1 Flashcards
(182 cards)
1
Q
What is financial planning?
A
A collaborative process that helps maximize a client’s potential for meeting life goals through financial advice that integrates relevant elements of the client’s personal and financial circumstances.
2
Q
List the 7 steps of the financial planning process.
A
- Understand the Client’s Personal and Financial Circumstances
- Identify and Select Goals
- Analyze the Current Course of Action and Potential Alternative Courses of Action
- Develop Recommendations
- Present the Planning Recommendations
- Implement the Plan
- Monitor Progress and Update
3
Q
What is the time frame to notify the CFP Board of adverse conduct?
A
30 calendar days.
4
Q
True or False: The more tailored the communication, the more likely it will be viewed as Financial Advice.
A
True.
5
Q
Define ‘Engagement’ in the context of financial advice.
A
An oral or written agreement, arrangement, or understanding.
6
Q
What is the Duty of Loyalty?
A
Place Client’s interests above self, disclose conflicts, and obtain consent.
7
Q
What distinguishes Fee-Based from Fee-Only compensation?
A
Fee-Based includes any part of compensation deemed sales-related; Fee-Only has no sales-related compensation.
8
Q
Name the three duties owed to clients.
A
- Definitional: Integrity, Competence, Professionalism
- Detailed: Provide information to client, compensation methods
- General Rule + Exceptions: Borrowing/lending money, confidentiality, privacy
9
Q
What are the three categories of adverse conduct?
A
- Unacceptable: Felony theft/embezzlement, tax fraud, violent felony within 5 years
- Presumed to be Unacceptable: 2+ bankruptcies, felony non-violent +5 years ago
- Other Conduct that may reflect adversely: customer complaints, civil proceedings, misdemeanors
10
Q
What are the four forms of discipline?
A
- Private Censure
- Public Letter of Admonition
- Suspension
- Revocation
11
Q
What are the two general phases of the business cycle?
A
- Expansion
- Contraction
12
Q
Define GDP.
A
Total market value of income and output produced by all the people and companies in the US.
13
Q
What is price elasticity?
A
How quantity demanded changes in response to changes in price.
14
Q
What is the Law of Demand?
A
An increase in price will decrease quantity demanded and vice versa.
15
Q
Fill in the blank: Deficit spending occurs when government expenditures exceed _______.
A
revenues.
16
Q
List the three primary tools of the Federal Reserve.
A
- Discount rate
- Reserve Requirement
- Open market activities
17
Q
What is the Front End/Housing Cost Ratio maximum percentage?
A
28%.
18
Q
How many months of emergency funds are recommended for a two-income household?
A
3 months.
19
Q
What is Chapter 7 bankruptcy?
A
Eliminates consumer debt by having a trustee sell the debtor’s personal property.
20
Q
What are the five categories of credit score?
A
- Payment History
- Amounts Owed/Utilization
- Length of Credit History
- New Credit
- Credit Mix
21
Q
What is the maximum amount for a conventional mortgage?
A
Below $766,550.
22
Q
What does the Emergency Fund Ratio measure?
A
Monetary assets divided by monthly living expenses.
23
Q
What is the FAFSA?
A
Free Application for Federal Student Aid.
24
Q
What does ‘Disability’ mean in insurance terms?
A
A condition that prevents a person from performing their job.
25
What is the Last-Month Rule regarding HSAs?
If eligible under HDHP on the first day of the last month of the tax year, you may fund HSA for the entire year.
26
What is the definition of 'Peril' in homeowners insurance?
The actual cause of loss.
27
What is a Personal Umbrella policy?
Extends coverage for libel and slander.
28
What is the purpose of the Coinsurance clause in property insurance?
To require that the dwelling is insured for at least 80% of Replacement Cost Value for a partial loss to be paid in full.
29
What does 'ADLs' stand for?
Activities of Daily Living.
30
What is the 1035 Exchange?
A tax-free exchange of one insurance product for another.
31
What is a Modified Endowment Contract (MEC)?
A cash value life policy that fails the 7-Pay test and changes the tax treatment for cash distributions.
32
What is the 'House Money Effect'?
Taking more risk with gains made from prior investments.
33
What does 'Mental Accounting' refer to?
The tendency to separate money into different categories based on subjective criteria.
34
What is the formula for calculating ACV of damage?
((Did Have/should have) * Loss Amount) - Deductible
35
Will a policy pay more than the stated limit?
No, the policy will never pay more than the stated limit.
36
What type of damage is covered when striking an animal under a Personal Auto Policy?
Comprehensive coverage
37
What does a Personal Umbrella policy extend coverage for?
* Libel and slander
* Boat coverage if minimum is maintained
38
What are money markets?
Short term debt instruments, cash and equivalents
39
What are capital markets?
Trade in long-term debt and equity instruments
40
What is the primary market?
Initial Public Offerings (IPOs)
41
Which act regulates the primary market?
Securities Act of 1933
42
What is the secondary market?
Trading among investors
43
What did the Securities Act of 1934 create?
The SEC (Securities and Exchange Commission)
44
What is the Investment Company Act of 1940 related to?
Mutual Funds
45
What does the Investment Advisor Act of 1940 regulate?
Investment advisors
46
What does SIPC stand for and when was it established?
Securities Investor Protection Corporation, established in 1970
47
What year was insider trading legislation introduced?
1988
48
What did the Gramm-Leach-Bliley Act of 1999 repeal?
Glass-Steagall Act
49
What is the formula for Holding Period Return?
Profit / Cost
50
What does Annual Yield not account for?
Capital appreciation
51
What is the Time Weighted Return?
A global standard for fund performance based solely on appreciation or depreciation period to period
52
What is the Dollar-Weighted return?
Return specific to a client with their own cash flows
53
How is total risk defined?
Total Risk = Systematic Risk + Unsystematic Risk
54
What quantifies systematic risk?
Beta
55
What is Purchasing Power Risk?
Risk associated with inflation
56
What is Reinvestment Risk?
Risk that future cash flows will need to be reinvested at lower rates
57
What is Market Risk?
Risk of losses in positions arising from movements in market prices
58
What is the r-squared (r²) threshold for using beta?
If r² > 0.7 use beta; if r² < 0.7 use standard deviation
59
What factors influence an investor's capacity for risk?
* Time horizon
* Liquidity needs
* Total investible assets
60
What are Junk Bonds rated?
Below BBB
61
What percentage of observations fall within one standard deviation?
68%
62
What does positively skewed distribution indicate?
A long right tail
63
What is Leptokurtic distribution characterized by?
More peaked than normal
64
What is the Efficient Market Theory?
Belief that all available information is reflected in stock prices
65
What does the Sharpe Ratio measure?
Risk-adjusted return
66
What does the Treynor Ratio use instead of standard deviation?
Beta
67
What does CAPM stand for?
Capital Asset Pricing Model
68
What does Jensen's Alpha measure?
Performance relative to expected return based on risk
69
What does an upward sloping yield curve indicate?
Normal economic conditions
70
What is Nominal Yield?
Stated or coupon yield
71
What is Duration in bond valuation?
Estimates sensitivity of a bond to changes in interest rates
72
What happens to duration as maturity increases?
Duration increases
73
What is the purpose of matching the duration of a portfolio to a time horizon?
Immunizes those assets against interest rate risks
74
What does Yield to Worst represent?
The lower of Yield to Maturity (YTM) and Yield to Call (YTC)
75
What is the Multi-Stage Dividend Discount Model used for?
Valuing stocks based on expected future dividends
76
What is a Margin Call?
A demand by a broker for additional funds to cover potential losses
77
What does the Options Clearing Corporation do?
Guarantees performance of options contracts and eliminates counterparty risk
78
What is the Time Premium of an option?
The additional amount over intrinsic value, greatest at contract creation
79
What is a Covered Call?
Selling call options while owning the underlying stock
80
What is the risk associated with Naked Call Writing?
Unlimited risk
81
What is a Protective Put?
Buying a put option while owning the underlying stock
82
What is a Collar strategy?
Buying a put and selling a call to protect against stock price decreases
83
What is a Straddle in options trading?
Buying a put and call on the same stock with the same expiration date
84
What does Hedging involve?
Taking a position to offset potential losses in another investment
85
What distinguishes forwards from futures?
Forwards are not standardized and carry counterparty risk
86
What does NPV stand for?
Net Present Value
87
What is a wash sale?
Realizing a loss and acquiring a substantially identical security within 61 days
88
What is the tax formula for calculating taxable income?
* Income
* Minus Exclusions
* Gross Income
* Minus Deductions FOR AGI
* AGI
* Minus deductions FROM AGI
* Minus Greater of itemized deductions or the standard deduction
* Minus Qualified business income deduction
* Taxable Income
89
What are some common exclusions from taxable income?
* Muni Bond Interest
* Fringe Benefits
* Inheritances and Gifts
* Scholarships
* Personal Residence Sale (up to $250,000/$500,000)
90
What is Schedule 1 used for?
Above the line deductions to arrive at AGI
91
What is the limit for SALT deductions?
$10,000 limit
92
What is the standard deduction based on?
Client's age and blindness status
93
What are refundable tax credits?
Credits that exceed liability are refunded directly to the taxpayer
94
What is the penalty for negligence in tax matters?
20%
95
What is the maximum penalty for failure to file taxes?
25% of unpaid taxes
96
What is the maximum number of owners for an S-Corp?
100 owners
97
What is a key feature of a C-Corp?
Double taxation
98
What is a General Partner in a partnership?
Has full control and unlimited liability
99
What is the FIFO method of inventory valuation?
First-In, First-Out; more realistic inventory valuation
100
What is the Straight Line depreciation method?
Cost divided by useful life
101
What does Section 179 allow?
Businesses to deduct the full cost of qualifying capital assets immediately
102
What is a capital asset according to the tax code?
Not including accounts or notes receivable, copyrights, inventory, or depreciable property
103
What are 1231 properties?
Used in trade or business and held for production of income
104
What is a 1031 exchange?
Like-kind exchange of business realty
105
What is the treatment of related party transactions?
Gains treated normally, losses not recognized until sold to an unrelated party
106
What is recognized gain?
Lesser of realized gain or net boot received.
107
Define deferred gain.
Realized gain minus recognized gain.
108
What is substituted basis?
FMV of qualifying property received minus the deferred gain.
109
Who are considered related parties in transactions?
Family and related entities if taxpayer owned 50% or more of the stock or interests.
110
How are gains treated in related party transactions?
Treated normally, as if sold to an unrelated party.
111
When are losses recognized in related party transactions?
Losses will NOT BE RECOGNIZED until the related party sells the asset to an unrelated party.
112
What happens to suspended losses when sold in a taxable transaction?
Used to offset gain as well as other active and portfolio income.
113
What qualifies for the personal use property exemption?
Can rent for 14 days or less, NOT required to report income.
114
What is the exclusion amount for personal residence sale under Section 121?
250k for single filers, 500k for married couples.
115
What are the requirements for the personal residence sale exclusion?
Must have owned and USED the property for 2 out of last 5 years.
116
What is the AGI limit for deducting rental real estate losses?
25k loss allowed if MAGI is equal to or less than 100k.
117
What is the phase-out range for rental real estate loss deduction?
From 100k to 150k AGI.
118
What is the maximum allowable deduction for charitable contributions of LTCG property?
May elect to value at FMV or basis.
119
What is the carrying over limit for contributions exceeding AGI limits?
Contributions can be carried over to each of the FIVE succeeding years.
120
What are the requirements for written acknowledgment for charitable contributions?
Must obtain written acknowledgment for any single contribution of $250 or more.
121
What is the imputed interest rule?
If taxpayer charges less than adequate rate of interest, imputed to lender.
122
What is the formula for calculating Alternative Minimum Tax (AMT)?
Regular taxable income + preference items + standard deduction + AMT adjustments - exemption amount.
123
What is the Kiddie Tax threshold for unearned income?
1300 standard deduction or earned income plus $450.
124
What is the maximum contribution limit for defined contribution plans?
69k limit with 345k max compensation considered in formula.
125
What is the maximum employer contribution rate for retirement plans?
Max deductible employer contribution is 25% of covered payroll.
126
What are the characteristics of a Money Purchase Pension plan?
Mandatory annual employer contributions, 100% employer funded, easy for participants to understand.
127
What is the special catch-up provision for Section 403b plans?
Employees with a minimum of 15 years of service can contribute an additional allowance up to 3k/year.
128
What is the self-employment tax rate?
15.3%, consisting of 12.4% for Social Security and 2.9% for Medicare.
129
What is the penalty for early withdrawal from retirement accounts?
10% penalty unless exceptions apply.
130
What is the 5-year rule for Roth distributions?
Applies to owners' death, disability, first-time home purchase, or age 59.5.
131
What is a Rabbi Trust?
Funds safeguarded in event of merger or acquisition and not trigger immediate recognition of compensation.
132
What is the maximum retirement plan contribution for self-employed individuals?
First subtract ½ SE tax from net earnings and multiply by the adjusted employer plan contribution rate.
133
What is the requirement for inherited IRA distribution for non-spouse beneficiaries?
Subject to RMDs.
134
What is the goal regarding constructive receipt and current taxation?
To avoid constructive receipt and current taxation, there must be a substantial risk of forfeiture.
## Footnote
This is crucial for the non-recognition of income by executives until the risk is no longer present.
135
What is a Rabbi Trust?
A Rabbi Trust safeguards funds for executives, ensuring they are not available for corporate use and protecting them in the event of a merger or acquisition.
## Footnote
It does not trigger immediate recognition of compensation.
136
What are the tax implications of a large CVLI?
Executive owns the policy, employer pays premiums, executive pays taxes as bonus compensation, and death benefits are tax-free.
## Footnote
The executive also has access to cash value.
137
What are the three types of plans recommended regarding employer contributions and employee taxation?
1. Qualified Tax-Advantaged Plan
2. Non-Qualified Section 162 Bonus Plan
3. Non-Qualified Deferred Compensation Plan
## Footnote
You cannot have all three at once.
138
What is the difference between NQSO and ISOs?
NQSO gives a corporate deduction when the employee pays tax at exercise, while ISOs may never grant a corporate deduction and can create AMT.
## Footnote
NQSO is subject to W-2 taxation, whereas ISOs have specific holding period requirements.
139
What are the Social Security tax rates for employees and employers?
6.2% OASDI and 1.45% Medicare, totaling 7.65% from both employee and employer up to $168,600, with 1.45% unlimited above that.
## Footnote
Additional Medicare tax of 0.9% applies above certain income thresholds.
140
What is AIME in the context of Social Security?
Average Indexed Monthly Earnings based on the 35 best years of earnings.
## Footnote
This figure is crucial for calculating the Primary Insurance Amount (PIA).
141
What is the earliest age to claim Social Security benefits?
62, but benefits are permanently reduced if claimed early.
## Footnote
Benefits increase by 8% per year if delayed up to age 70.
142
What is the maximum reduction for early retirement benefits?
30% maximum reduction.
## Footnote
The reduction is calculated based on the number of months prior to Full Retirement Age (FRA).
143
What is the taxation rule for Social Security benefits?
Up to 85% of Social Security benefits may be subject to income tax based on provisional income calculations.
## Footnote
Provisional income includes 50% of SS benefits, tax-exempt income, and AGI without SS.
144
What are the eligibility requirements for spousal Social Security benefits?
The worker must be receiving benefits, and the spouse must have been married for at least 1 year.
## Footnote
Former spouses can apply if divorced for more than 2 years, having been married for at least 10 years.
145
What is the primary purpose of Medicare Part A?
To provide hospital insurance for individuals aged 65 or older who have paid into Medicare for at least 10 years.
## Footnote
It includes flat co-pays for days beyond the initial coverage period.
146
What is the penalty for failing to take Required Minimum Distributions (RMDs) from IRAs?
A 25% penalty tax on the undistributed amount.
## Footnote
RMDs must start by April 1 of the year following age 73.
147
What is a Qualified Charitable Distribution?
A nontaxable distribution from a traditional IRA directly to an eligible charity.
## Footnote
Must be at least 70.5 years old on the date of distribution.
148
What is a Qualified Domestic Relations Order (QDRO)?
A legal order in divorce proceedings that recognizes a spouse's right to receive a portion of the other spouse's retirement plan benefits.
## Footnote
Distributions made under a QDRO are not subject to the 10% early withdrawal penalty.
149
What are the types of wills recognized in estate planning?
1. Mutual Will
2. Reciprocal Will
3. Holographic Will
4. Nuncupative Will
## Footnote
Each type has different legal implications and requirements.
150
What is the role of a Durable Power of Attorney (POA)?
Allows an individual to make decisions on behalf of another person, remaining effective even if the principal becomes incapacitated.
## Footnote
Essential for managing financial and healthcare decisions.
151
What is the annual gift exclusion amount?
$18,000 for present interest gifts.
## Footnote
Applies to gifts made to individuals without incurring gift tax.
152
What is the lifetime gift/estate exemption amount?
$13,610,000 for gifts and transfers at death.
## Footnote
Unified credit allows for a tax-free transfer up to this amount.
153
What are the tax implications of a step-up in basis for community property?
100% step-up to the fair market value for the surviving spouse.
## Footnote
This is beneficial for minimizing capital gains taxes upon sale.
154
What is the Generation-Skipping Transfer Tax?
Tax applied to transfers made to individuals two or more generations below the transferor.
## Footnote
It includes taxable distributions, taxable terminations, and direct skips.
155
What is the process for calculating estate tax liability?
Gross estate minus deductions equals adjusted gross estate, then subtract charitable bequests and marital deductions to determine taxable estate.
## Footnote
Form 706 must be filed within 9 months of the decedent's death.
156
What is an irrevocable trust?
A trust that cannot be modified or revoked by the grantor after its creation.
## Footnote
Irrevocable trusts often provide tax benefits and asset protection.
157
What is a Grantor Trust?
A revocable trust where all income is taxed to the grantor.
## Footnote
The grantor retains control over the trust and can modify it.
158
What is the 65 Day Rule?
Allows fiduciaries to make distributions within 65 days of the new tax year.
## Footnote
This rule is important for tax planning purposes.
159
What is a Testamentary Trust?
A trust created through a will that is funded with assets after the grantor's death.
## Footnote
It helps in managing estate taxes and ensuring proper asset distribution.
160
What is the Section 645 Election?
Allows the executor of an estate and the trustee of a revocable trust to treat the estate and trust as one for tax purposes.
## Footnote
This can simplify tax reporting.
161
What is Distributable Net Income (DNI)?
Represents the maximum amount that can be taxed to the beneficiaries of a trust.
## Footnote
It allocates taxable income between beneficiaries and the trust.
162
True or False: A Grantor Trust must file Form 1041.
False.
## Footnote
Grantor Trusts do not require Form 1041 if the grantor is taxed.
163
What is a GRAT?
A Grantor Retained Annuity Trust that provides fixed payments to the grantor for a specified term.
## Footnote
Future appreciation passes to non-charitable beneficiaries.
164
What is a CLAT?
A Charitable Lead Annuity Trust that pays fixed income to charity for a period, with the remainder going to non-charitable beneficiaries.
## Footnote
Can be inter-vivos or testamentary.
165
Fill in the blank: A QPRT is a ________ that holds a person's residence and allows them to live rent-free.
Qualified Personal Residence Trust
## Footnote
The grantor must rent the home at fair market value or move out at the end of the term.
166
What does a Spousal B-Trust do?
Utilizes the decedent's maximum unified credit and allows the surviving spouse to obtain income as needed.
## Footnote
Assets are not included in the surviving spouse's estate at death.
167
What is a Qualified Domestic Trust (QDOT)?
A trust for non-citizen spouses that allows the estate to qualify for the marital deduction.
## Footnote
This is crucial for estate tax planning in mixed-nationality marriages.
168
True or False: Special Needs Trusts preserve eligibility for government benefits.
True.
## Footnote
They provide for extra services not covered by public assistance programs.
169
What is an ILIT?
An Irrevocable Life Insurance Trust that removes life insurance from the owner's estate.
## Footnote
Must survive three years to avoid inclusion in the estate.
170
What is a Family Limited Partnership?
A pass-through entity consisting of family members that allows property transfer at reduced costs.
## Footnote
It provides income tax reduction and protection from creditors.
171
What is a Private Annuity?
An agreement where the buyer pays the seller for life, with no collateral required.
## Footnote
Payments continue even if the buyer dies before the seller.
172
What is the penalty for a frivolous tax return?
$5,000.
## Footnote
This penalty applies if the tax return is deemed to have no merit.
173
What is the maximum compensation considered for contribution formula?
$345,000.
## Footnote
This is relevant for retirement plan contributions.
174
What is the measure of total risk in investments?
Standard deviation.
## Footnote
It quantifies the volatility of investment returns.
175
What is the 300 deduction for educators?
A deduction for educator expenses up to $300.
## Footnote
This applies to eligible educators for unreimbursed expenses.
176
What is the waiting period for Social Security disability benefits?
5 months.
## Footnote
Benefits begin after this waiting period.
177
What is the penalty for early withdrawal from an annuity purchased before 8/14/82?
FIFO method applies for tax purposes.
## Footnote
This affects the tax treatment of withdrawals.
178
What does the Endowment Effect refer to?
The tendency to overvalue items owned, affecting negotiation decisions.
## Footnote
This can lead to suboptimal choices in trades or sales.
179
What is the tax treatment of damages received for personal physical injuries?
Excluded from income.
## Footnote
Only damages for physical injuries or sickness are excludable.
180
What happens if a client doesn’t have children regarding the GSTT?
There is a special exemption for the 37.5 rule.
## Footnote
This affects generation-skipping transfer taxes.
181
What is the penalty for a deficiency in tax payments?
20% tax penalty.
## Footnote
This applies to underpayment of taxes owed.
182
What is the maximum exclusion for educational assistance programs from an employer?
$5,250.
## Footnote
Amounts above this threshold are considered taxable income.
