calculated under the accrual method of accounting. B)Self-employment tax is the government's way of discouraging entrepreneurship and innovation. C)Once the wage base has been exceeded, there is no self-employment tax on the excess. D)A taxpayer is allowed to deduct one-half of his or her self-employment tax liability as an adjustment to income.

D) A taxpayer may deduct one-half of his or her self-employment tax liability as an "above the line" deduction—an adjustment to income. Mod 5

Bill is highly confident, strong willed, and difficult to advise. Which one of the following best describes Bill's investor personality? A)Guardian B)Celebrity C)Individualist D)Adventurer

D) An adventurer is impetuous, confident, strong willed, and difficult to advise. Mod2

A major responsibility of FINRA is A) registering agents of broker-dealers to do business with the public. B) insuring customer accounts in the event of the liquidation of brokerage firms. C) establishing rules for issuing new securities in primary markets. D) developing rules and regulations for its members.

D) FINRA is the largest securities industry self-regulating organization and, therefore, develops rules and regulations for its members. Mod 8

Specialty homeowners insurance is needed for high-value homes because A)older homes with historical value may need extra ordinance and law endorsed coverage to bring the property up to code if damaged. B)unique and high-end furnishings and specialty rooms may be inadequately covered by a standard homeowners policy. C)the government-sponsored flood insurance program does not provide adequate limits for the dwelling or contents for homes valued over $250,000. D)all of these.

D) If the home is older there may be a need for an extra ordinance or law endorsement in order to bring the property up to code when damage is repaired. If the home has historical value, restoration cost coverage will be needed, as standard contemporary materials may not be adequate to restore the property. Some items may not be able to be replaced and so extra high limits and guaranteed replacement cost or restoration cost coverage may be needed. This would also apply to custom or unique features and materials. If significant remodeling has been done, such as a room in the basement converted to a wine cellar, specific coverage will be needed so that specialized rooms or features can be replaced. The standard flood policy provides only $250,000 coverage on the dwelling and $100,000 on contents. Mod 4

Perhaps the best preventive measure high net worth clients can take to reduce the likelihood of personal and security losses is to A)get highly trained guard dogs to protect the property. B)purchase appropriate insurance policies. C)keep a top-notch legal team on retainer to represent the client when needed. D)educate themselves as to how, when, and where threats can materialize.

D) Insurance policies can only respond to claims, not prevent them. The same goes for a crack legal team on retainer. Guard dogs may prevent some risks, but the best option is to be educated about what threats can materialize and how. Security specialists can develop a comprehensive security plan that involves home protection and security, protection while traveling, and prevention of identity theft and other cyberattacks. Mod 4

Which one of the following statements is incorrect regarding investment interest expense? A)Interest paid or accrued to purchase or carry tax-exempt investments is not deductible. B)Investment interest expense is deductible up to the amount of the net investment income. C)Investment interest expense may only be deducted if the taxpayer itemizes. D)Excess investment interest expense cannot be carried forward into succeeding tax years.

D) Net investment income is the taxpayer's investment income—typically interest, nonqualified dividends, and short-term capital gains. Investment interest is an itemized deduction. Excess investment interest expense can be carried forward into succeeding tax years. Mod 5

Reasons for investing in real estate include all of the following except A)relatively constant cash flow. B)tax shelter potential. C)long-term appreciation potential. D)liquidity

D) Real estate is generally an illiquid investment. Mod 3

XYZ Inc., a C corporation, has $200,000 in taxable income this tax year. It distributes half to its shareholders in the form of cash dividends. As far as XYZ Inc. is concerned, which one of the following amounts, if any, is subject to the corporate income tax? A)$150,000 (Half of corporate dividends are deductible.) B)$100,000 (This is $200,000 less the dividend distribution.) C)$0 (C corporations do not pay income tax.) D)$200,000 (None of the corporate dividends are deductible.)

D) Since XYZ Inc. has taxable income of $200,000, that is the amount subject to tax. Dividends are not deductible. Mod 4

The Care Obligation under SEC Regulation Best Interest requires which of the following of broker-dealers when making any recommendations? A) Reasonable care, skill, and loyalty B) Reasonable prudence, diligence, and care C) Reasonable loyalty, diligence, and care D) Reasonable diligence, care, and skill

D) The Care Obligation under Regulation BI requires exercising reasonable diligence, care, and skill when making any recommendations to a client. Under the fiduciary duty of care prudence is also required, which requires a fiduciary to manage and invest another's money with such skill and care as a person of ordinary prudence and intelligence would use in managing his or her affairs or investments. Regulation BI stops short of requiring the fiduciary standard of broker-dealers, so prudence is not required. Mod 8

Which statement regarding charitable lead trusts that are qualified for the charitable deduction is NOT true? A) A noncharitable beneficiary receives the remainder interest. B) The charity receives the income interest. C) The trust term can last either for a set period of years, or for the life or lives of a person or persons living at the time the trust is established. D) The charity receives a right to all the income from trust assets.

D) The charity must receive either an annuity or a unitrust interest, neither of which equates to a right to all income from trust assets. Mod 7

You sell your client a GNMA based on your explanation that they are "safe" because they are guaranteed by the U.S. government. In which ethical duty may you have failed your customer? A) Duty to consult B) Duty to keep current C) Duty to diagnose D) Duty to disclose

D) The duty to disclose requires an investment professional to explain the risks of investments sold to clients, even those backed by the U.S. government. Even though they are free of default risk, GNMAs are still subject to many other risks, such as interest rate and purchasing power risk. Mod 8

One of the most important life goals of wealthy individuals is A) protecting wealth. B) assuring their retirement lifestyle. C) minimizing taxes. D) travelling the world.

D) The most frequently stated life goals for wealthy individuals are having good health, travelling the world, and achieving financial success. To achieve financial success, the most common financial goals are protecting wealth, assuring retirement lifestyle, minimizing taxes, and leaving an estate to their heirs. Mod 1

Which statement regarding a reverse gift transaction is NOT correct? A) The property used in a reverse gift transaction has a low basis in relation to its fair market value. B) The primary purpose of this transaction is for the donor to get a stepped-up basis in the asset that is gifted. C) The donee cannot have a legal obligation to leave the property to the original donor (or spouse) at the donee's death. D) The property involved has a high basis in relation to its fair market value.

D) The primary purpose of the reverse gift transaction is to eliminate this potential gain so that the asset can then be sold without payment of a large capital gains tax. Mod 7

For a taxpayer with an AGI in excess of $150,000 for the prior tax year ($75,000 if married filing separately), the estimated tax penalty safe harbor is A)90% of the current year's tax liability or 100% of the prior year's tax liability. B)110% of the current year's tax liability or 125% of the prior year's tax liability. C)80% of the current year's tax liability or 120% of the prior year's tax liability. D)90% of the current year's tax liability or 110% of the prior year's tax liability.

D) The safe harbor is 90% of the current year's tax liability or 110% of the prior year's tax liability if the taxpayer's prior year AGI exceeded $150,000. If the prior year's AGI was $150,000 or less, then the safe harbor is 90% of the current year's tax liability or 100% of the prior year's tax liability. Mod 5

The top reasons for a wealthy client to leave an adviser have been found to be in the general category of A)poor firm notoriety. B)high fees. C)poor investment advice. D) poor communication.

D) The top reasons a wealthy client would leave an adviser, with the most egregious reason being first, are: not returning phone calls in a timely manner, not being proactive with contact, not providing good ideas and advice, and not returning emails in a timely manner. Mod 1

Which of the following are the only exceptions to an estate transfer being subject to the GSTT when a gratuitous completed inter vivos transfer is a generation-skipping transfer? I. The transferor makes payments directly to the recipient for medical expenses II. The transferor makes direct payments of medical expenses to the medical provider on behalf of the recipient III. The transferor makes payments directly to the recipient for educational expenses and room and board IV. The transferor makes direct payments to the educational institution for tuition expenses on behalf of the recipient A) II and III B) I and IV C) II only D) II and IV

D) The transferor can qualify within the limited exception if direct payment is made for medical expenses in addition to making direct payments for tuition expenses. Mod 7

Use of the GSTT exemption for lifetime skips is A) only available for lifetime transfers. B) only applicable for nonskip parties. C) applicable only for the wealthy. D not mandatory.

D) Unlike the applicable credit amount that is used to keep a taxpayer from having to pay gift or estate taxes that would otherwise be due, use of the GSTT exemption for lifetime skips is not mandatory. The use of the GSTT exemption is available for testamentary transfers. Mod 7

Which statement regarding the rights of a judgment creditor is correct? A) Spendthrift clauses are hard to enforce against creditors in most states. B) The creditor cannot exercise the power of a debtor/beneficiary of a trust to demand that trust assets be paid to the beneficiary. C) The creditor can revoke an irrevocable trust established by the debtor. D) The creditor is most likely to seize property that is solely owned by the debtor.

D) When there is no co-owner of the property, the creditor can easily seize and sell the property to satisfy the judgment. Mod 7