CFP PRACTICE Q'S

Assume Dennis and his brothers are all in their 50s. Dennis and his brothers wish to adopt a qualified retirement plan for The Blue Elf. They are considering the following plans and whether they 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 Why DB over 401(k)?

- DB allows greater contributions than 25% and $56k limitation of a 401(k) - funding for past service (owners past service is greater than employees) - greater contributions for older employees - limitation on a comp base of $280k is a non-issue (earnings are all far below that)

types of structured communication

1) interviewing 2) advising 3) counseling

self employment tax

15.3% (of .9235 1-.065 times earnings)

limit on employer contributions to money-purchase plan (2019)

25% (for owner-employee.... 20% of net earnings = max contribution to Keogh plan)

Terrence White, CFP® has completed a comprehensive financial plan on a fee basis for his client, and has called upon James Knight, CFP® to implement a detailed recommendation to have the client acquire $1,000,000 of Universal Life with a guaranteed death benefit. On the basis of these facts, which of the following statements is correct? A - James Knight, CFP® is not required to enter into a written agreement with the client. B - Due to the collaboration between Terrence and James, Mr. Knight must enter into a written agreement with the client. C - Mr. Knight must disclose his inherent conflict of interest. D - Because of the multiplicity of financial planning issues, Mr. Knight is required to have a corollary financial planning agreement with the client.

A (Because James Knight is merely implementing a recommendation by the financial planner Terrence White, James is not required to enter into a written agreement. If James were also performing the material elements of financial planning, he would be required to have a written agreement. See Rule 1.3. Topics 1 and 8; Domains 1 and 8)

Newly minted CFP® professional, Mark Andrew, attempted to augment his brand image and marketing efforts by securing a personalized license plate of MA CFP and changing his email address to [email protected]. Which of the following statements concerning the CFP Board marks is correct? A - Both the license and the email are technical violations of the marks usage rules. B - Neither the license nor the email are violations. C - The license is a violation, but not the email. D - The email is a violation, but not the license.

A (Both the license and the email are technical violations of the marks usage rules.)

Ray and Susan DeMedio are 74 and 72 years of age and are finding their budget a little tight in retirement. The bonds that were to provide them with income are not earning as much interest as they used to earn so their cash flow is reduced. They would like some assistance in finding ways to increase their cash flow. They are also concerned about their granddaughter who is 5 years old and being raised by their daughter as a single parent. They want to help their granddaughter by setting up a life insurance policy that would provide the policy proceeds for the child's education and future expenses when they die. They do not want to be saddled with making premium payments but have $26,000 that they have set aside that could be used to buy the policy with a single payment. They would like the CFP® professional to recommend a policy and the best way to set up the life insurance. Which alternative would be the most appropriate for the CFP® professional to recommend to the DeMedios? A - Give the money to their daughter to arrange for the life insurance and make the premium payments. B- Purchase a second-to-die policy and establish a trust to receive the policy proceeds for the granddaughter. C - Purchase a whole life policy and name the granddaughter as the beneficiary. D - Purchase a 7-pay universal life policy that is a MEC with the proceeds payable to the daughter

B (The second-to-die policy does not pay the policy proceeds until the second death so the premiums are lower; alternatively, the DeMedios could buy a larger policy with their $26,000 if it is a second-to-die policy. In addition, establishing a trust will be a way to protect the proceeds for their daughter so the money is not expended inappropriately and is conserved for the child's education and future. If the money were given to the daughter, there would be a risk that the premiums might not get paid and the policy might lapse. If the granddaughter is named as the beneficiary, there is no safekeeping or supervision of the proceeds as there would be with a trust in which a trustee manages the assets. The management by a trustee would be helpful for the granddaughter. The use of a 7-pay policy is not consistent with the requests of the DeMedios to buy a single payment policy and not make additional premium payments. There is no important adverse effect of the policy becoming a MEC because the death benefit is not taxable income, but the best arrangement is not to have the proceeds payable to the daughter. Topics 28 and 68; Domain 4)

Sarah has a disability income policy provided by her employer. Disability is defined as "own occupation," and the policy will pay 50% of gross pay after 90 day elimination period. the annual premium is $350 and the employer pays 1/2 and sarah pays one half. Which of the following statements concerning Sarah Loudon's disability income insurance policy is correct? a The policy includes the most stringent definition of disability. b Sarah should change policies to one that includes an "educated and trained for" definition of disability. c Sarah would receive disability benefits equal to her current salary. d Disability benefits Sarah would receive would be 100% income-tax-free.

a (Own occupation is the most generous type of coverage because the definition is the most stringent. If the insured does not fit the very narrowly defined specifics of his or her occupation, then the insured can collect benefits and continue to work in another area if need be. Any occupation is the most restrictive type of coverage because the insured will receive no benefits if he or she can hold any job. Sarah's disability policy only pays 50% of her monthly gross salary. Since the premium payments are split between Sarah and the employer, benefits would not be 100% income-tax-free. Topic 25; Domain 3)

Janet Deleau arranged a meeting with her CFP® professional to discuss education planning for her daughter. Janet was unfamiliar with the rules for financial aid and wanted to find out how to use her assets and income most effectively without jeopardizing financial aid. Janet expected to use some of the money she had saved in an IRA and a Roth IRA. Her parents also offered to help with their Roth IRA. Which of the following statements can the CFP® professional tell Janet concerning the use of IRAs or Roth IRAs to finance education costs? a - For financial aid purposes, the distributions from a parent's Roth IRA will likely be counted as income. b - For financial aid purposes, the funds in a parent's IRA are countable assets. c - The assets in a grandparent's Roth IRA are countable assets for financial aid calculation. d - Both IRAs and Roth IRAs avoid income tax on distributions used to pay qualified higher education expenses for a taxpayer's child.

a (The distributions from a Roth IRA or traditional IRA will likely be counted as income for financial aid calculation purposes. The funds in an IRA or Roth are not countable assets, but the distributions may impact the calculation of income. While both IRAs and Roth IRAs avoid the penalty tax for distributions used to pay higher education expenses, the income tax is still owed on distributions from an IRA. The Roth IRA distribution may be tax and penalty free, however, it is still reported as untaxed income on the FAFSA. (Topic 21))

Dennis owns a restaurant with his two brothers. One is two years older and the other is four years older. Which of the following would be correct if they did a buy sell agreement? a With a cross-purchase agreement, six life insurance policies and six disability policies will be purchased. b A cross-purchase agreement will be substantially more equitable than an entity agreement. c An entity approach will mean the partnership does not need to buy as much life insurance coverage as with the cross-purchase agreement to arrange an equitable purchase and sale of the business interests. d With a cross-purchase agreement, Dennis must purchase a larger life insurance policy on his older brother than on his other brother.

a (With a cross-purchase agreement, each brother will have to buy policies on the other two brothers. The total number of policies is six; six life insurance and six disability income policies will be required. With a cross-purchase agreement, the brothers will buy equal amounts of insurance on one another because they have equal interests. They will each buy $160,000 of coverage (the value of each brother's interest) on the other two brothers. An entity agreement will be as equitable as a cross-purchase agreement because the brothers are close in age and have the same percentage interests in the business. With an entity approach, the partnership will have to buy as much life insurance coverage as with the cross-purchase agreement and may have to buy more, due to the ballooning value of the business when it receives life insurance proceeds. The partnership receives the life insurance proceeds, and if they are allocated equally among the partners' accounts, this added cash increases the value of each interest. The surviving brothers will then need additional money to pay for the increased value of the deceased brother's share. Topics 29, 67, and 70; Domain 6)

Ben Fuentes is a teacher who is 55 years of age and has taught in a private elementary school for the past 25 years. His annual salary is $30,000. During the initial data gathering session Ben mentioned to the CFP® professional that the school advised him that he could contribute over $26,000 to the retirement plan for this year. What kind of plan must be provided by the school? a - 401(k) b - 403(b) c - 457 d - 412(i)

b (Under a 403(b) plan the employees at public and private schools are permitted to make salary reduction contributions of up to $19,000 in 2019, plus catch up contributions of up to $3,000 for employees with 15 years of service, plus additional catch up contributions of up to $6,000 for those age 50 and over. The 401(k) would permit the salary reduction of $19,000 and catch up of $6,000 but not the additional $3,000. A 457 plan in a non-governmental tax-exempt organization would be for a select group of highly compensated individuals and not for a teacher. A 412(i) plan is funded by employer contributions. Topics 57 and 59; Domain 2)

Jordan, age 16 and a dependent of James, has a part time job and earned $4.5k this year. In addition, she had $600 of interest income and $1k in qualified dividends. What is the amount of income taxable to Jordan? a) $0 b) $1,250 c) $1,600 d) $6,350

b) $1,250 1) calculate standard deduction. standard deduction for a dependent on another taxpayer's return is the greater of $1,100 or earned income + $350 (up to a max of $12,200, the standard deduction for a single taxpayer), so her standard deduction is $4,850) 2) deal with the unearned income. the unearned income that is taxable is $1,600. the first $1,100 is tax free because it's covered by the standard deduction under kiddie tax rules. the next $500 is taxed to child at his/her own rate. (Note: 1.1k tax free, nest 1.1k at child rate, anything above is at trust and estate tax rate TCJA 2018) You have now used $1.1k of the standard deduction, leaving $3.75k to be used against earned income. 3) earned income is $4.5k. subtract the remaining $3.75k of standard deduction, leaving $750 taxed to the child at her rate (she worked for it, so no kiddie tax) 4) check yourself total standard deduction - $4,850 total taxed at child rate - $1,250 total taxed at trust rate - $0 TOTAL - $6,100 (all of the taxable income accounted for)

Holly worked at FSU and contributed the max to the 403(b) plan this year, including a catch-up contribution. However, she decided to change jobs in July of this year and went to work for the Georgia Department of Revenue, which sponsors a 457 plan. Holly just turned 63 years old and plans on retirement in two years at age 65. What is the most that she can contribute to the 457 plan this year (2018)? a) $0 b) $19k c) $25k d) $38k

c) $25k Holly can contribute the annual deferral limit of $19k plus the catch up of $6k for a total of $25k (she can double deferral because she doesn't have prior unused deferrals)

what does whole life insurance offer?

consistent premiums and guaranteed cash value accumulation

For which of the following reasons may a CFP® certificant reveal information about a client under the Rules relating to the Principle of Confidentiality in the CFP Board's Code of Ethics and Professional Responsibility? a - To carry out a transaction for the client b - To comply with legal requirements c - To defend the CFP® professional in a civil dispute with the client d - To defend the CFP® professional against charges of wrongdoing

d (A CFP® professional is allowed to reveal information about a client for all four of the listed reasons. Topic 1; Domain 8)

Your client's only employer has established a payroll deduction TSA. Your client is single, making more than $61,000 per year. Which of the following is TRUE concerning the plan? a - The phase-out maximum AGI of $60,000 in the current year does apply. b - TSA contributions are not subject to Social Security taxes. c - The employer usually controls the investment selections. d - Contributions are not subject to Federal/State Withholding tax.

d (Contributions to a TSA are made before Federal/State withholding taxes are applied. Phase-outs apply to traditional IRAs, not TSA plans. Salary reductions into a TSA are subject to Social Security and Medicare taxes. Employers usually allow the employee to control the allocation of assets within their TSA.)

Sheldon is evaluating several stocks that he is thinking about adding to his portfolio. According to CAPM, which of the following statements are true? 1 - Dots above the line are over-valued portfolios 2 - Dots below the line are under-valued portfolios 3 - Dots on the line at the lower end is better 4 - Dots on the line at the middle is better a - I and II only b - I, II, and III c - IV only d - None of the statements are true

d (Dots below the line are over-valued, because the security is not providing the amount of return that it should be yielding if correctly priced. Dots above the line are under-valued because they are yielding more than they should according CAPM. Dots on the line are all priced correctly, according to their level of risk. Also note that the slope of the line is determined by the market risk premium. Topic 35)

Which of the following statements concerning the Markowitz efficient frontier is correct? a - A portfolio that offers the lowest rate of return with the lowest degree of risk is on the efficient frontier. b - A portfolio that offers the lowest rate of return for a higher degree of risk is on the efficient frontier. c - A portfolio that offers the lowest degree of risk for a given rate of return is above the efficient frontier. d - A portfolio that offers the highest rate of return for a given degree of risk is on the efficient frontier.

d (The efficient frontier shows all portfolios that offer the highest rate of return for a given degree of risk or, conversely, the lowest degree of risk for a given rate of return. Topic 35; Domain 6)

what does universal life insurance offer?

flexible premiums, death benefits and savings option

most generous type of disability coverage?

own occupation

Carl Sanders is 48 years of age and has been a client for several years but has previously only wanted recommendations for investment planning. He has a moderate risk tolerance and a net worth of about $300,000. Following your recommendations he has been investing in a diversified portfolio of small cap, large cap, and balanced funds; and you set up a bond ladder for him. Carl mentioned on the phone that he is now ready to talk about retirement planning. Carl has his own business, and the business has grown so he now has 20 employees. The business has been generating a steady income so a retirement plan may be appropriate. Some employees are older than Carl and some are younger. The employees receive compensation that is generally less than what Carl earns although he has one Vice President of Sales who makes about the same as Carl. Carl said that he knows some of his friends have 401(k) plans and have told him that he should start a plan at his business. Carl likes the idea of employees contributing for their own retirement, but he wants a plan that will not be too expensive to install and maintain for his firm. Carl said that he is starting to think about retiring so he needs to do some planning for it. As a CFP® certificant, what is your best course of action at this time in response to Carl? A - Obtain an employee census and income statement from Carl for his business. B - Consult with a retirement plan specialist on costs for retirement plan installation and maintenance. C - Define a new scope of engagement with Carl. D - Explore with Carl his goals, objectives, and priorities for retirement needs.

C (The engagement with Carl has previously been only for investment planning, so this change to include retirement planning will require defining the new scope and documenting it with a new engagement letter. The new scope needs to be defined before the planner undertakes exploring Carl's new goals, objectives, and priorities for retirement needs. When the planner gathers information to fulfill the engagement, then the planner will want to get an employee census and income statement for Carl's business and possibly consult with a retirement plan specialist. Topics 8, 52, and 59; Domain 1)

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)

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 ( Explore with the Metiers the time horizon and priorities for each of their financial goals.)

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))

Assume Dennis and his brothers are all in their 50s. Dennis and his brothers wish to adopt a qualified retirement plan for The Blue Elf. They are considering the following plans and whether they 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 Why not SEP or SIMPLE?

SEP and SIMPLE may require contributions for the part-time employees

amortization example

Solution: The correct answer is B. The calculation of the interest that will be saved by refinancing the 30 year mortgage to a 15 year mortgage requires two calculations using the amortization function of a financial calculator. First, we calculate the amount of the remaining balance on the original 30 year mortgage. This calculation requires us to input the data needed to determine the amount of the current mortgage payment and without clearing the calculator, we use the amortization keys. On an HP 10bII, the keystrokes are as follows: 360, n (because there are 360 months of payments on a 30 year mortgage) 6/12, = , I/YR 150,000, PV 0, FV then press PMT to calculate the monthly payment which is 899.33 Without clearing the calculator, then enter the following keystrokes on the HP 10bII: 1, INPUT, 108 Gold Shift, AMORT The calculator will display the Per 1 - 108, so we press "=" to display the amount of principal paid over the first 108 months (9 years) of the mortgage which is 21,314.75. Next, by pressing the "=" key again, we get the amount of interest paid. We need to write down this amount which is 75,812. By pressing the "=" key once again, we get the amount of the remaining balance which is 128,685.25. We need to write this amount down to be used in the calculation for the 15 year mortgage. Before leaving this first calculation, however, we also want to find out the total interest that would be paid if the 30 year mortgage were not refinanced at his time, so we enter the following keystrokes: 109, INPUT, 360 Gold Shift, AMORT The calculator will display the Per 109- 360, so we press "=" to display the amount of interest paid from year 9 to year 30 of the mortgage which will be $97,944.84. If you are using an HP 12c, the keystrokes are as follows: 360, n (because there are 360 months of payments on a 30 year mortgage) 6, ENTER, 12, ÷, i 150,000, PV 0, FV then press PMT to calculate the monthly payment which is 899.33 Without clearing the calculator, then enter the following keystrokes: 108, Yellow f, AMORT The calculator will display -75,812.44 which is the amount of interest paid over the first 108 months. Then, we press the "exchange × and Y" key (4th key from the left in the third row down) to display the principal paid. Then we press the RCL key and then the PV key to display the remaining balance on the mortgage of 128,685.25. We need to write this amount down to be used later in the calculation for the 15 year mortgage. Before leaving this first calculation, however, we also want to find out the total interest that would be paid if the 30 year mortgage were not refinanced, so we enter again the following keystrokes: 360, n (because there are 360 months of payments on a 30 year mortgage) 6, ENTER, 12, ÷, i 150,000, PV 0, FV then press PMT to calculate the monthly payment which is 899.33 Without clearing the calculator, then enter the following keystrokes: 360, Yellow f, AMORT The calculator will display -173,757.28, which is the amount of interest paid over the 360 months (30 years) of the mortgage. To find the amount of interest that will be paid from year 9 to year 30, we subtract the $75,812.44 from $173,757.28 and the result is $97,944.84. Now, the second calculation will be to find the total interest that will be paid on the 15 year mortgage. We have to begin by calculating the payment required on the mortgage and then using the amortization function calculate the total interest that will be paid. On an HP 10bII, the keystrokes are as follows: 180, n (there are 180 months of payments on a 15 year mortgage) 3.5/12, = , I/YR 128,685.25, PV (this number is the remaining balance on the 30 year mortgage calculated above) 0, FV then press PMT to calculate the monthly payment, which is $919.95. Without clearing the calculator, enter the following keystrokes: 1, INPUT, 180 Gold Shift, AMORT The calculator will display the Per 1 - 180, so we now press "=" to display the interest paid over the 15 years as $36,905.46

calculation of dennis's gross estate

The gross estate would include one-half of the joint tenancy property owned by the spouses and all of the property owned separately. The life insurance death benefit and the IRA assets would also be includible. The gross estate would include the following assets: 50% of checking account $ 2,160 Money market fund 5,200 50% of savings account 4,585 Certificate of Deposit 5,000 50% of growth stock mutual fund 7,800 Stock 8,800 IRA 21,800 Partnership in restaurant 160,000 Life insurance death benefit 100,000 50% of house 80,000 50% of Volvo 13,500 50% of Explorer 17,500 Boat 12,000 Total $438,345

calculating Dennis's probate estate

The probate assets would include assets owned by Dennis but would not include any portion of the jointly owned assets. The probate estate also would not include life insurance and IRA assets, which would be paid to beneficiaries directly, by reason of contractual obligations. The probate estate for Dennis would include the money market fund of $5,200, the certificate of deposit of $5,000, the stock valued at $8,800, the partnership interest valued at $160,000, and the boat valued at $12,000. The total would be $191,000. Topic 64; Domain 3

whole v. universal life insurance

Whole life insurance offers consistent premiums and guaranteed cash value accumulation. Universal policy provides flexible premiums, death benefits, and a savings option.

Paul Michael, CFP®, is a registered representative at an independent broker-dealer who just concluded FINRA arbitration hearings in which he was found to have made unsuitable recommendations and product placements for three clients. He was fined $20,000 and suspended from investment activities for three months. Which of the following is correct? a Paul must notify CFP Board within 30 days of the initial notification from FINRA. b There is no requirement for Paul to notify CFP Board as to the FINRA action. c Paul will be required to divulge the FINRA event only at the time he renews his certification online. d Due to the suspension, Paul must voluntarily suspend use of his CFP® marks for an equivalent time period.

a (A certificant who has received a professional suspension must notify CFP Board within 30 calendar days after the date on which the certificant has been named as a subject of, or whose conduct is mentioned adversely in, a Regulatory Investigation or Regulatory Action alleging failure to comply with the laws, rules, or regulations governing Professional Services. Topic 3; Domain 8)

Charles Train is 28 years of age and works for an employer that has a 401(k) plan. Charles also works for another employer, which has a 403(b) plan. Charles participates in both plans. What is the limit for contributions that Charles can make under the two plans? a - $19,000 total for both plans b - $19,000 for each plan c - $56,000 or 100% of income, total, for both plans d - $56,000 or 100% of income for each plan

a (If an employee participates in a 401(k) and a 403(b) plan, the elective contributions are aggregated when applying the $19,000 (in 2019) limit on salary deferral. Topic 57; Domain 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)

Assume that the initial margin requirement for the purchase of securities is 60%, and the maintenance margin requirement is 35%. An investor wishes to buy 1,000 shares of Redneck Corporation stock, currently selling for $24.25. In this situation, which of the following statements is correct? (Ignore all transaction costs.) a - If the investor buys the stock on margin, he or she will be borrowing $9,700 from the broker. b - If the investor buys the stock on margin, he or she will be borrowing $14,550 from the broker. c - If the investor buys the stock on margin, he or she will be borrowing $15,762.50 from the broker. d - If the stock's market price rises to $27.50, a margin call will be made by the broker.

a (An initial margin requirement of 60% means that 60% of the purchase price is paid in cash, and 40% is borrowed from the broker: 1,000 × $24.25 × .4 = $9,700 borrowed B is incorrect because it assumes an initial margin requirement of 40%: 1,000 × $24.25 × .6 = $14,550 C is incorrect because it uses the maintenance margin requirement, not the initial margin requirement, to compute the amount borrowed: 1,000 × $24.25 × .65 = $15,762.50 D is incorrect because an increase in the market price of the stock will not trigger a margin call; only a substantial decrease in the stock's market price will do so. Only if the stock's market price declines below $14.92 will the maintenance margin requirement be violated because at a price of $14.92, the requirement is still barely met. $14,920 - $9,700 = $5,220 $5,220 ÷ $14,920 = .35 Topic 40)

A CFP® professional is explaining the allocation of the client's assets into bonds and cash equivalents. In order to demonstrate the differences, the CFP® professional tells the client about the kinds of investments held in bond funds and money market funds. The CFP® professional can identify which of the following investments as not likely to be found in the portfolio of a typical money market mutual fund? a - Collateralized mortgage obligations b - U.S. Treasury bills c - Negotiable certificates of deposit d - Commercial paper

a (CMOs are not short-term or highly liquid, safe securities and, therefore, are not likely investments for a money market mutual fund. Topic 41; Domain 5)

Raymond Rodgers, a CFP® professional, has been performing financial planning services for a client for several years. The client is 66 years of age and has just sold his business for $2 million. The client has come to see Rodgers to review his financial plan. What is the next step for Rodgers? a Understand the client's personal and financial circumstances b Identify and Select Goals c Develop the Financial Planning Recommendation d Monitor the recommendation

a (Due to the client's sale of the business, an evaluation of the changes should be done by recreating the personal financial statement and cash flow analysis before moving on to new goals. Even though the planner and client have an existing relationship, the sale of the business is a change of situation that may suggest the need for different personal financial situation and different goals. (Topic 8, Domain 7))

Richard Peterman retired at age 65 and began taking distributions from his IRA. In case of his death, Richard would like to name a beneficiary for the IRA assets so that income taxes will be deferred as long as possible. If Richard dies in the next year, the start of distributions can be deferred longest when Richard names which of the following beneficiaries? a His spouse, who is age 62 b His child, who is age 41 c His brother, who is age 57 d His grandchild, who is age 10

a (If an IRA owner has begun receiving distributions and dies before the entire interest is distributed, the distributions to a nonspouse beneficiary must start no later than December 31st of the year following the owner's death. The spouse, however, has the option of rolling over the IRA assets into his or her own account and treating the IRA assets as his or her own. Richard's spouse would not need to begin distributions until the year after she reaches age 70½. Editor's Note: The nonspouse beneficiary has the ability to roll over qualified plans (not IRAs) to an inherited IRA. However, the nonspouse beneficiary must still take distributions starting the year after death from the inherited IRA. Topic 60; Domain 4)

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 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)

Following the collection and analysis of the client's financial information, a CFP® professional prepares a comprehensive financial plan for her client. At their next meeting, the CFP® professional presents the recommendations, and then at the conclusion of the presentation, the CFP® asks for feedback from the client. After a moment, the client begins to express some concerns about the budgeting issues and the savings that will be required. The CFP® professional wants to find out more about the client's concerns. Which of the following responses would be most appropriate for the CFP® professional to employ? a Reflection-of-feelings response b Interpretive response c Suggestive response d Explanatory response

a (Reflection-of-feelings response is a technique a counselor uses during active listening to encourage additional discussion. The counselor responds to the client by attempting to reflect back to the client in words the underlying feelings presented by the client's statements of concern. The counselor communicates understanding and empathy for the client's distress. The other responses presented in this question are responses a counselor uses to signal that she is moving away from active listening and in a new direction beyond the client's statements. Topic 15; Domain 5)

One of the alternatives that you are considering for education planning for a client is a 2503(c) trust. Your client has young children and would like to put some money away over the next few years for their education. In regard to the client's education financing goals, you will want to consider all of the following statements about the 2503(c) trust, EXCEPT: The assets must be used to pay for the minor's college expenses. Contributions to the trust will be eligible for the gift tax annual exclusion. Trust income is accumulated in the trust and taxed annually to the trust. The minor must have a right to withdraw principal and income at age 2

a (The assets placed in a 2503(c) trust must be used for the benefit of the minor and can be used prior to age 21, but they need not be used only for the minor's college expenses. After age 21, the minor can use the assets in any way the minor chooses. The trustee will exercise discretion over expenditures before age 21; if the minor does not elect to withdraw the assets from the trust at age 21, the trustee can continue to supervise the trust. Contributions are eligible for the gift tax annual exclusion. Trust income is accumulated in the trust and taxed annually to the trust. Topic 18; Domain 4)

If The Blue Elf adopted a money-purchase pension plan in 2019, what is the maximum deductible contribution that could be made for Dennis? (earnings of $56k) $10,780 $11,600 $14,500 $18,000

a (The limit on employer contributions to a money-purchase plan is 25% of compensation or $56,000 (2019), 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)

What is the main function of the CFP Board's Code of Ethics and Professional Responsibility? a - To benefit customers b - To create liability for misconduct c - To prescribe services to be provided d - To establish a fiduciary standard

a (The mission of the CFP Board is to benefit the public through its activities of enforcing education, experience, and ethics requirements for CFP® certificants. The Code of Ethics and Professional Responsibility benefits the consumer by setting standards for planner conduct. Topic 1; Domain 8)

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)

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)

John (a CFP) was recently convicted of a DUI and promptly notified the CFP Board. The Board is currently evaluating whether to revoke or suspend his CFP certification. John is about to meet with a client. Which of the following actions is most appropriate for John to take regarding the upcoming client meeting? a) disclose the DUI conviction to the client b) cancel the upcoming client meeting c) report the conviction on form ADV d) no action is currently necessary until the board notifies John of any disciplinary action

a) disclose the DUI conviction to the client (the code of ethics requires the CFP professional to disclose any info about the certificate or the certificate's employer that could reasonably be expected to materially affect the client's decision to engage the certificate that the client might reasonably want to know in establishing the scope and nature of the relationship. if John is registered with the SEC, he must report the charge and conviction on his U4)

You are shocked to learn that one of your long-time clients, who was still running marathons in the past year at the age of 78, recently passed away. The client's daughter comes in to see you and is upset because, in reviewing his financial affairs, she found out that her father has been paying over $2,000 a year for the past 10 year for a long-term care policy. She feels that there should be some sort of cash value associated with the policy since he has paid well over $20k and never used any. She is angry and filed a complaint with the CFP board. She also filed a complaint with the state insurance commission, who found it to be without merit. Which of the following actions will the board be most likely to take? a)investigate the complaint to determine its merit b) suspend your use of the CFP marks while investigating c) ignore the complaint as unjustified d) since the state commission has already found it to be without merit, the board will have no need to investigate further

a) investigate the complaint to determine its merit (even though another regulatory body may find a complaint to be without merit, the board will assess the situation based on its rules, which often require a higher standard of care than other regulatory bodies. even if they do find the complaint to be without merit, the person who sent the complaint will still be notified of the findings rather than simply ignored)

Which of the following policies should you recommend to new parents who want to protect themselves while their child is a minor but have a tight budget since they have to buy diapers and formula? a - A 10-year term policy b - A 20-year term policy c - A whole life policy d - A universal life policy

b (A 20-year term policy will be the cheapest life insurance policy that will cover the new parents the entire time the child is a minor. A 10-year term policy will not provide any coverage after the 10-year period, leaving the parents exposed for at least 8 years, until the child graduates from high school. The universal and whole life policies will provide for permanent coverage; however, they will have higher premiums than the term polices. Topic 31; Domain 4)

A client is unsure whether his employer provides a 401(k) plan or a 403(b) plan for employees. The CFP® professional can advise the client that all of the following organizations are eligible to adopt a 403(b) plan for employees, EXCEPT: a - State hospital b - Federal government c - Private school d - Public school

b (A 403(b) plan may be adopted by an employer that is a tax-exempt organization or that is a public school system. Organizations that are wholly owned by a state or local government are usually not eligible employers, but a state hospital organized as a separate 501(c)(3) organization will be eligible. Also eligible is an agency of a state that is part of a public school system and an educational organization, such as a college or private school. Topic 57; Domain 2)

Sheryl Kramer inherited stock that her mother purchased for $25,000. At her mother's death, Sheryl lived in a community-property state with her husband David, and the stock was valued at $50,000. Two years later, the Kramers moved to a state that followed common-law principles of property ownership, and the stock was then valued at $60,000. Five years later, in 2019, the stock was valued at $100,000, and Sheryl gave the stock to the Kramers' two children. Sheryl and David agreed to split gifts. What is the amount of Sheryl's taxable gifts? a $15,000 b $20,000 c $30,000 d $50,000

b (The value of the gift is $100,000 on the date the gift is made. Sheryl and her husband split gifts, so Sheryl will report one-half of the gift, or $50,000. She can take one annual exclusion for each child, so the taxable gift is reduced by $30,000 to $20,000. Remember that for each child, Sheryl's husband will also take an annual exclusion on his gift tax return. Topic 66; Domain 2)

Rachel Menendez is 64 years of age and has decided to retire from her position with a graphics design firm. She has asked a CFP® professional to help her set up an investment portfolio for her retirement years. She expects to live at least 20 years and she has a moderately conservative risk tolerance. For the income portion of Rachel's portfolio, the CFP® professional is considering an alternative to give Rachel more control over the investment, provide her with cash flow, and reduce her risk. Which of the following alternatives will provide Rachel with these advantages? a - High yield bond fund b - Bond ladder c - Investment grade bond fund d - Bullet portfolio

b (A bond ladder requires the investor to purchase bonds with different maturities so equal portions of the portfolio will mature each year. The bonds can be purchased over the entire 20 years of Rachel's expected retirement, or bonds could be purchased over 10 years and then as each bond matures, some can be reinvested at a ten-year maturity. The staggered maturities mean that the investor has reduced risk from interest rates and inflation. Since some bonds are maturing each year, the investor has cash flow each year and control over reinvestment. By contrast, the bullet portfolio is invested in bonds maturing at one time so there is more risk from changes in interest rates, little cash flow until the maturity date, and less control over the investment. A high yield bond fund will entail more default risk than seems appropriate for this investor. The investment grade bond fund will have more interest rate and inflation rate risk than the bond ladder. Topic 40; Domain 4)

Which of the following statements concerning systematic and/or unsystematic risk is not correct? a - Unsystematic risk can be reduced through diversification of a portfolio. b - A coefficient of determination of .75 in a portfolio means that 75% of the portfolio's risk is unsystematic. c - A portfolio's beta is a measure of its systematic risk. d - A fully diversified portfolio has no unsystematic risk.

b (A coefficient of determination of .75 means that 75% of the risk in the portfolio is systematic and 25% of the risk is unsystematic. Topics 34 and 35)

A CFP® professional wants to review with a client the retirement benefits that will be provided by his employer. The client has provided documents showing a benefit under a nonqualified plan that will be funded by a rabbi trust. The CFP® professional wants to evaluate the likelihood of the client receiving benefits under this plan and the protections provided for benefits. Which one of the following provisions should the CFP® professional tell his client is not permitted under an effective rabbi trust? a - In the event of a merger or acquisition of the employer, the trust will become irrevocable. b - In the event of the employer's insolvency, the employer will make irrevocable contributions sufficient to pay required benefits. c - In the event of the employer's liquidation or bankruptcy, the plan assets will be available to the employer's creditors. d - The employer may make contributions in employer stock, and the trustee may be authorized to hold stock of the employer company.

b (A rabbi trust may not provide a solvency trigger, i.e., in the event of the employer's insolvency, the employer will be required to make irrevocable contributions sufficient to pay required benefits. The rabbi trust may provide that in the event of a merger or acquisition, the trust will become irrevocable or that the employer is required to make irrevocable contributions. In the event of the employer's liquidation or bankruptcy, the plan assets must be available to the employer's creditors. The employer may make contributions in employer stock, and the trustee may be authorized to hold stock of the employer company. Topic 29; Domain 2)

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)

An investor has a well diversified portfolio of investments but is worried about an unexpected decline in the stock market. She does not want to sell the investments and incur taxable capital gains, as well as transaction costs. Which of the following recommendations will be most helpful to this investor? a - Buy an index future. b -Buy an index put. c - Buy an index call. d - Sell an index put.

b (An investor will buy a put for protection against a market drop. The buyer of the put acquires the right to sell the security at the given price, so the value of the put will increase if the market declines, and the investor is protected. A bullish investor will buy a call or sell a put. Topic 40; Domain 4)

During the year, Mr. Chambliss paid $1,800 in margin interest on his brokerage account. His brokerage records show that he realized $5,450 in long-term capital losses during the year, earned $2,400 in municipal bond interest, and had taxable interest income of $950. These were his only investment activities. His AGI was $85,000, and he had itemized deductions of $13,500 before considering his investment activities. How much investment interest can Mr. Chambliss deduct on his return? a - $0 b - $950 c - $1,450 d - $1,800

b (He can deduct the interest paid, to the extent of his investment income. That includes his taxable interest income of $950, but not his nontaxable municipal bond interest. Topic 43; Domain 3)

You are working with a 62-year-old client, Robert, concerning retirement distribution planning. Robert is concerned about his ability to maintain his lifestyle throughout his retirement years and is increasingly upset over the prospect of not having enough income to live comfortably. Your analysis shows that Robert has done an excellent job in saving for retirement and you wish to ease his fears during your next meeting. According to behavioral finance principles, which of the following is likely to be the best way for you to communicate Robert's situation to him? a - Explain that in order to meet his goals, he only needs to generate a 6% average return throughout his retirement years. b - Explain to Robert that based on your evaluation he can meet his goal of $50,000 of after-tax income while taking on only minimal risk. c - Explain to Robert that the Monte Carlo simulation predicts a 90% probability of success based on a moderately conservative portfolio with an average return of 6%. d - Recommend that Robert invest in a fixed income portfolio designed to generate a 6% return.

b (In behavioral finance, people tend to respond to the way information is framed or presented. For example, framing a statement that there is a "60% chance of gain" will often be interpreted as more favorable (choosing to go forward with the investment) than the exact same information being stated as a "40% chance of loss". In this case, the framing is in terms that are most relevant to the customer. He wants to know that he will have enough income. The rate of return is irrelevant to him, so framing the conversation around the return will not be meaningful and is unlikely to alleviate his fears. Telling the client that there is a 90% probability of success may have the effect of communicating more than Robert needs to know and may cause him to feel uncertainty rather than confidence in his situation. Topic 35; Domains 4 and 5)

Which statement(s) accurately reflect(s) the Tax-Sheltered Annuity (TSA) provisions: 1 - Salary reductions into a TSA are exempt from all payroll taxes. 2 - The annual elective deferral limit may be increased by up to $3,000 for employees of certain organizations who have completed 15 years of service and meet certain other requirements. 3 - Tax sheltered annuities must allow participants to invest in mutual fund, annuities and/or fixed income securities. 4 - To calculate the maximum exclusion allowance for make-up calculation purposes, the participant's years of service and the amount of total excludable contributions made in the prior three years are needed. a - I and II only. b - II only. c - I, III and IV only. d - IV only.

b (Statement "I" is incorrect because deferrals are still subject to Social Security and Medicare taxes. Statement "III" is incorrect because TSAs can only invest in mutual funds or annuities and not any direct investments. Statement "IV" is incorrect because the total excludable contributions must be for all prior years, not just the past three.)

A CFP® certificant has provided a client with financial planning services, including investments and income tax planning. The CFP® certificant is preparing an income tax return as part of the on-going services for the client and has been provided with the client's tax information. The client is single and has a salary of $55,000. The client has received dividends of $3,000 and has capital gains of $2,500. In addition, the client has a $35,000 loss on a residential rental unit that he owns and manages. What is the client's AGI? a - $25,500 b - $35,500 c - $55,000 d - $60,500

b (The AGI will include the client's salary, the dividends, and the capital gains. The client can also deduct above the line the amount of the loss on the residential rental unit but only up to a maximum of $25,000. The client can deduct the full $25,000 because the client's AGI is below $100,000. The client's AGI, therefore, will be $55,000 + $3,000 + $2,500 - $25,000 = $35,500. Topic 43 and 49)

What is the effect of the loan to The Blue Elf, cosigned by Dennis and Sarah Loudon? a The amount of the loan increases Dennis Loudon's basis in the partnership. b A portion of the loan increases Dennis Loudon's basis in the partnership. c The amount of the loan reduces Dennis Loudon's basis in the partnership. d A portion of the loan reduces Dennis Loudon's basis in the partnership.

b (The basis of a partner is increased by an increase in his or her share of partnership liabilities because the increase is treated as a contribution of money to the partnership. Dennis and his brothers are liable on the loan, so Dennis has increased his share of liabilities by one-third of the amount of the loan. Topic 44; Domain 3)

Judy Meserschmit is a partner in an accounting firm where she specializes in tax audits. Judy is a 1/3 partner and her adjusted basis in the partnership is $25,000. The partnership decided to take out a loan during the year for $45,000 to pay its expenses. For the year, the partnership reported a loss of $180,000. How much loss from the partnership can Judy claim for the past year on her federal income tax return? a - $25,000 b - $40,000 c - $60,000 d - $75,000

b (The loan taken out by the partnership during the year increased Judy's basis by her 1/3 share of the $45,000 loan or $15,000. Judy's basis, therefore, increased from $25,000 to $40,000. Judy cannot deduct a loss from the partnership in excess of her basis (the amount she has "at risk"), so she can claim only a $40,000 loss. Topic 44)

Stanley Armis is 65 years of age and has consulted a CFP® certificant concerning retirement income planning. Armis has a traditional IRA (deductible) and a Roth IRA and is considering taking withdrawals from one or both of the IRAs. Both the traditional and Roth IRA contain $50,000. What additional information will the planner need to obtain from Armis? Dates IRAs were established Amount of contributions Investments purchased in the IRAs Expected tax bracket a (1) only b (1) and (4) only c (4) only d (2) and (3) only

b (The planner needs to know whether distributions from the Roth IRA will be tax free or not. To determine that issue, the planner needs to know when the Roth IRA was established. If it was established more than 5 years earlier, the distributions will be tax free. The second piece of information the planner needs is the client's tax bracket. If the client will be in a low tax bracket in the current year, then the planner will want to advise the client to consider delaying the distributions from the Roth IRA to another year when he may be in a higher tax bracket. While the planner may want to know the amount of contributions in the Roth, this knowledge is not necessarily needed to make the recommendation, and the investments purchased in the IRAs are not needed, making B a better answer than D. Topic 57; Domain 2)

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. Month 5 Month 6 Month 7 Group $1,167 $1,000 $1,000 Social Security $800 $800 Individual policy $500 Total $1,167 $1,800 $2,300)

Which of the following statements describe advantages of a profit-sharing plan? 1 The employer's stock can be owned by employees. 2 Employees know the amount of the benefit they will receive at retirement. 3 25% of participants' compensation can be contributed by the employer. 4 The employer can account for past service. a (1) and (2) only b (1) and (3) only c (3) and (4) only d (1), (2), (3), and (4)

b (Two advantages of a profit-sharing plan are that the plan can invest in employer stock, and the contribution limit is 25% of compensation. With a profit-sharing plan, an employer cannot account for past service, and employees are not assured of any particular level of benefits. Topic 59; Domain 4)

Sara Robinson has pursued her CFP® certification diligently for two years in a Registered Program, and will take the national examination next month. She believes her new career as a financial planner will change her life course as she emerges from personal bankruptcy. Which of the following is correct regarding her situation? a - Her bankruptcy will not be an issue with CFP Board if it is a Chapter 13. b - The bankruptcy is a presumptive bar to certification. c - CFP Board will note the bankruptcy filing on the CFP® professional's public profile; however, her bankruptcy will not bar her from attaining the certification. d - If the bankruptcy was Chapter 7, she will not be permitted to attain certification under any circumstances.

c (A single bankruptcy-only (personal or business) within the last five years is no longer a presumptive bar (as of July 1, 2012). The candidate will be permitted to obtain certification without the need to petition the DEC (Disciplinary and Ethics Commission); however, CFP Board will note the bankruptcy filing on the CFP® professional's public profile on the CFP Board website for a period of 10 years from the date CFP Board is notified of the bankruptcy. Two or more bankruptcies and a single bankruptcy in combination with one or more other conduct issues will be considered a presumptive bar requiring the candidate to petition the DEC for reconsideration. Topic 1; Domain 8)

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)

David and Lenore Amaya have two children enrolled in private colleges. Their son James is 20 is living on his own, and will be a junior; their daughter Kylie is 18 and will be a freshman. They have a third child who will be ready for college in two more years. David is a stock broker and earns $195,000 annually, and Lenore is a dentist and earns $135,000 annually. The Amayas' AGI is $350,000. James worked during the summer in a research lab and earned $15,000 for the summer and will earn an additional $6,000 during the school year, and this amount represents more than 50% of his support. Kylie worked at the swim club and earned $2,500. The college tuition and expenses for James are $35,000 annually but he has a partial scholarship for $10,000. Kylie will have college tuition and expenses of $38,000. The Amayas have set up a 529 plan for James that holds $20,000 and another 529 plan for Kylie that has $50,000. Which of the following methods should be used for paying the higher education expenses for the Amaya children? a The parents should take the American Opportunity Tax Credit (AOTC) and both children can take distributions from the 529 plans b The parents should take the Lifetime Learning Credit for James, AOTC and 529 plan distributions for Kylie c James should take the AOTC; both children can take 529 plan distributions d James and Kylie should take AOTC credits, and both children should take 529 distributions

c (David and Lenore cannot take the AOTC or Lifetime Learning Credit because their AGI is above the phaseout level. James can take advantage of the AOTC due to the income he has earned to that covers more than 50% of his living costs. James can obtain reduction of his income taxes by claiming the AOTC. Kylie did not earn enough income to benefit from using AOTC, and her parents will benefit from using the qualified dependent credit for her. Distributions can be taken from the 529 plans, and James can use the 529 plan for the expenses above the amount needed to qualify for the credit. Topic 18, Domain 4)

A CFP® professional is helping William Schmidt with his retirement planning and is gathering information about his expected retirement. William turns 70½ on July 22, 2019 and has continued to work at the advertising firm where he has worked for 25 years. William wants to work until he is 74 and the employer is willing for him to continue working. William has a 401(k) plan in which he has a balance of $450,000 plus he has a 3.5% interest in his employer's stock through an ESOP. The current market value of the interest in the employer stock is approximately $200,000. William also has a traditional IRA to which he made deductible contributions and which is now worth $150,000. When must William begin to take distributions from his 401(k) and from the IRA? a April 1, 2020 for both b April 1, 2020 for the 401(k) and April 1, 2024 for the IRA c April 1, 2020 for the IRA and April 1, 2024 for the 401(k) d April 1, 2024 for both

c (Distributions from qualified plans must begin by April 1 of the year following the later of either (1) the year in which the employee turned 70½ or (2) the year the employee retires if the employee is not a 5% owner. In this question, the employee is a 3.5% owner so the distributions can be delayed until April 1 of the year following the year of retirement. The IRA distributions, however, must begin by April 1 of the year following the year in which the employee turns 70½. Since William will be 70½ in 2019, his distributions from the IRA must begin April 1, 2020. William will retire when he is 74 in 2023, so the distributions from the 401(k) must begin April 1, 2024. Topic 60; Domains 2 and 3)

A CFP® professional is explaining how Section 303 can assist in estate planning. She wants to explain to the client some of the requirements for the application of Section 303. The CFP® professional can tell the client that a Sec. 303 redemption will be appropriate for all of the following estates, EXCEPT: a At his death, the decedent owned stock of a closely held corporation in joint tenancy WROS with his wife. b Before his death, the decedent had transferred his stock in a closely held corporation to a revocable trust. c By will, the decedent bequeathed his stock in a closely held corporation to his daughter and provided for estate and death taxes to be paid by the residue. d Before his death, the decedent's adjusted basis in his closely held stock was almost zero.

c (If stock is included in the decedent's gross estate, it can be redeemed under Sec. 303. One-half of the jointly owned stock will be included in the decedent's gross estate, so some of this stock can be redeemed from the wife to the extent that it bears a portion of estate taxes. Similarly, stock that was transferred to the revocable trust can be redeemed from the trustee to the extent that it bears a portion of estate taxes. A Sec. 303 redemption cannot occur where the stock has been transferred by a specific bequest and will not bear any of the taxes. A decedent's stock receives a step-up in basis at death, so a Sec. 303 redemption is appropriate when the basis was near zero before death. The estate can sell the stock at no capital gain. Topic 71; Domain 5)

You have been working with Sue Peters for a number of years, primarily in the areas of retirement, insurance, and investments. Sue is 52 years old, happily single and plans to stay that way. When you last met with Sue a year ago she had just received a $200,000 inheritance from her mother and was uncertain about what to do with it. You have projected that, if she continues to work to age 66, Social Security, her small pension from work, and income from her 401(k) and other taxable investments should be adequate for her needs; however, should she need long-term care, her assets could be depleted rather quickly. During the last meeting you mentioned that Sue could use income generated from the inheritance to purchase LTC insurance or life insurance with an LTC rider, but she was too distraught over her mother's death to make a decision. You and Sue agreed to place the inheritance money in a money market account until Sue was ready to make a decision. Today, Sue has come in all excited about an investment opportunity that she "ran into". She met a gentleman at the coffee shop last week who owns several apartments in Sue's neighborhood and is looking to sell one of them for $200,000. Which of the following identifies the most important information you need to help Sue make a decision regarding the purchase of the rental property? a - You need no additional information. Sue has no experience with owning rental properties and should not invest in additional real estate in the same neighborhood where she owns her home. Her main priority should be purchasing long-term care insurance. b - Gross rental income and the cost of property taxes and insurance. c - Gross rental income; the cost of property taxes, insurance, and other routine expenses paid for the property; estimate of any repairs needed in the near future; vacancy rate; and appropriate discount rate. d - You should obtain information regarding the average return on equity REITs and real estate limited partnerships, both of which would provide Sue with greater diversification and relieve her of the day-to-day management responsibilities of direct-ownership of real estate.

c (In order to evaluate the rental property Sue is considering, the first step is to divide Net Operating Income (NOI) by the appropriate capitalization rate to determine the amount she should be willing to pay for the property in order to achieve the desired rate of return. NOI is found by computing the gross rental receipts, plus nonrental income, minus vacancy and collection losses, and minus cash operating expenses (including an allowance for periodic replacement of leasehold improvements). NOI should be calculated as an average over several years. The capitalization rate is subjective, but should represent an appropriate return given the level of risk. If the results of this evaluation are favorable, the planner may choose to also educate the client regarding other alternatives for real estate investing (answer choice D), but the question asks which is most important. The client's wishes should be given priority until they are proven to be unfavorable. Topic 33)

Dennis received 100 shares of EXXON stock as a gift from his father. His father bought the stock for $50/share in 1996. He gifted it to Dennis in 1998, when shares sold for $60/share. Dennis has reinvested dividends in additional shares of EXXON stock. The total amount of reinvested dividends is $1k. No dividends were reinvested this year. The stock currently sells for $72/share. If Dennis sold all of his EXXON stock at the end of this year for $8,800 total at a net price of $72 per share, what would he report for gain on this transaction? a Long-term gain of $1,200 b Long-term gain of $2,200 c Long-term gain of $2,800 d Long-term gain of $2,200 and short-term gain of $600

c (The EXXON stock was acquired at $50 per share. The stock was a gift to Dennis, so he takes the carryover basis of $50 per share. The reinvestment of dividends adds to the basis. The dividends total $1,000, so the basis is $6,000. The total selling price is $8,800, as shown in the personal balance sheet. This price includes the reinvested dividends. The gain is the selling price less the cost basis, or $8,800 - $6,000 = $2,800. This gain is a long-term gain because the holding period was more than 12 months. Topic 38; Domain 3 Editor's Note: Due to the reinvested dividends, Dennis owns more than the 100 shares he received from his father. Based on the $72 per share price and the $8,800 value, he owns 122.22 shares. The fractional share ownership is common when the client participates in a dividend reinvestment program.)

All of the following should be recommended today for financing the future education costs of the Loudons' two children, EXCEPT: a Dennis and Sarah should dollar-cost average into a growth stock mutual fund. b Dennis and Sarah should pay down their home mortgage. c Dennis and Sarah should invest in zero-coupon bonds in their children's names. d Dennis and Sarah should each buy at least $100,000 of additional life insurance coverage.

c (The Loudons should not buy zero-coupon bonds in their children's names due to the kiddie tax rules on the OID income. In addition, the Loudons should not place assets in their children's names because such assets may disqualify them for financial aid for education. Paying down their mortgage will allow them to take out a larger home equity loan or line of credit when their children are ready for school. The equity in their home will not be counted towards determination of financial need for purposes of their family qualifying for scholarships, grants, and loans. All of the other options would make good choices for investing for future college costs. Topic 6; Domain 4)

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 Values: $50,000 & $25,000 Cash Values: $29,000 & $10,000 Gains: $0 & $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 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? a - ($100) b - $100 c - $400 d - $900

c (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. Topic 40; Domain 5)

George Prinsen has consulted a CFP® professional about his investments. They have discussed some option investment strategies for protection and speculation. George is an aggressive investor and is interested in maximizing total return. George has agreed with the plan to use option strategies, and the planner wants to review the strategies in ways that will help George to understand how they are being used in his portfolio. Which option strategy can the planner tell George will have the most potential return? a - Write a covered call b - Write a put option c - Buy a call option d - Buy a put option

c (The strategy of buying a call option offers the most potential return because the underlying stock can increase in value to an unlimited extent and the client's potential return on the call, therefore, is unlimited. The strategy of writing a call or put has the potential to generate income for the client but the income is limited to the premium received for the option. The strategy of buying a put option is generally used to protect a portfolio against loss but can be used for speculation about the future direction of the stock. The strategy of buying a put has a limited potential return because when the underlying stock drops to zero it can fall no further. The maximum gain on a long put is the strike price minus the premium. Topic 33; Domain 5)

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. Which of the following statements concerning the estate tax treatment of the installment payments due after Tom's death is correct? a The unpaid installments will not be included in Tom's gross estate. b The unpaid installments will be included in Tom's gross estate at their face value of $200,000. c The present value of the unpaid installments will be included in Tom's gross estate. d The unpaid installments plus the interest payable on the balances will be included in Tom's gross estate.

c (The unpaid installments should be included in Tom's gross estate, discounted to present value, using the Sec. 7520 interest rate for the month of Tom's death. Topics 66 and 70; Domain 3)

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)

Which statements below accurately reflect characteristics of the Tax Sheltered Annuity (TSA)? 1 - Annuity payments from a TSA are taxed using the three-year rule. 2 - Employers may make matching contributions or contribute a fixed percentage. 3 - An employee under age 50, who contributed $8,000 to a 401(k) plan is limited to contributing a maximum of $11,000 to a salary reduction TSA. 4 - At the TSA owner's death, the full amount of proceeds paid to beneficiaries is included in the gross estate of the decedent. a - I, II and III only. b - I, II and IV only. c - II, III and IV only. d - I, III and IV only.

c (Total salary reductions for qualified 401(k) and TSA is limited to $19,000 per year in 2019. Contributions to 401(k)s and 403(b)s are aggregated such that they may not exceed the total annual limit. The TSA has make-up provisions that allow certain employees to make up contributions that could have been made in the past but were not. All assets in qualified plans are part of the gross estate of the account owner. Employers may make matching contributions or contribute a fixed percentage of an employee's compensation to a TSA.)

Cindy Thorworth is 68 years of age and a widow. She has substantial assets and would like to remove some assets from her estate to reduce taxes at her death. She would like to see her children receive an inheritance, and she wants to leave some money to the Metropolitan Art Museum. She also wants to have a monthly income that will adjust with inflation. Which of the following options should a CFP® professional recommend to Cindy? a CRAT b Pooled-income fund c CRUT d Charitable lead trust

c (With a charitable remainder unitrust, Cindy can place money in trust for the benefit of the Metropolitan Art Museum and obtain a charitable deduction in the year the trust is established. Cindy will remove assets from her estate because assets have been given away by placing them in trust, and the remainder interest passes to the charity. The income that Cindy will receive will adjust for inflation because the payout is determined by taking a specified percentage of the trust's assets each year. As investments increase in value, the monthly income will increase. With a CRUT, invasion of principal is also permitted, to maintain payments. With the tax refund that Cindy will get in the year the trust is established, she can buy a life insurance policy to provide her children with an inheritance. A CRAT will provide all of these same benefits, except that the annuity payout does not adjust for inflation. The annuity consists of fixed payments that would remain the same each year for Cindy's life. A pooled-income fund is also similar to the CRUT but does not provide for invasion of principal when trust income is insufficient to make the annual payments. Topic 69; Domain 4)

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))

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)

Mary Chan is 57 years of age and wants to buy a parcel of raw land in a beautiful rural setting. She has found the plot of land that is perfect for her and wants to buy the land now. In 6 years she plans to build a cottage on the site for a retirement home, and she will retire to the cottage 3 years later. At that time, she will sell the house that she currently lives in and which is fully paid for. She has discussed these goals with a CFP® professional, and she has completed projections of her retirement income needs. Mary would like a recommendation as to the best way to finance the purchase of the land. Which of the following recommendations would be most appropriate for the CFP® professional to make? a - Mary should make a withdrawal from her employer's retirement plan b - Mary should apply for a construction loan c - Mary should sell her variable annuity d - Mary should apply for a home equity loan

d (Mary owns a home that is paid for so she will be able to get a home equity loan to buy the plot of raw land. The interest on the home equity loan is will not be deductible under TCJA 2017 changes, though it is still the best option. A withdrawal from her employer's retirement plan or the sale of the variable annuity will result in increased income taxes. She may have to pay both income taxes and penalty on the proceeds from these sources. The construction loan is not a likely avenue for financing because Mary is not planning to build her cottage for 6 years. Topics 43, and 60; Domain 4)

Which of the following accurately describes a 403(b) plan? a - A 403(b) plan is a noncontributory qualified profit sharing plan. b - Because of catch-up provisions, the investment risk of the assets within a 403(b) plan is borne by the plan sponsor not the participant. c - A participant's benefits within a 403(b) plan will generally vest according to a 3 to 7 year graduated vesting schedule, however, a 5-year cliff vesting schedule may be used. d - 403(b) plan assets can be invested indirectly in stocks and bonds through annuities or mutual funds.

d (Option "D" is a correct statement accurately describing a 403(b) plan. Option "A" is incorrect as a 403(b) plan is an employee deferral plan and is not a qualified plan. Option "B" is incorrect as the investment risk is borne by the employee in all cases. Option "C" is incorrect as an employee's benefit within a 403(b) plan is always 100% vested.)

Peter and Sarah Marcella are 67 years of age and have been retired for two years. They obtained assistance from a financial planner on determining their retirement income and investments. After two years, however, they find that their assets and investments have declined substantially, and they are worried about a reduction in their retirement income. They expect to live for at least another 20 years in retirement and want to be sure they do not run out of money. They have consulted a different planner, who is a CFP® professional, to help them with reviewing and revising their retirement income planning. What is the first priority for action by the CFP® professional? a Provide client disclosures to the Kilkos. b Describe the investment strategies that could be used to increase income. c Explore with the Kilkos their financial goals, needs, and priorities. d Explain the scope of services the CFP® professional offers.

d (The CFP® professional needs to explain the scope of services that he or she offers so the clients will know what the engagement will be. They need to know from the CFP® professional what they are entering into for an engagement. After this explanation is made, the planner will define the scope of the engagement and then provide the client disclosures. There would be no reason to provide the disclosures before there is an explanation of the services that the CFP® professional is providing. The first step of the financial planning process is establishing and defining the client-planner relationship. After this step is completed, then the planner will proceed to the active financial planning steps; the gathering of information, including exploration of the clients' financial goals, needs, and priorities. The description of investment strategies will be a later step of the financial planning process after the data gathering is completed. Topic 8; Domain 1)

Timothy James, CFP® owns his Registered Investment Advisor firm, and prepares comprehensive financial plans on a fee-for-project basis. Tim also maintains his insurance license for the occasional situation where clients need life, disability, or long-term care insurance. In Tim's practice, which of the following is correct? a - Tim may indicate that his firm generally operates on a fee-only basis. b - As long as Tim has a separate company for his insurance practice, he can legitimately assert that his RIA firm is fee-only. c - If Tim anticipates no insurance opportunity in a financial planning engagement, he is not required to disclose his licensure. d - Tim is not permitted to use the fee-only description under any circumstances.

d (The certificant may not use the term fee-only because he may receive commissions from the sale of products. A certificant may use the term fee-only if and only if all of his/her compensation from all his/her client work comes exclusively in the form of fixed, flat, hourly, percentage, or performance-based fees. Forming a separate company does not obviate this rule, and the rule applies even though there is an expectation that no commissions will apply in a particular case. Topic 1; Domain 8)

You are a CFP® certificant and are pleased that two of your favorite clients, Henry and Heloise Tarkin, have referred their two best friends to you. This is your first meeting with Wilber and Judy Lawson, and they have brought their most recent two years' brokerage statements with them. The Lawsons are concerned that their broker might be doing excessive trading in investments that are too risky for them. Which of the following should you do first? a - Provide them with information on how to contact FINRA regarding the churning in their account. b - Ask them to fill out a risk tolerance questionnaire. c - Make copies of their documents so that you can analyze the transactions for frequency and suitability. d - Discuss with them the services that you offer and whether you will be able to meet their needs.

d (This is the first meeting with the clients and is the time to establish the relationship: what are their needs and are you able to meet them? While the clients have brought their statements with them, you are not at the data-gathering stage yet, nor are you ready to go to step 3 and analyze (answer choice C) until you have completed steps 1 and 2 in the planning process. Answer choice A is incorrect because you do not know whether there is excessive trading in their account at this point.)

A client is discussing a buy-sell agreement with three other owners of the business. During the data gathering for his financial plan, the client asks the CFP® professional about the advantages of the different kinds of buy-sell agreements. The CFP® professional could recommend the cross-purchase agreement as compared to the entity agreement for which of the following reasons? a Fewer insurance policies are required. b Premiums are deductible. c Premium payments are more assured. d Survivors will get an increased basis.

d (With a cross-purchase plan, the insurance death benefit is used to buy the business interest of the deceased owner, and the surviving owners will make purchase payments for the interest. These purchase payments increase the basis of the survivors in their interests in the business. The cross-purchase agreement will require more insurance policies than the entity agreement because each owner must buy life insurance on every other owner. The entity agreement only requires the business entity to buy a policy on each owner. Premiums for a buy-sell agreement are not deductible. Premium payments for the life insurance funding the buy-sell agreement are more assured when the entity makes the premium payments under an entity agreement. Sometimes an owner may forget to make the premium payment or may skip a payment due to cash flow problems. The entity is not as likely to skip payments. Topics 29 and 67; Domain 2)

Madonna Bakopoulos arrived for the presentation of her financial plan. Before the plan was presented by the CFP® professional, Madonna began to speak in a worried tone about losing her health coverage. She expressed fear that her employer would try to change the health plan or fire her. She wondered whether she should quit first. The CFP® professional should explain that an employer subject to COBRA must provide a covered employee with the option of continuing health insurance coverage in all of the following circumstances, EXCEPT: a - The employer changed its health plan. b - The employee quit. c - The employee retired. d - The employee was terminated for gross misconduct.

d (an employer is required to continue health coverage under COBRA if the employer changes its health plan for all employees. An employer, however, is not required to continue coverage when an employee was terminated for gross misconduct. An employer must continue coverage when an employee quit or retired. Topic 24; Domain 3)

Bill and his wife Beth both work for Bollinger ship yard, which sponsors a safe harbor 401k plan with a dollar for dollar match up to 4 percent. They each earn $125k but don't defer anything in the 401k even though they're eligible. If they were to contribute $12k to their IRAs in 2019, how much could they deduct? a) $0 b) $6000 c) $9000 d) $12,000

d) $12,000 neither of them are active participants because they do not contribute nor does the employer make a contribution. also there is no indication in the question that they received a forfeiture allocation. therefore, since they are not active participants, they can fully deduct their contribution.

most stringent definition of a disability?

own occupation

Rule 144 securities

restricted securities (could be received in ESOP)

variable, whole & universal (life insurance)

variable = investable whole = fixed premiums universal = flexible premiums

When should behavioral finance issues, such as recency, should be considered in the financial planning process?

while the planner is developing the recommendations