CFP - Practice Exam

Derek Bogart has consulted a CFP® professional for financial planning, and they have discussed education planning for Derek's 5 year old son. Derek wants to save for his son's college education but feels he cannot select a particular school to use for estimating costs. Instead, he has selected an amount that he wants to have available when his son is ready to start college at age 18. Derek thinks $200,000 will be a good education fund to set for a goal because he can supplement it, if necessary, out of current income or loans when his son is in college. Derek plans to invest the money in conservative investments that will earn about 6% annually and will not be taxable. The CFP® professional explains to Derek that while inflation might run about 3%, education costs are probably going to continue increasing at about 6% annually. Approximately what amount will Derek need to save each year for his son's college education fund? $9,900 $10,600 $12,900 $15,400

$10,600 Derek's son will start in 13 years, Derek can earn 6% on the money while invested, and he wants a fund of $200,000. He is choosing to save a flat amount and states he will supplement as necessary at the time he starts school. The keystrokes on a financial calculator are: 13, N 6, i 0, PV 200,000, FV Then, press PMT and the calculator will display 10,592. Topic 17

A CFP® professional has been advising a client on ways to increase income from his portfolio by writing options. The CFP® professional explains to the client that he can write a call option on Merck stock for a $4 premium, and the strike price for the call is $40. His purchase price for the Merck stock in his portfolio was $40. If the option is exercised when Merck stock is selling at $45, what is the total amount of income the client will recognize on the option? ($100) $100 $400 $900

$400 The client is the writer of the option and receives the premium of $4 per share, or a total of $400, because option contracts are for 100 shares. The stock is called away at $40, so the gain will go to the call option holder. He uses his stock purchased at $40 to fulfill the option he wrote. Topic 40; Domain 5 Further Details: An option is not exercised at the current price. It is exercised at the strike price. Bob sold a Call at $4, with a strike price of $40. This equals his receipt of $400 in premium. He now has an obligation to sell someone shares of stock at $40 if the call is exercised. The owner of the call, let's call him John, choses to exercise the option. He calls the stock from Bob at $40. Bob owns the stock, that he purchased at $40. He sells it to John at $40. He has no gain, no loss in fulfilling John's option. If John gets the shares at $40, John can turn around and sell them at $45 in the open market. Bob is no longer part of the transaction.

Martha Gault, a single mother, is employed as a teacher and receives a salary of $58,000 annually. Martha's school insures her for disability, and she was out of work for two months. Martha also receives $18,000 in alimony from her 2009 divorce, and $6,000 in child support from her ex-husband. A CFP® professional is helping Martha to do some income tax planning. How should the CFP® professional calculate Martha's adjusted gross income, based on the following information: Salary $58,000 Alimony received 18,000 Child support 6,000 Interest income 2,000 403(b) contributions 7,000 529 plan contribution 500 Disability income 8,000 IRA contribution 1,000 Medical expenses 2,000 Health insurance 4,000 Child care 1,200 State and local taxes 2,200 $60,000 $69,000 $70,000 $79,000

$79,000 Martha Gault is not self-employed, so she is not entitled to adjustments for self-employment tax or self-employed health insurance. She is also not entitled to an IRA deduction because her income is above the threshold for persons who are active participants in an employer-sponsored retirement plan. She is an active participant because she contributes to a 403(b) plan. The deduction is completely phased out for single persons who are active participants with income of $75,000 (2020) or more. Child support received is not income for Martha. The other expenditures similarly do not provide adjustments. Martha will have gross income of $86,000 from salary, disability income, alimony, and interest income. She will reduce her income by the $7,000 in contributions to the 403(b) plan, so her AGI will be $79,000. Topic 43

Anne Simpson is 28 years of age and has been an employee of the Telford Furniture Company for 5 years. Her income for the 5 years has been $32,000, $33,000, $34,000, 35,000, and $36,000. The company retirement plan has 6-year graded vesting. The plan contributes 7.5% of an employee's compensation after one year. What is Anne Simpson's vested benefit after 5 years? $5,250 $6,210 $8,280 $10,350

$8,280 Anne Simpson is eligible for contributions after one year, and no contribution was made for Anne for her first year of employment. The first contribution was at her income of $33,000 × .075 = $2,475. She was not vested at the time this contribution was made. Subsequent contributions were in the amounts of $34,000 × .075 = $2,550, $35,000 × .075 = $2,625, and $36,000 × .075 = $2,700. The total contributions are $10,350. With a 6-year graded vesting schedule, there is no vesting in the first year, and then the vesting increases 20% per year. Simpson is 80% vested after 5 years. The vested benefit is 80% of $10,350 = $8,280. Topic 56; Domain 2

A CFP® professional wants to present a financial plan to her client with an explanation of the selection of the optimal asset allocation for the client. Which of the following statements can the CFP® professional use in explaining the differences between the security market line (SML) and the capital market line (CML)? 1. The SML shows the relationship between risk and return for a particular asset, whereas the CML shows that relationship for efficient portfolios of assets. 2. In the SML, risk is measured by the beta coefficient; whereas in the CML, risk is measured by the standard deviation. 3. The risk-free rate of return is an element of the SML, whereas the risk-free rate of return is not an element of the CML. (1) only (1) and (2) only (1) and (3) only (2) and (3) only

1 and 2 (3) is not a correct statement because the risk-free rate of return is an element of both the SML and the CML. Topic 35; Domain 5

A CFP® professional has been updating the income tax planning for the Wiggins, who have been clients for many years. The Wiggins' daughter Sally is 18 years of age and will go to college this year. While at college, she will get a job to earn some money. Sally will earn $4,350, and her parents will pay her support of $12,900. Sally will put $1,500 of her earnings in a money market fund. She will use the remainder of her earnings to pay her first semester tuition for $2,700. Which of the following statements concerning income tax planning for the Wiggins are correct? 1. Sally's parents will get a qualified dependent (family) tax credit for her. 2. Sally's parents will not get a qualified dependent (family) tax credit for her. 3. Sally's earnings are subject to tax. 4. Sally's earnings are not subject to tax.for (1) and (3) only (1) and (4) only (2) and (3) only (2) and (4) only

1 and 4 Sally's parents will not be able to take a dependency exemption for Sally because TCJA set them to zero for 2018 - 2025. The support includes the cost of education, but the tuition cost is $2,700, which is less than one-half of the total support. Although Sally's earnings are more than the income tax exemption amount of $4,300 in 2020, she is a full-time student under age 24, so her parents will be able to claim her as a dependent. Sally's earnings will not be subject to tax because she can take the standard deduction equal to her earned income plus $350, up to the maximum of $12,400 for 2020. Topic 43

Tim Mercer has asked his CFP® professional to review his insurance protection and investments. The CFP® professional is considering whether Tim should convert his term insurance to a universal life policy. Which of the following are advantages of universal life insurance? 1. It provides flexibility of both premium and death benefits. 2. It provides adjustable types of coverage throughout the lifetime of the insured. 3. It provides the insured with a high-risk/high-return investment vehicle. 4. It provides a cash-value fund that accumulates tax-deferred. (3) and (4) only (1) and (2) only (1) and (4) only (2) and (3) only

1 and 4 Universal life policies provide for both flexibility of premium payments and death benefits. The face amount of the policy can be increased or decreased. Coverage is not adjustable, and the cash value is invested in short-term money market accounts that grow tax-deferred and are considered to be relatively safe. Topic 28; Domain 4

A $1,000 par value bond with four years remaining to maturity has a 7% annual coupon rate. If bonds of comparable riskiness are now yielding 8%, what is this bond's duration? (Note: Assume that the bond's interest is paid annually, rather than semiannually.) 2.11 years 2.83 years 3.49 years 3.62 years

3.62 Duration is found by dividing the aggregate present value of the bond's cash inflows, weighted by the year in which each cash flow occurs, by the price (intrinsic value) of the bond. In the present case, the bond's price, or intrinsic value, is $966.88 (that is, FV = $1,000, N = 4, PMT = $70, and I/YR = 8). The weighted value of the cash flows, discounted at 8%, is: Cash Weighted Present Flow Weight Cash Flow Value $ 70 1 $ 70 $ 64.81 70 2 140 120.03 70 3 210 166.70 1,070 4 4,280 3,145.93 Total $3,497.47 The duration is $3,497.47 ÷ $966.88 = 3.62 years. A shortcut to calculate the present value of the weighted cash flows is to use the cash flow keys on a financial calculator. You just need to input the following cash flows: 0, 70, 140, 210, and 4,280; input 8% as the interest rate; and solve for NPV, which is $3,497.47. Topic 38; Domain 2 and 3

The CFP® professional has recommended that a client purchase an annuity for retirement income planning. In assisting the client with the selection and purchase, the CFP® professional compares the premium cost of different annuities. All of the following statements comparing the premium cost of two types of annuities are correct, all other things being equal, EXCEPT: A. A deferred annuity is more expensive than an immediate annuity. B. A cash refund annuity is more expensive than an installment refund annuity. C. A joint and last survivor annuity is more expensive than a single life annuity. D. An immediate annuity for a 50-year-old is more expensive than an immediate annuity for a 60-year-old.

A A is incorrect because with a deferred annuity, the issuing company delays payment of benefits until a starting point in the future, thus giving the issuer the investment income during the period of deferment and reducing the cost of purchasing the benefit. A refund annuity promises to pay the beneficiary the difference between the cost of the annuity and the payments made to the annuitant before death. A cash refund annuity requires immediate payments and so is more expensive than payment in installments because of the time value of money. A joint and last survivor annuity is more expensive than a single life annuity because the life expectancy for two people is generally greater than for one. An immediate annuity for a 50-year-old is more expensive than one for a 60-year-old, due to the long life expectancy. Topic 27; Domain 6

A client is concerned about losing health care coverage at the time he changes jobs. The CFP® professional can advise the client that under COBRA, an employer will not be required to provide continued health insurance coverage for all qualified beneficiaries under the plan in which of the following circumstances? A. The employee fails to pay 102% of the cost of coverage. B. The employee becomes entitled to Medicare benefits. C. The employee's child ceases to be a dependent under the plan. D. The employee becomes insured under another medical care plan that excludes preexisting conditions.

A An employer can require a former employee or beneficiary to pay 102% of the cost of the coverage. If the employee or beneficiary fails to pay the premium, coverage can be terminated. Coverage can also be terminated when an employee or beneficiary becomes covered under another plan unless the new plan excludes preexisting conditions. In that case, the employee must be permitted to continue coverage for the period provided under COBRA. A child ceasing to be a dependent is one of the qualifying events that triggers COBRA coverage for qualified beneficiaries. Another qualifying event is an employee becoming entitled to Medicare benefits. Topic 24; Domain 3

A CFP® professional is reviewing tax documents provided by a client for her various business interests. The CFP® professional would expect to find estimated tax payments reported for all of the following, EXCEPT: A. Partnership B. Sole proprietor C. Corporation D. Trust

A Partnerships are not taxpaying entities and pass through their income and losses to the partners. The partners file individual estimated tax reports and make individual estimated payments. Sole proprietors file individual estimated taxes, and corporations, trusts, and estates must pay estimated taxes. Topic 44; Domain 2

James Carlisle operates a successful construction company, that builds custom homes, named Carlisle Developments, Inc., which is an S corporation. He and his wife Sandy each own fifty percent of the stock in Carlisle Developments, and both are officers of the corporation. Both spouses are 45 years old, but recent health problems have caused Mr. Carlisle to consider retiring at the end of this year. He currently owns several pieces of investment real estate that generate rental income of $8,000 per month after mortgage payments, including interest and principal. Now that the Carlisles' two older children are married and on their own, they have only 16-year-old Joshua at home. As a result, their current residence is much larger than the family needs since they have lived there for almost 15 years. They estimate that the family's present home would sell for $700,000 (after selling expenses). They paid $325,000 for their present home and currently owe $135,000 on a first mortgage. Mr. Carlisle has come to you to determine how he could best structure his affairs to provide income for his early retirement, pay for Joshua's college education, and pass on the business to his children. Currently, Mr. Carlisle has approximately $200,000 invested in his name in a tax-deferred Individual Retirement Account. Which of the following techniques will help the Carlisles to reduce their income for this year so they can make a contribution to a Coverdell Education Savings Account for their son Joshua? A. Delay closings for houses built until next year. B. Defer needed repairs or improvements to real estate into next year. C. Pay their January home mortgage payment in the middle of December. D. Postpone paying salary to Mr. Carlisle until after the beginning of next year.

A Postponing salary will not reduce income because profits from the S corporation are passed through to the shareholders, and the amount that profits would go up would exactly equal the amount of salary received by Mr. Carlisle. By postponing closings, the S corporation would report lower income, and postponing capital gains reduces AGI. Accelerating repairs (rather than deferring repairs) can lower income from rental properties. Advance payment of the mortgage on the Carlisle's home would not reduce AGI because the mortgage interest deduction is an itemized deduction subtracted from AGI to compute taxable income. Note that advance mortgage payments for the rental property can reduce the income from the rental property and can reduce AGI. Topic 47; Domain 4

Harold Johansen is 68 years of age and expects to live in retirement for 20 more years. Harold has been advised by his CFP® professional that a portion of his investment portfolio should be invested in equities so that his total return will keep pace with inflation. Harold and his planner have agreed that inflation will average about 3% annually. Harold is able to tolerate moderate risk, but he does not want any international exposure. He has a pension as well as Social Security benefits. Which of the following investments would be most appropriate for the CFP® professional to recommend to Harold for the equity portion of his portfolio? A. Wilshire 5000 Index Fund B. Global Equity Fund C. REIT stock D. High Yield Fund

A The Wilshire 5000 Index Fund invests in over 5,000 different issues traded on the stock exchanges so this fund will provide the returns of stock market investments and has only the moderate risk that Harold can tolerate. The Index fund invests only in domestic issues so its international exposure is minimal, unlike the Global Equity Fund that will be invested in many international markets. The REIT stock will be higher risk than the Wilshire 5000 Index Fund and will give Harold investments in only one sector - the real estate sector. A high yield fund is an investment in corporate bonds and is not appropriate for the equity portion of Harold's portfolio. Topics33, 37and 41; Domain 4

Peter Piper established a revocable living trust which provides for income to be paid annually to his wife Pat for life, and at her death, the corpus will be paid to their three children per stirpes. Peter's will was written before the trust was created and provided for a credit bypass trust with the residue going into a marital trust. Peter transferred to the revocable trust the title to three investment properties valued at $250,000 each and his $400,000 stock brokerage account. In addition, four years before he died, Peter transferred a $500,000 life insurance policy to the revocable trust and kept his wife as the designated beneficiary. Peter's home with his wife, valued at $300,000, was titled in tenancy by the entireties. Peter's account balance in a defined-contribution retirement plan through his employer was $400,000. Peter's wife is named as the beneficiary. Peter also had bank CDs with a combined value of $50,000, and he had a joint checking account worth $10,000 with his wife. Which of the following statements is correct if Peter dies today and his wife dies 10 months later? A. All assets passing under Peter's will go to the credit bypass trust. B. Peter's use of the revocable trust will help reduce his estate taxes. C. Peter's estate will avoid probate due to the revocable trust. D. Peter's life insurance policy will not be included in his gross estate since he transferred it four years before his death.

A The only assets passing under the will are the CDs. Since they are less than the unified credit equivalent, Peter's entire estate passing under the will goes to the credit bypass trust. These CDs will require the probate process, so Peter's estate will not be able to avoid probate entirely. The $50,000 from the CDs will be the only assets to fund the credit shelter trust. These assets are passing to the children, subject only to a life estate in Peter's wife, so these assets do not qualify for the marital deduction. The revocable trust is, in effect, a bypass trust. The revocable trust does not reduce Peter's estate taxes because the assets are includible in Peter's gross estate. Revocable trusts are not used to reduce estate taxes, but to avoid probate. The life insurance policy will be included in Peter's gross estate because he transferred the policy to a revocable trust, rather than to an irrevocable trust. Topics 66 and 68; Domain 3

Harold and Sarah Chang are sending their first child to college this Fall and are considering their options for paying the tuition expense of $18,000. They set up an UGMA account for the child that contains $20,000, and the child's grandparents have funded and are the custodian of a 529 plan that now holds $15,000. Harold and Sarah expect their AGI to be $75,000 this year and next. Harold has an investment account that holds $20,000 invested in stocks, bonds, and mutual funds. How should the Changs pay for the first year of their child's education? A. The parents should pay $4,000, and the remainder should be paid from the UGMA account. B. The 529 plan should pay $6,000, the parents should pay $6,000, and the child should pay $6,000. C. The UGMA account should be used to pay $18,000. D. The 529 plan should pay $14,000, and the parents should pay $4,000.

A The parents should pay $4,000, so they will qualify for the American Opportunity Tax Credit; moreover, the UGMA account should be used to pay the remainder in order to reduce the amount of assets held in the child's name. The reduction in assets in the child's name will help to qualify the child for financial aid. The assets in the 529 plan are owned by the grandparents so they do not appear on the FAFSA. If the assets in the 529 plan are distributed to pay the tuition, the amounts will be treated as income on the FAFSA for the following year. Topic 21

A CFP® professional is working with a sophisticated investor who holds numerous types of investments. The client has inquired about what types of securities he might own that were not obligated to follow the registration requirements of the Securities Act of 1933. All of the following are exempt from the Act of '33, EXCEPT: A. Open-end companies B. Rule 144 securities C. Sales to accredited investors D. Securities of municipal, state, and federal governments

A The securities of open-end investment companies (commonly called mutual funds) must be registered under the '33 Act. The other securities are exempt. Topic 5, Domain 8

Assume for this question that the family maximum for retirement and survivor benefits under OASDI is $1,800 per month and that a worker retired at age 65 with a PIA of $1,300. If the worker later died at age 66, leaving a spouse, age 55; a dependent, unmarried child, age 17; and another dependent, unmarried child, age 15, what will be the spouse's monthly Social Security survivor benefits? $375 $600 $975 $1,300

B A surviving spouse under 60 years of age, who is caring for a child under age 16, is entitled to Social Security survivor's benefit equal to 75% of the deceased worker's PIA. In this case, 75% of $1,300 is $975. Each dependent, unmarried child under age 18 is also entitled to 75% of the worker's PIA. Since the deceased is survived by two dependent, unmarried children under 18 years of age, there are three family members who are entitled to a $975 monthly benefit. Their combined monthly benefit would total $2,925, which would exceed the maximum family benefit of $1,800 by $1,125. Therefore, the total excess is divided by 3, to calculate the amount by which each family member's benefit must be reduced, to stay within the limit, or $1,125/3 = $375. The monthly benefit for the spouse and each dependent child is $975 - $375 = $600, for a total of $1,800 in benefits for the family per month. Topic 53; Domain 3

A CFP® professional has contacted the Golden Fleece Insurance Company for a quote for insuring a client's home. The Golden Fleece Insurance Company has been given an A+ rating by A.M. Best Company. What can the CFP® professional properly tell the client about the insurance company? A. A+ is the highest rating given by A.M. Best, so this company is one of the safest. B. A+ is the second highest rating given by A.M. Best, so this company is very safe. C. A+ is a standard rating given by A.M. Best, so this company has adequate overall performance. D. A+ is a rating based only on adequacy of loss reserves and surplus, and this rating means the company is financially stable.

B A+ is the second highest rating given by A.M. Best Company, so the insurer has demonstrated superior overall performance and a very strong ability to meet obligations to policyholders. The highest rating is A++. The criteria used are both quantitative and qualitative, and ratings are based on the insurer's overall performance, competitive market position, and ability to meet obligations to policyholders. Topic 31; Domain 6

Clarissa is 85 years of age and a widow. She has made transfers of $14,000 to her daughter each year for the past 10 years as part of her gift and estate planning. Clarissa needs to enter a nursing home for her care and the average costs of nursing home care in her state are $5,000 per month. The home where Clarissa has applied will cost approximately the same as the state average. Clarissa has $77,000 of assets at the time of applying for and entering the nursing home and applying for Medicaid. How long before Clarissa will be eligible for Medicaid payment of her nursing home care? A. 24 months B. 29 months C. 43 months D. 60 months

B Before Clarissa will be eligible for Medicaid, she must spend her assets for nursing home care except for $2,000. She will expend $75,000 for the first 15 months. At the end of the 15 months, she will be ineligible due to the transfers to her daughter of $14,000 in each of the 5 years before her application. The transfers will cause a penalty of 14 months. The transfers more than 60 months before her application will not result in a penalty period.

After the phone call where William Richter mentioned retaining you for assisting him and his wife, your first course of action should be to: A. Provide written disclosure of the possible conflict of interest. B. Inform William Richter of the possible conflict of interest and the need for further discussion. C. Amend the current letter of agreement to include the new scope of the engagement. D. Draw up a new letter of agreement.

B Currently, there is no existing relationship with William Richter in an individual capacity. Even though, it is highly likely that the disclosure will eventually need to be in writing, at this point it is important to inform William Richter of the possible conflict and discuss the scope of the possible engagement in further detail. The existing engagement cannot be amended to accommodate the new clients who will be William and Brenda Richter. A new letter of agreement must be drawn up, but the scope of the engagement has still not been defined. Topics 8, 1, and 2; Domains 1 and 8

A CFP® professional has been reviewing income tax returns that a client has provided during their meetings. The CFP® professional observed that the client has in some years been required to pay AMT and appears likely to incur additional AMT in the future. In order to suggest ways that the client might avoid AMT in the future, the CFP® professional has selected ways that the client has been able to reduce the AMT in the past. Which of the following methods has the client been able to use to reduce the AMT that otherwise might have been required? A. Exercise ISOs B. Make charitable contributions C. Pay state income tax in advance D. Invest in private activity municipal bonds

B Gifts to charity are deductible for both the regular income tax and the AMT, so charitable contributions will reduce the client's taxes even when AMT may otherwise be required. For example, state income taxes and real estate taxes will be added back, and miscellaneous itemized deductions are all added back. The payment of state income tax in advance, therefore, will not reduce AMT because the state taxes are added back. Exercising ISOs will result in additional AMT to the extent of the bargain element. Interest on private activity municipal bonds is taxable for AMT purposes. Topic 46; Domain 3

After the closing of Anthony's estate, William and Brenda Richter come to engage you to create a financial plan. However, William balks somewhat at your fee and is uncertain as to the extent of the services he will require. He suggests that since the two of you don't know each other well, that you start off with just a basic allocation and you go from there. Your best course of action is to: A. Leave the room and suggest that he and his wife privately discuss the services required. B. Inquire as to how the death of his brother and the newly-acquired inheritance may have altered his and his wife's goals. C. Write a broad letter of agreement and amend it as necessary to adjust to the scope of the engagement. D. Take information from the prior engagement and reduce your fee.

B Leaving the room for William and his wife to discuss the issue is not likely to advance the conversation. While the scope of the engagement may change as it evolves, this engagement has no defined responsibilities or services to be provided. Even though you may have garnered some information about William Richter in his role as executor of his brother's estate, your new client is William and Brenda Richter. The scope of the engagement is much more likely to gain structure by shifting the conversation to their goals and engaging them as a couple. Topics 8 and 15; Domain 1

A CFP® professional has been consulted for financial planning by Sam Clover and his wife Margery. Sam is 50 years old and Margery is 46, and they have two children. Sam explained to the CFP® professional that they have not been able to save any money to invest for retirement and were always spending more than they earned. Margery pointed out that they did not have any need to save because they would inherit from Sam's family a substantial amount of money. Sam did not want to rely on the inheritance since he did not know how much he would inherit and wanted to leave some of the inheritance for their children. Margery did not see a need to leave any inheritance to their children and expected they would have a large inheritance anyway. The Clovers provided the CFP® professional with information on their current investments and retirement plans and mentioned that they needed to discuss education planning. The Clovers have assets of about $500,000 most of which is in their 401(k) plans and IRAs. Their income is approximately $170,000 annually. What action should the CFP® professional take first with the Clovers? A. Assess the clients' level of knowledge and experience with financial matters B. Assess the CFP® professional's ability to meet the clients' needs and expectations C. Prepare a cash flow statement for the clients D. Obtain from the clients their current education plan and resources

B The CFP® professional will need to assess his ability to meet the Clovers' needs and expectations because Sam and Margery each have different needs and expectations. The services that can be offered may be limited to education planning or to a few areas where the Clovers are in agreement as to their needs and expectations. The CFP® professional will need to discuss the financial planning process with the Clovers and the importance of getting agreement on the goals and needs before proceeding. Topic 8, Domain 1

Southside Video Productions, Inc. (SVP) has experienced a decline in its business and has filed for bankruptcy. While in bankruptcy, SVP terminated its defined-contribution pension plan and will distribute account balances to the plan participants. Arthur Melrose, who is 52 years of age and an employee of SVP, has an account balance of $100,000 in the SVP pension plan. Arthur has an outstanding loan of $40,000, and his account balance is security for the loan. SVP has requested repayment of the loan, and Arthur cannot repay it. Arthur has consulted you about the loan and the likely outcome for him. Which of the following statements concerning the SVP pension plan is appropriate to tell Arthur? A. Arthur's pension plan balance will be reduced by the amount of the loan, and Arthur can roll over the $60,000 balance into an IRA, without income tax liability. B. Arthur's pension plan balance will be reduced by the amount of the loan; the $60,000 balance can be rolled over into an IRA; and Arthur will incur income tax plus a 10% penalty on the amount of the loan. C. Arthur's pension plan balance will be reduced by the amount of the loan; he cannot roll over the balance; and he will incur income tax liability plus a 10% penalty on his $100,000 account balance. D. Arthur's pension plan balance of $100,000 will be rolled over without reduction for the loan, and he must make payments according to a reasonable schedule, with no additional income tax liability.

B The defaulted loan is deemed a distribution that is subject to income tax and penalty. Even though the account balance is used to pay back the loan and the $60,000 balance is rolled over, the defaulted loan is deemed a distribution. Since Arthur is under age 59½, the distribution is subject to the 10% penalty. The TCJA does allow you to replace the loan amount in the rollover IRA up until the due date of the tax return (including extensions) for the year of the distributions, and be permitted to treat it as a rollover. For example, if Arthur's loan offset occurred in 2019 and he could come up with the $40,000 from some other account and add it to his rollover IRA before the due date of the tax return (October 15, 2020 if he files an extension), he could then avoid the tax and penalty.

Mark Hassim is 64 years of age and has built up an importing business that he would like to see pass to his family members. He believes that he has ample wealth without the business interest for his retirement income needs and would like to get his family involved in the company by giving them interests in the business. Mark wants to retain management control over the business but provide the family members with income. He would like to reduce his income taxes by reducing his income from the business as much as possible. Mark would also like to give interests to family members to reduce the size of his estate. Mark has run his business as a sole proprietorship but has been considering the adoption of a different business form. The CFP® professional has gathered data on Mark's business interest and other assets and liabilities and has confirmed that Mark does not need the income from the business to provide the retirement income that he wants. Which of the following alternatives should the CFP® professional recommend to Mark for his business entity and plan of asset transfer? A. S corporation with Mark owning 51% of the shares and family members owning the rest B. LLC with Mark as manager and family members owning the financial shares C. Limited partnership with Mark as the general partner and family members as limited partners D. C corporation with Mark owning the voting shares and family members owning non-voting shares

B The limited liability company can be set up with Mark as the manager so he can continue to control the operation of the business, but the family members will own the financial shares. The financial shares can be designated as the ownership shares that entitle family members to all of the income (and losses) from the business. Mark would only be paid for his work as the manager and not receive profits from the company. The other forms of business would provide for Mark to continue in some kind of ownership capacity, so he would continue to receive a share of the profits. With the S corporation, Mark would have control of the entity by virtue of his owning 51% of the stock, but he would also have to report 51% of the income from the business. As the general partner in a limited partnership, Mark would also receive a share of the profits as income. The C corporation would probably not be recommended due to the double taxation of profits and the added expense and work of maintaining a corporate entity. Topics 44 and 70; Domain 4

Howard Cross has group disability insurance through his place of employment, where he earns an annual salary of $20,000. The plan will pay 70% of earnings after 90 days but will only pay 60% if other sources are available. Howard owns a disability policy that will pay $500 a month after 180 days, and Social Security will pay him $800 per month. Howard will be disabled for over a year. What amount will he receive in disability benefits for months 5, 6, and 7? A. Month 5: $1,167, Month 6: $1,967, Month 7: $2,467 B. Month 5: $1,167, Month 6: $1,800, Month 7: $2,300 C. Month 5: $1,800, Month 6: $1,800, Month 7: $2,300 D. Month 5: $1,000, Month 6: $1,500, Month 7: $2,300

B This question requires you to calculate the monthly payments that will be made by three different plans. The first plan is a group disability plan provided by the employer and will pay 70% of the annual salary of $20,000. The 70% of $20,0000 is $14,000 and this amount is divided by 12 to calculate the monthly payment, which will be $1,167. The payments begin after 90 days so this is the amount that will be paid in month 5. In month 6, Social Security will begin to make monthly payments because there is always a 5 month delay before the start of Social Security disability payments. In month 6 the payments from the group plan will then have to be reduced to 60% of the annual salary. The payment for the group plan will be 60% of the $20,000 or $12,000 divided by 12 is $1,000. So the payment for month 6 will be $1,000 from the group plan plus $800 from Social Security for a total of $1,800. The individual policy owned by Howard will pay $500 after 6 months, so in the seventh month, he will be paid $1,000 from the group disability plan, $800 from Social Security, and $500 from the individual disability policy for a total of $2,300.

When Samuel and Jill Clary married, Samuel started a construction business and titled all of the business assets in his wife's name. The business was successful, but Jill was unexpectedly killed in an automobile accident. The business assets were worth $20 million, and the house they owned by the entireties was valued at $230,000. Jill had also inherited $300,000 of securities and a $200,000 vacation home from her parents. Jill's will left her entire estate in trust for Samuel. The trust provided for Samuel, who is now age 56, to receive the life income from the assets, and at his death, the trust assets are to pass to their three children per stirpes. Two of the children are married, and each has two children. Which of the following recommendations would be appropriate for the postmortem planning of Jill Clary's estate? 1. A QTIP election for the trust will help to reduce estate taxes for Jill's estate. 2. A QTIP election for only a portion of the trust will help to reduce overall estate taxes on Samuel and Jill's estates. (1) only (2) only Both (1) and (2) Neither (1) nor (2)

Both 1 and 2 A QTIP election for the trust will help to reduce federal estate taxes for Jill's estate. The QTIP election preserves the marital deduction for the trust and will defer estate taxes to Samuel's estate. A QTIP election for only a portion of the trust will help to reduce overall estate taxes on Samuel's and Jill's estates because, then, Jill's estate can make use of the applicable unified credit. Topic 71; Domain 4

*The Martins have a beach house in Florida, in addition to their principal residence in New Hampshire. Their AGI, without considering their beach house, is $90,000. The Martins will pay $6,500 in mortgage interest, $1,200 in property taxes, $400 in insurance, and $2,200 for repairs, maintenance, and general upkeep on their beach house. The house cost $115,000, excluding land, in 1998, when the Martins purchased it. Under MACRS, residential real estate is classified as 27.5 year property, and nonresidential real estate is 39 year property. Which of the following statements concerning the Martins' second home is correct? A. If the Martins rented out their beach house for less than 20 days during the year, they would not have to report the income from the rental on their tax return. B. If the Martins rented out the beach house for 25 days, for a total income of $5,000, and used it personally for 15 days, they could receive a partial deduction for depreciation against their rental income. C. If the Martins used the beach house for 10 days and showed an intention to produce income by receiving $10,000 in rent and actively participating in decisions regarding the property, their AGI would be less than $90,000. D. The Martins will receive a deduction for interest, property taxes, and insurance, whether or not they rented out their beach house.

C According to tax Regulations, no income on the rental of a vacation home for less than 15 days is included in gross income. However, when the home is rented out for 15 or more days and the taxpayer uses it less than 15 days or 10% of the rental (whichever is more), then the home is not considered a residence. In addition, if an intention to produce income is shown, the taxpayer can treat the home as a rental property and deduct all costs associated with the property, even to the extent of creating a loss. In this case, the expenses, including depreciation (27.5 years), would be $14,482 and would create a loss of $4,482, which would offset other income because the Martins' AGI is not high enough to trigger limitations on rental losses and because they qualify for active participation, with regard to the beach house. When personal use exceeds 14 days, expenses are allocated between personal and rental use, and expenses are only deductible to the extent of income (no loss can be created). In calculating the expenses that can be used, depreciation is the last available, and the portion of the other expenses already allocated against the rental income would have reduced the income to zero. The depreciation cannot be used to create a loss, so it is not deductible. Finally, only mortgage interest and property taxes are deductible as itemized deductions, regardless of rental income. Topic 49

Ian McClair is 45 years of age and his wife Sally is 42 years of age. They have two children ages 9 and 7. The McClairs consulted a CFP® professional primarily for education and investment planning but accepted the planner's suggestion that they undertake comprehensive financial planning. The McClairs had done no estate planning, and the planner recommended that they obtain wills. After the planner completed her presentation of the plan, Sally mentioned that she was going to be visiting her parents in Canada where she was born. The planner then asked whether Sally had become a U.S. citizen, and she answered that she had not. Ian stated that he was a U.S. citizen. What is the effect of Sally's citizenship on estate planning for the McClairs? A. If Sally dies first, her estate must use a QDOT to obtain a marital deduction. B. If Sally dies first, only a unified credit may be used by her estate. C. If Sally dies first, her estate can take advantage of an unlimited marital deduction. D. If Sally dies first, her estate will not be subject to estate tax in the U.S.

C If Sally dies first, then Sally's estate will be entitled to take the unlimited marital deduction because Ian is a U.S. citizen. If Ian dies first, his estate will be required to use a QDOT to obtain a marital deduction because Sally is not a U.S. citizen. Sally's estate will be subject to estate tax in the U.S. because she is a resident of the U.S. Topic 69; Domains 4 and 7

A CFP® professional has reviewed information provided by a client during data gathering on investments, income tax returns, and retirement accounts. The client is 50 years of age, married, and has two children. The client and wife have a modified AGI of $130,000 and file a joint income tax return. The CFP® professional observed that the client has invested in a real estate limited partnership that has generated losses of $8,000 last year, and the client has not taken any deduction for the losses. The client also owns an investment in residential real estate that the client manages and rents out. This investment produced losses of $12,000 last year. The client did not deduct those losses. What action should the CFP® professional recommend for the client? A. File an amended return and seek a refund for an additional $20,000 in deductions for losses. B. File an amended return and seek a refund for an additional $12,000 in deductions for losses. C. File an amended return and seek a refund for an additional $10,000 in deductions for losses. D. File an amended return and seek a refund for an additional $8,000 in deductions for losses.

C Losses from the real estate limited partnership are passive losses that cannot be deducted against the client's active income. The losses from the residential real estate rented by the client can be deducted in part due to the real estate exception for active participation. The maximum deduction is $25,000 but this maximum is reduced by one dollar for every two dollars that the client's modified AGI exceeds $100,000. Since the client's modified AGI is $130,000, the maximum deduction is reduced by ½ × $30,000 = $15,000. The client can deduct $25,000 - $15,000 = $10,000. Topic 49.

Forrest Toussant is age 61 and his wife Silene is 60. Forrest worked at a car dealership until he was laid off three months ago after 22 years with the same company. His wife continues to work at a furniture store as a bookkeeper. Forrest will not receive the same pension payments that he was expecting because he will not complete the number of years for a full pension, and the company pension fund was not fully funded. The company has gone out of business, so Forrest will receive the amount guaranteed by the Pension Benefit Guarantee Corporation. Forrest had expected to retire at age 66 with a full pension. The pension and his Social Security benefits would have provided a comfortable retirement with the benefits that Silene will also receive. The mortgage on their house is paid off so Forrest is wondering whether he should take early retirement and begin collecting Social Security at age 62. Silene had planned to retire early but now feels she must continue working to earn enough for them to pay their living expenses. She would like to know when she might be able to retire. The Toussants have been using their emergency fund for the last few months to meet some of their expenses, so they need some assistance in determining how to replenish the emergency fund. Their expenses have been exceeding income so they will need help with budgeting. How should the CFP® professional proceed to help the Toussants? A. Consult with mortgage and budget professionals on reverse mortgages and budgeting. B. Obtain feedback from the client on any assumptions, findings, and alternatives presented. C. Evaluate the strengths of the client's current financial situation through a cash flow statement. D. Analyze and evaluate the client's vulnerabilities for current, deferred, and future tax liabilities.

C The CFP® professional will want to analyze and evaluate the client's current financial status. One of the most important ways to accomplish that evaluation for the Toussants is by means of the preparation of a cash flow statement from the data gathered on their income and expenses. Since the main concerns of the Toussants are with regard to their cash flow, both now and as they approach retirement, the cash flow statement will be important for many aspects of their planning. The Toussants have not expressed a concern over tax liabilities so that tax evaluation will not take priority. Consultation with mortgage and budget professionals can be obtained when the planner wants to develop alternatives to present to the Toussants. The planner will obtain feedback on alternatives, assumptions, and findings when the plan is presented. Topics 9, 10, 11 and 43; Domain 3

Robert and Janice Repice are 65 and 63 years of age and have consulted a CFP® certificant in connection with their retirement income need. From detailed information on their current and anticipated expenses in retirement, the planner has determined that if the Repices retire this year, the Repices' income need in retirement is $70,000 per year. They have Social Security benefits and pension plans that will provide them with $50,000 annually. They are not concerned at all about leaving an inheritance for family members. They have two universal life insurance policies and have provided the following information about the policies: Face Value Cash Value Gain $50,000 $29,000. 0 25,000. 10,000 0 The Repices would like the planner to advise them concerning the insurance policies. What should the planner recommend that the Repices do with the policies? A. Sell the policies and invest the proceeds 50% in stock ETFs and 50% in bond ETFs. B. Sell the policies and invest the proceeds in a variable annuity that will pay a guaranteed minimum income and has a 10 year period certain C. Arrange a 1035 exchange of the policies for a fixed annuity and invest the excess in CDs. D. Arrange a 1035 exchange of the policies for a $100,000 life insurance policy.

C The Repices need guaranteed income that will be provided by the fixed annuity and CDs. While they have no gain in their policies so that a 1035 exchange is not required to avoid income tax, they need the safety of the fixed annuity payments. The Repices need an additional $20,000 of income annually in retirement so they cannot take the risk of a variable annuity or investments in stock. The investments in ETFs and in an annuity with a period certain are also not required because they are not looking to leave any inheritance. They will want to find an annuity with the highest annual payment so they will not want a period certain that would reduce their payments. Topics 27, 28 and 33; Domain 4

A CFP® professional is helping a client to plan a buy-sell agreement for his corporation. The client owns the business with two friends. The CFP® professional wants to tell the client about some of the different tax consequences that can arise with a buy-sell agreement, particularly a stock-redemption agreement. Which of the following statements concerning a stock-redemption buy-sell agreement for a closely held corporation will be appropriate for the CFP® professional to present to the client? A. The premiums for the life insurance policies insuring the shareholders are deductible by the corporation. B. The premiums for the life insurance policies insuring the shareholders are taxable income to the shareholders. C. The corporation can pay the death proceeds to the estate to redeem the deceased shareholder's stock, so there will be no taxable gain on the sale. D. The death proceeds of a life policy insuring a controlling shareholder and payable to the corporation are includible in the gross estate of the controlling shareholder.

C The premiums are not deductible by the corporation, and they are not income to the shareholders. The corporation can pay the death proceeds to the estate to redeem the deceased shareholder's stock, so there will be no taxable gain on the sale. Even though a shareholder has a controlling interest, the death proceeds of a life policy insuring the shareholder and payable to the corporation are not includible in the gross estate of the controlling shareholder. Topics 29, 62, and 70; Domain 5

A client of modest means has described losses he has taken in the real estate and stock markets over the past few years, but he is 60 years of age and wants to plan for retirement at age 65. The client is committed to making substantial contributions to retirement plans, but his retirement goals exceed his projected assets. He has asked you to recommend some investments with higher returns so he can achieve the returns needed to reach his goals. You point out to him that higher returns will mean higher risk, that there is a risk-return tradeoff, and that you do not recommend such high risks for him at this stage in his life. He asks for investments that will not be high risk but that have high returns. In order to assist this client, you will need to make use primarily of what structured communication? A. Accurate empathy B. Advising C. Counseling D. Either/Or Questions

C There are three kinds of structured communication: interviewing, advising, and counseling. In this question, the financial planning process has proceeded past the interviewing stage. The client has already received advice concerning the risk-return tradeoff and the higher risk that will accompany higher returns. The financial planner will need to provide counseling instead of more advising. The financial planner will need to make use of the attributes of a good counselor such as accurate empathy, but empathy is not a structured communication. Either/Or questions will probably not be helpful in this discussion since the financial planner does not need to get specific answers as much as provide counseling that will allow for rapport building and more collaboration on the client's problem. Topic 15; Domain 5

Ted Hughes is 38 years of age and is a manager at the marketing firm where he has worked for 5 years. Ted has not married and is active in charitable activities. He would like to benefit a charity in the event of his death and has considered giving some of his life insurance to charity. Among the benefits that Ted receives at work is group term life insurance in a face amount that is twice his salary. He would like to give the amount of life insurance above $50,000 to charity by naming the charity as his beneficiary. Ted has consulted his CFP® professional about the income and estate consequences of this action. Which of the following statements are appropriate for the CFP® professional to tell Ted? A. Naming the charity as beneficiary will not provide Ted with an income tax deduction but the policy proceeds above $50,000 will be included in his gross estate. B. Ted can exclude from income those premiums attributable to the coverage for the charity, and the policy proceeds above $50,000 will not be included in his gross estate. C. Ted can exclude from income premiums attributable to the coverage for the charity, and the policy proceeds above $50,000 will be included in his gross estate. D. Ted cannot exclude from income premiums attributable to the coverage for the charity, and the policy proceeds above $50,000 will not be included in his gross estate.

C While only naming a charity as a beneficiary of a life insurance policy will generally not permit an income tax deduction, there is an exception for an employee who names a charity as the beneficiary of the death benefit above the $50,000 amount in a group term life plan (or the charity may be named beneficiary of all of the death benefit under the plan). Ted can exclude from income premiums attributable to the coverage for the charity, and the policy proceeds above $50,000 will be included in his gross estate. Ted's estate will be able to take a charitable deduction for the death benefit paid to the charity. Topics 51, 66, and 67; Domains 4 and 5

Ben Patel placed $5,000 in an UGMA account for his son soon after birth and then several years later invested the money in a 529 plan. Ben's parents have also contributed to a 529 plan for Ben's son. Ben has consulted a CFP® professional to advise him on the 529 plans. Ben would like his son to be eligible for financial aid and is not familiar with the effect of 529 plans on eligibility. Ben's son will be applying for college in 5 years and earns some money in the summers and has been saving for college. Which of the following statements will be appropriate for the CFP® professional to make to Ben concerning the impact of 529 savings plans on financial aid? A. A 529 savings plan owned by grandparents is treated as assets of the student on the FAFSA. B. Qualified distributions from a 529 savings plan owned by the student are countable income on the FAFSA. C. Qualified distributions from a 529 savings plan owned by the grandparents are not countable income on the FAFSA. D. A 529 savings plan purchased by the student's UGMA is treated as assets of the parent on the FAFSA.

D Even though the student's UGMA or UTMA is used to fund a 529 savings plan, the assets are treated as parent assets on the FAFSA. A 529 savings plan owned by grandparents is not treated as assets of the student or parent on the FAFSA, but qualified distributions will be treated as income of the student. Qualified distributions from a 529 savings plan owned by the student or parent are not countable income on the FAFSA. (Topics 18 and 21)

Calypso Lee has been working with a CFP® professional for several years and met with her for an annual review. Lee was interested in taking advantage of the tax benefits of a like-kind exchange and wanted to know what exchanges she might be able to pursue. Which of the following transactions would be appropriate for the CFP® professional to tell Lee would qualify for a like-kind exchange? A. Lee will exchange her residence in New York for a residence in Florida. B. Lee will exchange her stock portfolio for a bond portfolio. C. Lee will exchange her interest in a partnership for an interest in another partnership. D. Lee will exchange her rental duplex in Boston for a home in Texas that she will rent out.

D For an exchange to qualify for the tax benefits of a like-kind exchange, the property exchanged must be held for investment or in a trade or business. The rental duplex is held for investment and for the rental business, and the home in Texas will similarly be held for rental and investment. The residences are not held for investment or for trade or business because they are for personal use; therefore, they do not qualify. An exchange of stocks, bonds, business inventory, and partnership interests are specifically excluded from eligibility for like-kind exchange treatment. Topic 48

Next year, Tom Traxler is planning to sell the commercial property on which he operated his business to his daughter Sally, for $300,000. Tom's adjusted basis in the property will be $100,000. The sale will be structured as an installment sale, with Sally to make a down payment of $60,000 and make installment payments annually for 12 years. Sally will pay 10% interest on any unpaid balance. Tom wants to know what will happen if he died after Sally had made the second installment payment. Tom's will leaves his estate to his wife. If the installment note were given to Sally under a codicil to Tom Traxler's will, which of the following statements would be correct? A. Sally must recognize gain on the remaining installments. B. Sally must report the remaining installments as income in respect of a decedent. C. The remaining installments receive a step-up in basis. D. Tom's estate must recognize gain on the remaining installments.

D If the installment note were bequeathed to Sally, Tom's estate must recognize the remaining gain immediately. The estate is treated as making a disposition of the note. There is no step-up in basis. Sally will not have to report the installments as income in respect of a decedent because she is now the obligor and owner of the note. Topics 66 and 70; Domain 7

Assume Dennis and his brothers are all in their 50s. If Dennis and his brothers wish to adopt a qualified retirement plan for The Blue Elf, which of the following plans would allow the maximum contributions for the owners, with the least contribution expense for the other employees? A. SEP B. SIMPLE C. 401(k) plan D. Defined-benefit plan

D The SEP and SIMPLE may require contributions for the part-time employees. The part-time employees can be excluded under the defined-benefit and 401(k) plans. The defined-benefit plan will allow greater contributions than the 25% and $57,000 (2020) limitation of a 401(k). The defined-benefit plan will permit funding for past service, and the owners have greater past service than do other employees. The owners are also older than the other employees who will be eligible for the contributions. Greater contributions can be made for older employees. The limitation on a compensation base of $285,000 (in 2020) will not be a factor because all of the earnings are far below this amount. Topics 47 and 48; Domain 4

When Terry and Sandy Metier arrived for the annual review of their financial plan, they told their planner that Terry had lost his job and was doing consulting work now to earn some money but was making less than one third of his previous income. Sandy was working part time to help out, but their income was now substantially less than at their last review. They informed the planner that they have not been able to save or make retirement contributions for over 6 months. The Metiers' plan required them to make contributions to their IRAs and Roth IRAs for another 9 years when they would retire at age 65. The loss of Terry's job means that they are paying for health insurance under COBRA and have lost some life insurance and disability coverage previously provided by Terry's employer. Their youngest child has two more years of college, and they have depleted their 529 plan. They have put their house up for sale to reduce expenses. How should the planner proceed with the review for the Metiers? A. Determine the college costs for their child and the amount of these costs that could be obtained by financial aid. B. Request that the Metiers help the planner to create a new balance sheet and cash flow statement. C. Consider investment reallocation and other alternatives for meeting the Metiers' goals and objectives. D. Explore with the Metiers the time horizon and priorities for each of their financial goals.

D The change in circumstances for the Metiers will require a new financial plan, and the planner will need to start with gathering new information. The planner must determine whether the clients' goals have changed and what the goals are. As part of this information gathering, the planner will need to find out the time horizon for each goal and the Metiers' priorities. Answer choice B is incorrect because the creation of the new balance sheet and cash flow statement occurs in step 1 of the planning process. When the client's situation changes, the planner must determine which step in the planning process he or she must return to first. If the parties to the engagement or the scope of the engagement have changed, the planner would return to the agreement. If the scope has not changed, the planner should determine if a return to the engagement agreement is appropriate, and so on. In this question, the earliest step for the planner to return to is step 1, Understanding the Client's Personal and Financial Circumstances, and collect and verify all quantitative and qualitative information (C.1.a of the Practice Standards, before creating a new balance sheet and cashflow (C.1.b of the Practice Standards). Topics 8, 9, 17, 19, and 37; Domain 2

A CFP® professional meets with a married couple who want advice on what to do with the assets in a 401(k) plan. The husband has worked for his employer for 25 years and has accumulated an account balance of $802,000. This retirement account contains $620,000 worth of appreciated employer stock. The couple is planning to retire and would like to know whether they should sell the employer stock. What should the CFP® professional recommend to these clients? A. Roll over the account balance to a Roth IRA B. Roll over the account balance to an IRA to take advantage of the NUA tax rules C. Roll over the account balance to an IRA and reduce the employer stock to 15% D. Roll over some of the employer stock and all of the other assets to an IRA and sell the employer stock in the IRA.

D Under the NUA rules, the husband will not be taxed on the net unrealized appreciation contained in the employer stock that is distributed in a lump-sum to him. This NUA will be taxed at long-term capital gains rates. If the stock is rolled over to an IRA then the benefits of the NUA rules will be lost because all distributions from the IRA will be ordinary income. The husband will want to have some of the employer stock distributed to him so it can be retained in a taxable account, such as his brokerage account; therefore, the capital gains can be deferred. The adverse consequences are that the husband will have ordinary income to the extent of the original cost of the stock when contributed to his account. The employer stock that is rolled over to an IRA can be sold to allow for diversification. The tax on gains from these sales of employer stock will be deferred until it is distributed to the couple. The rollover to the Roth IRA would not afford tax deferral because the assets would be subject to tax at the time of the rollover. Keep in mind, as long as the entire balance leaves the qualified plan, the employer stock can be split between the IRA and a taxable account and utilize NUA on the portion rolled to the taxable account. Assets cannot be left in the qualified plan to utilize NUA.

Several years ago, a CFP® professional helped a client, Ken Randall, to establish an UTMA account for his daughter. Ken is the custodian of the account. The daughter is now at the age of majority, and Ken does not want his daughter to know about the account. What should the CFP® professional do? A. Advise the daughter of the account. B. Set up an appointment with the daughter and father to discuss the account. C. Follow the client's wishes and not tell the daughter. D. Advise the client of his fiduciary obligation to the daughter.

D While the Uniform Transfers to Minors Act does state that the custodian must turn over control of the account to the minor upon reaching the age of majority, the transfer of control does not happen automatically. The father must fill out the appropriate forms to transfer the account to the child. So, while the father could potentially delay that transfer to the daughter's control, he should do so with the understanding that, as the custodian, he is a fiduciary and must act in the best interest of the daughter. Upon reaching the age of majority she will be able to sue him for breach of his fiduciary responsibility if she feels he has done something harmful to her. If answer choice D were not one of the choices, the next best answer would be B, to set up a joint appointment with father and daughter to discuss the account and the father's reasons for wanting to delay the transfer of control. Editor's note: The UTMA is a model law and each state has the right to adopt it as is or to modify it in some ways. Some states allow the custodian, at the time the account is established, to extend the custodial relationship to the minor's age 25; however, since this is not part of the model law, students who work in states that allow such a change should be careful to answer UTMA questions based on the general rules rather than the laws of their particular state. Answer choice A is incorrect because the planner's client is the father, the custodian of the account. Until such time as the father is no longer custodian of the account, the planner does not have an obligation to advise the daughter, nor should he violate his client's confidentiality. Of course, it would be wise for the planner to document his discussion with the father, noting that the father was advised of the potential consequences of not telling the daughter about the account or turning it over to her. (Topic 18, Domain 7)

Steven Myers, age 47, is married and has two children and is President of Myers Associates, Inc., a graphic arts design company. Steven has consulted a CFP® professional for comprehensive financial planning. The CFP® professional has obtained documents from Steven concerning his employee salary and benefits at his company. The Myers company has a disability income plan which provides long-term disability coverage for its employees. Under the plan, the company pays half of the premium, and the employee pays half. Steven Myers, who has an annual income of $90,000, is insured under the plan for replacement of one-half of his monthly income. If Steven Myers is disabled and receives Social Security disability benefits of $12,000 during the year, how much of this $12,000 will be includible in Steven's gross income for federal income tax purposes? None 0-50% 50-85% 50-100%

None Generally, for a taxpayer who files a joint return and whose "combined income" (AGI + foreign income + tax exempt income + ½ of Social Security benefits) is above $32,000, up to 50% of Social Security benefits are included in income. If a MFJ taxpayer's combined income exceeds $44,000, up to 85% of Social Security benefits may be subject to taxation. In this case, Steven Myers will have to report one-half of the $45,000 he will receive as disability income insurance benefits because his employer paid one-half of the premiums. Since his combined income will be only $22,500 + $6,000 (which is ½ of his Social Security benefit), for a total combined income of $28,500, he will be below the $32,000 minimum and none of the Social Security benefits will be included in his gross income. Topic 53; Domains 3 and 6

Assume that an annual dividend of $2.00 per share was paid yesterday on Alpha Corp. common stock. Your client is considering investing in this stock, but she needs at least a 15% return to induce her to take on the riskiness of Alpha stock. If the dividend growth rate was expected to be 7% per year for the next five years, followed by 3% per year thereafter, what would be the maximum price you should tell your client to pay? $11.99 $12.12 $20.09 $24.12

The first step in the solution is to discount the first five expected dividends back to their value today at the required rate of return, as follows: End of YearDividendP.V. @ 15%1$2.14$1.862$2.29$1.733$2.45$1.614$2.62$1.505$2.81$1.40Total PV $8.10 A faster, alternative way to determine the total PV of the dividends for the first 5 years is to use the NPV calculator function: YearDividend AmountDividend Cash Flow Received0$2.00$0 (you did not buy it yet so you do not get this dividend)1$2.00 × 1.07 = $2.14$2.142$2.14 × 1.07 = $2.29$2.293$2.29 × 1.07 = $2.45$2.454$2.45 × 1.07 = $2.62$2.625$2.62 × 1.07 = $2.81$2.81 Enter each of the cash flows in the right column into the cash flow keys on the calculator, put in 15 as I/YR, and solve for NPV = $8.10. This is the dollar amount the client is willing to pay for the first 5 years of dividends. The next step is to apply the dividend growth valuation model to the dividends to be received at the end of the sixth year and thereafter: $2.81 × 1.03 - $2.89 .15 - .03 .12 =$24.12 Since $24.12 is the value of those dividends as of the beginning of Year six (or the end of Year five), that amount must now be discounted back to today at the required rate of return. Enter $24.12 as the FV, 5 as the N, and 15% as the I/YR. PV = $11.99. Finally, add the PV of the two sets of dividends to produce the stock's intrinsic value: $8.10 + $11.99 = $20.09 Topic 38; Domains 2, 3, and 4

If The Blue Elf adopted a money-purchase pension plan in 2020, what is the maximum deductible contribution that could be made for Dennis? $10,780 $11,600 $14,500 $18,000

The limit on employer contributions to a money-purchase plan is 25% of compensation or $57,000 (2020), but for an owner-employee, the maximum money-purchase plan contribution to a Keogh plan is 20% of net earnings. The adjustment to the percentage is computed by the formula: Plan contribution %/1 + Plan contribution % OR 25/1.25 = .20 or 20% The earnings for Dennis from the Blue Elf are $58,000 of Schedule E income from the partnership. To compute the self-employment tax on Schedule SE for Dennis, multiply the self-employment earnings by .9235, to arrive at the new earnings of $53,563. This amount is multiplied by the 15.3% self-employment tax, and the tax is $8,195. The deduction for self-employment tax is one-half of this amount, or $4,098. After the deduction, the amount of income from which contributions can be made is: $58,000 - $4,098 = $53,902 The contribution can be 20% of this amount, or (.2) × ($53,902) = $10,780 Topic 55; Domain 3