Final Review Quiz #2

Mr. Sims purchased a $500,000 life policy in 1987 paying 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 rate. 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.

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. 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 in 1987. The policy was acquired before MEC rules took effect in 1988.

Chariots of Hire, a tour bus company, employs 19 workers but only 15 are covered under its group insurance plan. If one of the covered employees is terminated, what is the amount of time for which the employee is able to continue his or her group coverage under COBRA rules? A) -0- months of coverage B) 18 months of coverage C) 36 months of coverage D) 29 months of coverage

A) -0- months of coverage Under COBRA rules, employers having 20 or more employees must, under specific circumstances, allow terminated employees and members of their families to continue to be covered under the employer's group health insurance plan. Chariots of Hire has only 19 employees and we do not know if they are full-time workers.

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 primary residence B) A distribution made to the owner for qualified higher education expenses furnished to the owner personally C) A distribution made to a 50 year old beneficiary after the death of the owner D) A distribution attributable to the owner's disability

A) A distribution made to the owner ($10,000 lifetime limit) for the primary residence The distribution must be for the purchase of a first home, not necessarily a primary residence.

Sally has asked you (a CFP® practitioner) to evaluate the following bonds. She is in this highest marginal tax bracket. On a tax-equivalent basis, which of the bonds provides the best return? Note: Unless the question indicates that the client is subject to the 3.8% investment tax mandated by the Affordable Care Act, do not use 3.8% in any calculation. A) A municipal revenue bond paying 5.2% B) A corporate zero coupon bond returning 7.8% C) A Treasury zero coupon bond paying 7.6% interest D) A corporate coupon bond paying 7.9% interest

A) A municipal revenue bond paying 5.2%

Which of the following trusts is required to distribute income annually? A) A simple trust B) A 2503(c) minor's trust C) An irrevocable life insurance trust D) An irrevocable trust with Crummey provisions E) A qualified personal residence trust (QPRT)

A) A simple trust By definition, a simple trust distributes income annually.

Terrie Cross and Brenda Davis have decided to close their business. They had entered into a cross-purchase buy-sell agreement funded with life insurance policies. Both Terrie and Brenda are married. How should they handle the ownership of their policies at this point? A) Each should purchase her own policy from the other owner. B) They should maintain the current ownership arrangements of the insurance policies C) Terrie should sell Brenda's policy to Brenda's husband, and Brenda should sell Terrie's policy to Terrie's husband. D) They should change to an entity buy-sell agreement.

A) Each should purchase her own policy from the other owner. After the business closes, it is reasonable that each owner then owns the policy on her own life. Because the business is closed, there is no reason to maintain the current arrangement of ownership of the policies. Answers C and D trigger "transfer for value."

Mr. Smith is subject to the AMT. Which of the following can reduce his AMT payable? A) Exercising more nonqualified stock options B) Assuming a larger mortgage C) Purchasing more municipal bonds (private activity) D) Buying an oil and gas partnership E) Purchasing more public purpose bonds

A) Exercising more nonqualified stock options Exercising nonqualified stock options will increase his regular income which thus reduces his AMT payable. The mortgage interest deduction associated with a larger mortgage will decrease his taxable income. Purchasing public purpose bonds will have no effect.

Which of the following mortgage investments is guaranteed by the U.S. Government? A) GNMA B) FHA C) VA D) FNMA

A) GNMA Certain agency securities are fully guaranteed by the U.S. Government. Ginnie Mae (GNMA) issues pass through certificates with federal backing in the event of default. FHA and VA are loan programs and not investments.

Arthur, age 63 regrets retiring early. He's single and bored. Arthur found a job at Walmart as a greeter. The job will pay $15,000 per year. Arthur doesn't need the money because he is currently receiving $6,000 per month from his former employer's money purchase pension plan plus early Social Security retirement benefits of $1,000 per month. Arthur lives in a comfortable apartment, has full medical coverage and makes no charitable contributions. He normally claims the standard deduction. Which of the following is true if he takes the job with Walmart? A) He will remain in a 22-24% income tax bracket. B) He should find a job that pays him more than $15/hour. C) The impact of the earned income will be a very marginal increase in income tax. D) His Social Security Retirement benefits could be reduced because of his earned income.

A) He will remain in a 22-24% income tax bracket. Arthur will be in the 22-24% bracket. If he works the same hours for better pay, Arthur will exceed the 1-2 rule ($19,560) which would reduce his current Social Security retirement benefits. For now, Arthur remains with Walmart.

What is beta? A) The measure of the systematic risk of a security B) The measure of how a money manager outperforms or underperforms the market as a whole C) The measure of how a money manager reduces the fluctuation of the fund relative to the market as a whole D) The measure of the unsystematic risk of a security

A) The measure of the systematic risk of a security By definition

When the McFarlands retire, they expect to live on 50% of their current pre-retirement income adjusted for inflation. What should they worry about the least? A) Their income taxes B) The rate of return on their investments C) Their investment risk tolerance D) Their life expectancies

A) Their income taxes Given that they expect to live on one half of what they spend now, the McFarlands will probably be in a low tax bracket. The other factors matter, but more. Income will relate to investment performance which reflects the amount of risk the McFarlands are willing to assume. Life expectancy also matters.

Toby Smith, age 61, gifts $1 million to an irrevocable trust that provides income only to his troublesome son, Bugsy, age 37. Bugsy can't keep a job and is always asking for money from his father and others. The trust income is distributed quarterly. Toby's investment advisor handles the $1 million trust portfolio. The payout is approximately 3% or $30,000. Toby is married with three other children. The other children are upset because no trust arrangement was established for them. Which of the following statements accurately reflects Toby's situation? A) Toby has made a taxable gift of $1 million. B) Toby and his wife have made taxable gifts of $484,000 (split-gift less $16,000) C) The $30,000 is taxable income to Toby. D) Toby should have established a 2503(c) trust.

A) Toby has made a taxable gift of $1 million. Gifts in trust are future interest gifts. No Crummey powers are included. The income is taxable to Bugsy. This is a 2503(b) trust. The trust is not tainted. Nothing indicates that Toby is the trustee. Toby transferred the money into the trust. Nothing indicates a split gift. There is no Crummey provision.

Your client, Seymour heard about an "interesting" mutual fund. He asks you if the mutual fund is a wise investment and if he should buy it. You research the mutual fund and other factors and learn the following. alpha: -7 beta: .4 R2: 80% SD: 10% T-bills: 4.5% What would you recommend? A) You tell the client not to buy the mutual fund because the alpha is negative. B) You tell the client to buy the mutual fund because the beta is low. C) You tell the client to buy the mutual fund because the Sharpe Index will be high. D) You tell the client to consider the fund's turnover ratio.

A) You tell the client not to buy the mutual fund because the alpha is negative. When the R2 is high, Alpha becomes important. If the Alpha is negative; the fund does not appear to be a wise purchase.

John and Carol had their financial liabilities decrease from $250,000 of debt to $200,000. This occurred because of the following. -They used cash flow to pay off $20,000 of credit card debt. -They sold stock with a basis of $70,000 at a loss of $20,000 and used the proceeds to buy a new car. -They paid off their $12,000 auto loan. Their only other debt has been their home mortgage. It was a $175,000 mortgage taken out some years ago (30-year / 8%). Based on the above information, how much principal reduction happened to the mortgage? A) $12,000 B) $18,000 C) $20,000 D) $28,000 E) $30,000

B) $18,000 Net change in liabilities: $50,000 Less credit card payment: -20,000 Less auto loan payments: -12,000 = Residence mortgage: $18,000 The sale of the stock at a loss was a wash. The new car replaces the stock as an asset. Their Statement of Financial Position would have shown the stock at FMV, rather than basis. The auto loan would have to be paid using cash flow. There is no other possibility. The loss would affect their taxes.

Mrs. Perry will report a current tax year AGI of $145,000. She recently donated $100,000 of publicly held stock to a private university. The stock was purchased 10 years ago for $25,000. What is the maximum allowable income tax deduction she can take in the current year for this gift? A) $25,000 B) $43,500 C) $50,000 D) $100,000 E) $145,000

B) $43,500 A private university is deemed to be a public charity/50% organization. Mrs. Perry's gift of long-term appreciated property is allowed a deduction of 30% of her AGI. Valuating at basis (50%), would provide Mrs. Perry with a deduction of only $25,000. The remaining $56,500 carries forward for 5 more years or death.

Pat Dugan is a 70-year-old man about to retire. If he annuitizes the current account balance from the retirement plan in which he has participated throughout his long career, which of the following annuity options will provide Pat with the highest payment in his first year of retirement? A) Life income with a 5-year period certain B) A life annuity C) Joint lifetime income with his son (age 49) D) Joint lifetime income with his wife (age 71)

B) A life annuity The life annuity always produces the highest payout. A life annuity may also be called as a pure life annuity or a straight life annuity.

Your client, Byron Sheridan, died recently at age 83. He was married to Virginia, age 83. Byron enjoyed managing his investments and diversifiedhis invested assets among several asset classes. When Byron died, he held the assets listed below. Which of them would be eligible for a step up in basis? A) A $100,000 CD now worth $105,000 (acquired 5 years ago). B) A municipal bond purchased at a discount ($95,000) two years ago now having a date of death FMV of $100,000 C) Stock purchased 6 months ago for $50,000 that created a $10,000 STCL. D) An annuity purchased 10 years ago for $100,000 having a date of death FMV of $115,000.

B) A municipal bond purchased at a discount ($95,000) two years ago now having a date of death FMV of $100,000 The municipal bond was held for the long-term and is eligible for stepped up basis upon Byron's death. The tax deferred accounts such as an annuity (and retirement accounts generally do not step up in basis). The CD is cash. There is no stepped up basis; a dollar is a dollar.

Mr. and Mrs. Bell are divorced. Under the divorce decree, Mr. Bell is required to pay alimony for 10 years. After two years, Mr. Bell dies. What happens to the alimony payments? A) Excess front-loading rules apply, and thus, excess alimony is recaptured. B) Alimony payments cease. C) Alimony payments continue to be paid by Mr. Bell's estate for the remaining eight years. D) A lump-sum alimony payment representing the present value of what would have been aggregate future payments is paid to Mrs. Bell from Mr.Bell's estate.

B) Alimony payments cease. The ex-spouse generally has no rights to the decedent's estate. Often the divorce decree mandates that the alimony payor acquire life insurance on his/her own life. This insures that the ex-spouse will receive alimony as decreed.

Coverdell Education Saving Plans permit tax free withdrawals 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. Room and board V. Uniforms as required A) None of the above B) All of the above C) II, III, IV D) I, II E) III

B) All of the above All these items are eligible for tax free withdrawals from Coverdell Education Savings Accounts. These expenses may reflect both elementary and secondary education.

The date is April 13th and CPA Hal Kraft calls you, a CFP practitioner, introducing himself as a tax preparer for your clients. Your clients are a married couple, Norma and Eric Cotter. The Cotters were unable to locate a K-1 from a low-income housing limited partnership that you suggested that the Cotters acquire. Mr. Kraft asks you to provide him with information as to the Cotters' holdings and reporting tax year distributions. What should you do? A) Give Mr. Kraft the information as a fellow financial services professional. B) Decline to give the information to Mr. Kraft until you have permission from the Cotters. C) Report Mr. Kraft for violating generally accepted accounting principles. D) Consult the CFP Board for specific guidance in this matter.

B) Decline to give the information to Mr. Kraft until you have permission from the Cotters. Under the Duty of Confidentiality of the CFP Code of Ethics and Professional Responsibility, until the client grants permission to share financial information with third parties, the planner many not do so. This presumes that the requesting party is neither a regulator, a member of the IRS, or preparing a defense on the planner's behalf.

You are a CFP® professional. Terry Hand is an old college friend and has been a client of yours for years. He has titled all of his accounts individually in his own name, You haven't socialized with him since the college years and you have never met his wife. On a late Friday afternoon he comes by to ask if you could join him for a drink. You are surprised becuase, for decades, your relationship has always been as a financial adviser. At a quiet bar he starts belting down drinks. You nurse one. Finally, he says he has a problem. He has two families with children by both his wife and girlfriend. The girlfriend knows he is married. He is worried as to how to set up his estate plan. How would you best respond? A) He should place all his assets in a revocable trust to keep all transactions private. B) He should see an attorney C) He needs to find another financial adviser because you have a conflict of interest. D) You need to get his wife's consent to do an estate plan.

B) He should see an attorney You do not have a conflict of interest or an ethical obligation to involve his wife because she has never been your client. The dynamics of his personal life are complicated. An attorney can advise him on complicated strategies and help him execute documents as needed. You cannot help Terry with documents. There is no need to terminate the relationship. His wife is not your client and his assets appear to be individually owned.

An employer can self-fund certain benefits under a 501(c)(9) voluntary employees' beneficiary association (VEBA). Which of the following may be funded? I. Death benefits II. Medical benefits III. Unemployment benefits IV. Retirement benefits V. Deferred compensation benefits A) I, II, III, IV B) I, II, III C) I, II D) IV, V E) All of the above

B) I, II, III Retirement and deferred compensation benefits may not be funded through the vehicle.

Barry retired a few years ago from Belmont, Inc. at age 65. He is turning age 72 at the beginning of this year. He is planning to return to work at Belmont toward the end of the year on a full-time basis. Barry has the following types of retirement accounts not all of which come through his current employer. From which of the following accounts does Barry have to take a mandatory distribution by April 1st of next year? 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 E) I, II

B) I, II, IV, V A minimum distribution is required for the year in which the participant attains age 72. Considering the question is worded, Barry still will be retired when he reaches age 72 (middle of the year). He will be back to work at the end of the year and may not be eligible to participate in the 401(k) until the following year.

A few years ago John and Jim started a business J&J, Inc. as an S corp. In spite of a sluggish economy, the company has grown at a rapid rate. J&J has focused on selling shoes to men with small feet. At the time the business formalized they entered into an entity buy sell agreement funded with life insurance policies on each owner. However, John produces more of the income than does his partner Jim. This reflects Jim's personality, he is uncomfortable around most people. Therefore Jim handles the administration of the business. John now believes that he can outsource the administrative work and decrease the overall expense of the business. Because of this John wants to sever ties with J&J and start his own company with lower overhead and thus substantially higher revenues. He believes he can do this by selling all sizes of shoes rather than shoes only to men with small feet. His research shows that this will greatly increase the size of his market. Upon learning of John's plans, Jim went into business with a new co-owner, Scott. They too will form an S corporation, J&S Inc. This time Scott and Jim will implement a cross purchase buy sell agreement. Jim does not want to manufacture shoes of all sizes due to the inherent cost of production. Which of the following statements is/are correct regarding the situation if Jim is looking to use his current life insurance policy owned by J&J, Inc to fund the new Cross Purchase Buy Sell with Scott. I. Jim's Policy Owned by J&J can be aquired by Scott to fund the Cross Purchase Agreement for J&S, Inc. II. If Scott and Jim enter into an Entity purchase buy sell agreement J&S Inc could buy Jim's policy from J&J Inc and there would not be a transfer for value exposure. III. If J&S was established as a C corporation and the policy was transferred to Scott the death benefits would avoid federal income taxation if Jim lived for at least 3 years. IV. Because the policy has only been in force for 2 years, Jim would have to wait 1 more year. Before he could remove the policy from J&J Inc to avoid inclusion in his gross estate. V. John could buy his policy from J&J Inc and this would not trigger transfer for value rules. A) I, V, IV B) I, II, V C) II, V D) II, III, V E) I,II,III, V

B) I, II, V Statement I is correct. It is permissible although it would create a transfer for value issue. Statement II is correct because a corporation in which the insured is a shareholder can purchase the policy without triggering transfer for value rules. Statement III is not correct. There will still be tax due to transfer for value regardless of how much longer Jim lives. Statement IV confuses 2 different rules. Statement V is correct because John can buy his own policy.

Under code Section 6166 which is the following is true? I. You can only use it if the client dies owning a business. II. It can't be used for sole-proprietor interests. III. During the first 4 years the estate only has to pay interest on any tax owed at the death of the client. IV. The gross estate must include an interest classified as "closely held", the value of which exceeds 50% of the gross estate. V. It allows for installment payment of estate taxes over 10 equal installments beginning 4 years after the client's death. A) I, II, III, V B) I, III, V C) III, IV D) II, IV E) IV, V

B) I, III, V It is available for sole-proprietor interest. It is 35% of the adjusted gross estate. The 2% interest rate only applies to a limited dollar amount, but the remainder also qualifies for interest only payments.

Charlie was granted an incentive stock option (ISO) four years ago when the FMV and option price was $20 per share. Charlie exercised the option two years ago when the stock was trading at $30 per share. If he sold the stock today for $35 per share, which statement(s) is/are true? I. Charlie was taxed on the $10 per share gain at capital gains rates when he exercised the option (no substantial risk of forfeiture). II. There are no regular income tax consequences when the ISO is granted or exercised; Charlie will pay capital gains presuming the stock is sold at a gain. III. If Charlie sells the stock for $35 per share, he will be taxed at capital gains rates on the $15 gain per share. IV. At the time of exercise, $10 per share may have been an add-back item for AMT purposes. A) I, II, III, IV B) II, III, IV C) I, III D) II, IV

B) II, III, IV Because the stock was held for the two-year/one-year holding periods, it retains ISO status and thus qualifies for LTCG. The bargain element of $10 per share may have an AMT add-back. However, the question does not indicate any AMT was paid, therefore the basis is the cost of the shares.

Which of the following types of qualified retirement plans can be integrated with Social Security? I. A 401(k) plan (no match or company contribution) II. A money-purchase plan III. An ESOP IV. A stock bonus plan V. A defined benefit plan A) I, II, III, IV B) II, IV, V C) III, V D) II, V E) All of the above

B) II, IV, V ESOPs and 401(k) plans with no employer matching contributions cannot be integrated with Social Security. Item I does indicate a pure 401(k) with no match or profit sharing contribution. Defined benefit and money purchase pension plans can be integrated. Stock bonus plans can be integrated.

Mrs. Elbert, your current client, has just turned 68 years old. She has $10,000 in the bank, modest yearly income of $20,000 from a plan sponsored by her former employer and her Social Security Retirement benefits. In a typical year, Mrs. Elbert spends $10,000 in medical and limited mobility-related expenses. She is generally opposed to living in a nursing home and wants advice on long-term care insurance policies. As a CFP® practitioner, what should you do? A) Convince her to purchase a LTC policy B) Investigate long-term care policies for her, explain LTC and other alternatives to her, enabling her to make a decision C) Explain Medicare and Medicaid benefits to which she may be entitled. D) Tell her that it seems as if she cannot afford long-term care insurance and terminate your professional relationship with her.

B) Investigate long-term care policies for her, explain LTC and other alternatives to her, enabling her to make a decision The question says you are a CFP® practitioner. Your client asked for advice on long-term care insurance policies. You should give her all the alternatives. CFP Board wants us to educate clients.

Which of the following statements is true regarding a QPRT if the grantor dies during the retained-interest term? A) The value of the remaining term will return to the grantor's gross estate. B) It leaves the grantor's estate with no greater tax liability than had the QPRT not been established. C) The applicable credit amount plus any gift tax actually paid on the original transfer are lost. D) The present value of the retained income interest is brought back into the gross estate.

B) It leaves the grantor's estate with no greater tax liability than had the QPRT not been established. The full value of the home generally reflecting the date of death FMV is brought back into the gross estate. Had the QPRT never been established, the estate would have the same tax exposure because the property would appear in the gross estate at FMV.

Joe Jones works for "Take-A-Boat" boat rentals. The company has a SIMPLE plan in which Joe participates. As he approaches 72, Joe plans on working fewer hours. He would still like to participate in the SIMPLE plan. Which of the following can you accurately tell Joe? A) You cannot contribute to a SIMPLE IRA after age 72 but you can contribute to a non-deductible IRA. B) You can continue to contribute to a SIMPLE. C) Since you are a more than 5% owner you must start to take distributions from the SIMPLE when you reach 72 and then stop contributing. D) You can contribute to a Roth IRA.

B) You can continue to contribute to a SIMPLE. We do not know Joe's AGI. AGI affects Answer D. If Joe's AGI is over the threshold, he may not contribute to a Roth. As an employee, Joe must take distributions from the SIMPLE when he reaches 72, however, he can still contribute. (Yes, money is flowing out of and into Joe's account in the same year(s)).

Sam Waters, age 63, has decided to retire. The company he has worked for maintains an endorsement type split dollar life insurance arrangement on his life. Sam has no other life insurance and has been told that due to several health problems if he applied for life insurance he would be rated (increased premium) or declined coverage altogether. His employer has informed him that he can purchase the policy that is currently held under the split dollar agreement. Presuming that Sam does buy the policy from his employer, what amount would he have to pay for it? Universal Life Current death benefit: $1,000,000 Cash Value: $120,000 Premiums paid: $100,000 A) He can purchase the policy by paying $100,000 but it would trigger transfer-for-value income tax consequences. B) $100,000 C) $120,000 D) $100,000 plus 6% interest. The 6% reflects the employer's interest charge E) $120,000 plus 6% interest. The 6% reflects the employer's interest charge

C) $120,000 Under this endorsement method spilt dollar life insurance arrangement, if Sam wants to buy the policy under which he is the named insured, he will have to pay the higher of the cash value or premiums paid. The company will realize a gain representing the excess cash value over the premiums paid. The endorsement split dollar agreement typically precludes the employer charging interest to the insured employee.

Mrs. Kalish, age 82, gifted the following assets over the past three years. Three years ago - she gifted a stock portfolio with a basis of $1million and a FMV of $1.5 million currently worth $2 million. Two 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. One year ago - she gifted a whole life insurance policy with a face value of $1 million and an interpolated terminal reserve plus unearned premium of $100,000. This year, because she is sad over the passing of her pet cat, Melina, she gave $100,000 to the Society for the Prevention of Cruelty to Animals. Mrs. Kalish passed away today. Which of the following is true? A) All the assets shown above will be included in Mrs. Kalish's gross estate at FMV (throwback rule). 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's gross estate. D) The stock is not included in her gross estate because she lived 3 years following the transfer.

C) $3.4 million of the assets will be included in Mrs. Kalish's gross estate. No 3-year rule applies to the stock. Because it was a taxable gift it will be added to the taxable estate rather than included in the gross estate. The stock was gifted to the daughter. Thus, the daughter's carryover basis is $1 million, which, given the $2 million in sales proceeds produces a capital gain of $1 million. The GRAT (5 year) and the life insurance (3-year rule) are included in the gross estate. The GRAT assets would be included in Mrs. Kaslish's gross estate likely at date of death FMV because she dies before the end of the term of the trust. The life insurance policy would be included in her gross estate at face value because Mrs. Kalish had incidents of ownership in the three year period prior to her death.

Based on the following facts, what is the holding period return of the following investment in common stock? -Purchased 1,000 shares at $30 on January 1st -Paid a $1 dividend on December 1st of the first year -Paid a dividend on December 1st of the second year. It was 5% greater than the prior year's dividend -Sold 1,000 shares at $41 on December 31st of the second year A) 38.33% B) 41.67% C) 43.50% D) 45% E) 46.67%

C) 43.50% HPR = ($41.00 + $1.00 + $1.05) - $30 / $30 = 43.50%

Your client, Tom, purchased a bond for $950 with a coupon rate of 6%. The bond matures in 17 years and is callable in 5 years at $1,110. What is the YTC for Tom's bond? A) 4.53% B) 4.67% C) 9.05% D) 9.70%

C) 9.05% 2 P/yr 5 gold N -950 PV 1,110 FV 30 PMT i= 9.05% (end mode, semiannual)

You have registered with the SEC as an investment adviser. Under which of the following circumstances must you deliver a brochure (ADV) to a client? A) When the client receives only impersonal investment advice and pays less than $500/yr in advisory fees. B) When the clients are SEC-registered investment companies. C) Before or at the time the advisor enters into an investment advisory contract with the client even if the agreement with the client is oral. D) Only if you are entering into a fiduciary relationship.

C) Before or at the time the advisor enters into an investment advisory contract with the client even if the agreement with the client is oral. Answers A and B are exceptions. Answer D is nonsense.

Childhood pals Stu and Lou had always wanted to spend time together, so shortly after graduating high school, they opened a hamburger joint 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

C) Both Lou's Estate and Stu Both Lou's estate and surviving owner Stu both experience basis step up. Lou's estate gets an increase in basis to 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 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.

Your married client, Mr. Hart, has a son, Robert. Robert is about to enroll in college to study pharmacology. Mr. and Mrs. Hart are delighted that Robert has turned his life around. Only two years ago, Robert was convicted of a felony for distributing a controlled substance. Which among the following education financing strategies is available to the Harts if their AGI is around $100,000? A) Claim the American Opportunity Credit B) Make a deductible charitable gift of tuition to the college C) Claim the Lifetime Learning Credit D) Make a tax-free gift by paying Robert's tuition

C) Claim the Lifetime Learning Credit Both the American Opportunity credit and Lifetime Credit programs specify certain exclusions. For the American Opportunity Credit only, an otherwise eligible student can be excluded if convicted of a felony (in this case distributing a controlled substance). This restriction does not apply to the Lifetime Learning Credit. The Hart's relatively low joint AGI qualifies them for a Lifetime Learning Credit. Answer D is unclear because it does not indicate whether the tuition is to be paid directly to the education provider. If it is paid to Robert, all or part of the gift may be exposed to federal gift tax. Regarding Answer D. No charitable gift deduction is available for tuition payments to a school.

What is the least important obligation when you, a CFP® practitioner, are about to begin the first step in the financial planning process? A) Identifying the client's understanding and expectations when engaging you as their financial planner. B) Learning the client's attitudes about money and personal and financial goals. C) Disclosing the exact amount of compensation that you will receive for performing the planning services. D) Explaining the obligations and responsibilities of each party.

C) Disclosing the exact amount of compensation that you will receive for performing the planning services. Disclosure of planner compensation should occur be in the first step that establishes a mutually agreeable relationship between the planner and the client(s). However, the exact amount of planner compensation is unknown in the earlier steps of the financial planning process. Thus, disclosing the exact amount of planner compensation is not required.

Your newest client, Tiffany, is age 23. Her Uncle Donald gave her $5,000 as a college graduation present after receiving her BA degree in Communications. Tiffany tells you 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. You tell Tiffany that she should understand 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 you do now? A) Refuse to continue the relationship with Tiffany. Clearly you and she 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.

C) Educate Tiffany as to why she needs to have an emergency fund before saving for retirement. 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! There is no need to end the client/planner relationship at this point. There is little, if any information in the question to indicate a need for life insurance before dealing with other financial matters.

John Jay is dismayed at having his CFP® marks revoked. Upon investigation of the complaints, the disciplinary commission ruled he repeatedly placed clients' property in the firm's accounts. John believes that he can disprove the charges. What can he do? A) He must accept the revocation, the commission has made its ruling. B) He may appeal the ruling at any time. C) He may file an appeal to the commission within 30 days of its ruling. D) The dispute over the revocation must be taken to arbitration.

C) He may file an appeal to the commission within 30 days of its ruling. An individual subject to discipline by the commission must appeal its decision within 30 days. Yes, under the new rules the dispute will go to arbitration, but Answer C comes before Answer D.

Your client, Stephen Stone, age 55, has a net worth of approximately $400,000. He is concerned about the costs associated with 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 Stephen purchases an LTC policy, the policy may provide benefits if he is unable to perform a minimum amount of ADLs. III. Medicaid may pay if Stephen uses up his assets to below the state threshold. IV. Stephen's major medical insurance policy may pay for long-term care if he qualifies. A) All of the above B) I, II, III C) II, III D) II E) III

C) II, III If Stephen purchases a long-term care insurance policy, and is unable to perform the requisite number of ADLs to trigger benefits (typically, tow or three), the policy will probably pay the benefit. Medicare may cover Stephen's LTC expenses if he "spends down" his assets to a mandated level of impoverishment. Medicare pays for no more than 100 days of (rehabilitative) care. Medical expense insurance does not provide long-term care benefits.

Which of the following risks is not presented in an investment in zero-coupon bonds ? A) Interest rate risk B) Market risk C) Reinvestment rate risk D) Purchasing power/inflation risk E) Default risk

C) Reinvestment rate risk One advantage of a zero-coupon is the elimination of reinvestment rate risk because there is no coupon to be reinvested. The zero coupon bond is generally subject to market risk, interest rate risk, and, if the zero is not a Treasury security, default risk.

Bill Williams, CFP®, wrote a plan for his client, Sally Linton, age 58. Sally indicated she would work for 9 more until her FRA (full retirement age) to qualify for full Social Security and maximum qualified plan benefits. One month later Sally unexpectedly quit her job. The facts are, however, the company she worked for was sold to a competitor and her position was eliminated. The new company offered her an unacceptable position. Now Sally realizes, at 58, with outdated skills, retirement is her only option. Sally indicates to Bill she is willing to sell her second home at the beach. How should Bill proceed? A) Make no recommendation until Sally sells the second home. B) Advise Sally to go back to her employer and take the position. C) Review Sally's current lifestyle and expenses and establish a budget until the second home sells. D) Advise Sally to apply for unemployment benefits. E) Ask Sally to come back in a few days. The planning needs to be reevaluated.

C) Review Sally's current lifestyle and expenses and establish a budget until the second home sells. Bill has all of Sally's data. He just completed a plan. Sally is upset. She needs advice now. Making her wait might make her more upset. In creating the plan, Bill did assess Sally's current lifestyle and expenses. Sally can't file for unemployment insurance benefits because she terminated voluntarily. Sally clearly does not want to take the newly offered position.

Your client, Mrs. Cates, died 6 months ago. Her family inherited almost $5 million without shrinkage from federal estate tax. Mrs. Cates' property generally received a step up in basis. Mrs. Cates son, Caleb, received $2 million from his mother's estate. Caleb deposited the money into a joint account that he and his wife have maintained for years. Caleb and his wife, Cindy, had been your clients before Mrs. Cates died. The account, which holds other assets in addition to the inheritance, is now worth $3.5 million. This morning, Caleb called to request $100,000 in cash, not a check from the account. This is a very unusual request, so you ask Caleb the reason for the withdrawal. He says he needs it to pay his mistress in exchange for her agreeing not to tell Cindy about the affair. What should you do? A) Call Cindy for authorization to make the distribution (joint account) B) Tell Caleb that you will ignore federal money laundering rules and hide the distribution C) Tell Caleb that this situation creates a conflict of interest for you and that you cannot proceed with the withdrawal without Cindy's consent D) Terminate the relationship E) Make arrangements to pay him $100,000 in the form of a joint check

C) Tell Caleb that this situation creates a conflict of interest for you and that you cannot proceed with the withdrawal without Cindy's consent This situation creates a serious conflict of interest for you because you were hired by both Caleb and Cindy. The account is joint property. Due to federal money laundering rules, brokerage firms generally will not facilitate substantial distributions in cash. Obviously Caleb does not want Cindy to learn about his request for money.

Sadly, doctors have diagnosed your client, Sam, as being terminally ill with heart disease. He sold his $250,000 face value life insurance policy to a qualified viatical settlement company for $175,000 a year ago. In the past few weeks, Sam was invited to participate in a clinical trial of a new medicine that will prolong his life for 5-10 years. The medicine appears to be working effectively for Sam. How is the $175,000 that Sam received on the viatical sale affected? A) Sam will now have to recognize taxable income of $175,000. B) Sam will be required to return the $175,000 to the viatical settlement company within the next 90 days. C) The viatical settlement company will regret this particular transaction. D) The viatical settlement company can return the policy to Sam per the original settlement agreement.

C) The viatical settlement company will regret this particular transaction. The viatical company's return will suffer if Sam lives too long. Sam is not affected.

Mr. Able, age 75, came to you, a CFP® professional, with large folders filled with investment data. He is confused. He has concerns regarding all the investments his advisor has sold him. He would like you to help him identify which investments have been performing better over the last 10+ years. You tell him that because this analysis will take a considerable amount of time, you would need to charge him a fee. Mr. Able agrees. As you proceed you realize that the investments are specific common stocks or bonds. The allocation reflects the traditional 70/30 split. Over the prior decade, on average, the stock portion generated returns of over 10% and the bond portion generated returns of 4%. How should you best respond to Mr. Able's concerns? A) Given his age, advise Mr. Able to rebalance the investments for a 60/40 split allocation. B) The bond return indicates excessive risk for a 75 year old client. C) You should discuss Mr. Able's health because the return levels may have to continue for the next decade. D) Mr. Able should keep his advisor.

C) You should discuss Mr. Able's health because the return levels may have to continue for the next decade. Mr. Able's health and life expectancy should factor into his investment plans. Given strong health and a family history of longevity, he might live for another 20 years. In light of historical returns in the decade from 2009 to 2022, the overall portfolio return is certainly acceptable. The advisor has not underperformed.

Bob works for Technotalk, Inc.Bob's salary is $100,000. He makes an elective deferral of $20,500 to the company's 401(k) plan. If Technotalk is a large company, what is the maximum it could contribute and deduct as a match and a profit-sharing contribution for Bob in 2022? A) $14,000 B) $20,500 C) $27,000 D) $40,500 E) $61,000

D) $40,500 Section 415 of the Internal Revenue Code limits the annual addition to a maximum of 100% of compensation or $61,000. $61,000-$20,500=$40,500. The company may contribute and deduct more than 25% of salary in addition to the elective deferral of an individual employee/participant (not to exceed $61,000) providing that the plan deduction for total includible compensation does not exceed 25% (elective deferrals).

Mr. and Mrs. Dell have decided to retire. They always lived in California, a community property state. They have decided to move to Arizona (also a community property state). They sold their California house (basis $100,000) for $800,000. They then purchased a spacious condominium in Arizona for $400,000. What is the basis of the Arizona condominium? A) -0- B) $100,000 C) $200,000 D) $400,000 E) $700,000

D) $400,000 Mr. and Mrs. Dell sold their California home for a $700,000 gain ($500,000 exclusion). The basis in the Arizona condo is what they paid for it.

An U.S. investor owns German bonds. What will make the bonds increase in value? A) A decrease in the value of the Euro B) An increase in European interest rates C) A stronger U.S. dollar D) A decline in U.S. interest rates

D) A decline in U.S. interest rates If a U.S. investor owns securities denominated in a foreign currency, that individual would profit if the dollar declined (devalued) or the value of the foreign currency rose (revalued). An increase in European interest rates would decrease the value of German bonds. If U.S. interest rates decline, the value of the dollar will decline.

Which of the following is not an exception to the premature early withdrawal penalty for distributions from an IRA before age 59½? A) First home expense up to $10,000 based on one such $10,000 distribution per lifetime B) Qualified education expense (tuition fees, books, supplies, and equipment) C) Distributions for medical care that exceed 10% of adjusted gross income D) Distributions to pay medical insurance premiums following separation from employment after 12 consecutive weeks of unemployment insurance benefits in accordance with a QDRO

D) Distributions to pay medical insurance premiums following separation from employment after 12 consecutive weeks of unemployment insurance benefits in accordance with a QDRO To avoid the premature withdrawal penalty for distributions from an IRA used to pay medical premiums while unemployed, there is a requirement to file for federal or state unemployment insurnace benefits after separation from service. Only distributions for tuition and fees for post secondary education are eligible for the penalty-free withdrawal. The QDROs exclusion is for qualified plans only.

George Hallas owns 80% and his daughter, Georgina, 20% of Hallas, Inc. (a corporation). Hallas, Inc. grosses approximately $20 million in a typical year. George and his daughter also own a general partnership worth $5 million. George owns a $3 million life insurance policy outright under which he is the named insured. He wants to remove the life insurance policy from his estate. What do you 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

D) Gift the policy to his daughter If the corporation owns the policy, the proceeds may be considered in valuing the decedent's interest for federal estate tax purposes unless there is valid agreement fixing the price that would reflect an arms-length sale to an unrelated party. This would be questionable because the buyer and seller are daughter and father, respectively. Answers B and C create a similar problem. When George dies, the partnership dissolves. The ownership of the policy after that point would be uncertain and possibly flow through George's estate.

During the initial meeting with Susan Burke you learned that she is single and age 38. She is currently experiencing a $3,000 annual cash deficit. She recently sold her home, and used the proceeds to purchase a larger, more expensive home on the water. She used most of her cash for the purchase but still has a mortgage of $100,000. She also purchased a boat and a truck. She would like to retire in 7 years and would like your ideas on the best investment vehicle. She also wants to send her daughter to an Ivy League college and take her on a trip to Europe before she starts. Her daughter is 15. What recommendation would you make? A) Sell the home and move into one more affordable B) Dollar cost average into an aggressive growth fund to get the returns needed to retire C) Start gifting to the child using EE bonds D) Have the client reassess and commit to more realistic goals

D) Have the client reassess and commit to more realistic goals You can't create an effective plan when the client's goals appear to be unattainable.

Robert Zimmerman owns Smokey Bacon, Inc. Smokey Bacon provides a profit sharing 401(k). Robert makes the maximum elective deferral and with the company match and typical forfeitures, annual additions have ranged between $20,000 - $25,000. He has started another company, Eggcellent Eggs, Inc. with some good friends, and they are considering a profit sharing 401(k) plan for Eggcellent Eggs. Robert will be a controlling shareholder in Eggcellent Eggs. Given Robert's positions, which of the following statements is true? A)Robert cannot be a participant in Eggcellent Eggs profit sharing 401(k) plan. B) Since Robert is fully participating in the Smokey Bacon profit sharing plan, he cannot participate in Eggcellent Eggs profit sharing plan (related employers). C) Robert is limited to the lesser of 25% of covered compensation or $61,000 (2022) for annual additions provided by both Bacon and Eggs. D) He cannot defer any compensation into Eggcellent Eggs 401(k) plan.

D) He cannot defer any compensation into Eggcellent Eggs 401(k) plan. Robert can be a participant in Eggcellent Eggs plan for profit sharing contributions but not elect any more deferrals. Answer C is incorrect because his annual additions limit (for both plans combined) is the lesser of 100% of compensation or $61,000 in 2022 (Bacon and Eggs are related employers).

Pension contributions are based on compensation. Which of the following is generally considered to be compensation to an employee? I. Salary II. Bonus III. Business expense reimbursement IV. Incentive stock options V. Contributions to a deferred compensation plan A) All of the above B) I, II, IV C) I, II, III D) I, II E) I, IV

D) I, II Salaries and bonuses are clearly compensation. A reimbursement pays the employee back for business expenses incurred but is not compensation. An ISO is a right to buy the employer's stock and is not compensation. However, if the ISO becomes disqualified because the stock is exercised and sold in the same calendar year, the employee may be required to recognize any profits as compensation. Deferred compensation is not treated as compensation until it is constructively received. For tax purposes, compensation is considered current when it is paid no later than 2-1/2 months after the year in which it is earned. For a more-than-50% owner, the compensation must be paid by year end. Deferred compensation is not compensation for tax purposes until it is constructively received.

Baker, Inc. provides a qualified retirement plan (employer funded). The plan falls under numberous ERISA rules. The plan lost 50% due to poor investment decisions in the previous year. What recourse can the employees take? A) Sue the plan officials for 100% of the investment losses B) Sue the plan officials for 50% of the 50% loss C) Do nothing: qualified plan investment managers are not required to make profits D) Sue the plan officials for 100% of the losses plus punitive damages E) Sue the plan officials for losses to the plan

D) Sue the plan officials for losses to the plan Errant plan officials can be held personally liable for losses to the plan as well as other factors. ERISA prohibits monetary punitive damages for claims

PDQ common stock has experienced the following returns over the past 4 years. Year 1: -20% Year 2: +10% Year 3: +10% Year 4: -40% Which of the following is true about the standard deviation for PDQ? A) The standard deviation is negative. B) The information provided is insufficient to calculate standard deviation. C) Only three years of returns can be used to determine standard deviation accurately. D) The standard deviation of PDQ is 24.5%.

D) The standard deviation of PDQ is 24.5%. Calculating was not needed to answer this question. There is no limit as to the number of years of return outcomes used to determine the standard deviation of a stock. The information necessary to calculate the standard deviation for PDQ, namely return outcomes, is shown in the question data. Answer A is incorrect because standard deviation cannot be negative.

Mrs. Baker, age 72, establishes an irrevocable trust. She transfers $15 million into the trust with income to her daughter for life. Her daughter, Jane, is 30 years old. When Jane dies, the remainder will go to Jane's two children, who are currently ages 6 and 7. Jane is divorced. Because she never received alimony payments, Jane depends on the income from the trust to pay her bills. When Jane dies who will be liable for the GSTT due? A) Mrs. Baker B) Jane C) Jane's two children D) The trustee from trust property

D) The trustee from trust property This situation reflects a taxable termination. The trustee must pay any GST tax owed on a transfer to a skip person or skip persons. Only the two grandchildren are skip persons.

Which of the following statements about disability payments and benefits are true? I. Employer contributions to employee group disability insurance plans are generally tax deductible. Benefits will be taxable to the insured 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. Tll or part (contributory) of the benefits will be tax-free to the employee. III. The employer offers an executive bonus (Section 162) to purchase an individual disability policy for an employee. The premium is deductible by the employer, and the benefits are tax-free to the employee IV. Insured S corporation owners always receive tax-free disability benefits. A) I, II, III B) I, II C) II, III D) III, IV E) All of the above

E) All of the above Employer contributions for group disability insurance are generally treated as an ordinary and deductible business expense. The premiums will result in no taxable income to the employee. However, disability insurance benefits will result in taxable income to the claimant. If the plan is operates through an executive bonus - Section 162) and the employee is charged with the insurance premium (bonus), then the benefits are received tax-free.

Plant Parenthood is a landscaping company. It has 18 full-time employees participating in its group health plan, and 4 full-time employees who are not participating in the plan. Joe, a participating employee with family medical coverage under Plant Parenthood's group health insurance plan, just divorced Sara. How long will COBRA cover Sara and Debbie (Joe's 12-year-old daughter)? I. Sara is entitled to 18 months of continuation in the group plan. II. Sara is entitled to 36 months of continuation in the group plan. III. Debbie is entitled to 18 months of continuation in the group plan. IV. Debbie is entitled to 36 months of continuation in the group plan. V. Debbie is still covered under the group medical insurance plan. A) I, III B) II, IV C) II, III D) I, V E) II, V

E) II, V Under COBRA rules, Sara will get 36 months of continuation coverage in the group medical insurance plan (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 requirements because Plant Parenthood has 22 full time employees.

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 or other education related arrangement. Holly may qualify for some state merit scholarships. Her parents, both professionals, earn well over $80,000 each, but spend most of what they make. Which of the following college tax and funding strategies 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) PLUS E) None of the above

E) None of the above The American Opportunity Credit may be available for the undergraduate years, but not for the graduate years. The Lifetime Learning Credit is subject to an AGI phaseout. The Coverdell ESA and PLUS loans do not generate federal income tax credits.