CFP PRACTICE EXAM

The QRP Company has a 25-year bond with a 10% coupon paid annually and is currently trading at par. If QRP has the option to call the bond in five years at $105, which of the following is the yield-to-maturity and the yield-to-call? A 10.80% Yield-to-Maturity, 10.00% Yield-to-Call B 10.00% Yield-to-Maturity, 10.50% Yield-to-Call C 10.00% Yield-to-Maturity, 10.80% Yield-to-Call D 9.47% Yield-to-Maturity, 10.80% Yield-to-Call

-Calculate YTM & YTC. Y to M Y to CN = 25 25DV-1000 -1000P 100 100FV 1000 1050ANSi = 10 10.8 A. Incorrect. The YTM for a par bond equals the coupon rate. B. Incorrect. Yields will not be equal due to call premium. In this option the YTC is incorrectly calculated. C. Correct. The YTM for a par bond equals the coupon rate YTC formula. Rate = (5nper,-10pmt,100pv,-105fv,0end,0.1guess) D. Incorrect. This option uses the call premium amount to calculate YTM instead of par.

From February 2010 to the present, she has been registered with FINRA through Firm X as a General Securities Representative. The calls were intended to obtain current information in preparation for client meetings, obtain documents that would facilitate a mortgage refinance, and to update a contract holder's address of record. Ms. Gordon's conduct violated FINRA Rule 2010 which requires associated persons to observe high standards of commercial honor and just and equitable principles of trade. In March 2017, Ms. Gordon entered into a Letter of Acceptance, Waiver and Consent with FINRA, and consented to the imposition of a suspension from associating with any FINRA member firm in any and all capacities for 30 business days and a $5,000 fine. In what way does the FINRA action against Ms. Gordon affect her certification as a CFP® professional?

A. Correct. A CFP ® professional has a duty to notify CFP Board when he or she 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 (sub section 'b'); and had conduct mentioned adversely in a Finding in a Regulatory Action involving failure to comply with the laws, rules, or regulations governing Professional Services (except a Regulatory Action involving a Minor Rule Violation in a Regulatory Action brought by a self-regulatory organization) (subsection 'c'.)

Scott Edison, a CFP® professional, is an employee of ABC Investments, a Registered Investment Advisor. Mr. Edison's clients Al and Marty Rome are 99 and 95 years old respectively. The Romes have appointed their family friend, Jeff Kincaid, as Power of Attorney to manage their finances. The Powers of Attorney for both Mr. and Mrs. Rome are on file with ABC Investments. Based on CFP Board's Code of Ethics and Standards of Conduct, which scenario describes Mr. Edison's responsibility regarding confidentiality and privacy? A Mr. Edison may discuss the Romes' investments and his investment recommendations with Mr. Kincaid. B Mr. Edison must not communicate with Mr. Kincaid unless either Mr. or Mrs. Rome is included in the communication.

A. Correct. A CFP ® professional must keep confidential and may not disclose any non-public personal information about any prospective, current, or former client ("client"), except that the CFP ® professional may disclose information: d) To a person acting in a representative capacity on behalf of the client

Gary and Meghan, both 60 years of age, have a combined estate of $30,000,000, including a home and a $1,000,000 whole life insurance policy on Gary. The couple has two children. Gary wants Meghan to receive the income from the policy if he dies, but he does not want the proceeds of the policy to be included in his or Meghan's taxable estate. He wants the proceeds ultimately to go to their children. Gary and Meghan have recently executed Wills establishing bypass trusts which utilize their applicable exclusion amounts. Who should be the owner of Gary's life insurance policy? A An irrevocable life insurance trust (ILIT) B The couple's two children C A qualified terminable interest property (QTIP) trust D Gary's bypass trust

A. Correct. An irrevocable life insurance trust does not create ownership; therefore, no inclusion in the gross estate. B. Incorrect. This will not ensure that income goes to Meghan. C. Incorrect. Insurance proceeds would be includable in Meghan's gross estate. D. Incorrect. This will not remove insurance proceeds from the taxable estate due to recent funding of the bypass trusts and utilization of their applicable exclusion amounts

A client owns 100% of Acme Corporation, a mature business worth $150 million with 783 employees. Estate and succession planning is becoming a concern for the client because Acme is expected to have a high growth rate, he is looking to retire within five years, and he will need to replace his income in retirement. He has three adult children, all executives at Acme, and he would like to transfer the value of Acme to his children. Which strategy would BEST help the client accomplish his goals? A Grantor retained annuity trust B Outright gift C Charitable remainder trust D Phantom stock

A. Correct. Annuity payout to a grantor provides for the client's need for income and transfer of ownership to the children. B. Incorrect. An outright gift of the business to his children would not produce income and would potentially cause gift tax. C. Incorrect. With a charitable remainder trust, the remainder interest in the business would go to charity, not the children. This does not align with the client's goals. D. Incorrect. Phantom stock does not convey any actual ownership in the business. A phantom share is a credit in an employee account for an amount equal to the value of your company's "real" shares. This option would not provide income and it would not effectively transfer ownership to his children.

One reason a CFP® professional should recommend dollar cost averaging is to A encourage disciplined investing B take advantage of a rising market C increase return and decrease market risk D outperform the lump-sum strategy

A. Correct. Dollar cost averaging encourages consistent saving and helps to eliminate emotional investing and market timing. B. Incorrect. In a rising market, a lump-sum strategy would outperform the dollar cost averaging strategy. C. Incorrect. Dollar cost averaging does not necessarily increase returns in all market conditions. D. Incorrect. Dollar cost averaging does not guarantee better performance than lump- sum strategies.

A grandparent wants to help pay for a grandchild's college education and sends a check for $30,000 to the grandchild's college for tuition. How much of the $30,000 is considered a taxable gift? A $0 B $15,000 C $16,000 D $30,000

A. Correct. If the payment is made directly to the college, it doesn't count as a gift. B. Incorrect. Any transfers made directly to educational institutions do not count as annual exclusions, taxable transfers, or taxable gifts. C. Incorrect. Any transfers made directly to educational institutions do not count as annual exclusions, taxable transfers, or taxable gifts. D. Incorrect. Any transfers made directly to educational institutions do not count as annual exclusions, taxable transfers, or taxable gifts.

Bonnie is a widow with an estimated net worth of $30,000,000. She is terminally ill and is expected to die before the year ends. She has $3,000,000 in one IRA and $1,000,000 in another IRA. She would like to give $3,000,000 to a charity. Which of the following will minimize her income and estate tax liability? A Strikeout option. Naming the charity as beneficiary of the $3,000,000 IRA B Leaving $3,000,000 from an IRA to the charity in her Will C Withdrawing $3,000,000 from an IRA and giving it to the charity before she dies D Naming her estate as beneficiary of the $3,000,000 IRA and giving the charity $3,000,000 in the Will

A. Correct. No income or estate tax will be applied when an IRA passes via contract to a nonprofit beneficiary. B. Incorrect. Assets in an IRA cannot pass tax-free from a Will. C. Incorrect. Income tax will be applied on distribution. One can deduct a portion of any gift to charity, but no estate tax. D. Incorrect. This strategy would incur estate tax because the IRA assets will be included in the estate and the estate is above the lifetime exclusion amount even if she inherited her spouse's exclusion amount.

Hillary Brooke, a CFP® professional, recently went out of town for a medical procedure. Before she left, she received checks from ten clients who wanted their funds deposited into their retirement accounts. Hillary took the checks with her and discovered that she could not deposit the funds into the retirement accounts while she was out of town. Therefore, she deposited all ten checks into her firm's checking account with the intent to wire the funds from her firm's account to each client's retirement account. Has Hillary violated any standard within the CFP Board's Code of Ethics and Standards of Conduct?

A. Correct. Per Standard A.15.b: A CFP ® professional may not commingle a client's financial assets with the financial assets of the CFP ® professional or the CFP ® professional's firm. B. Incorrect. This option addresses the timeliness of the deposit, which is not important because commingling is not permitted. C. Incorrect. There was a clear violation of Standard 15. D. Incorrect. There was a clear violation of Standard 15

Which of the following is an example of quantitative information a CFP® professional may obtain to understand the client's personal and financial circumstances? A Capacity for risk B Risk tolerance C Attitude towards spending D Earnings potential

A. Correct. Quantitative: Risk Capacity is calculated as the ratio of the investor's overall wealth to their investible assets. B. Incorrect. Qualitative: The level of risk an investor is willing to take. C. Incorrect. Qualitative: An assessment based upon the client. D. Incorrect. Qualitative: Potential gains from dividend payments and capital appreciation shareholders might earn from stock

An employer provides basic group term life insurance coverage for all of its employees. However, the employees also have the option to purchase additional coverage on their lives under the terms of the employer's group contract. Which of the following group insurance terms BEST describes this additional coverage? A Supplemental life insurance B Split-dollar life insurance plan C Voluntary accidental death D Salary continuation plan

A. Correct. Supplemental life insurance offers additional coverage, typically at an extra cost to the employee. B. Incorrect. A split-dollar life insurance plan is a premium and death benefit sharing arrangement between the employer and the employee. It is common with key- executives and typically not offered to all employees. C. Incorrect. While this coverage provides an additional death benefit in the event of an accident, there is no coverage for death by sickness. D. Incorrect. Salary continuation plans are a form of disability coverage, not life insurance

Carol, who passed away recently, is fully insured for Social Security benefits. She is survived by her son Kirk, age 13, and husband Herb, age 30. Kirk is entitled to survivor's benefits. Kirk lives with Herb, who does not work. Herb is entitled to surviving spouse with child-in-care benefits. Herb's child-in-care benefit ends when Kirk A turns age 16 B turns age 18 C graduates high school D graduates college

A. Correct. Surviving spouse with child-in-care benefits terminate when the child reaches age 16 unless the child is disabled. B. Incorrect. Surviving spouse with child-in-care benefits terminate when the child reaches age 16 unless the child is disabled. Kirk is eligible to receive benefits until age 18 (or age 19, if still in high school). C. Incorrect. Surviving spouse with child-in-care benefits terminate when the child reaches age 16 unless the child is disabled. Kirk is eligible to receive benefits until age 18 (or age 19, if still in high school). D. Incorrect. Surviving spouse with child-in-care benefits terminate when the child reaches age 16 unless the child is disabled. Kirk is eligible to receive benefits until age 18 (or age 19, if still in high school).

A CFP® professional recommended a client not renew certificates of deposit (CDs) when their term expired so the client could reinvest the funds elsewhere. Instead, the client renewed the CDs at current rates for an extended period. The client's action indicates it is likely that A the client disagrees with the financial plan presented by the CFP® professional B the client may have diminished capacity and is unable to follow instructions C CD interest rates are rising and are a more appropriate investment D the Standard & Poor's 500 (S&P 500) index fund is declining

A. Correct. The client has taken an action that conflicts with the CFP ® professional's recommendation. It is reasonable to assume that they disagree with the financial plan as presented. B. Incorrect. The client has affirmatively decided to renew their CDs, which suggests that they are able to make decisions and take actions. It is far more likely that the client simply disagrees with the recommendation presented by the CFP ® professional. C. Incorrect. We cannot conclude that CD interest rates drove the client to act. The client may value CDs for another reason, such as safety of principal (FDIC insurance) or status quo bias. D. Incorrect. Nothing about the CD renewal suggests that the S&P 500 is performing poorly.

ABC stock is currently priced at $40. A client believes that ABC's price has an equal probability of either rising dramatically or failing dramatically over the next few months due to an anticipated announcement concerning a possible government contract. Which of the following investment strategies is most appropriate for the client? A Buy a $40 put and buy a $40 call B Write a $40 call and buy a $35 call C Write a $45 put and write a $45 call D Short sell at $40 and buy a call at $35

A. Correct. The put will be profitable if the market falls dramatically. The call will be profitable if the market rises dramatically." B. Incorrect. This position is not profitable if the stock profit falls. C. Incorrect. This will only be profitable if the market is stable where the client would keep the option premiums and neither option is exercised. D. Incorrect. This is only profitable if the market declines.

Last year, a married couple had an adjusted gross income (AGI) of $140,000 and paid federal income taxes of $15,000. Their luck changed when they won $5,000,000 in their state's lottery on January 1 of this year. They elected to receive a $3,200,000 lump-sum cash payment rather than a 20-year annuity stream. As a result of winning the lottery, they anticipate owing $750,000 in federal income taxes this year. What is the amount they should pay each quarter in estimated taxes to avoid underpayment penalties? A $3,750 B $4,125 C $168,750 D $187,500

A. Correct. Their AGI last year was under $150,000. As such, they need to pay 100% of the prior year tax liability in order to avoid the underpayment penalty. 25% of the estimated payment is due each quarter. $15,000 / 4 = $3,750 B. Incorrect. This answer incorrectly assumes that they need to pay 110% of the prior year's tax liability. C. Incorrect. This answer incorrectly assumes that they need to pay 90% of this year's anticipated tax. $750,000 x 90% / 4 = $168,750 D. Incorrect. This answer incorrectly assumes they need to pay 100% of this year's anticipated tax. $750,000 / 4 = $187,500

Which of the following is a valid comparison between the capital asset pricing model (CAPM) and the arbitrage pricing theory (APT)? A APT is a multi-factor model while CAPM is a single factor model. B CAPM captures more market complexity than the APT model. C CAPM is based on the idea that perfect substitutes must sell at the same time. D APT model is easier to use because the factors/betas have economic sources.

A. Correct. This is the correct differentiation. B. Incorrect. The single-index model is less complex. C. Incorrect. This option describes the arbitrage pricing theory. D. Incorrect. Factor-analytic, factor interpretation is more difficult

According to CFP Board's Code of Ethics and Standards of Conduct, a CFP® professional may represent the CFP® professional's or the CFP® professional's firm's compensation method as "fee-only" only under which set of circumstances? A The CFP® professional and the CFP® professional's firm receives no sales-related compensation; and related parties receive no sales-related compensation in connection with any professional services the CFP® professional or the CFP® professional's firm provides to clients. B The CFP® professional or the CFP® professional's firm earns more than 99% of their compensation from fees and less than 1% from sales-related compensation.

A. Correct. This option is based on Standard A.12.A.i. The distractors are are based on common questions CFP Board receives from CFP ® professionals about scenarios where CFP® professionals believe it is appropriate to use fee-only in circumstances the rules dictate it is not

An executive in Sox Co. is negotiating a non-qualified retirement arrangement and wants the benefits to be protected in the event that Sox Co. changes ownership. Which of the following plan provisions will promote this objective? A Informal funding through a rabbi trust that becomes irrevocable if Sox Co. changes ownership B Placement of assets to fund the plan in an irrevocable trust for the benefit of the executive's spouse C Indemnifying the executive for any benefit losses through a surety bond purchased by Sox Co. D A plan provision that allows the executive to make withdrawals from the plan at the executive's discretion

A. Correct. This protective provision is approved by IRS rulings. B. Incorrect. The value of the assets will be currently taxable under the economic benefit doctrine. C. Incorrect. An indemnity bond provided by the company causes current taxation. D. Incorrect. A withdrawal provision results in constructive receipt of all benefits subject to withdrawal

A married couple for this taxable year will have an income tax liability of $475,000. Their current year adjusted gross income (AGI) is $1,200,000, and their AGI in the prior year was $1,470,000. Their income tax liability for the prior year was $612,500. The couple is interested in utilizing the most advantageous cash management method available. Which of the following amounts should the couple pay through withholding or estimated tax payments in order to avoid a penalty for underpayment of estimated tax? A $427,500 B $475,000 C $612,500 D $673,750

A. Correct. To avoid the penalty, the couple needs to pay an amount equal to the lesser of 90% of the current year's tax liability or 100% of the prior year's tax liability. However, if their AGI for the prior year is greater than $150,000, then the rule changes to the lesser of the 90% of the current year's tax liability or 110% of the prior year's tax liability. In this case, since their AGI for the prior year was greater than $150,000, they would utilize the 90% of current tax or 110% of prior year liability. B. Incorrect. This represents 100% of the current tax liability. To avoid the underpayment penalty, a taxpayer need only pay in 90% of the current tax liability. C. Incorrect. This represents 100% of the prior tax year liability. To avoid the underpayment penalty, a taxpayer need only pay in 90% of the current tax liability, which in this case is less than the prior tax year liability. D. Incorrect. This represents 110% of the prior tax year liability. This amount exceeds 90% of the current tax liability. Therefore, the taxpayer would only need to pay in 90% of the current tax year liability

Which of the following gift transfers, if made by a donor to a skip person, will be subject to the generation-skipping transfer tax (GSTT), if the donor does not elect gift-splitting? A Transfer of $24,000 to a Uniform Transfer to Minor's Act (UTMA) account B Transfer of $60,000 to a Section 529 Qualified Tuition plan and the donor elects to front load the contribution C Transfer of $32,000 as direct payment to a physician for medical expenses D Transfer of $12,000 to a Section 2503(c) trust

A. Correct. Without gift splitting, annual gifts over $17,000 are subject to GSTT. B. Incorrect. Current front-load limit is 5 x $17,000 = $85,000, so this is not subject to GSTT. C. Incorrect. Direct payment of medical expenses is not subject to gift tax limits or GSTT. D. Incorrect. Contributions to a 2503(c) trust qualify for the annual $17,000 exemption.

A client is 52-years-old and has an IRA with a balance of $800,000. He wishes to remove $1,000 from the account to meet expenses until he takes a new job next month. Which 72(t) distribution option should be selected? A Amortization B Required minimum distribution C Annuitization D A 72(t) distribution option is inappropriate

A. Incorrect. 72(t) distributions can be set up as amortization payments, but need to be a span of 5 years or until the owner reaches 59.5, whichever time period is longer. Since John has a one-time need, 72(t) distributions are inappropriate. B. Incorrect. 72(t) distributions can be set up as required minimum distributions, but need to be a span of 5 years or until the owner reaches 59.5, whichever time period is longer. Since John has a one-time need, 72(t) distributions are inappropriate. C. Incorrect. 72(t) distributions can be set up as level annuity payments, but need to be a span of 5 years or until the owner reaches 59.5, whichever time period is longer. Since John has a one-time need, 72(t) distributions are inappropriate. D. Correct. John should take a one-time payment and pay penalty tax rather than commence a 72(t) distribution. Since John has a one-time need, 72(t) distributions are inappropriate.

Which of the following is a true statement regarding a SIMPLE IRA? A The employer must file Form 5500 annually. B The employer has a fiduciary responsibility for investing the funds. C Highly compensated employee deferrals may be limited due to ADP testing. D SIMPLE IRAs are available only to companies that have 100 or fewer eligible employees.

A. Incorrect. A SIMPLE IRA does not require filing a Form 5500. B. Incorrect. Investments in a SIMPLE IRA are employee-directed. C. Incorrect. This is not applicable for SIMPLE IRA plans. D. Correct. This accurately describes SIMPLE IRA plans.

Ethan, age 70, is a wealthy widower who has four healthy children. Ethan is suffering from a disease that will probably result in his not living out his life expectancy. Ethan's current projected gross estate is $3,000,000, of which $2,500,000 consists of rental real estate investments. Ethan's objectives consist of minimizing estate and gift taxes and providing sufficient cash flow to himself for the rest of his life in order to pay for the cost of potentially expensive health care. Which of the following techniques would be MOST appropriate for Ethan? A A self-canceling installment note (SCIN) B A private annuity contract with his children C Creation of a family limited partnership followed by federal annual exclusion gifts D A grantor retained income trust (GRIT)

A. Incorrect. A self-canceling installment note is finite in duration and will not guarantee that Ethan will receive income for the rest of his life. If he survives the payout period, he will recoup the full $2.5 million plus interest which will be includible in his gross estate thereby not minimizing estate taxes. B. Correct. A private annuity will provide payment for as long as he lives based on his life expectancy, but if he dies before his life expectancy (which he probably will), he may not receive full value. However, his children will acquire the property at a discounted price. C. Incorrect. This approach would likely take much longer than life-expectancy would allow since he can give only $15,000 annually to four children (and any spouses and grandchildren, which he may not want to do). D. Incorrect. Since his life expectancy is short, a GRIT may not work to exclude the principal from Ethan's estate.

A CFP® professional is meeting with a married couple, Jo and John, to deliver a plan. John was not present during the initial goals discussion. While reviewing the goals, John shares his desire to complete an extensive master bathroom remodel estimated to cost $25,000. Jo was not aware of John's desire to fund this project. How should the CFP® professional best respond to this goals communication deficiency between the couple? A Calculate the cost-benefit of the remodeling project B Facilitate further discussion about the remodeling project C Deliver the plan without accommodating the remodeling project D Adjust the plan by adding in the additional $25,000 remodeling expense

A. Incorrect. A subsequent component of planning, following agreement on the goal(s). B. Correct. A critical component of goal setting, dramatically affecting strategies. C. Incorrect. Does not address one of the partner's goals. D. Incorrect. A required step after the goal priority and amount have been confirmed.

A client couple, both 59 years of age, has requested a CFP® professional's recommendation regarding long-term care insurance. One spouse is in excellent health and the other is in fair health. They are both currently employed, have a surplus cash flow, and have investable assets of $350,000. The CFP® professional should recommend that the couple A wait until age 65 and Medicare eligibility to apply for coverage on both B apply for coverage on both now C apply for coverage on the healthy partner only D begin funding an investment account in lieu of insurance

A. Incorrect. Age 50 and up is the appropriate time to recommend long-term care insurance. In addition, waiting until age 65 could result in a substantial increase in the premiums. Finally, Medicare is not a relevant factor in determining whether they need long-term care insurance. B. Correct. This is the best recommendation because given the couple's age, as well as their assets, it is recommended that they both purchase long-term care insurance. C. Incorrect. Both spouses have a need for long-term care insurance. Not enough information is given to conclude that the couple cannot afford coverage for both. D. Incorrect. Not enough information is given to indicate they can afford to self-insure.

At age 25, Olivia received an inheritance of $35,000 from her aunt. On the advice of her roommate, a licensed insurance agent, she purchased a deferred annuity. Today, at age 40, she consults with a CFP® professional regarding her options with the annuity, who raises concerns that the original sale of the annuity was not suitable. What is the first course of action the CFP® professional should take? A Report the roommate to the state insurance commission B Complete a 1035 exchange to a new annuity contract C Advise Olivia to surrender the contract since surrender charges no longer apply D Determine Olivia's future cash flow needs

A. Incorrect. Although suspicious of an inappropriate recommendation, the CFP ® professional has not gathered enough information to determine if a referral is appropriate. B. Incorrect. This assumes that an annuity is the most appropriate option. C. Incorrect. This assumes that an annuity is not appropriate. Also, Olivia's tax situation is not known. D. Correct. This information is necessary in order to develop any further recommendation.

Gina is a healthy 70-year-old widow. She requested financial planning assistance from her CFP® professional. Her objectives are to (1) maintain her modest standard of living and (2) preserve her estate for her heirs. Her pension is indexed for inflation and is her main source of income. Her cash flow shows an annual surplus of $5,000. She is in the 22% marginal federal tax bracket. Her total net worth is $500,000, which consists of her $150,000 home and $350,000 of investable assets. Which of the following is the most appropriate recommendation for meeting Gina's objectives? A Purchase a permanent life insurance policy B Invest in growth mutual funds earmarked for her heirs C Invest in general obligation municipal bonds D Purchase a long-term care insurance policy

A. Incorrect. Although this might preserve the estate, premium cost would most likely reduce her standard of living and not address the long-term care exposure. B. Incorrect. The objective was not to grow the estate, but to preserve it. Exposure to long-term care costs is a greater concern than future growth. C. Incorrect. Facts do not support the need for additional tax-free income and again the immediate exposure of long-term care costs remain. D. Correct. Given the client's objective of preserving her estate, maintaining her standard of living, and ability to pay for additional insurance, long-term care insurance is the most appropriate recommendation for her.

Hundreds of attendees participate in a forum for first-time home buyers. During the question-and-answer session, the presenter leads a discussion on mortgage rate trends. A CFP® professional's client is at the forum and disagrees with some of the opinions expressed but goes along with the consensus. How should the CFP® professional categorize this client's behavioral trait? A Anchoring effect B Confirmation bias C Herd mentality D Recency bias

A. Incorrect. Anchoring is dependent on a current reference point, which is not applicable in this situation. B. Incorrect. The client is not seeking support of a preconceived opinion, as confirmation bias suggests. C. Correct. The client is demonstrating a tendency to follow the expressions of what the crowd thinks they know, contrary to his rational belief. D. Incorrect. Recency bias favors recent events over historic ones and does not apply to this client's behavior

Antonio and Maria, residents in a common-law state, have the following assets: • Joint checking account: $10,000 • Principal residence (held as tenants by the entirety): $200,000 • Antonio's brokerage account: $84,000 • Life insurance on Antonio's life, owned by him, payable to Maria: $300,000 • Life insurance on Maria's life, owned by her, payable to Antonio: $100,000 Assuming Antonio dies first, which of the following is the correct combination of assets included in the following respective categories? ProbateEstate GrossEstate $0 $294,000 $42,000 $405,000 $84,000 $105,000 $84,000 $489,000

A. Incorrect. Antonio's brokerage account in his sole name is 100% includable in his probate estate. B. Incorrect. Antonio's brokerage account in his sole name is 100% includable in his probate estate. C. Incorrect. Antonio's brokerage account in his sole name is 100% includable in his gross estate. Antonio's life insurance, owned by him, is 100% includable in his gross estate. D. Correct. Probate: $84,000 Gross:(½ x $10,000) + (½ x $200,000) + 84,000 + 300,000 = $489,000

A client who was severely injured in an accident says that the insurance company involved with the claim has offered a monthly structured settlement. The payments will compensate for the loss of income because the person was paralyzed. If accepted, which of the following is an advantage of this strategy? A Any remainder of interest or term certain passes estate and income tax-free to the heirs. B The monthly income would not be subject to creditors of the client. C The payments may be structured by the client in a way that allows a lump sum at a date in the future. D All ongoing life payments would be income tax-free.

A. Incorrect. Any remainder of interest in an award of damages is included in gross estate. B. Incorrect. The law allows creditors to attach the monthly income from a structured settlement as the recipient has unfettered access and the funds. C. Incorrect. The periodic payment schedule cannot be changed. D. Correct. Amounts received as damages on account of personal physical injuries or physical sickness are excludable from income (Code Sec 104(a)(21))

A 45-year-old client has just changed employers. She has a $25,000 traditional IRA, a $100,000 investment account, and $65,000 in her 401(k) plan with her former employer. Her new employer offers a 401(k) plan with immediate eligibility that allows incoming rollovers. The client has asked her CFP® professional for advice on what to do with the 401(k) assets from her former employer. The CFP® professional should advise this client to A leave the 401(k) in place to preserve the current holdings B rollover the 401(k) to her IRA for increased account flexibility C rollover the 401(k) into her new employer's plan to improve choices D make an appointment to evaluate and document her options for the 401(k)

A. Incorrect. As holdings by nature of plan provisions in summary plan description will change over time. B. Incorrect. As at her age of less than 55, IRAs have greater restrictions. C. Incorrect. As with one less plan, choices are typically fewer. D. Correct. Per DoL regulations, the CFP professional should educate the client regarding choices: to leave the plan as-is, roll to the new plan, or transfer IRA.

Andrea, age 65, has an estate of $14,000,000 with $3,500,000 in a traditional IRA. She is married to her second husband, age 60. She has three children from a prior marriage whose ages range from 31 years to 42 years. She would like to take care of her surviving spouse after her death and preserve as much assets as possible for her children. What recommendation is the most tax efficient from the standpoint of both federal estate and income tax purposes? A Leave her IRA to her children and create a qualified terminable interest property (QTIP) trust for her spouse funded with the remaining asset B Leave her IRA to her spouse and create a marital QTIP and bypass trust for her remaining assets C Leave her IRA to a bypass trust that benefits her children and leave the remaining assets to a QTIP trust D Withdraw the assets from her IRA and execute a Will with an optimal marital QTIP/applicable exclusion formula

A. Incorrect. By having her children inherit the IRA they will be subject to RMDs thereby incurring income tax. B. Correct. The best income tax efficiency occurs if the surviving spouse is the beneficiary of the IRA (husband not yet 73, so not yet subject to RMDs). Andrea desires to take care of her spouse and the IRA could give him a lifetime retirement benefit. She can take care of her children, maximize her applicable exclusion, and preserve the principal of the remaining assets with a QTIP and credit shelter trust arrangement. C. Incorrect. If the IRA goes to a bypass trust it would not qualify for the estate tax marital deduction. Therefore, it would be subject to income tax (as withdrawn) and estate tax. D. Incorrect. Withdrawing the assets from the IRA would immediately subject them to ordinary income tax rates

A client has been employed with the HH Company for the last 20 years. The client has not become eligible for the employer's qualified retirement plan. The most likely explanation for this is that A the client is not a union member B the client's compensation has been too low C the employer's plan has been deemed top-heavy D the client has not met the minimum hours requirement

A. Incorrect. Employers may choose to exclude union members from qualified retirement plans if collective bargaining is in place, but exclusion from union membership should not exclude the employee from the employer's qualified retirement plan. B. Incorrect. Non-highly-compensated employees cannot be excluded from qualified retirement plans on the basis of compensation alone. C. Incorrect. Top-heavy eligibility only impacts highly-compensated employees. It is unlikely that a top-heavy plan would be in place for twenty consecutive years because it would deny key executives the opportunity to participate in a tax-deferred plan. D. Correct. An annual hours requirement is a likely exclusion from qualified retirement plans for part-time employees.

ssuming that an investor's portfolio consists entirely of Treasury bonds, shifting out of these into the Standard & Poor's 500 (S&P 500) index fund suggests that the investor's strategy foresees which of the following scenarios? A Falling interest rates and a stagnant economy B Rising interest rates and a robust economy C High interest rates and a robust economy D A deflationary economy

A. Incorrect. Falling interest rates increases the value of Treasury bonds. A stagnant economy is a contraindicator for broad market (S&P 500) equity investing. B. Correct. Rising interest rates decrease the value of outstanding Treasury bonds. A robust economy is a strong indicator for broad market (S&P 500) equity investing. C. Incorrect. A robust economy is a strong indicator for broad market (S&P 500) investing. High interest rates are not a strong enough rationale to justify a rebalancing. D. Incorrect. A deflationary economy is a strong contraindicator for broad market (S&P 500) equity investing and presents a high default risk, which is a strong indicator for Treasury bond investing.

Which of the following would avoid an additional 10% federal excise tax on IRA distributions before age 59½? A File a notice with the tax return showing that the withdrawal is a partial return of the after-tax deposits. B Delay withdrawals until age 55. C Make withdrawals to purchase disability insurance. D Take substantially equal periodic payments based on life expectancy.

A. Incorrect. Filing a notice with the tax return is not sufficient to avoid the 10% excise tax. B. Incorrect. Age 55 is not a viable exception for IRA owners; it only applies to employer plans such as 401(k). C. Incorrect. There is no one-time exception for IRA owners under IRC §72(t). D. Correct. Of the four options, only substantially equal periodic payments over life expectancy offers a viable alternative. The other three options are not allowed by the IRC §72(t)

A client uses their personal funds to open a joint checking account with their grandchild. Which of the following constitutes a completed gift? A The grandchild passes away. B The grandparent writes a check from the account to establish a joint brokerage account. C The grandchild writes a check from the account to pay their own credit card bill. D The grandchild writes a check from the account to pay their grandparent's mortgage.

A. Incorrect. Funds have not yet been withdrawn for the grandchild. B. Incorrect. The creation and contribution to a joint brokerage account is not a gift until the joint owner makes a withdrawal for her personal benefit. C. Correct. Acceptance of a gift constitutes completion. D. Incorrect. There is no acceptance of a gift when paying the grandparent's mortgage.

What are the tax consequences of a married couple making a one-time contribution of $150,000 to a Section 529 plan? A The couple can deduct $30,000 on their federal income tax return. B The earnings on the account are not tax-deferred. C The couple will not owe gift tax, as long as both spouses file a gift tax return. D The couple will not owe gift tax and no gift tax return is required

A. Incorrect. Gifts are not tax-deductible. B. Incorrect. Earnings are tax-deferred. C. Correct. -$15,000 * 2 * 5 = $150,000. A Form 709 is required by both spouses when one uses a five-year frontloading strategy for 529 funding. D. Incorrect. A gift tax return is required when one uses a five-year frontloading strategy for 529 funding

Griffin owns 100 shares of ABC stock. He believes the stock may go down but does not want to give up his potential for future gain if he is incorrect about the price drop. What should a CFP® professional advise him to do? A Sell short ABC stock B Write a put option on ABC stock C Purchase a put option on ABC stock D Buy a call on ABC stock

A. Incorrect. If Griffin sells short, he will lose upside appreciation. B. Incorrect. Griffin would write a put if he does not think the stock is going down. C. Correct. The purchase of the put will protect the downside, but allow Griffin to participate in the upside. D. Incorrect. Buying a call will help Griffin only if he expects the price to increase.

Portfolio immunization attempts to balance which two of the following components of interest rate risk? A Price risk and credit risk B Price risk and reinvestment risk C Reinvestment risk and credit risk D Default risk and price risk

A. Incorrect. Immunization does not address credit risk. B. Correct. Immunization attempts to balance price risk and reinvestment risk. It offers protection against changes in interest rate risk. C. Incorrect. Immunization does not address credit risk. D. Incorrect. Immunization does not address default (credit) risk.

Federal fiscal policy is restrictive when the government does which of the following? A Increases taxes and expenditures B Decreases debt and reserve requirement C Increases interest rates and taxes D Decreases expenditures and debt

A. Incorrect. Increasing taxes is restrictive; however, increased expenditures will stimulate the economy. B. Incorrect. Reserve requirement is part of monetary policy. C. Incorrect. Altering interest rates is part of monetary policy. D. Correct. Decreased expenditures by the government means the government is not buying goods and services from the private sector. Decreased debt means the government is reducing liquidity. Increased taxes means the government is removing money from the private sector.

A client who is fully insured under Medicare has received 105 consecutive days of skilled nursing care following discharge from a lengthy hospital stay. If the facility charges $300 per day and the daily Medicare co-pay is $185.50 per day, how much will Medicare pay for the 105 days of skilled care? A $0 B $11,450 C $12,022 D $15,160

A. Incorrect. Medicare covers skilled care following a hospital stay of 3 or more days. B. Incorrect. This includes Medicare paying the co-pay amount of 114.50 * 100 days. 100 days is the maximum benefit allowed. C. Incorrect. This amount is incorrect as it assumes coverage for all 105 days and that the daily co-pay applies every day. D. Correct. This combines the $300 per day benefit for the first 20 days and $114.50 per day for the next 80 days. There is no benefit after 100 days. ($300 x 20) + (80 x $114.50) = $6,000 + $9,160.00 =$15,160

Jane is a 26-year-old attorney in the 32% marginal tax bracket. She currently has an adequate emergency fund, a moderate risk tolerance, and $10,000 to invest for 10 years. In which of the following investments should Jane be advised to invest her money? Average 10-Year AnnualTotal Investment ReturnMunicipal bond fund3%Growth common stock fund7%International stock fund8%A blue chip common stock10% A Municipal bond fund, 3% B Growth common stock fund, 7% C International stock fund, 8% D A blue chip common stock, 10%

A. Incorrect. Municipal bond funds yield low total return. B. Correct. This option provides the necessary diversification with a potential for growth. C. Incorrect. International investments come with higher risks due to the additional risks of currency fluctuation, political risk, higher costs, and taxes. D. Incorrect. A blue chip common stock offers no diversification.

A client is evaluating a group disability contract versus an individual disability contract. There are only five people in the group applying for this coverage. Which of the following would MOST likely be the major benefit of the group disability policy over the individual disability contract? A Inclusion of part-time employees B Enhanced benefit triggers C Lower premium on the policy D More liberal definition of disability

A. Incorrect. Part-time employees are typically ineligible under group disability policies. B. Incorrect. Enhanced benefit triggers are generally available under individual disability contracts. In such a small group, it is unlikely that coverage can be customized. C. Correct. Insurance companies can more easily underwrite multiple lives for a single employer and can send a single premium notice. These cost savings are passed through in order to make small group coverage more attractive to purchase. D. Incorrect. Individual disability generally offers a more liberal definition of disability.

Suzie is planning to attend an out-of-state college next year and is applying for need-based financial aid. Suzie lives with her parents, Bruce and Lana, and the family owns the following assets: Stock portfolio in Bruce's name$60,000Bond portfolio in Lana's name $42,000Joint savings account in Bruce's and Lana's names $10,000Bruce's traditional IRA $25,000Lana's Roth IRA $30,000Family car $27,000Suzie's Roth IRA $5,500Suzie's checking account $1,500 What action could Bruce and Lana take that would reduce the Expected Family Contribution when calculating need-based financial aid? A Gift the family car to charity B Gift appreciated stock from Bruce's investment portfolio to Suzie C Gift depreciated bonds from Lana's investment portfolio to Suzie D Contribute funds from Bruce's investment portfolio to Bruce's traditional IRA

A. Incorrect. Personal items are not included. B. Incorrect. Moving assets from parent to child would either have no effect or increase the Expected Family Contribution. C. Incorrect. Moving assets from parent to child would either have no effect or increase the Expected Family Contribution. D. Correct. Retirement assets are not included in the financial aid calculation, while non-retirement investment assets are. Personal items are never included. Moving assets from parent to child would either have no effect or increase the Expected Family Contribution.

If a mutual life insurance company experiences increases in yields on invested assets, those increases in yield may A decrease the premium on a whole life insurance policy B decrease the expenses on a variable universal life (VUL) insurance policy C increase the dividends paid on a whole life insurance policy D increase the cash value of a variable whole life insurance policy

A. Incorrect. Premiums on whole life insurance are fixed although they can be offset by dividends. B. Incorrect. Expenses on a VUL insurance policy are not related to the earnings of the insurance company that issued the policy. C. Correct. A mutual insurance company is owned by the policyholders who are in a position similar to stockholders. They benefit from increased earnings. D. Incorrect. Variable life cash value is determined by the underlying investments, not the earnings of the issuing insurance company.

A CFP® professional is meeting with a client today to present a financial plan. Due to his substantial wealth, the client feels that there is little that he cannot achieve. However, the planning process has revealed certain goals to be unrealistic. In which stage of the financial planning process are unrealistic goals addressed? A Presenting the financial planning recommendations. B Obtaining qualitative and quantitative information. C Identifying and selecting goals. D Analyzing the client's current course of action.

A. Incorrect. Section 5 does not initially address dealing with unrealistic goals. B. Incorrect. Section 1 does not initially address dealing with unrealistic goals. C. Correct. Section 2 does initially address dealing with unrealistic goals. D. Incorrect. Section 3 does not initially address dealing with unrealistic goals

purchasing 12 stocks in an investment portfolio, there are two possible outcomes: Expected ReturnProbabilityOutcome A20%.60Outcome B2%.40 Starting with an initial investment of $100,000, what is the mean or expected value of the investor's portfolio? A $105,500 B $112,800 C $120,000 D $132,800

A. Incorrect. See option B rationale for correct computation. B. Correct. 20% * .60 = 12% 2% * .40 = 0.8% Sum = 12.8% $100,000 * (1 + 12.8%) = $112,800 The weighted average of possible outcomes and their probabilities which equals the expected return. C. Incorrect. See option B rationale for correct computation. D. Incorrect. See option B rationale for correct computation.

Jorge has $20,000 of an investment portfolio that he wants to allocate to fixed income securities. His objectives include safety of principal, modest current income, and a chance to offset cost-of-living increases. Which of the following is Jorge's most suitable choice? A Series EE savings bonds B High-yield corporate bonds C Inflation-adjusted zero coupon bonds D Treasury inflation-protected securities (TIPS)

A. Incorrect. Series EE savings bonds pay a fixed interest rate with no current income. They do not adjust for inflation. B. Incorrect. High-yield corporate bonds typically pay a fixed interest rate and do not provide safety of principal. C. Incorrect. Inflation-adjusted zero coupon bonds pay no current income. D. Correct. TIPS have an inflation adjusted maturity value. TIPS pay interest at a fixed rate to the adjusted principal which is measured by changes in the CPI.

An investor with a $100,000 short-term capital loss carryover invests equal amounts in each of the following positions. Which one would have the GREATEST reduction to their capital loss carryover? A Municipal securities with a 5% coupon issued by their home state purchased at a 5% discount and held to par B Municipal securities with a 5% coupon issued by their home state purchased at a 5% discount and sold at a premium C A commercial non-qualified deferred fixed annuity with a 5% bonus and a guaranteed floor interest rate of 5% D Domestic zero-coupon treasury securities purchased at a 5% discount and held to maturity with an imputed current yield of 5%

A. Incorrect. Sold at par would not produce maximum capital gain. B. Correct. Sold at premium would produce maximum capital gain. C. Incorrect. This is taxed as ordinary income. D. Incorrect. These are taxed as ordinary income

A client has the following income and losses for the current year: • $1,500 loss from a 30% interest in Laminate Partnership in which the client does not materially participate • $500 loss from a 0.2% limited partnership interest in Venture • $2,400 loss from a 12% interest in ABC, an S corporation in which the client manages one of the departments • $32,000 salary as manager with ABC, an S corporation • $600 of dividend income from Higher Mutual Fund Which two items are considered passive activities for the client? A Venture and ABC B Laminate Partnership and ABC C Laminate Partnership and Venture D Venture and Higher Mutual Fund

A. Incorrect. The client draws a salary as an active employee of ABC, so ABC is not considered a passive activity. B. Incorrect. The client draws a salary as an active employee of ABC, so ABC is not considered a passive activity. C. Correct. The client does not materially participate in Laminate Partnership and even though they have a 30% interest, it is still considered passive. Venture is a limited partnership and their investment would be considered a passive activity. D. Incorrect. The dividend income from Higher Mutual Fund is considered investment income so it is not a passive activity.

Which of the following statements accurately describes a non-qualified deferred compensation (NQDC) plan? A It allows the employer to deduct contributions. B It may have a defined benefit or defined contribution structure. C It is required under Section 409A to permit employee contributions. D It provides an additional savings opportunity for rank-and-file employees.

A. Incorrect. The contribution is not taxed to the employee, so there is no deduction available to the employer. The distribution is deductible by the employer only when it is distributed to the employee. B. Correct. A non-qualified deferred compensation (NQDC) plan may have a defined benefit or defined contribution structure. C. Incorrect. A non-qualified deferred compensation (NQDC) plan does not allow for employee contributions. D. Incorrect. A non-qualified deferred compensation (NQDC) plan is not available to rank-and-file employees.

Arthur, a 71-year-old widower, is diagnosed with a serious disease. In the next few months he anticipates being physically and mentally incapacitated, and he expects to die within 1 year. Arthur has done no planning and has two children and four adult grandchildren. His estate is expected to be valued at $650,000 and is comprised of: • a life insurance policy with a $200,000 death benefit • $150,000 IRA with his deceased spouse named as beneficiary • $200,000 investment portfolio • $100,000 in personal assets He wants his estate to be divided equally. Which of the following is the most critical priority? A Immediately begin gifting $15,000 per year to his six heirs B Change the beneficiary designation on his IRA to his six heirs in equal shares C Set up and fund a revocable living trust and execute a durable power of attorney D Transfer his $200,000 life insurance policy to an irrevocable life insurance trus

A. Incorrect. The estate is less than the unified credit amount, so this gifting has no impact on the estate tax situation. It is reducing probate exposure but not as much as the funded revocable trust which is the correct answer. B. Incorrect. This option reduces probate exposure but not as much as the funded revocable trust which is the correct answer. This would be the second course of action after the correct answer. C. Correct. This option eliminates probate and addresses his wishes prior to complete incapacity. This is the first course of action. D. Incorrect. The estate is less than the unified credit amount, so this gifting has no impact on his estate.

A client is the owner of a jewelry store and is in the 32% income tax bracket. The client wants to sell one of four assets, each having a fair market value of $25,000 and a cost basis of $15,000. The client has held all of the assets for more than 1 year. Which asset should the client sell to maximize the amount of after-tax cash flow? A A diamond from his business inventory B A painting from his personal art collection C A gold statue that he created D IBM stock from his investment portfolio

A. Incorrect. The inventory is an ordinary income asset subject to the client's 32% ordinary tax rate. B. Incorrect. The painting is a collectible subject to a 28% rate. C. Incorrect. The statue is an ordinary income asset subject to the client's 32% ordinary tax rate. D. Correct. The stock is subject to the 15% long-term capital gains rate.

client is 59-years-old, earns $180,000 per year, and plans to retire in 6 years. Which of the following retirement plans would allow the client to accumulate the largest retirement amount over that time period? A Age-weighted profit sharing plan B Defined benefit plan C Safe harbor 401(k) plan D Cash balance pension plan

A. Incorrect. The maximum total contribution per employee is limited to $58,000 or 100% of compensation, whichever is less. B. Correct. This plan allows for the maximum amount of retirement savings. The annual contribution required under a defined benefit plan is the amount necessary to provide the ultimate retirement income benefit. There is no dollar or percentage limitation. C. Incorrect. The maximum total salary deferral with catch-up is $26,000. D. Incorrect. Annual employer contributions must reflect a uniform allocation formula based on compensation (e.g., 5%).

A client purchased a life insurance policy and intentionally withheld information about his cancer diagnosis. He died 10 months after the policy was issued and the insurer can confirm the cancer diagnosis preceded policy issue. In this situation, the insurance company A will be required to pay the claim for the full face amount B will be allowed to reduce the amount of the death benefit payable based on rates for cancer C will be able to rescind the policy and avoid paying the full face amount D will pay the death benefit into an escrow account but the benefit will be returned if the cause of death was cancer

A. Incorrect. The policy is contestable and the insurer has grounds for contesting. B. Incorrect. Allowing the beneficiary to collect the death benefit that would have been payable had the insurer known of the cancer would not penalize the policy owner. C. Correct. The policy can be rescinded on the basis of fraud. D. Incorrect. The policy can be contested based on concealment by the insured, therefore no death benefit will be placed into an escrow account for future consideration of payment.

A married couple has two children, ages 4 and 6. The couple would like to set up and fund a Section 529 Qualified Tuition Plan for each child, and would like an estimate of the expected costs for each child. They have indicated a desire to fund 4 years of public, in-state tuition for each child. The current average annual cost of tuition, including room and board, is $18,000. What additional information is necessary to provide an estimate of educational costs? A Projected investment return B Home equity or retirement assets C Client's projected income D Historical tuition inflation rate

A. Incorrect. The projected investment return is not relevant to a cost projection. B. Incorrect. Home equity or retirement assets are not relevant to a cost projection. C. Incorrect. The client's projected income is not relevant to a cost projection. D. Correct. In order to calculate the cost of future expenses, an inflation assumption is required.

Which of the following strategies will most likely increase a client's cash flow? A Refinance the client's 2-year-old 30-year mortgage at 7% with a 15-year mortgage at 6.5%. B Exchange credit card debt for a home equity loan. C Decrease the deductible on auto insurance. D Invest in a deferred variable annuity

A. Incorrect. The shorter term for the mortgage will decrease cash flow by increasing payments. B. Correct. Extending the term of the debt and lowering the rate will increase cash flow. C. Incorrect. This will decrease cash flow by increasing premium. D. Incorrect. Purchasing a deferred variable annuity decreases cash flow.

What is the total value of the assets that will be taken into consideration for Suzie's need-based financial aid eligibility? A $112,000 B $113,500 C $130,500 D $166,000

A. Incorrect. The student's checking account value should be included. B. Correct. Retirement assets are not considered for financial aid. Personal property such as vehicles are not considered. Non-retirement savings and investment accounts of parents and the student are considered. 60,000 (stocks) + 42,000 (bonds) + 10,000 (savings) + 1,500 (checking) = 113,500 C. Incorrect. Personal property should not be included. D. Incorrect. Personal property and Roth IRAs should not be included

The most important factor in analyzing a tax-sheltered real estate limited partnership (RELP) is the A tax benefit(s) B fundamental investment strength C interest rate risk D audit risk

A. Incorrect. The tax benefits do not address the economic viability of the partnership. B. Correct. Strength of the partnership is the most important characteristic of the investment. C. Incorrect. Interest rate risk is an indirect risk of most private real estate partnerships, but is not most important. D. Incorrect. This event is unlikely given Schedule K-1 tax reporting.

A client decided to donate an antique vase, which they purchased 13 years ago for $1,700, to their favorite qualified charity. The charity promptly sold it for $3,250 and then sent a letter to the client, thanking the client and advising them of its disposition. What amount would the client be allowed to deduct on their federal income tax return? A $0 B $1,550 C $1,700 D $3,250

A. Incorrect. The taxpayer is generally entitled to a deduction when donating property to a qualified charity. B. Incorrect. This incorrectly assumes that the difference between the price sold and the price paid by the taxpayer is deductible. C. Correct. When a taxpayer donates use-unrelated tangible personal property to a charity, their deduction is limited to the lesser of the taxpayer's cost basis or the fair market value of the property at the time of donation, which in this case is $1,700. D. Incorrect. This incorrectly assumes that the fair market value at which the property was sold is deductible.

The value of an unmarried client's gross estate is $2,000,000. The client's taxable income is $100,000. If the client gifts stock worth $12,000 to a son, which of the following statements is correct? A The client can claim an income tax deduction for the amount of the gift. B The stock will be treated as an adjusted taxable gift. C No gift taxes are payable as a result of this gift. D The stock given to the son will be included in the client's gross estate if the client dies within 3 years of the gift.

A. Incorrect. There is no income tax deduction for property gifted to the son. B. Incorrect. The annual exclusion under IRC Section 2503(b) does not apply to adjusted tax gifts. C. Correct. The gift is within the $17,000 annual gift tax exclusion limit. D. Incorrect. There is no 3-year lookback rule for gifts that don't exceed the annual gift tax exclusion limit.

Which one of the following is a correct statement about zero coupon corporate bonds? A The bonds are not callable prior to maturity. B The client may elect to postpone tax on accrued interest until sale or maturity. C Upon sale or maturity, accrued interest is includible in gross income. D The annual imputed interest must be included in gross income.

A. Incorrect. These bonds may be callable. B. Incorrect. No such election is available. C. Incorrect. The excess is imputed interest that is reported annually. D. Correct. Imputed interest is required to be included annually.

A married couple lives in a community property state with one child, age 4. At their child's birth, the couple opened a 529 college savings plan, funding it with $84,000. They each filed a Form 709, reporting the contribution amount. One parent received a large bonus this year and they would like to make additional contributions to their child's 529 plan. How much is the couple allowed to contribute in the current year without being required to file a gift tax return? A $0 B $13,200 C $30,000 D $150,000

A. Incorrect. This is not correct because they have not maxed out their exclusion under the five-year rule. B. Correct. The $84,000 original gift is required to be reported ratably over five years, making the annual amount $16,800. The difference between the $30,000 annual limit and the $16,800 reported in year 4 is $13,200. C. Incorrect. This is not correct because the original gift of $84,000 is reported ratably over five years. D. Incorrect. This is not correct because the original gift of $84,000, which is reported over five years, did not exhaust the total $140,000 available front-load exclusion amount.

A client purchased 1,000 shares of XYZ, Inc. at $10 per share last year. Yesterday XYZ stock dropped to $5 per share and the client purchased an additional 1,000 shares. If the client sells their original position 2 weeks from now at $5 per share, what is their cost basis on the remaining 1,000 shares? A $5,000 B $7,500 C $10,000 D $15,000

A. Incorrect. This option does not capture the wash sale loss disallowance of $5,000. B. Incorrect. This option incorrectly represents the average cost basis of the two lots. C. Correct. When a wash sale occurs, the basis in the remaining shares is the cost basis of those shares plus any loss that is disallowed due to the wash sale rules. Therefore, their basis is $10,000 ($5,000 paid for new shares plus $5,000 wash sale loss disallowance on the sale of the original shares). D. Incorrect. This option incorrectly represents the total cost basis of the two lots.

Pat, age 70, never paid into Social Security. • Her 1st marriage to Zeke, currently age 70, ended in divorce after 10 years. • Her 2nd marriage to Alex ended with his death after 3 years. • Her 3rd and current marriage to Jacob, age 70, started 18 months ago. • Pat's daughter, Teri, passed away recently. Teri was paying for all of Pat's expenses. Zeke, Alex, and Teri are fully insured for Social Security. Jacob is currently entitled to retirement benefits. Pat is eligible for which of the following Social Security benefits? A Spousal benefits only B Spousal and widow benefits only C Spousal, widow, and parent's benefits only D Spousal, widow, parent's, and divorced spousal benefits

A. Incorrect. This option does not include widow and parent's benefits, which Pat is eligible for. B. Incorrect. This option does not include parent's benefits, which Pat is eligible for. C. Correct. Pat is eligible for spousal benefits because she was married for at least 12 months to Jacob, who is already entitled to retirement benefits. Pat is eligible for widow benefits even though she is married because she remarried after age 60. Pat is eligible for parent's benefits because she was receiving at least 1/2 support from Teri when Teri died. She is not eligible for divorced spousal benefits because she is currently married. D. Incorrect. Pat is not eligible for divorced spousal benefits because she is currently married.

A married employee filing jointly, who has an effective tax rate of 20% now and will have an effective tax rate of 30% after retirement, wants to maximize retirement funding. The employee has an adjusted gross income (AGI) of $37,000 and $45,000 in municipal bond interest income. The BEST funding strategy to minimize the employee's tax consequences in retirement would be to immediately put $3,000 in a A Traditional IRA B Roth IRA C 401(k) plan with a zero-dollar match D Non-qualified annuity

A. Incorrect. This will be subject to required minimum distributions and potentially put the employee in an even higher tax bracket in retirement. B. Correct. Since the employee will be in a higher tax bracket in retirement than currently, the Roth IRA is a better vehicle to invest in since there are no required minimum distributions. C. Incorrect. This will be subject to required minimum distributions and potentially put the employee in an even higher tax bracket in retirement. D. Incorrect. Any distribution from an annuity is taxed at the ordinary income tax rate, unless the annuity is annuitized.

A retired couple, both age 65, own 10,000 shares of Acme, an aggressive growth stock. The shares are valued at $100 each, while their cost basis is $1 per share. The couple's goals are to avoid the capital gains tax and increase their cash flow. The MOST appropriate option for them would be to A sell the Acme stock and invest the proceeds in municipal bonds B sell the Acme stock and use the proceeds to establish a charitable remainder trust C donate the Acme stock to a charitable remainder trust and receive income from it D donate the Acme stock to a charitable lead trust and receive income from it

A. Incorrect. This will subject them to capital gains tax. B. Incorrect. This will subject them to capital gains tax. C. Correct. This will avoid the capital gains tax and also provide them with an income stream. D. Incorrect. This won't provide them with an income stream as the income goes to the charity.

A client is a financially sophisticated 32-year-old stock market watcher who is shopping for permanent life insurance. She works as a computer consultant and expects her earnings to fluctuate significantly over her lifetime. Which of the following life insurance products BEST suits the client's needs? A Variable whole life B Variable universal C Universal D Whole life with paid-up additions rider

A. Incorrect. Variable whole life insurance is not an appropriate option because it does not offer flexible premium payments. B. Correct. Variable universal life insurance is appropriate because it offers flexible premium payments and variable underlying subaccounts that offer more investment options than traditional or universal life insurance. C. Incorrect. While universal life insurance offers flexible premium payments, the cash value is invested in the general account of the insurance company (primarily fixed income) and variable subaccounts are not permitted. D. Incorrect. This option does not offer flexible premium payments and the cash value is invested in the general account of the insurance company (primarily fixed income) and variable subaccounts are not permitted.

A CFP® professional has a client, age 40, who has never had to work. As beneficiary of a large trust, the client has struggled to find satisfaction in virtually any pursuit. The client has been spending down the trust corpus without contemplating the future and believes their trustee will handle any financial details. It is MOST appropriate for the CFP® professional to show the client how A spending has allowed the client to live a worry-free life B financial dependence has stifled the client's motivation, creativity, and desire to succeed C compulsive buying disorder has become an addiction for the client that needs to be addressed D feelings of shame, associated with the trust, have created negative feelings about money and wealth

A. Incorrect. We don't know if the spending has led to a worry-free life and this response would not help the client. B. Correct. Financial dependence, which is the reliance on an outside source for income, is demonstrated by the client. It is most likely that financial dependence is affecting this client more than the other options listed. C. Incorrect. Compulsive buyers experience irresistible urges to buy, lose control of their spending, and continue to buy even when it becomes problematic. D. Incorrect. Sometimes people feel shame around the financial mistakes they have made. The shame they feel may prompt them to reject help.

A client couple would like to maintain their current lifestyle but also want to do the following: retire in 10 years, purchase a new vacation home, and fund their children's education. After assessing the couple's risk tolerance, a CFP® professional has determined that they could be more aggressive with their investments to increase the likelihood of meeting all of their goals. Which of the following is the BEST way to discuss these findings with the couple? A Present alternative goals that may be easier to attain B Discuss potential inflation scenarios and their impact on asset values C Ask the clients how they could reduce their current lifestyle expenses D Present scenarios for the likelihood of meeting goals based on different asset allocations

A. Incorrect. While the clients' goals may eventually change based on the information presented, it is not helpful to begin the discussion by asking clients to alter goals before having reviewed alternatives. B. Incorrect. While the clients' goals may eventually change based on the information presented, it is not helpful to begin the discussion by discussing potential inflation scenarios and their impact on asset values. C. Incorrect. While the clients' goals may eventually change based on the information presented, it is not helpful to begin the discussion by asking clients to alter goals before having reviewed alternatives. D. Correct. The best course of action is to present several scenarios, including the clients' original wishes, and educate the client on the likelihood of attaining those goals.

A client, age 42, earns $35,000 at QPI, Inc. His assets are positioned as follows: Cash $1,000Equity Mutual Funds $6,500Fixed Income Exchange-Traded Funds $7,000 Limited partnerships$55,000401(k)(employer stock)$23,500 Which of the following assessments is MOST correct about this client? A He has an adequately balanced portfolio. B He has insufficient liquidity for emergencies. C He has a better than average rate of return. D He has protection from interest rate risk.

A. Incorrect. With over 25% of his assets in his employer's stock, he does not have a balanced portfolio. B. Correct. Liquidity for emergencies in this case is only $1,000. Even with growth funds and income funds added, it is only $14,500, which is still low, especially when the illiquid limited partnership is considered. The 401(k) will be taxable and may be subject to penalties upon withdrawal, or would need to be borrowed, which increases liabilities and monthly expenses. C. Incorrect. Over half of the portfolio is in limited partnerships about which no other information is provided. It is impossible to predict the return without more information. D. Incorrect. Interest rate risk is not correlated with limited partnership illiquidity or valuation requirements. The bond exchange-traded funds (ETFs) have interest rate risk.

James Johnson, a CFP® professional, was engaged by Mark and Sally Thompson to develop a financial plan and locate an investment advisor to implement the plan. Mr. Johnson prepares the plan and engages his college roommate, Ted Goins, to provide investment advice to the Thompsons. Mr. Goins' firm pays Mr. Johnson a referral fee of one percent of the assets that are transferred to Mr. Goins' firm for management. Which of the following potential responsibilities does Mr. Johnson have to his clients?

B Mr. Johnson must disclose to his clients the arrangement whereby Mr. Goins' firm will compensate Mr. Johnson for engaging the firm to manage the clients' investments. B. Correct. This option is based on Standard A.13. All three distractors fall short of meeting the standard.

A client plans to set aside an equal amount at the end of each month for the next 25 years as a retirement fund. The client's life expectancy after retirement is 20 years and the client can earn 10% per year on any funds invested before or after retirement. The capital needed at the client's retirement age has been calculated to be $2,128,390. How much must the client set aside to fund this amount rounded to the nearest dollar? A $1,591 B $1,604 C $1,612 D $1,803

B. Correct. Key: HP12C: 2,128,390 [FV] 12 x 25 = 300 [n] 10/12 = 0.8333 [i] G [END] [PMT] = -1,604.11

For eight years, Mark Lee, a CFP® professional, faced personal and financial hardship, causing him to incur various debts and to fall behind on the taxes he owed to the IRS. Although Mr. Lee established an installment plan with the IRS for the outstanding taxes, the IRS filed a tax lien against Mr. Lee. Following notification of the lien, Mr. Lee filed for bankruptcy under Chapter 13. What responsibility does Mr. Lee have to the CFP Board?

B. Correct. Per Standard E.3.l and E.3.m: Mr. Lee must report both the bankruptcy and IRS lien within 30 days of each event.

An unmarried client wants to make a gift of highly appreciated real estate to her children. The real estate produces substantial cash flow. The client is concerned that the children are not mature enough to handle sudden wealth. The client believes that in 10 years the children will have the maturity to handle the wealth. The client has promised a local religious organization a substantial annual gift for their building fund from the cash flow on the real estate. The client's estate is valued at approximately $8,000,000. Which of the following would reduce the client's taxable estate and accomplish the client's goals? A Grantor lead annuity trust (GLAT) B Charitable lead annuity trust (CLAT) C Grantor retained annuity trust (GRAT) D Charitable remainder annuity trust (CRAT)

B. Correct. The charitable lead annuity trust would meet all of the client's requirements. The client's children could be the remainder beneficiaries of the trust. This would prevent them from getting the value of the real estate and its revenue until the end of the trust. The church could be named as the income beneficiary of the lead trust and allow them to receive the annual cash flow required to fund the building. The transfer to the trust could be structured to make sure the transfer is under the applicable gift tax exclusion.

Which of the following BEST describes a CFP® professional's obligations when identifying and selecting goals for a financial planning client? A A CFP® professional must identify potential goals and then select the goals for the client. B A CFP® professional must help the client identify goals and then help the client select and prioritize goals. C A CFP® professional must request that the client select the goals that the client wishes to accomplish. D A CFP® professional must work with the client to come to an agreement on the client's goals.

B. Correct. This option is per Standard C.2. The distractors either incorrectly apply the standard or come from a prior version of the standards.

A client transfers $500,000 to an irrevocable trust for the benefit of his grandchild. He also plans to add $40,000 to the trust at the end of each year for 12 years. The trust assets grow at an 8% after-tax rate. If no distributions have been made from the trust, what amount will be in the trust at the end of 12 years following the last contribution? A $759,805 B $1,267,085 C $2,018,170 D $2,078,896

C. Correct. Correct HP 12C keystrokes -500,000 [PV] -40,000 [PMT] 8 [i] 12[n] g[END] mode FV = 2,018,170.

On November 12 of last year, a client bought 300 shares of ABC Corporation at $20 each. The client bought an additional 300 shares 6 months later at $25 each. Today, the shares are trading at $23. The client wants to sell 100 shares. Which of the following should the client do assuming they want to minimize their tax liability? A Accept the IRS's normal method of determining which position to sell B Sell the shares purchased last year C Sell the shares purchased this year D Assume an average cost basis of $22.50 for tax purposes on the sale

C. Correct. If the client sells the shares they purchased in the current year, they can use the higher $25 basis when determining the gain or loss upon the sale. If they sell the shares for $23 per share, and their basis is $25 per share, the client's total capital loss will be $200 [($23 - $25) x 100 shares].

During the current year, a client paid $21,000 of investment interest expense. The client's investment income is as follows: Dividends $5,000Royalties $1,000Short-term capital gains $6,000Long-term capital gains $4,000 Interest income belonging to the client's 8-year-old child and reported on the client's tax return is $2,000. If the client elects to include dividend and capital gain income in investment income, what is the maximum amount of investment interest expense that the client can take as an itemized deduction? A $12,000 B $14,000 C $16,000 D $18,000

D. Correct. Long-term capital gains and qualified dividends are not considered investment income unless the taxpayer makes an election to have these income items taxed at ordinary rates. Since the client made this election, all income stated in the question would be considered investment income. The total investment income is $18,000 and that would be the amount of investment interest expense the client is entitled to deduct

A CFP® professional has been asked to develop a financial plan for one of her clients. Upon delivery, the client notices that the CFP® professional has assumed a 6% rate of return, while the client insists on assuming 10%. Which of the following is the CFP® professional's BEST course of action? A Rerun the scenario reflecting the 10% rate of return as insisted by the client B Compromise with the client and run the scenario at an 8% rate of return C Continue to show the scenario with a 6% return as originally prepared D Ask the client to explain their insistence on a 10% rate of return

D. Correct. The CFP ® professional must first understand what is driving the client's concern. The client may require more return, which would ordinarily necessitate portfolio trades to riskier investments. Alternatively, the client may feel that their existing portfolio can produce greater return. The client's rationale should be explored before proceeding

Which of the following is NOT information a CFP® professional must consider when developing the financial planning recommendations? A The assumptions and estimates used to develop the recommendation. B The basis for making the recommendations. C The timing and priority of the recommendation. D How and when the CFP® professional will monitor the recommendations.

D. Correct. This option is based on Standard C.4. The key is a requirement in the step for monitoring and updating the financial planning recommendations. At the "developing the financial planning recommendations" step of the Practice Standards, a CFP ® professional is not considering monitoring of the recommendations.

A CFP® professional recommends a client establish a $30,000 cash reserve account after reviewing their goals and objectives. The client does not like this idea and says he prefers to invest the $30,000 in the stock market because he thinks the stock market will outperform the money market. How should the CFP® professional proceed in light of the client's feedback? A Educate the client on the purpose and characteristics of cash reserves B Suggest that the client use a balanced portfolio for this goal C Establish a secured line of credit tie-to this account's assets D Recommend a 3-year market-linked certificate of deposit

Solution A. Correct. The strategy of cash reserves is to provide liquidity and ease of access with stability of principal for unplanned (emergency) needs. If the client understands the rationale behind establishing a cash reserve, the client may be more likely to follow the CFP professional's advice. B. Incorrect. Cash reserves are not to be invested. C. Incorrect. Access to debt is not reliable to accommodate sudden cash needs. D. Incorrect. Does not meet requirements as the full sum is unavailable during the three-year term

A client borrowed $15,000 at 10% interest. She immediately used $8,000 to purchase shares in a stock mutual fund and put the remainder in her savings account, which bears no interest. Later that year she used funds in her checking account to pay off credit card debt to avoid an 18% finance charge. Without taking into account the investment interest limitation rules, which of the following is the maximum interest expense deduction that she can claim? A None of the interest paid is deductible B Interest on the $8,000 paid for the mutual funds C Interest on the $8,000 paid for the mutual funds and the 18% credit card interest D Interest on the $15,000 loan

Solution A. Incorrect. Investment interest expense is deductible if the investor itemizes. B. Correct. Investment interest expense incurred to purchase the mutual fund is deductible if the investor itemizes. C. Incorrect. Credit card interest is not deductible; it is personal interest. D. Incorrect. Of the $15,000, only interest on the $8,000 used to purchase the mutual fund is deductible.

high income, self-employed CFP® professional owns a considerable amount of tax-exempt securities and dividend-paying securities. Which of the following debts should the CFP® professional pay off first? A Qualified residence B Trade or business C Investment D Consumer

Solution A. Incorrect. This is an itemized deduction. B. Incorrect. This is a deduction against business income and self-employment tax income. C. Incorrect. This is a deduction against investment income (e.g., dividend-paying stocks). D. Correct. Consumer debt interest is nondeductible so the CFP ® professional should pay this debt off first.

A client has the following margined portfolio with corresponding current market prices: 300 shares of XYZ @ $26 200 shares of ABC @ $31 100 shares of ZZZ @ $36 The client currently is at 40% equity. What amount is the client's debit? A $4,400 B $7,040 C Strikeout option. $10,560 D $17,600

Solution A. Incorrect. This is the margin call breach point, not debit. This is calculated with $17,600 x 25% = $4,400 B. Incorrect. This is the equity, not debit. This is calculated with $17,600 x 40% = $7,040 C. Correct. The correct answer is calculated by multiplying the portfolio value by 1 minus the equity percentage [$17,600 x (1-.40) = $10,560] D. Incorrect. This is the total market value (TMV), not debit. This is calculated with $7,800 + $6,200 + $3,600 = $17,600