Wiley Lesson Assessments, Wiley Test Bank, Wiley Study Tips, Wiley Vignettes, CFP Mock Exam 1

Your client asks if she should buy a stock trading at $57.25. Her required return is 8%. The stock just paid a dividend of $3 and has an expected growth rate of 2%. Based on the dividend discount model, what is the value and should she buy it?

$51 and she should not buy the stock. Correct. Based on the dividend discount model, D1/r-g = 3(1.02)/0.08-0.02 = $51. If $51 is the value based on the required rate of return, the price of $57.25 is too high.

Trusts and unlimited marital deduction

1. An A trust qualifies for the marital deduction because the surviving spouse has a general power of appointment. 2. A B trust does not qualify for the marital deduction because the assets bypass the surviving spouse's general power of appointment. 3. A QTIP trust qualifies for the marital deduction.

Which of the following is not a reason to use a mutual fund? 1. Transparency 2. Professional management 3. Minimums 4. Diversification

1. Transparency Correct. Mutual funds must age their holdings before providing them to the public. You may have an idea of what the fund holds but you cannot know real time.

What are the 6 ADL tasks for Long Term Care?

bathing, dressing, transferring, eating, toileting, and continence.

In what accounts are RMDs required?

o Retirement plans such as 401(k) plans are subject to required minimum distributions (RMDs). o Roth IRAs are not subject to RMDs

The following activities will always bar someone from using the CFP® marks:

• A financial felony • Murder, rape, or other violent crime within the last five years • Revoked license

Why use a trust?

• Assist those who are not capable of property management • Creditor protection • Spendthrift clause can be included so that beneficiaries cannot assign, pledge, or promise to give the assets of the trust to anyone (This clause is not allowed in many states.) • Can allow trustee to make distributions on a discretionary basis • Can split interests in property • Avoid taxes due to future appreciation • Avoid transfer tax on subsequent generations • Reduce gross estate • Avoid probate

Dave is buying a bond for $1,153. The bond has 14 years until maturity and a coupon of 5% what is Dave's yield to maturity ($1,000 par)?

3.60% Correct. Enter as follows on the HP12c: $1,000 FV; $−1,153 PV; 25 PMT ($50/2); 28 N (14yr×2); I = 3.60 (1.80×2).

How many days are allowed when performing a rollover?

60 days

What is a highly compensated employee?

A highly compensated employee will always be one that has owned more than 5% of the company in either the current or prior year. He is not required to earn more than $120,000 when he owns more than 5% of the company.

A fund is currently trading at a discount of −20%, but over the past year it has traded at a discount of −5%. If the one-year standard deviation of the discount is 5, calculate the Z-statistic for the fund. Based on this finding, determine whether the fund is relatively cheap or expensive, given its one year average.

Applying, the formula for the Z-statistic: Z−statistic=(−20−(−5))/5=−3Z-statistic=(−20−(−5))/5=−3 Therefore, with a Z-statistic of −3, the fund would be considered relatively less expensive, given its historic standard deviation and discount rates.

Dasani works as an insurance agent for a national property and casualty insurance firm. She has been working with a recent college graduate to establish a new automobile and renter's policy. To whom does Dasani owe a fiduciary responsibility, the insurance company or the client? Would her obligation change if Dasani were an insurance broker?

As an agent, Dasani owes her fiduciary responsibility to the insurance firm. Had Dasani been an insurance broker, her duty of care would have changed to that of the policy applicant.

What is the balance sheet formula?

Assets = Liabilities + Net Worth Assets, liabilities, and net worth are shown at their current market value.

A client is looking to complete a fixed-income portfolio. He is looking for the bond with the lowest risk. He has identified several options as listed below, and isn't sure which would work the best. Each has the same yield to maturity. The current market rate for the bonds listed below is 5%. Which of the following would meet his criteria? Bond Year Coupon Bond A 10 year 2% Bond B 10 year 5% Bond C 10 year 0% Bond D 10 year 8%

Bond D has the lowest risk. CORRECT. Bond duration is a measure of risk. The larger the coupon, the faster the bond holder will have his money returned, which reduces the duration of the debt.

The LLC and the AOTC have very similar qualified expenses, what is the key difference?

Books, supplies, and expenses must be paid directly to the school for the LLC but not for the AOTC.

What is a life insurance unit?

A unit represents $1,000. A 100-unit face value would be equivalent to $100,000.

What is the difference between ADV Part I&II

ADV Part I is used to disclose an adviser's name, background, and philosophy. ADV Part II is used to disclose compensation and fees, educational background, investment objectives, strategies, and other types of information.

What is the only federal financial aid option given in the parent's name?

Parent PLUS Loans

What are the grants for undergraduates only and are always need-based (low EFC).

Pell and Federal Supplemental Educational Opportunity Grants

Difference between property damage liability insurance coverage and physical damage (comprehensive) or collision insurance:

Physical damage (comprehensive) or collision insurance, applies to damage or loss to a client's car, regardless of fault. When a claim is made against the comprehensive or collision portion of a policy, the client will pay a deductible. If a claim is made against the liability portion of the policy, the client will not pay a deductible.

Calculate the price of a stock with a P/E ratio of 30 and an EPS of $3 per share.

Price per share of the stock = 30 × 3 = $90 P/E=(Price per share)/EPS or Price per share=P/E×EPS Where EPS=earnings per share of the stock

George wants to roll over his 401(k) to an IRA. He currently has $1,000,000 in his 401(k). He filled out the paperwork incorrectly and was sent a check for $800,000. The 401(k) custodian withheld 20% of the 401(k) balance for taxes before mailing the check. George has come to you for advice. What should he do to ensure he does not owe any additional taxes on the rollover?

George has accidentally elected a 60-day rollover. He should deposit the entire original balance of his 401(k) ($1,000,000) into his IRA. If he deposits only $800,000, George will owe ordinary income taxes on $200,000. Depending on George's age, he may also be subject to a 10% penalty on the $200,000. George will receive the $200,000 in tax withholding as a refund when he files his tax return. George should ensure that he does not complete any other 60-day rollovers within the next 365 days.

Which source of education savings would result in earnings taxed under kiddie tax rules?

Interest-paying bonds that are gifted to a minor child who is in a lower income tax bracket than her parents Correct. This is the correct answer because bond interest is taxed to a minor under kiddie tax rules.

When a client purchases a disability insurance product, what should he or she be familiar with?

Renewability CORRECT. Knowing if the policy is noncancelable (price does not change as long as the client pays the premium) or guaranteed renewable (automatically renewed but the price can go up) is important when factoring the expense of this insurance.

Requirements for an S Corporation

S corporations are similar to C corporations for liability purposes but are taxed like partnerships for income tax purposes. A corporation must elect to become an S corporation by filing Form 2555 with the IRS and must meet the following requirements: • Fewer than 100 shareholders • All domestic shareholders • Cannot be owned by a C corporation, trust, or partnership In addition, certain types of companies are ineligible to be S corporations, and must be taxed as C corporations. These include: • Insurance companies • Domestic international sales corporations • Certain financial institutions

Ben holds the following two stocks in his brokerage account. Calculate standard deviation and variance of both stocks. The 6-year returns for these stocks are listed. • Stock X: 5%, −25%, 33%, 27%, 14%, −4% • Stock Y: 43%, 9%, −16%, −4%, 4%, 24

SD X = 0.2128, Variance 0.045 SD Y = 0.2094, Variance 0.044

What Employer Retirement Plan can be funded after the end of the tax year?

SEPs can be established and funded after the end of the tax year until the tax return is due (including extensions), which makes SEPs incredibly flexible employer-sponsored retirement plans.

Nondiscriminatory Tests

Safe harbor Test ≥ 70% NHC employees covered Ratio Percentage Test % of NHC covered / % of HC covered ≥ 70% Average Benefit Percentage Test Average benefit % of NHC covered/Average benefit % of HC covered ≥ 70%

Erin created a trust with $1 million of dividend-paying securities. Her husband Liam has the right to receive all income for life, and at his death, the trust assets will be distributed to Erin's daughter, Addie, who is the remainder beneficiary. Erin has also given Liam a general power of appointment over trust corpus. Which power is a general power of appointment that will qualify the transfer for a gift tax marital deduction?

Liam has the right to appoint trust property to his estate. Correct. This is the correct answer because a general power of appointment allows the holder to appoint property to his or her estate.

Lisa is concerned about a drop in the market, and particularly in one of her favorite stocks that she owns. The stock is trading at $54. She would like to make sure she doesn't lose significant value due to a correction. She would like to reduce the cost of this protection if possible. If her target price is $57, what strategy would be recommended in this situation?

Buy a put option and sell a call option. CORRECT. This is a collar, or zero-cost collar strategy. The put will protect the downside loss of value if there is a market correction. Since Lisa's target price isn't very high, she could sell a call option to offset the cost of the price of the put. The stock could be called away, but the strike price on the call could be her target price.

Mandy's husband was Celestine. He died in March 2019. Mandy wants to make a gift of $9,000,000 to her daughter Amanda. Celestine has an unused basic exclusion amount of $4,000,000 remaining. Can Mandy make this transfer to Amanda without incurring a gift tax liability?

Mandy has her personal lifetime exemption worth $11,400,000 available to her. In addition this, she can utilize her deceased spouse's remaining exemption ($4,000,000) when making transfers. Since the total exclusion available to her ($11,400,000 + $4,000,000 = $15,400,000) is greater than $9,000,000, Mandy can make this transfer to Amanda without incurring any gift tax liability.

Jordan is considering purchasing a bond with the following characteristics: • Face value = $1,000 • Coupon rate = 6% (semiannual payments) • Maturity = 6 years • Interest rate = 8% Calculate the price of this bond.

Calculator TI BA II Plus Face value $1,000 FV Current price ($906.15) [CPT], PV Discount rate 8%/2 = 4% I/Y Periods (semiannual) 6 × 2 = 12 N Coupon payment 60/2 = 30 Pmt Price of the bond is $906.15.

Bankruptcy: Difference between Chapter 7 & 13

Chapter 13 is different from Chapter 7, as a plan is put in place that takes time to administer. Debtors filing for Chapter 13 bankruptcy will likely: • Remain in possession of assets, • Wait months or years before debts are discharged, • Continue to make payments until debts are paid or discharged, • Obtain protection from lawsuits and garnishments while in bankruptcy, and • Receive broader elimination of debts.

Cathy is 62 and has tried to remain "under the tax radar" for most of her life, taking cash-only jobs and not reporting her earnings to the IRS. Her Social Security earnings history shows that she has earned 32 credits for Social Security. She wants to know if she can start taking Social Security on her record now. Is she eligible? If not, when will she be eligible?

No, Cathy must earn 8 more credits to be eligible for Social Security.

Sharpe Ratio vs. Treynor Ratio

The Sharpe ratio is the appropriate measure for comparing the performance of a mutual fund managed by a single fund manager. The Treynor ratio is more appropriate when the fund is managed by a team of fund managers and assumes that the unsystematic risk within the portfolio has been diversified away. Sharpe ratio=(Rp−Rf)σp Treynor ratio=(Rp−Rf)β

A growing company pays an annual dividend of $1.25. This results in a dividend payout ratio of 25% as the company is trying to retain cash, while returning some earnings to stockholders. The company trades at a P/E ratio of 10. At this current level, what is the dividend yield for the stock?

The dividend yield is 2.5%. CORRECT. The dividend yield is the dividend divided by the stock price. In this case, those numbers are not given directly. Therefore, it must be calculated. If the dividend is $1.25 and represents 25% of earnings, that means that earnings are $5/share = $1.25/25%. If EPS is multiplied by price-to-earnings ratio (P/E ratio), the stock price is $50 = $5 × 10. The yield is then $1.25/$50 which is 2.5%.

George wants to sell his rental beach home and purchase rental property in the mountains. His friend tells him he can do a nonsimultaneous tax-free exchange as long as the fair market value of the mountain property is equal to or greater than the fair market value of the beach property. How long after selling his beach property does George have to identify and purchase the mountain property?

The mountain property must be identified within 45 days of the closing of the beach property and must be closed within 180 days of the closing of the beach property.

Shelley has made several sales of stock in the current year. She would like to know the outcome of all these transactions, as she is aware there are some special rules. If the following transactions have been made, what occurred? Purchase Information Sales Information Date Price Date Price Stock #1 1/1/2015 10,500 2/15/2017 15,600 Stock #2 1/25/2017 25,600 3/25/2017 23,750 Stock #3 8/15/2000 13,000 5/1/2017 15,000 Stock #4 9/13/2016 17,800 4/15/2017 8,500

There is a short-term loss remaining. CORRECT. First, begin by separating long-term and short-term transactions. Total short-term loss will be $11,150 and total long-term gain will be $7,100. Then net the short-term loss against the long-term gain. Short-term loss of $4,050 will remain.

Cole lives in Texas, a community-property state, with his wife Chantel. Both Cole and Chantel are U.S. citizens. Cole owns $100,000 in separately owned assets and the couple has marital property worth $2 million. How can Cole maximize use of a marital deduction in his estate at death?

Transfer his ownership interest in property to Chantel by will. Correct. This answer is correct because asset ownership does not transfer automatically (as is the case with assets titled JTWROS), therefore a will must be used to transfer separate and community property to a spouse in a community-property state. This allows a decedent spouse to utilize a marital deduction in his or her estate.

Maurice had been working for a large steel manufacturing firm. He was laid off two weeks ago. Unfortunately, he lost access to his group-provided health plan, as did his wife and three children. Maurice just received a letter from his former employer stating that he is eligible to continue coverage through COBRA. If Maurice had been paying $400 per month for coverage while working, with his former employer contributing $1,200 per month for the coverage, how much might Maurice be asked to pay in order to extend coverage through COBRA? Also, will his wife and children be included in the COBRA extension?

Under COBRA, the maximum premium Maurice will pay is 102% of the cost of the coverage. In this case, the cost was $1,600 per month. As such, he could be asked to pay as much as $1,632 per month ($1,600 × 1.02). Because his spouse and children were originally covered, the new coverage will also be extended to them. Each of them will also be eligible to extend coverage individually, although this would not be cost effective.

Tommi established an irrevocable trust nine years ago. Her primary objective at the time was to minimize estate taxation, although she was also happy to reduce probate costs and burdens. Two years ago, Tommi transferred an $800,000 face-value whole life insurance policy to the trust. She reassigned the ownership to the trust and also made the trust the beneficiary. She remained the insured. If she were to die today, would the value of the insurance policy be excluded from her gross estate?

Unfortunately for Tommi, the full value of the $800,000 life insurance policy will be included in her gross estate. The transfer of life insurance is one asset that has a three-year lookback for possible inclusion.

Based on your knowledge of alternative investments, which direction should the efficient frontier move when alternative investments are added to a portfolio along the frontier?

Up and left CORRECT. Based on the fact the alternative investments have low correlation and higher return potential than traditional assets the efficient frontier would shift left (lower risk) and up (higher potential return).

Who does not need to register with the SEC?

Use the following acronym to remember who is excluded from registration: NEver USe a TABLE to stand on... • News publishers • U.S. government securities • Teacher • Accountant • Broker • Lawyer • Engineer

Sean and Andrea want to jointly gift property worth $40,000 to their daughter Mary in 2019. The married couple has not made any previous gifts prior to this transfer. Will this transfer have tax consequences for Sean and Andrea?

Using their annual exclusions ($15,000 each), Sean and Andrea can transfer up to $30,000 to Mary in 2019 (2 × $15,000). Additionally, they must use a small portion of their applicable tax credit of $5,000 each (available unified credit: 2 ×$11,800,000) to offset the tax on the remaining taxable gift of $10,000 ($40,000 - $30,000) on this transfer. Under the concept of portability, the unused exclusion amount of the deceased spouse(s) (DSUEA) can be applied to reduce a surviving spouse's gift tax liabilities.

Preferred stock of a corporation offers dividends worth $3.00 per share. If the discount rate is 5%, calculate the price of the stock.

V=$3/0.05=$60V=$3/0.05=$60

An individual puts $1,000 into an investment. This investment generates an average of 10% return every year. Using the simple interest returns method, how much will the investor have at the end of three years?

Value at the end of 3 years = $1000 × (1 + (.10 × 3)) = $1,300

What is the alternate valuation date?

When the value of a decedent's estate has decreased after the date of death, an executor should consider using the alternate valuation date, if allowed, because this will result in a lower overall tax liability. The executor of an estate may elect to value assets either: • At the date of decedent's death or • Six months after the date of death (known as the alternate valuation date).

Nimi is an entrepreneurial person. He has decided to get involved in two activities that promise to bring in extra income. The first involves renting his condominium out during college football game days. He knows that it is difficult to find hotel rooms in his town when games are being played. This means that people are willing to pay above-average rents for short-term stays. He is also joining a company that provides car rides to people who sign up and request car services online. As Nimi's financial planner, what type of insurance should he purchase before jumping into these activities?

While you may applaud Nimi for being entrepreneurial, you know that he is placing himself in a risky position engaging in these activities. His traditional homeowner's and automobile policy coverage will not cover losses associated with these activities. Nimi needs to purchase host protection insurance. This coverage can protect Nimi when he rents out his home and drives clients for a fee. He should also consider increasing his umbrella liability coverage and possibly purchasing business insurance coverage.

Harry turns 66 this year. His wife, Amelia, has already filed for her Social Security benefit. Can Harry file for the spousal benefit at full retirement age and switch to his at 70?

Yes, Harry turned 62 before January 1, 2016, is at full retirement age, and his wife has already claimed her Social Security, so he qualifies for the restricted filing option.

Marnie, a CFP professional, has borrowed money from two different clients; one is a close friend and the other is a family member. When she needed to borrow money for a down payment on a house, both clients were happy to lend the money and felt no pressure to do so. Marnie indicated she would pay each of them back in total within one year. Did Marnie behave unethically according to CFP Board Standards?

Yes, Marnie behaved unethically. She put herself in a situation that would make objectivity quite difficult. A certificant shall not borrow money from a client. There are exceptions to this rule: (a) the client is a member of the certificant's immediate family, or (b) the client is an institution in the business of lending money and the borrowing is unrelated to the professional services performed by the certificant. Thus, borrowing money from the family may be considered ethical, assuming Marnie is adhering to the Standards. Borrowing money from a client, even if she is considered a friend, is likely to be determined unethical by CFP Board.

Sam is 62 and has earned 40 credits for Social Security. Is Sam eligible for Social Security for a Social Security Retirement Benefit?

Yes, since Sam has earned 40 credits, he is eligible for a Social Security benefit.

Heather wants to know if her qualified plan will meet the general safe harbor test this year. She provides the following information: • The company has 200 employees. • 175 employees are nonexcludable. • 50 of the 175 employees are highly compensated. • Of the HC employees, the plan benefits 40 of them. • Of the NHC employees, the plan benefits 100 of them. Does the plan meet the safe harbor coverage test?

Yes, the plan meets the general safe harbor test. The calculation is: • Nonexcludable NHC employees: 125 • Employees covered: 100 • 100 / 125 = 80% ≥ 70% • The test passes.

Your client, Donna, is buying a new home. She has agreed to pay $550,000 with 20% down payment. She wants to know the difference in total interest cost if she decided to use a 15-year mortgage at 3% or a 30-year mortgage at 3.5% (both are fixed).

$164,345 CORRECT. By calculating the monthly payments you get 15 year of $3,038 and $1,975. This makes the total cost of the loans $546,940 and $711,286, respectively. With the difference being the interest cost.

How are premiums treated in a Section 162 executive bonus plan?

The employee is required to include the premiums paid for the life insurance as taxable income.

In a _______ bond strategy, _______ is matched with the investor's time frame for using the money.

immunization; duration Correct. Immunization is the process of matching duration to an investor's time horizon. This balances interest rate and reinvestment risk.

Debt Repayment Strategy: Stable vs. Unstable

Financially stable=prioritize paying high−interest debt Financially unstable=prioritize paying secured over unsecured debt

Which level of efficient market hypothesis (EMH) rules out the benefit of technical analysis but NOT non-public information?

Weak form Correct. Weak form rules out use of past price information but not non-public information.

Calculate the real rate of return if the nominal return of a portfolio is 10% and inflation is 4%.

The real return can be computed approximately by subtracting the inflation rate from the nominal rate (N - I). But it is expected that in the CFP Exam, the correct formula ((1 + Ri) = (1 + Ni) / (1 + I)) is used. An application of this formula is shown in Vignette 5. Ri=(1.1/1.04)−1=0.0577=5.77%

The capital market line (CML) is created by combining what two assets?

The risk-free rate and the risky portfolio along the efficient frontier

Last year Sherman's office building was destroyed by an earthquake. The building had an adjusted basis of $125,000. This year Sherman's insurance company paid him $200,000 to cover the loss. Sherman then purchased another office building for $205,000. What is Sherman's taxable gain on the transaction?

$0 Correct! Sherman reinvested all the insurance proceeds so there is no taxable income.

Robert has a $12 million estate and is married to Devon. Robert's executor will make the following transfers into trusts at Robert's death. Which trust will not qualify for the marital deduction in Robert's estate?

$5,490,000 transferred to a testamentary bypass trust with Devon and Robert's son as trust beneficiaries. Correct. This is the correct answer because a marital deduction is not available for Devon's terminable interest in a bypass trust.

Calculate the duration of a 5-year bond with a current price of $932. The bond offers a coupon rate of 5% and has a yield to maturity of 6.64%. The bond makes annual payments.

D = ((1 + 0.0664) / 0.0664) − ((1 + 0.0664) + (5 × (0.05 − 0.0664))) / (0.05 × ((1 + 0.0664)5 − 1) + 0.0664) D = 4.53 years

What are the best options for education planning for K-12 private, public, or religious school?

When the exam refers to education planning for K-12 private, public, or religious school, remember ESAs work; and as of January 1, 2018, 529 plans do as well (i.e., up to a $10,000 distribution each year for elementary and secondary school)!

What is uncertainty risk?

Uncertainty risk is the risk that an event falls outside of a model or outside of traditional risk model. This can never be accounted for with Monte Carlo analysis.

Janice invested in a limited partnership in the current year. She bought a 25% stake in the company for $1,000,000. When she received her K-1 at the end of the year, she saw that the company's loss for the year was $1,600,000. She was then allocated her proportionate share based on her ownership. She had no other investments. This is not a passive investment for Janice. How much of the loss will be suspended under that at-risk rules?

$0 CORRECT. Given that Janice had $1,000,000 invested in the company, and her proportion of the loss was $400,000 she will be able to take the entire loss and will not have to suspend any losses to future years.

A ______ allocation is designed to meet a client's long-term investment goals and objectives and is seldom updated with the exception of rebalancing and changes to client goals.

Strategic Correct. Strategic allocations are set up for long-term goals and are generally updated only when rebalancing to the original target is needed or the client circumstances change.

Jessica is an executive at a local company. She is single and earns a very high income, which puts her in the 39% tax bracket. She tells you that she wants to buy a 10-year bond in her taxable account. Which type of bond makes the most sense given the information provided? 10-year U.S. Treasury bond yielding 5% 10-year municipal bond yielding 5% 1-year zero-coupon bond yielding 5% 10-year Yankee bond yielding 5%

10-year municipal bond yielding 5% Correct. This is the best option since municipal bonds are federally tax free.

Calculate the price of a stock that recently paid out dividends worth $2 per share. The dividend is expected to grow annually at 5%. The return of the market is 8%, and the risk-free rate is 3%. The beta of this stock is 1.05.

Step 1: Calculate expected return using CAPM: Rp=Rf+bet(Rm−Rf)Rp=Rf+bet(Rm−Rf) Rp=.03+(1.05×(0.08−0.03))=8.25%Rp=.03+(1.05×(0.08−0.03))=8.25% Step 2: Calculate the price of the stock using the constant growth model: V=D1/(r−g)=Do×(1+g)/(r−g)V=D1/(r−g)=Do×(1+g)/(r−g) Therefore, substituting the value of r with the computed Rp above of 8.25%: V=$2×(1.05)/(.0825−.05)=$64.62V=$2×(1.05)/(.0825-.05)=$64.62

Ben believes that ABC Company is going to do extremely well over the next six months. Currently it is trading at $25 per share. Ben has $2,500 in cash and equity of $60,000. If Ben wants to buy as many shares as he possibly can, including using margin, how many shares can he buy? (Assume no margin debt outstanding and initial margin of 50% of equity.)

1,350 Correct. Ben can buy 100 shares with cash. He will then have $62,500 in equity, which allows him to borrow $31,250. This buys 1,250 shares. When you add this to the initial 100 shares, Ben owns 1,350 shares.

Bill's holding period return on his investment is 15%. Over the same time period inflation was 4%. What is Bill's real return?

10.58% Correct. The formula for real return is: (1 + Ni)/(1 + I) = (1 + RR) (1 + 0.15)/(1 + 0.04) = (1.1058)

Bob has always been overconfident about his stock picks. He has often spoken about Tech International, Inc, which was a stock he picked that rose five times its original value in three years. However, it only rose three times its original value. He has rarely discussed his other stocks, which have not turned out nearly as well. Often he will minimize the loss or simply forget about these losses. Some of those picks were real losers. Bob's bias is best identified as:

Cognitive dissonance CORRECT. This bias is best demonstrated by exaggerating past gains, while minimizing or forgetting past losses.

Sarah has always dreamed of going to college. She lost her parents when she was young. She has very little assets and very little income. She is trying to figure out which options may be open to her. Before checking any other options, she thought she would look at potential loans. Which loan may suit her situation?

Subsidized Stafford Loan CORRECT. The Subsidized Stafford Loan is a student loan which is based on needs and would be appropriate for Sarah.

Stock of a corporation is expected to generate a constant dividend growth rate of 5%. The corporation just paid a dividend of $2 per share. If the current price of the stock is $30, calculate its expected return.

r=D1V+g r=(($2×(1+.05))/$30)+0.05=0.12 or 12%

You are evaluating adding one of three investments for your client's portfolios. Based on all the research you have available, you believe the stock market will decline over the next 12 months. If you use a ______ strategy you should use the investment with the lowest _______.

tactical; beta Correct. Tactical investment strategies make investment decisions in the short term, based on the expected return of the market. Lowering the beta is a way to protect in a down market.

If interest rates go up by 0.25%, a bond with a duration of seven and a price of $985 will now trade at what approximate price?

$967.76 Correct. The price changes by approximately 1.75% (7 × 0.25) since rates went up the price must go down.

Calculate the yield to maturity of the following bond: $1,000 par with a coupon of 6% and maturity of 10 years that is currently trading at $962.

6.52% Correct. Enter as follows on the HP12c: $1,000 FV; $−962 PV; 30 PMT ($60/2); 20 N (10yr*2); I = 6.52 (3.26*2).

What does beta measure?

Beta reflects a measure of risk for a diversified portfolio.

Why is this statement incorrect: Gary and Vickie are married and live in a community-property state. Gary made a QTIP election for the lifetime income interest he gave to Vickie in an irrevocable trust therefore the trust will not be included in Vickie's estate at her death.

Incorrect. The answer is incorrect because a QTIP election allowed Gary to take a gift tax marital deduction on IRS Form 709, causing the tax to be postponed and the trust property included in Vickie's estate at death.

Calculate the M-squared measure for a portfolio if its return (Rp) is 10%, the risk-free rate (Rf) is 4%, the standard deviation of the portfolio is 15%, and the standard deviation of the market is 10%.

M-squared=(((0.10−0.04)×0.10)/0.15)+0.04=0.08 or 8%

Portfolio A has the following characteristics: R = 10%; standard deviation = 20%; beta = 1.2. The risk-free rate is 4%. Calculate the Sharpe and Treynor ratios for this portfolio.

Sharpe=(0.1−0.04)/0.20=0.3 Treynor=(.1−0.04)/1.2=0.05

Ben placed $100,000 into a variable deferred annuity. In which of the following situations would there be no tax due? 1. Surrendering the annuity at age 52 when the account value is $90,000 2. Withdrawing $5,000 from the $120,000 account value at age 62 3. Annuitizing the contract at age 65 4. Surrendering the qualified annuity at age 55 when the account value is $90,000

Surrendering the annuity at age 52 when the account value is $90,000 Correct. If the account value is less than the original premium deposited, there will be no tax due. 4. is incorrect because A qualified annuity has all tax-deferred money, so Ben would be subject to both income tax and a 10 percent early-withdrawal penalty

Serif recently gave her daughter, Vibha, her collection of jewelry that she had gathered over her lifetime. Fortunately Serif had kept good purchase records over the years. Her basis in the jewelry was $25,000, and the jewelry had an FMV of $100,000 at the time of the gift. Serif paid gift tax of $30,000 on the transfer. What is Vibha's basis in the jewelry?

Vibha's basis in the jewelry is $47,500 ($25,000 + [(($100,000 - $25,000) / $100,000) × $30,000]).

Scott received incentive stock options (ISOs) from his employer. The option allows Scott to purchase 100 shares of company stock at $50 per share. Scott exercises the option five years later when the fair market value of the stock is $125 per share. Scott holds the stock for three more years and then sells it for $175 per share. In the year of exercise, Scott has reportable amounts for regular tax purposes and for AMT purposes, respectively, of

$0 and $7,500. Correct! There are no tax consequences for regular tax, but the bargain element from the exercise of the stock options would be an AMT adjustment in the year of exercise. The bargain element is $75 per share, and Scott exercised 100 shares, a total of $7,500.

Many families are dual income. You can factor the second income into your calculation. Ben and Jennifer have a total combined income of $250,000. They are comfortable with a 6 percent earnings rate on any death benefit proceeds and would like to provide income to the surviving spouse for 25 years. Using the income retention human life valuation approach, how much coverage should Jennifer buy if she earns $140,000?

$1,897,050 CORRECT. This is the correct calculation for the shortfall that Ben will have. The Calculator should be placed in Begin Mode to calculate this answer, since the funds will be needed at the beginning of the year, not the end of the year.

Moe earned $10,000 during the year teaching college courses while working on his PhD. He also received a fellowship grant of $2,500. He had the following expenses: Room and board $1,500 Tuition and course fees $1,750 Books $ 250 What income must Moe report on his income tax return?

$10,500 Correct. The grant or scholarship is tax-exempt only up to the amount of tuition, fees, and books. His tuition and books total $2,000, but his scholarship was $2,500, so $500 is taxable.

Conrad is a full-time student in his junior year at college. His expenses include $2,500 for tuition, $600 for textbooks, and $3,000 for room and board. Conrad is a dependent on his parents' income tax return. What is the total amount of the American Opportunity Tax Credit (AOTC) that can be taken this year?

$2,275 Correct. This is the correct answer because 100% of the first $2,000 of tuition plus 25% of the remaining tuition and textbook costs ($1,100 × 0.25 = $275) totals $2,275. Room and board costs are nonqualified expenses and the AOTC can only be taken for qualified education expenses.

Lewis gave Mark 1,000 shares of a stock with a current value of $100,000. Lewis's adjusted basis on the stock is $25,000, and he had to pay a gift tax of $10,000 on the transfer. How much will Mark's adjusted basis on this stock be?

$25,000+($10,000×($75,000/$100,000))=$32,500

The exemption amount allowed to a simple trust on its Form 1041 fiduciary income tax return is

$300 Correct! A simple trust has an exemption amount of $300.

A calendar-year taxpayer made the following charitable contributions: Checks to church totaled $5,000 Unimproved land to the city, basis of $40,000, fair market value of $70,000 The land had been held as an investment and was acquired five years ago. Shortly after receipt, the city sold the land for $90,000. If the taxpayer's adjusted gross income (AGI) is $120,000, the allowable charitable contribution deduction for the year is

$45,000 if the reduced deduction election is made. Correct! The taxpayer gets the full $5,000 for the church donation. The taxpayer elected the reduced deduction, which means the deduction of capital gain property is its basis and the deduction is limited to 30% of AGI.

John and Mary purchased a new home several years ago for $400,000, excluding the value for the land. The replacement cost for this home is now $600,000 and the homeowners' policy was never adjusted. If the deductible is $1,000, how much insurance will be reimbursed if there is $100,000 of damage due to a large oak tree hitting their home?

$82,333 CORRECT. The insurance reimbursement is calculated as: [$400,000 Policy / ($600,000 Replacement Cost × 80%)] × $100,000 Loss - $1,000 Deductible, or $82,333.

Jason is single and lost his wife many years ago. He has been looking at funding a vehicle whereby the assets could go to his children after he receives a 12-year annuity. He understands it is a specific type of GRIT for annuities. During the year, Jason transferred $1,500,000 into the trust. After 12 years of the annuity payments, the remainder will pass to his three children, Annabel, Alex, and Lexi. The present value of the annuity is $670,000. He has only made the above transfer during the year. What is Jason's taxable gift?

$830,000 CORRECT. Jason is making a gift of a future interest valued at the difference between the amount he is funding ($1,500,000) and the PV ($670,000) of the annuity payments to him. Since this is a future interest gift, he will not get the $15,000 annual gift exclusion for each child.

Your client Jennifer is a 65-year-old widow and she approaches you about long-term care insurance. She knows that it can be expensive to pay for all of the long-term care out of her assets but does not want to buy a policy that will cover all of the expenses (she will self-insure some of the cost). In her area, a semi-private room costs $90,000 per year (increasing by 6% annually) and she would like to cover two-thirds of that expense through insurance. If she needs care in 10 years and is in the 30% tax bracket, approximately how much qualified coverage would satisfy her objective while keeping the premium to a minimum?

$9,000 per month Correct. This is the correct calculation: two-thirds of $90,000 divided by 12 months, inflated by 6% annually.

Assume the following: • The annual cost of LTC services is $55,000. • Your client is age 50. • Your client has $225,000 in assets that can be used in case of emergency. • The cost of LTC services is increasing by 6% per year. • The length for LTC services is six years. • A client's need for LTC services begins at age 75. • The average annual rate of return on investment assets is 7%. Based on this information, what is the client's LTC insurance need?

$9,222

Which of the following statements regarding a grantor retained trust is correct? -Trust beneficiaries have a vested remainder interest in the trust therefore trust income distributed to the grantor is taxed to the beneficiaries. -At the end of the grantor's income term, principal and any trust appreciation will pass to trust beneficiaries gift tax-free. -If the grantor survives the initial trust term, only the remainder interest of the trust is included in the grantor's gross estate. -If the grantor dies before the income term ends, the entire value of the trust property is included in the grantor's gross estate and probate estate.

-At the end of the grantor's income term, principal and any trust appreciation will pass to trust beneficiaries gift tax-free. Correct. This is the correct answer because the gift tax is assessed at the initial funding of the trust, not again when trust assets ultimately pass to remainder beneficiaries.

What is included on an income statement? -Deferred Compensation -Realized Capital Gains -Interest Earned on EE bonds -The current ratio

-Realized Capital Gains Correct! The income statement details the financial cash flows of a household over a set period of time, such as month or year, and capital gain realized during that period would be included.

The value of the annuity grows based upon credits the insurance company issues in which of the following? 1. Excess interest annuity 2. Equity indexed annuity 3. Variable annuity

1 and 2 Correct. Both of these annuities pay interest based upon credits from the insurance company: Excess interest has a guaranteed and a non-guaranteed rate; equity index ties the credits to the performance of an outside index, such as the S&P 500.

Five major causes of estate liquidity needs are:

1. Administrative expenses 2. Financial needs during the transition period 3. Funeral expenses 4. Medical expenses 5. Income, estate, gift, and generation—skipping taxes

The local coffee house, Perk Central, would like to start a SIMPLE IRA plan. They have 110 employees, but more than half earned only a couple thousand dollars due to high staff turnover. The company would like to implement a two-to-six-year vesting schedule to keep employees around. Which one of the following would be correct regarding Perk Central's SIMPLE IRA plan? 1. Contributions are 100% vested when made. 2. Perk Central has too many employees to qualify for a SIMPLE IRA. 3. Employers can make discretionary contributions to a SIMPLE IRA. 4. The maximum salary deferral by the employee is the same as a qualified 401(k) plan.

1. Contributions are 100% vested when made. CORRECT. This answer is true. Any contribution made to the IRA is vested immediately and has no vesting schedule.

If a plan fails the ADP and ACP tests, it must take corrective action or the plan could be disqualified. Four corrective measures can be taken to bring the plan into compliance:

1. Corrective distribution 2. Qualified nonelective contributions (QNECs) 3. Qualified matching contributions (QMC) 4. Recharacterization

Minimum retirement plan qualification requirements:

1. Plan eligibility is 21 years of age and one year of service or two years of service with 100% vesting. 2. 1 year of service = 1,000 hours 3. Vesting rules: 2-6 years graduated or 3-year cliff

Teresa holds the CFP® marks. She owns a small advisory firm that specializes in providing advice to pre-retirees regarding IRA rollovers and distributions. She does not provide any advice or recommendations on the allocation of assets within someone's IRA. Instead, her recommendations entail advice on how to best facilitate the transfer or distribution of IRA assets. Assuming that this is Teresa's only professional service, which of the following statements is true? 1. Teresa is considered a fiduciary under Department of Labor (DOL) rules. 2. Teresa is considered a fiduciary under SEC rules. 3. Teresa is considered a fiduciary under CFP rules.

1. Teresa is considered a fiduciary under Department of Labor (DOL) rules. Correct. She is considered a fiduciary under DOL rules because she is providing recommendations with respect to rollovers, transfers, and distributions from IRAs.

A portfolio has an expected return of 12 percent. The current expected return of the market is 10 percent and the risk-free rate is 3 percent. What is the beta of the portfolio?

1.29 Correct. This question requires you to rearrange the capital asset pricing model (CAPM) formula: Rp = Rf + B(Rm − Rf) 0.12 = 0.03 + B(0.10 − 0.03) Solving for beta, you get 1.29

A client uses alpha calculations whenever searching for investments to purchase. Recently, he found a stock fund that has an alpha of 6%. He knows the risk-free rate is 3% and the market risk premium is 5%. He believes this may be an exceptional investment but, he found that the market beta was used instead of the actual fund beta. The current beta understates the true beta by 0.4. What would the investment need to return if the updated beta is utilized to maintain the same alpha?

16% CORRECT. Alpha is 6% = r p - [rf + (rm − rf) beta] 6%=X−[0.03+5%(1.4)] X=16%

Each of the following are ways cash value may grow in a permanent policy except: 1. Declared dividends 2. Applied interest 3. Individual stock growth 4. Subaccount growth

3. Individual stock growth Correct. A client cannot pick individual stocks to be placed into a life insurance policy to build the cash value.

Zoe is considering buying a bond in her joint brokerage account but she is concerned about taxes and rising interest rates. She has narrowed down the bonds to the following, which one should she pick based solely on the information provided? 1. 10-year U.S. Treasury with a coupon of 2% 2. 10-year U.S. Treasury with a coupon of 2.5% 3. 10-year municipal bond with a coupon of 2% 4. 10-year municipal bond with a coupon of 2.5%

4. 10-year municipal bond with a coupon of 2.5% CORRECT. The municipal bond is the best option for tax purposes and the higher coupon on this bond means it will have lower duration and lower interest rate risk.

Chris and Austin are friends who started a marine repair business 10 years ago. Each invested $25,000 in the corporation and it is currently worth $300,000 today. The company had purchased life insurance on each shareholder's life and was the owner and beneficiary of the two policies. Austin tragically died in a diving accident last month. Which statement concerning this stock redemption plan is not correct? 1. In a stock redemption plan, the corporation pays all of the insurance premiums that are not tax deductible. 2. The value of the stock owned by Austin is included in his gross estate. 3. Austin's estate will not realize any taxable gain because the corporation pays the estate a price that is equal to the stock's value. 4. In a stock redemption plan, the insurance premiums paid by the corporation are considered taxable income to the shareholders

4. In a stock redemption plan, the insurance premiums paid by the corporation are considered taxable income to the shareholders CORRECT. This statement is not correct because insurance premiums paid by the corporation are not taxable income to its shareholders.

Jim and his wife, Charlotte, each age 50, own a consulting business. The business is nonincorporated and cash flows are variable. Each earns $200,000 in net profit from the business. They are looking to maximize their annual contributions to a pretax retirement plan. What plan will provide Jim and Charlotte the maximum deferral?

401(k) profit sharing plan Correct! Based on their net income, the 401(k) profit sharing plan would provide: $25,000 (2019) ($19,000 + $6,000) in elective deferrals plus a profit sharing amount that would cap at the 415(c) limit of $62,000 (2019) ($56,000 + $6,000). The profit sharing/s contribution is calculated identically to the SEP IRA; however, it has the added benefit of an elective deferral.

Lauren and Nick have $5,000 in their checking account, a 6-month CD for $5,000, an 18-month CD for $5,000, and a savings account with $12,000 in it. If their monthly expenses total $6,000 ($2,000 discretionary) what is their emergency fund ratio?

5.5 CORRECT. Emergency fund ratio = current assets/ monthly non-discretionary spending. So, $22,000/$4,000. The 18-month CD is long term and $2,000 of expenses are discretionary.

You are evaluating a bond for purchase in a client's account. You observe that the bond is currently trading at $950, has a 5% coupon rate, paid annually, and has 10 years until maturity. The bond is callable in five years at $1,010. What is the yield to maturity and the yield to call?

5.66% and 6.36%, respectively CORRECT. For yield to maturity, N = 10 years; FV = $1,000 (when the bond matures); PV = -$950 (current price); PMT = $50 (Bond pays 5% X Par Value of $1,000 = $50 yearly). Solve for I = 5.66% For the yield to call, N = 5 years; FV = $1,010 (the amount paid when the bond is called. PV = -$950 PV; PMT = $50 (Bond pays 5% X Par Value of $1,000 = $50 yearly) solve for I = 6.36%

Assume upon the death of the breadwinner that a $500,000 death benefit will be paid out. The surviving spouse will need a monthly amount of $3,250, at the beginning of each period, and the transfer of $100,000 to her child after receiving 20 years of payments. Under the capital retention approach, what annual rate of return is needed?

5.68%. CORRECT. This answer is correct because it is using an annuity. n = 20 × 12 or 240; PMT = $3,250 g BEG; PV = ($500,000); FV = $100,000; i = 0.4732 × 12 or 5.6790%.

Prosperity Inc. offers a defined benefit plan for their 200 employees. How many employees of the firm must benefit from the plan? 50 employees 80 employees 2 employees

50 employees Correct. Minimum participation rules for a defined benefit plan require: On each day of the plan year, a defined benefit plan must benefit the lesser of: 50 employees of the employer, or the greater of: 40% of all employees of the employer, or Two employees (or if there is only one employee, such employee).

What are the seven tests to determine whether a taxpayer materially participates in an activity?

7 Tests of Material Participation o S AND P 555, 100 o S—Substantially all of the participation o AND—Facts AND circumstances o P—Personal service activity 3 preceding years o 5—More than 500 hours of participation o 5—5 × 100, more than 100 hours in 5 activities. o 5—5 out of past 10 years material participant o 100 - > 100 hours, as much as anyone else

Tim is considering a real estate investment with all cash. The building will cost $1,200,000 to purchase and will pay $50,000 net in years 1 through 3. In years 4 and 5 Tim expects to increase rents and receive a net of $65,000. He will sell the building in year 5 for approximately $1,500,000. If Tim does a $25,000 upgrade in year 2 out of his net income, what is the IRR of this investment?

8.39% CORRECT. Draw a time line with CF0 as -$1,200,000 (enter this into your calculator as CF0), CF1 is $50,000 (enter each cashflow (number 1 through 5) as CFj in your calculator), CF2 is $25,000 ($50,000 less $25,000 upgrade), CF3 is $50,000, CF4 is $65,000 and CF5 is $1,565,000 (this is the combination of selling the building for $1,500,000 plus the $65,000 in rent he will receive). This creates an IRR of 8.39%.

The price of a security at the beginning of a period was $1,000. During this period, the portfolio earns dividends worth $50. Calculate HPR if at the end of the period, its price is $1,100.

HPR=($1,100+$50)$1,000−1=0.15or15%

Which of the following investments is the best to hold in a non-retirement account based on tax consequences (assume risk tolerance is not an issue)? Zero-coupon bond (pays only at maturity) A dividend-paying stock A corporate bond maturing in three years A REIT mutual fund

A dividend-paying stock Correct. A dividend-paying stock is the best answer because dividends may be treated as qualified, and gains will be paid at the preferred capital gain rate when sold.

As an element of her practice, Lindsey, a CFP® professional, requires each new client to complete a risk-tolerance assessment, in addition to other forms designed to measure each client's attitudes and expectations. Lindsey uses the risk-tolerance score obtained from her assessment as a key input into portfolio decisions. Today, after meeting with a prospective client, Lindsey learned that the prospect refused to complete the risk-tolerance assessment. What should Lindsey do?

A CFP® professional is required to communicate to the client that any recommendations rely on the completeness and accuracy of the information provided by the client. It is essential to disclose that incomplete or inaccurate information will impact conclusions and recommendations. A financial planner should not make recommendations on issues for which a client has failed to provide needed information. Lindsey should either restrict the financial planning engagement to elements that do not require the use of a risk-tolerance score and, in doing so, arrive at this decision mutually with the prospective client. or terminate the engagement.

Coverdell ESA Rules

A Coverdell ESA is a trust or custodial account for paying the qualified education expenses of the designated beneficiary of the account. • Contributed in cash • $2,000 maximum per year • Contributed before age 18 • Used prior to age 30

An accumulation annuity is a deferred annuity with all of the following characteristics except: It provides access to a contract fund through partial or full withdrawals. A fixed-dollar benefit will begin on a specified date in the future. All immediate annuity options are available. The account value determines all contract benefits.

A fixed-dollar benefit will begin on a specified date in the future. Correct. This is the definition of a paid-up deferred annuity, not an accumulation annuity.

What is a return of premium term policy?

A return of premium feature provides a policy owner a refund of all or some of the premiums paid for the term insurance at the end of term coverage period if no death benefit was paid. A return of premium feature can be offered through a separate rider or as a policy provision. Term life policies with this option will be more expensive than similar term life policies that do not offer this feature.

What duration of a CFP suspension includes an automatic reinstatement provision?

A suspension of less than one year has an automatic reinstatement provision. A suspension over one year needs to be petitioned in order for the CFP marks to be reinstated.

Kim is interested in purchasing a life insurance policy. She would like a policy that will guarantee to pay her husband $250,000 at her death. She wants lifetime coverage with a fixed monthly premium. What type of insurance policy would be most appropriate for Kim?

A traditional whole life insurance policy would be appropriate for Kim. This type of policy provides a fixed death benefit and lifetime premium. She might consider purchasing a participating whole life policy. The receipt of dividends would help reduce her monthly premium if applied toward the purchase of insurance.

A credit card charges 1% interest on a loan every month. What is the interest rate that it charges on an annualized basis (APR)?

APR: (1 + .01)12 - 1 = 12.68%

Kaylee, a CFP® professional, was engaged by her client who is retiring soon. The client hired Kaylee to provide financial advice. The client has most of her retirement funds invested in her employer's 401(k) plan. Kaylee did not obtain any information about the 401(k) plan because she assumed there are more (and better) investment options available in an individual retirement account compared to the 401(k) plan. Based on this assumption, Kaylee concluded that the client's portfolio would be better off in an IRA. Kaylee appropriately disclosed her material conflicts of interests and then recommended that the client take a distribution from her 401(k) plan and roll the assets into an IRA. Kaylee intends to analyze and recommend an investment strategy for the IRA after the funds have been distributed to the IRA. Did Kaylee satisfy her fiduciary standard of care?11

According to CFP Board, Kaylee did not satisfy her fiduciary duty. CFP Board states: At all times when providing financial advice to a Client, a CFP® professional must act as a fiduciary, and therefore, act in the best interests of the client. A Client is any person to whom a CFP® professional provides or agrees to provide Professional Services pursuant to an Engagement. Financial Advice includes communications that, based on their content, context, and presentation, would reasonably be viewed as a recommendation to take or refrain from taking a particular course of action with respect to the advisability of investing in, purchasing, holding, gifting, or selling Financial Assets. The Fiduciary Duty includes a Duty of Loyalty, a Duty of Care, and a Duty to Follow Client Instructions.13 This vignette focuses on the duty of care, which requires a CFP® professional to act with the care, skill, prudence, and diligence that a prudent professional would exercise in light of the client's goals, risk tolerance, objectives, and financial and personal circumstances. Making the particular recommendation is not in the client's best interests. Furthermore, Kaylee did not act with care, skill, prudence, or diligence in this matter.

What should a client who is interested in longevity protection consider purchasing?

An immediate annuity with a life-contingent income option.

You have the initial meeting with your client, and outline their needs and desires. You find that one desire is to fund their son's education. Even though he is only three years old, they believe he will be going to a private school, in state, which currently costs $15,000 per year and appears to be growing at 5% per year. They are saving $3,000 at the end of each year and expect to continue that until college begins. They want to know if they are on track by the time he enters school 15 years from now. The anticipated growth rate of their investments is 8%. What Advice do you give them?

Approximately $1,500 per year additionally needs to be added to savings to fully fund their educational goal. (Q. 85 Practice Exam 1)

Barbara is a single retiree. Barbara is considering purchasing an annuity to supplement her retirement income. She has no direct dependents; however, she has a niece that she would like to help financially in the future. If Barbara is concerned about receiving a minimum return on her annuity premium and not losing benefits should she die unexpectedly, what type of annuity option should she purchase?

As a single person who is interested in helping her niece financially, if possible, Barbara should consider purchasing a life contingent annuity option with a period certain or a refund feature. This strategy will ensure that either Barbara or her niece will receive payments in the future should Barbara die unexpectedly.

Hope and Faith are a same-sex married couple. All of their assets are held JTWROS. Currently, their combined net worth is $9 million. Do they need to establish a credit equivalency (bypass) trust arrangement?

As of 2015, all states must recognize a marriage of individuals of the same sex. Assuming that, as a couple, Hope and Faith do not require special oversight or property, they do not need a bypass trust arrangement. First, their combined estates are less than the basic exclusion amount for a married couple. Second, portability eliminates the need for a trust. Keep in mind that, according to the IRS, "the terms 'spouse,' 'husband,' and 'wife' do not include individuals (whether of the opposite sex or the same sex) who have entered into a registered domestic partnership, civil union, or other similar formal relationship recognized under state law that is not denominated as a marriage under the laws of that state, and the term 'marriage' does not include such formal relationships." 2

Bob is an executive for a Fortune 500 company. The company offers life insurance within his qualified pension plan. Bob wants to make sure that the term life insurance currently held within the plan is in line with the various testing requirements. He currently has $1,000,000 of coverage for $16,000 in premiums. His employer contributed $100,000 to the plan in the year that was allocable to Bob.

Based on the 25% test, premiums cannot exceed $25,000 (25% × $100,000). Since the premiums are only $16,000, the plan meets the 25% test.

Lucy is covered by an employer-provided health care plan. She is worried that her coverage will be canceled because over the past two years she has incurred significant medical expenses due to a life-threatening disease. Explain to Lucy how the concepts of guaranteed renewability and noncancellability apply to her situation.

Besides tax and cost benefits, an advantage associated with purchasing health insurance coverage through an employer-provided health plan is that this type of coverage is guaranteed renewable and noncancellable. Guaranteed renewable means that Lucy may renew her coverage without proof of insurability. Noncancellable in this case means that Lucy cannot be singled out based on her health history and denied coverage. Since she is part of a group plan, the insurance company must cover her.

If the market risk premium is currently 8% and the risk-free rate is 2%, which of the following funds have the best and the worst alpha? Fund 1: Return 11.5% / Beta: 1.10 Fund 2: Return 9.2% / Beta: 0.95 Fund 3: Return 9.4% / Beta: 0.90 Fund 4: Return 13.7% / Beta: 1.20

Best: Fund 4 / Worst: Fund 2 Correct. Alpha = Rp - E(Rp) or Alpha = Rp - (Rf +b(Rm-Rf)) Given this, the alpha for each fund is: Fund 1: 0.70, Fund 2: −0.40, Fund 3: 0.20, Fund 4: 2.10. We want to select the highest alpha as the best and the lowest as the worst.

Jeff and Kristen are in their mid-40s, are married, and have three children. In your conversation with them, you discover that they need substantial life insurance coverage to meet their goals of paying off debts, establishing a college fund, and saving for future goals. They are aggressive investors but are on a premium budget to meet these goals. Which of the following would be most appropriate to present to them? 1. Term life 2. Whole life 3. Universal life 4. Variable universal life

Both I and IV Correct. The term policy will help them cover a large need with minimal premiums, and the variable universal life will allow them to invest in the market as aggressively as they want through the policy's subaccounts.

Edward, an older child of one of your highest-income clients, has already earned his bachelor's degree and has gone back to school after working for several years. He is taking courses that will qualify him to sit for a professional certification exam through the local college. Before considering any education benefits (exclusions, deductions, or credits), Edward has a tax liability of $2,100. Edward is in the 12% marginal tax bracket. During the tax year, Edward was billed $6,000 in tuition and fees. The tuition and fees were paid for with a scholarship of $2,500, and the rest was paid by Edward ($3,500). Edward is considering how to treat the scholarship on his tax return as well as the tuition and fees expense. What do you recommend to Edward?

By excluding the scholarship from income, Edward will save an estimated 12% of the value of the scholarship in taxes. Edward would be able to claim the Lifetime Learning Credit for the remaining $3,500 of qualified expenses, and his Lifetime Learning Credit would be $700 ($3,500 × 0.20). Edward's total tax savings under this scenario would be $700. However, Edward can elect to recognize the scholarship as income, if the scholarship is not required to be used for tuition (scholarships are ordinary income not subject to self-employment tax), and then he would be able to claim the Lifetime Learning Credit on the full tuition amount. By doing this, Edward would have $300 of additional tax from the scholarship income. However, his Lifetime Learning Credit would increase to $1,200 ($6,000 × 0.20). Edward's tax savings would be $900 ($1,200 - $300). Edward would be better off recognizing the scholarship as income and then claiming a larger tax credit. You remind Edward to check in with you each year, because depending on his marginal tax bracket and other circumstances, your recommendation could change.

Mary began working for Global Foods, Inc. in the current year, and is included in the company's SEP IRA plan. She will make $30,000 and is concerned about her retirement. She wants to contribute the maximum possible to the plan. In addition, it has been a great year at the company, and her employer will make the maximum contribution on her behalf. Given these facts, what will Mary's vested balance be, considering both her contribution and her employer's?

CORRECT. All contributions to the plan are made by the employer, so Mary is unable to contribute. The maximum contribution an employer can make is the lesser of 25% of compensation or the maximum for the year ($53,000 for 2016 or $54,000 for 2017). All amounts are immediately vested.

You are talking to three colleagues throughout the day. Erin states that the government's fiscal policy is expansionary since the Fed is decreasing interest rates. John agrees and says the fiscal policy is also loose due to tax cuts. Finally, Todd says that monetary policy is starting to become restrictive because the Fed has been selling bonds in the open market. Who is correct with their observations?

CORRECT. John and Todd are correct. Erin is incorrect because she references fiscal policy and interest rates. Interest rates are part of monetary policy.

Your client Dan states the he believes he will need $3 million in his 401(k) to retire comfortably. He has begun to aggressively fund it at the end of each pay cycle (monthly) with $1,175 and he has $230,300 in the account right now. If he continues with the same contribution rate for the next 30 years until retirement, what rate of return will he need?

CORRECT. PV = -230,300, N = 360 (30 years X 12 months per year); PMT = -1,175; FV = 3,000,000; solve I/Y = 0.5517% × 12 (monthly) equals 6.62%.

Call & Put Options

Call (Buy) & Put (Sell) • The intrinsic value of an option cannot be less than zero. • Holders of American options can exercise their contracts at any time before the expiration date. • Holders of European options can exercise their contracts only on the date of expiration.

What are Capital Assets?

Capital assets are everything EXCEPT CAR ID: • C—Copyrights/creative works (ordinary asset) • AR—Accounts Receivable (ordinary asset) • I—Inventory (ordinary asset) • D—Depreciable property used in trade or business (Section 1231 asset)

Larry owns a business held as a limited liability company (LLC). He is the only owner. If he decides to close the LLC and file for bankruptcy, he must use: Chapter 7 Chapter 11 Chapter 13

Chapter 7 When the LLC goes out of business, the debts remain. LLCs and similar business structures are not allowed to reorganize in the same way an incorporated business might. Larry, as the LLC owner, does not have direct responsibility for these liabilities. Since Chapter 11 bankruptcy is reserved for incorporated businesses and other similar organizations, he must file for Chapter 7 bankruptcy.

After looking through several potential investments, John is confused by which to choose. He believes that having a diversified portfolio will meet his objectives and reduce risk. He finds several potential investment options, and he likes the higher returns, but he isn't sure how to account for risk. What would take into account his belief of portfolio construction on a risk-adjusted basis?

Choose the investment with the highest Treynor ratio. CORRECT. Given John's belief in a diversified portfolio, the best ratio to choose would be the Treynor ratio. It is a relative risk adjusted measure for systematic risk.

What is an insurance Hazard?

Conditions that increase either frequency or severity of loss are called hazards.

What will be the conversion value of a bond that has a conversion price of $50 when the market price of the common stock is $40 per share?

Conversion value = ($1,000 / $50) × $40 = $800 It is worth noting that the bond will trade based on other similar bonds when it is below the conversion value.

Government loan limits for college depend on several factors. Which one of the following comments regarding loan limits is correct? -The unsubsidized loan limits for dependent and independent students are the same in undergraduate programs. -The subsidized loan limits for dependent and independent students are the same in undergraduate programs. -Independent subsidized graduate loan levels are higher than undergraduate levels. -There is no aggregate subsidized or unsubsidized loan limit.

Correct! Even though the unsubsidized amounts are different, the subsidized loan limits are the same. The amounts start at $3,500 for year 1, move to $4,500 in year 2, and max out at $5,500 per year for year 3 and beyond.

John is asking what might be some of the differentiating features of a qualified plan as opposed to a tax-advantaged plan. Which of the following statements regarding the nonqualified plans is correct? 1. Some non-qualified plans allow lending features. 2. Nonqualified plans have ERISA protection. 3. Vesting is typically not required in a nonqualified plan. 4. There is no tax deduction for any nonqualified plan.

Correct. Nonqualified plans generally do not have lending features. That is a feature specific to qualified plans. Nonqualified plans do not have the same ERISA protection available to a qualified plan. A qualified plan has an anti-alienation feature, which prevents most creditors from ever garnishing assets inside the plan. The federal government is an exception. Another exception is a qualified domestic relations order when divorced couples might be separating marital property. IRAs, for example, have bankruptcy protection up to a certain limit. Vesting is usually unique to ERISA-based qualified plans. IRAs, including SEPs and SIMPLEs, have no vesting schedule. Traditional IRAs, SEP IRAs, and SIMPLE IRAs, as well as 403(b)s and 457(b)s provide pretax contributions and, thus, tax deductions.

Jen is evaluating a large-cap growth stock mutual fund. The fund has had the same solo portfolio manager running it for the last 20 years. Jen has found that the return of the portfolio is 8.57%, while the risk-free rate is 1.95%. The standard deviation is 9.23% and the beta is 1.07. Jen asks you to help her calculate the Sharpe and Treynor ratios and decide which ration to use.

Correct. Sharpe ratio is best for a single mutual fund managed by a solo manager. Sharpe = Rp−Rf/Std. Dev. = 8.57−1.95/9.23 = .72

Debbie wants to pay for her grandchild's college tuition this year. She has a mutual fund portfolio worth $250,000, which returns 5% a year. She has checking and savings accounts worth $100,000 and $300,000, respectively, that earn minimal interest. Debbie had previously contributed $25,000 to her grandchild's UTMA account established by her son and the account balance is now worth $38,000. As her financial planner, what recommendation would you make to help Debbie meet her gifting goal?

Correct. This is the correct answer because paying tuition directly to a college is not a taxable gift and Debbie should pay from an account that does not provide her with much investment return.

Cynthia and Jan are married and have two children. They have made no previous gifts before. How much total gift can they make to each child without incurring any gift tax liability in 2019?

Cynthia and Jan can together transfer up to $22,800,000 (2 × $11,400,000) using their lifetime exclusions. In addition to this, they can also use their annual exclusions in 2019: 2(both parents)×$15,000×2(two children)=$60,000 Therefore, in 2017 Cynthia and Jan can make a total transfer of: $22,800,000+$60,000=$22,860,000

Where should you transfer appreciated or highly appreciating income-producing property to?

GRITs are effective estate planning tools because the transferred assets from the grantor are valued at a discount for federal gift tax purposes. The amount of the discount depends on the length of the initial trust term and the interest rate used to value the assets.

David, age 80, is a longtime client of yours. You have been managing his RMDs since age 70½, and he always has taken the minimum required distribution, not $1 more than required. One day David calls you up and explains that he recently remembered he has a 401(k) from an old job that he had back in the 1960s. He has never taken any money out of this 401(k). What should you advise David regarding this account?

David will have to pay a 50% excise tax on the RMDs not taken from the 401(k). You should then assist David with taking his RMD for the current tax year. You should also talk to David about possibly taking advantage of special tax treatments, like pre-1974 capital gains treatment or 10-year forward averaging.

Required Vesting Rules

Defined Contribution Plan Noncontributory: 2-6 years or 3-year cliff Employee deferral is always 100% vested. Defined Benefit Plan 3-7-year graduated or 5-year cliff Note—An employer can always be more generous.

Stock of a corporation is expected to generate a constant dividend growth rate of 4%. The corporation just paid out a dividend of $1.50 per share. The required rate of return is 10%. The stock is currently selling for $29. Calculate if the stock is overvalued or undervalued.

Do=$1.50;g=4%;r=10%Do=$1.50;g=4%;r=10% D1=Do×(1+g)D1=Do×(1+g) V=D1r−gV=D1r−g V= $1.50 × (1 + .04) / (.10 − .04) = $26 Since the current price of the stock is $29, which is greater than the calculated value of $26, the stock is overvalued.

Your client Carrie Altoon has a music company. The company is currently owned by Carrie and her two daughters, Melody and Bluesy. Carrie wants to transition into retirement. She would like Melody and Bluesy to buy the business and take over control, but she has a couple of concerns. Her successful retirement is her first concern; thus, she desires a formal agreement that Melody and Bluesy will purchase the business. She is okay taking payments, as she knows her daughters do not have a lot of cash. She is also happy to receive the full value now, but she is worried about adding debt to the business's balance sheet. Second, she is concerned about, if Melody or Bluesy were to become disabled or die prematurely, what would happen to her retirement income, if she is receiving payments over a long period of time from the business (or from her daughters based on their success in the business). Her retirement funding and continuation of the business is at risk. Carrie needs a plan to minimize risk and disruption if either daughter were to leave the company or become unable to continue. Carrie also wants to ensure that the business ownership stays in the family.

Development of a buy-sell agreement could meet all of Carrie's requirements. The agreement provides the cash to pay off outstanding company debt, to purchase outstanding ownership interests, and to maintain Carrie's retirement in the case of the death or disability of Melody or Bluesy. Using an entity-purchase agreement as a succession planning tool, the company owns life insurance on each of the owners. The company pays premiums and retains cash value. In the event of death or disability, the company uses proceeds from the insurance to purchase the business interests of the deceased or disabled business owner. In this case, if Carrie were to die, insurance proceeds would be used to pay off the debt related to her retirement. Before making the recommendation, as a CFP professional, you should review two other possibilities. The first is a cross-purchase agreement. This is a plan where each owner buys life insurance on the life of the other business owners. As part of the agreement, proceeds from a policy will be used to buy the business interest of the deceased or disabled owner. Although less common, a second option is a wait-and-see agreement. In this situation, the business has the right to buy the deceased owner's interest first, but the company is not required to buy the interest. This agreement allows the remaining business owners to determine whether they wish to continue as owners and at what price they are willing to maintain ownership.

Using CAPM, calculate the expected return of a security P when its beta is 1.2. The risk-free rate is 3%, and the return of the market is 10%.

E(RP)=0.03+(1.2×(0.10−0.03))=0.114or11.4%

Who assumes the investment risk in a defined benefit plan?

Employer, in a defined benefit plan, the employee does not assume the investment risk. It is used by the company to administer the plan to meet their obligation, as defined in the plan.

What are the tests for Qualified Retirement Plans?

Every qualified plan must pass one of the three coverage tests: 1. Safe harbor 2. Ratio percentage 3. Average benefits In addition, if maintaining a defined benefit plan, every qualified plan must pass one of these two tests as well: The plan must include the lesser of 1. 50 employees or 2. 40% of employees Qualification tests are conducted after the close of the year; however, coverage tests are done throughout the year. Disqualification of a plan disallows the tax benefits of the plan.

What is EFC? Formula?

Expected Family Contribution EFC=Adjusted gross income−Deductions+Pretax health savings account or IRA−Taxes Regarding the EFC calculation: Income includes distributions from an IRA or Roth IRA as well as capital gains.

George died on March 3, 2019, from a car accident at the age of 30. Upon his death, he had $20,000 of unpaid medical expenses from the accident. His only assets were his bank account with a balance of $100,000 at the time of death. He had wages of $30,000 so far this year and a suspended passive loss of $2,000. What income and deductions can George's executor include on his final tax return?

George's executor should include $30,000 of income, passive losses of $2,000, and medical expenses of $20,000. (These are subject to the 10% of AGI floor.)

In 2019, Eric has gifted $15,000 in cash, $6,500 in bonds, and $17,500 worth of stocks in a trust with a life estate to his daughter Marcela. He has also given his son Mike $7,500 in cash, $6,500 in bonds, and stocks in trusts with a remainder interest worth $25,000. What are Eric's taxable gifts for 2019?

Gifts to Marcela: $15,000 + $6,500 + $17,500 = $39,000 Less exclusion: $15,000 Taxable gift = $39,000 - $15,000 = $24,000 Gifts to Mike: $7,500 + $6,500 = $14,000 Less exclusion: Up to $15,000 Taxable gift to Mike: $14,000 - $14,000 = $0. Additional remainder interest gift of $25,000 in stocks in trust is considered a future interest gift, which cannot be reduced by an annual exclusion. This will result in an additional taxable gift worth $25,000. Total taxable gifts for Eric = $25,000 + $24,000 = $49,000

Dion is a very risk-averse person. He likes a sure thing compared to taking risks. He would like to establish a charitable trust for his church. The church representative has asked Dion to choose between a CRAT and a CRUT. Which would be a better choice, given his risk tolerance?

Given Dion's low tolerance for risk, he should choose the CRAT because he will know how much the trust will distribute each year. The downside is that he can never earn more than this amount going forward, but he can never earn less either.

Will, one of your clients, has informed you that his AGI will be $66,000. Will is 55, single, and has never been married. Will also has a 401(k) at work. Will also contributes to a traditional IRA each year. How much can Will contribute to a traditional IRA, and what is the amount he can deduct?

Given Will's AGI, age, and active participant status, he can contribute $7,000 to an IRA of that amount, $5,600 is deductible. See the next calculation, and remember that Will is eligible for a $1,000 catch-up contribution because he is over 50. 7,000×(($66,000−$64,000)($10,000))=$1,400(phased-out amount) Deduction is reduced by the phased-out amount, so the net deduction is $5,600: $7,000−$1,400=$5,600

Larry, the owner of a 150-person corporation, wants to start a retirement plan for his employees. He needs your expertise in order to pick the best plan for his company. Which type of plan, pension or profit sharing, would be better for Larry, given that he is not sure he wants to fund the plan each year?

Given that Larry doesn't know if he wants to contribute each year, he should select a profit sharing plan. A pension plan will force Larry to make an annual contribution.

Hannah, Heather, and Robert purchased a property worth $300,000, each contributing equally. The property was titled as JTWROS. If Robert passes away unexpectedly, how much of the property would now be owned by Hannah and Heather? Does Robert's share of property have to pass through probate? Why? How much of the FMV of the property will be included in Robert's gross estate?

Hannah, Heather, and Robert purchased a property worth $300,000, each contributing equally. The property was titled as JTWROS. If Robert passes away unexpectedly, how much of the property would now be owned by Hannah and Heather? Does Robert's share of property have to pass through probate? Why? How much of the FMV of the property will be included in Robert's gross estate? • Hannah and Heather will each own 50% of the property upon Robert's death. • Robert's share of the property will not pass through probate, since the property was titled JTWROS. • $100,000, Robert's share of the property, will be included in Robert's gross estate.

Fund A has a return of 16% and fund B has a return of 12%. Both funds track the same benchmark index, which has a return of 10%. The tracking error for fund A is 5% and the tracking error for fund B is 3%. Compare the information ratios for funds A and B. Determine which mutual fund has a better information ratio (IR).

IR for Fund A=(0.16−0.10)/0.05=1.2 IR for Fund B=(0.12−0.10)/0.03=0.67 In this example, although fund B has a lower tracking error, fund A has a higher information ratio.

Cy is instituting a SIMPLE IRA for his 10 employees. He is attempting to understand what he must do as an employer both for himself and his workforce to keep his plan in compliance. Which of the statements regarding SIMPLE IRAs is incorrect? His employees can elect to defer up to $13,000. If he decides to match, the standard matching amount is 3% of an employee's compensation. If a 3% employer match is selected by Cy, when an employee earns $300,000 and defers $13,000, the employer match will be $8,400. Cy can make a 2% nonelective contribution if he chooses in any given year.

If a 3% employer match is selected by Cy, when an employee earns $300,000 and defers $13,000, the employer match will be $8,400. Correct. The contribution rules of the SIMPLE include: The employer must match deferrals dollar-for-dollar up to 3% of compensation (can be reduced to 1% in two out of five years) or make a 2% contribution to all eligible employees. There is no compensation limit (i.e., $280,000 when applying the 3% match). Cy can make a 2% nonelective contribution if he chooses in any given year.

When is a CD not considered a current asset?

If a CD is not maturing within 12 months or is not intended to be converted to cash in the next 12 months, it does not belong in the current asset section.

Betsy has two children, Jeffrey and Jenna. Jenna has two children, Dwight and Dawn. Jeffrey has no children. Betsy's will leaves all of her assets to her children and states that in the event that one of her children predeceases her, then her estate should be distributed between her remaining children and grandchildren per capita. If Jeffrey and Jenna were still living when Betsy died, how much would they receive? If Jenna predeceased Betsy, what would the distribution of the estate look like if the per capita method was followed? What would the distribution be if the per stirpes method were followed instead?

If both children were living, both Jeffrey and Jenna would receive half share of Betsy's estate. Under the per capita method, if Jenna had predeceased Betsy, the estate would be split three ways. Dwight, Dawn, and Jeffrey will each receive a third of the estate. Under the per stirpes method, Jeffrey would receive half the estate, while Jenna's share (½) of Betsy's estate would be split equally between her children with Dwight and Dawn each receiving one-fourth (¼) of the estate.

How to deduct medical expenses from an estate

If estate tax is owed, medical expenses should be deducted on Form 706. If no estate tax is owed, medical expenses should be deducted on Form 1040.

Best strategy for dependent care:

If the taxpayer's marginal tax bracket is 12% or less, it is generally best to first utilize the dependent care tax credit with qualifying expenses. If the taxpayer's marginal tax bracket is higher than 12%, then generally the best option is using the FSA for dependent care.

You have just started to work with a client and have finished evaluating his current financial situation. You determine his emergency fund is inadequate based on his salary and monthly expenses. After some discussion, the client explains that he does not like holding any cash because "It doesn't earn anything." He would rather contribute the funds to his 401(k) plan, since he currently lacks the cash flow to take full advantage of this account. What should you advise him to do?

If your client does not want to hold money in liquid assets, he should ensure he has access to a line of credit in case of an emergency. If he owns a home, he can open a HELOC at a bank. This will allow him access to the equity in his home if needed. He can also borrow from a cash-value life insurance policy and/or his 401(k) plan if available. You could also suggest holding one or two months of expenses in short-term bonds for smaller unexpected expenses.

Thomas Jefferson, the CEO of George Washington Corporation, wants to know if he is considered part of a controlled group for purposes of making his retirement contributions. Is he a part of a controlled group, considering these facts? George Washington Corporation owns: • 87% of Donald Trump Corporation • 40% of Abraham Lincoln Corporation • 90% of Richard Nixon Corporation Donald Trump Corporation also owns 85% of Bill Clinton Corporation. The remaining shares of each corporation are all owned by unrelated parties. Tell Thomas Jefferson whether he is part of a controlled group and, if so, which corporations are a part of the controlled group.

In this example, George Washington Corporation is part of a controlled group. The group is a parent-subsidy group consisting of Donald Trump Corporation, Richard Nixon Corporation, George Washington Corporation, and Bill Clinton Corporation. George Washington is the parent and Donald Trump + Richard Nixon Corporations are included because George Washington Corporation owns 80% of the shares. Since Donald Trump Corporation also owns more than 80% of Bill Clinton Corporation, it will also be considered a part of the controlled group.

When would a client not pay a deductible in an automobile policy?

Injury to another individual Correct. Deductibles generally do not apply to liability coverage, only property damage.

Nakia has been investing since she was a young woman. She has used the same brokerage account to hold her investment assets for nearly 30 years. Based on a combination of regular savings and investment performance, she has accumulated nearly $1,400,000 in assets in the account, of which $450,000 is held in cash. What will happen to Nakia's assets if the brokerage firm declares bankruptcy or begins a liquidation process?

It is likely that the firm will follow liquidation procedures outlined in SIPA, but it is possible that the firm could file for bankruptcy protection. In either case, Nakia's assets are protected up to $500,000; however, the SIPC insures her cash holdings only to $250,000. This means that there is a possibility that she could lose $200,000 of cash: Total cash−SIPA protected cash amount=$450,000cash−$250,000protected=$200,000 And she could potentially lose $700,000 from her securities: Total balance−Total cash−SIPA protected securities amount=$1,400,000−$450,000−$250,000=$700,000 The SIPC will also work to transfer Nakia's securities to another brokerage, if possible. At this time, Nakia does have some liability exposure should the firm need to liquidate.

Your client Dan called you because he had heard about a life insurance policy, called a hybrid policy, that could be used to pay for long-term care. Do the benefits get paid from the death benefit or cash value?

It pays benefits from the death benefit. Correct. This is how the hybrid plan pays benefits, with the same triggers as an individual long-term care policy.

Jarvis is a single 69-year-old male. He began receiving period payouts from an annuity this year. He will receive $18,000 per year from the insurance company. If Jarvis paid $75,000 into the annuity contract before taking distributions, how much of this year's annual distribution will be excluded from ordinary income taxes?

Jarvis can exclude $5,294 from ordinary income taxes this year. This estimate is based on the exclusion ratio and his IRS life expectancy of 210 months.

Joel, the owner of ABC Corporation, is starting a stock bonus plan for his company. He is afraid of rapid turnover in his company and wants the eligibility requirements to be as strict as possible. What should he make his eligibility requirements?

Joel should make employees eligible after attainment of two years of service and age 21. This is a special exception to the normal eligibility rules. Joel forfeits any vesting requirements by electing this special exception, and eligible employees will be vested immediately.

Joel has come to you for a debt management plan, as he has a lot of high-interest credit card debt. He is looking for the best strategy to pay down the debt. How should Joel choose which card to pay first?

Joel should pay off the highest-interest debt first. He should make the minimum payments on the remaining debt items. Once the highest-interest debt is paid off, he can move to the next highest-interest debt. He should continue this strategy until all the credit card debt is paid off. This is the most efficient use of cash flow and the fastest way to increase cash flow that can be directed toward other goals.

Joey is an entrepreneur who founded a new tech company. He does not have much capital outlay but expects to have plenty in the future. He wants to create a retirement plan that can reward and attract the best employees. He is worried about the contributions he will need to make to the plan, given the business's lack of cash during the growing period. Which retirement plan is best for Joey's business?

Joey should consider a stock bonus plan. He can contribute stock to the plan rather than cash. This will allow him to fund the plan even when the business is low on spare cash.

Which of the following children have income subject to federal income tax at trust and estate tax rates? Brittany, age 12, $2,500 from a paper route Kate, age 7, earns $2,900 in dividends from a mutual fund Tony, age 3, had $900 in interest on a savings account Amanda, age 19, $2,000 in dividends and interest

Kate Correct! Kate's income is all from investments, exceeds the threshold, and is subject to the "kiddie tax."

Lalinda just purchased her first home. She is meeting with her financial planner to determine the most appropriate form of insurance she should buy. She is considering HO-2, HO-3, and HO-5 policies. If she wants her personal property to be covered for all risks of physical loss, except those risks that are specifically excluded, which policy should she purchase?

Lalinda should buy an HO-5 policy. This is the only policy that covers her personal property for all risks of physical loss, except those risks that are specifically excluded.

Manuel would like to establish one or more grantor trusts to remove several pieces of highly appreciating assets from his gross estate. He owns a Paul Gauguin painting currently valued at $14 million, $1.5 million in dividend-paying stocks, and $3 million in corporate bonds. What type or types of grantor trusts should Manuel establish?

Manuel should use a GRAT to hold the painting and dividend-paying stocks. The use of a GRAT requires valuation only once when the trust is established. If the painting were held in a GRUT, it would need to be revalued on an annual basis. This revaluation could become very expensive over time. Also, assuming the stocks are increasing in value, the GRAT will shelter more of the appreciation from eventual taxation because the remainder interest is based on current values, not annual revaluation. The bonds should be held in a GRUT because they are less likely to appreciate in value over time.

Married filing Seperate Spouses Social Security Benefit:

Married filing separately filing status automatically includes 85% of Social Security benefits in taxation. Social Security benefits may also be reduced if the recipient is receiving benefits prior to the normal retirement age and is receiving earned income.

Calculate the mean and standard deviation for the following mutual fund: −37%, 27%, 12%, 6%, 15%, 11%, −5%:

Mean: 4.14 / Standard Deviation: 20.53 Correct. Using the E+ function on the HP12C you enter the returns above (remember to us CHS) for negatives. Then hit g "0" and g "."This will give you mean and standard deviation.

Your client Jessica is debating on what bond to purchase in her non-retirement account. She has narrowed it down to the following: a 4.1% agency bond, a 3.9% municipal bond, a 4% zero-coupon bond (Treasury), and a 4% Treasury bond. Assuming all the bonds have the same maturity, what is the best option if Jessica's income is $250,000 per year?

Municipal bond Correct. Based on the information provided, the municipal bond will provide the best after-tax return. Incorrect. The zero-coupon bond will pay phantom income. Incorrect. The Treasury bond is taxable as ordinary income. Incorrect. The agency bond is taxable as ordinary income.

For an investor to access certain alternative investments including hedge funds and private equity, they often need to be accredited. An accredited investor is one with which of the following?

Net worth of $1 million or annual income of $200,000 ($300,000 for married couples)

David and Tammy ask you if you believe they will qualify for the following mortgage amount. If they cannot, what amount do you believe they may qualify for (assume same terms)? Mortgage of $300,000 (30 year @ 4%) insurance is $100/m and taxes are $800/m. David and Tammy make $80,000 a year and have no reoccurring debt, the loan officer will decide off of PITI only.

No they will not qualify since PITI is above 28%. They can afford a loan of $202,339 CORRECT. PITI is correct at 28%. To find the new loan amount work backwards from the monthly income: 28% of $6,667 is $1,866 then subtract taxes and insurance. This gives us a monthly PI allowed of 966. This results in a loan amount of $202,339.

Are renewals allowed for compensation of a fee-only practice?

No. Renewals are paid by insurance companies on products already sold and are not allowed if a CFP claims to be fee only.

Nick works for a large corporation. The company provides generous employee benefits including a defined benefit pension plan, a 401(k) plan, and a comprehensive health plan that lasts through retirement. Nick is 61 years of age and worried about the financial stability of the firm. He knows that the PBGC provides insurance in case a company goes out of business and can no longer provide retirement benefits to plan participants and retirees. Which of Nick's benefit plans is insured by the PBGC?

Of Nick's three retirement plans, PBGC provides insurance coverage only for the qualified defined benefit plan. Neither the 401(k) nor the health insurance plan is insured by PBGC.

What is the maximum limit in the safe harbor formula?

Only $280,000 in compensation can be applied to the formula.

Some items on the taxpayer's Form K-1 from a partnership or S corporation retain their tax character when passed through via a conduit entity. Which of the following is not separately stated on the Form K-1? Long-term or short-term capital gains/losses Tax-exempt income and nondeductible expenses Ordinary gross income from business activity Investment or portfolio income and related expenses

Ordinary gross income from business activity Correct! The ordinary gross income is not separately stated on the K-1 form but is netted at the entity level with business expenses, and the net income or loss is reported to the taxpayer on the K-1 form.

Income paid to REIT shareholders is taxed as ______, while sales of the property inside the REIT are treated as ______.

Ordinary income; long-term capital gains Correct. Income paid is not taxed at the REIT level and is therefore ordinary income to shareholders. In addition, property sold in the REIT is always treated as long-term capital gains.

What type of plans have Pension Benefit Guaranty Corporation (PBGC) insurance?

PBGC insurance applies to defined benefit plans. Defined contribution plans are not covered by the PBGC.

Peyton wants to know how much college will cost when her newborn begins college at age 18. The current tuition is $14,000 and is expected to grow at 6% annually. What will the cost be for the newborn's first year of school?

PV = -14,000 N = 8 I/Y = 6% PMT = 0 FV = 39,961 The current cost of tuition is $14,000 per year. If the tuition grows at 6%, in 18 years tuition will cost $39,961.

Calculate the YTM on the following bond. Also calculate its YTC if the bond is recalled a year early. The face value offered with premium when the bond is retired early is $1040. • Face value = $1,000 • Current price = $872 • Coupon rate = 6% (semiannual payments) • Maturity = 5 years • YTM = ?

Part 1: YTM Information Computation TI BA II Plus Face value 1000 FV Present value -872 PV Coupon payment = $60/2 30 Pmt Maturity (5 years × 2) 10 N YTM 4.63% [CPT] I/Y Annualized (YTM × 2) 9.26% Part 2: YTC Information Computation TI BA II Plus Face Value 1040 FV Present Value -872 PV Coupon Payment = $60/2 30 Pmt Maturity (4 years × 2) 8 N YTC 5.427% [CPT] I/Y Annualized (YTC × 2) 10.855%

Paula has determined that she fits the definition of an investment adviser, as outlined by the SEC. She just took on her 100th client and now manages $125 million in assets. What forms must Paula complete to register as an investment adviser with the SEC?

Paula must file Parts I and II of Form ADV with the Investment Adviser Registration Depository (IARD). She may be required to submit financial documentation if she elects to take custody of client assets. (Few independent advisory firms act as a custodian.) At the state level, if appropriate, she needs to file Form U4. Remember too that she will be required to sit for and pass a series of FINRA examinations, unless she is a CFP certificant or holds another recognized designation.

Percy, 65, is one of your newer clients. He wants to take a distribution from his IRA. He tells you that he made nondeductible contributions to his IRA a long time ago. He wants to know how much of the distribution he will have to pay tax on. He says that he contributed $5,000 in total nondeductible contributions. The total account balance is $150,000. If Percy takes a distribution of $30,000, how much will be taxable?

Percy will be taxed on $29,000 of the $30,000 distribution. $1,000 of the distribution will be considered a return of basis. The calculation follows. Ratio of adjusted basis=($5,000)($150,000)=3.33%;3.33%×$30,000=$1,000=Basis in distribution$30,000−$1,000=$29,000=Taxable portion of distributionRatio of adjusted basis=($5,000)($150,000)=3.33%;3.33%×$30,000=$1,000=Basis in distribution$30,000−$1,000=$29,000=Taxable portion of distribution

Jim, a 72 year old widower, owns income-producing real estate with two business partners. His interest in the property is currently valued at $5 million and the property continues to appreciate every year. Jim wants to remove the property and its appreciation from his estate to avoid taxation at his death. Jim would like to gift the property to his son Evan, a successful chiropractor, but he relies on the income from the rental property to supplement his monthly income. Which intra-family transfer technique could Jim use to meet his objectives?

Private annuity Correct. This is the correct answer because Jim can sell the property to Evan and receive fixed monthly annuity payments for the remainder of his life. The property would not be included in Jim's gross estate and the annuity payments would cease at his death.

Tammy is a CFP professional who provides comprehensive financial planning services. She also helps her husband run a real estate investment company. A commercial property just came on the market. Tammy believes that this would be an ideal investment for her husband's company. Unfortunately, neither she nor her husband has enough cash to make a realistic offer at this time because they are closing on three other properties this month. Next month their cash flow position will be sufficient to make the purchase; however, Tammy is worried that the property will be sold before then. As a temporary measure, Tammy has decided to borrow the down payment money from a client. She and the client have entered into a legally binding agreement with full disclosure by Tammy and an above-market interest rate. Given the facts of the case, what form of discipline will CFP Board most likely take?

Public letter of admonition. Given that this was an isolated event and no harm was done to the client, the Disciplinary and Ethics Commission will likely issue a public letter of admonition.

Sophia is trying to determine if a mutual fund's return is significantly determined by its benchmark. What Modern Portfolio Theory (MPT) statistic is she looking for and what level is significant?

R-squared and a statistic above 70 Correct. R-squared explains what percentage of change in a dependent variable is predicted by the independent variable. Generally, an R2 above 70 is significant.

Who do Registered Investment Advisers (RIAs) have to register with?

Registered Investment Advisers (RIAs) who manage less than $100 million in assets must generally register in the state in which they conduct business. Only those RIAs who manage more than $100 million are required to register with the SEC directly.

Steve is a new client. He has come to you in December of the current year. You would like to engage in some year-end tax planning with Steve. You learn that Steve is a senior manager working for a fast-growing company that awards its employees incentive stock options. Steve tells you that he received an award of 1,000 shares three years earlier, under the company's incentive stock option plan. Each option had an exercise price of $2 per share. On March 2 of the current year, Steve exercised all 1,000 options when the share price was $42 per share. After learning this, you calculate Steve's regular taxable income for the current year to be $75,000 and his tax to be $12,359 (filing single). Steve claimed itemized deductions of $18,000 consisting of $9,000 of qualified mortgage interest (purchase loan), $8,000 in state and local taxes, and $1,000 in charitable contributions. What do you advise Steve regarding his AMT liability?

Regular Tax - $12,359, AMT - $13,338

What is the difference between moral and morale hazards ?

Remember the difference between moral and morale hazards this way: • Moral = Dishonest • Morale = Carelessness (more "e's" in the definition)

Calculate the return and risk of this two-asset portfolio: • Asset 1: Weight = 50%; return = 10%; standard deviation = 20% • Asset 2: Weight = 50%; return = 5%; standard deviation = 15% The covariance between the two asset classes is 0.01.

Return • Rp = (0.5 × 0.10) + (0.5 × 0.05) = 0.075 or 7.5% Risk • Step 1: σp2 = (0.5 × 0.2)2 + (0.5 × 0.15)2 + (2 × 0.5 × 0.5 × 0.01) = 0.021 • Step 2: σp = 0.021−−−−−√0.021= 0.144 or 14.4%

Your longtime client is very excited about a new tax planning strategy he has learned about. You invite him to the office and he proceeds to describe the strategy. He is very excited and could not believe that the tax savings could be so significant. You had not heard of this strategy before and ask where he learned of it. He replies that he was online one day and noticed a link, which led to another link, and eventually he learned about the strategy on a website. The reason for the client's excitement and urgency is that it is late December and the tax year is closing. Would you implement the strategy today to save on this year's taxes? He wants to know. How would you respond?

Reviewing the information about the strategy with your clients is a great first step since that lets your clients know that you are listening to them. Next you can point out the relevant code sections, regulations, and case law that applies to the strategy in question. You would also want to involve the client's tax adviser/accountant in this process so that they can support your position and recommendation. In the end, you should be confident, through your own research, of the appropriateness of any tax-related strategy based on authoritative documents (i.e., Internal Revenue Code, Treasury regulations, tax-related court cases, and IRS rulings and pronouncements).

Ruby, a Certified Financial Planner professional, is working with a young client who is just starting her working career. The client has a good job with outstanding promotion opportunities. The client has seen the statistics that she is more likely to become disabled than to die over her working life. She wants to purchase a long-term disability policy. Ruby has identified several possible policies, but each one is costly, especially when compared to the client's annual salary. What can Ruby recommend that will help reduce the policy premiums?

Ruby can provide at least five recommendations that can help reduce premiums for a long-term disability policy: 1. Extending the elimination period. 2. Purchasing a split-definition policy over an own-occupation policy. (Keep in mind that the coverage may not be sufficient to meet the client's needs.) 3. Reducing the income replacement ratio in the policy. 4. Integrating the policy with Social Security. 5. Purchasing a policy through a group plan rather than the individual marketplace.

What does CFP Rule 1.3 require?

Rule 1.3 requires a written agreement be executed to govern the financial planning services.

Conceptually, Sam understands the reason that financial institutions, such as banks, exist. A bank, for example, provides a safe and secure place for an individual or business to keep savings. Besides providing accounts that can be used to manage savings, what other role do financial institutions, such as banks, play in the financial markets?

Sam is correct in describing banks as offering a safe place to store savings. Banks and other financial institutions play another important role in the financial system. Essentially, banks and other financial intermediaries channel funds from savers and investors to borrowers, governments, or firms in an efficient manner. The price for this service is the spread between what a financial intermediary must pay for a deposit or investment and what the intermediary can earn lending or investing assets.

Sarah purchases 100 shares of a stock selling at $25 per share. If she uses margin trading for this transaction and the initial margin requirement is 70%, how much money did Sarah borrow? If the price of the stock rises to $30 per share, what will be Sarah's return on this investment? If the stock price had fallen instead and if the margin call is set at 30%, at what price would Sarah receive a margin call? (Assume there are no transaction costs in this trade.)

Sarah's borrowing = $25 × 100 × (1 - 0.7) = $750 Applying the return on investment formula for going long: • Return = (($30×100) − ($25 × 100)) / (.7 × 100 × $25) = 28.57% Margin call: Applying the formula for margin call below: • 0.30 = (y − $750) /y Where • y = the overall value of investment Therefore, multiplying y to both sides, we get: • 0.30y = y − $750 Rearranging the above term, y − 0.30y = $750 • 0.7y = $750 Therefore, y = $750/0.7 = $1,071.42 or Sarah will receive a margin call when the price of the stock falls $10.71 per share.

What expense is allowed in a 529 plan, but not for AOC or LLC?

The "cost of the purchase of any computer technology or equipment or Internet access and related services" are generally not considered qualified expenses under the American Opportunity Credit or Lifetime Learning Credit, but they are for 529 plan (and Coverdell ESA) withdrawals.

Now, if Sarah decides to short the 100 shares of a stock selling at $50 per share and the initial margin requirement is 70%, how much equity does Sarah have to put in? If the price of the stock falls to $30 per share what will be Sarah's return on this investment? If the stock price had risen instead and if the margin call is set at 30%, at what price would Sarah receive a margin call? (Assume there are no transaction costs in this trade.)

Sarah's invested equity or margin = $50 × 100 × 0.7 = $3,500 • Return = (($50 × 100) − ($30 × 100)) / $3,500 = 57.14% • 0.30 = ($5,000 + $3,500 − X) / X Multiplying by X on both sides: • 0.3X = $8,500 − X Rearranging: • 1.3X = $8,500 • X = $8,500 / 1.3 = $6,538.46 or $6,538.46 / 100 = $65.38 per share Sarah would receive a margin call if the price of the stock went up to $65.38 per share.

Mike and Pam, ages 67 and 65, respectively, filed a joint tax return. They provided all the support for their 17-year-old son, who had $2,200 of gross income. Their 22-year-old daughter, a full-time student until her graduation on June 25 of this year, earned $2,500. Her parents provided her remaining support. Mike and Pam also provided total support for Pam's father, who is a Colombian citizen and a resident of Colombia. Who is a dependent on Mike and Pam's tax return?

Son and daughter

Generally, on a taxable distribution (i.e., not used for qualified educational expense), clients also must pay a 10% additional tax on the amount included in income. But what are the exceptions?

The 10% additional tax doesn't apply when you "ADD A Credit": • Assistance (scholarship, grant, etc.) • Death • Disability • Academy (Military) • Credit (American Opportunity Tax Credit or Lifetime Learning Credit) The 10% additional tax does not apply to the following distributions: 1. Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. 2. Made because the designated beneficiary is disabled. 3. Included in income because the designated beneficiary received: a. A tax-free scholarship or fellowship grant (most common). b. Veterans' educational assistance. c. Employer-provided educational assistance. d. Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. 4. Made on account of the attendance of the designated beneficiary at a U.S. military academy. 5. Included in income only because the qualified education expenses were taken into account in determining the American Opportunity Tax Credit or Lifetime Learning Credit.

Namar transferred his business interest to his son using an installment note. The term of the note was 10 years. What will happen if, say, Namar forgives the note after 5 years?

The IRS will consider Namar to have been paid in full if he forgives the installment note. The IRS also will consider the act of forgiving the note to be taxable income to Namar. Additionally, Namar may owe a gift tax on the amount forgiven.

Why is this statement incorrect: Kathryn gifted income-producing real estate to a trust to benefit her husband Jake and their two children. Jake may receive trust income as needed and the trustee may distribute principal to him according to an ascertainable standard. The children will receive the trust corpus at Jake's death. Kathryn can take a marital deduction to offset the taxable gift transferred to this trust.

The answer is incorrect because Jake does not have access to all income and only has a special power of appointment over corpus therefore a marital deduction is not available to Kathryn to offset the tax on this gift.

Why is this statement incorrect: Kevin's will establishes a testamentary bypass trust for the benefit of his surviving spouse, Tara. At Kevin's death, the property passing from the will to the trust will receive a marital deduction in Kevin's estate.

The answer is incorrect because the bypass trust does not give Tara the right to all income for life, therefore property in the trust does not qualify for a marital deduction.

Mike is analyzing a private equity investment for a client. The investment minimum is $50,000, which would be invested right away. The fund is expected to pay a dividend of $1,000 on the next three anniversary dates, then a $5,000 dividend in the following two years. It will be sold in year 5 for an estimated value of $60,000. Due to the speculative nature the client requires a 12% rate of return. What is the NPV and should the client buy it?

The client should not buy it, the NPV is −$7,538 CORRECT. Draw a timeline and you will find CF0 is -$50,000, CF1, CF2 and CF3 are each $1,000 (enter each cashflow (numbers 1 through 5) as CFj in your calculator), CF4 is $5,000, and CF5 is $65,000 ($60,000 sale price + $5,000 dividend). Don't forget to put in the interest rate "I" at 12%, then push f PV, which solves for NPV and is −$7,538. This investment should not be purchased due to the negative NPV.

A client approaches his advisor with an investment purchasing question. The client has $70 and wishes to buy one stock. Each stock costs $70. Investment A pays a dividend of $4.00 per year, while investment B pays $3.50 per year. It is expected that Company A will increase their dividend 2% in the following year, and Company B will increase it 7%. If Company A is expected to grow at 4% and Company B at 5%, which company would be more beneficial if the client has a required rate of return of 10%?

The client should purchase Company B as it is valued at more than Company A. CORRECT. The dividend discount model exhibits the intrinsic value of a stock. V = D1 / (r - g). The dividend is based on next year's dividend. Below are the calculations using the information and the model. Company B is worth more than $70, and is therefore the better investment. Company A ($4.00 × (1.02)) / (0.10 - 0.04) = $68 value Company B ($3.50 × (1.07)) / (0.10 - 0.05) = $75 value

IBC Cola, Inc. has a qualified defined contribution retirement plan and would like to evaluate the requirements in their coverage test. They have the following information. Which one of the following is correct in regards to the information? Non-Excludable Employees Covered Non-Highly Compensated 75 48 Highly Compensated 25 22 100 70 Average Benefit by Compensation Highly Non-Highly 10% 6%

The company meets the ratio percentage test. CORRECT. The Ratio Percentage Test states that the coverage of non-highly compensated employees must be at least 70% of the percentage of covered highly compensated employees. The % of NHC covered is 64%. The % of HC covered is 88%. So, 70% times 88% is 61.6%. 64% NHC covered > 61.6% required. This passes the Ratio Percentage Test.

Which of the following credits is refundable? The credit for the elderly and disabled The home energy credit The earned income credit The credit for dependent care expenses

The earned income credit

A client comes to you after reading his recommended portfolio of two stocks. He thought he understood that his acceptable level of risk of loss was 13%, as outlined in his financial plan. However, both investments are above this level and he is confused. He wants an explanation as to why this portfolio has been recommended. What would be the most correct explanation?

The investments are not perfectly correlated to each other, therefore there are diversification benefits, which reduce risk. CORRECT. A portfolio will recognize diversification benefits whenever the correlation between assets is less than one (not zero). In addition, when other assets with less risk are added to a portfolio, this also helps to reduce the overall risk of the portfolio, but that was not an answer.

Howard and Jackie are married and file a joint return. Their mortgage has been paid off for a few years, now and each year they claim the following itemized deductions: Property Tax - $3,500 State Income Tax - $6,000 Cash charitable contributions - $12,000 Total - $21,500 Howard and Jackie are new clients. What are your tax planning recommendations for them?

There are two things to consider. First, depending on their state's standard deduction amount, Howard and Jackie may choose to take their itemized deductions on their federal return (even though it is slightly less than the standard deduction) so that they can also claim an itemized deduction on their state tax return. Second, if you determine that it would not be beneficial to claim their itemized deduction every year, then Howard and Jackie are great candidates to bunch their deductions. In December of the tax year, Howard and Jackie could make an additional $12,000 charitable contribution. The following year they would not make a charitable deduction, but they could claim the standard deduction. This is shown in the table. By utilizing the deduction bunching strategy, Howard and Jackie are able to claim total deductions of $61,000 (itemized one year and standard deduction the next year) even though they incurred only $50,000 of actual itemized expenses.

Which federal law limits the amount of liability for a lost or stolen credit card to $50?

This is the correct answer. The Fair Credit Billing Act limits someone's personal liability with a lost or stolen credit card.

Anna purchased a duplex 20 years ago for $50,000 while she was attending graduate school. She has held the duplex as an investment property ever since. Anna's children are now leaving for college and will be attending a different school than Anna attended. She would like to sell the duplex and use the proceeds to help pay for her children's education. The current fair market value (FMV) of the duplex is $175,000. There is a $20,000 balance remaining on the mortgage securing the duplex, and Anna has claimed straight-line depreciation of $20,000 on the duplex. Anna is single, in the 24% marginal tax bracket, and is not subject to the net investment income tax. What are the tax consequences of Anna selling the duplex to help her children pay for general school expenses?

This property (depreciable property used in a trade or business) is subject to Section 1231 and Section 1250 rules. Anna's adjusted basis in the duplex is $30,000 ($50,000 - $20,000). Anna's realized gain on the sale of the duplex is $145,000 ($175,000 - $30,000). Anna did not take any accelerated depreciation on the property, so she does not have any depreciation recapture. Anna does have Section 1250 unrecaptured straight-line deprecation of $20,000. Anna's realized gain of $145,000 is broken down as follows: • $20,000 Section 1250 unrecaptured gain taxed at 25% • $125,000 regular long-term capital gain taxed at 15% • The mortgage information is extraneous to the gain calculation.

Enos has recently retired and is about to begin receiving his first required minimum distribution (RMD). Enos is in a 24% tax bracket. He has the option of taking his first RMD April 1, next year. The distributions will be over $50,000 each year. Why is the following statement is not proper thinking regarding his RMDs? Enos should simply defer as long as he is able to defer and select the grace period distribution.

This question requires the reader to think about the efficacy of distributing the first RMD into the grace-period year. It's important to think about potential tax consequences when determining whether to defer or distribute at the required beginning date with no grace period. Enos should consider that selecting the grace period distribution now requires him to take two distributions in the same tax year. It is conceivable that this strategy could move him into a higher marginal tax bracket. Enos should perhaps take his first distribution as close to December 31 as possible, thus allowing the time value of money to potentially increase the account value. Enos will be required to satisfy his second distribution by December 31 the second year if he opts to defer distribution to the grace period year.

Registering vs. Obtaining License?

Those who provide investment advice for a fee register their practice, while those who sell products for a commission obtain a license.

An individual invests $10,000 into a mutual fund. At the end of the year the value of her portfolio increases to $12,000. The next year she invests another $1,000 into the fund. At the end of the second year, the value of the fund increases to $13,100. Calculate the time-weighted return for this investment. • Year 1 return: ($12,000 − $10,000) / $10,000 = 0.20 or 20% • Year 2 return: ($13,100 − ($12,000 + $1,000)) / ($12,000 + $1,000)) = 0.0077 or 0.77%

Time-weighted return = (1.20) × (1.0077) − 1 = 0.2092 or 20.92%

Ron and Jane, both 33, are buying their first home and would like to take funds from Ron's Roth IRA for the downpayment. Ron first contributed to the Roth IRA when he was 23. He has not contributed since he was 27, and the account is almost all earnings. Ron and Jane come to you to ask if Ron will have to pay a penalty or tax on the funds he removes from the IRA. What should you tell Ron and Jane?

To better assist Ron and Jane, we should examine the rules for a qualified distribution from a Roth IRA. The first rule is that the distribution must be made five years from when the first contribution was made. They meet this rule, since Ron first contributed to the account 10 years ago. Ron and Jane also satisfy the second test, since they are taking a distribution for the purchase of their first home. They can take up to $10,000 of earnings out of the account with no penalty or tax.

Tom's employer provides him with group term life insurance coverage of $200,000. Tom is 45 years old. He is not a key employee. Tom pays $100 per year toward the cost of the insurance. How much must Tom include as taxable income under Section 79?

Tom's employer must include $170 in his wages. The $200,000 of insurance coverage is reduced by $50,000. The yearly cost of $150,000 of coverage is $270 ($0.15 × 150 × 12), and is reduced by the $100 Tom pays for the insurance. The employer includes $170 on Tom's Form W-2.

Sheila and Josh own rental property on the South Carolina coast. The property has been in Sheila's family for six generations and has been appreciating in value. Sheila is concerned that when the couple dies, the value of the property will subject their estates to an estate tax. Sheila does not want to sell the property or give it away, and she wants the property to ultimately pass to her children. Sheila also wants to contribute to a local conservation charitable organization this year and provide them with financial support for the next four years. What trust can accomplish all of Sheila's objectives?

Transfer the property to a non-grantor charitable lead trust to benefit the conservation organization. Correct. This is the correct answer because the trust will provide income to the charity for a number of years and the children will receive the property in trust after the income period ends. The value of the property will be excluded from the couple's estates.

An individual invests $100 to buy a share of an exchange-traded fund (ETF). One year later, the investor buys another share of the same ETF for $120. At the end of the second year, the investor sells both shares of ETF for $250. During the first year, the investor received $3.00 in dividends from the investment. In the second year, the investor received $6.00 in dividends from two shares of the stock. If the stock is sold at the end of the second year, calculate its dollar-weighted return.

Using a calculator, enter these values: • CF0 = -$100 • CF1 = -$117 ($120 - $3) • CF2 = $256 ($250 + $6) Then calculate the internal rate of return. IRR = 11.86% Therefore, the dollar-weighted return is 11.86%.

An individual puts $1,000 into an investment. This investment generates an average of 10% return every year. Using the compound interest returns method, how much will the investor have at the end of three years?

Value at the end of 3 years = $1000 × (1 + .10)3 = $1,331

An investor has $60,000 in mutual fund A that is invested primarily in stocks and $40,000 in mutual fund B that is invested primarily 40% in bonds. During the year, fund A returns 8% and fund B returns 4%. Calculate the weighted average return of this portfolio.

Weight of the investment in mutual fund A as a percentage of the investor's total investment in this two-asset portfolio = $60,000 / ($60,000 + $40,000) = 60% Weight of the investment in mutual fund B as a percentage of the investor's total investment in this two-asset portfolio = $40,000 / ($60,000 + $40,000) = 40% Weighted average R=(0.6×0.08)+(0.4×0.04)=6.4%

Haley is meeting with a CFP professional for the first time but is very unsure of what to expect. She knows some CFP professionals who only sell insurance and others who provide more holistic financial planning services. She wants to have a clear understanding of the financial planning process and the services she should expect to receive. What are the important factors for CFP professionals to consider in communicating their services?

When Haley asks the CFP professional about the financial planning process, if the professional is entering a financial planning engagement, he or she generally should describe the Seven-Step Financial Planning Process and the scope of services offered, including which subject areas of financial planning will be addressed. The scope of the engagement must be mutually defined by the professional and the client before the professional provides any financial planning services.

What impacts income payments in a variable annuity?

With a variable annuity, income payments remain constant if the investment performance (after charges and expenses) equals the assumed investment return (AIR) stated in the contract. If the investment performance exceeds the AIR, payments will increase. If the investment performance is less than the AIR, payments will decrease.

Arthur, 58, is a football coach at a large public university. He has been offered the opportunity to contribute to a 457(f) plan. Arthur has come to you to find out more about this type of plan. He specifically wants to make sure that he will have access to the money he puts into the plan later on. What should you advise Arthur?

You should tell Arthur that the funds he defers to the 457(f) have a substantial risk of forfeiture. This means that the university's creditors could access funds in the plan if the university were to default on its debts. Arthur can put as much as he wants into the plan. (There is no limit on the amount deferred.)

Joey, age 40, has worked at a manufacturing plant for 15 years and has come to you for assistance in developing a financial plan. He loves his job, but recently his extended family ran into money trouble. Joey has $100,000 in a 401(k) and $50,000 in an IRA. He removed $15,000 from his IRA to help pay for his sister's medical expenses 10 days ago. Joey is not sure of the consequences of this removal. What advice can you provide Joey regarding this withdrawal?

You should tell Joey that he will be subject to a 10% penalty, plus ordinary income taxes, on the withdrawal from his IRA. Since his sister is not a dependent, he cannot remove the funds for her medical expenses. Since Joey took the funds from an IRA, he can deposit the funds back into the IRA within 60 days and complete an indirect rollover. This would allow him to avoid the 10% penalty and ordinary tax on the distribution. Joey can then take a loan from his 401(k) that will allow him to pay for his sister's medical expenses while also avoiding the 10% penalty.

Arrange in order of most-profitable to least-profitable stock market directions for a covered call strategy.

flat, down, up Correct. Covered call strategies perform best in flat markets. The stock price remains stable and income from options are collected as the calls expire. Down markets are next best because, as the stock price falls, the call options expire and provide additional income. In up markets, the stock is called away while the stock is doing well.

Bonds with ______ convexity relative to other bonds will _____ in value at a faster pace when interest rates decline.

higher; increase Correct. Convexity is always a benefit to bondholders. Bonds with high convexity will increase faster when rates fall and decrease more slowly when rates rise.

Investment returns that are leptokurtic can be a concern because the central tendency has a __________ peak but the tails are __________, this means while it is more likely returns are on average around the center point there are high likelihood of extreme returns in either direction.

taller; larger Correct. Leptokurtic distributions have larger peaks. This means most of the returns center around the average but there is higher likelihood for extreme returns.

Sara, age 76, recently retired and met with a financial planner. She was interested in purchasing a long-term care policy. Under HIPAA, a chronically ill person is unable to perform ________ activities of daily living for a period of at least ________ days.

two; 90 CORRECT. This answer is correct. Under HIPAA, the policyholder must meet one of the two definitions for eligibility. (1) Chronically ill is defined as unable to perform, without substantial assistance, two of the six activities of daily living (ADLs) for at least 90 days: eating, bathing, dressing, transferring from bed to chair, using the toilet, and continence. (2) Substantial cognitive impairment, when substantial services are required to protect the individual due to substantial cognitive impairment.

Your client John has asked you the total cost of college for his son. His son is 12 years old and will begin school when he is 18. John believes college will grow at a rate of 7% , and that he will get a 10% return on his investments due to the aggressiveness of his portfolio. How much will John need to have for his son on the first day of college to cover five years of tuition that is currently $17,000 per year?

~$121,000 Correct. Per the following calculation, the total for five years of school would be: Step 1 Step 2 Future Cost of First Year of College Cost of 5 Years of College When Entering School PV (17,000) PMT 25,512.42 N 6 N 5 I/Y 7.0% I/Y* 2.80% PMT 0 FV 0 FV 25,512.42 PV Annuity Due 120,799.90 *(1.10/1.07 - 1)÷100 = 2.8% Remember, this is an annuity due, since the tuition will be required before attending school.

The duration of a 5-year bond with a current price of $932 is 4.53 years. The bond offers a coupon rate of 5% and has a yield to maturity of 6.64%. Assuming that the bond makes annual payments, what will be the price of the bond if the yield decreases by 0.5%?

ΔP/P=−4.53×(−0.005/1+0.0664)=2.124% Therefore, the new price will increase by 2.124%. The new price can be calculated as follows: $932×(1.02124)=$951.80

The actual return of a portfolio with a beta of 1.10 is 12%. The risk-free rate is 3% and the return of the market during this period has been 8%. Calculate the alpha for this portfolio.

α=0.12−(0.03+(1.10×(0.08−0.03))=0.035or 3.5%

If the correlation between a security and the market is 0.90, the standard deviation of the security is 20%, and standard deviation of the market is 16%, calculate the beta for the security.

β=(0.90×0.20)/0.16=1.125

Potential causes of estate cash outflow:

• Accountant, administrative, attorney, and other court fees • Cost of managing, maintaining, and protecting the property • Costs related to the distribution of bequests • Final expenses • Funeral expenses • Medical expenses • Property appraisal and valuation expenses • Settlement of the debts left by the decedent • Payment of taxes • Transition expenses for surviving family members

Ben holds the two stocks in his brokerage account. Calculate the 6-year arithmetic and geometric mean for both stocks. The 6-year returns for these stocks are shown. • Stock X: 5%, −25%, 33%, 27%, 14%, −4% • Stock Y: 43%, 9%, −16%, −4%, 4%, 24%

• Arithmetic Mean Stock X=.05−0.25+.33+.27+.14−.046X=.05−0.25+.33+.27+.14−.046 = 0.0833, or 8.33% • Geometric Mean Stock X = ((1 +. 05) × (1 − .25) × (1 + .33) × (1 + .27) × (1 + .14) × (1 − .04))1/6 − 1 = 0.0645 or 6.45% • Geometric Mean Stock Y = ((1.43) × (1.09) × (.84) × (.96) × (1.04) × (1.24)) 1/6 −1 = 0.0838 or 8.38%

Carol held 1,000 shares of the stock of ABC Corp. when she died on a Saturday. Using prices of ABC Corp. on the prior Friday and the next Monday, compute the amount that will be included in Carol's gross estate: • Prior Friday: $100 (high); ($90 low) • Next Monday: $105 (high); ($95 low)

• Average price of the stock for the prior Friday = $95 • Average price of the stock for the next Monday = $100 • Amount included in Caro's gross estate: 1000×($100+95)/2=$97,500

CFP Board Practice Standards are intended to:

• Establish a level of professionalism. • Elevate/Advance the profession. • Enhance the value of financial planning. • Establish guidelines. One way to remember this is to think about another four E's: • E = Establish professionalism • E = Elevate/advance the profession • E = Enhance value of financial planning • E = Establish guidelines The Standards are obligatory for all CFP® professionals; however, the Standards are not a basis for legal responsibility.

Factors to look for that increase the need for disability insurance coverage include:

• Excess body weight • Tobacco use • Participation in high-risk activities • Chronic conditions, including diabetes, high blood pressure, back pain, depression, excessive alcohol consumption, or substance abuse

Common conduct that may lead to SEC investigations include:

• Misrepresentation or omission of important information about securities; • Manipulation the market prices of securities; • Stealing customers' funds or securities; • Violating broker-dealers' responsibility to treat customers fairly; • Insider trading (violating a trust relationship by trading while in possession of material, nonpublic information about a security); and • Selling unregistered securities.

Mortality Rate vs. Morbidity Rate

• Mortality rate: The number of deaths among a group of people. The rate is most often expressed as deaths per 1,000. • Morbidity rate: The ratio of the occurrence of sickness to the number of healthy persons among a group of people over a given period of time.

The following activities will lead to someone (presumed) being barred from using CFP marks:

• Nonviolent felony • Other felonies that are not murder or rape • Two or more personal bankruptcies

Income-producing investments include:

• Preferred stocks, and high-dividend-yielding stocks • Laddered portfolio of TIPs • Income-generating assets, such as REITs • Annuities • Long-term bonds with periodic coupon payments

Not all offerings of securities must be registered with the SEC. Some exemptions from the registration requirement include:

• Private offerings to a limited number of persons or institutions • Offerings of limited size • Intrastate offerings • Securities of municipal, state, and federal governments

John bought a cabin at the lake and began making renovations to use it as a second home. The cabin cost him $100,000, including $10,000 for the land. While John was working on the cabin, a forest fire destroyed it. The fair market value (FMV) of the property before the fire was $120,000 including $15,000 for the land. After the fire, the FMV was $15,000, the value of the land. John collected $85,000 from his insurance company. What is John's tax-deductible loss?

$0 Correct! John's basis in the cabin was $100,000 and he was reimbursed $85,000, resulting in a $15,000 loss, however, he cannot deduct his loss because it is not resulting from a federally declared natural disaster.

Mary (age 61 in January 2019) made her first Roth IRA contribution in January 2015 for the prior tax year. On February 1, 2019, she withdraws $15,000 from the Roth IRA to pay for a family vacation. This is the first withdrawal from the Roth IRA that she has taken. As of February 1, the value of the account is $25,000 and $10,000 represents contributions. What is the tax treatment of the withdrawal?

$0 taxable income; no penalty Since the contribution was made in 2015 for the PRIOR year, the date of contribution is assumed to be the first day of the tax year for which the contribution was made - January 1, 2014. The 5 year time frame begins January 1 2014 and is satisfied by January 1, 2018. Therefore, the distribution made in February 2019 is a qualified distribution, as it meets both the age (over 59 ½ ) AND the 5 year holding period requirements, so NO tax or penalty.

Jeffrey and Martha buy real estate worth $300,000. Jeffrey contributed $150,000 and Martha paid the remaining $150,000 when purchasing the property. The property is now worth $350,000. Four years later, if Jeffrey passes away unexpectedly, how much will be included in Jeffrey's probate estate if the property was held as JTWROS?

$0, because JTWROS titled assets do not have to pass through probate.

Calculate the conversion value of the following bond. The conversion price is $35 and the current stock price is currently $36.90 (par = $1,000)

$1,054.29 Correct. The formula is CV = (Par value / CP) × Ps so CV = (1,000/35) × 36.90

Using the life insurance needs analysis approach, calculate the amount of life insurance that Janice should have on her life using the following information: Mortgage: $250,000 Final expenses: $25,000 Auto loan: $25,000 Income: $120,000 Readjustment fund requirement: 2 years of Janice's income Present value of estimated college expenses: $400,000 per child Number of children: 2 Group life insurance: 2× salary Husband's income: $100,000

$1,100,000 CORRECT. Adding the cash outlays and subtracting the group insurance is correct. Cash Outlays: Mortgage: $250,000 Final Expenses: $25,000 Auto Loan: $25,000 Readjustment Fund: $240,000 College Expenses: $800,000 Total Cash Outlays: $1,340,000 Group Insurance Proceeds: $240,000 Total Cash Outlays − Group Insurance Proceeds = $1,100,000

If Mark was to die today, he would like his $175,000 mortgage paid in full, $25,000 earmarked for funeral costs and provide his wife a 30-year annuity of $5,000 a month. At the end of the 30-year period, he would also like $500,000 to go to his son. Assuming a 6% rate of return, what amount of insurance should he purchase today?

$1,116,979 CORRECT. The current need is $175,000 for the mortgage plus $25,000 for the burial expenses plus the PV of the 30 year $5,000 a month annuity stream and $500,000 to his son in 30 years. The PV of this is $916,979: n = 30 × 12, or 360; i = 6 / 12 or 0.50; PMT = $5,000; FV = $500,000. Therefore, the life insurance need today is $1,116,979.

Rick is considering a semi-annual bond with a $1,000 par value that matures in 10 years. The bond has a 5% annual coupon rate and current interest rates are 3%. What is the value of this bond?

$1,171.69 Correct. Enter as follows on the HP12c: $1,000 FV; $25 PMT ((1000 × .05)/2); 1.5 I (3%/2); 20 N (10yr × 2) PV = $1,171.69

Jack earns $150,000 annually and would like to purchase life insurance to protect his income for his family. He feels that they will be conservative with any life insurance proceeds and only earn 4%. About 40% of his income goes to expenses and taxes, and he would like use a replacement ratio in the insurance calculation. He feels that inflation is about 2% and is wondering how much insurance is appropriate. Assuming she wants to leave 20 years of income, use the human life valuation approach to calculate the life insurance need.

$1,223,129 CORRECT. This is the proper answer for the human life valuation approach with a replacement ratio. PMT = $150,000 × 60% = $90,000 PVA = (PMT/i) × (1 − (1/(1 + i)n

Jeff is considering buying a bond that is trading at $1,525. The bond is a $1,000 par with a coupon of 7%. It has 10 years until maturity and similar bonds are now trading at 2%. What is the value of the bond based on the given information, and should Jeff buy it.

$1,451.14 and Jeff should not buy it. Correct. Enter as follows on the HP12c: $1,000 FV; $35 PMT ((1000 × .70)/2); 1 I (2%/2); 20 N (10yr × 2) PV = $1,451.14. The bond is trading above PV; do not buy.

Jarvis is a participant in a defined benefit plan. He anticipates his benefit, without a survivorship option, to be $2,800 per month. As a married individual, he must select a joint and survivor option. He wants to ensure that his spouse will receive a benefit should he die first. If he selects the joint and survivor $180,000 in 2019 option, his benefit during his lifetime will be $2,400. How much will his spouse receive per month if he elects the $180,000 in 2019 joint and survivor annuity?

$1,600 Correct. The benefit will be reduced by approximately 1/3 at Jarvis's death: $2,400 × 0.6666 = $1,600.

Mr. G retired this year and received a taxable pension of $10,000 and Social Security benefits of $5,000. He also collected $2,000 in unemployment compensation. He is single. Assuming he has no other income, what is his adjusted gross income (AGI) for the year?

$12,000 Correct! His AGI consists of his pension, $10,000, and his unemployment compensation, $2,000. Incorrect. In this scenario, none of the Social Security income is taxable because Mr. G has less than $25,000 of total income when half of his Social Security benefit is added to his other income.

In the current year Fred invested $25,000 for a 25% interest in a real estate rental partnership where he was a general partner and a material participant. Fred's adjusted gross income (AGI) was $125,000, and his allocated loss from the real estate activity was $30,000. Fred has no passive income this year. What is Fred's deductible loss on his federal tax return?

$12,500 Correct! As a material participant and general partner, Fred would qualify for the special rental real estate loss allowance of $25,000. However, his AGI is over $100,000, so Fred loses $0.50 of loss for each $1 over $100,000 AGI, reducing the potential $25,000 deduction to $12,500.

A couple can gift the following maximum to a 529 Plan for education without any gifting tax consequences?

$150,000 CORRECT. This is the correct answer because the couple can split the gift and increase the yearly gift to $30,000, or $15,000 per person. The max contribution for a 529 can be five years; therefore, it would total $150,000 = $15,000 × 2 × 5.

On August 16 of the current year, Patrick turns 71. He was a participant in his former employer's profit sharing plan. Assume the following: He does not claim the allowed grace period election and that his profit sharing plan had an account balance of $450,000 on December 31 of the prior year, and $500,000 on December 31 of the current year. According to the uniform lifetime table, the factor for age 70 is 27.4, 71, 26.5 and 72, 25.6. What is the amount of Patrick's first required minimum distribution (rounded)?

$16,981 Correct. Because Patrick turned 70½ in the current year, it is a trigger year that creates the required beginning to begin required minimum distributions (RMDs). To calculate his first RMD, we would take the prior year value of all of his retirement plans and divide it into his life expectancy factor (26.5 for a person who will be 71 in the RMD year). $450,000/26.5= $16,981

On August 16 of this year, Ginny turned 71. She is retired and has a traditional IRA. Assume the following: She does not claim the allowed grace period election and that her IRA had an account balance of $450,000 at the end of last year and $500,000 at the end of this year. According to the uniform life expectancy tables, the Life Expectancy factor for age 70 is 27.4, 71, 26.5 and 72, 25.6. What is the amount of Ginny's first required minimum distribution (RMD)?

$16,981 Correct. This question is testing to see if you know the distribution rules based on the uniform life expectancy tables. Ginny will take her first RMD by December 31 of this year. Her life expectancy factor as a 71 year old is 26.5. By dividing the fair market value (FMV) of the account the prior December 31 by the life expectancy factor, we can determine the required minimum distribution. Calculated as follows: $450,000/26.5 = $16,981. Notice the question states that she did not claim the grace period, which is allowed only in her first RMD year. She could have distributed by April 1 of next year, however, she would still be required to make her second distribution by December 31 of next year.

Susan heard about the ability to buy stock on margin. She doesn't currently have all the money to buy 100 shares of Internet Spectacular, Inc., which she believes will be a huge success. The current price of the stock is $60. She was told the initial margin would be 80% with a maintenance margin at 30%. Since the stock might be volatile, she is concerned that she will have a margin call at an inopportune time. At what price, would Susan receive a margin call on this stock?

$17.14 CORRECT. The calculation is: Margin Call = Loan / (1 - Maintenance Margin) Loan = $60 × (1 - 0.8) = $12.00 per share, therefore, Susan paid $48/share of her own money and financed $12.00. CORRECT. Price to receive a margin call = $12 / (1 - 0.3) = $17.14. At $17.14 Susan will receive a call to add funds to maintain her margin.

Phil is a professor. He earned a salary of $140,000 from the university. He also received $35,000 in dividends and interest during the year. In addition, he incurred a loss of $25,000 from investment in a passive activity. His at-risk amount in the activity at the beginning of the year was $15,000. What is Phil's adjusted gross income for the year?

$175,000 Correct! The passive losses are not at all deductible in the current year. The losses, however, will be "suspended" until there is passive income to be offset or until the investment is sold.

Calculate the price of EFG stock when the beta of EFG is 1.25, the market risk premium is 5%, and the risk-free rate is 2.5%. EFG recently paid a dividend of $1.25 and is expected to grow at 8% per year.

$180 Correct. First calculate r using CAPM. Since market risk premium is given, (5)1.25+2.5 = 8.75%. Then use the dividend discount model. 1.25(1.08)/.0875−.08) = $180

Frank Jones is currently in a graduate program that costs $8,000 per year. He has two children. His oldest son attends the University of Michigan at a cost of $35,000 per year and his younger son attends a local college that costs $2,800 per year. What is the maximum lifetime learning tax credit that can be taken for the family?

$2,000 CORRECT. The maximum LLC COULD be 20% of the qualified expenses, up to a maximum of $2,000 per return. Therefore, you could use $1,600 for Frank and the other $400 for one of the sons. However, you would likely not choose to do this, since the American Opportunity Tax Credit is more valuable and available to the sons (not Frank, as he is in graduate school and the AOTC is only for the first 4 years of undergraduate education).

Mark is 20 years old and a full-time student at State University. His parents claim him as a dependent on their tax return. During the year he has interest income of $1,000, dividend income of $2,000, and wages of $500. He has itemized deductions of $1,500. What is Mark's taxable income for the year?

$2,000 Correct! Add the interest, $1,000, the dividends, $2,000, and the wages, $500, and subtract the itemized deductions of $1,500. Mark's standard deduction is less than his itemized deductions. His standard deduction would be $500 wages (earned income) plus $350 ($850), or $1,100. Determining taxable income is a separate calculation from determining how that income will be taxed under the "kiddie tax" rules.

The capital retention approach is a simple way to estimate a client's life insurance need. If your client, Georgia, earns $80,000 per year, feels comfortable with a 4 percent assumed growth rate on the insurance death benefit proceeds, and her husband's life expectancy is 30 years, how much insurance should she buy?

$2,000,000 CORRECT. Dividing the income by the growth rate is the proper calculation.

You are asked to evaluate the insurance policies of a new client, named Jill. The homeowner's policy is for $200,000 with a $500 deductible. It was purchased approximately four years ago. Jill recently updated her personal auto policy (PAP), which covers her three-year-old car, to include the following split limits: $200,000 / $400,000 / $45,000. The PAP has both collision and comprehensive coverage with a deductible of $250. Jill also has an umbrella policy in the amount of $1,000,000. If Jill hit a motorcycle and was sued for $1,240,000, what would be the proper order of how this settlement will be paid, ignoring any deductibles?

$200,000 PAP; $1,000,000 umbrella policy; $40,000 Jill CORRECT. The ordering rule of this payout is: PAP of $200,000 is paid first and the $1,000,000 umbrella policy is paid next. Any amounts above the $1,200,000 of coverage will be Jill's responsibility. Note: The breakdown would be $200,000 (per person) / $400,000 (total payout of all injured) / $45,000 (property damage).

Robert is a widower who wants to reduce the value of his sizeable estate by gifting money to his grandson to pay for his college education. Sam is 14 years old and will be attending college in four years. Sam's estimated future college expenses including tuition and room and board are: $ 52,000 freshman year $ 56,400 sophomore year $ 60,800 junior year $ 65,200 senior year Robert estimates he can earn an after-tax rate of return of 4% during Sam's college years. How much will Robert need to acquire by the beginning of Sam's freshman year to pay for these expenses at the beginning of each new college year?

$220,406 Correct. This is the correct answer. Using the cash flow mode, enter the following amounts as cash flows at the start of years 1, 2, 3, and 4: 52,000 CFo, 56,400 CFj, 60,800 CFj, and 65,200 CFj. Then enter 4 i and solve for NPV.

Jessica comes to you to find out what she needs to save for retirement. After discussing her goals you find out she has saved $275,635 and is currently 40 years old. She wants to retire at 65 and figures she can live off of $10,000 a month in today's dollars. You both agree she will plan until age 95 (assuming no money left after that) and inflation will be 2.7% while her portfolio will grow by 7% per year. What amount of money will Jessica need at the beginning of her first year in retirement to fund her first year of retirement, and what amount must she save each year until retirement to fund her total retirement?

$233,584 and $41,398 CORRECT. Jessica needs $120,000 in 25 years at 2.7% inflation. This results in $233,584. She needs this amount plus inflation at the beginning of each of the next 30 years, which means she needs a sum of $4,114,358 in 25 years. At 7% she would need to save $41,398 per year.

A client, who is very charitably minded, comes to you with a question on how to minimize her tax liability. She has several public charities she likes to support, but is also looking at a private non-operating foundation (who does not distribute funds within 2-1/2 months of their year-end). Her main goal is to maximize her deduction and reduce her liability in the current year. She has a couple options. One option is to use a short-term capital gain stock that is currently valued at $25,000 with a built-in gain of $7,000. The other is a long-term stock valued at $30,0000 with a built-in gain of $12,000. If her AGI is $80,000, what is the maximum deduction she can take and for which charitable entity?

$24,000 to the public charity CORRECT. The temporary 60% ceiling applies only to cash contributions, so the typical 20%, 30%, and 50% deductibility ceilings still apply to stock donations. Public charities, as compared to private non-operating foundations, have better deductible limits. In this case, the short-term capital gain stock (ordinary income property) is still limited to its adjusted basis of $18,000. The long-term capital gain stock with a fair value of $30,000, is deductible to 30% of her AGI, $24,000. The remaining $6,000 can be carried forward to the following year.

A simple trust has taxable interest income of $9,000, dividends from a domestic corporation of $20,000, and tax-exempt income of $3,000. What is the trust's taxable income?

$28,700 Correct. The interest and dividends are added together and an exemption of $300 is subtracted. The trust will not pay the tax on this income. It is a simple trust, and the beneficiary will receive a distribution of all income and pay tax on that income.

A client believes they will be short approximately $20,000 in today's dollars to meet their retirement needs. In order to be comfortable, the money must be available at the beginning of each year. They anticipate living 20 years in retirement with an estimated inflation rate of 2.5%. If they believe they will realize an after-tax return of 6%, how much will they need at the time of retirement to meet their need?

$296,590 CORRECT. Set the financial calculator to "Begin" to recognize that the amount is to be accumulated at the beginning of the retirement period. Then, the calculation is as follows: N = 20 (Number of years during retirement, which is given) I = 3.4% [ (1.06 / 1.025) − 1 ] × 100 = 3.4% (The real growth in investments after inflation). FV = 0 (Must set future value to 0 as there will be no future value) PMT = 20,000 (annual requirement given in the question) PV = $296,589.81

On January 15 of last year, Paul, a single taxpayer, purchased stock in Fish Corporation (the stock qualifies as Section 1244 stock) for $10,000. He purchased the stock directly from the company, and it was part of the first $1,000,000 of stock sold. On January 20 of the current year, Paul sold the stock for $7,000. How should Paul treat the loss on his current-year tax return?

$3,000 ordinary loss Correct! This is Section 1244 stock, and the losses, up to $100,000, are ordinary, not capital.

Peter, age 36, works at a company that provides a 60% disability policy on his $100,000 salary. The total premium is $4,000 of which Peter pays $1,000 and the employer pays the remainder. The elimination period is 90 days. If Peter becomes disabled on August 31st and stays this way for the remainder of the year, what amount of the disability benefits received are taxable?

$3,750 CORRECT. If Peter becomes disabled on August 31, he will collect only one month of benefits (December) after the 3 month elimination period. The total disability benefits received is $100,000 × 60% × 1/12 months or $5,000. However, the taxable portion is based on the employer's contribution of the premium, which is 75% (calculated as: $3,000 employer paid premium / $4,000 total premium). Therefore, the taxable amount to Peter is the $5,000 received × 75% of employer paid premium, or $3,750.

Malcolm had medical expenses of $5,000 last year and took a deduction of $300 after reducing his expenses by 10% of his adjusted gross income. He was reimbursed $500 this year by his insurance company. What amount must be included on this year's tax return as income?

$300 Correct. This is the amount Malcolm was actually able to deduct on his prior year's tax return, and this is the recovered amount he must claim as taxable income.

Recently a friend of yours calls and updates you on his life. He thinks he may be moving back home after being terminated from his job due to downsizing. He has a good job offer and wants to sell his home. He lived in the home for 15 months with his family. They always file their taxes married filing joint. Home prices have increased significantly. He bought his home at $350,000 and it's now worth $875,000. They have not done an exclusion previously. He would like to know the tax implications if he sells the home now. What amount is taxable or nontaxable?

$312,500 will be nontaxable. CORRECT. The family lived in the home for 15 months of the required 24 months over the last five years. Therefore, they can eliminate $312,500 by taking the maximum exclusion of $500,000 × 15mos/24mos = $312,500. Note that even though $525,000 is the gain ($875,000−$350,000). The exclusion is limited to $500,000.

Harold bought an apartment building for $320,000. He put a new roof on the building for $6,000. Closing costs when he bought the building were $1,500. He claimed depreciation since buying the building of $7,000. What is his adjusted basis in the apartment building?

$320,500 Correct! To the initial cost of $320,000, add the new roof, $6,000, add closing costs, $1,500, and subtract depreciation of $7,000.

Matthew currently has $40,000 saved for his son Jonathan's education. In six years, Jonathan's first-year tuition will be $22,000. If it is anticipated that Jonathan will attend school for four years, how much extra will Matthew need to have saved at the start of college if his investments yield 5% and tuition rises at 4%?

$33,000 Correct. First, calculate the future value of the current savings. Next, calculate the cost of four years of tuition, given the increase in tuition and the investment rate of return. The difference between the two values is the additional amount that is necessary to fund school: Step 1 - Step 2 Current Savings - Tuition for College Career PV(40,000.00) - PMT22,000.00 N6 - N4 I/Y5.00% - I/Y*0.96% (*(1.05 ÷ 1.04-1) × 100= 0.96%) PMT0 - FV0 FV53,603.83 - PV Annuity Due 86,752.79 86,752.79Total Needed 53,603.83Total Savings 33,148.96Amount needed

Jack made gifts totaling $380,000 in 2019. What is the total taxable gift amount? -Jack gave his son $45,000 to buy a truck for his business. -Jack transferred $200,000 to an irrevocable trust and gave the trustee discretionary authority to distribute income to the two trust beneficiaries. -Jack transferred $115,000 to an irrevocable trust that gave his father income for life and the remainder interest to his sister. -The income interest was valued at $15,000 and the remainder interest was valued at $100,000. -Jack contributed $20,000 to a political party.

$330,000 Correct. This is the correct answer because the taxable gifts are: (1) $30,000 for the truck after subtracting an annual exclusion of $15,000, (2) $200,000 to the trust which gives the trustee discretionary powers to distribute trust income since this cannot be reduced by annual exclusions, and (3) $100,000 for the split-interest trust since an annual exclusion can be taken for the income interest. The contribution to a political party is not a taxable gift.

Lauren and Nick are saving for their daughter's college tuition. She is now 13 and is expected to begin college at 18. Lauren and Nick currently have $234,000 in a 529 plan. Tuition is currently $62,000 per year and is expected to increase 6.5% per year. If Lauren and Nick can earn 5.5% annually, what amount do they need in five years to pay for all four years of school and how much do they need to save per year between now and then?

$344,642 and $6,954 CORRECT. The future cost of college is $84,945 per year (PV = $62,000, PMT = 0, N = 5, I/Y = 6.5%, solve for FV = $84,945). This must be paid at the beginning of the year (annuity due). So, the four-year need, adjusted for inflation, is $344,642 (N = 4, PMT = 84,945 (previous calculation), FV = 0 (all funds will be used), I/Y = ((1.055/1.065 − 1) X 100) = -0.9390%, solve for PV). At a growth rate of 5.5% for five years, with a starting balance of $234,000, Lauren and Nick must save $6,954 a year (N = 5, FV = $344,642 (from previous calculation), I/Y = 5.5% (investment growth rate), PV = $234,000 (current amount saved) solve for PMT = $6,954).

John made taxable gifts of $85,000 this year and $65,000 last year. John has not made other taxable gifts but plans to make them in the future. How much of John's unified credit will be reduced by these two gifts? The gift tax on $85,000 = $19,600 The gift tax on $65,000 = $14,300 The gift tax on $150,000 = $38,800

$38,800 Correct. As additional gifts are given, the tax rate continues to increase as the sum of the gifts enter new, higher marginal rates. Therefore, each gift cannot be viewed independently of one another. The cumulative gift ($85,000 + $65,000 = $150,000) is the appropriate manner for calculating the total tax that would be owed. This is the amount that would be used to reduce the unified tax credit available. Note that these are the only gifts John has made. Once the highest marginal rate of 40% (in 2018) is reached, every additional gift would be taxed at that same rate.

Grace earns $200,000 annually and is the primary breadwinner in her family. She is interested in purchasing life insurance to protect the income for her family should she pass away. She believes her family can earn 5% on any life insurance proceeds and that the inflation rate is 2%. Assuming she wants to leave 15 years of income, use the capital retention approach to calculate the life insurance need.

$4,000,000 CORRECT. Dividing the income by the discount rate (5%) gives us the correct answer with this approach, where the original capital is retained or preserved.

An older couple is a bit concerned about their taxes in the current year. This is the first year they have received Social Security benefits. They have always filed together as married filing jointly. They have nontaxable interest of $3,000 and their social security benefits are $15,000. If their AGI was $30,000, what amount of their social security benefits must be included in their taxable income if they are between the first ($32,000) and second ($44,000) hurdle?

$4,250 CORRECT. The includable income when between the two hurdles is 50% of the lesser of: 1) 50% of social security benefits, or 2) 50% of (MAGI + 50% of Social Security benefits - Hurdle 1). 50% of Social Security benefits ($15,000) = $7,500 50% ((($30,000 + $3,000) + 50% ($15,000)) − $32,000) = $4,250 The lesser amount is $4,250.

Frank Jones is currently in a graduate program that costs $8,000 per year. He has two children. His oldest son attends the University of Michigan at a cost of $35,000 per year and his younger son attends a local college costing $2,800 per year. What is the maximum American opportunity tax credit that can be taken for the family?

$4,700 CORRECT. The American opportunity tax credit is only available to students in the first four years of college. Therefore, only the sons would apply. It would be 100% on the first $2,000 and 25% on the next $2,000. The oldest son would recognize the maximum $2,500 (100% of $2,000 + 25% of the next $2,000 or $500). The younger son would recognize $2,200 from $2,000 at 100% and 25% on the next $800.

Tom, age 35, expects to retire at 65. His family history tells him that he will probably live until 70. Based on his calculations, he believes he will need $250,000 in today's dollars to fund his retirement. How much will Tom need to save at the beginning of each year until retirement if he has no savings and believes he will obtain an 8% return on his investments with inflation at 3%?

$4,959 Step 1: Calculate the future value of $250,000 PV: -$250,000 I: 3% PMT: 0 N: 30 FV = $606,816 Step 2: Calculate the annual payments needed to reach the future value Put calculator in BEG mode PV: 0 I: 8% FV:$606,816 N: 30 PMT = -$4,959.84

Jan and David purchased a home 10 years ago for $175,000 in a community property state. Jan contributed $50,000 to the purchase and David contributed $125,000. The house is now worth $800,000 when Jan passes away. What is the amount included in Jan's estate, and what is David's basis after Jan's death?

$400,000 and $800,000 CORRECT. In a community property state, the home is assumed to be owned 50/50. The key to this question is that the surviving spouse gets a step-up in basis to FMV on date of death. This makes the new basis in the property $800,000.

Marvin died this year and his executor noted the following expenses of his estate: Unpaid property taxes of $24,500. Gift taxes paid two years ago, totaling $204,000. A bill for $5,000 for the cost of Marvin's gravesite headstone. An unpaid electric bill for $500. A check sent to the local animal hospital for $1,000. A mortgage balance of $640,000 on the condo Marvin owned with his cousin as a tenancy in common. Marvin's interest was 60 percent ownership in the condo. State death taxes of $22,000 that are due this year. Based on these expenses, what is the amount that can be taken as a deduction from Marvin's gross estate?

$414,000 Correct. This answer is correct because deductions from the gross estate include unpaid property taxes, the headstone, an electric bill, and mortgage debt of $384,000 (60 percent). Gift taxes were previously paid, and a gift to charity and state death taxes paid are deducted from the adjusted gross estate.

Janice has retired early at age 55 and has a deferred annuity that she withdrew $50,000 from. She had originally placed $80,000 in this non-qualified annuity, and the account value before the withdrawal was $100,000. Calculate the amount she will be able to keep after taxes, assuming a 30% tax bracket.

$42,000 Correct. She will have to pay tax on the growth that was withdrawn (30% of $20,000) plus an early withdrawal penalty on the growth only (10% of $20,000).

A sole proprietor had income of $75,000 prior to a couple potential deductions. As your client, he isn't sure he can deduct the following and wonders if you can help him. He placed $15,000 of equipment in service during the year. He would like to take a Section 179 deduction if possible. He also made a gift to each of his 10 clients for a total of $300, he didn't wrap any of the items. He also had $4,000 worth of meals and entertainment. Lastly he spent $2,000 on education to maintain his existing skills, while going to a couple courses for $1,000 which would qualify him for a new trade or business. What is his net income with the above additional information?

$44,600 CORRECT. Section is fully deductible based on the amount placed in service during the year and the current level of income. Gifts are limited to $25 per client. Meals and entertainment are limited to 50%. Education to maintain/improve an existing skill set is deductible, but education for a new trade or business is not a deductible business expense. (It may, however, be eligible for a "for AGI" deduction under section 222.) After subtracting deductions for section 179, business gifts, and meals and entertainment, the remaining business income is eligible for the qualified business income pass-through deduction at 20%. The QBI deduction is deducted from AGI and reduces taxable income, but does not affect business income or adjusted gross income. CorrectWrongWrong Beginning income$75,000$75,000$75,000 Section 179 deduction(15,000)(15,000)(15,000) Gifts limited to $25 per client(250)(300)(250) Meals and entertainment limited to 50%(2,000)(4,000)(2,000) Education to maintain/improve existing(2,000)(2,000)(2,000) Education to qualify for new trade or business*00(1,000) Net business income before Pass Through Deduction$55,750 QBI pass-through Business Income Deduction at 20%(11,150)0(15,000) Impact on income$44,600$53,700$54,750 *Also, the $1,000 spent on the courses that would qualify the taxpayer for a new trade or business or usually deductible for AGI under section 222. So while the amount would not impact business income, and therefore the QBI pass-through deduction, it would reduce the taxpayer's taxable income.

Based on their average annual return and the education inflation rate, Brooke and Luke have found that they will need $123,600 on the day their son, Jake, begins college. Jake just turned five and will begin college at age 18. Brooke and Luke both get paid at the end of each month and would like to know how much of their paychecks they should allocate to Jake's education savings account. Assume they can earn an average annual return of 8% and that education costs grow at 5%.

$453 • Ignore the education inflation rate. You will only use the rate of return. • This is an ordinary annuity problem. Brooke and Luke will be saving at the end of each month. • They want to save monthly, so the number of periods and the rate of return will need to reflect that.

Assume upon the death of the breadwinner that a family needs $5,000 a month for the next 10 years under the capital liquidation approach. What is the death benefit needed today at a 4% rate of return assuming the payment occurs at the beginning of each period?

$495,497 CORRECT. This is the correct answer. Because the payments occur at the beginning of each period, you need to compute an annuity due. n = 10 × 12 or 120; i = 4 / 12 or 0.3333; PMT = $5,000 g BEG; PV = ($495,497.04).

How much can an employee generally exclude from gross income of benefits received under a dependent care assistance program each year?

$5,000

In the current year, Sally had taxable income of $30,000, not considering capital gains and losses. In the current year, she incurred a $5,000 net short-term capital loss and a $5,000 net long-term capital loss. What is her long-term loss carryover to the following year?

$5,000 Correct! Since the $3,000 deductible loss comes first from short-term losses, the entire $5,000 long-term loss from the current year carries over to the next year.

After completing his taxes, Bob (a 40-year-old male) can't believe he forgot to take his deduction for alimony he paid. His taxable income as a single individual was $125,000 prior to alimony. He paid alimony in the amount of $20,000. If Bob itemized his deductions and the following categories increased his itemized deductions, what is the effect on his taxes for including his deduction for alimony? Medical expenses State income taxes Mortgage interest Miscellaneous itemized deductions

$5,160 CORRECT. Since the alimony deduction is for AGI, this means AGI will go down $20,000. This is the base for calculating medical expenses. Since medical is limited to the amount above 7.5%, the deduction increases $1,500. Reduction in Income $20,000.00 Additional Medical Deduction at 7.5% ($20,000 × .075) $1,500.00 Total reduction in Taxable Income $21,500.00 Marginal Tax Rate 24% Change in Taxes $5,160.00 Excluded: No impact on mortgage interest. No impact on miscellaneous itemized deductions as they are no longer allowed.

Dan, age 70, purchased a deferred annuity 12 years ago for $50,000. Today the balance is $105,000. Dan now wants to use the annuity to provide a stream of income that will last for his life expectancy of 15 years. The insurance company tells Dan that his payments will be $750 per month. How much of this payment will be taxable income to Dan in the current tax year (assuming the first monthly payment is received in January)?

$5,670 (Amount invested/total amount of payments) = Exclusion ratio. $50,000/$135,000 = .37 not taxable. Annual income × (1 − Exclusion ratio) = annual taxable amount. $750 × 12 × (1 − .37) = $5,670 taxable income. The original investment was $50,000, which grew to $105,000. The $55,000 gain must be taxed and is included in the annual income on a pro-rata basis.

Phyllis, age 57, is planning to retire from her teaching job at a public school at age 60. The normal retirement age for staff at Monticello Public Schools is 62. Phyllis has been contributing to both a 403(b) plan and a 457(b) plan for the last 25 years. She would like to know the maximum elective deferrals that she can contribute.

$50,000 Correct. Because Phyllis is over age 50, she is allowed to contribute $19,000 to her 403(b) and $19,000 to her 457(b). In addition, each plan allows a $6,000 catch-up for those attaining age 50 in the contribution year. The total contribution amount for Phyllis is $50,000.

Jane, age 45, has been contributing $5,000 each year for 10 years into her Roth IRA. Thanks to erudite investing, Jane's account is now worth $100,000. She has come up against an emergency and would like to take $60,000 out of her account. What is the outcome of such a move?

$50,000 will be returned with no taxable event. Correct. This question is testing whether you know the ordering rules for Roth IRA distributions. Based on the ordering rules, all contributions will be returned with no tax and no penalty at any time of distribution. Therefore, $50,000 is returned to Jane. The issue then becomes the growth of income. Each dollar above the contribution or basis amount is taxed and penalized in a nonqualified distribution.

Calculate the amount of LTC insurance needed given the following (rounded): Current daily cost of LTC: $200 per day LTC inflation rate: 5% Client's age: 55 Estimated age that the client will need care: 80 Total number of years of care: 4 Assets designated to pay for LTC care: $100,000 Growth rate of assets: 7%

$522,736 Correct. Find Annual Cost of LTC today $200 x 365 = $73,000 Inflate to cost in 25 years FV = ? I/Y = 5% N = 25 PV = −73,000 FV = Cost of 1 year of care @ age 80 = 247,203.91 Calculate total cost over 4 years FV = ? I/Y = 5% N = 4 PMT = −247,203.91 FV = Total Cost = 1,065.479.76 Dtermine Growth of Funds FV = ? I/Y = 7% N = 25 PV = −100,000 FV = $542,743.26 Subtract Total Cost from Designated Funds $1,065,479.76 −$542,743.26 = $522,736.50

John has a long-term disability policy through his group plan, which he pays for through pretax dollars. He receives an annual salary of $150,000, and his group plan pays a 50% benefit. He also purchased a private disability plan that pays an additional 15% of his salary. If John is in the 30% tax bracket and were to become disabled, calculate how much he would receive monthly on an after-tax basis.

$6,250 Correct. He would receive a 50% benefit from his group plan, which would be taxable, and 15% from his private plan, which would not be taxable.

The Jones family prides itself on education. Two of the children are attending college as undergraduates taking a full load, while mom and dad are both pursuing another master's degree. Both children receive a partial scholarship paying approximately 50% of all tuition and fees. Below is a listing of the tuition and fees paid out of pocket by each family member. The family doesn't make enough money to disqualify them from receiving any educational credits. What is the total balance of credits from either the American opportunity tax credit (AOTC) or lifetime learning credit (LLC) given the following: Tuition Fees Child #1 4,000 500 Child #2 2,500 1,000 Mom 7,000 1,000 Dad 3,000 500

$6,875 CORRECT. This is the total educational credit for the family. This takes into consideration that AOTC maxes out on a per student basis of $4,000 spent on college, and that LLC maxes out at $2,000 per family. Understanding that AOTC is taken only for the first four years of college is important, as it gives a larger credit (up to $2,500 versus $2,000) on a smaller amount ($4,000 qualified expenses versus $10,000).

Tom and Melba work for HGD Corporation. Tom earns $90,000 annually, whereas Melba earns $145,000 annually. Assuming that the Social Security part of FICA maxes out at $132,900, Tom will pay _________________ in FICA taxes and Melba will pay _______________ in FICA taxes.

$6,885; $10,342 Correct. Tom will pay 7.65% of his income toward FICA taxes ($6,885). Melba will pay 6.20% in Social Security taxes on $132,900 in income; she will also pay 1.45% in Medicare taxes on the full amount of earnings ($10,342).

Pat and Taylor are married. They are both covered under Pat's PPO health plan. The plan has a $500-per-person deductible requirement, with an 80/20 coinsurance provision. The plan's out-of-pocket maximum is $3,000 per person. How much must Pat and Taylor pay if they have the following claims this year? • $250 ear exam for Taylor • $2,000 vein surgery for Pat • $4,500 elective cosmetic surgery for Taylor • $3,200 follow-up surgery for Pat

$6.190

Colleen and Ryan are married and have executed wills that transfer all of their property interests to one another at death. The couple owns the following assets: -A primary residence worth $1.4 million titled as tenants by the entirety -Colleen's 401(k) worth $440,000, which names Ryan as beneficiary -Ryan's brokerage account worth $1.6 million that is titled TOD with Colleen -Ryan is the owner and beneficiary of a $200,000 life insurance policy on his brother Todd's life, which is valued at $60,000 -A $120,000 index mutual fund account owned by Ryan's revocable trust which will transfer to his son from a previous marriage at Ryan's death -A condo and fishing boat that Ryan owns with Todd as JTWROS worth $300,000 If Ryan were to die today, what is the value of his probate estate?

$60,000 Correct. This answer is correct because Ryan is the owner and beneficiary of the life insurance policy, but he is not the insured. Therefore the value of the policy will be included in Ryan's gross estate and his probate estate.

Joan sold a file cabinet used in her business for $250. She had purchased it two years ago for $400 and deducted depreciation of $220. What is the amount and character of Joan's gain or loss recognized on this sale?

$70 ordinary income Correct! Joan purchased the file cabinet for $400 and took depreciation deductions of $220, giving her an adjusted basis of $180. Her gain on the sale is $70. Since this is Section 1245 property, personal property used in business, she has to recapture her gain under Section 1245 as ordinary income up to the total gain. Her gain is less than total depreciation taken, so all the gain is taxed as ordinary income.

Carl's salary is $100,000 per year and after expenses and taxes his net take-home income is $60,000. He would like buy enough life insurance so that his wife could invest the money at 5 percent and have income for 20 years. Using the human life valuation approach, calculate the life insurance need using the replacement ratio (rounded).

$747,733 CORRECT. This is the correct number, although it is common to make it a rounded value when proposing the insurance. You may suggest Carl purchase a $750,000 policy.

Barry was in an accident with an underinsured motorist named Pam. Pam ran a red light and crashed into Barry's automobile. Pam's split limits are $75,000 / $250,000 / $5,000 and Barry's split limits are $100,000 / $35,000 / $10,000. What will each insurance company pay if Barry has $105,000 liability claim?

$75,000 from Pam's personal auto policy (PAP) and $25,000 from Barry's PAP CORRECT. Because an underinsured driver caused the accident, Barry will first collect $75,000 from Pam as this is the primary insurance. Then, he will collect any amount on his policy up to the limit of $100,000, which is the secondary insurance. Therefore, the first $75,000 of the $105,000 loss is covered under Pam's personal auto policy (PAP) Coverage C. Barry will receive the next $25,000 from his insurance and the total amount received will be $100,000, which he has coverage for.

On June 15, 2017, Eric purchased stock in ABC Corp. (not small business stock) for $8,000. On January 14, 2018, the stock became totally worthless. How should Eric treat the loss in the current year when he files his tax return?

$8,000 long-term capital loss Correct! The loss is long term because with worthless stock, the transaction is treated as a sale on the last day of the year, making it long term.

During the current year, per the divorce decree (finalized before January 1, 2019), John made the following payments to Lisa: The entire mortgage payment on the house, owned jointly $10,800 Tuition for their child's school $ 6,000 Child support $ 4,500 Life insurance premiums on policy owned by Lisa $ 3,000 What is the amount of John's alimony deduction?

$8,400 Correct. Total of half the mortgage payments and the life insurance premiums qualify as alimony for divorces finalized before January 1, 2019.

Which of the following is not considered a fiduciary under DOL and ERISA guidelines? 1. A trustee of a large national charitable foundation 2. A plan administrator who provides regulator advice to a 401(k) plan 3. An SEC-registered investment adviser who manages an endowment for a mid-size municipality

1 & 3 The only individuals or firms that fall under DOL and ERISA rules are those who exercise discretionary control or authority over the management of a qualified retirement plan or provide advice regarding plan assets, have discretionary authority or responsibility for the administration of a plan, or provide investment advice to a plan for compensation, or have any authority or responsibility to do so. While trustees and registered investment advisers may also be fiduciaries, they are not considered fiduciaries under DOL and/or ERISA rules.

Emily's dream is to become a stock broker. She wants to market and sell the widest possible range of investments. Which FINRA licenses does Emily need to hold? 1. Series 7 2. Series 63 3. Series 65 4. Series 66

1 and 2 The Series 7 is the general securities license that will allow Emily to sell a wide range of products, including stocks. The Series 63 is intended to test an applicant's knowledge to become a securities agent which is specific knowledge to become a stock broker. Remember that Emily will need to pass the Securities Industry Essentials (SIE) prior to sitting for the Series 7 and 63 examinations.

Ben bought his house five years ago for $425,000. He made a down payment of $75,000 and financed the rest over 30 years at 5.25%. Since then rates have fallen by 1% on 30-year mortgages but are expected to increase in the near future. In addition, home prices in Ben's neighborhood are up 20%. Which of the following are true? 1. Ben is currently paying $1,932 per month. 2. Ben's current mortgage balance is $322,523. 3. Assuming no cost and 20% down, Ben can cash out $85,477. 4. Ben should consider refinancing with an adjustable rate mortgage. 5. Ben's new payment, if he refinanced his current balance to a new 30-year mortgage, would be $1,586.66.

1, 2, 3, 5 Ben borrowed $350,000 ($425,000 PP − $75,000 DP, which is the PV) for 30 years (N=360 =30 years X 12 months per year) at 5.25% (I/Y= 0.4375% = 5.25% / 12 months) which equals a payment (PMT) of $1,932. After 60-months (5 years X 12 months per year), you would reduce N by 60 (to 300), and re-solve for PV of the mortgage. Which will give you the principal balance of $322,523. Since his home has appreciated to $510,000 ($425,000 × (1 + 20%)) and he would need 20% equity ($510,000 X 20% = $102,000), Ben can now borrow $408,000 ($510,000 − $102,000 = $408,000). If he pays off his loan of $322,523, he is left with $85,477 ($408,000 − $322,523). If interest rates are expected to increase in the near future, Ben should refinance to a fixed rate mortgage at 4.25%. It does NOT make sense to refinance with an adjustable rate mortgage only to see your future rate increase. Ben's new payment would be $1,586.61 (rates have declined by 1%), with PV = $322,523 (new principal balance), N = 360, I/Y = 0.3542% (5.25% − 1% = 4.25% / 12), FV = $0; solve for PMT.

Longevity risk can be mitigated in what three ways:

1. Addition of risky assets within retirement portfolios 2. Converting all or a portion of the retirement portfolio to annuities 3. Using a layered approach to asset allocation based on how soon part of the portfolio will be required for withdrawal by retirees

Which of the following individuals must disclose their behavior to the CFP Board at this time? 1. Heather, who had her securities license suspended for improper trades in a client's account. 2. Luke, who received a misdemeanor ticket for reckless driving. 3. Terrance, who was accused by a client of excess trading in a managed account.

1. Heather, who had her securities license suspended for improper trades in a client's account. This answer is true, and requires Heather to disclose that her license has been suspended due to the improper trades. She will need to respond to inquiries from the Disciplinary and Ethics Commission.

Lindsey and Pat were divorced in 2015. Both are single and have not remarried. Lindsey pays monthly alimony to Pat in the amount of $8,000 per month. Shannon and Taylor were divorced in 2019. Both are single and have not remarried. Shannon pays alimony to Taylor in the amount of $12,000 per month. Both Lindsey and Shannon also pay $4,500 per month in child support. Which of the following statements is true in relation to these situations? 1. Lindsey may deduct $96,000 when filing taxes. 2. Shannon may deduct $144,000 when filing taxes. 3. Pat and Taylor must report all alimony received as taxable income. 4. Regardless of the ability to deduct alimony payments from current year taxes, all child support payments are deductible for Lindsey and Shannon.

1. Lindsey may deduct $96,000 when filing taxes. Correct. According to the IRS, amounts paid to a spouse or a former spouse under a divorce or separation instrument (including a divorce decree, a separate maintenance decree, or a written separation agreement) are considered alimony for federal tax purposes. Alimony is deductible by the payer spouse, and the recipient spouse must include it in income. Beginning in 2019, a taxpayer may no longer deduct alimony or separate maintenance payments made under a divorce or separation agreement. Alimony and separate maintenance payments receive under such an agreement are not included in gross income. Child support is never deductible or taxable.

Periodic benefit statements with information to participants and beneficiaries about their account balances and vested benefits must be provided:

1. Quarterly for individual account plans that permit participants to direct their investments 2. Annually for individual account plans that do not permit participants to direct their investments 3. Every three years for defined benefit plans

Difference between a rabbi trust and secular trust:

1. Rabbi trusts derived their name from a trust used to fund a nonqualified retirement benefit for a rabbi. With a rabbi trust, the deferred compensation contributions are placed into a trust with conditions that money can be used only for the beneficiary's retirement. To avoid current taxation on plan assets, the trust assets remain subject to the claims of creditors but no general expenses or obligations of the business. 2. A secular trust provides the same protection provided by a rabbi trust (protection against the business failing to fulfill its future promise by holding assets in a trust) plus protection against the firm's creditors. Because of this second condition (lack of forfeiture), contributions to a secular trust are currently subject to income tax to the key employee. o Rabbis are trusting, so they believe benefits will be paid and do not have to pay taxes. o Those who are not religious are less trusting that benefits will be paid and must pay taxes as a result.

Which of the following income sources should be included when deciding how much a client needs to maintain as a cash reserve? 1. Social Security benefits 2. Benefits from a personal disability income insurance policy 3. Income from residential rental property 4. Tax refund

1. Social Security benefits Correct! Social Security benefits are guaranteed. If a client is already retired and/or eligible to collect benefits, it would be a stable source of income.

Marco and Oliva are general partners of a family limited partnership. They transferred $500,000 of appreciating investment property to the FLP and will gift limited partnership interests to their two children. Which statement is correct? 1. The parents can reduce gift taxes on transfers of the limited partnership shares by using two discounts, a lack of marketability discount and a minority discount. 2. General partners can determine the value of the discounted gifts of limited partnership interests. 3. A minority discount is applied to limited partnership interests that do not offer a readily available market for trading. 4. When general partners transfer more than 50% of limited partnership interests to family members they no longer have complete control over FLP assets.

1. The parents can reduce gift taxes on transfers of the limited partnership shares by using two discounts, a lack of marketability discount and a minority discount. Correct. This is the correct answer because both discounts leverage the general partner's annual exclusion when FLP interests are gifted to limited partners.

Five years ago, Carrie created an irrevocable life insurance trust to hold a $1 million cash value life insurance policy. She transferred ownership of the policy to the trust and remained the insured. A Crummey notice was also issued. The trust is the insurance beneficiary. Carrie will transfer payments to the trust each year so that the ILIT trustee can pay the life insurance premiums. What is the correct tax consequence of this arrangement? 1. Transfers to the trust to pay the annual premiums are taxable to the extent they exceed the annual gift tax exclusion amount. 2. Carrie is responsible for paying income taxes on any dividends paid by the life insurance company. 3. The cash value of the policy will be taxed as a capital gain asset at Carrie's death. 4. The face value of the life insurance policy will be included in Carrie's gross estate because she is the insured.

1. Transfers to the trust to pay the annual premiums are taxable to the extent they exceed the annual gift tax exclusion amount. Correct. This is the correct answer because transfers made to irrevocable trusts are subject to gift taxes. Beneficiaries with Crummey powers have a present interest in trust so Carrie may reduce taxable gifts transferred to the trust by annual exclusions for each Crummey beneficiary.

Aaron made cash gifts to his two sons from a previous marriage for the past three years. His wife Lynette consented to split the gifts. After reducing the taxable gifts by gift-splitting and annual exclusions, Aaron and Lynette each made total taxable gifts of $22,000 for the past three years.

1. What is the gift tax for the current tax year? Total taxable gifts for each spouse are $66,000. The tax on $66,000 = $14,560 Tax on previous taxable gifts ($44,000) = $9,160 Current-year gift tax: Subtract previous taxable gifts, $9,160, from total taxable gifts, $14,560 = $5,400. Tip: Since taxable gifts were made in multiple years, you must add all taxable gifts together. Had you looked up the tax on $22,000 for the current year's taxable gifts, the tax is only $4,240. By adding in previous taxable gifts, the current gift tax is higher at $5,400. That is because gift taxes are cumulative and progressive. Note: Aaron and Lynette will not have to pay a gift tax because their unified credits are available to offset this tax. 2. How much of Aaron and Lynette's unified credit remains after making the gifts this year? The unified credit in 2019 is $4,505,800. The tax on total taxable gifts = $14,560. Therefore, each spouse has $4,505,800 - $14,560 = $4,491,240 of their unified credits remaining to offset future taxable gifts or an estate tax. 3. If Aaron or Lynette were to die after making gifts this year, how much would be added to their estate tax return as adjusted taxable gifts? Total taxable gifts of $66,000 will be added to each spouse's estate tax return as adjusted taxable gifts.

Zoe is considering investing in a private equity fund. The minimum investment is $50,000. If she invests that amount it is expected she would need to add another $10,000 one year later. It is expected that Zoe will get $5,000 for the following four years on the anniversary date. At the end of year six, no dividend will be paid but the fund plans to liquidate and give Zoe $80,000. What is the IRR for this investment?

10.17% Correct. It is best to draw a timeline for these questions. If you do, the following becomes clear: CF0 is −50K, CF1 −10K, CF2 +5K, CF3 +5K, CF4 +5K, CF5 +5K, CF6 +80K F IRR = 10.17%. Also be careful on the positive and negative cash flows.

Arthur is an attorney who owns and participates in a separate small business (not real estate) during the current year. He has one employee who works part-time in the business. Which of the following statements is correct? 1. If Arthur participates for 500 hours and the employee participates for 520 hours during the year, Arthur qualifies as a material participant. 2. If Arthur participates for 600 hours and the employee participates for 1,000 hours during the year, Arthur qualifies as a material participant. 3. If Arthur participates for 120 hours and the employee participates for 125 hours during the year, Arthur qualifies as a material participant. 4. If Arthur participates for 95 hours and the employee participates for 5 hours during the year, Arthur probably does not qualify as a material participant.

2. If Arthur participates for 600 hours and the employee participates for 1,000 hours during the year, Arthur qualifies as a material participant. Correct! If Arthur participates more than 500 hours he is a material participant.

Which of the following statements is false? 1. The beneficiary of an estate of trust may be taxed on money required to be distributed in a year, whether or not a distribution is actually made. 2. Money distributed to a beneficiary from an estate is taxed twice, on the estate income tax return, Form 1041, and on the beneficiary's 1040 tax return. 3. Tax-exempt interest distributed to a beneficiary is not taxable to the beneficiary. 4. Losses of estates and trusts are generally not deductible by the beneficiaries.

2. Money distributed to a beneficiary from an estate is taxed twice, on the estate income tax return, Form 1041, and on the beneficiary's 1040 tax return. Correct. This statement is false. The estate's 1041 tax return takes an income distribution deduction for income distributed to the beneficiary(ies) and issues a K-1 form to the beneficiary(ies) to report the beneficiary share of income.

Matt gave his son Jeffrey gifts of $200,000 in 2013, $400,000 in 2014, and $200,000 in 2018. Calculate Matt's gift tax due for 2013, 2014, and 2018. The gift tax exclusion was $14,000 in 2013, 2014, and $15,000 for 2018.

2013 Gift Tax Calculation Gift amount in 2013: $200,000 (Less annual exclusion): ($14,000) Taxable gifts for 2013 $186,000 Add taxable gifts from prior years $0 Total taxable gift for 2013 $186,000 Tax on total taxable gift $50,320 ($38,800 + 0.32 × ($186,000 − $150,000)) Less tax on prior gifts $0 Balance $50,320 Applicable credit 2013 $2,045,800 Less applicable credit for prior taxes $0 Balance $2,045,800 Applicable credit $50,320 Total gift tax $0 2014 Gift Tax Calculation Gift amount in 2014: $400,000 (Less annual exclusion): ($14,000) Taxable gifts for 2014 $386,000 Add taxable gifts from prior years $186,000 (from 2013) Total taxable gift for 2014 $572,000 Tax on total taxable gift $182,440 ($155,800 + 0.37 × ($572,000 − $500,000)) Less tax on prior gifts $50,320 Balance $132,120 Applicable credit 2014 $2,081,800 Less applicable credit for prior taxes $50,320 Balance $2,031,480 Applicable credit $132,120 Total gift tax $0 2018 Gift Tax Calculation Gift amount in 2018 $200,000 Less annual exclusion $15,000 Taxable gift for 2018 $185,000 Add taxable gifts from prior years $958,000 (from 2013, 2014) Total taxable gift for 2018 $1,143,000 Tax on total taxable gift $403,000.00 ($345,800 + 0.4 × ($1,143,000 − $1,000,000)) Less tax on prior gifts $329,420.00 ($248300 + 0.39 × ($958,000 − $750,000)) Balance $73,580.00 Applicable credit 2018 $4,417,800 Less applicable credit for prior taxes $329,420 Balance $4,088,380 Applicable credit $73,580 Total gift tax $0 Total gift $66,000 Tax on this gift $14,560

Which statement does not accurately reflect the purpose of each intra-family transfer? 1. A sale lease-back removes business property from an owner's estate and provides income to family members in the form of lease payments. 2. A SCIN is used to prevent inclusion of outstanding installment note payments in a property owner's gross estate when the owner has a short life expectancy. 3. A GRIT transfers property in trust to family members at a reduced gift tax value. 4. A family LLC is structured to give members limited liability while avoiding income tax rules for corporations.

3. A GRIT transfers property in trust to family members at a reduced gift tax value. Correct. This is the correct answer because a GRIT is an unqualified interest therefore the grantor has a retained interest of zero when remainder beneficiaries are family members. The gift tax value is based on the value of the assets transferred to the trust.

Selma died three months ago and her executor must determine which of the following assets will be included in her gross estate. 1. A life estate in a vacation home that Selma had received from her father 20 years ago. 2. A whole life insurance policy that Selma owned on her cousin's life that she transferred to her cousin six years before she died. 3. An irrevocable trust Selma created four years ago for her two children in which she retained the right as trustee to distribute trust income and corpus to them at her discretion. 4. An irrevocable trust that Selma, as beneficiary, was given a power of appointment to withdraw funds to pay for her children's education expenses.

3. An irrevocable trust Selma created four years ago for her two children in which she retained the right as trustee to distribute trust income and corpus to them at her discretion. CORRECT. This is the correct answer because Selma, as trustee, retained control over trust distributions therefore the value of the trust is included in her gross estate.

A couple with two young children wants to begin an investment program to provide for their retirement and for their children's education. Which of the following is the least tax-efficient manner of helping them accomplish their goal? 1. Investing in individual Roth IRAs. 2. Investing in the wife's 403(b) plan or husband's 401(k) plan. 3. Investing in a growth and income mutual fund. 4. Investing in education savings accounts for the children.

3. Investing in a growth and income mutual fund. Correct! This is the least tax efficient way to save since contributions are not tax deductible and earnings are taxed each year.

Which of the following factors may not be used to determine whether an S corporation may be subject to the tax on excess net passive income (sting tax)? 1. The S corporation has C corporation earnings and profits at the end of the tax year. 2. Passive investment income is more than 25% of its gross receipts. 3. More than 50% of the loans payable are not at risk. 4. The S corporation has been an S corporation from the date of its incorporation.

3. More than 50% of the loans payable are not at risk. Correct! This statement has nothing to do with the sting tax.

Neville created and funded a revocable living trust two years ago. Neville also serves as the trustee. His niece, Nelda, is the beneficiary of the trust. Which of the following statements is correct? 1. Nelda is responsible for paying all income taxes from earnings on assets held in the trust. 2. Nelda, as trust beneficiary, must pay income taxes on her pro rata share of income distributed from the trust. 3. Neville is responsible for paying all income taxes from earnings on assets held in trust. 4. Neville and Nelda must pay an equal share of taxes on trust earnings.

3. Neville is responsible for paying all income taxes from earnings on assets held in trust. Correct. This answer is the correct answer because Neville as grantor is responsible for paying all income taxes from earnings on assets held in trust.

Mr. Jones has often thought of himself as a free spirit. He has been contemplating taking time to travel the world in his yacht. He has figured out a plan to make it happen, and would like to know how he can meet the $100,000 requirement to fund his dream. If Mr. Jones is planning a yearlong trip around the world with the family to take place in three and a half years (when he retires), which of the investment choices would be most appropriate to meet that goal? 1. S&P 500 Index fund 2. High-tech mutual fund 3. Zero-coupon municipal bond 4. International stocks 5. Leveraged REIT fund

3. Zero-coupon municipal bond CORRECT. Based on the relatively short timeline for the trip, the zero-coupon bond would ensure the money is available for the goal.

An investment manager states that they returned 12.5 percent last year. If the investment beta is 1.2, the market return was 8 percent, and the risk-free rate was at 2.5 percent, what is the manager's alpha?

3.4 Correct. Alpha = Rp − (Rf + b(Rm − Rf)) 0.125 − (0.025 + 1.2(0.08 − 0.025)) = 0.34

Sally died last month and her executor Fred must determine the liquidity needs of her estate. Sally made lifetime gifts that exceeded her exemption amount, therefore Fred must ascertain whether any unpaid gift taxes must be paid from a funding source that is identified in Sally's will. Which of the following gifts is subject to gift tax and must be reported on Sally's final gift tax return? 1. A net gift of $300,000 that Sally made to her daughter Cloe this year. 2. A reverse gift whereby Sally's sister Ruth gifted Sally low-basis stock she owned 18 months ago when she learned Sally was seriously ill. The stock was transferred to Ruth at Sally's death by her will. 3. A transfer of $1,500,000 to a skip-person irrevocable trust that Sally made two years ago. At the time the trust was established, Sally allocated $1,500,000 of her GST exemption to the trust and had $2 million of her unified credit remaining after the gift was made. 4. A bargain sale Sally made to her daughter Cloe this year in which she transferred beachfront property worth $1 million to Cloe for a sale price of $400,000.

4. A bargain sale Sally made to her daughter Cloe this year in which she transferred beachfront property worth $1 million to Cloe for a sale price of $400,000. Correct. This answer is correct because Sally owes a gift tax on this transfer. The difference between the sale price and the fair market value of the property ($600,000) is the value of the taxable gift. Sally's executor Fred will report this gift on Sally's final gift tax return and because her unified credit has been depleted, Fred will pay a gift tax from a funding source identified in Sally's will.

Arthur recently set up a simple grantor revocable trust, with his favorite niece, Jenna, as the beneficiary. He put various investments in the trust, including stock from the company he worked at for 30 years. The total contribution was $1,300,000. He would like to continue to fund the trust with other assets. Which one of the following is a true statement in regards to Arthur's trust? 1. Gifts made to the trust will be taxable. 2. Income is taxable at the trust's taxable rate. 3. The trust is permitted to accumulate income. 4. When Arthur dies, the assets will be included in his estate.

4. When Arthur dies, the assets will be included in his estate. CORRECT. This is the general rule. When a trust is set up, and he can control the assets, the disposition of the trust, changes to the trust, etc. the assets will be included in his estate. A complex trust can accumulate income; however, a simple trust cannot.

Which statement regarding a grantor retained trust is not correct? 1. The gift tax value for the remainder interest is less than the FMV of the assets transferred to the trust because the beneficiaries do not have current use of the trust assets. 2. The grantor, not the trust, pays income tax on the income distributed during the income term. 3. Once a GRAT has been funded, no additional contributions are allowed to the trust. 4. When a grantor survives the income term, a step-up in basis is allowed for the trust property at the grantor's death.

4. When a grantor survives the income term, a step-up in basis is allowed for the trust property at the grantor's death. Correct. This is the correct answer because no step-up in basis is allowed for property transferred to a trust.

What is a Crummey provision?

A Crummey provision: 1. Creates a present interest in a trust which qualifies contributions to a trust for the annual exclusion; and 2. Allows the trust beneficiary to withdraw some or all of any contribution to a trust for a limited period of time; this creates the present interest. Remember, trust income stream can create present interest.

Eric owns a landscaping business. He has two longtime project managers who oversee two crews each. Crew members are primarily high school kids and college students looking for summer work. Aside from the project managers, Eric rarely keeps employees longer than two years. Eric would like to start a retirement plan for his company and would like to benefit primarily himself and his project managers. Eric is looking for the easiest way to do this. What plan do you suggest for Eric?

A SEP IRA would be very effective for Eric. A SEP would allow Eric to contribute to the plan, and he would only need to cover himself and his project managers and those over 21 who have three years (out of the last five) of employment with the company. Given the characteristics of Eric's workforce, most of his laborers would not be eligible for participation. The SEP IRA would be the simplest to establish.

Ben would like to start a retirement plan for his employees. He doesn't want the company to bear the investment risk. Given his advanced age, he would like employer contributions to be in his favor. In addition, he doesn't want an employee to contribute to the plan. Ben believes it is important to fund the plan yearly, and would like to implement a plan with mandatory funding which can be supported by the company's strong consistent cash flow. He believes in qualified plans for various reasons, so it must be a qualified plan. With these criteria, plan would fit the best?

A Target Benefit Pension Plan CORRECT. A target benefit pension plan is a qualified plan that favors older entrants. The investment risk is born by the employee, and the employer is the contributor to the plan.

Your client Bill wants to hedge the risk of XYZ stock, which he currently owns. He is thinking about buying a put option but feels it is too expensive. What is a strategy that you might suggest to Bill?

A collar Correct. By using a collar Bill will buy a put and sell a call. The premium received from the call will offset some or all of the put cost.

Which statement regarding a QTIP trust is correct? A donor may make an election on a gift tax return to qualify the property transferred to a trust for a gift tax marital deduction. At the surviving spouse's death, the income interest in a QTIP trust can be appointed to other beneficiaries through the spouse's will. A QTIP election gives a spouse a general power of appointment over the assets in trust. QTIP property is included in a decedent spouse's estate therefore it is not included in the other spouse's estate at death.

A donor may make an election on a gift tax return to qualify the property transferred to a trust for a gift tax marital deduction. Correct. This is the correct answer because a donor may make an election for a lifetime terminable interest gift to a spouse on a gift tax return. An executor may make an election on a decedent's estate tax return for terminable interest property bequeathed to a spouse.

Elements required in a financial planning written agreement

A good way to remember the elements required in a written agreement is to think in terms of the four Cs and PTSD. The four Cs are: 1. Compensation 2. Conflicts of interest 3. Competency 4. Contact information PTSD stands for: 1. Parties 2. Termination 3. Services 4. Date

Lafawna and her husband, Ted, believe that they need to purchase some type of LTC insurance. They are concerned that Ted, in particular, may need LTC services in the future based on his family history. Unfortunately, their current family budget is very tight. Lafawna is concerned that they must make a choice between being adequately insured in the case of unexpected death and LTC needs. What type of policy could be recommended to address Lafawna's concerns?

A hybrid insurance product can be recommended to solve Lafawna's concern.

Vincent sold Jarome, Vincent's nephew, some stock that Vincent purchased five years ago and believes will appreciate in value in the coming years. Vincent's basis in the stock is $10,000. However, at the time of sale to Jarome, the FMV of the stock was only $5,000. If Jarome sells the stock for $9,000 six months later, what is the type and amount of his gain?

A nephew is not a related party. Therefore, when Vincent sold Jarome the stock, Vincent realized and recognized a long-term capital loss of $5,000. Jarome's basis was $5,000. When Jarome sold the stock, he realized and recognized a short-term capital gain of $4,000. If Jarome was Vincent's brother, Jarome would have been a related party. In the event that Vincent and Jarome were brothers, Vincent could not recognize his long-term loss of $5,000. Jarome would have a dual basis in the asset, and his holding period would start on the date of purchase. Thus, when Jarome sells the stock, he has a realized short-term capital gain of $4,000. However, because of the dual basis rules, he does not recognize any of his gain.

What is a private annuity?

A private annuity is a technique where a family member agrees to pay the owner of an asset (business or other asset) a predetermined amount over a period of time in return for eventual ownership of the asset. The value of the annuity should be based on the current asset owner's age, health status, and market interest rates. The entity paying the annuity may not be an insurance company or a firm engaged in making or financing annuity payments. It is important to note that a private annuity must be an unsecured promise. Additionally, the annuity must defer the capital gain over the life of the asset owner. This technique is appropriate when the asset owner's life expectancy is much less than the IRS table used to calculate the annuity value.

Wheeltown Corporation is in the process of establishing a retirement plan. The Board of Directors would like to know what are the advantages associated with creating a qualified plan, and if they do implement a qualified retirement plan, who may be included as a participant.

A qualified retirement plan is one that meets IRS Code provisions. The primary advantages associated with establishing a qualified plan are (1) employee contributions can be made on a pretax basis, (2) employer contributions will be tax deductible, and (3) earnings in the plan and/or participants' accounts can grow on a tax-deferred basis. It is possible to establish a nonqualified plan. Such a plan is not generally reviewed or approved by the IRS; however, if a nonqualified plan is open to general employee participation, the plan will likely be subject to Department of Labor and ERISA rules.

Marcos has a dilemma. He has a very high tolerance for risk, but he also knows that he needs to have a risk management plan in place to take care of his family should he unexpectedly die. He would like to combine the features of a cash value life insurance product with a subaccount that will allow him to invest his accumulated cash value aggressively. What type of life insurance policy will provide Marcos the greatest flexibility in terms of adjusting the face value of the policy, potentially adjusting premiums, and investing aggressively?

A variable universal life (VUL) policy would be perfectly suited to Marco's needs. Unlike a variable policy, a VUL allows for adjustable premiums, and unlike a universal policy, Marco can use subaccounts in the VUL to invest aggressively. He should know, however, that neither the face value nor the rate of return in a VUL is guaranteed.

Nedra, a CFP® professional, received a call from a client who is approaching retirement age. The client asked Nedra whether she should invest in a real estate investment trust to generate retirement income. In order to make the investment, the client will need to liquidate other investment assets, all of which Nedra manages under an assets under management agreement. The real estate investment trust assets will be managed by another firm. Nedra conducted an analysis and concluded that investing in the real estate investment trusts is a bad idea because she believes the current asset mix will generate higher returns. Additionally, Nedra knows that even if she earns a commission on the sale of assets used to purchase the real estate investment trust, the amount earned will be less than her ongoing management fee. What should Nedra do?

According to CFP Board, this is a classic case that involves the duty to disclose conflicts of interest. A CFP® professional must make full disclosure of all material conflicts of interest that could impact the client-planner relationship. Information is material when a reasonable person would consider the information important when making a decision. A CFP® professional must make full disclosure and obtain the consent of the client before providing any financial advice. In this vignette, Nelda has a material conflict of interest because she can earn more compensation if her client does not invest in the real estate investment trust. Keep in mind that Nelda may disclose her conflict of interest either in writing or orally. However, as a best practice, CFP Board recommends that a CFP® professional disclose any conflicts of interest in writing.

Brandon purchased a bond issued by Acme Inc. on September 30, 2017, for $910. The bond makes coupon payments every January and July of the calendar year. He also paid a commission of $15 on the bond. The bond has a coupon rate of 5%. How much does Brandon have to pay his broker for accrued interest? What are the tax implications of this? • Bond price = $910 • Commission = $15

Accrued interest = $50 × (3/12) = $12.50 • Brandon has to make the following total payment to his broker: $910 + 15 + $12.50 = $937.50. • Brandon's taxable interest for the year will be $50 × (6/12) = $25. • On his 1099-INT, Brandon has to report the $25 but he can deduct $12.50 for the accrued interest paid by him.

Tony is age 70 and Kate is age 64. They are married and file a joint tax return. They have no dependent children. Kate is legally blind. Which of the following does Kate qualify for? Personal exemption of $4,200 Additional personal exemption Additional standard deduction Personal exemption of $4,200 and additional standard deduction

Additional standard deduction Correct! Kate qualifies for the additional standard deduction because she is blind.

Gordon, a new client who has been with the firm for about a year, has requested a $100,000 distribution from his account. You inform Gordon that you are happy to help him with this but would like to know a little more about the request so that you can update Gordon's planning documents. Gordon tells you that a friend's business contact is starting a new property management business using nonrecourse debt. Based on what Gordon's friend has said, Gordon believes that his $50,000 investment in the business could generate $650,000 in taxable losses over the next 10 years. Such losses could eliminate Gordon's tax liability over that time period and result in tax savings over that time period of approximately $175,000. Gordon is very excited about this planning strategy and is puzzled by your lack of excitement. Gordon changes his story and believes that the loan is a recourse loan. However, Gordon can tell that you still have concerns about the tax implications of the investment.

After listening to Gordon, you explain to him that one of the restrictions that he faces on this investment is that he will only have $50,000 at risk, so the maximum aggregate loss he can claim on his tax return over the next 10 years would be $50,000. The nonrecourse debt that the business will be assuming does not increase Gordon's at-risk amount because he is not liable for it. Gordon is a "money" partner, typically a limited partner in a limited partnership, and he would not be materially participating in the activity. As such, even if Gordon's investment is at risk, his ability to deduct losses from the activity would be limited to the extent that he has passive activity income. Since Gordon is investing in the activity strictly for losses and tax savings, it is likely that all of the losses from the activity will be suspended until there is passive activity income to offset the losses or until Gordon sells his interest in the activity and he can claim any suspended passive activity losses, up to the at-risk amount.

Bob is 35 and wants to retire at 65. He currently makes $78,000 a year. He has saved up $100,000 in retirement assets. He has calculated that he needs $3,000,000 at retirement to meet his retirement goals. He expects inflation to be 3% and his rate of return before retirement to be 9% and after retirement, 7%. He expects to live until 90. What does he need to save monthly to reach his retirement goal?

Again, read the last sentence first to figure out what we need to answer the question. To calculate a monthly savings goal, we only need: • Current savings level: $100,0000 • Retirement savings goal: $3,000,000 • Expected rate of return: 0.75% (9%/12) • Work life expectancy: 360 [(65 - 35)12] Now we put those numbers in the calculator like this: • N: 360 • I: .75 • PV: -$100,000 • FV: $3,000,000 Solve for PMT: $834.06 per month If Bob waited five more years before saving any more for retirement, he would have to save at a rate of $1,604.58 per month to meet his goals instead of $834.06.

Agnes has been giving her granddaughter $15,000 each year for the last five years. The average cost of a nursing home in her state is $5,000 a month. She also gifted her granddaughter $100,000 six years ago. Agnes is in need of long-term care (LTC) and wants to know if she is eligible for Medicaid should she be required to go to a nursing home. If she is not eligible, what is the penalty for violating Medicaid rules?

Agnes will be ineligible for 15 months of coverage and will have to pay out of pocket. Correct. Based on the facts presented, Agnes gifted her granddaughter during the look-back period. As such, Agnes will be ineligible for Medicaid coverage for 15 months based on the amount she gifted, $75,000 divided by the average cost of the state's nursing home stay, which equals $5,000. The look-back period as stated in the fourth option is incorrect, the look-back period is only five years. Take the amount transferred during the look-back period and divide by the state's average cost of a nursing home stay.

You are forecasting Alexis's income tax liability. She has $80,000 of income from her salary, $20,000 of income from her interest in a limited partnership (she is a limited partner), and a $28,000 loss from rental real estate in which she actively participated. What is Alexis's permitted passive activity loss, if any?

Alexis can use $20,000 of her $28,000 loss to offset her passive income from the limited partnership. The remaining $8,000 loss from rental real estate can be applied against Alexis's nonpassive income (up to $25,000). Thus, in this situation, Alexis is able to utilize all of her $28,000 passive activity loss because of the special exception for rental real estate.

Alexis purchased a car five months ago for $24,000. She borrowed $22,000 from a local credit union to finance the purchase. Yesterday, Alexis was involved in an accident. She was not at fault, but her new car was damaged beyond repair. The other driver's insurance company agreed to pay for damages but determined that Alexis's car was totaled, with a fair market value of $18,000. What optional endorsement should Alexis have purchased with her personal automobile policy to ensure that she would receive replacement value rather than fair market value for her car?

Alexis should have purchased gap insurance. This coverage pays the difference between her vehicle's actual cash value and what she still owes on the loan. She would have received $18,000 from the other insurance company, plus $4,000 from her insurance company.

Which of the following are characteristics of exchange-traded funds (ETFs)? 1. Real-time trading 2. Transparency 3. Cost 4. Ability to trade derivatives 5. Taxes

All 5. Correct. All of the above are characteristics of ETFs.

Aman is considering a career change. He has heard about the opportunities available to those who hold the CFP® marks. His goal is to help people deal with financial questions and concerns using a process that is consistent and proven. Do Certified Financial Planner professionals follow a process, and, if yes, what are the steps in that process?

All Certified Financial Planning professionals who provide financial planning services are required to follow the seven-step financial planning process. One way to remember these steps is to use the acronym UGADPIM.

Nellie is considering filing for Chapter 7 bankruptcy, but she is worried that she will lose her home, retirement savings, and other assets. If Nellie does end up filing for bankruptcy, what assets are exempt from liquidation?

All the assets Nellie is holding in qualified retirement plans are exempt from liquidation. Depending on the state in which she lives, and based on whether she filed a homestead exemption, she may be required to sell her home and use the equity to pay back creditors. Most other assets will need to be liquidated, although the law does provide provisions to maintain a car, if needed, and some personal items (e.g., wedding band, clothing, etc.). Some debt and liabilities cannot generally be discharged. These can be thought of as items where the government is the debt holder, taxes are owed, criminal and civil issues liabilities are due to another party, or support for divorced individuals and children is expected to be paid. Examples of nondischargeable debts include: • Internal Revenue Service (IRS) liabilities • Local and state tax liabilities • Student loan debt • Money owed to others obtained via criminal or unethical behavior • Government loans • Civil court jury awards • Criminal fines • Money obtained from embezzlement • Liability claims from driving under the influence • Credit card advances • Extravagant purchases made with a credit card(s) • Alimony • Child support

Mutual fund A has a beta of 0.9. The fund had a return of 12% in the previous year. The risk-free rate was 5% and the market return was 8%. Calculate the alpha for this fund.

Alpha(α)=0.12−(0.05+(0.9×(0.08−0.05)))=0.12−0.077=0.043 or 4.3%

What is a QTIP trust?

Also known as a C trust, a QTIP allows a decedent to qualify a transfer for the marital deduction at death yet still control the ultimate disposition of the assets. A QTIP trust is used in second-marriage situations. Assets are taxed at the death of the second spouse. Property must qualify for marital deduction. Remember: 1. The spouse is required to receive annual income for life. 2. The spouse must be able to force the trustee to sell non-income-producing assets. 3. The spouse, as executor, must file a QTIP election on IRS Form 706 of the decedent. 4. The executor has 15 months to determine the applicability of the QTIP election (nine months plus extension).

Nigel is 50 years of age. He works out three times per week and eats a sensible diet of fruits, vegetables, and protein. Everyone in his family is on the heavy side. At 5 feet 10 inches tall, Nigel is just like his father, weighing 220 pounds. Although he has been trying to stop, Nigel does smoke 7 to 10 cigarettes per day. Given this information, would Nigel be considered a preferred, standard, or substandard risk in the life insurance underwriting process? What will his rating mean for his ability to obtain insurance?

Although Nigel eats well and works out on a regular basis, it is likely that an insurance company will rate him as substandard on a life insurance application. This rating stems from his weight and the fact that he uses tobacco on a regular basis. Insurance companies typically have tiered systems in which tobacco and nontobacco ratings apply. Although a substandard risk rating will not prohibit Nigel from obtaining insurance, he can expect to pay a higher premium than others.

Sheri is a CFP® professional. She has held the certification for nearly 15 years. During that time, she has held several positions in large and small financial service firms. Recently she took a position with a retirement planning firm. Sheri no longer provides advice or guidance on issues related to cash flow or net worth planning, education planning, or education planning, although she does review each client's tax and investment situation when developing retirement plan recommendations. Sheri would like to know if she must follow the CFP Board Practice Standards when working with her new retirement planning clients.

Although Sheri is not practicing comprehensive financial planning, she is providing financial advice that integrates elements of the financial planning process and a client's situation. As such, Sheri is required to follow the financial planning process and to provide services using the Practice Standards.

Jack is a recent college graduate and believes that he will be able to save $200 from his salary every month. Jack wants to start investing. He has done some research on the different investment choices that are available to him but he is still very confused. He likes the idea of investing all his money into a high-quality stock, but his colleague at work has advised him to create a portfolio of very-low-quality penny stocks instead. Jack's boss at work has, however, told him to put his savings into a high-quality mutual fund or an exchange-traded fund instead. What should Jack do?

Although it is a good idea for Jack to start investing, he needs to avoid putting all his money into one stock, even though it may be of high quality. This is because if all his savings are allocated narrowly into one stock, should the stock of the corporation not do well in the future, Jack could lose a lot of money. One benefit of allocating to a portfolio of multiple securities is that the investor's risks are diversified across these different securities. Although creating a diversified portfolio of penny stocks sounds like a good idea at first, Jack may not have enough information or the ability to create and manage a portfolio of penny stocks. Additionally, penny stocks are very risky, and in his beginning years of investing Jack may not have sufficient financial capacity to take this type of risk. Investing his savings into a mutual fund or ETF as his boss has suggested is perhaps Jack's best option. This is because the risk within a pooled investment portfolio, such as a mutual fund or an ETF, is relatively lower because of the diversification benefits and professional management that such instruments offer.

Eric is considering investing in one of the two ETFs: ETF A has a standard deviation of 12% and a beta of 1.4. ETF B has a standard deviation of 13% and a beta of 0.9. If the market return, rm, is 12% and rf is 3%, which of the two ETFs would have the higher expected return? Why?

Although the standard deviation of ETF B is higher, according to CAPM, the expected return of ETF A will be higher since it has the higher beta: • RA = 0.03 + 1.4 × (0.12 - 0.03) = 0.156 or 15.6% • RB = 0.03 + 0.9 × (0.12 - 0.03) = 0.111 or 11.1% According to CAPM, the market demands a higher return from securities with greater systematic risk. The diversifiable risk, which is included in the total risk measure (standard deviation), can be diversified away. Hence the market does not reward investors holding securities with greater diversifiable risk but low systematic risks.

Jack and Victoria have both contributed $100,000 each to their survivorship annuity. On the day of Jack's death, the annuity is worth $150,000. How much will be included in Jack's gross estate?

Amount included in Jack's gross estate = $150,000×($100,000/$200,000)=$75,000

Matt owned 4% of a closely held business. The business was valued at $1,000,000. However, the appraisers added a lack of marketability discount to the business, and since Matt owned only 4% of the business interest, an additional minority discount was added to the property. If the total discount on the property was 45%, how much will be included in Matt's gross estate?

Amount included in Matt's gross estate = $1,000,000×(1−0.45)×0.04=$22,000

Amy purchased a machine for use in her business. She paid $200,000 for the machine and took $140,000 of depreciation. (Straight-line depreciation would have been $100,000.) She sold it for $240,000. Which of the following statements about the nature of her gain is true?

Amy will have a $140,000 Section 1245 ordinary gain and a $40,000 Section 1231 gain. Correct! Of Amy's $180,000 gain, $140,000 will be taxed as ordinary income due to recapture of depreciation taken under Section 1245. The remaining $40,000 gain under Section 1231 will be subject to long-term capital gains tax rates.

A client is ready to set up a business and has made initial estimates of potential income. He is looking at the potential tax consequences of owning each, while currently receiving a salary of over $200,000. He will be filing with his wife under married-filing-jointly (MFJ) status. His new business is anticipated to produce $50,000 worth of income. Only considering the tax consequences in the year of his new venture, will it be better to: 1) have a sole proprietorship or 2) form an S corporation and pay himself $25,000 as an employee?

An S-corporation because not all the income will be affected by payroll taxes. CORRECT. Both entities are "flow-through," which means the income comes directly to the owner of the company. However, with a sole proprietor, all the income has to be taxed as if it is payroll. This means that all FICA, Medicare, and other taxes, which are 15.3%. However, if an individual pays as an employee in an S-corporation, then only $25,000 will be affected by payroll taxes at 15.3% and the other amount is only at the owner's ordinary income rate. Therefore, it is better to be taxed as an S corporation.

What is the maximum 529 Contribution?

An individual may contribute up to $75,000 in single year—5 × 15,000 (i.e., the annual exclusion) with no gift tax consequence. A couple may contribute $150,000 annually (gift splitting).

Spiros owns a pizza shop. He wants to retire this year and receive a monthly income of $4,000 from the business. Spiros's son Billy works in the shop and would like to buy the business but he cannot afford a down payment. Spiros wants to sell the business to Billy but he is concerned about Billy's lack of management experience. Which intra-family transfer technique is best suited to meet these objectives?

An installment sale Correct. This is the correct answer because a promissory installment note is secured and does not require a set sales price. A down payment is not essential and payments can fluctuate and be made from future business profits.

What is an insurable loss?

An insurable loss is a CHAD: 1. Can't be catastrophic 2. Homogenous group 3. Accidental 4. Determinable 1. Losses cannot be catastrophic for the insurance company. 2. The potential pool of insureds must be large and homogenous. 3. Losses must be accidental. 4. Losses must be determinable and measurable.

Jake is starting college in a few months. His mom, Karen, wants to pay for Jake's education but has not begun saving yet. Karen and her husband earn $120,000 annually. Which of the following is the best method for Karen to cover the cost of college? A. 529 plan B. PLUS Loan C. Series EE bonds D. American Opportunity Tax Credit

Answer: Since Jake is only a few months away from beginning school, saving to a 529 plan and Series EE bonds are not the best options. Karen would likely be eligible for the American Opportunity Tax Credit, but this is not an option available to pay for college as the credit is available only on the tax return after payments have been made. Thus, the best answer is choice B. • Remember that the AOTC is per student.

Calculate the beta of a stock that has a standard deviation of 18% and a 78% correlation with the market if the standard deviation of the market is 12%.

Applying the formula for calculating beta: • (.78 × .18) / .12 = 1.17 The beta is then applied in the CAPM formula to compute the expected return of the security: • ri = rf + β (rm - rf) Where • ri = expected return of the portfolio • rf = risk-free rate • rm = return of the market • β = beta of the portfolio (Rm - Rf) is known as the market risk premium. The market is represented by the S&P 500 index. The beta of the market is considered 1. • Securities with greater risk than the market have betas that are greater than 1; securities with lower risk than the market have betas that are less than 1. • Securities that fall above the security market line on the "Security Market Line" graph are considered undervalued. • The market expects a lower return from these portfolios than their actual expected return performance. • Securities that fall below the security market line on the same graph are considered overvalued. • Given their systematic risk, their expected return is lower than the expected return for securities with similar systematic risks.

Frank has always been a hard worker. He will be attending college in six years. He believes he can cover $15,000 of his tuition (including 3% yearly increases) in various entrepreneurial efforts that will not take away from his studies. If school will cost $22,000 and increase yearly at 3% during his four years, how much will he need to have saved prior to entering if he can grow his investments at 7%?

Approximately $26,500 Correct. First determine what Frank's yearly cost will be. Since he knows the future yearly tuition, and he knows he can offset a large portion of it with his entrepreneurial skills, he will be left with $7,000 per year. Over four years, considering inflation and investment return, he will need approximately $26,500 to be fully funded. Total Cost of College Future yearly cost 22,000.00 Future yearly income (15,000.00) PMT 7,000.00 ========= N 4 7,000.00 I/Y* 3.88% FV 0 PV Annuity Due 26,468.67 *(1.07 ÷ 1.03 - 1) × 100 = 3.88%

Matt has won a $20,000 scholarship to pay for his first year of college, which he will begin in 10 years. He plans to be at school for only three years. The first year of tuition is estimated to be $30,000 when he enters. If tuition is expected to rise 5% while he is in school, and he can earn 6% from the money saved, how much will he need when he enters college?

Approximately $69,000 Correct. The first step is to calculate the total future cost of three years of college. This is done using the future tuition, the number of years in school, tuition inflation, and investment return. Once this is determined, the scholarship will be deducted from the total: Total Cost Of College PMT 30,000.00 N 3 Total Cost 89,153.62 I/Y* 0.95% Scholarship (20,000.00) FV 0 ======== PV Annuity Due 89,153.62 69,153.62 *(1.06 ÷ 1.05 - 1) × 100 = 0.95%

Sonya, a CFP professional, advertises her services as "financial counseling with a heart." When working with clients, she writes a targeted financial plan. Each plan contains an analysis of the client's cash flow and net worth situation, a review of insurance issues, and a detailed retirement analysis. Sonya always provides recommendations that can be implemented to improve a client's situation. Will CFP Board consider her work financial planning?

Based on CFP Board's definition of financial planning and the definition of financial advice, Sonya is providing financial planning. Keep in mind that delivery of marketing materials, general financial education, or other general financial communications generally will not be classified as financial planning. For example, teaching a financial class or continuing education program is not considered financial planning.

Kristy is reviewing her employer-provided long-term disability insurance policy. She pays policy premiums on a pretax basis. The policy provides a benefit based on the following income benefit formula: Employee Income×70%,excluding Social Security benefits If Kristy makes $89,000 and becomes disabled under the terms of the policy, how much can she expect to receive monthly?

Based on an annual income of $89,000, Kristy receives $7,417 (rounded) per month before taxes. Her policy will pay her 70% of this amount during her disability, which is approximately $5,192 before taxes. Because she has paid premiums on a pretax basis, the full amount will be subject to income taxes.

Abed and Michelle work for a large sales and marketing firm. They are both thinking about making a career change. The thought of financial planning as a career is very appealing to both Abed and Michelle. Unfortunately, in the past, their financial behavior was problematic. Abed, for example, was convicted of felony theft three years ago, and Michelle filed for personal bankruptcy four years ago. Based on CFP Board's Fitness Standards for candidates, who will be barred from becoming certified?

Based on the candidate Fitness Standards, Abed will be barred from becoming certified as a CFP® professional. The Disciplinary and Ethics Commission might find Michelle's bankruptcy to be unacceptable, depending on the circumstances. If this is the only bankruptcy she has filed in the last five years, and if she is not under any investigation by CFP Board for other misconduct, she will most likely not be barred. This is known as a bankruptcy-only case. Michelle should expect CFP Board to disclose the bankruptcy publicly. The concern with bankruptcy is that those who work with financial planners expect their advisers to be experts in managing personal financial affairs; a bankruptcy indicates problematic personal behavior on the part of the adviser. However, Michelle may petition the Disciplinary and Ethics Commission to allow her to become certified. If she shows, for instance, that divorce was the cause of the bankruptcy, the Commission may grant the petition.

Muriel currently earns $145,000 per year. She and Tucco believe that they can earn an 8% return on their investment portfolio assets. Given this information, how much life insurance does Muriel need using the capital retention approach? How much does Muriel's insurance need to change using the income retention approach if it is assumed that Tucco earns $100,000 per year?

Based on the capital retention approach formula, Muriel needs approximately $1,800,000 in life insurance coverage. This estimate is close to that found with the human life valuation approach. $1,812,500=$145,0000.08$1,812,500=$145,0000.08 Muriel's life insurance need is significantly less using the income retention approach. She needs approximately $500,000 in coverage. [Note: The 22 superscript in the equation represents the time until Tucco turns age 67.] $495,756=45,0000.08[1−1(1+ 0.08)22]$495,756=45,0000.08[1−1(1+ 0.08)22]

Marsha, a 73% owner of a shipping company, provides you with an employee census. She wants to know which of her employees are highly compensated. Based on the information below, which employees are considered highly compensated? • George, a 2% owner who makes $90,000/year • Carden, an employee who earns $125,000/year • Lindsey, a 20% owner who earns $100,000/year • Joey, a 5% owner who earns $60,000/year • Marsha, a 73% owner who earns $200,000/year

Based on the census provided, Carden, Lindsey, and Marsha are all HC employees. Because the definition of HC employee includes greater than 5% owners, Joey would not be considered an HC employee. George does not have enough ownership or compensation to be considered an HC employee.

Muriel and her partner, Tucco, are 45 years old. They have two teenage children. She is employed as a pharmacist and earns $145,000 yearly. Muriel is interested in purchasing a life insurance policy that will cover lost income until Tucco turns age 67, should she die prematurely. She and Tucco believe that Muriel needs coverage only for the next 20 years. At that time, their primary residence will be paid in full and their children will no longer be dependents. If they believe they can earn 8% on an annualized basis on a diversified portfolio, how much life insurance does Muriel need today using the human valuation approach? (Assume she has no other policies at this time.) Also, what type of life insurance product would be most appropriate for her?

Based on the human valuation approach, Muriel needs approximately $1,600,000 in life insurance coverage. Note that the solution shown is based on an annuity-due estimate. A beginning payment assumption is appropriate because the calculation is designed to estimate an amount need to generate future income. Given the information in the vignette, a 20-year term policy would be an appropriate choice for her coverage. [Note: The 22 superscript in the equation represents the time until Tucco turns age 67.] $1,479,108=145,0000.08[1−1(1+ 0.08)22]$1,479,108=145,0000.08[1−1(1+ 0.08)22]

Chris, 65, is an entrepreneur who recently started his own company. The company sells knitted scarves and sweaters in local stores in his hometown. Business has been doing very well, and he has decided he wants to start a pension plan. He does not mind taking on the investment risk for his employees. His employees are all in their early 20s and do not really care about retirement as much. Given that Chris is adamant about starting a pension plan, which plan would be best for him?

Because Chris wants a pension plan, he should consider the target benefit pension plan. This will be the best plan for him, since his employees are younger. More of the contribution will go to Chris each year due to the significant age gap.

Jackie just became the head of human resources for a 1,000-person business. In order to attract and, more importantly, retain the best career employees, she wants to make sure the company has a good retirement plan in place. Specifically, she wants the employer to take on the investment risk of the investments. Which type of plan would be better for Jackie, given this information? Jackie's company has strong and stable annual profitability and cash flows.

Because Jackie wants the employer to take on the investment risk, the company will need to start a pension plan, if one is not already in place.

Jolanda would like assistance in selecting the best pension plan for her tech company. She wants to be able to reward those with longer service, even though the plan is only being established this year. She would like participants to have separate accounts or at least for it to appear as if the accounts are separate. She does not care about the costs, as business has been booming and she wants to reward her employees with a great retirement package. This will also help her in attracting the best employees. Which plan is best for Jolanda?

Because Jolanda wants a pension plan that can give credit for prior years' service, she needs a defined benefit pension plan. The cash balance plan gives the impression to participants of a separate account; therefore, this would be the best plan for Jolanda.

Olivia is evaluating the defined benefit plan for her company. She comes to you with questions about the different vesting schedules available. She tells you that her plan is top heavy, and she is looking for clarification on what that means. What vesting schedules can Olivia use? Is there anything else Olivia should know because her plan is top heavy?

Because Olivia's plan is top heavy, she must use an accelerated vesting schedule. She must choose from a 3-year cliff or 2-6-year graduated schedule. The vesting can also be more generous than the standard schedule (e.g., immediate vesting, 1-year cliff, 2-5-year graduated), but it cannot be more restrictive. In addition, because the plan is top heavy, Olivia must use a special unit credit formula when determining the benefit. This formula is: 2%×Years of service×Average annual compensation

Willie lives in Texas. He moved to Texas when he graduated from college. During his time in Texas, he has acquired a large ranch valued at several million dollars. Unfortunately, Willie has also been subject to several large civil lawsuits. He lost each suit, and he feels that the lawsuits were unfair. His largest creditor is the IRS. He now owes close to $10 million in civil damages. What legal action can his creditors take against Willie?

Because Willie lives in Texas, he cannot be forced to liquidate his ranch to pay his creditors. If Willie is married, the exemption will pass to his spouse and children (if any). At the death of the spouse (or last child), proceeds from the property sale can be used to settle the civil claims.

Scott and Irma have been married for 45 years. They have a combined net worth of $18 million. All assets held by Scott and Irma are titled joint tenants with right of survivorship (JTWROS), and, in cases where beneficiary designations are used, Scott is the named beneficiary for Irma; Irma is the named beneficiary for Scott. Their wills leave any remaining assets to the surviving spouse. If the value of Scott's assets is $9 million on January 1 when he dies and $8 million six months later, what value can his executor use for estate planning purposes?

Because all of Scott's assets included in his estate will transfer automatically to Irma via the unlimited marital deduction, his executor may not use the alternate valuation date, even though this would result in a lower gross estate.

Ben and Liz had lived together as an unmarried couple for 16 years. Ben had purchased their residence before he met Liz and 2 years ago he changed ownership of the home to tenancy in common with Liz. The home was valued at $1.4 million at the time the gift was made. Assume that Ben died this month and the home was worth $1.6 million. What is the taxable gift?

Ben's estate tax return will include $685,000 as an adjusted taxable gift. Correct. This answer is correct because Ben made a gift of one-half of the $1.4 million home minus an annual exclusion of $15,000. The taxable amount of the gift, $685,000 is added to his IRS Form 706 as an adjusted taxable gift.

Billy would like to take a plan loan from his 401(k) account and is not sure how much he can take a loan for. He has come to you for help in determining the maximum amount he can take from his 401(k). If his account balance is $15,000, how much can Billy borrow? If his wife, Jane, has an account balance in her 401(k) of $200,000, how much could she borrow? Assume that both plans allow for loans.

Billy can borrow a maximum of $10,000 from the plan. Jane could borrow a maximum of $50,000 from her plan. Qualified plans may permit loans up to the lesser of one-half of the vested plan accrued benefit, up to $50,000. If the vested benefit is less than or equal to $20,000, then the loan is permitted up to the lesser of $10,000 or the accrued benefit.

After reviewing several potential bond investments, Frank, a Certified Financial Planner, wants to calculate the value of each bond. He believes that some of the bonds are either over or under valued, based on estimates that he has made. Given the following assumptions used by Frank, which bond(s), if any, should be purchased (both are paid semi-annually, with $1,000 par)? Price Estimated Yield Coupon Maturity Bond A $1,050 6% 7% 10 yrs Bond B $950 8% 6% 4 yrs

Bond A should be purchased as it is undervalued, and Bond B should not be purchased as it is overvalued. CORRECT. The calculation shows Bond A is selling at $1,050, but is worth $1,074 while Bond B is priced at $950 and is only worth $932. Bond A = n = 20, i = 3%, pmt = 35, FV =1,000 is $1,074.39 Bond B = n = 8, i = 4%, pmt = 30, FV =1,000 is $932.67

A client has a $25,000 balloon payment that will come due on real estate deal in six years. He also has a child who will be attending college in two years, who will need $15,000 for tuition their first year. He believes, without a doubt, she will receive a full scholarship. He has several different types of investments, and is willing to take on as much risk as possible. However, in this situation, he believes he shouldn't miss out on the real estate deal. Which of the following would be the best fit? Coupon Callable Duration YTM Bond A 5% Yes in 6 years 4 7% Bond B 6% Yes in 5 years 6 8% Bond C 4% No 6 8% Bond D 7% No 4 6%

Bond C CORRECT. This is a bond immunization problem. Duration is the appropriate measure to ensure that the money will be available when needed, thus immunizing the liability of $25,000 in six years.

Byron and Veronica Mills have come to you to do some year-end tax planning. It is November and you predict their AGI for the year to be $355,000. They have the following itemized deductions: State and local taxes paid $28,000 Mortgage interest paid $20,000 Charitable contributions $35,000 Job related and misc. deductions $18,000 Gambling losses $5,000 Total itemized deductions $106,000 They plan to give some additional money to charity and do not know what impact on their taxes it would have this year. They know they are going to be phased out of some of their deductions, but they do not know how much, and they are wondering what an additional charitable contribution of $10,000 this year would do to their deduction. How do you respond?

Byron and Veronica are not subject to a phase-out of their deductions. Additional charitable contributions are deductible. Note that several of the listed deductions are capped or not allowed: Deductible state and local taxes are capped at $10,000, Job related and misc. deductions are suspended (capped at $0), and Gambling losses can only be claimed to the extent that there is gambling income. Thus, the total allowed itemized deductions before any additional charitable contributions are considered is $65,000.

Brandon is a successful serial entrepreneur and longtime client. Brandon's businesses are in online applications, and he has a very good track record of small start-ups. Brandon does not have any dreams of taking the companies public, but occasionally he sells a business or spins one off into partnerships where others manage the business for him so he can work on additional ideas. Brandon would like to offer a retirement plan for his employees in one of his businesses. Brandon mainly has computer programmers working for him. He knows that many of them dream of starting their own companies and that they could have great jobs elsewhere if they left Brandon's company. From a business, perspective Brandon wants to retain his programmers and make them valued, without giving up ownership in his business. Since the workers' pay is quite high already, he does not want to pay for a benefit that they do not value. What are some key points to summarize for Brandon about retirement plan selection and plan design?

Brandon desires a retirement plan that young employees value and want to participate in. He is not concerned about his retirement benefit through the plan. Brandon does not want to give up ownership in his company. He wants to target the retirement benefits to those employees who value this benefit. Brandon is not price sensitive about the plan but does not want the benefit wasted. Given that Brandon wants employees to value the plan and he wants to partner with them in saving for retirement (and not waste money on those who do not value this benefit), Brandon should consider contributory plans that allow generous matching options. Contributory plans include 401(k) plans and SIMPLE IRAs. If Brandon wants to offer a generous matching structure for the plan, only a 401(k) plan should be considered, since SIMPLE IRAs have very restrictive matching structures. The 401(k) allows Brandon significant design flexibility and a generous matching provision (i.e., 100% match on the first 5% of pay contributed, or even a 200% match on the first 5% of pay) would satisfy any safe harbor rules, allowing all employees to defer the maximum amounts.

Scott and Michelle have acquired significant assets over their lifetime. They have planned to distribute assets to reduce their overall estate tax liability. However, they will still owe a substantial amount. Given that the greatest share of their assets is tied up in Scott's business, which they would like to leave to their children, they have some concern about paying the taxes when they come due. They anticipate taking advantage of the marital deduction when either Scott or Michelle passes away. Scott has some considerable health issues; Michelle does not. What is the best path to satisfy the issues raised?

Buy a second-to-die policy owned by an irrevocable life insurance trust. Scott and Michelle have liquidity issues to pay estate taxes when due. A life insurance policy can help with this issue. Scott may be uninsurable due to his health issues. Therefore, a second-to-die policy would be possible, especially with Michelle being healthy.

Means testing is an aspect of which type of bankruptcy filing?

Chapter 7 This is the correct answer. Chapter 7 requires a means test. If someone's income exceeds a court-determined threshold, the filer will be required to use a Chapter 13 filing.

Your client has a qualified plan at his company and you are the plan adviser. Semiannually you offer consultations to employees covered by the plan. Cody is an employee at the company and is covered by the plan. Cody is single, 51 years old, and earns $71,000. While meeting with you about the plan, he asks if he can contribute to a traditional IRA and claim a deduction for it on his tax return. How do you respond to Cody?

Cody is an active participant in his employer's plan. Given his filing status, his income is within the phase-out range for being able to deduct contributions to IRAs. Cody can contribute $7,000 ($6,000 (2019) + $1,000) to an IRA. He is only allowed to deduct $2,100 of his contribution. Cody's deduction is reduced by $4,900 (70%), calculated as follows: (($71,000−$64,000)$10,000)×$7,000=$4,900 Note that Cody is still eligible to make his catch-up contribution. However, it is also included in the general phase-out of the deduction. Also note that Cody will now have a tax basis of $4,900 in his IRA if he makes this contribution.

A longtime client, Dan, wants to form a partnership with his daughter and has some questions for you. Dan wants to open a tanning salon with his daughter Irena. They plan to structure this business venture as a general partnership. They each contribute $50,000 in cash to the partnership. Dan has extensive experience with tanning salons and provides professional consulting services valued at $10,000 to the partnership. Irena contributes a tanning bed, which has an adjusted basis of $5,000, to the partnership. In Year 1 of operations, the business experienced a loss, and $5,000 of the loss was allocated to Dan. In Year 2, the business had income, and $10,000 of that income was allocated to Dan. Two years after the formation of the partnership, Dan takes a withdrawal from the partnership for personal expenses. What is Dan's new adjusted basis if he withdraws $40,000, $60,000, or $75,000?

Dan must recognize $10,000 of ordinary income on his tax return for compensation for his services. Dan's adjusted basis in the partnership is $60,000. Irena's adjusted basis in the partnership is $55,000. If Dan were to withdraw $40,000 from the partnership, his new basis would be $25,000. If Dan were to withdraw $60,000 from the partnership, his new basis would be $5,000. If Dan were to withdraw $75,000 from the partnership, his new basis would be $0 and he would have a capital gain of $10,000. Remember! If a withdrawal is taken in excess of a partner's adjusted basis, the partner must recognize capital gain to the extent the withdrawal exceeds the basis.

Donald Horn is a new client and is involved in several passive activities. Donald would like your help on estimating his taxes, particularly the NIIT on his passive activities so that he can make estimated tax payments throughout the year. Donald's filing status is single and his self-employment income is projected to be $220,000. His passive activity income is projected to be $90,000 next year. What do you tell Donald regarding his projected NIIT liability and his self-employment tax liability? Source: This vignette is adapted from an example in IRS Net Investment Income Tax FAQs, https://www.irs.gov/uac/newsroom/net-investment-income-tax-faqs.

Donald's modified adjusted gross income is $310,000 ($220,000 + $90,000) and exceeds the threshold of $200,000 for single tax filers. His modified AGI exceeds the threshold by $110,000, and his net investment income is $90,000. The NIIT is based on the lesser of the amount by which modified AGI exceeds the threshold ($110,000) or the actual net investment income ($90,000), so $90,000 will be used as the tax base. NIIT is $3,420 ($90,000 × 0.038). Donald is also subject to the additional Medicare tax on his self-employment income. His self-employment tax is $220,000, which is $20,000 in excess of the threshold. Additional Medicare tax is calculated as follows: Self-employment earnings $220,000 Deemed deduction × 0.9235 Net self-employment income = $203,170 OASDI wage base $132,900 OASDI tax rate × 0.124 OASDI tax = $16,480 HI tax base $203,170 HI tax rate × 0.029 HI tax = $5,892 Total SE tax = $22,372 Additional Medicare tax Net self-employment earnings $203,170 Single threshold − $200,000 SE earnings subject to add. Medicare tax = $3,170 Additional Medicare tax rate × 0.009 Additional Medicare tax $29

Howard, a new client, has expressed a desire to make a $20,000 donation to a 50% limit organization. This is a relatively routine annual contribution for Howard, and he has made it in cash. Howard's portfolio contains many highly appreciated investments. He has directed you to liquidate some investments for this contribution. Howard identified a stock that he has held for 10 years with a basis of $4,000 and an FMV of $20,000 that he would like sold to generate this cash. Howard's marginal tax bracket is projected to be 24% and his AGI is projected to be $200,000. What do you tell Howard?

Donate Stock - 4800 Savings Donate Cash - 1824 Savings

Duncan, an amateur chef, owns his own home in the suburbs of a large city. He spends a lot of time at work. He worries that his home could become a target of burglars. This is a worry because he generally keeps small amounts of cash ($100 to $200) in the house. He is also worried that someone might steal his cooking utensils, computer, and gold jewelry. What should Duncan do to ensure that if this property is lost or stolen, it will be replaced at replacement value? Also, what can Duncan do to reduce the risk of being burglarized that might reduce his homeowner's premium?

Duncan should purchase personal property endorsement coverage for the high-value items he owns. This is particularly true in relation to his jewelry, computer, and cooking utensils. Duncan should also consider installing an alarm on his house. This will reduce the likelihood that he will be burglarized. The alarm may also qualify Duncan for a premium discount.

Jessica has been a CFP professional for nine years. She was pulled over two weeks ago by a State Trooper initially because he suspected her of reckless driving. Later, during the traffic stop, the Trooper determined that Jessica was driving while intoxicated. She was booked and taken to jail. Later, in court, she was found guilty of misdemeanor DWI; however, she was acquitted of the reckless driving charge. Jessica would like to know if she is subject to CFP Board discipline and, if yes, what she needs to do.

Each aspect of Jessica's situation is subject to potential CFP Board disciplinary procedures. The conviction for DWI must be reported to CFP Board within 30 days. Under the rules, Jessica must also report the reckless driving charge even though the charge was later withdrawn. CFP Board retains the right to penalize Jessica beyond what occurs in a court proceeding.

Emma has worked for her employer for many years. She purchased her employer's stock over the course of several years in her 401(k), and it currently has a FMV of $100,000. She originally purchased the stock for $10,000. She wants help determining the best way to remove the funds from the account and has heard that she may qualify for special tax treatment. What should you advise Emma on her distribution options?

Emma should consider utilizing NUA rules. Based on the information provided, Emma could take a lump-sum distribution of the plan. She would pay ordinary income tax on $10,000 (the original cost of the employer securities). The other $90,000 could be realized as long-term capital gains once sold. Because capital gains rates are currently preferential to ordinary income rates, Emma will save in the long run by utilizing NUA. Emma could also roll over her assets to an IRA, but she would lose the ability to utilize NUA.

A traditional split-dollar life insurance arrangement can be a source of liquidity for an employee's estate at death. Which statement regarding this arrangement is not correct? 1. At the employee's death, the greater of the cash value or premiums paid is paid to the employer and the balance of the proceeds is paid to the beneficiary of the policy. 2. The employer pays the portion of the annual premium equal to an increase in the cash surrender value of the policy and the employee pays the balance of the premium. 3. A private split-dollar life insurance arrangement can be used between family members. 4. Employees cannot transfer their share of the policy into an ILIT to protect distributions from being included in his or her gross estate.

Employees cannot transfer their share of the policy into an ILIT to protect distributions from being included in his or her gross estate. Correct. This statement is not correct because an employee can transfer his or her share of the policy into an ILIT to avoid inclusion of the benefit in their gross estate at death.

Deshunnon and Liz have asked you for some tax planning guidance regarding their daughter's tax return. Erika is 20, a full-time student at State University, and claimed on her parents' tax return. She has been working while going to school and earned $4,000. She also received $5,000 in unearned income from an UTMA account. Deshunnon and Liz's marginal tax bracket is 25%. What do you tell them regarding Erika's tax situation?

Erika is subject to the Kiddie Tax because she is a full-time student and under the age of 24, has unearned income of more than $2,200, and did not provide more than half of her support with earned income. To calculate Erika's tax liability, follow three broad steps: 1. Calculate her regular taxable income. 2. Calculate what portion of her unearned income will be taxed at trust and estate tax rates. 3. Determine Erika's tax. Liability $493

How many clients trigger a need to register as an investment advisor under the Investment Advisors Act of 1940?

Fifteen CORRECT. This statement is correct because an individual who has fewer than fifteen clients does not need to register as an investment advisor under the Investment Advisors Act of 1940.

Widget Company has seen its debt ratios expand each quarter for the last two years. What risk are analysts likely to worry about?

Financial risk and default risk Correct. Financial risk is due to the weakening of the balance sheet and the potential for default risk exists if this continues and the firm cannot pay its debt.. Business risk is a result of the firm operations. Default risk is correct if the balance sheet continues to deteriorate the firm may struggle to repay its debts.

Alexis is a self-employed client who has come to you with questions about this year's SEP contribution and deduction. Alexis earned $145,000 in self-employment income. Alexis has two employees who work for her and would be covered by the SEP plan. Alexis has decided to contribute 15% of compensation to the SEP plan and is wondering what her contribution will be. What is your answer for Alexis? Retirement plan features for SIMPLE and qualified plan contributions for self-employed contributions are discussed more fully in the "Types of Retirement Plans" and "Other Tax-Advantaged Retirement Plans" lessons.

Following the steps outlined in the text, Alexis's contribution to her SEP plan is $17,633. Her contribution is calculated as follows: Step 1: Calculate self-employment earnings less ½ the self-employment tax: Self-employment earnings $145,000 Deemed deduction × 0.9235 Net self-employment income = $133,908 OASDI WAGE BASE $132,900 OASDI TAX RATE × 0.124 OASDI tax = $16,480 HI TAX BASE $133,908 HI TAX RATE × 0.029 HI tax = $3,883 Total SE tax = $20,363 ½ SE tax = $10,181 Self-employment earnings $145,000 ½ SE tax − $10,181 Self-employment earnings eligible for SEP $134,819 Step 2: Calculate self-employed individual's SEP contribution rate: (0.15)(1+0.15)=0.130435=13.0435%(0.15)(1+0.15)=0.130435=13.0435% Step 3: Multiply Step 1 by Step 2: 0.130435×$134,819=$17,5850.130435×$134,819=$17,585

What type of titling may be appropriate for unmarried and/or nontraditional partners in order to avoid the property going through probate?

For nontraditional partners who want to avoid probate, JTWROS is the best option available.

Damion has been promoted to a position of vice president in his firm. With the promotion came a significant increase in income. He is worried that should he become disabled, his family would have a hard time adjusting to his lost income. What definition of "disability" will provide the most advantageous description of disability for Damion to ensure that he will receive benefits in case he is no longer able to work as a vice president?

For some clients, it is considerably more difficult to qualify for benefits when subjected to an any-occupation definition instead of the more lenient own-occupation definition. In Damion's case, he should seek out an own-occupation disability policy. He may be able to negotiate coverage directly with his employer.

Louise died on February 3 (Friday) of this year. She owned 100 shares of a stock that was not traded that day. Using the price and trade information for the days surrounding February 3, compute the value for these stocks that will be included in Louise's estate: • Price on February 1 (Wednesday) = $90 per share • Price on February 7 (Tuesday) = $92 per share • Price on February 8 (Wednesday) = $91 per share

Formula: • Valuation = (Number of days between preceding trade and decedent's date of death × Trading price after decedent's date of death) + (Number of days between next trade and decedent's date of death × Trading price preceding decedent's date of death) / Sum of days before and after the date of death • Price per share = ((2 × 90) + (2 × 92)) / 4 = $91 per share • Value of the investment to be included in Louise's gross estate = $91 × 100 = $9,100

Fred, 58, has been working as a professor at a public university for 18 years. He has never made contributions to his 403(b). He has come to you for assistance in saving for retirement. You are going to advise him to participate in the 403(b) available at his university. How much can Fred contribute to the plan this year?

Fred can contribute $28,000. Fred's base allowed contribution is $19,000 annually. In addition, he qualifies for a catch-up contribution of $6,000 because he is over 50. Finally, he qualifies for the special 15-year catch-up. Since he has never contributed to the plan before, this catch-up is $3,000.

Based on the last five years of return data which of the following 4 mutual funds had the lowest and highest standard deviation? Fund 1: 5, 8, −2, 5, 3 Fund 2: 4, 9, 0, 4, 9 Fund 3: 10, 11, −4, 10, 12 Fund 4: 6, 3, 5, −3, 8

Fund 1 (low) and Fund 3 (high) Correct. Using the E+ function on the HP12C you can enter the returns as R1 E+, R2, E+..... then hit g "." to get standard deviation.

You are evaluating three small-cap stock funds. You want to know which fund has the best manager performance relative to its expected return. Fund ABC returns 12.5% with a beta of 1.15, fund EFG returns 11% with a beta of 1.11, and fund XYZ returns 15% with a beta of 1.5. The Treasury is trading at 2.6% and the expected market return is 8%. Which fund has the best alpha?

Fund XYZ with an alpha of 4.3% Correct. Alpha = Rp - E(Rp) where E(Rp) = (Rf + B × (Rm - Rf)). Fund ABC has an alpha of .0369 or 3.69%. Fund EFG has an alpha of .0241 or 2.41%. Fund XYZ has the highest alpha at .043 or 4.3%. ABC: 0.125 - (0.026 + [1.15 × {0.08 - 0.026}]) = .0369 EFG: 0.11 - (0.026 + [1.11 × {0.08 - 0.026}]) = .0241 XYZ: 0.15 - (0.026 + [1.5 × {0.08 - 0.026}]) = .043

Victoria designs and manufactures seasonal apparel and decorations. She has a thriving business and has found a great niche employing legal immigrants and refugees who have the skill set she is looking for. Victoria pays her employees well for their work. She has some key employees (designers, marketing and sales, etc.), but her main concern is for her rank-and-file employees. She wants to provide a retirement plan for her employees, but she is not confident that they would be able to manage the investments wisely since many of them have never invested before and do not seem interested in doing so. However, Victoria knows that her business, given its seasonality and vulnerability to changing fads, cannot commit to regular and substantial retirement plan contributions. She has come to you for some advice and recommendations regarding her plan. What do you suggest?

Given Victoria's overarching desire to help all of her employees but minimize investment decision making for them, she should consider an employer-funded plan. However, Victoria does not want to commit to significant retirement plan contributions, given the unpredictability of her business income, so a pension plan is not a good fit. Employer-funded profit sharing plans include profit sharing plans, employer stock-based plans, and SEP IRAs. The fact pattern did not say whether Victoria's company has stock or whether she desires to share ownership of the company with the plan, so ESOP and stock bonus plans will not be considered. A profit sharing plan provides Victoria certain benefits that a SEP IRA does not. Investment selections of a profit sharing plan can be limited and defaulted so that contributions on behalf of employees are automatically deposited into a life cycle or target date fund, unless employees have chosen otherwise. Custom portfolios could be developed within the profit sharing plan so employees could simply select a portfolio rather than individual securities. Victoria would not have the same level of control of investment option design with a SEP IRA. The profit sharing plan with a universal contribution to all employees of 3% or more would also meet safe harbor rules so that key employees at the firm could also contribute to a 401(k) without actual deferral percentage and actual contribution percentage testing restrictions.

Michelle is 63, afraid of losing money, and needs cash for her current needs. She is retired and has a marginal tax rate of 15%. She is looking to add some fixed income assets to her portfolio. She has decided to select from the following securities to potentially add to her portfolio: revenue bonds issued by the local government, debt securities guaranteed by Fannie Mae, debt securities guaranteed by Ginnie Mae, and debentures issued by the Ford Motor Company. She wants to invest only in securities that are backed by the full faith and credit of the U.S. government. Which of these securities should she consider for her portfolio?

Given her high level of risk aversion and low income tax bracket, the fixed income investments are suitable for Michelle. All of the securities that Michelle has on her short list are fixed income instruments. However, only one of these is backed by the full faith and credit of the U.S. government. The debenture issued by the Ford Motor Company is corporate debt and can be immediately eliminated from her options. Revenue bonds issued by the local municipality are not backed by the full faith and credit of the local government or municipality but instead depend on the revenue generated from the project(s) for which the revenue bonds were issued. The Fannie Mae debt is not backed by full faith and credit of the U.S. government. Only Ginnie Mae debt is backed by the full faith and credit of the U.S. government.

Xavier, a financial planner, is conducting an evaluation of his client's life insurance needs. He has determined that the client needs $800,000 in new coverage. Xavier's analysis suggests that the client needs lifetime coverage. What policy should Xavier recommend if the client has sufficient income to cover policy premiums and is looking for a policy that provides flexible premiums and the ability to invest in equity investments?

Given the client's wishes (the need for flexible premiums and the ability to invest in equities), Xavier should recommend a variable universal life insurance (VUL) policy. This type of policy can provide lifetime permanent coverage with some degree of premium and investment flexibility.

Your client recently graduated from college and is renting an apartment in the city and walking to work. Which of the following policies are you most likely to discuss with this client?

HO-4 Correct. This coverage (tenants and cooperative policies) protects a client's property when renting, as well as providing some personal liability coverage.

The price of a security at the beginning of a period was $1,000. During this period, the portfolio earns dividends worth $50. Calculate HPRR if at the end of the period, its price is $1,100.

HPRR=HPR+1 1.15 Holding period return relative (HPRR) is simply the ratio of value of a security at the end of a period to its value at the beginning of the period.

Suppose Cliff had $125,000 in taxable income from his business, and mistakenly believes the income was actually a loss. As a result he converts $125,000 from his pretax IRA to a Roth IRA. Which of the following is true about Cliff's options?

He has no options. He must pay the tax from the conversion amount, but there will be no penalty. Correct. Cliff must pay the income tax on the conversion but is not subject to the penalty. Prior to December 31, 2017, Cliff could have recharacterized the Roth conversion, but that option has been eliminated due to tax law changes.

Frank's children have moved away, and he is now ready to focus on his retirement planning. He is 48 years old and has a couple of different investment vehicles, including a taxable brokerage account, a traditional IRA, and Roth IRA. He would like to ensure that his holdings are tax efficient. He has several bonds that produce solid income and several mutual funds that have significant yearly capital gains distributions. In addition, he has several stocks with low dividend yields and a low level of capital appreciation. Frank is in a high marginal tax rate currently, and expects that to decrease after retirement. What advice would you give him?

Hold the bonds and mutual funds in the ROTH IRA. CORRECT. Given that Frank is in a high marginal rate, it is best to use his IRAs to hold income-producing investments. This would include capital gains distributions, which are assumed to be taxed at a lower rate during retirement.

Marcel is a financial planner who is registered with SEC as an investment adviser. When developing a privacy disclosure, what must Marcel include in the policy statement?

Marcel must describe the following, in detail, in his privacy statement: • Nonpublic information collected • How he secures and protects current and prior client information • How information is shared with any affiliated/nonaffiliated parties

David's will leaves $300,000 to his son, Justin. According to the will, if Justin does not want to take, or is unable to take, the $300,000, then the money goes to Justin's daughter, Kimberly. When David dies, Justin does not want the money and wants his daughter, Kimberly, to have it instead. Justin is concerned about gift tax consequences of disclaiming his inheritance. If Justin disclaims the inheritance, can Kimberly still receive it? Why or why not? What could be the tax consequences?

If Justin legally disclaims his inheritance, Kimberly will receive the money. Because Justin followed correct procedure to disclaim his inheritance, there will be no gift tax consequence for transfer of the money from Justin to Kimberly. However, David's estate is subject to a generation-skipping transfer tax for the money passing to his granddaughter, Kimberly.

Irene has been working for Action LLC for one year. Action sponsors a SIMPLE IRA plan. Irene elected to defer $13,000 and Action matched 3% of her $300,000 salary. Irene has just been offered a better job at Legacy Outfitters. What are Irene's options when she separates from Action?

If Legacy offers a SIMPLE IRA, she can roll over her SIMPLE from Action to Legacy. Correct. The SIMPLE IRA is an odd plan in that a distribution or transfer made from a SIMPLE during the first two years of participation will incur a tax and an egregious penalty of 25% (not 10%). If Legacy offers a SIMPLE, she can transfer her existing funds to Legacy's SIMPLE. If Legacy does not have a SIMPLE, the only logical recourse that Irene has is to leave the SIMPLE at Action for one more year.

James donated stocks with a basis of $200,000 to his son William. The current value of the stocks are $180,000. If William were to sell the stocks six months later for $220,000, how much would his capital gains or losses be? If the value of the stock six months later was $190,000, how much would William's capital gains or losses be? If the value of the stock six months later was $160,000, how much would William's capital gains or losses be?

If sold for $220,000: • William would have a long-term capital gain of $220,000 - $200,000 = $20,000. If sold for $190,000: • William would have neither a capital gain nor a capital loss since the value of the stocks fell between the two basis amounts for him ($200,000 and $180,000). If sold for $160,000: • William would have a short-term capital loss of $160,000 - $180,000 = ($20,000).

Ilyar exchanges real estate with a basis of $150,000 (FMV of $165,000) for other real estate with an FMV of $230,000. He also gives up shares of stock worth $65,000 with a basis of $30,000. What are the tax implications for Ilyar from this transaction?

Ilyar's realized gain on the stock (boot) = $35,000 and his realized gain on the 1031 property = $15,000. Ilyar's recognized gain on the stock (boot) = $35,000 and his recognized gain on the 1031 property = $0. Ilyar's basis in the new property is $215,000 ($230,000 - $15,000).

Terry, a 72-year-old widower, would like to transfer the ownership of his home to his children. The home is currently valued at $800,000, but Terry expects the house to appreciate in value by at least 6% each year. Terry has decided to establish a qualified personal residence trust. If the trust's term is 10 years but Terry lives only 9 years, how much will be included in his gross estate if the home is worth $1,000,000 at the time of his death?

In Terry's case, the full fair market value of the home ($1,000,000) will be included in his gross estate. Had he lived past the 10-year term of the trust, the full value would have been excluded from his gross estate. He would have, however, owed a gift tax on the remainder interest. Keep in mind that if Terry had outlived the term of the trust, he could have arranged to lease the home from the beneficiaries.

Sheri is a practicing financial planner, but she does not yet hold the CFP Board certification. She currently acts as the trustee to her family's charitable trust. Sheri would like to know if she is considered a fiduciary.

In her role as a trustee, Sheri would be considered a fiduciary. She must manage trust assets for the sole benefit of the trust beneficiaries. She must be fair and not engage in self-dealing. She must also strive to preserve the property in the trust and make the assets as productive as possible. Sheri must also invest trust assets prudently and be impartial when making decisions regarding trust assets and beneficiaries. At this time, Sheri is not considered a fiduciary under CFP Board rules. However, when she enrolls in a CFP Board-registered academic or certificate program, and when she becomes a CFP® professional, she will be considered a fiduciary under CFP Board rules in her role as a trustee.

Carlos became disabled at 29 and wants to know if he is eligible for SSDI. After reviewing his work history, you find that he has earned 26 credits. Does he qualify for SSDI?

In order to answer this question, we must find out how many credits Carlos must have to qualify and compare that to the number of credits he has earned. The calculation is as follows: [(29−21)×4]/[28×4/2][(29−21)×4]/[28×4/2] 16 total credits needed. Since Carlos has more than 16 credits, he qualifies for SSDI.

A financial planner's long-time client stopped by the planner's office today to talk about his older widowed mother. Her health has been declining for several years. The client just learned that his mother is unable to get in and out of bed on her own. Additionally, his mother is no longer able to walk; she must use a wheelchair. The client would like to know if his mother should file a claim against her long-term care insurance policy.

In this case, the client's mother would not qualify for long-term care coverage. At this time, she is unable to perform just one activity of daily living (i.e., transferring from bed to chair). Generally, LTC is needed as a result of disability, chronic illness, cognitive impairment, or Alzheimer's disease. It is possible, however, for LTC services to be used as a bridge from an illness to nondisability status, although most individuals who require LTC assistance remain in need of services for the remainder of their lives.

Knowton recently inherited a sizable estate. He is looking to hire a financial planner to help him create a retirement plan and manage the estate assets. Knowton met with a financial services professional who indicated that she provides planning services through the sale and management of life insurance products. When he asked, the professional indicated that she is paid a commission on the sale of products. Is the financial professional in this case an agent or an employee of the insurance company? To whom does the financial professional owe a fiduciary duty?

In this case, the financial professional is an agent. Knowton knows this because the financial professional charges a commission on products sold. Given her agency status, the financial professional's fiduciary obligation is to the insurance company, not to Knowton. Agents generally are allowed to follow a best interest standard of care, meaning that an agent must act in the retail customer's best interest and cannot place its own interests ahead of the customer's interests. A fiduciary must recommend products and services that are the best available in meeting a client's needs.

Sophia and Velma are a same-sex couple living together in a large northeastern U.S. state. They are not married but have been living with each other in a committed relationship for eight years. Sophia would like to ensure that if she were to pass first, all her assets, including her 401(k) plan, life insurance, and investment assets, will go to Velma. She does not want, however, to lose flexibility related to these assets or trigger a possible gift tax. What estate planning strategies would be most appropriate for Sophia at this time to ensure that her wishes are carried out at her death?

In this situation, Sophia should make sure that the beneficiary designations on her 401(k) and insurance policies clearly list Velma as the primary beneficiary. Sophia should avoid retitling the ownership of assets jointly at this time because using JTWROS could trigger the gift tax. In terms of bank assets, she could retitle the accounts as POD. Doing so will ensure that Velma ultimately receives the assets without triggering a gift tax today. Another solution involves establishing and funding a living trust naming Velma as the trust beneficiary at Sophia's death.

A corporation holds entity insurance (stock redemption) to protect it against any issues that may arise through the termination or transfer of ownership. They have been concerned about one owner, who has become critically ill. Which one of the following is not a benefit of this arrangement - Deductibility of Insurance Premiums or Taxability of Insurance Premiums?

Insurance premiums are nondeductible and therefore, this is not a benefit of the agreement.

Omar recently sold his business for a significant amount of money and now he plans to retire. His financial goals for the money include: (1) providing enough income for his personal needs, (2) controlling use of the assets throughout his lifetime, (3) reducing probate costs, and (4) passing his wealth to his family after his death. What trust arrangement is most appropriate to meet Omar's goals?

Inter vivos revocable trust Correct. This is the correct answer because Omar will have complete control over trust income and assets and can appoint family members as beneficiaries to receive trust assets after his death.

Jessica bought a bond on December 1st. The bond was issued on January 1st. The semi-annual coupon is 7% ($1,000 par). What is the coupon amount Jessica will next receive and how much accrued interest will Jessica pay?

Interest to Jessica on 1/1 is $35 and accrued interest when the trade is placed is $29.17 Correct. The bond pays $35 semiannually ((1,000 × .07)/2). Since Jessica is buying the bond after five months, the accrued interest is $29.17 (35 × (5/6)). This is paid and then deducted on Jessica's 1099.

Which federal legislation requires that firms or sole practitioners who provide investment advice for a fee register with the Securities and Exchange Commission?

Investment Advisers Act of 1940 This is the correct answer. This act requires that firms or sole practitioners, compensated for advising others about securities investments, must register with the SEC and conform to regulations designed to protect investors. Since the act was amended in 1996, generally only advisers who have at least $100 million of assets under management or advise a registered investment company must register with the SEC.

What Assets should not be considered when evaluating a vehicle for holding a client's emergency fund?

Investments, including stock or high-yield bond mutual funds, should not be considered when evaluating a vehicle for holding a client's emergency fund, due to short-term volatility.

The manager of Triumphant Hedge Fund has $10 billion in assets under management. If the fund follows a typical 2/20 compensation structure, how much will the fund manager earn if the threshold profit percentage is set at 8% for the hedge fund?

Irrespective of the performance of the fund, it will earn 2% of $10 billion or $200 million in assets under management. Additionally, the fund will also charge an additional 20% if the 8% profit threshold is achieved.

A CFP professional's client has not set up a 529 plan for his child, David, who has already started college. Can she start one now and take advantage of the fact that computers are considered a qualified expense for tax-free 529 distributions?

It is true that a client could start a 529 plan anytime. The real benefit, however, comes with the tax-free withdrawal of earnings that build up in the plan over time. Thus, it would be more difficult to accrue enough earnings to be of immediate benefit given the short time horizon. This student could still benefit if postsecondary education continues, particularly if he attends graduate school. Setting up a 529 plan is also an investment decision, which means both the risks and potential rewards should be considered, along with alternative ways of accomplishing the same objective. This client could benefit even without substantial investment return if she participates in a state-sponsored plan that offers a state tax deduction for residents.

Lamar is a CFP® practitioner in good standing. Lamar has held the CFP® marks for over 20 years. During that time, he has developed an expertise in retirement plan administration. Other CFP® professionals typically call Lamar when they have complex questions about the appropriateness of establishing a retirement plan for a small business. As Lamar's practice has grown, he has been asked by some clients to provide advice and counsel on very complex estate planning topics. The last time that Lamar reviewed estate planning in depth occurred when he was studying for the CFP® examination. Lamar is reluctant to refer his clients to anyone else because he is fearful that his competitors will see his clients as prospects. Has Lamar violated any aspect of CFP Board's Code of Ethics and Standards of Conduct? If yes, which principle?

It turns out the Lamar has violated several principles within the Code of Ethics. Lamar lacks the competence to provide high-level estate planning advice. Under the Code of Ethics, Lamar should have recognized his technical limitations related to estate planning and referred his clients to an expert. Additionally, Lamar should immediately make a commitment to increasing his knowledge and capabilities related to complex estate planning issues.

Jacob is a real estate investor. Jacob owns several properties through a limited liability company (LLC). As a way to increase his returns, Jacob started flipping houses 18 months ago. He has accumulated a large amount of personal debt used to finance home purchases. Unfortunately, few of the homes he has purchased and renovated have sold. In fact, Jacob has been experiencing a significant negative cash outflow. He is essentially out of options at this point. His income from the properties has declined to almost nothing (he has no one renting at this time). He is considering filing for bankruptcy. He would like to know what his best option is in order to obtain a quick discharge of his debts so that he no longer needs to pay his outstanding loans. Jacob would also like to know what the impact of filing will have on his credit rating.

Jacob's best bankruptcy option, at this time, is to file for Chapter 7 bankruptcy. He will need to pass the means test; however, this should not be an issue because he has very limited income sources. If he were to fail the means test, he would be required to file for Chapter 13 bankruptcy. Before deciding to file for bankruptcy, Jacob needs to remember that the action will negatively affect his credit score for 7 to 10 years. The length of the negative effect is based on when the final debts are discharged. A Chapter 7 filing will have the shortest effect, whereas a Chapter 13 filing can adversely affect a filer for a longer period of time. (Under federal law, Jacob can receive a free copy of his credit report once every 12 months from each of the primary credit reporting agencies—Equifax, Experian, and Transunion—by going to www.annualcreditreport.com.)

Jake, 48, has come to you to request help in determining the amount of money that can be contributed to his traditional IRA for the year. His wife, Joy (age 52), made $50,000 of W-2 wages. He made $2,000 as an independent contractor and $6,000 from investment earnings. How much can Jake and Joy contribute to their IRAs?

Jake can contribute $6,000 to his IRA. Joy can contribute $7,000 to her IRA for a total contribution of $13,000 between the two of them. Because they are married, Jake can take advantage of a spousal IRA, since his earnings are not high enough for a full IRA contribution. Since Joy is over 50, she is allowed an additional catch-up contribution of $1,000.

Jane provides a money purchase pension plan for her employees. She wants to fund the plan for each employee with either a term or whole life insurance policy. Which person does not pass the requirement for maintaining insurance as incidental to the plan? Jeff has received $100,000 in his money purchase pension plan. He has a $1,000,000 death benefit policy that cost $20,000 that Jane provided. Mary has received $200,000 in contributions to her plan. She also has a $500,000 whole life policy that cost $40,000. Janice has received $45,000 in contributions of which $25,000 has been payed to whole life premium payments. James has received $150,000 in contributions. $70,000 in premium payments were made to his whole life insurance policy.

Janice has received $45,000 in contributions of which $25,000 has been payed to whole life premium payments. Correct! Janice's contribution is not in compliance. Her whole life insurance cost exceeds the 50% threshold: 25/45 = 55.5%.

Jeff and Caroline, a married couple filing jointly, sell their principal residence that they have owned and resided in for the last 10 years for $1.2 million. Jeff and Caroline's basis in the home is $500,000. Jeff and Caroline have other net investment income of $150,000. Their modified AGI is $400,000. What is Jeff and Caroline's realized gain on the sale of their principal residence?

Jeff and Caroline's realized gain on the sale is $700,000. The recognized gain subject to regular income taxes is $200,000 ($700,000 realized gain less the $500,000 Section 121 exclusion). Jeff and Caroline have $150,000 of other net investment income, which brings their total net investment income to $350,000. Their modified AGI exceeds the threshold of $250,000 by $150,000, so Jeff and Caroline are subject to NIIT on the lesser of $350,000 (their net investment income) or $150,000 (the amount their modified AGI exceeds the $250,000 married filing jointly threshold). Jeff and Caroline owe NIIT of $5,700 ($150,000 × 3.8%).

Joe, 52, and Nancy, 56, need money for repairs to their house. They have come to you to ask if they can take funds from their Roth IRA for the repairs. They both opened the Roth IRAs four years ago. Joe's Roth IRA has an account balance of $50,000, consisting of $20,000 in contributions, $10,000 in conversions (converted four years ago), and $20,000 in earnings. Nancy's Roth IRA has an account balance of $30,000, consisting of $20,000 in contributions and $10,000 in earnings. How much can Joe and Nancy access without facing taxation or penalty?

Joe and Nancy can access $40,000 without facing any taxation or penalty. Since they do not meet the requirements for a qualifying distribution, they must take a nonqualified distribution for the repairs. Regular contributions can always be withdrawn from a Roth IRA without penalty or taxation. Joe's conversion would be subject to a penalty of 10% because the conversion was made fewer than five years ago. Earnings will always be subject to taxation and penalty if taken out as a nonqualified distribution.

Hector has come to you for help determining if he is a member of a controlled group. He is one of four shareholders who own Corporations X and Y in the percentages found in the table. Hector: 20%-25% Brandon: 10%-45% Michelle: 45%-10% Kelsey: 25%-15% The remaining percentages are owned by unrelated shareholders. Is Hector a member of a controlled group?

Joe is a member of a controlled group. There are four owners who together own 80% or more of each corporation. There is also effective control because the identical ownership in each corporation is more than 50% (Hector, 20%; Brandon, 10%; Michelle, 10%; Kelsey, 15% = 55%). Therefore, this is a brother-sister controlled group.

John and Emily Jones are your clients and are very excited that their daughter has been accepted to a top university for undergraduate studies. They have come in to share the good news with you. Tuition and fees will be $35,000 annually, and other costs of attendance will average $20,000 annually for a combined $55,000 annual education expense. John and Emily have been saving for this day using a 529 savings plan and have accumulated enough in their 529 plan to pay $40,000 of the costs annually. John and Emily plan to pay the remaining annual costs with current cash flow and perhaps student loans. John and Emily have AGI of $170,000. What are the tax implications of this funding strategy?

John and Emily can allocate the distributions from the 529 plan to room and board and other nontuition qualifying expenses. Out-of-pocket money and loan proceeds can be allocated to tuition. This will allow John and Emily to also claim the American Opportunity Credit for the tuition that they pay. They will have $4,000 of qualifying expenses for the American Opportunity Credit, which will result in a potential tax credit of $2,500 (100% of the first $2,000 of qualifying expenses and 25% of the next $2,000 of expenses up to $4,000). However, John and Emily's AGI is in the phase-out range. Their credit is reduced by 50%, or $1,250, calculated as follows: (($170,000−$160,000)$20,000)×$2,500=$1,250

Two Certified Financial Planners are analyzing various investments. Throughout the analysis, each utilizes various pieces of information to complete their analysis. John utilizes an approach that takes into consideration various charts, but primarily utilizes ratio analysis, while digging deep into the income statement, the balance sheet and various ratios and economic data. Susan likes to look at the number of short sellers on a particular stock while analyzing market volume. She believes that looking at the support and resistance of the stock price gives great insight into potential opportunities to profit. Which analysis style are John and Susan exhibiting?

John focuses on fundamental analysis, but does some technical analysis. CORRECT. This answer is correct as fundamental analysis is rooted in examining the financial statements, along with ratio analysis. He does use various charts, which is a tip off that he does use some technical analysis.

John has been a CFP professional for over 20 years. He advertises his financial planning services as offered on a fee-only basis. While over 95% of his current business is based on fees earned managing client assets, John still maintains his securities licenses as a registered representative, even though he rarely charges a commission for his services. Is John allowed to use the term "fee-only" to describe his business model?

John may not use the term "fee-only" to describe his practice or compensation method. Generally, anyone who retains a securities license, acts as a registered representative of a broker/dealer, is dually registered, or is an employee of an insurance firm may not use the term "fee-only."

Jose and Lordis Martinez are your clients. They have very strong and steady incomes and are looking at purchasing a new home. They feel that they are in a position to purchase their dream home. With interest rates low, combined with the ability to deduct mortgage interest on their tax return, they feel that they can purchase just about anything they want. They are looking at a home that would cost $2,500,000. They would put $500,000 down and then borrow $2,000,000 for 30 years at an interest rate of 4.5%. They have come to you to get your opinion on their purchase, particularly what their mortgage interest deduction would be on their tax return. They expect that they will pay $80,000 in mortgage interest for the first year of the loan. What is your response?

Jose and Lordis Martinez are taking out mortgage acquisition debt in excess of $750,000. Their total mortgage interest deduction will be limited to $30,000, calculated as follows: $80,000×($750,000$2,000,000)=$30,000 Thus, Jose and Lordis will not receive a tax benefit for the full amount of mortgage interest paid. This probably will not affect their decision to purchase the home, but at least they will not be surprised at tax time.

Jose, a new client, has completed his new client information-gathering survey. He has a baseball card collection that he thinks is worth $15,000. He also has $10,000 of U.S. savings bonds that mature in 10 years. He enjoys collecting baseball cards and involves his son in the activity. Jose has a CD for $20,000 that matures in six months. The early withdrawal penalty is 5% of the balance. Jose's home was purchased 10 years ago for $250,000, and it is currently worth $400,000. How would these items be reported on Jose's financial statements?

Jose's baseball card collection is a hobby. As such, it would be included in the personal use assets (also referred to as the household assets) section of the balance sheet. The U.S. savings bonds would be reported at their fair market value ($10,000) in the investment assets section of the balance sheet. The CD is a current asset because it matures within 12 months. The early withdrawal penalty is listed simply as a distraction. Jose's house is a household asset (personal use asset) and should be reported at its fair market value of $400,000 on the balance sheet.

Julie is the owner of a factory and wants to start a retirement plan. She wants to make sure she benefits from the plan the most and is not as concerned about how much her employees get. She wants the plan to be low cost and only wants to fund it in years when she has extra cash. What strategy could Julie use to ensure that she benefits the most from this plan?

Julie could start a profit sharing plan and integrate it with Social Security. By doing this, she could receive an additional 5.7% once her compensation reaches the Social Security wage base. Julie could also add a CODA (401(k)) option to the plan. This will allow her to maximize the amount deferred to her account without contributing for all employees. Note: Julie should be careful of the various testing requirements that come with CODA and profit sharing plans.

Kwasi Maafolah, a longtime client, is planning the following contributions and is seeking your advice. His AGI for the year is projected to be $150,000. He would like to donate $10,000 of cash to his church. He would also like to donate $60,000 worth of appreciated stock to his church. In addition, Kwasi made a cash contribution of $10,000 to a private charity. For tax planning purposes, what do you estimate Kwasi's charitable deduction to be?

Kwasi's overall limit on charitable contributions is $75,000 (50% of $150,000)($90,000 if giving cash to a 50% organization, 60% of $150,000). 30% of Kwasi's AGI is $45,000. • Step 1: Category 1 contributions = $10,000; Category 2 contributions = $10,000; Category 3 contributions = $60,000. This category limit could be as high as $90,000 ($150,000 x 60%) for those who are giving all cash. • Step 2: Category 1 allowed deduction is $10,000, calculated as follows: $150,000 × 50% = $75,000 - $10,000 (Category 1) = $65,000 remaining deduction. This category limit could be as high as $90,000 ($150,000 × 60%) for those who are giving all cash. • Step 3: Category 2 allowed deduction is $5,000, calculated as follows: $75,000 - ($10,000 + $60,000) = $5,000; lesser of $5,000 (remaining amount up to 50% overall limit) or $10,000 contribution. • Step 4: Category 3 allowed deduction is $45,000 calculated, as follows: Lesser of $45,000 (30% of AGI cap on contribution), or $65,000 (50% of AGI limit less Step 2). Kwasi's allowed charitable contribution for the year would be $60,000. Kwasi would also have carry forward charitable contribution amounts in Category 2 of $5,000 ($10,000 - $5,000) and in Category 3 of $15,000 ($60,000 - $45,000). If Kwasi has a high adjusted basis in the stock donated relative to the FMV, he may elect to value the stock at the adjusted basis so that he would not be subject to the 30% of AGI limit on the long-term capital gain property. This may allow him to take a larger deduction for the donated stock in the current year.

Lamar is 50 years old and considering purchasing an accumulation deferred annuity. He is concerned that if he makes the purchase, he will be forced to annuitize the contract at a future date. He is unsure if he will need the income payout later in life. What are Lamar's payout alternatives if he does purchase the annuity? What are some of the advantages and disadvantages associated with the different alternatives?

Lamar can either take distributions directly from the accumulation account or convert the account to a payout annuity. An advantage associated with taking periodic withdrawals instead of annuitizing is that Lamar will retain access to and control over the account. He can make partial withdrawals as he needs funds, and if the distributions are equal to or less than 10% of the account value, he will not pay a surrender charge. Also, by maintaining the account with the insurance company, Lamar will continue to be credited interest or earnings on the amount still in the account. The primary disadvantage associated with not annuitizing is that Lamar could end up depleting the account during his lifetime, which could result in an income shortfall later in life.

Lamar is a CFP® professional. He is also an SEC Registered Investment Advisor. Recently Lamar was reprimanded by the SEC for recommending a product that provided an undisclosed referral payment to him. He reported the incident to CFP Board, but he does not expect to be sanctioned because he believed at the time of the recommendation that the product was the best available to the client. Is Lamar correct in thinking that CFP Board will not discipline him for his actions?

Lamar's primary regulator in this case is the SEC. Whenever CFP Board rules appear to contradict a federal or state regulation, CFP Board requires CFP® professionals to comply first with federal and state regulations. Because Lamar failed to comply with regulatory requirements, he could come under discipline by CFP Board.

When meeting with his financial planner, Larry indicated that when it comes to his short-term liquid assets, he must have a 100% guaranteed rate of return with no risk of loss. During a discussion about investment alternatives, his financial planner indicated that Larry would be equally served using an account at a bank, credit union, or money market mutual fund. Is Larry's financial planner correct?

Larry's financial planner is incorrect. Investments held in money market mutual funds can go down in value even though fund managers attempt to keep the net asset value of the funds at $1.00. If a money market mutual fund loses value, it is up to the fund manager to make up any losses. At this time, federal or state insurance does not exist to insure fund holders.

Latrell, a CFP professional, has a successful brokerage practice. He is considering establishing his own investment advisory firm that will charge an assets-under-management fee to all clients. Latrell knows that he will need to register with the SEC because he plans to manage several hundred million dollars. What process does he need to undertake in order to register his new firm with the SEC? Additionally, what FINRA licenses will Latrell need to obtain in order to become an investment adviser representative?

Latrell must submit the nine elements of registration listed under the heading "General Firm Registration Requirements" in order for this firm to become a Registered Investment Adviser. Latrell must also complete paperwork with the SEC to become an investment adviser representative. Because he is a CFP certificant, all examinations will be waived. Had he not been a CFP professional or not held a similar credential, he would have been required to take and pass the Series 65 or both the Series 66 and 7 licensing examinations. Keep in mind that Latrell will need to submit Form U-4 and ADV Part 2B.

Jack and Jill, each age 40, are married filing jointly. Jack is an active participant in his employer's sponsored plan at work. Jill is a stay-at-home mom. Jack had $80,000 in W-2 earnings this year. Their AGI, which included some passive income, was $111,000. Can they each contribute to an IRA? If so, how much is deductible?

Let us break down this answer. 1. The question whether each can contribute should be tackled first as it is a trick question. The answer is yes. Jack can contribute and Jill can equally contribute up to $6,000 by virtue of a spousal IRA contribution. (Note that there is no "spousal IRA" designation. The designation would be a traditional IRA.) In short, anyone can contribute to an IRA provided he or she has earned income or is married to a spouse who has earned income and is not age 70½. The question is whether the contribution is deductible. 2. The second part of the question asks whether they can both deduct their contributions. Jack, as an active participant in his employer's sponsored plan, is within the phase-out limitation. Therefore, Jack's deductible contribution can be calculated as: Reduction=Contribution maximum×(AGI−Lower phase-out limit)(Phase-out range) Calculation: Reduction=$6,000×(($111,000−$103,000)$20,000)=$2,400 Jack's maximum deduction is $6,000 minus $2,400 = $2,600. Where MFJ AGI is $111,000, Jill is eligible to make a full $6,000 deductible IRA contribution.

Maria, a longtime client, has contacted you and expressed a great deal of concern about the refugee crisis in parts of Europe, the Middle East, and Africa. She has started volunteering at a local refugee center in your hometown and has learned of several different charitable organizations working to feed and provide basic care for refugees living in refugee camps overseas. After doing some checking on her own and working with others who have visited organizations and facilities in Europe, Maria has identified two local European organizations that she would like to make a contribution to. She plans to give $10,000 to each of the organizations and has called you to discuss the best way to go about doing this. What do you tell Maria?

Maria's donations, although beneficial to the charitable organizations, would not be deductible because the organizations are not U.S.-based charities. As Maria's financial planner, you would want to investigate to determine whether these charities have U.S.-based affiliate charities. If there are U.S.-based affiliate charities that Maria could donate to, then she would receive a tax deduction for her donation and the foreign charities would also receive the money via their U.S. affiliates.

Mary owns a privately held business with her sister Pam. The company is set up as an LLC, with each sister controlling a 50% interest. What type of buy-sell agreement would be most appropriate for Mary and her sister if they are interested in simplicity and ease?

Mary and Pam should consider establishing a cross-purchase buy-sell agreement. An entity purchase agreement does not work as well because the firm is not considered to be its own entity and, as such, cannot own an insurance policy. Also, because stock has not been issued, there is nothing to transfer at the death of one of the sisters.

Matt and Natalie like to donate 10% of their income to various organizations and causes from year to year, but sometimes they have not always identified the cause to which they want to donate. It is November and they have come in for their quarterly meeting. They ask if you know of any charities that they should consider donating to this year since they have not found any that they want to support. What do you tell them?

Matt and Natalie could open a donor-advised fund this year and make a donation of 10% of their income to the fund. They would then be able to claim a deduction for their charitable contribution in the current year, but they would not have to distribute the money to a charitable organization until they have had time to identify one. Donor-advised funds are 50% limit organizations. An advantage of donor-advised funds is that some local charities may not have the ability to accept donations of appreciated stock. Matt and Natalie could donate appreciated stock to the donor-advised fund, as outlined in vignette 4, then the donor-advised fund could sell the stock, and Matt and Natalie could direct the fund to distribute cash to the local charity. This allows Matt and Natalie to benefit from donating appreciated stock, and the charity can receive cash.

Molly, a CFP professional, is advising her client, Ryan, who became the legal guardian of his younger brother a couple years ago when their parents passed away. Ryan just graduated from college himself and is making a very low income and has very little in terms of savings to help his younger brother pay for college. Ryan asks Molly if she knows of any financial aid programs that might help. What educational planning strategies, related to need-based financial aid, should Molly consider in the development of the education plan?

Molly, as a CFP professional, and if utilizing the six-step financial planning process, should gather additional data regarding the current financial situation and specific education goals of Ryan and his brother. With that said, Molly could easily list several need-based financial aid opportunities that Ryan's brother would likely qualify for, including the Pell Grant, FSEOG, Federal Work-Study Program, Federal Perkins Loan, and Subsidized Direct Stafford Loan. Remember, unsubsidized direct loans are based on the cost of education but are not considered need-based aid. In other words, even someone with a very high EFC can take out an unsubsidized direct loan. Ryan's family experienced a tragedy with the loss of their parents, but Ryan would be incorrect to assume that his brother needs to forgo college due to financial constraints. With the tragic loss of the parents, Ryan's brother may be eligible for various scholarship opportunities as well.

What are the most commonly used Chapters of Bankruptcy for individuals?

Most individual bankruptcies use either a Chapter 7 or a Chapter 13 process. Under current legislation, someone declaring bankruptcy must attempt Chapter 13 prior to Chapter 7. The intent of the law is to encourage debtors to repay some of their outstanding liabilities.

A client is currently in the 32% marginal federal tax rate and a 4% marginal state tax rate. He is looking at tax saving strategies and wants to explore municipal bonds. He understands that there are tax benefits, but does not understand how to compare the yield on a muni to that of a corporate bond. He is considering a couple of different options. Which one would be the best choice given his current situation: Corporate bond 8.5% yield Municipal bond 6.0% yield-subject to state tax Municipal bond 5.0% yield-not subject to state tax

Municipal bond subject to state tax. CORRECT. The after-tax yield is 5.76, which is the highest of all three, as shown in the explanatory table. Corporate Muni Sub2St Tax Muni NSub2StTax Rate 8.50% 6.00% 5.00% Taxes (federal and state) 36.00%, 4.00%, 0.00% Remaining yield is multiplied by (1-Taxes) 5.44%, 5.76%, 5.00%

Jessica comes to you seeking advice on whether she should buy a property that just hit the market. The list price is $1.2 million. She has talked to the real estate agent and has the following information. The building has four apartments that rent for $3,000 a month each. Usually one of the apartments is open due to vacancy. The total basic upkeep and maintenance cost is about $20,000 per year. Jessica will pay all cash. What is the net operating income (NOI) and what price should Jessica pay based on a 6.5% capitalization rate?

NOI = $88,000; Value = $1,353,846 Correct. Gross Rental Receipts = $144,000; Vacancy Losses = $36,000 (i.e., $3,000 × 12); Maintenance Cost = $20,000; NOI = $88,000. $88,000/0.065 = $1,353,846

Nancy's mortgage payment is causing a strain on her monthly cash flow. She thinks she would be able to put more toward savings if her payment was lower. Nancy is currently in an increasing interest rate environment and wants to avoid an ARM. What are some other options Nancy has available to reduce her monthly payment?

Nancy can refinance her debt and extend the term of the loan. By extending the term, her monthly payment will be lower, allowing her to save more. The interest rate on a fixed mortgage, which is also deductible, is often lower than the long-term return offered by an equity investment. This is a good strategy for Nancy to consider that could lead to greater wealth accumulation for her retirement years.

Narod is age 45 and is currently paying $1,000 per year in premiums on a nonparticipating whole life policy. The policy does not pay dividends. The cash value in the policy at the beginning of the year was $8,000. The end-of-year cash value was $8,250. If the face value of the policy is $100,000 and market interest rates are 4.50%, how much is Narod paying per thousand for coverage? How does this compare to industry benchmarks? Based on your analysis, should Narod retain or replace this policy?

Narod is currently paying approximately $12.59 per $1,000 of life insurance coverage. YPT=[[(1000+8000)×(1.045)]−(8250+0)(100,000−8250)×(0.001)]=$12.59YPT=[[(1000+8000)×(1.045)]-(8250+0)(100,000-8250)×(0.001)]=$12.59 The recommended rate for someone his age is $6.50 per thousand. However, given the rules for policy replacement that state the cost should be two times more than the benchmark before replacing the policy, Narod may retain the policy. He should continue to shop for a policy that has a lower cost per thousand.

Jennifer owns 10 rental properties that rent for $10,000 per month. Jennifer typically has a 25% vacancy rate on her property. Her total maintenance expenses for the year were $600,000. She also made $200,000 in mortgage payments, of which $100,000 was interest. If an investor has a required return of 8%, how much will he or she be willing to pay for Jennifer's properties?

Net Operating Income is $400,000 The investor will be willing to pay: Net operating income/Capitalization rate $400,000/0.08= $5,000,000 for this property

Nikki and Ty are a successful entrepreneurial couple. They have been married for 10 years. Nikki is 15 years older than Ty. While they have been married, they have accumulated a significant amount in assets—well above the applicable credit amount for each of them. Several assets owned by Nikki have been appreciating quickly. Nikki does not want to sell the assets or lose control over their use at this time, but she does want to ensure that Ty will be able to enjoy the assets during the remainder of his life, should she predecease him. What trust strategy can Nikki and Ty use that will remove these assets from the surviving spouse's estate as a way to reduce future tax liabilities?

Nikki and Ty should establish a credit shelter trust in combination with a marital trust. Although they may not need a credit shelter trust to avoid taxation—thanks to the trust's portability—it may still be useful in the future in protecting Ty from taxes on the quickly appreciating assets held in the trust.

Wade is 23 years old and just became disabled. He came in wanting to know if he qualifies for Social Security Disability. After going over his work history, you find that Wade has earned 6 credits, 4 of which are from the past three years. Does Wade qualify for SSDI?

No, although Wade has the required 6 credits, only 4 of them fall in the last three years. To qualify for SSDI, Wade would have had to earn at least 6 credits in the last three years.

Hank Bradley was a U.S. citizen whose estate, valued at $6.1 million, was bequeathed to his son John. The largest asset in Hank's estate was his interest in Birchwood Industries, a closely held corporation in Vermont that has been in operation for the past 25 years. The FMV of Hank's stock in Birchwood Industries was $2.8 million, which is 25 percent of the value of all voting shares of Birchwood Industries stock. The corporation has real estate interests worth $6.4 million. The estate has debts totaling $400,000. Does Hank's estate qualify for a special use valuation discount?

No, because the 50 percent test was not met. Correct. This answer is correct because the 50 percent test was not met. The value of real and personal property (less debts or unpaid mortgages) in the decedent's estate must equal at least 50 percent of the decedent's gross estate. In this case, $2,800,000/$6,100,000 = 46 percent.

John, a CFP professional, was asked by the client during a prospect meeting how he would be paid. His compensation method is 100% commission, so he told the client that she could put her checkbook away since his "financial planning services wouldn't cost her anything because he receives his compensation from both the investment and insurance companies he uses to implement her financial planning recommendations." Is John's statement considered ethical according to CFP Board's Practice Standards and Code of Ethics?

No. John's limited explanation of payment is not understandable by the client. In addition, implying the services will not come at a cost to the client is misleading and thus inconsistent with the Code of Ethics.

Jane invests $100,000 in the stock of a Chilean corporation. According to current exchange rates, $1 = 675 Chilean pesos. If her investments denominated in Chilean pesos go up 25% during the period but the exchange rate changes to $1= 700 Chilean pesos, what is Jane's overall return in this investment after adjusting for changes in the exchange rate?

Note that although Jane's investments went up by 25%, the value of the Chilean peso fell from $1 = 675 Chilean pesos to $1 = 700 Chilean pesos. This accounts for a drop of 3.7% ((700 - 675) / 675). Therefore, the net return for Jane's investment when adjusting for the rising value of dollar (and fall of the Chilean peso) is calculated as shown next. Step 1 Converting dollars to Chilean pesos based on the dollar to Chilean peso exchange rate: Amount in Chilean pesos = Initial dollar amount × Chilean peso exchange rate Initial investment: $100,000 = 675 × $100,000 = 67,500,000 Chilean pesos Step 2 The new value after the investment increases by 25%: Initial value × (1 + R) Where R = Rate of return or increase in the value of the investment = 25% The value in Chilean pesos after the 25% increase = 67,500,000 × (1 + .25) = 84,375,000 Chilean pesos Step 3 Converting Chilean pesos to dollars = Amount in Chilean pesos / Exchange rate in Chilean pesos: When converting this to dollars, the new value will be: 84,375,000 Chilean pesos / 700 = $120,535.71 Step 4 Overall return on the investment adjusting for changes in exchange rates = (New value (Dollars) - Initial investment (Dollars)) / Initial investment (Dollars) Adjusted net return = ($120,535.71 - $100,000) / $100,000 = 20.54%

A trust vs. B trust

One easy way to remember the difference between an A and B trust is that a power of appointment trust is an "A" trust (A for appointment).

Frank's computer networking company recently started a qualified retirement plan to attract employees, as well as help them plan for retirement. He is about ready to hire a new employee. He will either offer $79,500 salary or $70,000 salary with a $10,000 guaranteed retirement contribution. Which of the following is true?

One offer will reduce expenses by $227. CORRECT. Given that a contribution to a qualified retirement plan by a company exempts the company from payroll taxes, the larger offer ($70,000 + $10,000) will save the company $227. Salary 70,000 79,500 Payroll taxes paid by company 7.65% 7.65% 5,355 6,082 Difference in payroll taxes $727 Salary 70,000 79,500 Payroll taxes 5,355 6,082 Guaranteed retirement contribution 10,000 0 Total cost to company 85,355 85,582 Total Difference $227

Difference between Medicare and Medicaid

One way to remember the difference between Medicare and Medicaid is to memorize this mnemonic: • Medicare: CARE for all who qualify • Medicaid: AID to those who need it

GRAT v. GRUT

One way to remember the difference between a GRAT and a GRUT is to think about the valuation of the assets: • In the GRAT, as always the same or a fixed amount. • In the GRUT, as updated yearly.

What is generally covered in a homeowner policy?

One way to remember what is generally covered in a homeowner's policy is to use the following mnemonic: VVV WEATHR FSL • Vehicle • Vandalism • Volcano • Windstorm • Explosion • Aircraft • Theft • Hail • Riot • Fire • Smoke • Lightning

Ann is a widow who received income from a credit shelter trust. She also has a general power of appointment over property held in an irrevocable marital trust. When she passes away, what portion of the assets held in these two trusts would be included in her gross estate? What would happen if Ann released her general power of appointment in the marital trust to her son?

Only the assets in which Ann held a general power of appointment will be included in her gross estate. In this case, only the assets in the marital trust will be included. If Ann releases her general power of appointment she will have made a taxable gift. She may owe a gift tax based on the value of the assets in the trust.

Tools the Federal Reserve can use to influence the economy include

Open market operations Correct! The Federal Reserve uses open market operations to increase or decrease the money supply, which can have an influence on the economy.

Which type of pooled investments redeems shares on a daily basis?

Open-end mutual fund Correct. Open-end mutual funds redeem shares at the end of trading each day. The number of outstanding shares varies based on investor demand.

Dan wants to begin saving for his son's education. He would like to fully fund four years of college. Dan recently spoke with a financial aid counselor at a local university that he thinks his son will attend. The counselor told Dan that tuition is growing at 5% annually and will be $23,000 when Dan's son begins college in seven years. Dan comes to you and asks how much he will need to have saved by the time his son starts college. Assuming he can earn an average annual return of 7%, what do you tell Dan?

PV = 89,453 N = 4 I/Y = ((1.07 / 1.05) - 1) * 100 = 1.905% PMT = 23,000 FV = 0 • Dan should save the money by the time his son begins college. This should signal that this is an annuity due problem. In this question, the payment represents the cost of tuition for each year the child is in college. The payment will need to be adjusted for inflation and earnings, so the inflation-adjusted rate of return is necessary. Since Dan wants to fully fund four years of school, the payment will be made only for four years. Note: Dan's investment earnings are greater than inflation. Therefore, he will owe less than the gross amount over four years. That is a good check to make sure you get the right answer. The PV of $89,453 is less than four years at $23,000, which is $92,000. The third step is to determine the amount your clients will need to save on a consistent basis (usually monthly or annually) to fund their child's education.

The differences between 3 Charitable Trusts

Pooled-Income Fund (PIF) (run by charity) • Asset from many donors pooled together • Income for life to donor • Remainder to charity • Good for small gifts; low costs Charitable Remainder Annuity Trust (CRAT) • Less flexible • Fixed annuity > 5% of initial fair market value • Annuity must be paid annually • Life or term (not more than 20 years) • No additional contributions allowed • Remainder interest >10% • Donor can change charitable beneficiary Charitable Remainder Unitrust (CRUT) (inflation protected) • More flexible than CRAT • Fixed income percentage of at least 5% of the annual fair market value • Annual valuation • Donor can contribute after inception to increase income stream and take additional tax deductions • Catch-up provisions allowed if distributed income is less than stated percentage • Remainder interest > 10% of initial value 1. The donor can elect to receive an income interest from the trust, based on the value of the assets it holds. 2. The donor receives a charitable income tax deduction equal to the fair market value of the asset, less any income interest the donor may receive.

Vincent and Martha Sullivan have a daughter, Lacie. Vincent was traveling to see Lacie when he died in an accident. Vincent and Martha owned the following properties: • Primary residence $400,000 held in tenancy by entirety • Remaining mortgage $100,000 • Vehicles owned: o Car: $20,000 (held fee simple) by Vincent; $20,000 by Martha (held fee simple). The car passes by will to Martha. Life insurance policy on Vincent's life owned by Vincent. Death benefit on the policy is $1,000,000, and its fair market value is $160,000. The only beneficiary is Lacie. Retirement plan investments valued at $3,000,000 owned by Vincent with Martha as beneficiary. Irrevocable trust with Martha as beneficiary worth $1,000,000. Vincent and Martha made equal contributions on the jointly held properties. In settlement for the car accident, Vincent's heirs received $1,000,000 for wrongful death. Vincent has requested charitable contributions worth $100,000 from his checking account to his favorite nonprofit foundation. Vincent's unpaid medical expenses were $10,000, and his funeral expenses were $40,000. Administrative fees for the estate were $50,000, and remaining credit card debt was $20,000. Calculate Vincent's probate estate. Calculate Vincent's gross estate.

Probate Estate - $20,000 Gross Estate - $4,220,000

Jim has decided to provide a qualified retirement plan for his employees. His company, Jim's Cardboard Manufacturing, has been in operation for 10 years. Jim explains to Madison, his retirement adviser, that profits from the company are variable, but that he can come up with enough money most years to provide a benefit. Even so, in years when Jim's company's profits might be reduced, he is motivated to continue funding a retirement plan. One specific requirement is that Jim does not want to dilute the value of his company. What plan is best suited for Jim's needs?

Profit sharing plan with a CODA Correct. A profit sharing plan with a CODA would work because it offers the flexibility of the profit sharing plan and gives employees the ability to defer salary to a 401(k) or cash account.

Mackenzie is a CFP professional. She is in the process of reviewing a client's current homeowner's policy. Under what section of the policy can she find information about the client's responsibilities in case of a claim?

Property and casualty insurance policies share at least five common elements: 1. A declarations section 2. A definition section 3. An insurance agreement section 4. A conditions section 5. An exclusions section Mackenzie can find information about her client's responsibilities in the conditions section of the policy. Generally, the client must maintain the property prior to a loss. When a loss does occur, the client must take steps to notify the insurance company, protect the damaged property, and provide access for evaluation and repair. The declarations section provides details about the type and amount of insurance as well as who is insured. The definitions section provides the insurance company's definition of terms such as insured, disability, deductible, and so on. The insurance agreement section describes whether the policy is an all-risk or a named-perils agreement. The exclusion section outlines what is specifically excluded in the policy. Typical exclusions include losses due to flooding and earthquakes.

Some fundamental data for Acme Industries Inc. is presented next. Using the information, compute Acme's ROE: • EPS = $1.00 per share • Dividends = $0.50 per share • Number of shares outstanding = 10,000,000 • Total equity = $100,000,000

ROE = Net income / Equity = ($1 × 10,000,000) / ($100,000,000) = 10%

Kyle and Elise are new clients, and you are doing some year-end tax planning. Through the client intake process, you learned that Kyle and Elise have 9 children, the oldest of whom is 18. For the current tax year Kyle expects to pay $9,000 in state income taxes and $3,500 in local property taxes. After all deductions and exemptions are claimed, Kyle and Elise's taxable income is $139,550 for the year. Kyle has mentioned that the couple has been hit with AMT in the past and he is wondering if they should prepare for it again this year. What is your response?

Regular Tax - $22,418, AMT - $13,481

Ed, your longtime client and a successful entrepreneur, is the majority shareholder of the Lincoln Corporation. The Lincoln Corporation owns the Booth Corporation. The Booth Corporation pays a $100,000 dividend (from current and retained earnings) to the Lincoln Corporation. The Lincoln Corporation then pays a dividend (from current and retained earnings) to Ed of $150,000. How much will be included in the Lincoln Corporation's gross income? How much is the Lincoln Corporation's dividends-received deduction?

Remember! Dividends are always included in gross income. Later, the dividends-received deduction is taken to remove the deductions from taxable income. The Lincoln Corporation includes all $100,000 of the dividend in income. Because the Lincoln Corporation owns all of Booth Corporation, the Lincoln Corporation can deduct $100,000 as a dividends-received deduction. Ed is an individual and will report all $150,000 of the dividend as taxable income. Ed is not eligible to deduct any portion of the dividend.

Roberto established a GRIT and transferred $2 million to the trust today. He will receive all income for eight years and the remainder interest will pass to his son Stefan when his income interest ends. The IRS Section 7520 rate is 4.8 percent at the time the trust is funded and his income interest equals $646,322. What is the taxable value of the gift to Stefan?

Roberto's gift to the trust is valued at $2 million Correct. This is the correct answer because Roberto established a GRIT with a family beneficiary, therefore his retained interest is zero and the taxable gift is based on the value of the assets transferred to the trust.

Roger and Sarah have been married for 37 years. During that time they have accumulated a wide variety of assets, investments, and properties. Roger is worried about the probate process. He does not want his family's financial position to become public knowledge. Sarah is more concerned, however, with making sure that she and Roger control their assets—she does not want someone else telling her what she can and cannot do with what they own and earn. What type of trust would be appropriate for Roger and Sarah?

Roger and Sarah should consider establishing a living (inter vivos) revocable trust. Although this type of trust will not reduce their estate or gift tax liability or provide protection against claims made by creditors, a revocable living trust will allow Roger and Sarah to retain control over their assets while providing a mechanism to minimize issues associated with probate.

Corey's divorce was finalized last month. He wants to know which types of trusts he could establish that would benefit all three of his children. Why is a Section 2503(c) trust not appropriate for Corey to consider?

Section 2503(c) trust can only be established for one minor beneficiary, not for multiple beneficiaries.

A wheat farmer is long wheat in his field. What should he do in the futures market to hedge against the price of wheat falling before the harvest?

Sell Wheat Futures Correct. If a farmer is long wheat (on the farm), to offset this risk of wheat prices falling, the farmer would open a short position in the future market.

A portfolio was initially constructed to have a 60/40 split of stocks and bonds respectively. This was based on various factors, including risk tolerance, client goals, required returns, and forecasted economic growth. Nothing has changed in the investment policy statement to warrant a change. Over the last two years, the bonds in the portfolio did not change in value, but the stock portion increased by 20%. What should be advised?

Sell stocks in an amount of less than 5% of the portfolio and reallocate it to bonds CORRECT. If the original allocation is $60 stocks and $40 bonds, that would be a 60/40 split. If stocks rise 20% to $72 and bonds do not move (i.e., remain $40), the total would be $112. Stocks would now be 64% (72/112) and bonds would be 36% (40/112). Therefore, to rebalance this portfolio, less than 5% (or 4%) would need to be sold and allocated to bonds.

Michelle's father worked at a large consumer products company, called ABC. When he passed away he left her shares which have continued to grow over the years. Michelle has not disposed of any of the ABC shares, and thought now may be a good time to sell some. However, she invested in XYZ company in January of this year. The shares have shot up in the last eight months. Though she likes the gain, she is uncomfortable with the changes in the company and the variability in stock price. She is currently in the middle of the 12% marginal tax bracket. She would like to know the tax implications if she sells shares in company ABC versus XYZ in the current year. She can't pay more than $1,000 of additional tax, but prefers paying as little as possible. Both ABC and XYZ have a basis of $6,000 and can be sold for $16,000. Which of the following are correct in regards to these potential transactions?

Selling all the ABC stock would be best. CORRECT. Given the shares have been with her for years after her father's passing, these will be considered long-term capital gain property. Since she is in the 12% marginal tax rate, she will not pay any capital gains tax on the sale. If she wishes to sell $16,000 of the shares, it would cause no tax consequences, and therefore should be sold.

As the executor of a relative's estate, Jerry is contemplating selling some of the illiquid assets from the estate to pay for some cash outflows he expects from the estate. The estate does not have much in liquid assets. Jerry has also learned that the surviving spouse of the decedent is expected to receive some life insurance money. Is selling the illiquid assets a good strategy? What could be some other options that Jerry could consider?

Selling the illiquid assets at a discount to create liquidity in the client's estate is not the most efficient strategy, as it can result in further loss and possibly some tax consequences. Jerry should first explore better options, such as taking a loan for the estate, using the life insurance payout, and/or other strategies and options discussed in this lesson before he decides to have a fire sale on the decedent's illiquid assets.

Cody is the CEO of a small manufacturing company. He needs help determining how much the HC employees can defer to the company's qualified retirement plan. The company has five NHC employees and four HC employees. The ADP of the NHC employees is 3%, and the ADP of HC employees is 8%. Does the plan meet the ADP test? What is the allowable ADP for HC employees? If the plan does not meet the test, what would you advise Cody on how to fix the plan so it passes the ADP test with minimal cost?

Since the ADP of NHC employees is 3%, the ADP for HC employees is calculated by adding 2% to the ADP of NHC employees. This results in an allowable ADP of 5% for HC employees. Since the actual ADP is 8%, a corrective measure will have to be taken. A corrective distribution is one of the easiest and least costly corrective measures to take.

Sergio is a new client and is presenting you with recent stock transactions from his portfolio. Sergio enjoys trading securities, but he has been very careful to hold them for long-term holding periods. Sergio had one transaction, the sale of Power Plus stock, that had resulted in considerable gains. Sergio purchased 10,000 shares of Power Plus on March 1, 2017, for $3 per share, and sold all 10,000 shares on March 1, 2018, for $8 per share. Sergio paid a $100 commission to buy the stock and a $100 commission to sell the stock. Sergio files as single and is in the 22% marginal tax bracket. What type of gain does Sergio have from this transaction?

Sergio has a gain of $49,800. The commission on purchase is added to the basis of the stock ($30,000 + $100 = $30,100), and the commission on sale is deducted from the selling price ($80,000 - $100 = $79,900). The gain is a short-term capital gain because Sergio did not hold the stock longer than one year. It will be taxed at ordinary tax rates (assuming there are no capital losses to offset the gain).

Laverne is a single 32-year-old female. She has no dependent children. Laverne is slightly overweight and a smoker. When evaluating her risk exposures, should her financial planner conclude that Laverne's primary need is life or disability insurance?

Several factors come into play when evaluating Laverne's situation. First, as a young female, her life expectancy is longer than that of a male of a similar age. This means she will need replacement income for a longer period of time, making a compelling case for disability insurance coverage. Second, she is single. Third, she is a smoker, and fourth, she is slightly overweight. The last two personal factors increase Laverne's chances of needing disability coverage sometime in her lifetime. Given her situation (she has no dependents) and her health factors, the financial planner should recommend disability coverage as a top priority.

Elizabeth, age 59, is planning to retire from her public school job at age 65. The normal retirement age at Lawrence Public Schools is age 62. She has been contributing to both a 403(b) plan and a 457(b) plan for the last 30 years, however, there have been many years where she didn't max out 457(b) contributions. If she had contributed the max each year to her 457(b) plan, she would have had an extra $30,000 in contributions. She now would like to know her options for maxing out her contributions.

She can make both a $25,000 contribution and a final three-year catch-up contribution to her 457(b) plan. Correct. She is eligible for the final three-year catch-up contribution and can make a total contribution of $38,000. She can still contribute to the 457(b) after the normal retirement age for Lawrence Public Schools if she is still employed.

In January 2019, Jason gifted property worth $1,100,000 to his son Jeremy. Jason paid gift taxes worth $440,000 on this transfer. Jason passed away in December 2019. Explain what impact this will have on Jason's estate.

Since Jason made this gift within three years of his death, the gift tax worth $440,000 that he paid will be included in Jason's gross estate.

On March 1, 2019, Latrice gifted a collectible that she had purchased on January 1, 1997, for $3,000 to her son, Lamar. If Lamar sells the collectible on April 3, 2019, for its fair market value of $20,000, how much will Lamar's capital gain be?

Since Lamar received the collectible as a gift from Latice, the holding period will include Latrice's holding period beginning January 1, 1997. Lamar will therefore have a long term capital gain of: $20,000−$3,000=$17,000from selling this collectible

You are setting up a financial plan for the Smith family. They have numerous goals and need to alter their lifestyle a bit in order to achieve those goals. To help with this plan, you set up quarterly goals to make incremental changes to their saving and spending pattern over the next two years. The idea is that the small goals can be achieved to reinforce the long-term plan. Which type of counseling have you been providing the Smiths?

Solutions-focused counseling CORRECT. Solutions-focused counseling generally focuses on the strengths and goals of the client. Making incremental goals helps to keep positive focus and advance towards long-term goals.

Space Lab Company would like to provide a future retirement benefit for its senior executives. The company is willing to set aside annual contributions into a trust in the name of key employees. The business plan is to indirectly fund the future compensation of the key employees from a combination of assets held in the trust and through the cash value built up in life insurance policies. Given the firm's plan, what type of trust should it establish to ensure that the key employees are not taxed on current contributions to the plan? Also, what type of insurance policy would be most appropriate in this case?

Space Lab Company should use a rabbi trust arrangement within a deferred compensation plan. A rabbi trust provides some protection for the key employees that assets will be available to fund future benefits. The key employees will not owe tax on firm contributions to the trust; however, trust assets will be subject to firm creditors. Universal life insurance policies (universal life (UL), indexed universal life (IUL), variable universal life (VUL)) are ideal products for use by Space Lab Company. Universal life insurance is flexible in terms of changing the premium and face value of the policy. This flexibility will allow the firm to adjust the insurance contract over time while providing the key employees security and a guarantee that their benefits are tied to an insurance contract.

Stanley, an artist of some notoriety, recently gave his close friend Jenny a painting that he had created several years ago as a going-away gift. The painting had an FMV of $4,000 on the date of the gift, and it cost Stanley $500 to create the painting and have it framed. Jenny moved across country shortly after that. Jenny never told Stanley, but she really did not enjoy his provocative and politically charged style of art, so she sold his painting for $3,000 six months after receiving it. What is Jenny's gain on the sale of the painting?

Stanley made a gift to Jenny. On the date of gift, Stanley's basis in the painting was $500 and the painting's FMV was $4,000, so a simple carry-over of basis and holding period occurred on the date of gift. Jenny's basis then is $500 and her holding period is long term. When Jenny sold the painting for $3,000, she realized, and will recognize, a long-term capital gain of $2,500 ($3,000 - $500).

What is the relationship between State Income Taxes and AMT?

State income taxes are not deductible for AMT purposes. Therefore, they are added back to taxable income and increase the AMT that will be paid.

Stephen has recently told you that he intends to make some risky investment decisions and try his luck with a large portion of his life savings that are invested in his brokerage account. You caution Stephen about the potential risk of loss, which may happen if he makes poor investment decisions. Stephen thinks that his investments are protected by the Securities Investors Protection Act of 1970 (SIPC). Therefore, he believes that even if he makes a few mistakes in his investment decisions, the SIPC will protect his investments from losses regardless. Is Stephen's interpretation of the SIPC protection correct?

Stephen's interpretation of the SIPC protection is not correct. The SIPC does not protect against bad investment decisions. The Act does protect investors' wealth within brokerage accounts in the event the broker goes out of business or if the broker is unable to return the invested money back to the investors.

Charles maintains a watch list of stocks, and fills out a ledger of prices and returns over a six-month period. The returns by month are presented below. He would like to know which one of the following two stocks is the least risky to include it in his portfolio? Stock A 6% 6% 10% −12% 16% 6% Stock B 8% −10% 12% 12% 6% 7%

Stock B as it has a lower standard deviation. CORRECT. Standard deviation is the best measure to identify risk. The calculation for standard deviation results in 9.35 for Stock A and 8.16 for Stock B. It is best to use your calculator to quickly calculate these amounts.

If a portfolio is exposed to the least amount of risk, what is the overarching name of the risk and what are two potential risks that will remain, no matter what additional investments or investment classes are added.

Systematic risk-interest rate and exchange rate CORRECT. Systematic risk is the risk that cannot be diversified away. It is the risk that is "in the system." The mnemonic for systematic risk is PRIME which stands for purchasing power risk, reinvestment rate risk, interest rate risk, market risk and exchange rate risk. Those risks that can be diversified away are accounting and business risk.

Recall from Vignette 4 that TJ was involved in an accident. Because her liability split-limit coverage was 25/50/25, she ended up paying for damages out of pocket. What type of coverage should TJ have purchased originally to avoid this possibility? What might the insurance company have required TJ to do at that time?

TJ should have purchased a personal umbrella liability insurance policy (umbrella policy). This policy would have paid the expenses her automobile policy did not pay. However, the insurance company likely would have required TJ to increase the liability limits in her automobile policies plus the liability limit in her homeowner's policy. This requirement would have increased her total insurance premium expense; however, the added coverage would be useful in protecting her assets from a lawsuit.

TJ was recently divorced. Her current income is low, but her net worth, which consists of two vehicles, a home, and retirement plan assets, is relatively high. Because of her cashflow situation, TJ elected to purchase the following split-limit liability coverage on her vehicles: 25/50/25. Assume that TJ is involved in an accident in which she is at fault. If three people are in the other car and each has medical bills of $18,000, how much will her insurance pay for medical expenses per person and for the accident? Similarly, if the other car is worth $45,000 and was totaled, how much will her policy pay? Will TJ be responsible for any out-of-pocket expenses associated with this accident?

TJ's policy will pay a maximum of $25,000 per person in bodily injury expenses. Technically, each person in the other car will be covered; however, TJ's policy has a maximum $50,000 limit per accident in bodily injury. This means that TJ is responsible for paying the difference between the medical bills ($18,000 × 3 = $54,000) and the insurance limit ($50,000). TJ is also responsible for paying the difference between the maximum amount the insurance company will pay for property damage ($25,000) and the cost of the other car ($45,000). It is also possible that she could be sued for negligence. In this event, TJ would be liable for all liability expenses because the liability limits in her policy have already been exhausted.

Tammy is a business consultant who is classified as an independent contractor. She has not made any entity election and is therefore automatically considered a sole proprietor. Tammy made $190,000 in consulting income last year. Her total expenses related to her consulting income were $40,400. She has come to you seeking a second opinion on her self-employment tax liability because she felt it was too high. How much self-employment tax will Tammy owe due to her consulting income?

Tammy will owe $20,486 in self-employment tax. Remember! The Social Security tax is taxed only up to the Social Security wage base. In 2019, the wage base is $132,900.

Terrell lives in a two-bedroom cottage on the Gulf Coast in Texas. He is reviewing his homeowner's insurance policy. Terrell wants to make sure that he is covered for losses brought about by a hurricane. When he reviews his policy, he notices that the insurance company uses multiple definitions to refer to different elements of the policy. Under what section of the policy can Terrell find information about hurricane coverage?

Terrell can learn about coverage related to hurricane damage under the policy section titled "Perils." Keep in mind that Terrell's choice to live on the Gulf Coast is a physical hazard. He can expect to pay higher premiums because the severity of losses associated with hurricane damage tends to increase losses.

Ben and his partner, Cody, are interested in saving for the college education of their children, a two-year-old and a newborn. Ben and Cody both have incomes in the top 1% of earners in the United States and therefore correctly assume they will not qualify for any need-based financial aid. They are very insistent that their highest-priority goal is to save enough to pay the full cost of attendance to any Ivy League school. If their children do not go to college, they would like to use the savings for their expected grandchildren or other family members, such as nieces or nephews. What are the important factors for the CFP® professional to consider in communicating the best vehicle for college savings and which vehicle(s) should be recommended?

The CFP professional should consider myriad factors in recommending a specific savings vehicle for Ben's and Cody's college savings goal. Given their very high incomes, a 529 plan should be recommended. Which state's plan they should acquire depends on the state residency of the clients (many states offer state tax deductions up to a certain contribution level when made by residents of that state), quality of investment options, and costs associated with all the different plans available. Remember, they can contribute to any state's plan and benefit from tax-free earning regardless of where their children attend college. All 50 states offer at least one plan.

Exchange Rules for Annuities and Life Insurance

The IRS allows an annuity to be exchanged using Code 1035, on a tax-free basis, to another annuity contract but not to an endowment or life insurance policy. It is possible to exchange a life insurance policy for an annuity. You can remember this using the following mnemonics: 1. Lindsey Lohan = Life Insurance to Life Insurance Okay 2. Alcohol Anonymous = Annuity to Annuity Okay 3. In LA = Life Insurance to Annuity Okay 4. Not AL = No Annuities to Life Insurance

The PFC Company is a small business that manufactures electronic components. The company was established as a limited liability company (LLC) with six owners. The owners are working to establish a business continuity plan. They are trying to decide whether to use a cross-purchase agreement or an entity-purchase agreement. Which plan offers the greatest ease of implementation and ongoing management?

The PFC Company owners should consider establishing an entity-purchase buy-sell agreement. This method will reduce the number of life insurance policies that must be purchased, which will make managing the plan easier.

John Sample, CFP, is creating a new website. He plans to run the following description on the front page of the site: "John Sample, CFP®, RIA, is the founder of Sample Planning Group." Will the SEC allow this statement?

The SEC will not allow John to use the phrase because he is prohibited from using RIA as a description of his practice. He may state: "John Sample, CFP®, Registered Investment Adviser [or Advisor], is the founder of Sample Planning Group."

Portfolios A and B contain comparable investments in a single asset class. Portfolio A returned 8% and had a standard deviation of 6%. Portfolio B had a return of 12% and had a standard deviation of 10%. The risk-free rate is 3%. What is the Sharpe Ratio, and which investment should you choose?

The Sharpe ratio of A is 0.83 and B is 0.90; choose investment B based on the Sharpe ratio. The calculation for Sharpe is: (Rp − Rrf)/Standard Deviation Correct. The Sharpe for A is 0.83 and B is 0.90. The higher Sharpe should be chosen.

Jim and Dolores Smith have come to you for assistance with selecting the right Medicare policy for their needs. Both are looking for flexibility and full coverage for the plan that they select. They have also informed you that many of their doctors are in the Northeast and the Southeast. In addition, they want a plan that would allow them to select doctors of their own choosing regardless of where those physicians practice. Help Jim and Dolores determine the best plan to select. They have been putting into the Medicare system since they first began work 45 years ago.

The Smiths should select Part B and Part D along with Part A. Correct. A Medicare Advantage, or Medicare Part C plan would not give the Smiths the flexibility that they are looking for. They want to be able to select any physician, anywhere within the United States. Part C or Medicare Advantage, in essence, works as an HMO. The Smiths will need Part A to cover all inpatient needs, Part B to cover outpatient needs, Part D to cover drug needs, and a Medigap or supplemental policy to cover the gaps from Parts A and B coinsurance and copays.

Jorge became subject to AMT for the first time last year. He had to make several adjustments to his regular taxable income to arrive at alternative minimum taxable income. Which of the following AMT items will give Jorge an AMT credit to use in a future year? 1. Real estate taxes paid on his primary personal residence 2. The bargain element in exercise of incentive stock options 3. Interest on private activity municipal bonds 4. Miscellaneous itemized deductions subject to an adjustment for 2% of adjusted gross income

The bargain element in exercise of incentive stock options Correct! This is a deferral item and can generate an AMT credit to use in future years.

When selecting a benchmark for a client's portfolio, you observe the below R2 information for several benchmarks. Based on this information which benchmark has the best explanation of the portfolio? AND what asset class is in this portfolio? S&P 500 R2: 0.87 Russell 1000 R2: 0.90 Barclays Aggregate: R2: 0.10 MSCI EAFE: R2: 0.15

The best benchmark is the Russell 1000 and the portfolio is weighted towards large-cap stocks. Correct. The Russell 1000 has the highest R2; this is potentially the best benchmark. In addition, this question forces you to know the major benchmarks. The Russell 1000 and S&P 500 are both large-cap U.S. stock benchmarks.

Greyson is a young financial planner who is doing everything he can think of to build his practice. Fortunately for Greyson, he was able to make several good connections while in college. It turns out that one of his best friends has a sister who plays professional golf. She is young (age 16) and very successful, and happens to be looking for financial planning help, primarily someone to look after her golf earnings. After meeting with Greyson, she decided that she would like to hire him as her financial planner. Are there any potential roadblocks to this arrangement?

The biggest roadblock to the arrangement is that, in this case, Greyson's potential client is not legally competent to become a party to the contract; she is under the age of majority. The contract generally would need to be between Greyson and the golfer's parent(s) or legal guardian(s).

What are the main similarities and differences between a security market line and a capital market line?

The capital market line and the security market line both connect the return of the risk-free asset to the return of the portfolio on the efficient frontier. The capital market line is plotted on a graph that has the returns on y-axis and standard deviation on the x-axis. The security market is also plotted on a graph with returns on y-axis and beta on the x-axis. The capital market line is based on MPT, and the security market line is based on the capital asset pricing model.

You are in the process of compiling Maria's financial statements for the year. During the year she purchased a new car. The car is worth $40,000, and she has an auto loan of $35,000 for the car. How would this transaction be reported on Maria's financial statements for the year?

The car loan and purchase would show up on Maria's statement of cash flows. The loan proceeds would be a cash inflow, and the car purchase would show up as a cash outflow. The fair market value of the car would be reported as a personal use asset on the balance sheet, and the auto loan would be a long-term liability. Maria's equity in the car would not be reported separately on the balance sheet but would simply add to her overall net worth.

Scott has a life insurance policy sheltered within an irrevocable life insurance trust (ILIT). His two children have Crummey provisions available for their benefit. When Scott created the trust two years ago and transferred the policy, its gift tax value was $500,000. Upon Scott's death in the current year, the policy paid $1,500,000 into the ILIT. How much is included in Scott's gross estate?

The entire $1,500,000 will be included in Scott's gross estate since the transfer was made within three years of his death.

Pat has a required return of 9% for all stocks he buys. If XYZ just paid a dividend of $0.95 and is trading at $22, XYZ is expected to grow at 5%. What is the expected return and should Pat buy XYZ?

The expected return is 9.53% and Pat should buy XYZ. Correct. R=D1/V + G so 0.95(1.05)/22 +0.05 = 0.0953 = 9.53%. Since the hurdle rate for Pat is 9% XYZ is expected to exceed his required return so he should buy.

You learn that the market tends to have a negative skew on its returns. Rank in order of smallest to largest the median, mean, and mode of a distribution with negative skew.

The order is: mean, median, mode. Correct. With a negative skew extreme negative returns pull down the mean. This leaves the order a mean, median, mode.

John wants to know if his qualified plan will meet the safe harbor test or ratio test this year. He provides the following information: • The company has 100 employees. • 75 employees are nonexcludable. • 10 of the 75 employees are highly compensated. • Of the HC employees, the plan benefits 8 of them. • Of the NHC employees, the plan benefits 44 of them. Does the plan meet the safe harbor coverage test? If not, does this plan meet the ratio test?

The plan fails the general safe harbor test. The plan meets the ratio test. The table shows the calculation.

Frank has been interested in buying a manufacturing company that is currently trading at $32. He believes the company will continue to grow at 4% yearly. He has estimated that the stock has a beta of 1.4. The current three-month U.S. Treasury rate is 2%, with a risk premium of 5%. If the stock is currently paying a $1.50 dividend and is expected to continue, is the stock over or under valued?

The stock should not be purchased as it's overvalued. CORRECT. The dividend discount model uses next year's dividend as the numerator. That is D1. D1 is calculated as Do × (1 + growth rate). Therefore, $1.50(1.04) = $1.56. 1.56 / (.09 − .04) = $31.20. Stock is priced at $32, which is higher than intrinsic value of the stock.

Susan is a 45-year-old doctor making $250,000 a year. She wants to retire at 67 and replace 80% of her income in retirement. She currently has $275,000 in retirement assets. Her expected rate of return is 8% before retirement and 7% after. Inflation is 3%. She expects to live until 95. Her Social Security estimate is $2,750 per month at 67. What will her first-year income need at retirement be?

The trick in this question is to read the last sentence first then find the information necessary to answer it. Since we are only calculating for income needed at retirement, the variables needed are: • Work life expectancy: 22 years (Retirement age - Age or 67 - 45) • Retirement income need in today's dollars: $167,000 (80% of current income - Social Security or $250,000 × 0.80 - $2750 ×12) • Inflation: 3% Now we put these numbers in the calculator and solve for future value: • N: 22 • I: 3% • PV: $167,000 • PMT: 0 Solve for FV: $319,989.27

George is starting a retirement plan for his employees and wants to understand the different formulas for computing the benefit under a defined benefit pension plan. Which formula would be best if he wanted employees with more years of service to receive a higher benefit?

The unit credit formula factors in the years of service an employee has been with the company. The other formulas, flat percentage and flat amount, do not factor in years of service after the general vesting period.

Jolyn and Hamley have been married for 26 years. Jolyn is a U.S. citizen. Hamley is a citizen of Portugal. How much of Jolyn's estate can she pass to Hamley at her death without triggering the estate tax? Would the answer change if Hamley became a U.S. citizen prior to Jolyn's death?

The unlimited marital deduction is severely limited because Hamley is not a U.S. citizen. If Hamley were to become a U.S. citizen, then the couple could use the unlimited marital deduction for gifts and bequests.

Ben is considering a zero-coupon bond with seven years to maturity. The face value is $1,000 and current interest rates for comparable bonds are 4%. What is the value of the bond and what is the duration?

The value is $757.88 and the duration is seven. Correct. Enter as follows on the HP12c: $1,000 FV; $0 PMT; 2 I (4%/2); 14 N (7yr×2) PV = $757.88. Zero-coupon duration equals maturity.

What is the waiting period for most transactions relating to an ESOP (Employee Stock Ownership Plan)?

The waiting period for most transactions relating to an ESOP is three years. Remember this general rule for the CFP Exam.

Larry's Ad Agency provides a 401(k) profit sharing plan for its employees. Larry provides a generous 6% match and also the potential for a profit sharing contribution. This year profits were substantial, so over the 6% match, Larry will also contribute 10%. Why is the following incorrect advice to give Larry's Ad Agency? Fran, age 60, who earns $300,000 and contributes $25,000 to her 401(k). Fran will receive a total contribution of $72,000. This includes her elective deferrals, match, and profit sharing contribution.

This answer does not factor in the 415(c) limit. In effect, the total of all contributions, pre- and Roth-elective deferrals, after-tax contributions, employer matches, forfeitures, and profit sharing amounts in 2019 cannot exceed $56,000. For those age 50 or older, the limit increases to $62,000 as a result of the $6,000 catch-up. Finally, there is a compensation limit that can be applied to our formula. For 2019, the compensation limit is $280,000. So, although Jane earned $500,000, the employer's contribution is limited to $280,000 × 6% match and $280,000 × 10% profit sharing match. This total is further limited by the 415(c) limit which caps total contributions to $56,000 for those under age 50.

Marybelle's client, Tomi, purchased a home three years ago for $200,000. Tomi purchased an HO-3 policy at that time with coverage equal to $200,000. The replacement value of his home is now $300,000. He recently incurred a loss of $50,000 due to a fire. If Tomi's insurance company uses the 80% rule, and his deductible is $1,000, how much will Tomi receive as a reimbursement?

Tomi will receive a reimbursement from the insurance company equal to $40,833. $200,000$300,000×80%×($50,000−$1,000)$200,000$300,000×80%×($50,000−$1,000) The difference between his claim and the amount of reimbursement (before the deductible has been paid) is known as a coinsurance penalty.

Travis provides financial planning services in his local community. He has 50 clients, for all of whom he has written a comprehensive financial plan. He only charges a fee for plan development and an hourly fee for services after the plan has been delivered. Travis has decided that he does not need to register as an investment adviser with his state or the SEC because he does not sell or recommend investment products. Is Travis correct?

Travis is incorrect. He appears to meet the three requirements necessary for registration. 1. Because he is paid, he is considered to have received a fee. 2. He is in business because he "holds himself, herself, or itself out as an investment adviser or as providing investment advice; the person or firm receives separate or additional compensation for providing advice about securities; or the person or firm typically provides advice about specific securities or specific categories of securities."7 Although Travis does not manage client assets, he presumably provides advice about securities and investments as an element of his financial planning practice. 3. He is providing advice on securities. The SEC will conclude that Travis is providing advice if he does any of the following: provides "advice about market trends; advice in the form of statistical or historical data (unless the data is no more than an objective report of facts on a nonselective basis); advice about the selection of an investment adviser; advice concerning the advantages of investing in securities instead of other types of investments; and a list of securities from which a client can choose, even if the adviser does not make specific recommendations from the list."8 It would be difficult for Travis to provide even the most basic financial planning advice without engaging in at least one of these actions.

Farrell, in his role as a financial adviser, is helping a married client determine the most appropriate form of an annuity distribution from a retirement plan after the client's retirement. What type of joint and survivor benefit will provide the highest initial payout to the client? Are there any caveats associated with obtaining such a payout?

Typical joint and survivor annuity options include a 100%, 66 2/3%, and 50% payout. Of these, the 50% payout will provide the highest initial benefit because at the death of the retiree, his or her spouse will receive only 50% of the original payout for the remainder of the spouse's life. It is possible to obtain an annuity without a survivor benefit (generally called a single life annuity). This option provides the highest initial payout; however, the client's spouse must waive his or her right to a survivor annuity. The waiver must be in writing and typically notarized.

Steps in financial planning process

U Understand Ugly G Goals Girls A Analyze Aways D Develop Date P Present Pathetic I Implement Ignorant M Monitor Men As defined by CFP Board, there are seven steps to the financial planning process: 1. Understanding the Client's Personal and Financial Circumstances 2. Identifying and Selecting Goals 3. Analyzing the Client's Current Course of Action and Potential Alternative Course(s) of Action 4. Developing the Financial Planning Recommendation(s) 5. Presenting the Financial Planning Recommendation(s) 6. Implementing the Financial Planning Recommendation(s) 7. Monitoring Progress and Updating

Arbitrage pricing theory (APT) focuses on which of the following factors Expected inflation Expected changes in industrial production Expected change in the term structure of interest rates Unanticipated changes in risk premiums

Unanticipated changes in risk premiums Correct. Only IV is correct. APT is used to price unexpected changes. Expected changes should already be priced into the market.

Donald recently sat for and passed the CFP examination. He just met his experience requirement working for a small brokerage firm in New York City. Unfortunately, Donald's firm was shut down by the Securities and Exchange Commission (SEC) for fraud. As an element of the SEC enforcement, each of the brokers working at the firm lost their securities licenses, and each person, including Donald, was barred from serving as a Registered Investment Adviser (RIA) in the future. After hearing Donald's case, the Hearing Panel recommended revocation of Donald's CFP certification. Donald appealed the ruling, but the original recommendation was upheld. How soon can Donald retain the right to use the CFP marks?

Under CFP Disciplinary Rules and Procedures, the revocation of, Donald's right to use the CFP marks is permanent. That is, he can never be reinstated as a CFP certificant. It is important to note that revocation is permanent even if a court or other regulatory body later acquits Donald or reinstates his securities licenses.

Jared owns a midsize manufacturing firm. He established a qualified retirement plan several years ago. Jared asked his financial planner to determine if the plan currently meets ERISA standards and whether Jared has ever violated ERISA rules. Several items prompted the financial planner's interest. Which of these would be considered a prohibited transaction or activity under ERISA? • Jared's benefits administration office provides 401(k) plan participants a yearly benefits statement. • Plan advertisements that encourage employees to focus their investments within the 401(k) plan on company stock • Jared's daughter taking a job with a firm that provides accounting services to Jared's company • Helping plan participants earn high returns by limiting investment alternatives in the company's 401(k) plan to company stock, a small-cap index fund, and a money market fund • Lending money to Jared's son periodically, at a 5.5% rate of interest, from retirement assets

Under ERISA rules and guidelines, all plan actions must benefit employees and plan participants. Jared has a fiduciary responsibility to the plan. All but one of the items listed by the financial planner are prohibited under ERISA: • Jared's benefits administration office provides 401(k) plan participants a yearly benefits statement. A plan that allows participants to direct their own investments must provide a benefit statement quarterly. • Plan advertisements that encourage employees to focus their investments with the 401(k) plan on company stock. Under ERISA, plan documents and advertising must encourage diversification within self-directed plans. • Jared's daughter taking a job with a firm that provides accounting services to Jared's company. As long as Jared's daughter is not providing direct services to the plan or being paid by the plan, this is not a violation of ERISA. • Helping plan participants earn high returns by limiting investment alternatives in the company's 401(k) plan to company stock, a small-cap index fund, and a money market fund. This violates ERISA diversification guidelines. Even though Jared's intentions may be good, the plan must offer participants a variety of investment alternatives. Typically, ERISA requires that a plan offer a choice of three investment options beside an employer's stock. Most often these choices are stocks, bonds, and cash. Often within these asset classes are multiple asset categories. For example, with the stock asset class, multiple categories such as large value, large growth, and international stock are made available to participants. • Lending money to Jared's son periodically, at a 5.5% rate of interest, from retirement assets. This is a prohibited transaction under ERISA.

Sarah works as an insurance agent. She is interested in establishing a sideline business offering retirement planning services. Specifically, she would like to help small businesses establish qualified retirement plans. Sarah is confused about the regulatory status of her role. Will she act as an agent or as a fiduciary once one or more qualified plans are established?

Under ERISA rules, any person who establishes, operates, or performs functions related to one or more qualified retirement plans must act as a fiduciary, regardless of the way they are usually or most often compensated. A fiduciary, under ERISA rules, must act solely in the interest of plan participants and their beneficiaries. Fiduciaries must also be prudent in carrying out their duties and follow plan documentation. They must also diversify plan assets and pay themselves a reasonable expense. As defined, a fiduciary may not receive a commission on the sale of products or services to or for a qualified retirement plan.

Mabel and Frank were married for 12 years before their divorce last year. When they were first married, Mabel purchased a life insurance policy naming Frank as the insured. She named herself as the policy beneficiary. As a couple, they also owned a homeowner's insurance policy on their home. The home was titled joint tenants with right of survivorship (JTWROS). Although Frank gave up his interest in the home when they divorced, they did not change these policies. Unfortunately, a series of negative events has since transpired. Six weeks ago, Frank died. The insurance company paid Mabel the face value of the life insurance policy. Frank's new wife protested the payment by claiming that Mabel did not have an insurable interest in Frank at the time of death and, as such, Mabel was not eligible to receive payment. Around the same time, Mabel's home (the one she owned jointly with Frank) burned down. Frank's new wife filed a claim for Frank's share of the insurance proceeds. In which situation will the insurance company side with Frank's new wife?

Unfortunately for Frank's new wife, the insurance company will rule against her on both issues. First, an insurable interest in a life insurance contract only needs to exist at the time the policy is issued. Second, at the time of the house fire, neither Frank nor his new wife had an insurable interest in the property. For these reasons, Mabel was entitled to receive the life insurance policy payment and reimbursement for the home fire.

Which of the following types of insurance has its cash value grow based upon subaccounts? Whole life Universal life Indexed universal life Variable universal life

Variable universal life Correct. The client selects which subaccounts he/she would like to use to grow the cash value inside this contract.

Veronica, a new client who is two years into her new dental practice, has come to you with a question about her student loan interest. Her brother, who graduated with an undergraduate degree in accounting, is telling her that she should be deducting her student loan interest on her tax return. However, when Veronica reviewed her tax return, she cannot see any deduction taken for her student loan interest that she paid. Last year Veronica paid $6,000 in student loan interest, and this year she is scheduled to pay $5,900. Veronica is married, but she and her husband file separate returns because he does not want his tax return associated with Veronica's dental practice. Veronica's AGI is $75,000. How do you respond to Veronica's question?

Veronica cannot claim the student loan interest deduction because her filing status is married filing separately. Assuming that Veronica's husband's AGI is $65,000 and that he would be willing to file a joint return with Veronica, then the couples' AGI on a married filing jointly return would be $145,000. The student loan interest deduction is capped at $2,500 per tax return, and the maximum deduction is reduced as modified AGI exceeds $70,000 for single filers and $140,000 for married filing jointly filers. The deduction is completely phased out when modified AGI exceeds $85,000 ($170,000 for married filing jointly). Since Veronica and her husband's modified AGI is $145,000, they are $5,000 into the phase-out range. Their maximum student loan interest deduction is reduced by $417 ($2,500×($145,000−$140,000$30,000)($2,500×($145,000−$140,000$30,000) for a maximum student loan interest deduction of $2,083. The remaining student loan interest that Veronica paid, assuming she filed jointly with her husband, would not be deductible.

Veronica is a new client. During the next meeting, you will be reviewing her financial position. You have prepared her financial statements and noted the following: Total Income - 250,000 Annual nondiscretionary expenses - 120,000 Total Retirement Savings Contributions - 24,000 Total Debt Payments - 53,000 Current Assets - 40,000 Total Assets - 800.,000 Current Liabilities - 10,000 Total Liabilities - 330,000 What is Veronica's current ratio, retirement savings ratio, emergency fund ratio, debt payments to income ratio, and debt ratio?

Veronica's current ratio is strong at 4.0, or 400%. Her retirement savings ratio is 0.096, or 9.6%, which is good but less than the recommended savings rate of 12%. Veronica's emergency fund ratio is four months ($40,000 / ($120,000/12)), which is on target. Her debt payments to income ratio is 21.2% and her overall debt ratio is 41.25%. Veronica's debt payments appear manageable; however, her overall debt ratio is slightly high, suggesting that a large portion of Veronica's assets are financed.

Imagine a low- or middle-income family with four children. Assume they will likely qualify for some level of need-based grants, scholarships, and interest-subsidized student loans. Given these facts, is it optimal for this family to save substantial funds for their children's college expenses? Consider that these savings will potentially reduce their retirement savings and current standard of living. The savings also will raise their expected family contribution (EFC), which in turn will decrease their need-based aid, including grant money that does not need to be repaid. If their children plan to work in service-related professions, will your recommendation change? What if the income expectation associated with a child's planned occupation is quite low or high?

When providing financial planning services as a CFP professional, you should utilize the six-step financial planning process, including gathering additional data regarding the prioritization of education goals within context of other goals, projected income and assets, and potential eligibility for preferential student loan borrowing or forgiveness programs. Although recommendations should ultimately be based on the values and goals of the client, the financially optimal strategy here may be to prioritize tax-advantaged retirement savings (e.g., 401(k), individual retirement accounts [IRAs], Roth IRAs), as these funds typically are not considered in the EFC. Keep in mind that contributions to a Roth IRA can be taken out at any time, and funds in retirement plans (401(k), 403(b), 457) can be borrowed against to finance education if needed. More important, recognize that most low- and middle-income families are not maximizing the contributions to tax-advantaged savings plans, often even when there is an employer match on contributions. Also, federal student loans allow for extremely flexible student loan repayment programs based on the student's level of income and generous loan forgiveness opportunities, particularly when working in service-related professions. Last, regardless of expected income, when using federal loans, there exist income-driven repayment plans that would protect a client's child from ever paying more than 10% of his or her income toward federal student loan debt, regardless of total debt amount.

When can AMT Credits be used?

When the AMT liability is less than the regular tax liability. Correct! The credit can be used only in a year when AMT is not an issue.

A stock is trading for $43 on January 4. An investor buys a put option with a strike price of $38 on this stock by paying a $7 premium and the expiration date of the put option is on April 4. Assuming that this is an American put option, calculate the intrinsic value and profit or loss for the investor in the following cases: • The price of the stock reaches $30 on February 18. • The price of the stock reaches $55 on March 18. • The price of the stock reaches $35 on April 18.

When the price of the stock reaches $30 on February 18: • Intrinsic value = Strike price − Stock price = $38 − $30 = $8 • Profit: $38 − ($30 + $7) = $1 When the price of the stock reaches a value of $55 on March 18: • Intrinsic value = $0 (cannot be negative) • Loss = $7 (limited only to the premium for the option purchased) When the price of the stock reaches $35 on April 18: • Intrinsic value = $0, since the option expired on April 4 • Loss = $7 (since the option expired on April 4, it can no longer be exercised)

A stock is trading for $43 on January 4. An investor buys a call option with a strike price of $48 on this stock by paying a $7 premium and the expiration date of the call option is on April 4. Assuming that this is an American call option, calculate the intrinsic value and profit or loss for the investor in the following cases: • The stock reaches a value of $56 on February 22. • The stock continues to fall since buying the contract and ends with a price of $33 on April 4. • The price of the stock reaches $56 on April 22.

When the price of the stock reaches $56 on February 22: • Intrinsic value = Stock price − Strike price = $56 − $48 = $8 • Profit: $56 − ($48 + $7) = $1 When the price of the stock continues to fall: • Intrinsic value = $0 (cannot be negative) • Loss = $7 (limited only to the premium for the option purchased) When the price of the stock reaches $56 on April 22: • Intrinsic value = $0 (since the option expired on April 4) • Loss = $7 (since the option expired on April 4, it can no longer be exercised)

During a recent recession, Wilma received a judgment lien from a mortgage company. The value of her home dropped in value because of two events. First, her husband died, which reduced her household income. Second, a zoning change occurred in her community. After these events, she found that she could not make the mortgage payments in a timely manner. Additionally, the zoning change resulted in the home's value dropping, which created negative equity. Wilma was unable to sell the home and voluntarily vacated the premises. What steps does Wilma need to take in order to petition the Disciplinary and Ethics Commission regarding her situation?

Wilma must write a letter describing her situation and sign documentation allowing the Commission to review her petition. She must then provide all information requested by the Commission in a timely manner. While the Commission may deny her petition, if the petition is granted, the Commission will likely include a time stipulation because the events leading up to the lien did not directly result from her own behavior or financial decisions.

Tuma works as a financial planner. His primary responsibilities involve managing client assets through his brokerage firm's managed accounts platform. Tuma offers advice on a wide range of assets, including equities, bonds, options, and other investments. Clients who use his service agree to pay a flat fee. Tuma is paid when the brokerage firm deducts the commissions that the client would have paid from the fee. In this way, clients know exactly what they are going to pay each year in fees, whereas Tuma knows that he can continue to generate income from the sale of products. Does Tuma need a FINRA license? If yes, which one?3

Yes, Tuma needs a securities license because he is an agent for a broker-dealer (registered representative) and he provides investment advice. Given the range of products Tuma uses in his practice, he will need a Series 7 license. He will also need a Series 63 license, although his firm may require him to obtain the Series 66 as well. Tuma will also need to complete continuing education in order to maintain his licenses. Remember that Tuma will need to pass the Securities Industry Essentials (SIE) prior to sitting for the Series 7, 63, or 66 examinations.

Sally has done her own calculations on her retirement plan. She has laid out her cash flow needs when she retires as well as her savings rate while working. Based on her calculations, she will require an 8% investment return. She gives you her assumptions, which you have reviewed and believe, are correct. As you recalculate the expected return of her identified investment, will Sally meet her goal given the following assumptions? Market return 6.0% Risk-free rate of return 3.0% Beta

Yes, as her expected return (8.3%) is above her required rate of return. CORRECT. This answer is correct, as the expected return is 8.25% per the capital asset pricing model (CAPM) which is as follows: = Risk-Free + (Market Return - Risk-Free) × Beta = 3% + (6% - 3%) × 1.75 = 8.25%

Hank Bradley was a U.S. citizen whose estate, valued at $6.1 million, was bequeathed to his son John. The largest asset in Hank's estate was his interest in Birchwood Industries, a closely held corporation in Vermont that has been in operation for the past 25 years. The FMV of Hank's stock in Birchwood Industries was $2.8 million, which is 25 percent of the value of all voting shares of Birchwood Industries stock. The corporation has real estate interests worth $6.4 million. The estate has debts totaling $400,000. Does Hank's estate qualify for a stock redemption and installment payment of estate taxes?

Yes, because the 35 percent test was met. Correct. This is the correct answer because the value of Birchwood Industries was more than 35 percent of Hank's adjusted gross estate. Hank's adjusted gross estate equals $5.7 million ($6,100,000 - $400,000 in debts). $2,800,000/$5,700,000 = 49 percent.

Dan, a CFP professional was approached by a client about a new investment. The client would like to know if it would be appropriate given the assumed rate of return in the financial plan of 8%. Is the investment appropriate for the client based on the following? Expected Return Probability of Return 6% 35% 9% 50% 12% 15%

Yes, this investment's expected return is more than the rate in the financial plan and is appropriate for the client. CORRECT. The expected rate of return is the total of each of the expected rates multiplied by their probability. 8.4% = (6% × 35%) + (9% × 50%) + (12% × 15%). This amount is greater than 8.0%, and therefore is acceptable.

There are five exceptions to the terminal-interest rule.

You can remember this as SIGCQ? 1. Survivorship condition: A bequest to a spouse may require survival for up to six months after the death of the decedent. 2. Insurance: The beneficiary has power of appointment over proceeds paid in installments. 3. General power of appointment: The heir must have a life interest in the property, receive all income from the property, and retain a power to appoint the property to others. 4. Charitable interest income: The beneficiary must have an income interest in a charitable remainder trust. 5. QTIP property: The decedent controls the ultimate distribution of property after the surviving spouse's death. While alive, the surviving spouse receives income from the property for life, with the property being included in the surviving spouse's estate at death.

Ginny, 60, has been working as a researcher at a public university for 14 years. She comes to you to make sure she is saving enough for retirement. She also wants help decreasing her tax liability. She has been saving all of her money to a brokerage account and wonders if she should take advantage of the 403(b) and 457(b) her institution offers. What should you advise Ginny if she would like to save around $50,000 per year? Rollovers are not permitted from a 457(f) plan.

You should advise Ginny to contribute to her 403(b) and 457(b) plans. She can contribute $25,000 to each of these plans for a total of $50,000 in tax-deferred savings. This will help save Ginny taxes as well. Next year, she will qualify for the 15-year catch-up and can save an additional $3,000 to her 403(b). Ginny can contribute to both of these plans since contributions to the 457(b) do not aggregate with other retirement plan contributions.

Josh, 32, was a participant in his employer's SIMPLE IRA plan until he recently quit for a better job. He made his first contribution to the plan exactly one year ago. He comes to you and asks you to roll over the plan to an IRA because he wants access to better investment options. What should you advise Josh before rolling over his SIMPLE?

You should advise Josh to wait to rollover his SIMPLE until two years after his first contribution to the plan. By waiting, Josh will avoid the 25% penalty associated with SIMPLE IRAs. If Josh's new employer has a SIMPLE IRA plan, Josh could also roll the funds into the new plan without any penalty.

What are the tax penalties for failure to file/pay?

• Failure to file: 5%/month up to 25% • Failure to pay: 0.5%/month up to 25%

What is Fiduciary Duty?

• Financial planners who follow the fiduciary standard are required to manage their clients' money in good faith and trust. • This includes putting the clients' interest above own when making all investment decisions. • The financial planner is expected to manage her or his clients' money with their best interests in mind at all times. • The investment manager also has several important responsibilities o Investment managers are responsible for managing the portfolio based on the recommendations outlined in the IPS. o The managers also are responsible for evaluating the portfolio's performance relative to the market and other established performance-oriented benchmarks. o Investment managers need to revisit clients' investment objectives periodically and suggest changes, if necessary. o Investment managers are required to rebalance the portfolio, if necessary, to adjust the asset classes back to the asset allocation proportions suggested in the IPS. • Managing the constraints o Investor risk tolerance and time horizon are important constraints that both parties need to revisit periodically. • Fiduciary responsibility o Since clients entrust investment managers with managing their money, investment managers ideally should have a fiduciary obligation toward their clients and the clients' future beneficiaries. • Other considerations when developing investment objectives o Explaining concepts such as longevity risk and purchasing power risk to clients, who are often not knowledgeable about these concepts prior to engaging with their financial planners. o Understanding clients' levels of financial knowledge before presenting them with the recommendations. Client also might have specific investment preferences, such as a preference for socially responsible investments. In such cases, the planner must restrict positions on investments such as tobacco and increase allocation into stocks that are more environmentally or socially responsible.

When establishing and defining a mutually defined relationship, a financial planner should:

• Identify the client. • Identity the services. • Understand client needs and expectations. • Identify conflicts of interest. • Explain client roles. • Define scope of engagement. • Agree on duration. • Make disclosures.

Rules for Taxation of Trusts

• Income tax (hybrid entities) o Distributions taxed to beneficiary o Accumulated income taxed at trust rate • Simple trust mandates distribution of income • Complex trusts permit accumulation of income • Transfers to revocable trust not completed gift • Transfer to irrevocable trust generally completed (unless retained interest) Revocable Trust • Transfer to the trust by grantor: Not gift taxable. • Transfer from trust to another entity or person: Taxable gift if over the annual exclusion amount. • Gift tax paid by grantor. • Transfer from trust to charity: Taxable gift. • Charitable deduction can be used to offset tax. • Inclusion of assets in grantor's estate at death: Included. • Income taxed to grantor: Yes. Irrevocable Trust • Transfer to the trust by grantor: Taxable gift. • Transfer from the trust to another entity or person: Potentially taxable. • Transfer from trust to charity: Taxable gift. • Charitable deduction can be used to offset tax. • Inclusion of assets in grantor's estate at death: Not included. • Exception: Assets will be included if decedent held a general power of appointment and, as trustee, could distribute trust income or change trust beneficiaries. o Exception: The value of life insurance transferred to the trust within three years of death. o Exception: The value of life insurance transferred to the trust at any time if the grantor retains incidents of ownership. • Income taxed to grantor: No.

Types of Alternative Investments

• International investments including American Depository Receipts (ADRs) of foreign stocks • Mutual funds or ETFs with exposure to international markets • Direct ownership of foreign stocks and bonds • Real estate • Real Estate Investment Trusts (REITs) • Precious metals and other tangible assets • Hedge funds

Jeffrey and Martha buy real estate worth $300,000. Jeffrey contributed $100,000 and Martha paid the remaining $200,000 when purchasing the property. If the property is titled as tenancy in common, what are Jeffrey and Martha's shares of ownership in the property? If Jeffrey passes away before Martha, how much of this estate will be included in Jeffrey's estate?

• Jeffrey's share: $100,000 / $300,000 = one-third, or 33.33% • Martha's share: $200,000 / $300,000 = two-thirds, or 66.66% Jeffrey's share, or $100,000, will be included in Jeffrey's estate if he passes away before Martha.

The concepts of marketability risk and liquidity risk are similar but differ in these ways:

• Liquidity risk is the risk that an investor may not be able to recover the expected value from an asset when converting it to cash. • Marketability risk is the risk that an investor may not be able to easily sell the asset or convert it to cash.

Medicare does not cover all of a retiree's needs. Some of the items and services that Medicare does not cover include:5

• Long-term care (custodial care) • Most dental care • Eye examinations related to prescribing glasses • Dentures • Cosmetic surgery (except in limited cases) • Acupuncture • Hearing aids and exams for fitting them • Routine foot care

In order for permanent insurance to receive preferred tax treatment a policy must:

• Provide coverage up to at least age 95, • Limit the amount of premium that may be paid in relation to the face amount of coverage, and • Establish a minimum ratio between the cash value and face amount of insurance.

The expected return of a portfolio is 8% and its beta = 1.2. If the market risk premium is 4%, calculate the risk-free rate.

• Rp = Rf + (Rm - Rf)β • 0.08 = Rf + (0.04) × 1.2 Rearranging this equation, we get: • Rf = 0.08 - 0.048 = 0.032 or 3.2%

Sandi, a widow, has a stock portfolio valued at $1 million and an estate worth $7 million. She established an irrevocable trust for her three grandchildren and transferred the stocks to the trust. The grandchildren will receive all income from the trust each year. This is Sandi's first taxable gift, and she allocated $1 million of her GST exemption to the trust. What are the tax consequences of this transfer?

• Sandi has reduced the value of her gross estate by $1 million, which will reduce her estate taxes. • Sandi can reduce the taxable gift by three annual exclusions resulting in a taxable gift of $1,000,000 - $45,000 = $955,000. • The taxable gift of $955,000 will be added to Sandi's estate tax return as an adjusted taxable gift. • Sandi cannot reduce the gift by three GST annual exclusions because there are multiple skip person beneficiaries in the trust. • Sandi did not pay a GST tax on the transfer because $1 million of her GST exemption was allocated to the trust, which sheltered the tax. • Sandi's grandchildren will not pay GST taxes on income distributed from the trust because $1 million of Sandi's GST exemption was allocated to the trust, which eliminates all future GST taxes. • Sandi's grandchildren will pay income tax at their marginal tax rate for any income distributions they receive from the trust.

Don is survived by his ex-wife, Sarah, his wife, Amanda, and his two young children, Jack and Jill. Don's primary insurance amount is $1,000. Sarah is 60 and is receiving $715 per month in survivor benefits. Amanda, Jack, and Jill qualify for $750 each. Don's family is limited to 150% of his PIA. How much will each of his survivors get?

• Sarah—$715 • Amanda—$500 • Jack—$500 • Jill—$500 Sarah's benefit does not count toward the family benefit since she is an ex-spouse. Since the sum of Amanda, Jack, and Jill's survivor's benefit was greater than the family maximum, the amounts that they receive is equal to the maximum benefit divided by the number of recipients.

Potential sources of liquidity in an estate are:

• Savings and investments • Closely held business interests • Distribution of assets in lieu of cash payments • Life insurance • Loans for payment of taxes and expenses • Sale of assets or a business interest • Tax-advantaged accounts

What are the two most widely held FINRA licenses?

• Series 6: Allows a licensee to sell mutual funds, unit investment trusts, annuities, and variable life products • Series 7: Allows a licensee to sell nearly all other investment products, except commodities and futures

An all-risk or special form policy (HO-3) is the most common type of homeowner's policy. The dwelling is covered against all risks or perils except those specifically excluded in the policy. The most common exclusions include:

• Termites • Flood • Earthquakes • Landslides • Ordinance of law • Damage from water • War • Power failure • Intentional damage • Neglect

Basic documents used in estate planning are:

• Wills • Side letters of instruction • Powers of attorney for property • Living wills • Durable powers of attorney for healthcare • Do-not-resuscitate orders