Practice Exams - CFP

Rod Able, CFP® has a wealthy client he has prepared an estate plan for. Before the client agrees, Rod brings the plan to his firm's favorite attorney and CPA. The attorney wants the case. The attorney gives Rod money. The CPA is less impressed and gives Rod season tickets on the 30 yard line. Which of the following is false in regards to the client? A.Rod will have to disclose the exact compensation. B.Rod will have to disclose under Standard A.10. C.Rod violated Standard A.9. D.Rod violated the Principle of Integrity.

A - A.9 = Confidentiality, he violates integrity (subordinating personal gain) & confidentiality, and he will have to disclose referral fees under standard a.10. He doesn't have to disclose the exact amount unless client asks for it. Asking which is FALSE.

Mr. Roth lives in New York City. His federal tax rate is 32%; the New York State tax rate is 7%; and his New York City tax rate is 2%. If he bought U.S. Treasury bonds with a 6% coupon, what is his after-tax yield? A.4.08% B.3.66% C.8.82% D.9.83%

A - After-tax yield = Tax-exempt yield = 6% x (1 - .32) = 4.08% Interest on federal bonds (EEs, T-bills, and other Treasuries) is not subject to state and local taxes but is subject to federal taxes. If you use the TEY formula you must refigure using that modification of the after-tax formula.

Jack is age 50 and divorced. He no longer has to pay alimony or child support. His son is 28 and on his own. He has two life insurance policies: $60,000 of group term (son as the beneficiary) and $250,000 of whole life (estate as the beneficiary). He has been paying $3,000 of premium annually (10 years) on the $250,000 policy and can afford to continue to pay premiums. He wants to maximize his retirement benefits, and he believes he doesn't need as much life insurance. He has come to you to help him make a decision. Which solution is best for him concerning his $250,000 whole life policy? A.1035 the policy into a fixed or variable annuity B.Cash in and roll all the cash value into a mutual fund C.Lower the death benefits and continue the policy D.Exchange the existing policy for a variable policy but continue the face at $250,000 E.Use the extended term option and pay no further premium

A - Answer A is a tax-free exchange, and the basis of the life policy (premiums paid) will be carried over into the annuity. If he cashes in the policy (Answer B) and the policy has a loss, he can not claim the loss for income tax purposes. The mutual fund future gains and dividends will be subject to tax whereas the variable annuity will grow tax-deferred. The other options all continue the insurance in one way or another. He says he does not need as much life insurance. This question is subjective.

Under the 401(k) hardship withdrawal rules, an employee can request an amount equal to which of the following? A.The entire account balance B.An amount equal to elective deferrals C.An amount equal to vested profit sharing contributions D.An amount equal to the account earnings

A - Answer A is like picking "all of the above." The Bipartisan Budget Act allowed account earnings to be included in hardship amounts.

Rod continues - What does Rod have to do first after he took the referral fees? A.Inform his employer. B.Update the client about the situation. C.Terminate the relationship. D.Nothing, no harm has been done.

A - D.2 is obligations to the employer. A certificant who is an employee/agent shall perform professional services in the dedication to the lawful objectives of the employer/principal and in accordance with the CFP Board Code of Ethics. FINRA rules and his firm both require him to disclose outside compensation. How about Answer B? Is it the better answer? He disclosed confidential information. He will probably end up talking to the client as well, but that would come after talking to his employer. Not disclosing outside compensation is a terminable offensive at all FIRA firms. Test taking tip: It is common to see questions that ask what should be done next with all of the answer options being good advice for the situation. However only one option will be the most important goal to complete immediately.

Johnny sets up an irrevocable trust for his mother. The trust provides that his mother will receive $1,000 of monthly income solely for her benefit. The trust income is approximately $17,000 (varies). Johnny is the remainder beneficiary at his mother's death. To whom is the trust income taxable? A.Johnny B.Johnny's mother up to $17,000 C.The trust D.Johnny's mother

A - Johnny is providing support for his mother (income), but the assets at her death revert back to him (reversionary interest). It is also tainted for estate tax.

Mr. B died recently. As part of his estate planning, he gave a terminal interest in his house to Mrs. B (second wife). Will this terminal interest qualify for the marital deduction? A.Yes B.No C.No, because it is not a QTIP trust D.No, because the interest does not go into a marital or QTIP trust.

A - Normally a life interest (exception to the terminal interest rule) requires income, but allowing her to live in the home is the same as paying her housing expenses. Mrs. B has a beneficiary enjoyment.

Which of the following is true? A.Closed-end funds can trade at a premium or discount. B.UITs can be purchased on one of the national exchanges. C.Open-end funds are negotiable securities. D.UITs have a limited number of shares when sold.

A - One word makes all the difference in the answer. In Answer A, it is trade. In Answer B, it is national. In Answer C, it is negotiable. In Answer D, it is shares. Changing these words to something else could have made B, C, and D correct. Closed end funds trade like stocks. Therefore the prices are based on supply/demand.

Which of the following entities uses the conduit principle? I.Sole proprietorship II.LLC III.Dynasty trust IV.Regular corporation A.I, II, III B.I, II C.II, III D.I, IV

A - Simple trusts (like the dynasty) use the conduit principle as do certain business entities.

Which of the following will get a full step-up in basis at death? A.STCG property owned in a community property state B.CDs owned by the decedent C.Stock owned long-term with a loss. D.IRA owned by the decedent

A - Stock owned, no matter how long, gets a step-up. In community property states it is a full step-up. Answers C and D are ordinary income property. Answer C is loss property.

Dad is setting up trusts for his minor children. Which type of trust should he select? A.2503(c) trust B.2503(b) trust C.Irrevocable trust D.UTMA

A - The best answer is A. Unless the irrevocable trust (Answer C) has Crummey provisions, a gift to that trust is a gift of a future interest (no annual exclusions). An UTMA is a custodial acct.

Which of the following is allowable deductions for AGI? A.Business losses B.Real estate taxes C.Alimony received D.Casualty losses

A - The questions asked for deductions for AGI. Alimony received is income, which is the opposite of a deduction. There are items in the gross income list that are deductions. This is covered in Lesson 1. Real estate taxes and casualty losses are from AGI.

This year Sara Livingston contributed the maximum 5 year annual exclusion. If she only lives almost two addition years, what would be included in her estate? A.Two years of annual exclusions B.Three years of annual exclusions C.Five years of annual exclusions D.Nothing, it was a completed gift.

A - The year she made to contribution counts. Then two more years the total is 3, so therefore only two are included.

Bart, a private adviser, has only insurance companies as clients (30). Is he exempt from filing as an RIA? A.Yes B.No C.Depends on the assets of each company

A - Yes Registration is not required for a private adviser who only advises insurance companies. The number of companies is not a factor; it can be hundreds.

Dorothea participates in an ESOP funded with both company stock and mutual funds. She is concerned about phantom income when she retires and takes distributions from the ESOP. Which options would reduce her phantom income concerns? I. Take only a 72(t) distribution rather than a full distribution in her first year of retirement II. Take a full distribution of the account III. Take a distribution of the company stock IV. Roll the whole account into an IRA V. Roll the mutual funds into an IRA A.I, IV B.II C.III, IV D.III, V

A - Yes, if she does Answer IV, her NUA tax break is lost but that was not the question. Non-employer stock can be rolled into an IRA, but the NUA will be lost if company stock is rolled into an IRA. All the company funds must be distributed in one taxable year. Answer C is the most cost effective but would create phantom income. The basis of the stock is subject to income tax. Answers I and IV avoid phantom income. That is what the question addresses. Answer V is incomplete, what about the company stock? Answer I provides real income to her rather than phantom income. When talking about an ESOP plan taking a full distribution implies talking NUA on the stock NUA creates phantom income.

Why is the fiduciary requirement of a CFP® professional important? A.It adds credibility to the marks by building trust. B.It ensures CFP® professionals will not have conflicts of interest C.It ensures CFP® professionals will deliver sound advice. D.It ensures CFP® professionals will be competent in the advice they deliver.

A - You can be a fiduciary and still deliver poor advice or be incompetent in various areas of planning. CFP® professionals will have conflicts of interest, they just need to be disclosed.

If Ray and Kim start a regular C corporation (issued 1244 stock) and it fails totally this year, how much of the loss ($50,000) can they take? (Basis is $50,000). A.$50,000 as a capital loss B.$50,000 as an ordinary loss C.$3,000 as a capital loss D.Zero because regular C corporations can't pass losses through to shareholders

B - 1244 Corporation stock (for corporations with market cap <$1MM) allows $100k in O.I. to be written off to the shareholder annually (limited to their basis). Anything in excess of 100k can be written of as a capital loss (limited to $3k/yr with carryforward).

Jerry, age 65, wants to improve his wife's situation in the event of his death. He purchased a fixed annuity for $50,000. It is currently worth $80,000 with a surrender charge of $5,000. He is willing to take any option using the annuity to purchase some additional life insurance. What do you recommend he do? A.1035 the annuity into a WL or a VUL policy B.Annuitize the annuity to pay life insurance premiums C.Surrender the annuity and purchase life insurance D.Change the fixed annuity to a variable annuity

B - A 1035 exchange from an annuity into a life policy is not one of the three 1035 tax-free options. If he surrenders the annuity, he loses $5,000. If he annuitizes the annuity, surrender charge will not apply. The payout will fund some additional life insurance. Changing from a fixed to a variable annuity will not meet his goal.

What is not true about no-load funds? A.They have no sales charges. B.They have no management expenses. C.There is a continuous offering and redemption of shares. D.The shares sell at NAV. E.The shares are redeemed at NAV.

B - All funds charge shareholders an expense fee for operating expenses (management fee).

Mr. and Mrs. John Hammer retained a CFP® professional to handle the couple's combined interest. The majority of the assets were brought to the marriage by John. John's IRA ($2,000,000) named Alice, his wife, as beneficiary. The remainder of the assets were placed in a joint checking account and investment accounts with the CFP® professional. Several years later, the couple began experiencing marital difficulties and started divorce proceedings. After divorce proceedings began, Alice wrote a check in an attempt to withdraw almost all the funds from the joint accounts. The CFP® professional contacted John to inform him that Alice was attempting to remove all the money from the joint account. Since there was not enough cash in the account, the CFP® professional asked John if he was willing to sell investments to cover the check. John declined. The bank was directed not to process the check. However, Alice called the CFP® professional to inquire whether the check had cleared. The CFP® professional told her that it had cleared but did not inform her that John had been contacted. What standards have been violated by the CFP® professional? I.The professional should have communicated with both

B - Answer IV is a recommendation not a rule. You have to answer the question as written. Answers I, II, and III are violations to the Standards. This is an actual CFP Board ethics violation case that has been rewritten.

Which of the following is true about Coverdell ESAs? A.Multiple $2,000 contributions can be made on behalf of one beneficiary per year by multiple individuals (not both parents). B.Expenses such as tuition can qualify even when they are for graduate school (to age 30). C.Contributions to the ESA are tax-deductible. D.All earnings must be paid out at age 18. E.Contributions may only be made by a parent.

B - Earnings must be distributed when the beneficiary reaches age 30. The aggregate contribution on behalf of a beneficiary cannot exceed $2,000.

Which investment could provide both leverage and a hedge against inflation? A. Equity mutual fund B. Equity REIT C. Mortgage REIT D. Blind pool

B - Equity REITs can be leveraged. Equity REITs own the properties providing the investor with a hedge against inflation. An equity mutual fund or a mortgage REIT is a poor hedge against inflation. In a truly inflationary time (1981), stocks did poorly. Inflation hit 21%. Inflation is the biggest factor in this question. There is not enough information about the blind pool to use it as an answer`

Mr. Ramos, age 55, has developed a product that will make him millions over the next several years. He has a corporation with two young employees. He is unhealthy and tried to purchase life insurance. He declined the offer because he was rated and did not want to pay the premium. He would like to fund the maximum in a qualified plan to reduce income taxes, benefit his spouse, and have liability protection. Is there anything Mr. Ramos can do to accomplish all his goals? A.Install a defined benefit plan ERISA plan B.Install a 412(e)3 plan [or 412(i)] ERISA plan C.Install a target benefit ERISA plan D.Install a profit sharing ERISA plan funded with life insurance

B - He could do a fully funded whole life DB plan. The plan can use the actuarial assumptions of the whole life contracts. These assumptions are normally lower than the plan assumptions (more contributions). The insurance premium will be paid by the plan. If the death benefit is payable from the proceeds of a life insurance policy, the difference between the cash surrender value and the face amount is treated as death proceeds of life insurance, and is excluded from income tax, but only if the insurance cost under Table 2001 (standard rate) has been paid with nondeductible contributions or has been taxable to the employee. This is an experience based question.

You are trying to calculate the client's gross estate. Which of the following would be included in his estate? A.A policy his wife owns on his life B.A policy he sold to a viatical company two days before he died. C.A casualty loss due to a car accident that killed him D.Taxable gifts made this year to various family

B - He has no ownership interest in Answer A. The casualty loss will be deducted from his gross estate. The taxable gifts are added to taxable estate. The cash from the viatical policy will be included in his gross estate.

Beverly Bell was referred to Julie, a CFP® certificant. She is an up and coming executive with a small tech firm. Her main concern is her investments. After missing the market run up, she is ready to get out of her money market funds and CDs. As part of the data gathering, Julie asked her to complete a risk tolerance survey. The survey indicates a very conservative profile. As Julie proceeds, she says she is interested in establishing a sizable position in Advanced Micro Devices (AMD) stock. She likes Lisa Su (the CEO). What would be Julie's best response in this situation? A.Being an up and coming executive with a small tech firm does not match her risk tolerance survey, do not buy AMD. B.Educate Beverly on the advantages of diversification. C.Explain to Beverly how her risk tolerance survey result does not match her investment style. D.Have Beverly sign an acknowledgement that she advised against such a concentrated position in one security and buy AMD for her.

B - Here, the best answer is to educate the client. The question does not say what kind of executive she is. Maybe its marketing, or maybe it is accounting. Answers A and C seem too similar to pick one.

Which of the following distributions is generally taxable? I.A lump-sum compensatory damage settlement on account of personal injury II.An annuity payout of lottery winnings in installments over time III.A lump-sum punitive damage settlement on account of wrongful death IV.A fixed annuity payout of compensatory damages where the injured person had no right to the discounted present value of the payments or control over the investment of the present value A.All of the above B.I, III, IV C.I, IV D.II E.III

B - I, II, IV, The lottery winnings will always be taxable. Punitive damages are normally taxable. There is an exception for wrongful death. It is tax-free.

Mary Jane's husband died this year. He had a qualified plan at work. Mary Jane, age 53, also has a qualified plan at work. She does not need his qualified plan money now or in the immediate future. Since her husband's death, she is uncertain whether she will retire early or not. She would like to roll the qualified plan over into her name. What would be the best recommendation considering her situation? A.Do a direct rollover into an IRA account in her name. B.Do a direct rollover into her qualified plan at work. C.Take a direct distribution and open an IRA account in her name. D.Leave the funds in her deceased husband's qualified plan and change the name on the account to her name.

B - If she does a direct rollover into her IRA, she will be subject to the IRA rules. If she does a direct rollover into her qualified plan, she can use separation from service at age 55 (no 10% penalty) or wait until after retirement to take RMDs. This gives her greater flexibility considering her uncertainty as to when she will retire, plus she gets creditor protection under ERISA with a qualified plan. For the exam, if people are separating from service at 55 or older, your advice should be to leave their money in their current employer's plan.

Mr. Thomas dies. He was custodian/donor of his grandson's UTMA account. Was the custodian account included in Mr. Thomas' gross estate? A.He only had a special power (adverse party); the UTMA account will not be included in his estate. B.He had a general power; the UTMA account will be included in his estate due to beneficial enjoyment. C.He only had a special power consent (of the donor); the UTMA account will not be included in his estate. D.Since the UTMA was for educational purposes, the UTMA account will not be included in his estate.

B - If the donor/custodian dies before the child comes of age, it might be contended that the donor possessed a general power of appointment (beneficial enjoyment).

Harry purchased ten listed bonds (XYZs 8.00s 10/1/30) on July 1, 2022, at a market price of 105 ($10,500). Harry's transaction cost from the trade was $100. He paid his broker $10,800 for the bonds. His broker reported $400 on a Form 1099-INT (for 2022) as taxable interest on the bonds. How much is his taxable interest? A.$0 B.$200 C.$400 D.$800

B - On October 1, 2022, he will be paid $400 (the only semiannual payment for the year to him). Of the $10,800 he paid for the bonds, $10,500 was the cost of the bonds, and $100 was the commission; therefore, $200 was the accrued interest. He has to report $400 on Schedule B (Form 1099-INT) and then subtract $200 as accrued interest. His taxable interest is $200.

Mrs. Peters (AGI $130,000) would like to give one of the following stocks to the United Way. She asks you which one would produce the highest overall income tax deduction. A.Stock A purchased this year for $90,000, now worth $60,000 B.Stock B purchased two years ago for $50,000, now worth $80,000 C.Stock C purchased this year for $65,000, now worth $90,000

B - Stock A is loss property. The charitable deduction is limited to its current value ($60,000). It is not LTCG. Stock B has a basis of $50,000 but a FMV of $80,000. At 30% of AGI, she can deduct $39,000 this year and $41,000 next year using FMV (total $80,000). Stock C is STCG and is limited to basis. Answer B is the highest overall deduction.

John and Mary (both 62) have hired you to do retirement planning. You find out they have a reasonable amount of investments with a basis of 50%. He has a reasonable large qualified plan portfolio. She has a big Roth portfolio from both a plan rollover plus yearly contributions (she retired two years ago). They want to delay taking Social Security to at least age 66 or older. They would like about $150,000 of spendable income (after tax). What should they do if he wants to also retire (current salary $200,000+)? A.Start taking a $200,000 RMD from his qualified plan. B.Sell about $100,000 of investments and take a qualified plan distribution of $70,000. C.Start taking $150,000 of Roth distributions. D.Continue to work and build up the investment portfolio.

B - The $100,000 of investments would only have a gain of $50,000 (basis 50%) at 15% or $7,500. The qualified plan distribution would be ordinary income but also be at 12% based on that being the only ordinary income. When he retires he will not have any earned income. $70,000 at 12% is $8,400. $170,000 - ($7,500 + 8,400) = $154,100 of spendable income. On the practical side we want all clients to use up all of their lower income tax brackets first. A married couple can take up to roughly $80,000 of pretax money and still be in the 12% bracket. It is considered cheap money. The Roth grows tax-free.

Mike James is married to Terry. Mike is a saver and Terry is a compulsive spender. To control her spending Mike owns most of their assets in his name. He has about $13 million. His attorney suggested that Mike set up his estate planning so that the maximum exemption will go into a bypass trust at his death with Mike's sister as the trustee. Should the trust be a simple or complex trust and should it have 5 or 5 rights or HEMS provisions? A.Simple with no 5 or 5 rights and no HEMS provisions. B.Simple with no 5 or 5 rights but have HEMS provisions. C.Complex with no 5 or 5 rights and no HEMS provisions. D.Complex with 5 or 5 rights and HEMS provisions.

B - The bypass trust should be simple so it MUST distribute income ; a complex trust allows income to accumulate (no income to her) and the 5 or 5/HEMS apply to corpus which you are trying to conserve.

Which of the following assets will be part of a decedent's probate estate? A.A general power of appointment held by the decedent B.An insurance policy owned by the decedent in which his/her spouse is the insured C.Survivorship benefits in a qualified plan D.Real estate owned as tenants by the entirety E.A CD at a bank in a Revocable trust

B - The question says probate estate not the gross estate. A general power will be in the gross estate, but it can't be probated. Tenancy by the entirety avoids probate but is included in the gross estate. In Answer II, the insured has not died. The owner died. The replacement value (the interpolated terminal reserve) will be included in the decedent's probate estate. This is one of two ways an insurance policy is included; the second is naming the beneficiary the estate of the insured.

Mr. and Mrs. Hubbell have engaged you to analyze their taxes. You (a CFP® certificant) notice that the return contains errors. What should you do? A.Do not give advice as you are not a CPA B.Advise the clients to see their CPA to make corrections and consider withdrawing from the engagement C.File an amended return for the clients D.Contact the CPA to inform him/her of the errors

B - This issue is beyond the scope of the CFP® certificant's expertise and if all they need is tax help there may be no need to take them on as a client. Tell the clients to seek professional help. The issue is Competence.

Of the following two stocks, which one is more risky? A.Stock 1 with an average or mean of 8% and standard deviation of 10% B.Stock 2 with an average or mean of 4% and a standard deviation of 6%

B - To answer which stock is more risky, we need a relative measure of variability.Stock #1 10% : 8% = 125% Standard deviation divided by the meanStock #2 6% : 4% = 150% You have to use the coefficient of variation formula. This is not on the formula sheet. - ALSO if you did risk adj. return, you'd find A has more return for its risk, pointing to answer B as well.

John Turner set up an irrevocable trust for his daughter, Sara. John is the grantor. John's brother is the trustee. The trust was written years ago. You have been investing it wisely. All of a sudden you receive a request from Sara's attorney to change the portfolio to create more income for Sara. The attorney cites various legal cases to support the change. What should you do? A.Deny the change B.Contact the trustee C.Contact John Turner, he is still a client of yours D.Do nothing

B - Who is the client? The trust is the client. The trustee holds legal title. The beneficiary only holds equitable title.

Sandra Dee, age 64, just retired. She has decided not to take Social Security until age 70. Instead she elected to take 72(t) payments from her retirement plan. She will get around $50,000 per year. A friend of hers owns a gift shop and needs from time to time extra part-time help. Sandra expects to make an additional $15,000. She expects that her tax will be less than $7,000. Can she avoid having mandatory withholding from her retirement plan payout? A.No, her taxes will exceed $5,000. B.No, working part-time will require FICA taxes. C.Yes D.Yes, only if withholding from her part-time earnings exceeds $5.000

C - A series of substantially equal payments [72(t)] is one of the exceptions to mandatory withholding. Answer B is true but does not apply to the question. Answer D could offset some of her potential income tax but again does not answer the question.

5C, Inc. is going to install a profit sharing plan. They are concerned about employee turnover. They are considering that employee could participate after 6 months of service and age 19. Will this meet age and service requirements? A.No, the employees must be at least 21. B.No, the employees must have at least one year of service. C.Yes D.Answers A and B are requirements.

C - Age 21 and one year of service are the strictest age and service requirements. It can be less but not more like 2 years of service.

A client is interested in the PCT mutual fund. The beta is less than 1, the R2 is low, the standard deviation is high, and alpha is high. What should you tell the client? A.Alpha is significant. B.Beta is significant. C.The Sharpe calculation is significant. D.The Jensen calculation is significant.

C - Alpha, beta, and Jensen are not significant because of a low R2. Sharpe, which is a function of the standard deviation, is significant.

During the educational funding period, which of the following techniques will work for someone with a $60,000 MAGI for their child? A.An UTMA funded with EE education bonds B.A Parent Loan to Undergraduate Student (PLUS) C.Yearly gifts by a grandparent to a 529 plan and yearly contributions to a Coverdell ESA by the parents D.A Pell Grant

C - Answer A is wrong because EE education bonds cannot be owned by an UTMA. The child owns the UTMA, not an adult over age 24. PLUS and Pell Grants are available during the college years. The question is asking about the pre-college years. EE bonds are fine for an UTMA; using the bonds for education is not. EE bonds need to be owned by someone other than the student to qualify for the education tax break. If they are owned by a student in an UTMA and used for education, the tax break for education will be lost.

Katie Jones, a Florida resident, was married to Howard for 40 years. He died suddenly playing golf after he hit a hole-in-one. Katie and Howard never did any planning because they were only 60 years young. They kept all their non-retirement funds in TBE (tenancy by the entirety) ownership. Which asset will get a half step-up in basis? A.2-year CDs close to maturity in a brokerage account B.Annuity bought this year with a sizable gain C.A lot they bought 5 years ago when the real estate market tanked. They were planning to build their dream home on the lot. D.A joint life variable annuity purchased 15 years ago E.None of the answers will get a half step-up in basis

C - Answers A, B, and D are ordinary income property. They do not get a step-up in basis. But real property (the lot) held long-term does get a half step-up in basis when it is held as TBE ownership.

Phillip was V.P. of sales with Glamour, Inc. Glamour had an endorsement method split-dollar policy on his life. He decided to buy the policy from Glamour and transfer it to a new company he was starting with two other people (33% each). If Phillip dies suddenly, will the policy be included in his estate? A.No, this is what transfer for value avoids. B.No, Phillip gifted the policy to the new corporation (not a sale of the policy). C.Yes, if he dies within three years of the transfer. D.No, it will only be included if he changed the beneficiary.

C - At the time of the transfer, Phillip had an incident of ownership (right to name the beneficiary). He bought the policy. The three-year inclusion rule is in effect. Answer A is true, but Phillip buying his policy does not trigger a transfer for value.

Ken is considering starting a manufacturing facility to make a laser wrinkle remover. Ken anticipates contributing a limited amount of capital to start the business. He anticipates incurring losses for several years due to substantial MACRS deductions generated by manufacturing equipment purchases. He is lending the business money to purchase the manufacturing equipment and finance the losses. He can purchase a one million dollar businessowners policy with a one million dollar umbrella. Which of the following business forms would be most appropriate for Ken to use at this time? A.Sole proprietorship B.Limited partnership C.S corporation D.C corporation

C - Basis for an S corporation is limited to capital and direct loans. He is making a direct loan. It appears from the question that Ken would be able to take the losses. (Basis equals cash plus direct loans.) He would like the limited liability of the S corporation. One million dollars of insurance will not go very far when one "face job" does not work out.

Meg Tilly, a widow age 70, has given generously to family members using up all of her $12,920,000 exemption. She has a 1,000 acre ranch she inherited from her husband worth $6 million. She has a home worth $2 million and a vacation home worth $1,000,000. She gets $400,000 in income from oil and gas leases on the 1,000 acre ranch. The $400,000 plus other sizable investment income and income from a bypass trust ($20 million invested) are making her estate grow by $1,000,000 per year. She realizes that she is in a 40% estate tax bracket. What could she do if she is in good health to reduce estate taxes? A.Do a 10-year QPRT on her home. B.Make a charitable gift of $100,000 of cash each year. C.Do a net gift on the ranch. D.Do a 10-year GRAT on the ranch.

C - Both Answers A and D require she live 10 years and would be subject to gift taxes. She has already used her $12,920,000 exemption. Answer D would require a fairly high gift tax payment. The net gift technique removes the asset from her estate at a discount. It is a freezing technique and the gift taxes paid by family members would be credited against her estate taxes. Answer B is ok, but does not do much. Somewhat subjective.

Which of the following statements is true? I.A CFP® certificant may not commingle client funds with the funds of his/her financial planning firm. II.Client funds can be commingled in a common client investment account with the client's permission and adequate record keeping. A.I B.II C.I and II D.Neither I nor II

C - Both answers are correct. A financial planner cannot have a check for a client investment made payable to his/her planning firm. The check can be made out to an investment firm (a money manager like Vanguard or American Funds).

Barry is a registered representative of a major securities firm. Throughout a typical business day, he advises customers as to which stock, bonds, and mutual funds to buy or sell. Barry receives handsome commissions for his customers' securities transactions. His brother, Larry, holds both the CPA and the CFP® designations. He performs comprehensive financial planning for several dozen clients although only 30% of the financial plans he prepares cover investments. Larry is paid on an hourly basis. Which of the following statements regarding investment adviser registration requirements for these brothers is correct? A.Neither Barry nor Larry is required to register because investment advice is incidental to their main professions. B.Although Barry must register because he renders investment advice on a regular basis, his brother Larry is exempt from the adviser registration requirements because he is a CPA. C.Although Barry is excluded from the adviser registration requirements because he represents a broker-dealer and charges no special fees for advice, Larry must register because he holds himself out as financial planner and is paid for his work. D.Both Barry and Larry must register

C - Broker-dealers and their representatives are exempt from adviser registration requirements unless they charge special fees for investment advice/management. Barry receives only commissions. Regarding Larry, planning for dozens of clients is not incidental.

One of your clients is sending you a new client. As he arrives, he is already complaining to your receptionist about having to travel across town to see you. As you start to explain how you work with clients, he interrupts you. "Look, I had a planner who lost me money repeatedly over the past 15 years. I need a new planner, but I have to be assured I will not lose any money." What should you do? A.Do not take him on as a client. B.Explain to him that his expectations of you are not realistic. C.Educate him on risk versus reward principles. D.Accept him as a client, but invest him in a money market account.

C - Does the CFP Board question writer always want the answer to be terminate the relationship? (Answer A) or do they want you to educate a client? You might like Answer B better. This addresses expectations of you. We believe the exam would like you to choose Answer C. Answer C is a more technical approach to responding to the client. Answer B could get into emotional aspects. Subjective. We want to educate people if we can. We are only terminating the relationship if the client does something illegal or if they lie to you.

Mr. and Mrs. Pool own a Naples beachfront condo. The condo usually rents for 120 days a year. How many days can they use it and not hurt its rental characteristics? A.0 days B.12 days C.14 days D.26 days

C - For your rental property, you can use it the greater of 14 days or 10% of rental time. For your home, you can rent it out for 14 days tax free.

Tom purchased a universal life policy. The normal level premium was $2,000. Tom paid only the premium to keep the policy in force for 5 years. He paid $1,000 per year. In the sixth year he paid the normal premium of $2,000. How much can he pay in the seventh year and not cause the policy to become a MEC? A.$1,000 B.$2,000 C.$7,000 D.$14,000

C - He can make-up in the last year for the previous six years. The seven pay test is cumulative for the 1st seven years. Since he only paid 7,000 in the first 6 years. He can pay $7,000.00 in the 7th year.

Charlie, age 63, is divorced. He was an executive with a publicly held company. Since he was always in a top income tax bracket he invested only in municipal bonds. His bond interest is $50,000 per year. He decided to take his Social Security early so it is only $1,250 per month. He even sold his house. He is renting a small apartment in a building owned by his brother-in-law for $1,250 per month. Will he have to pay income tax this year if he is not taking any company plan distributions? A.Yes, his MAGI is $57,500. B.Yes, the Social Security will be 85% taxable. C.No D.Yes, he does not have any itemized expenses.

C - His Social Security is taxable. His $50,000 of municipal bond interest plus one half his Social Security places him over the threshold for 85% of his Social Security being taxed. However, his payments from social Security only total $15,000 per year ($1,250 x 12). 85% of $15,000 is only $12,750. He will receive the normal standard deduction when he files his taxes and that will completely wipeout the $12,750 of income and no tax will be due. The question is asking about taxable income not MAGI. MAGI or provisional income will tell you how much of the social security is taxable. However, the muni bond interest is not taxable. so, if the client only has $12,750 of taxable income, which is the taxable portion of the social security, they would not have any taxable income after they take their standard deduction.

Mr. Todd, age 70, is doing a CRAT that will pay him yearly income for life. He is discussing the payout with his attorney. Which of the following rules is most important? A.The stated term cannot exceed 20 years. B.The payout because of current market conditions could be less than 5%. C.The payout because of current market conditions could be more than 15%. D.Mr. Todd can make only one (initial) transfer of property.

C - If they payout is too high and the life expectancy is too long it could violate the 10% ending value rule. The IRS will void the trust if the ending value calculation is less than 10%. If the payout is less than 5%, an excise tax will be due but the trust is not voided.

Longtime companions Artie Swanson and Marty Clark have lived together for the past 20 years in a home that was left to Marty by his parents. They also operate an event planning business called AM Parties. Although the business is informally organized, it produced revenues of $250,000 last year. While there has never been a formal adoption procedure, Marty and Artie have raised Lilly. Lilly is the child of Artie's brother. (Both of Lilly's parents are dead.) Marty has a sister, Ruth. Ruth disapproves of Marty's lifestyle. Marty is seriously ill. Presuming Marty predeceases Artie, Lilly, and Ruth, which of the statements below best reflects the transfer of his property? A.Because the party planning business operates virtually as a general partnership, Artie will automatically own Marty's interest. B.Because Artie has lived in Marty's home for decades, common law marriage is deemed, and Artie will be the deemed owner of Marty's home. C.Presuming Marty has no will, it is unlikely that either Artie or Lilly will inherit his property. D.Presuming Marty has no will, it is unlikely Ruth will inherit his property.

C - In the absence of effective estate planning through a will or other means, intestacy favors blood relatives over domestic partners. Nothing in the question indicates a succession plan for the business. Same-sex domestic partnerships are not regarded as common law marriages.

Mr. Long bought a low-income housing program. It generated a $20,000 of credits for the year. If he is in a 37% marginal tax bracket, what is the dollar amount of the credit he can claim? A.$0. It is a passive loss. B.It is limited to $25,000. C.$7,400 D.$7,920 E.It is limited to $20,000.

C - Low Income Housing credit can be up to $25k with no phaseouts. Multiple $20k times his tax bracket for the dollar amount credit.

Which of the following investments will not be subject to phantom income taxation? A.Treasury issued STRIP B.CATS C.Original issue tax-exempt OID D.TIPS

C - OID on tax-exempt obligations is not taxable and on a sale or redemption gain attributed to the OID is tax-exempt. This refers only to the original bond issue. Tax-exempts are not subject to phantom income. CATS are no longer issued or traded; be careful picking answers you have never seen before. The other two, STRIP and TIPS, produce phantom income.

Harvey, married, bought a home 5 years ago for $350,000 subject to a $150,000 mortgage. The current fair market value is $425,000 and the mortgage balance is $140,000. How large of a home equity loan can Harvey take out and deduct the interest if the loan is used for home improvement? A.$0 B.$10,000 C.$285,000 D.$425,000

C - Qualifying home equity debt is no longer deductible unless it is used to buy, build, or improve a home. Harvey is improving. Given the answer choices, the maximum loan he could obtain would be for 100% of the equity in his home (425K - 140K). $610,000 ($750,00 - $140,000) or whatever a bank would approve him for less than that could have also been potential correct answers.

Tommy Jones establish a regular C corporation years ago. He has accumulated $100,000 of earnings over the last 10 years that were taxable to the corporation. This year the corporation made excess profits. What can the corporation do? A.Take a QBI deduction B.Pay tax of 21% on earnings C.Increase Tommy's salary D.Pay out excess earnings as dividends

C - Regular C corporations do not qualify for the QBI deduction. Unless there is a reason for Answer B . The corporation would pay tax and it could qualify the corporation for another second tax (accumulated earnings tax). Answer D has to be an after-tax distribution (double taxation). Answer C is a simple solution.

If Cheryl, who is a school teacher, takes a summer job making $6,000 with a local government agency, can she fund a 457 plan if she has already deferred $14,000 to her TSA? A.She can have only one salary deferral plan. B.Her deferral to the TSA of $14,000 eliminates any other deferrals. C.She can defer up to $6,000 more. D.She can defer up to $8,500 more.

C - She can defer up to 100% of compensation ($6,000). 457 plans do not aggregate with retirement plans.

If the U.S. is experiencing high unemployment, falling stock prices, and declining consumer spending, then what action(s) will Congress or the Fed take? A.The Fed will lower the prime rate. B.The Fed will sell securities. C.The Congress will authorize spending programs. D.The Fed will raise the discount rate.

C - The Fed does not set the prime rates. That is the rate banks offer their best customers for loans, CDs, etc. If the Fed sells securities or it raises the discount rate, it tightens credit. Congress will spend money to stimulate the economy.

Susan, a long time client of Allison Krause, CFP® stops in and drops off a 10,000 check made payable to Allison. She leaves an order with her secretary to buy $10,000 of Bitcoin as soon as she can get the check deposited. Allison is a registered representative with XYZ, Inc. broker dealer. What should Allison do? A.Deposit the check and execute the order from the client since it is a lawful order. B.Deposit the check. However, she will need to meet with Susan to discuss the order since Bitcoin is not suitable. C.She cannot deposit the money as she would be in violation of CFP Boards Code and Standards against commingling of client funds. D.Allison cannot place the order to buy Bitcoin as she does not have discretion over the account.

C - The check would need to be made payable the broker dealer or the custodian in this situation. Allison accepting the funds would violate Standard A.15.

Mr. Hale wants to borrow money to purchase more investments. He would like to deduct the loan interest. Which of the following assets makes the most sense to pledge? A.$100,000 of municipal bonds B.$100,000 IRA account C.$100,000 of common stock D.$100,000 in a money market account

C - The loan interest deduction may be disallowed when municipal bonds are pledged for a loan. Municipal income is not investment income. If an IRA is pledged for a loan, the IRA will be disqualified. Pledging the stock is like buying stock on margin. It makes the most sense. He should probably use the money market funds plus his new loan to got buy his new investment.

Dad is setting up educational trusts for his minor children now. Which type of trust should he consider if he is concerned that they may not attend college? A.2503(c) B.2503(b) C.Crummey trust D.Irrevocable trust E.529 plan

C - The normal answer is the 2503(c) trust, but the children get the corpus at 21. A 2503(b) is generally not a minor's trust. Both the Crummey and the irrevocable trusts are possible answers. These two trusts can continue indefinitely. Crummey is a gift of a present interest but does not have to terminate at 21. The irrevocable is a gift of a future interest and therefore does not qualify for the $17,000 annual exclusion like a Crummey trust. What's wrong with the 529? It is not a trust.

For this year, R.J. got the following K-1s: Arizona LP$5,000 lossDeep Hole Oil and Gas (GP)$30,000 loss What amount of loss can be deducted against his income? A.$3,000 maximum B.$5,000 C.$30,000 D.$35,000 E.$0 These are passive losses

C - The oil and gas is a general partnership (GP), and the loss is deductible in full. It is subject to the AMT, but that's not the question here. The Arizona LP loss is a passive loss.

Dottie Williams, age 40 divorced, has a 5 year old daughter. She wants to set up an UTMA account rather than a 529 plan for her daughter. She plans to gift the maximum exclusion for the next few years to accumulate $100,000 in the account. Why would she do this rather than doing a 529 plan? A.Since she will be the custodian, any interest or gains will be taxed to her and not subject to the kiddie tax. B.Since she will be the custodian, the money in the account will be out of her estate should she die before her daughter turns age 21. C.Since she will be the custodian, she can handle all the investments in the account. D.Since she will be the custodian, she can reclaim all the money in the account if her daughter does not use it by age 21.

C - The other answers are incorrect. The earnings will be subject to the kiddie tax and will be included in her estate if she dies before her daughter turns 21. At age 21 her daughter has outright ownership of the account. True, she would control the investments in a 529 as well, but this is the only possible answer and how the exam will be as well. Also, there are very few individual investments one can control in a 529 plan.

A CFP® practitioner makes a recommendation that one of his financial planning clients buy a particular stock using his instinct but no research. The client invests in that security. The financial planner is guilty of which of the following? I.Negligence II.A tort III.Violation of a fiduciary responsibility IV.A contract violation V.Subject to arbitration A.All of the above B.I, III, IV, V C.III D.II, IV, V E.V

C - The planner could be negligent which is an unintentional tort. He failed to live up to his fiduciary responsibility. He may be subject to arbitration, but that is not what the question asks (guilty of).

A new client discloses most of the data a CFP® practitioner needs to do the plan but not complete tax information (business). He has told the planner the name of a CPA. Can the planner call his CPA without getting his permission? A.Yes, he has given you the authorization to do the plan. B.Yes, per Standard A.9 (information disclosed) he has authorized the planner. C.No, the planner would violate the Principle of Confidentially. D.No, it does not matter; the CPA will not disclose the information.

C - The planner must obtain permission to share client data with any third party other than a regulator. Rule 2.1 has nothing to do with the question. Answer D is too indifferent and does not answer the question.

Sally works for two companies. Both have retirement plans. Company 1 has a 401(k), and company 2 has a Simple IRA. She is deferring the maximum. Under what circumstances will she be able to defer the maximum? I.Defer into company 1 first and company 2 second II.Defer into company 2 first and company 1 second A.I B.II C.I and II D.Neither I or II

C - The question is asking under which circumstances she will be able to defer the maximum, and you must answer exactly what is being asked. Either option would allow her to reach $22,500. If she does option one, she will max out the 401(k) at $22,500 and then put zero in the SIMPLE, but she still achieves the maximum deferral. In option two, she can max out the SIMPLE IRA and then add the remainder the 401(k).

Rita elects a salary reduction to her medical expenses FSA account. Which of the following is true? A.The salary reduction is subject to FICA and FUTA. B.If Rita fails to use all of the salary reduction ($3,050) by year end, the remaining dollars are not forfeited due to the 2½ month grace period. C.The medical expense portion is limited to $3,050.

C - There is an extra 2½ months to spend the money for the medical portion but only if it states there was a grace period amendment on the plan. The medical expense is limited to $3,050 per year.

Tom (64) and Helen (62) Hunt are married. This is a second marriage for both of them. They are both taking Social Security early. Other than a house (paid for) and personal property (cars paid for), they each have IRAs totaling around $2 million. Helen's mother, age 84, needs financial help to sustain her lifestyle. Both Tom and Helen feel Medicaid is charity. If Helen's mother needs assistance to live, what should Tom and Helen do? A.They should help Helen's mother buy LTC insurance. B.They should qualify her for Medicaid. C.They should have her move in with them. D.They should consult with Helen's sister before making a decision.

C - This is a who is the client issue. Tom and Helen are the clients, not Helen's sister. At 84, LTC is probably not available or so expensive that they would never buy the insurance. The question is asking what Tom and Helen should do, not how Helen's sister can possibly help.

Beckie and Earl Martin Mini Case (Question 25-27) Beckie and Earl Martin, a married couple, have been your clients for at least fifteen years. Your relationship with them is especially cordial because you, a CFP® practitioner, have served alongside them on several PTA committees. Your daughter and the Martins' youngest son, Michael, age 12, attend the same middle school. While the Martins appear adequately insured, you have not performed a cash flow analysis for them for the past five years. However, they seem to be doing well; he is a successful salesman of industrial snow removal equipment and she is a surgical nurse for the most successful neurosurgeon in the area. Earl is a sophisticated investor. He studied statistics in college and believes that he can apply probability analysis to achieve above average returns. Beckie has little interest in financial matters and encourages Earl to make investment decisions. You, the CFP® practitioner, recently purchased an expensive, sophisticated investment allocation and financial planning software program. You have offered to rewrite the Martins' plan because the software produces excellent pro forma models. However, you do not want to be typ

C - This question is debatable and subjective. No one knows how the CFP Board feels about interns. The technical rule however is you can share their information within your firm for "ordinary business purposes." Is you not feeling like doing data entry that day a legitimate business purpose? Probably not. How would the client feel about you passing all their information to a 19 year old stranger? Answer D could have been correct had it said confidentiality instead of competence. Answer B is wrong because you should not be sharing client information, even with you peers, without some legitimate purpose. Answer C implies no prior consent from the client was obtained, which makes Answer A difficult to pick.

The following are duties of a CFP® professional when selecting, using, and recommending technology, except: A.Exercise reasonable care and judgment B.Have a reasonable level of understanding of the assumptions and outcomes of the technology employed C.Be able to write out the formulas and steps used and explain them to the client Have a reasonable basis for believing the outcomes produced are reliable, appropriate, and objective

C - While it would be nice to be able to explain the mathematical formulas and steps if a client asked, it is not required.

Laura, a CFP® certificant, is the account representative of an irrevocable trust. Mrs. Cain set up a trust for her daughter Jane's son, Thomas. Mrs. Cain named her son, Robert, the trustee of the trust for Thomas, now age 14. Jane has lost her job, gotten a divorce, has custody of Thomas, but per the divorce decree receives no alimony or child support. Mrs. Cain refuses to help her daughter. That is why she set up this trust for Thomas with her son as trustee. Jane has called you requesting a distribution from the trust so she can have money to support Thomas. Robert will not approve the distribution. What should Laura do? A.Deny the request for distribution B.Get a written approval from Robert C.Call up the attorney who drew up the trust D.Consult her broker-dealer attorney

C - Who is the client? The trust is the client. The grandson, Thomas, has an equitable interest and his mother is the guardian. Robert will not give approval. The attorney for the trust is a privileged person and you can contact him or her. There is a support issue. You need legal advice. Answers A and D do not apply. When a trustee is unwilling to do things that should be done according to the trust document; you may have to get an attorney to force the issue. here this would be possible because the trust is for Jane's son and there is a pretty strong argument that the withdrawal Jane is requesting is to help provide for her so since she does not seem to have any other income. If she uses it for her rent obviously that helps her to some extent, but the kid needs a place to live too, so it is arguably for his benefit as well.

Beckie called you yesterday and she was rather upset. Earl apparently has a gambling problem and is continuously hounded by creditors at home. She confides in you that she has managed to save $400,000 over time and wants your advice as to how to best manage it. Earl has no knowledge that Beckie has her own funds. What would be your most appropriate response in this situation? A.Tell Earl about the private funds immediately. B.Advise Beckie to have the house retitled in tenancy by the entirety to protect it from creditors as soon as that becomes possible. C.Consider whether you can continue to be the Martins' financial planner. D.Design a portfolio allocation for Beckie's undisclosed (to Earl) individual account in light of her other investments, time horizons, and risk tolerance.

C - You were hired as the couple's financial planner. Concealing information from one of the spouses puts you in a position that could compromise your adherence to code of ethics and principles such as Fairness and Objectivity. Earl and Beckie are still your clients. When your client's experience a meaningful life change, it falls on the CFP® practitioner to reestablish the client/planner relationship. If all the parties (including you, the planner), agree to a comfortable arrangement, your professional relationship with one or both of the Martins can continue. This would not be unethical presuming mutual agreement among both the parties.

Alex and Joan White have been very successful. They had been approached by their favorite charity to fund a special program for needy children. With a AGI of $1 million they donated $3,000,000 of cash. This allowed them to take a $600,000 itemized deduction. Every year their AGI remained at $1 million. However, 5 -years later their business only provided an AGI of $500,0000 so they could only deduct $300,000. Now in the 7th year, what is their charitable itemized deduction? A.It depends on their AGI B.Up to $300,000 C.Nothing D.Since it was cash not appreciated property they can deduct 60%

C - limited to contributing yr + 5yr carryforward (unless death comes sooner - lose at death).

The advantages of an S corporation are which of the following? I.Separate tax entity II.Limited liability III.Taxed at a flat 21% IV.Conduit taxation A.I, II, IV B.I, II C.II, IV D.III, IV

C- Answer I and III are for regular corporations. S corporations are separate entities, not separate tax entities. S corps are conduits for tax purpose.

Lance wants to transfer property to his daughter. He is considering doing an installment sale. Which type of property and type of installment sale would you recommend? A.If it was raw land, do a simple installment sale. B.If Lance's assets where less than $10 million, it really does not make any difference. C.If the business property has a zero basis due to depreciation do a self-canceling installment sale D.If Lance had at least a 20 year life expectancy, it really does not make any difference

C- With fully depreciated property an installment sale would trigger almost a 100% recapture of depreciation as ordinary income (not capital gain) in the year of sale. A SCIN does not recapture depreciation (Answer C). How will the daughter make yearly payment with raw land (Answer A). Answer B does not indicate what kind of property to transfer. The same applies to Answer D.

Harry wants to increase the return on his portfolio and is considering the purchase of one of two bonds of equal credit quality. Bond A is a zero coupon bond selling for $424.60 with a maturity of 8 years. Bond B is selling for $907.00 with a maturity of 7 years with a 10% coupon. Which one should Harry select? A.Bond B because it has a shorter duration B.Bond A because the tax due on interest will be deferred until the bond matures C.Bond A because it's YTM is 11% D.Bond B because it's YTM is 12%

D Use semiannual/end mode for all bond questions including zeros.Bond A: (424.60 CHS PV)(1,000 FV)(16N) = 5.5% 5.5% x 2 = 11% (HP-12C)Bond B: (907.00 CHS PV)(1,000 FV)(50 PMT)(14N) = 6% 6% x 2 = 12%

Which of the following trusts could have ascertainable standard provisions (HEMS)? I.This trust consists of assets (income & corpus) intended for the sole use, enjoyment, or benefit of the surviving spouse. II.This trust will provide the surviving spouse with a stream of income that will be paid for life yet also qualifies the property for the marital deduction. III.This trust qualifies for the marital deduction but is structured in such a way that the surviving spouse does not receive corpus during his/her lifetime and could receive income, if available, from the trust at the discretion of the trustee. IV.This is an irrevocable trust established to receive assets that are disclaimed by the surviving spouse of a decedent. A.I, III, IV B.I, III C.II, III, IV D.II, IV

D - Trust I: General power of appointment "Marital A" trust. Trust II: A QTIP has special powers for the surviving spouse (could have HEMS). Trust III: An estate trust has a general power of appointment. The spouse can receive income if it produces income. The assets in the estate trust generally don't produce income. Trust IV A disclaimer trust (like a nonmarital) enables the surviving spouse to receive income, but it is subject to an ascertainable standard (special could have HEMS).

When is a company most likely to issue new bonds? I. When existing bonds are selling at a premium. II. When existing bonds are selling at a discount. III. When interest rates are expected to rise. IV. When interest rates have fallen. A.I, III B.II, III C.II, IV D.I, III, IV E.I, IV

D - A company would try to sell bonds before interest rates rise. In Answers I and IV, interest rates have fallen. The company could issue new bonds at the lower interest rates. Think of it as a company refinancing its debt.

Mrs. Todd dies at age 69 with $1,000,000 in her IRA. Her disabled son's age in the year after her death is 48 (distribution period 36). What is her son's required distribution in two years after her death if the account balance is $1,100,000 at the end of next year? A.$27,777 +/- $1 B.$28,571 +/- $1 C.$30,555 +/- $1 D.$31,428 +/- $1

D - $1,100,000 ÷ 35 = $31,428 (36 - 1 next year) It is two years after her death. Disabled beneficiaries can still "stretch" an IRA like this under the SECURE Act.

The Commission can order a suspension (Article 11.1 Sanctions) for a specific period of time, not to exceed _____ years. A.2 B.3 C.4 D.5

D - 5

A friend of yours advised you of a great growth mutual fund. Alpha Beta R2 Return Standard Deviation -1.19 .85 92 17% 17.82% Based on the data, what would you tell your friend? A.Buy the fund because the beta is low B.Buy the fund because the Sharpe ratio is over 1 C.Do not buy the fund because of the standard deviation D.Do not buy the fund because of the alpha and the high R2

D - A negative alpha indicates the portfolio manager underperformed the market on a risk-adjusted basis. A similar diversified fund (high R2) with a positive alpha can generally be found.

John tried to start a new business. Keeping it simple he just established a "doing business as" a sole proprietorship. For three years, he has lost money. Now in the fourth year, he has decided to close the business because he has another loss. Can he deduct the loss? A.He can only deduct the loss up to basis. B.He can take a loss up to $100,000. C.He can only take a loss of $3,000 D.Yes, he can.

D - A sole proprietor can always take a loss because he or she is providing the capital. Answer A applies to partnership, S corporation, and LLPs. Answer B applies to corporations. Answer C applies to sale of publicly held stock.

James Long at age 40 purchased a VUL. Now 15 years later his investments in the VUL doubled. At year end he received a report. He noted the death benefit had increased substantially. Otherwise the report was simliar to prior years. Did the policy become a MEC due to the material changes rules? A.No, he had not requested any change. B.Yes, it was over $150,000 death benefits. C.Yes, there was a substantial change. D.No, it was a VUL type B policy.

D - Actually eve in a type A VUL the death benefit can go up after a certain cash value (called a benchmark - see Insurance 5-3). But the best answer is Answer D because it says the change was due to the investments doubling over Answer A. There is no rationale for Answer B.

Harold and June Karter experienced tough financial years due to job loss, an underwater mortgage, and personal education loans. Finally, Harold landed a high paying executive position with a year-end substantial bonus. Now that their two children reached high school age, Jane has taken a marketing position. Unfortunately, now with their income levels in the $400,000 range, many college year credit programs and grants/loans will not be available for the children. In addition, their two children are at best going to graduate in the middle of their high school class and seem more interested in party schools than a good education. Into what kind of program should they deposit education money? A.529 prepaid tuition B.529 college savings C.UTMA invested in the S&P 500 D.Personally owned laddered CDs

D - Answer A is not a bad answer, but this limits the choice of schools and may have low returns. Answer B gives them more flexibility of schools and investment possibilities plus the opportunity to move money from one child to another or ask for a refund. In Answer C the children will get the money if not used for school. With the kids already in high school, is a few years enough investment time for an S&P 500 fund? With CDs the money is safe from investment risk and cannot be used by the kids unless they are serious about school; with this answer there is safety of principal and parental control. Somewhat subjective.

Mr. Hardy, age 75, thought he would live to be 90. He has a 20 million dollar estate mainly due to good investments. He bought a VUL that he has invested wisely. He created a MEC because he only bought the policy for investment purposes and death benefit. After the initial deposit he has not paid any additional premium. Unfortunately, he just had a medical exam and the medical results were sever. He is concerned the $4 million dollar policy is in his estate. What can he do? A.Transfer the policy to an irrevocable life insurance trust. B.Sell the policy to a family member to avoid estate taxes and MEC rules. C.Surrender the policy for the cash value. D.Nothing will work.

D - Answer A will not work due to the 3-year rule. If he does Answer B that is a transfer for value violation. The gain would be ordinary income. There might be a small gain since the maximum income tax rate is 37% versus estate tax 40%. However the death benefit might be better in his estate for liquidity purposes. You would never trade cash value for death benefit (Answer C).,

How long can a dynasty trust last? A.As long as there are children, grandchildren or great grandchildren alive B.Only for 21 years C.Only through four successive life estates D.Until the perpetuities period expires

D - Chlldren, grandchildren, or grandchildren, are subject to the perpetuities rules. Answer B is incomplete and Answer C is false.

Which of the following statements concerning Medicare Part A benefits is correct? A.To be eligible, you must be at least age 65. B.Home health care is covered under Part B. C.Hospice care is specifically excluded. D.Benefits are subject to both deductible and co-payments provisions for inpatient hospital care.

D - Disabled workers, for example, can be covered under age 65. Home health care and hospice care are covered under Part A. Please note that although the question is about Part A, it has a Part B answer to throw you off.

A tree falls on your car is an example of which of the following? A.BI/PD B.Medical payments C.Collision D.Other than collision

D - Falling Object

Ted Mack is a 2% owner of an S corporation. He is turning 73 in a few years He plans to continue to work and contribute to the company 401(k). Can he? A.No, he will have to start taking distributions only and can no longer contribute. B.No, S corporation plans do not allow owners to make contributions after they turn 73. C.Yes, he can contribute, but he has to start taking distributions. D.Yes, he can contribute.

D - He is only a 2% owner not a 5% owner. He can make contributions and not take distributions until he retires.

Harry is a 20% owner of an apartment building. His active income is $100,000. His portfolio income is $80,000. The building generates $15,000 of losses. Which of the following is true? A.He can deduct the losses in full. B.He can only deduct the losses against active income. C.He can only deduct the losses against portfolio income. D.He cannot deduct the losses.

D - He makes $180k in AGI so past the $25k/yr active RE activity deduction. (phaseouts from 100k - 150k)

Dr. Jeffrey is retired but bored. He is considering purchasing an antique refurbishing business. The business had marginal profits in the past. He has a knowledge of antiques and plans to upgrade the equipment and building. He feels that after losing money (due to upgrades), the business will be profitable. He plans to put up all the capital. Which of the following business forms is the most appropriate? A.Sole proprietorship B.Limited partnership C.Personal service corporation D.S corporation E.C corporation

D - He needs limited liability. A sole proprietorship could expose him if he breaks a valuable antique. At this point in life, he cannot lose his nest egg. He can take losses up to his investment.

Mr. Thomas is age 73. He is married. His second wife is age 54. He has two sons (ages 40 and 36) from his prior marriage. He wants to take his RMD as slowly as possible. Which of the following is his best option? A.Take distributions, using the new uniform life expectancy table. B.Take distributions with his son (age 36), using the joint and last survivor table. C.Take distributions with his son (age 40), using the joint and last survivor table. D.Take distributions with his wife, using the joint and last survivor table.

D - His wife is more than 10 years younger. The joint and last survivor table would be more favorable than the new uniform life expectancy table. The new uniform life expectancy table is based on a 10 year spread.

Aidyn has been quite successful at his high level engineering job, moving up the career ladder to one of the highest skill positions at his company. His high income has put him in a 37% tax bracket, and he has invested enough money to fund all his financial goals, like education for his children and saving for his own retirement. His financial advisor believes he should start his own engineering company taking on a figure-head type CEO role to help shelter some of his income into lower tax brackets, continue to grow his overall level of wealth, and perhaps even become a top competitor of his current company. The planner has done all the analysis and presented the business plan to Aidyn. Aidyn, however, refuses to move forward with the plan. What values or biases would cause him to reject this advice despite the near-certain financial benefits? I.His parents are still married after 50 years together. II.He was raised to believe hard work is the secret to success and financial gain. III.He is a workaholic. IV.His family has "old money," and he is already financially set. A.All of the above B.I, II, and IV C.III and IV D.I and II

D - I, II - This question is asking about values and biases. Answer III is more of a problematic behavior. There is nothing here to support him being a workaholic; it appears he is just a smart engineer that is good at his job. Likewise, he could take the new CEO role and still be a workaholic, so that should not hold him back from accepting the new role. Answer I reflects being raised in a household where long term relationships and loyalty may have been strong values instilled in Aidyn and he may feel like he is betraying his employer by becoming a direct competitor. Answer II reflects that he may believe the figure-head type CEO position to not be "real" work, and that he may prefer making and designing things on his own. Being the CEO would rely on other people working hard for him. Generally, people that come from "old money," are very comfortable with the concept of having other people work for them and using their money to purchase assets, rather than generating income from the fruits of their own "work." You really have to think through how each of the answers would impact his real world behavior.

Monica owns a car made by Great American Motors, Inc. She loves the car and believes it to be the best automobile she has ever owned. Based on this, she recently decided to purchase 100 shares of stock in Great American Motors. Which of the following is true? A.She most likely researched the financial statements and future prospects of the company before purchasing the stock. B.This purchase reflects confirmation bias. C.This purchase reflects possession bias. D.This purchase reflects familiarity bias.

D - Mere possession bias, also known as endowment bias, states that people value things more once they possess them. In this question it might have been reflected had Monica been unwilling to sell the car even if it was a lemon or unwilling to ever consider buying a car from another manufacturer. Confirmation bias is reflected when people are more willing to accept facts that support their current beliefs rather than those facts that challenge their beliefs. Here, Monica may be placing too much value on the company due to her familiarity with her car. An unhealthy company could certainly make a good car. Hummer, Oldsmobile, Pontiac, and Saturn all made good cars, but would have been bad investments since they are all now defunct.

Mrs. Chambers took out a reverse mortgage some years ago to supplement her retirement income. Over the years her health deteriorated, and she recently died. She is survived by three children. Are her children responsible for selling the house and paying off the balance? A.No, the bank still owns the house. B.Yes, they could sell the house and use the sales proceeds to pay off the reverse mortgage balance. C.Yes, they can refinance the mortgage to help pay off the reverse mortgage balance. D.Both Answers B and C.

D - Mrs. Chambers died. This is a reverse mortgage question. They can do Answers B or C or the bank will take the house. The children refinance the loan. For them they would just end up with a note against the house they would need to pay; its really refinanced into a regular loan at that point.

Mr. Clarke, owner of Clark, Inc., wants to know which of the following will be a taxable benefit to his employees if paid by Clark, Inc.: A.Occasional theater tickets B.Group life insurance of $50,000 for all employees C.Business use of a company car D.Personal use of the company apartment on weekends

D - Occasional (not personal) use of the company apartment is ok.

Mrs. Jackson, age 65, just inherited a $500,000 IRA from her deceased husband. She states that she needs approximately $50,000 a year to maintain her lifestyle. In addition, her Social Security benefits will increase to $1,200 per month. How do you recommend she invest the $500,000 IRA if she considers herself conservative? A.A balanced portfolio of stocks and bonds B.A growth mutual fund C.An FDIC insured account earning 6% (5 year CD) D.A 30-year treasury bond paying 7% (current yield)

D - She is conservative; therefore, Answer D is better than Answers A or B. It says approximately. The bond generates $35,000 of income per year without invading principle. Considering that plus the $14,400 from SS is approximately $50,000 (close enough). She needs the income now. She probably has a 25-30 year life expectancy. Inflation is NOT an issue in the question. Answer C will have potentially significant reinvestment risk at maturity (5 years) and falls too short of her income objective. The FDIC account would only be insured for $250,000 under current law. Can she take RMDs? Yes, she may have to take them. $500,000 divided by 27.4 is only $18,248.18. But, she is going to withdraw $35,000 of bond interest. There should be no RMD problem for many years.

Mrs. Steel (widow), age 65, would like to contribute a substantial sum to charity but she needs income to replace the assets gifted. She would like an income stream that is guaranteed. She has Purdue University in mind. To what technique should she transfer money? A.CRAT B.CRUT C.Pooled income fund D.Charitable gift annuity E.CLUT

D - Specific charity + guaranteed amt (pooled income fund won't guarantee an amt - think annuity). A CRAT wouldn't been used if she didn't have a specific charity in mind.

Who controls the monetary policy of the U.S.? A.The President of the United States B.The Treasury department C.The NY Federal Reserve D.The FOMC

D - The Federal Open Market Committee (FOMC) controls monetary policy. The New York Fed is the lead bank of the FOMC.

Ruth's car just broke and she found a new low mileage replacement for $6,000, which of the options below is the most realistic option to receive the $6,000 for her new car? A.An inservice withdrawal from her DB pension plan at work B.A hardship withdrawal from her profit sharing plan at work to avoid the 10% penalty C.A loan from her SEP IRA at work. D.Charge it on her 22% credit card.

D - The only options you have are the four options given. Answers A, B, and C are all impossible. There are not loans from SEPs, nor in service withdrawals from DB pension plans. Buying a car with a hardship is somewhat debatable, but very few plans would allow it. Even if they, there would still be a 10% penalty charged.

Beth Danner spent nearly a year and a half taking the CFP education courses and finally passing the exam. Upon submittal of her paperwork, the CFP Board found cause to suspend issuance of the CFP® certification for 2 years. Will the Board publicly publish such a suspension? A.Yes, suspensions are automatically published. B.No, but the CFP Board will require her to notify all her clients. C.Maybe, it is at the discretion of the committee. D.No, she never attained the marks.

D - This is not a suspension. She never attained the marks. Answer C is too vague. They are suspending the issuance, not suspending her.

Baron and his wife recently had their first meeting with their new financial planner. After creating the financial plan, Baron returned to the office alone the following week and revealed that he had a secret savings account on the side he doesn't want his wife to know about in case she leaves him. His first wife walked out on him, and he has had trouble getting over it. How should the planner respond? A.The planner is obligated to tell Baron's wife about the secret account since they are both clients. B.The planner should honor Baron's request and keep the account a secret. C.The planner should terminate the client since he is acting unethically. D.The planner should discuss the consequences of what may happen when Baron's wife finds out about the secret account.

D- There are several versions of this question in the material, and all of them have different answers, including this one. All you can do is pick the best of the four options given. Here the planner should try to explain the possible repercussions of not being transparent with his spouse about his financial affairs. Had Answer D not been here, Answers A and B could both be viable options. Had answer C said, "consider terminating Baron," it might have been a viable option as well. In Baron's paranoia about his wife leaving him, he may be failing to see that hiding the account from her could cause her to leave him for his dishonesty.

Which of the following would cause someone to recognize taxable income on their own tax return? I.A scholarship received by a student that was spent on a campus dormitory. II.A Pell Grant received by a student that was used to pay for an off campus apartment. III.A kiddie tax of $300 generated by an UTMA. IV.A student loan forgiven under an income driven repayment plan. V.A student loan forgiven under PSLF. A.All of the above B.III, IV, and V C.II, IV, and V D.I, II, IV, and V E.I, II, and IV

E - Scholarships and grants are taxable income if not used for tuition, fees, or required supplies. A kiddie tax bill would cause the child's parents to pay taxes on their return, and that is not what the question asks. Under loan forgiveness, service related programs like PSLF are tax-free, but income-driven loan forgiveness methods produce taxable income when forgiven.B

R.J. wants to set up a trust for his problem child (daughter). He wants to contribute money yearly to the trust, but his daughter would only get income (no 5 or 5 right). The residual would go to his grandchildren at her death (her children). She would receive all the earnings from the trust no matter how much it made. He realizes he will have to give the money away irrevocably but is desperate to get her on the right track. Which of the following trusts would work best? A.2503(c) B.2503(b) C.A support trust D.A grantor trust E.An irrevocable trust with Crummey provisions

E - The 2503(c) is for minors. The 2503(b) will work, but yearly gifts would be gifts of a future interest and won't quality for the annual exclusion. A support trust is to discharge an obligation. R.J. doesn't have an obligation to a grown child. A grantor trust would cause the income to be taxed to R.J. In regards to an irrevocable trust, please go back to Lesson 6. Yes, she could demand under the Crummey provisions, but it is better to have that risk and gift money into the trust each year with no tax implications, than to do the 2503(b) which will have every dollar be a taxable gift.

Bob Hayes consults with you, a CFP® practitioner, on investments. He sets up a joint account with his wife. Time goes by and Bob reviews the account on a periodic basis with you by telephone. Out of the blue, you receive a telephone call to break the joint account into two separate accounts. Bob and his wife have decided to live separately. He informs you which stocks go into his account and then tells you to place the remainder in her account. You realize he is keeping the better performing stocks. What should you do? A.Follow Bob's advice. B.Consult Bob's wife before doing anything. C.Consult your compliance department. D.Terminate the relationship before you get in trouble. E.Tell Bob you need to meet with him and his wife before you can do anything.

E - You cannot breakup the account from him calling and telling yuo to do it. Answer B is not bad. However, you will really want to meet with both of them to hash this out. Answer C is not bad. However, this is an operational issue, not really compliance. Two individual accounts would need to be opened. Then you can get an LOI to journal the investments in kind, typically it would be signed by both spouses.

In a time of declining interest rates, which of the following produces the most total return? A.Corporate long-term bond B.Zero bond C.GNMA fund D.T-bills

Only one bond indicates its maturity (Answer A). The zero does not indicate its maturity and produces only phantom income. When interest rates decline, mortgages are normally refinanced (GNMAs). T-bills only last for 1 year (or less). When interest rates decline, the client wants to own long bonds for capital gains.

A client calls you because she hears about a mutual fund. She asks you if the mutual fund is a wise investment and whether she should buy it. You research the mutual fund and find out the following: Alpha Beta R2 SD T-Bills -7 .4 22% 18% 3% What would you recommend? A.Do not purchase the mutual fund because the alpha is negative 7. B.Purchase the mutual fund because the beta is low. C.Purchase the mutual fund because R2 is significant. D.Do not purchase the mutual fund because the standard deviation is high.

With a low R2, the standard deviation (Sharpe) becomes important. The R2 is too low to use the alpha answer. Alpha measures (as a percentage) the contribution of the portfolio manager. Do not buy a mutual fund just because its beta is low. With a standard deviation of 18%, this mutual fund will have a wider dispersion from the average return. Investors prefer assets with the least risk for a given expected return. Sometimes you are forced into an answer because nothing else makes sense. Answers B and C do not make sense. Many questions on the CFP® Certification Examination are on the edge. You can consider this to be a similar question to what you might see.