All Flashcards

Question

Section 457 Plans

Answer 1

\*\*\*elegible vs. non-elegible (top hat plans\*\*\* **Eligible** * non-qualifed deferred comp plan, which means not subject to 10% EWP * state and local government plans (non-church!) * contribution $19.5k * special catch-up provisions in years before normal retirement age (2x's base amount, so $39K!) * limited in-service withdrawals * distribution: death, retire, emergencies * can allow for ROTH contributions * \*\*\*not considered active participant status\*\*\* * often not available to "rank and file" EEs * no NUA, as it's not a qualified plan

Answer 2

* Lapses of general powers of appointment above the 5-and-5 power in the three years prior to the holder's death are included in the holder's gross estate (in addition to the full amount of any unused general power of appointment for the year of death).

Answer 3

* The 7-pay test requires that the total premiums paid never exceed the amount of level annual premiums paid if the policyholder had been charged a level amount that would pay the policy up after 7 years. * If the level amount for a 7-pay policy is a $3,000 annual premium, then the premiums paid cannot exceed $3,000 in the 1st year. In the 2nd year, the total premiums paid cannot exceed $6,000. * If at any time the total premiums paid exceed the net level premiums that would have been paid up to the time in question, the policy is considered a modified endowment contract and its tax treatment changes.

Answer 4

* Recognize the income immediately, rather than waiting until there is no longer a substantial risk of forfeiture. * Election must be made within 30 days of the grant (by writing a letter to the IRS) * then gains are recognized as LTCG....vs. OI * Immediately include, as ordinary income, the fair market value of the stock at receipt, less any amount paid for the stock. * In the event of forfeiture, the employee may have a capital loss if he paid any amounts toward the purchase of the restricted stock. * "congressionally mandated gamble"

Answer 5

Marital Trust - * surviving spouse has GPOA **(big difference)** * terminable interest, but still qualifies for deduction (like C) * income payable to spouse at least annually (like C) * asset included in surviving spouses estate (like C)

Answer 6

Compares HCE to the R&F ADP - testing pretax deferrals (from EE) ACP - testing matching contributions (from ER) **Test Criteria:** * 0 to 2% = 2x's non-HCE * 2% to 8% = 2% + non-HCE * \>8% = 1.25x's non-HCE **Remedy**: If fails or about to fail, 2 options: * corrective distributions (give back to highly comp'ed EEs, won't be happy), or * nonelective contribution or matching contribution (cost the ER $$$) - 100% vested immediately

Answer 7

* P1 + P2 - 2P3 - (3 year agreement amount) = Recapture

Answer 8

* First in, first out (FIFO) basis recovery applies only to annuities purchased before August 14,1982 - otherwise LIFO * If the annuity is owned by a non-natural person (such as a corporation), earnings within the contract are taxable each year. * Exchanging an annuity for a life insurance contract does not qualify for tax-free treatment under Section 1035. * An immediate annuity will not be subject to the early withdrawal penalty because it will satisfy the substantially equal periodic payments exception to the IRS 10% early withdrawal penalty.

Answer 9

* **Tactical** asset allocation refers to deviating from a portfolio's target asset allocation weights in the short term to take advantage of perceived opportunities in specific asset classes. * **Strategic** asset allocation is determining the target asset allocation percentages for a portfolio. * **Rebalancing** is periodically adjusting a portfolio back to its target asset allocation. * **Dynamic** asset allocation takes a multiperiod view of the investment horizon. In other words, it recognizes that asset (and liability) performance in one period affects the required rate of return and acceptable level of risk for subsequent periods.

Answer 10

* Aggressive Growth = tech, small cap, EM * High risk, seeking income = high yield bonds * Growth = stock * Income Producing Stock = large cap, preferred, utilities * Growth, leaning conservative = balanced funds (50/50) or Asset Allocation fund * high tax bracket (32%+) = munis!!! * Income = Bonds * Safety of Principal = treasuries * Liquidity = money markets, CDs, Remember...we're in **CFP Land**...keep it simple

Answer 11

* non-business bad debt = short term capital loss in the year it becomes worthless (e.g., Joey borrows some money and never pays u back)

Answer 12

* **Loss Aversion** - remembering losses more than wins; holding on to losers for too long, thereby not accepting the loss * **Confirmation bias** - data that confirms current beliefs * **anchoring** - attaching to a number (usually) - comparisions from there * **mental accounting** - putting money into different buckets based, IRAs, vs. checking. vs. winning from lottery, credit card vs. cash * **Illusion of control** - belief in ability to personally control outcomes * **Recency -** putting more weight on recent information (EM did great last year, let's invest!) * **Hindsight bias** - believing that they would have made a different better decision than what someone else did - i knew the crash was coming! * **Herd mentality** - follwing CNBC! * **Endowment bias -** emotional attachement assets they own, especially if inherited * **Affinity Bias** - preference for "home country" stocks, or stocks that "do good in the world" vs. which may have the best performance * **Snake bite effect** - becoming timid after taking a loss * **Availability bias** - preference for companies based on how familiar they are with them - starbucks! * **Self Attribution** - belieft that I earned all my wins, and external variables are responsible for my losses * **Cognitive Dissonance** - ignore information that does not agree with world views, as would create a psychological conflict * **Self-Control** = lack of self control, spend it all now, don't worry about the fture

Answer 13

Bills * Do not pay interest and are sold at a discount * Have maturities up to one year Notes and Bonds * Treasury notes and bonds provide semiannual interest payments. * Income from both Treasury bonds and Treasury notes is exempt from state income taxes. Bonus - The federal government does not sell zero-coupon bonds. Brokerage firms create zero-coupon bonds by selling the interest and principal of Treasury bonds as separate securities.

Answer 14

1) Calculate the current interest rate If the current value of the 30-year bond is $1,103.19, then the prevailing market interest rate is 9% (PV = 1,103.19; N = 60; PMT = 50; FV = 1,000; solve for I/YR = 4.5 × 2 = 9.0%). 2) Adjust the current interest rate (+2%), then calculate the new price If the interest rate increased 2 percentage points to 11%, the value of the bond would decrease to $912.75 (FV = 1,000; N = 60; I/YR = 5.5(11% ÷ 2); PMT = 50; solve for PV = 912.75, or $912.75). The difference equals $190.44 ($1,103.19 − $912.75).

Answer 15

CR = coupon Rate Premium bonds:CR \> CY \> YTM Par bonds:CR = CY = YTM Discount bonds:CR \< CY \< YTM * Premium bonds - cost more because you're getting you're money back more quickly in high interest payments (vs. at the end) * Discount bonds - getting more cash back at end via par (why YTM is higher than CY)

Answer 16

* Ladder = minimize impact of interest rate changes * Barbell = more aggressive than ladder

Answer 17

* substituion swap - more in municpal and corporate market, * intermarket spread - take advantage spread between bond types (corprates vs. govs) and buy and sells based on spread between them * rate anticipation - based on what you think the Fed is going to do (essentially market timing) * pure yield pickup - aka taking more risk, lower quality, longer maturity * tax swap - interest rate go up, prices go down = take a capital loss on a bond, and then buy one with "similar but not same" characteristics (not a wash sale) -

Answer 18

* Low = large coupons, short-term, and short durations, lower ratings * High = low coupons, longer-term, high duration, higher ratings

Answer 19

Bill (up to one year) * Interest * State = No * Federal = Yes Notes (2 to 10 years) * Interest * State = No * Federal = Yes Bonds (10 to 30 years) * Interest * State = No * Federal = Yes Municipals * Interest * State = No, if issued from your state * Federal = NO Corporates * Interest * State = Yes * Federal = Yes Savings Bonds * Interest * State = No * Federal = Yes (but waived if EE bond used for eduction) * Cap Gains * State * Federal

Answer 20

* 100% = Transportation expense * 50% = Business meal and tip * 0% = Entertainment expenses are not allowed

Answer 21

* meals and tips are only 50% deductible * Calculate on per day basis * airfare (to and from) was transportation for business that would not change whether it was personal or not, so it is not pro-rated but rather fully deductible. * Airfare Deductibility Rules: * Domestic: If primarily business then deduct all airfare. Prorata meals and lodging. * Foreign: Prorata meals and lodging. Prorata airfare unless (then you can deduct all): \< 7 days \<25% on personal

Answer 22

* very popular in CFP land * uses index funds * transaction costs are minimized but not buy and forget...must still monitor and update on a periodic bases

Answer 23

* Life insurance proceeds on a business owner's life are NOT tax deductable to the business * The business entity buys the interest of an owner who dies. * The business owner's estate usually does NOT recognize a taxable gain when it sells the deceased's interest.

Answer 24

* premiums for the life insurance are not tax deductible and the proceeds received from the life insurance are not taxable * number of policies = N\*(N-1)

Answer 25

**NOT a marital trust** * does not qualify for the marital deduction * fully utilizes the full applicable credit/exemption amount ($4,625,800/$11.7M) * best for appreciating assets - as assets will NEVER be taxed again * prevents overqualification of the estate i.e., too much to spouse * surviving spouse has HEMS power, but no annual distribution requirement * spouse can be the beneciary, but cannot be the sole bene * NOT included in surviving spouses estate * usually goes to the kids tax fee also called, credit equivalency trust, credit shelter trust, or family trust

Answer 26

* C-Corp * Pros * Limited liability for shareholders * raise capital * Continuity of business life * EE benefit plans * Separate taxable entity * corporate dividend exclusions (get a break) * 21% flat taxes - MAJOR advantage * 1244 stock (**often tested!**) – allows for up to $100K in losses against OI * Cons * Double taxation (corporation taxed, then the share holders are taxed) * Lots of paperwork * capital losses NOT deductable * No preferentail LTCG rates * Accumulated earnings tax * Excess compensation rules * Special Taxes for C-corp * Accumulated earnings – 20% penalty (same as highest LTCG tax) * Personal Holding Company tax – individual starts a c-corp, 20% tax - call AAA for HELP

Answer 27

**Example** * Max is the sole shareholder in the ABC Corporation. * ABC makes a distribution of $60,000 to Max. * This year, ABC has accumulated earnings and profits of $40,000. = then max dividends = $40K * Dividends can only be distributed to the extent of earnings and profits - so capped at $40K (rest is salary, cap gains, or return of basis) * Max's basis for the stock he owns in the company is $7,000. = tax free return How much of this distribution is taxable to Max as a capital gain? = $13K - dividends + salary = Gross income to owner - company wants to pay higher salary to avoid paying taxes on dividends, which are double taxed - Dividends are only taxable to the extent of the corp's current and accumulated earnings and profits

Answer 28

* PHC - Personal Holding Company (20%) - if not really an active business, lots of pasive income * PSC - Personal Services Company (20%) - services company accumulated too much in earnings * Call AAA for Help * accounting, architecture, accuaries, health, engineering, legal, performing arts

Answer 29

* Qualify for the marital deduction (that’s the “qualified” terminable interest trust) * Election made on From 706 * Must pay income to the surviving spouse annually * Does NOT grant general power of appointment over the trust assets. * Grantor can determine where assets go with surviving spouse dies (likely to children of first marriage) * Asset are included in the surviving spouse’s gross estate * Protection is afforded against the surviving spouse's creditors during lifetime and at death

Answer 30

* Each employee has a certain number of dollars or credits which can be spent on a variety of benefits * A flexible spending account (FSA) is a cafeteria plan consisting of various tax-free benefits that are funded through salary reductions elected by employees each year. * Qualified benefits, which exclude the cash option, are an exception to the constructive receipt rules of income taxation. * The plan must include a cash option. * Appropriate when the employee mix includes young, unmarried people with minimal life insurance and medical benefits needs, as well as, older employees with families who need maximum medical and life insurance benefits. * Appropriate when the employer is large enough to afford the expense of such a plan.

Answer 31

* Only likely to be called when trading a premium (not before!) - because interst rates have ALREADY decreased * Buy "deep discount bonds" if you don't want your bonds called

Answer 32

\*\*\*care because can only take losses on capital assets, not ordinary assets\*\*\* * Anything except: (these are ordinary assets) - seet for the production of income * A - Accounts or notes recieveable * C - Copywrite or creative work * I - Inventory * D - Depreciable property used in a trade/business for the production of income (computer used in business is a favorite example ordinary asset) \*\*\*All ordinary assets that would result in ordinary income tax (not capital gain) if sold at a gain\*\*\*

Answer 33

Only get $3K loss, but can use against ordinary income, however, canNOT carry it forward...like you, it's gone... :(

Answer 34

* Must be federally declared disaster or you get $0! if declared disaster, then use the lower of * loss in FMV (old-new) or, * adjusted basis Subtract **$100** and then 10% of your AGI = allowable loss \*\*\*don't forget the $100\*\*\*

Answer 35

* Non-cash contributions to religious, public, and educational institutions and private operating foundations may not exceed 50% of AGI. * Long-term unrelated-use tangible property must use the lesser of basis or FMV (50% of AGI) * Ordinary income property is valued at the lesser of adjusted basis or FMV. (50% of AGI) * Charitable contributions by S corporations are a component of the net income reported on the shareholder's K–1. * If the donations in cash, the AGI limit is normally 60%, however, there is a temporary CARES Act provision in place allowing for a 100% AGI limitation for cash donations.

Answer 36

Either the basis or the FMV amount is available as a deduction, the % of AGI tells what is max amount for this year * Cash = up to 60% of AGI * STCG or unrelated use property = 50% of AGI against the lower of basis or FMV * Intangibles, related use property, real property = choice of: * 30% of AGI against the FMV * 50% of AGI against the basis can carryover up to 5 years

Answer 37

* CRAT * 5 to 50% of initial FMV of asset * for life or up to 20 term * deduction = PV of retained income interest * payouts taxed to the bene's as OI or CG * CRUT * 5 to 50% of assets - revalued annually * for life or up to 20 term * can put **MORE** contributions * deduction = PV of retained income interest * payouts taxed to the bene's as OI or CG

Answer 38

* Section 6166 (installment payments of estate taxes) - requires the closely held business interest to be more than 35% of the AGE * Section 2032A (special use valuation) requires the value of the closely held business to be at least 50% of the AGE * Section 303 (closely held stock redemption) - must be a corporation.

Answer 39

* Must have 20 full time EEs, part time counts for half * former EE pays up to 102% of cost **18 months** * termination of employment - including retiring, voluntary resignation, being laid off, and being fired for anything except gross misconduct * a change in status (e.g., full-time to part-time) * Voluntary or involuntary termination qualifies the individual for 18 months (unless fired for gross misconduct, then you and your family get nada!) **29 months** * Disability **36 months** * death * divorce or legal separation causing the spouse and/or dependent children to lose coverage * child reaching an age where the child is no longer eligible to be covered * employee reaching Medicare age, and spouse and/or dependent child losing coverage as a result.

Answer 40

Strategies * Sale via ESOP - bail out an owner of a closely held company * CRT - put the highly apprecaited in the trust, let the trust sell (tax free), then receive an income stream * Put Options - "protective puts" - like insurance - provides downside protection (often the right answer on CFP test), but allows client to remain invested and benefit from the upside * Zero Cost Collar - okay, but gives up on the upside - essentially a short straddle * Buy into an Exchange Fund - exchange your highly appreciated funds ($1M+) and buy into private partnerships

Answer 41

* CR - triggered if an executive has the ability to access the funds or if the funds are securely set aside for the executive. * EB - triggered if there is an irrevocable transfer of funds made on the executive's behalf that provides a benefit to the executive.

Answer 42

* CR - triggered if an executive has the ability to access the funds or if the funds are securely set aside for the executive * EB - triggered if there is an irrevocable transfer of funds made on the executive's behalf that provides a benefit to the executive

Answer 43

* Convertible bonds can be converted into a specified number of common shares at the option of the investor. * Sold at a premium over the price of comparable non-convertible bonds - offer a yield that is less than the yield on straight bonds with similar risk and maturities. * When stocks sell for a price that is above the conversion price, convertible bonds sell for their stock values. * Have downside risk protection because they have the advantage of bonds. * Most convertible bonds are converted. * Most are callable, and companies often call their bonds to force conversion.

Answer 44

* Sold at a premium over the price of comparable non-convertible bonds * Offer a yield that is less than the yield on straight bonds with similar risk and maturities. * Have downside risk protection because they have the advantage of bonds. * Most convertible bonds are converted. * Most are callable, and companies often call their bonds to force conversion.

Answer 45

* Conversion Value = Par/Conversion Price (or ratio) x's Market Price of Stock

Answer 46

* Bond Prices do NOT change in a liniar way * concave to the left * steeper at lower coupons * flatter at high coupons \*\*\*meaing the duration formula is not exactly right\*\*\* (+ or - a %)

Answer 47

* normalized metric of how 2 variable move together * -1 to 1 --- must be, if you don't get a number between these, re-calc! --- * (r) = rho

Answer 48

* absolute metric of how 2 variable move together * Based on standard devation and correlation coefficient * intermediate step - by itself doesn't tell you much

Answer 49

* contribution is limited to $2,000. (non tax deductable!) * qualified education expenses can be incurred for elementary, secondary, undergraduate, or graduate level education. * Coverdell Education Savings Accounts (CESAs) can be established for any child under age 18 (also contributions must stop at 19) * No taxes on qualified withdrawals * Must be half-time+ for room and board to be covered * Impacts family's abilitiy to qualify for financial aid (if parents will be over 59.5, better to invest into roth - if funds are limited e.g., $2K/year)

Answer 50

if die during the term of a CRUT, does the PV go to your estate?

Answer 51

Currently - survivor benefits ONLY (no retirement of disability!!!) * A $255 lump-sum death benefit, which is generally payable to the insured's spouse. * A widow or widower's income payable to a surviving or divorced spouse with a dependent child under the age of 16. Fully * A widow or widower's income payable to a deceased worker's spouse at age 65 or at age 50 if the widowed spouse is disabled. * Monthly retirement income of 100% of the worker's primary insurance amount at the insured's full retirement age (should have life insurance for immediate needs)

Answer 52

* prior to age of majority, custodian has all the power, even if they're not the parent * at age of majority, transfer must be initiated by the custodian (does not happen automatically, and cannot be intiated by CFP or anyone else..don't have the authority)

Answer 53

* The maximum permitted disparity, or the difference between the base contribution percentage and the excess contribution percentage, cannot exceed the lesser of the 2x's the base contribution or base contribution + 5.7% (the Social Security tax rate attributable to OASDI). * Therefore, with a base of 7% * 2x's 7% = 14% or * 7% + 5.7% = **12.7%**

Answer 54

EE - based on taxpayer - meaning deferral amount is aggregated across companies ER - based on ER (ABC Co.), may contribute up to the $58K limit, regardless or what other ER (XYZ Co.) is doing

Answer 55

* **P&C** - * Home/commerical property - multiply the ratio \*'s the loss, **THEN** subtract the deductable * usually 50% of Schedule A (dwelling) coverage for personal property * **Health -** * Pay deductable **FIRST**, then multiply by the coinsurance amount * Large claim, just look at the MOOP * Smaller claim, do the calculation

Answer 56

* max annual benefit determined by 3 highest CONSECUTIVE earnings years

Answer 57

Limited to the lesser of $230,000 (2021) or the participant's compensation averaged over the **3 highest consecutive earnings years** (do not need to be the most recent)

Answer 58

Either to be reallocated to remaining participants' accounts or applied to reduce the employer contribution \*\*\*in DB account, can only be used to reduce ER contribution (as there are no individual accounts to allocate to)\*\*\*

Answer 59

The plan must satisfy one of the following two tests * The first is the 25% test. * No more than 50% of the employer **contributions** can be used to purchase whole life insurance. * No more than 25% of the employer **contributions** can be used to purchase life insurance term or universal * The second test is the 100:1 ratio test; * For defined benefit plans, a death **benefit** cannot exceed 100 times the expected monthly benefit for the employee.

Answer 60

* Short = up to 2 year * Long = 2+ years and until certain age, usually 65

Answer 61

* Dividends are taxable to the recipient as dividend income, but can only be distributed to the extent of the corporation's current and accumulated earnings and profits

Answer 62

* participating = pay dividends (return of premium) * usually only from mutual companies, if stock company, additional earnings paid to stock holders * Types * cash - no taxes if less than basis, if \>basis, then OI * reduced premium - no taxes, just reduces payment for that year * accumulate at interest - set aside in account and earn interest (can be taxable) * paid up additions - adds to death benefit, no current taxes, paid-up so no more premiums - good if client is unhealthy and likely couldn't get other insurance * one year term - boosts death benefit for that year

Answer 63

* Establishes the amounts taxable to the beneficiaries. * if mixed between DNI and corpus, use an allocation * Limit the amount of distribution deduction that may be available to the trust. * Includes most normal income and expense items. * Capital gains are NOT included in the calculation of DNI (become additions to the corpus)

Answer 64

* S Corporations and sole-proprietorships cannot deduct any premiums for group health insurance for owners. Non-owner employee health premiums are fully deductible to both entities. * Partners are able to deduct 100% of the health insurance premium on their individual tax returns.

Answer 65

* Open market operations - buy and selling of treasuries * reserve requirement - change amount required at banks as a % of deposits * discount rate - amount charged to banks borrowing from the fed

Answer 66

1. Raise revenue 2. Economics and Growth Development (social objectives) 3. Price stability

Answer 67

* Cash Value life insurance * withdrawal = **FIFO**!!! * surrender = allocation between basis and earnings * Cash Value - MEC (fails the 7-pay test) * withdrawal or loans = **LIFO -gain taxed as OI (ouch!)** * 10% penalty if \<59.5 * surrender = allocation between basis and earnings * death benefit - standard, income tax fee * Annuity * withdrawal, loan = **LIFO - gain taxed as OI** * 10% penalty if \<59.5 * annuitization = * * allocation between basis and earnings * no EWP penatly, as taking funds over lifetime! * if live beyond premium paid, then 100% taxable (good for you, this is the idea!) * if die before recovered premium, can recover basis as misc. deduction above 2%

Answer 68

* Not included: retirement assets, personal property (cars, homes) * Included: income of parents and students, non-retirement savings & investment accounts of parents and students

Answer 69

RIA * Series 65: Uniform Registered Investment Advisor Examination. * Series 66: Uniform Combined State Law Examination. BD Rep * Series 7: General Securities Registered Representative * Series 63: Uniform Securities Agent State Law Exam * The Series 65 is the Uniform Investment Adviser Exam. The registered investment advisor may also want to sell securities in which case the Series 7 and Series 63 would also be required for regulatory compliance and registration with states which the RIA was residing and transacting business. * The Series 66 is the combination of the Series 63 and Series 65 combined into one exam.

Answer 70

\*\*\*everything passed to the owners and reflected on their tax returns/Schedule C\*\*\* * Sole Prop * General Partnership * Limited Partnership * LLC (if non-c-corp selected) * S-Corp * flow through entity * pays owner a small salary - SE tax due on this portion (just half?) * pay the balance as dividends - no SE tax

Answer 71

**Nontaxable** * deminimis (copiers, sporting tickets) * onsite athletic facilities * meals and lodging furnished for ER convenience * can target a specific group of EEs (e.g., executives) **Taxable** * stipend for off-site athletic facility

Answer 72

* if unmarried and would like to leave to children and charity * revocable trust (flexibility), and use applicable exclusion ($11.7M) for kids, and rest to charity = $0 in taxes! * if married and kids * leave IRA to husband, then marital QTIP and by-pass trust for the kids

Answer 73

## Footnote 1) Stock price (2nd price) following the date of the gift multiplied by the number of trading days between the inital trade (1st) date and the gift date 2) Stock price (1st price) directly preceding the gift date multiplied by the number of days trading days between the date of the gift and the next trading day. 3) Divided by the sum of the days before and after the date of the gift. A - Price B- Days B - Price A - Days

Answer 74

Donor's adjusted basis + [(unrealized appreciation ÷ FMV at date of gift) × gift tax paid]

Answer 75

* annual exclusion is available when a life insurance policy is transferred * a gift occurs if someone purchases a life insurance policy and designates someone else as the owner at inception * a gift occurs when the owner of a life insurance policy transfers the policy to someone else without adequate consideration * if a policy is transferred while premiums are still being paid, the gift tax value of the policy is equal to the sum of the interpolated terminal reserve and the unearned premium

Answer 76

* NO coupon, do not provide steady payments * mortgage backed securities backed by federal gov. * pass through of principle and interest * however, cash flows not steady - if interest rates go down, people refi and don't get the same upside (price apprecation) as normal bonds * same downside, less upside, so yield are higher

Answer 77

* person had a job that did NOT contribute to SS * Reduces their spousal benefits by .667% (both while alive and dead (survivorship))

Answer 78

To be nondiscriminatory = must cover 70%+ of all EEs AND at least 85% of non-key EEs

Answer 79

Up to $50K * Deductable to ER * nontaxable to EE Over $50K * Deductable to ER * **Taxable to EE (but deductable)** \*\*\*ER can always deduct 100% of the group insurance premiums they pay\*\*\* **Table I Rates - creates imputed income** **Most policies can be converted into permanent cash value policy (guaranteeed)**

Answer 80

* If leaving job, can often convert into a cash value policy, and usually without showing proof of insurability

Answer 81

* $$$ put into a trust for a single skip person is subject to GSTT, because it's a direct skip * Transfer to an irrevocable trust is a completed gift subject to gift tax * The donor is liable for any GSTT due on a direct skip (not the trust) * If donee has right to annual income from the trust, it is a present interest which qualifies for the GSTT annual exclusion.

Answer 82

* Moral - dishonesty - slamming on brakes to cause car behind to rear end

Answer 83

* HCE - used for minimum parrticpation/nondiscrimination rules - also use for group health - $50K - exclusion * $130K * \>5% owner * Top 20% test * Safe Harbor test, 70% coverage tests * Key EEs - used to determine if plan is Top Heavy * \>5 Owner (same as HCE) * Officer and $185K * 1% owner and $150K * Top Heavy = \>60% of benefits going to Key EEs

Answer 84

* A Abode * detached buildings B = 10% of A * Contents/personal property - C - Usually 50% of A * Loss of Use - D - usually 20% of A or 40% of C (same thing, just depends on what they give you) * Liability - section E * covers damages to other people at home and away * Medical to Others - section F * not based on liability, just if person is injured * Get Personal Property Floaters - jewlery, furs, guns,.

Answer 85

**like a combo of Traditional and Roth account!!!** * Above the line deduction, no FICA or F&S taxes * Catch-up provision of $1K for 55+ * max contribution - $3600 for individual; $7,200 for family * can be established by ER or EE * tax free on way out * \*\*\*can make a one-time trustee to trustee transfer from an IRA, limited by max contribution amount\*\*\* MSA * like, HSA, but for 65+ and on Medicare

Answer 86

* Immunization attempts to protect the yield of a bond portfolio from changes in interest rates. * Expected to provide a specific return over the investment time horizon. * If interest rates rise during the investment period, the capital losses are expected to be offset by the gains on reinvestment income. * Duration is equal to the investor's investment time horizon * Zeros play a big role because they don't have reinvestment risk \*\*\*attempts to manage Interest Rate Risk and Reinvestment Risk\*\*\*(for bonds, these offset each other)

Answer 87

* People are EQUALLY as happy at any point along their indifference curve * Find the point where the indifference curve and the efficient frontier touch

Answer 88

* if don't disclose cancer diagnosis, then fraud, insurer does NOT have to pay * if insured misstates age, then adjust coverage as-if age was correctly stated

Answer 89

* Aleatory - based on chance * Adhesion - take it or leave it * Unilateral - only one party is making a promise (i.e., Insurer) * Collateral source rule - just because I have insurance, doesn't mean that you don't need to pay * Estoppel - prevents company from claiming a right that they've waived * Tort * Negligence * Vicarious liability (parent to child; ER to EE) * Contributory negligence - if I'm even 1% at fault, then I can't collect anything * Comparative negligence - % at fault - split between parties (much more common)

Answer 90

* amortization period for intangibles is generally 180 months (15 years) * Other examples of Section 197 intangible assets include: goodwill, going-concern value, operating systems, patents, copyrights, formulas, and non-compete agreements.

Answer 91

* The number of relevant elements of the client's personal and financial circumstances that the Financial Advice may affect * The portion and amount of the client's Financial Assets that the Financial Advice may affect * The length of time the client's personal and financial circumstances may be affected by the Financial Advice * The effect on the client's overall exposure to risk if the client implements the Financial Advice * The barriers to modifying the actions taken to implement the Financial Advice

Answer 92

* Investment Grade = High or Medium Grade = must have an "a" in it, either all A's or B's with at least 1 A * Main Graders: * Standards and Poors * Fitch * Moody's

Answer 93

* Best Efforts - the investment bank incurs zero risk * Private Placement - no more than 35 non-accredited investors may participate * Standby Underwriting - the underwriters purchase securities remaining after the initial offering at a predetermined price * Firm Commitment - all risk is shifted to the underwriter

Answer 94

**4D IRS Child's Meal at Home** * Death * Disability * Divorce * Disaster * **Insurance premiums for unemployeed (IRA Only)** * Reservist * Substantially equal paymetns child - $5K for birth of child - each parent * Medical expenses \>7.5% * **Education (IRA Only)** * Annuitized Payments * Levied by IRS **Home - first time (wtihin 2 years) home buyer, up to $10K (IRA Only)** 59.5

Answer 95

* non-deductable contribution creates basis * create an allocation, and each distribution a part return of basis (no tax) and part gain (taxed)

Answer 96

* If death of the IRA owner occurs after the required beginning date, then longer of: * The deceased owner's remaining life expectancy reduced by one each year * The eligible designated beneficiary's remaining life expectancy reduced by one each year * Eligible designated beneficiary = not more than 10 years younger than the deceased owner.

Answer 97

* Cannot leave the money in his father's IRA to accumulate * May receiving the entire amount as a lump-sum distribution * Or over a 10-year payout of the balance * If he does not clean out the account earlier, the entire account balance must be distributed by December 31 of the year containing the 10th anniversary of parent's death * This is because a son who is older that the state-set age of majority is not an eligible designated beneficiary according to the SECURE Act.

Answer 98

* designed to tie the interests of the executive to the company * great if the company is short on cash, and stock is hot...Tesla! * Grant - no tax at grant (must be at the current FMV of the stock) * Exericse - no tax at exercise, must be 1 year+ from the grant date (difference btw Grant and Exercise is called the bargin element) * bargin element at exercise is a positive AMT adjustment (preference item) * Sale - must be 2+ years from the grant date **AND** 1 year from exercise = qualified sale if meet qualified sale, then gain above grant prices is considered LTCG if they don't meet either or both timeframes, then OI for the bargin element and capital gain (long or short) for the FMV less the excise price

Answer 99

ISO * May be granted only to employees, usually executives * Employee cannot transfer ISOs during the employee's lifetime. ISOs can be transferred only at death. * cannot exceed 10 years * favorable tax treatment NQSO * More rank and file * May be granted to employees, independent contractors, family members of the employee or independent contractor, or any other beneficiary * May be gifted to an individual or charity during the owner's life or at the death of the owner.

Answer 100

* only for the top EEs - like the CEO * ER buys it (not deductable, and is the beneficiary * not about the EE....other than thier life

Answer 101

* Company is the owner and beneficary, thus... * premiums are NOT deductible as a business expense, and any benefit paid will NOT be taxable to the company

Answer 102

* The interest-adjusted method considers the time value of money. * The net payment cost index method measures the relative net payment of a policy for a given term, assuming no surrender of the policy. * The net cost method is the most basic method; however, this method does not consider the time value of money.

Answer 103

* When a beneficiary receives the death benefit from a life insurance policy funded within a qualified plan = **not ALL tax free** * The taxable portion equals the cash surrender value ($60,000) minus any costs included in the participant's income during the participant's life ($25,000) * So taxable amount is $35K

Answer 104

* Human Life Value - how much the person would have made over their lifetime, based on current income, age, etc. * computer program - usual way * LIFE * Liabilities (mortgage, debts) * Income replacement (see below) * Final Expenses (emergency fund, funeral) * Education * Capital Retention - Income / Interest Rate (inflation adjusted) - leaves amount at the end * Capital Utililization - TMV - define how much income needed and then solve for PV, nothing left over

Answer 105

* **Automatic premium** loan provision provides that the premium will automatically be charged against the policy cash value if it is not paid by the due date. * **Reinstatement provisi**on allows a policyholder to reinstate a policy after it lapses, but **only if the insured can prove insurability** * **Nonforfeiture** provision specifies what will happen to the cash value if the policyowner discontinues premium payments * **Incontestability** provision prevents the insurer from challenging the validity of a policy after it has been in force for a specific period.

Answer 106

* opposite side of the same coin (protection) * Life - needed in case you die to soon ("win" by dying young - small premium and large payout) * Annuity - needed in case you live too long ("win" by living a long time - get back more premium than you put in) you can't win both ;)

Answer 107

* \<10K = vested balance (which can be up to 100% of balance) * 10k to 20k = 10K (which can be more than 50% of balance) * 20k to 100k = 50% of vested balance * 100K+ = 50K * repaid within 5 years, unless home, then usually 10 years * level quarterly payments at a reasonable interest rate

Answer 108

* tax deductable to ER * NOT taxable income to the EE

Answer 109

* must be guaranteed renewable (HIPAA qualification) * must not have a cash value.(HIPAA qualification) * must conform to NAIC LTCI model regulation * cannot pay for expenses reimbursable under Medicare * there is no elmination period * must offer inflation protection. * should be recommended starting at age 50+ * insured age dictates how much of their premum may be deductable as an itemized amount * people generally don't let lapse

Answer 110

- mostly custodial, meaning not getting better, Medicare doesn't do much - usually paid by Medicaid, but this is welfare, must have used most of your assets * Home * Respite - gives primary care giver a break * Custodial - non-medical supervisory care * Intermediate - some nursing care * Skilled Nursing Care - highest level 24 hours a day - nurse and doctor * Hospice - final days

Answer 111

* If you're long a commodity, then you wan a short hedge, which is a transaction involving the sale of futures (creates a short position) * If you're short a commdity, then you want a long hedge, which is a transaction involving the purchasing of a futures contract long position)

Answer 112

**Personalty** * Bonus depreciation - 100% in year 1 * MACRS table -200% declining balance with half-year convention (only get half in first year, half in last year, so 5-year property actually takes 6 years) * straight line - still available, only makes sense if in a higher tax bracket in later years * Section 179 - $1.05M in year one (but not needed with bonus depreciation in play) **Realty - always use straight line** * residential - 27.5 years * nonresidential - 39 years **Intangible** * Section 197 - amortized over 15 years (180 months) **Depletion** * Natural reources (e.g. oil and gas, gold)

Answer 113

* Market Risk = Market Return - Risk Free Rate (part of CAPM calc) * Stock Risk Premium = Market Risk \* Beta

Answer 114

* Benefit pays the entire cost of the first 20 days * Partial coverage between Day 21 and 100 * After 100 days - the patient must pay the entire cost \*\*\*skilled care only - nurse, doctor, 24/7 monitoring - big deal\*\*\*

Answer 115

* A - hospital statys * 40 quarters for SS, then no premium! * deductable and co-pays * B - physicians, outpatient * does have a premium (comes out of SS check) * co-insurance =20% * D - prescription drugs * dougnut hole * C - Medicare Advantage (new plan) * combines A, B, and D * similar to pre-65 managed care * not available in all areas \*\*\*once enrolled, can no longer contribute to an HSA\*\*\*

Answer 116

* alternative to Medicare Advantage plans * fills in the gaps to various degrees * A through N

Answer 117

Only for business depreciation of Personal Property * must be used if more than 40% of the property was placed in service during the last quarter of the year

Answer 118

* Used if more than 40% of the property is placed in service in the last quarter of the year

Answer 119

**Step 1: Compute the value of each future dividend until the growth rate stabilizes (Years 1-3).** D1 = $0.7600 × 1.035 = $0.7866 D2 = $0.7866 × 1.035 = $0.8141 D3 = $0.8141 × 1.035 = $0.8426 **Step 2: Use the constant growth dividend discount model to calculate the remaining intrinsic value of the stock at the beginning of the year when the dividend growth rate stabilizes (Year 4).** D4 = $0.8426 × 1.02 = $0.8595 V = $0.8595 ÷ (0.07 − 0.02) = $17.1896 **Step 3: Use the uneven cash flow method to solve for the net present (intrinsi value of the stock.** CF0 = 0 CF1 = 0.7866 CF2 = 0.8141 CF3 = 0.8426 + 17.1896 = 18.0322 I/YR = 7% Solve for NPV = 16.1659, or $16.17 (rounded)

Answer 120

* bid is usually equal to its NAV * shareholder vote by proxy * 12b-1 fees max of 1%

Answer 121

Nominal Return - Consumer Price Index = Real Return

Answer 122

* agreement to defer must be in place BEFORE money is earned * represents an UNFUNDED promise * there must be a SUBSTANTIAL RISK OF FORFEITURE * if EE dies, funds are paid to the estate and taxed * EE's pay FICA and Income tax when distribution occurs * 409a requirements - if fail this test, lots of penalties Unfunded: * promised to pay, very little security for EE * Top Hat plan - 457b Informally Funded * funds actually set aside - Rabbit trust, corporate owned life insurance (no deduction for premiums) * available to creditors Funded Plans * assets are set aside - secular trust * results in current taxation * beyond the reach of creditors * good if EE thinks tax rates will be higher in retirement (kind of like a Roth)

Answer 123

* when NPV is $0 or greater! * as even at $0 it provides the return that the investor is seeking

Answer 124

Needed because executives are making above the 415 limits (make defined benefit of $230K, DC limit is $58K) **Elective Deferral** - EE defers current income (what I do) **Supplemental** * ER funded - Excess Benefit - makes up the difference between 415 limit and 25% of salary * Supplemental (SERP) - golden handcuffs/top hats - benefits paid over a long time period, but very lucrative

Answer 125

* Straddle = buy a call and a put - benefits if price moves dramatically from current price * Short Straddle = write a call and a put - benefits if price is stable, allowing investor to keep the premiums * Protective Put - If own stock and want to protect profits = buy protective puts ~current market price * Allows upside participation via the stock if prices rise * Protects downside by allowing investor to put stock if price falls

Answer 126

* Capital losses are the result of a transaction, and are subject to limitations * Ordinary losses result from something other than a transation (like what? theft? fire)

Answer 127

* Over = too much to spouse * created by "i luv u" will or everything JTWROS - everything to spouse * Under = too little to spouse * too much in a b-trust that the spouse doesn't have anything to live off of

Answer 128

* Cannot claim losses in excess of your basis, even if active particiant

Answer 129

* Suspended due to at risk = how much is at-risk/invested * supended due to passive activity = must have income to offset against...otherwise, loss must be suspended * can always get it out at the end, with the sale of the asset \*\*\*every PIG needs a PAL\*\*\* Passive Income Generator (PIG) Passive Activity Loss (PAL)

Answer 130

* Not needs based * Must be **FULL** time student * unlimited amount, but no more than the cost of schooling it's a PLUS to have wealthy parents

Answer 131

mode \< median \< mean

Answer 132

1) calculate the multiplier = Price/Earnings 2) calculate dividend increase = current x's increase rate 3) multiply new dividend by multiplier

Answer 133

* Issued by municipalities to provide local industries with funds. * Derive their debt service only from their revenues and do not depend upon the issuing municipality * More than 10% of the proceeds are used for private business use * Interest is an AMT preference item

Answer 134

* plan cannot make loans to parties of interest (owners, fiduciaries) * limited amount of company securities * penalty of 15% when discovered * plan needs to put back into the shape it was before the prohibited transaction occured

Answer 135

* each unto it's own! (must be looked at individually) - they are stand alone entities * trade on exchanges and OTC \*\*\*NPTP (Non-Publicly Trader Partnership) or Private Placements = can be used to offset against other passive income\*\*\*

Answer 136

* QDOT would only be appropriate when the surviving spouse is not a U.S. citizen. * At least one trustee of the QDOT must be a U.S. citizen or U.S. corporation * Type of marital trust where all income must be distributed to the surviving non-U.S.-citizen spouse each year * QDOT treatment can be elected by the executor of the decedent's estate. * can be an election on 706 \*\*\*like a QTIP, but for a non-citizen spouse\*\*\*

Answer 137

* Applys to all pension plans * rights can't be waived without the spouses notorized permission * QPSA - no benefit until the age at which the worker would have begun recieving benefits (should have life insurance) *

Answer 138

* can be used to avoid 2 probates is couple dies in close proximity (like within 6 months of each other)

Answer 139

* They must be in writing. * The disclaiming party cannot have previously benefited from the interest being disclaimed. * They generally must be made within **9 months** of the creation of the interest. * The disclaiming party cannot direct the disclaiming interest to other parties.

Answer 140

5-year holding period + * Death * Age (59.5) * First Time Home – up to $10k * Disability Remember: Denver Area Fire Department

Answer 141

* Holding period is more than 60 days in the 121 days surrounding the ex-dividend date. * If not met, ordinary income tax rates apply

Answer 142

* With a QPRT, the grantor must survive the trust term to realize any estate tax savings. * After the trust term, the house goes to the beneficaries * The grantor makes a taxable gift upon the creation of the QPRT, although the gift is usually small. * If the grantor dies during the trust term, the entire value of trust property is included in the grantor's gross estate. This is true of most grantor retained trusts. * \*\*\*GRATs and GRUTs are remarkable because the value in the gross estate is only the value of the remaining payments. All other donor-retained trusts include the entire value of the trust property if the donor dies while the trust is in effect.\*\*\* * The taxable gift will be based on the fair market value of the house (on the date of transfer) less the present value of the right to live in the house. * Vacation homes are often transferred to QPRTs.

Answer 143

Must meet * coverage ratios tests (70% of non-HCE (safe harbor), ratio test, or benefits test) - HCE vs. non-HCE * contribution and benefits limitations (section 415) * vesting requirments (graded and cliff) **Coverage tests** * need to understand HCE ($130K, \>5%, top 20%) * 70% covered by: Percentage Test, Ratio Test, and Avg. benfits test * DB: 50/40 test - people before percentage Plan becomes top heavy based on too much benefit going to Key EEs: * Key EEs = ($185K+, \>5%, 1% and officer) * More than 60% of benefits/contributions (assets) go to Key EEs * DB - accelerated vesting and 2% per year requirement * DC - no change to vesting; but at least 3% non-elective contribution to little guys per year

Answer 144

* Real estate returns are not highly correlated with stock and bond returns * Real estate can act as an inflation hedge, unlike traditional assets * Properties are heterogeneous, not homogeneous, increasing the complexity of real estate risk analysis. * Real estate is not easily divisible.

Answer 145

* Individuals or MFJ can deduct up to $25,000 of rental real estate losses against active and portfolio income * However, 2 tests must be met to qualify for this exception. * One test is active/material participation in the activity * Ownership of 10% or more (in value) of all interests in the activity during the taxable year * In addition, the $25,000 offset allowance is reduced by 50% of AGI in excess of $100,000 with a complete phaseout at $150,000 AGI. * If MFS - then max of $12.5K, and phased out between $50K and $75K

Answer 146

Realized Amount = stock sale amount, less commissions (seems wierd not to back out basis...) Recognized = realized amount, less amount paid (including commissions) \*\*\*commissions are included for realized and recognized calculations\*\*\*

Answer 147

* Use annual exclusion * Pay gift taxes 3 years before death * use basic trusts with crummey powers * use ILIT for insurance * use applicable exclusion amounts (e.g., use the whole exemption and fund a GSTT trust - this gets $$$ to second generation, which is the challenge for many HNW clients) * use charitable deductions - there's a benefit to you \*\*\*estate tax due 9 months after death...really not long for a big estate\*\*\*

Answer 148

* Increases basis in mututal funds (even though not cash dividends like life insurance)

Answer 149

* Personal Use - no more that the lessor of 14 days or 10% of rented days * Allocate expenses between personal and rental use % * $25K deduction against other income (MFJ and SF), up to $100K AGI, above reduced $1 for $2, until phased out at $150K AGI * Can take a loss and carry over (if high income, likely won't capture until sold)

Answer 150

* Rented less than 15 days * All revenue is excluded from tax payer's taxable income

Answer 151

Mixed * Expenses allocated between rental use and personal use * Only deductible to the extent of rental income received (that is, the taxpayer cannot claim a loss) * can deduct mortgage interest and state taxes as itemized ductions * Losses may NOT be carried forward they are lost

Answer 152

* used when grandchildren (subject to GSTT) are beneficaries * takes advantage of GSTT exemption for first spouse to die * Marital deduction is NOT lost

Answer 153

1. A majority vote of the shareholders 2. fails to meet the requirements of a small business corporation. 3. When more than 25% of gross receipts for 3 successive years come from certain types of passive income and the corporation has accumulated earnings and profits from its operations prior to the S election

Answer 154

* Static risk includes losses caused by earthquakes and floods. * dynamic risk - related to the economy (inflation, market) * Speculative risk involves the chance of loss or gain (insurance tries to prevent) * Pure risk - only the opportuinty for loss = insurance * Fundamental risk affects a large group of people * Particular risk is personal and individual risk

Answer 155

**Trigger Dates** * Trigger in the year you turn 72 (can be delayed if still working and you own \<5% of the company) * But initial distribution doesn't need to be **until 4/1** of the next year (age 73) * However, still need to take the year 73 RMD by 12/31 of 73rd year **Table 3, 2, 1** * 3 - standard table (uniform lifetime table) * 2 - if spouse \>10 years younger (Joint Life and last Survivor Expectancy) * 1 - after account owner dies (???)

Answer 156

Qualified * 59.5, Death, Disability \*\*\*no first time home buyer\*\*\* * Distribution allocated between basis and earnings Can this happen while still employed?

Answer 157

How to take out- Avoid taxes and 10% penalty = 5 years + Death, Age, First Time Home Buyer, or Disability if neither of the above, then- * Contribution (no tax, no penalty) * Conversions (no tax, EWP) * Earnings (income tax and penalty) Roth and education, use in the junior and senior year, otherwise looks like income for the student \*\*\*can always use the higher education exclusion to avoid the 10% EWP on conversion and earnings, but income tax on earnings would still be due\*\*\*

Answer 158

* Taxed at vesting - Federal, State and FICA * can make the 83b

Answer 159

* The S corporation business form avoids double taxation! In a traditional corporation, the shareholders are paid dividends, which are taxed twice (once to the corporation and once to the shareholder). In the S corporation, the earnings are not taxable to the corporation and the shareholder's receipt of the earnings is only taxed once.

Answer 160

* The S corporation business form **avoids double taxation** * Commonly used for retirement purposes, allowing the retiree to draw a salary and avoid double taxation. * Also a useful tool when transferring income to a lower income family member because making the family member a stockholder allows items of income and expense to be transferred to the family member stockholder on the K-1. * Pass-through entity - **no expenses are deductible by the corporation** as it furnishes K-1s to the shareholders who then report items of revenue and expense on their personal income tax returns. * Partners, proprietors, and g**reater than 2% S corporation owners are not considered employees and are ineligible for fringe benefits** (e.g., the employer paid group term life insurance of $50,000) * LIFO recapture tax applies only to S corporations * flow-through is not considered self employment income * extentions must be filed by 3/15, and SEP contributions can be made up until the extention deadline

Answer 161

Rules Avoided: * ADP test. (actual defferal) * ACP test. (actual contribution) * Top-heavy rules. However are subject to coverage tests/general nondiscrimination rules Contribiutions - 2 ways: (100% immediate vesting) * Dollar-for-dollar matching on elective contributions, up to 3% of compensation, and a 50% match on the next 2% of compensation; max ER contribution of 4% * A nonelective contribution of 3% of compensation for everyone

Answer 162

* Eliminated when SIMPLEs were introduced * Grandfathered plans allowed, can add new participants * Deferals - federal income tax deferred, but subject to FICA and FUTA

Answer 163

* Applies only to stock issued after August 10, 1993. * **Must be held 5 years to be excluded from taxable income** * The capital gains rate on Section 1202 stock is 28% * Depending on the date of acquisition, 50%, 75%, or 100% of the gain may be excluded. * 8/10/93 to 2/18/09 - 50% exclusion * 2/18/09 – 9/27/10 exclude up to 75% * After 9/27/10 - 100% excluded * also excluded from AMT

Answer 164

* Section 1231 assets are certain assets used in a taxpayer's trade or business that are held for the long-term. * Assets include depreciable tangible and intangible personal property, real property, timber, certain livestock, and unharvested crops. * Not included: inventory, copyrights and property held for sale to customers.

Answer 165

* always at 25%, even if the client's marginal tax rate is higher or lower (??? - not sure this is right)

Answer 166

* $1.05M in immediate taxable dedutcion * can only be used against **current income**, then rest of expense can be carried over * can be used for depreciatable tangible capital assets (e.g, machinery, computers) * phase out starts at **$2.62M** - dollar for dollar

Answer 167

* Not a qualified plan - it's a deferred comp plan * May be established by governmental units or agencies and nonchurch-controlled, tax-exempt organizations * have special catch-up rules - contribution limit is **doubled** in the 3 years prior to the plan's normal retirement age ($19.5K x's 2 = $39K) * **Not subject to an early withdrawal penalty**

Answer 168

* 7.65% (6.2% OASDI and 1.45% HI) * 15.3% = 2x's for Self Employed Short cut to calculate (if below wage base $142.8K) Net Earnings \* .9235 (reduces earning by 7.65%) = Wage Base Wage Base \* 15.3% (SS amount for Self Employed) = SE Tax Super short cut = net earning \* 18.6%

Answer 169

* Tax advantage, but not qualified/ERISA plan (like IRA) * ER contributions only - but discretionary (big advantage to ER) - i.e., no fixed formula, unlike SIMPLEs * Contribution limit = 25% of salary (limited by includable comp of $290K) or $58K * Participants are 100% vested and nonforfeitable - self-directed * Participants cannot take loans from the plan (like IRA) * Can be integrated with Social Security. * Eligibility: 21+, $650 this year, and worked for 3 of last 5 years, no hours minimum (If high turnover, works well for ER) * ER - fully deductable at time of contribution - no payroll taxes charged * EE - like IRA distribution - ordinary income

Answer 170

* Sharpe = Total Risk - based on SD * Treynor = systemic/market risk adjust measure based on Beta

Answer 171

* Qualified plan under ERISA, because it uses the 401K vehicle (unlike SIMPLE IRA) * \<100 EEs earning at least $5K (low overhead to run) * EEs must have earned \>$5k in any 2 preceding year, and expected to earn $5K this year * No other plans, except the 457 plan * Can NOT make after tax contributions - i.e., this isn't a Roth! * EE deferral of $13.5k * 10% EWP - NOT the 25% penalty applies only to SIMPLE IRAs * Avoids ADP/ACP and top heavy rules * ER contributions - no vest schedule, always 100% vested * matching of 3% of comp - **cannot** reduce the matching percentage to below 3%. (unlike SIMPLE IRAs) or... * non-elective of 2% for all EEs

Answer 172

* No more than 100 EEs, must earn \>$5K * No non discrimiation or top-heavy rules * Contributions from EE ($13.5k, with $3K catch-up), and mandatory from ER * Mandatory = match (up to 3%, with no comp limit/effectively $450k) or non-elective (2% of comp up to $290K) * Match can be reduced to 1% in 2 out of 5 years \*\*\*flexibility not available in SIMPLE 401k, which is why most $$$ is in Simple IRAs\*\*\* * Can take a distribution from a SIMPLE IRA at any time without separating from service - but EWP and OI apply * 100% immediate vesting of employer contributions * Cannot be rolled into a traditional IRA until the participant has been in the SIMPLE IRA for 2 years. * 25% EWP (not 10%) for withdrawals occurring within the first 2 years of participation * Cannot be integrated with Social Security * EE - no income tax but does pay FICA and FUTA * ER - gets out of income taxes and FICA and FUTA!!! * like all IRAs - no insurance!

Answer 173

* To be effective, a self-canceling installment note must reflect a risk premium to compensate the seller for the possibility of cancellation. * A seller who accepts a self-canceling installment note **MAY** require security for the note without jeopardizing the estate planning advantages of the SCIN. * At the seller's death, the present value of any remaining self-canceling installment note balance is **EXCLUDED** from the seller's gross estate. * A self-canceling installment note is a debt that ordinarily is extinguished at the seller's death.

Answer 174

* related person 2 or more generations below the donor (e.g., Grandchild) * Trust - when all bene's are 2 or more generations below donor (i.e., a skip trust) * unrelated person younger by donor by 37.5 years or more

Answer 175

The security market line (SML) shows the relationship between the rate of return and systematic risk (beta). Thus, the SML depicts a security's expected return as a function of its systematic risk.

Answer 176

* **5/9th** times number of months up to 36 early * **5/12th** time numbers of month earlier than 36 so if taking 20 months early, just multiply 5/9 x's 20 = 11.11 (reduction) vs. his PIA * if late, **8/12** per month up to age 70

Answer 177

* 8/12 for each month, up to 70 * so get get up to 24% extra

Answer 178

* Need 6 of the last 13 credits * **If, \>31 = 20 of the last 40 quarters** * **\*\*\*also meet the definition of disability =** * Me = 100% * Spouse 50% for FRA, 35% at 62, 0% at 60 * umarried child \<18, 19 if in High School, or disabled before 22 = 50% * spouse with disabled child = 50% * parents - nada

Answer 179

* be **FULLY** insured, not just Currently * Meet a 5-month waiting period * **Unable to work in "ANY OCC" - occupation** * not due to alcohol or drug addiction * **Disability expected to last at least 12 months or result in death** * **\*\*\*if between 31 and 42, then need 20 of the last 40 credits\*\***\*

Answer 180

* Provisional Income- MAGI = AGI + Tax-Exempt Income + 1/2 of SS benefits Below 50% threshold, not taxable 50% Taxable (between 50% and 85% thresholds) * Single - $25K * MFJ - 32K **85% Taxable (if greater than the thresholds, then 85% taxable) - Know this number 85%** * Single - $34K * **MFJ - 44K**

Answer 181

* Most qualified plans and SEP plans --- **ESOP:, SIMPLEs and SARSEPs cannot use integration!!! - 401K profit sharing portion only** * Stops at wage threshold - $142.8K - integration level * Methods: * Excess - DC & DB plans (most likley to test DC) * offset - DB only * Excess: **_lessor_** of * 2x's the base * base +5.7% (permitted disparity) * Offset * 75 bps (max amount) for up to 35 number of years of service * 26.25% (max disparity) * if use lower integration level, maximum allowed disparity becomes less

Answer 182

In order of authority * IRC - the code * regulations * revenue rulings * private letters - individual * Notices * announcements

Answer 183

* the employer owns the policy and is primarily responsible to the insurance company for paying the entire premium. * If EE dies while employeed, the ER get back the premium paid and the remainder of the death benfits goes the EE's beneficiary.

Answer 184

* Spousal benefits = need to be married for \>12months (with a spouse who is recieving benefits) * Widow benefits = being a widow or widow, but remarried after 60 * Parent benefits = if receiving \>50% support from child and child dies * Divorced benefits = terminate when remarried * If disabled child = continue forever, unless marries and able-bodied person

Answer 185

* 62 - earn \>$18K before reduction, then $1 reduction for every $2 above limit * Year you get to FRA (67), earn \>$50K, then $1 reduction for every $3 above limit * No reduction after getting to FRA

Answer 186

**Fully** * Me = nope - dead * Spouse 100% for FRA, 83% at 62, 72% at 60 * umarried child \<18, 19 if in High School, or disabled before 22 = 75% * spouse with disabled child = 75% * parents - 75% * divorced spouse = same as spouse **Currently** * child \<18 = 75% * spouse caring for a child = 75%

Answer 187

**Currently** * lump sum death benefit of $255 * A surviving spouse caring for a child under the age of 16. * Unmarried children under the age of 18 who are dependents. * Unmarried disabled children who became disabled before age 22. (???) **Fully** * An unmarried surviving divorced spouse age 50 or over, with no children who was married to the decedent/worker for over 10 years and who is disabled. * parent benefit for parent who are over 62

Answer 188

* **Seed financing** - early-stage business funding for the purpose of research and development of an idea? * **Start-up financin**g is for product development and marketing for firms who have not sold products or services commercially. * **First-stage** financing is for initial manufacturing and sales. * **Bridge** financing is for firms that expect to go public within approximately 1 year.

Answer 189

* if based on injury or sickness, then all proceeds are income tax free * however, creditors can make claims against these assets * once established, cannot be changed - i.e., no flexibility

Answer 190

* P - purchasing power - impact of inflation - no matter how many bonds you have still impact - equities offset * R - reinvestment risk - next coupon, can't be invested at the same rate (elimiated by owning zeros) * I - interest rate - moves all bond prices up or down, impacts overall economy * M - Market risk - any given day can go up or down - one stock or 5000 - still impacted * E - exchange rate - foregin currency

Answer 191

If AGI * 100% of prior year's liability * 90% of current year liability If AGI \>$150K, lessor of: * 110% of prior year's liability * 90% of current year's liability 25% of estimated payment due each quarter

Answer 192

* correspondence - get a letter in the mail generated by a computer, based on being flagged - usually forgotten income - minor * office - request to appear at the local IRS office, you don't go, send a knowledgeable representative (EA, CPA, attorneys) **\*\*\*not CFPs\*\*\*** * field - agents actually show up at your office - big deal

Answer 193

Avoidance * mini bonds - avoid state and federal tax * treasuries - avoid state tax * deferral of taxable income (retirement) * use of deductions and credits Evasion - illegal!

Answer 194

* Fraud - no statue of limitations * Not required to file if under standard deduction, but you should anyway (in case you get audited at some later date) * Small Businesses - file by 3/15 (flow through) * FTF - Failure to File = 5% per month up to 25% (IRS does not like at all!) * FTP - Failure to Pay = .5% (IRS understands if it's going to take you a while to come up with the $$$) * If both, max is 5%/month, up to 25% * Frivolous return = $5K * Negligence = 20% of underpayment * Civil fraud = 75% of underpayment

Answer 195

Value to the Client: * Itemized Decuctions = amount \* marginal tax rate * Short Term Capital Loss = amount \* marginal tax rate * Credit = amount \* **100% \*\*\*often most valuable\*\*\*** **\*\*\*Credit to equvilant Itemized = Credit Amount / Marginal Rate\*\*\***

Answer 196

* Direct Skip during donor lifetime = donor pays taxes * Termination - trust terminates and only bene's are skip people * trust with non-skip and skip people * termination occurs with non-skip person dies * triggers GSTT paid by the trust * Distributions - trust distribution to a skip person * trust with non-skip and skip people * trustee makes a distribution to both people * trigger GSTT paid by skip person (grandson)

Answer 197

1. CD - interest taxable each year (no change in basis = no cap gains) 2. Blue-chip taxed at favorable capital gains rates (15%) 3. U.S. savings bonds - appreciation taxed at ordinary income tax rates for federal income tax purposes. However, savings bonds are not subject to state income taxes. 4. Traditional IRA (with nondeductable contributions)/ROTH = only the appreciation 5. 401(k) plan = the entire amount would be taxed at both federal and state ordinary income tax rates

Answer 198

* 2% misc. deductions, including attorney fees, unrembursed casualty losses,

Answer 199

* Generally aren't "gotcha" questions, usually testing is straight-forward and they're looking to test "main points" about an topic (e.g., pension plans aren't flexible from ER perspective) * meaning often go for the more obvious answer - but not necessarily the most simply worded (somethings that is a catch) * RTFQ - especially the last sentence, are they asking for taxable amount, or exclusion amount; absolute gain or taxable gain * Concepts * ask the client questions/slow down - don't jump to action * only engage outside professionals (CPA) with permission * remember who the client is, don't work with children * Options - choose simple strategies, don't leave client exposed for a few points * choose the more general answers * Select more traditional answers, like selling stock vs. art work (too many variable)

Answer 200

* Pay a fixed rate of interest * But **principal is adjusted** based on CPI * so inflation adjusted at maturity value, but NOT during the bonds lifetime * if there's an inflation assumption in the problem, **add this to the yield**

Answer 201

* Providing more than 60% of the plan benefits to Key Employees * Both DC and DB can be top heavy * DC required to contribute at least 3% of each nonkey employee's compensation, unless the contribution for key employees is less than 3%, in which an **equal** percentage for all participants may be used. * DB require employers to contribute at least 2% of average compensation times each employee's years of service, up to 20%. Average compensation used for this test, generally, is based upon an employee's highest three years of compensation. * Top-heavy defined benefit pension plans must use accelerated vesting schedules (which is the standard for DC plans)

Answer 202

Definition = \>60% of benefits go to **key EEs** * DB plan - based on accrued benefits * DC plan - based on assets in plan Accelerated Vesting Schedule * DB plan - use DC vesting schedule * DCplan = same schedule as always 3 - 2-6 Minimum funding * DB - minimum formula = at least **2% per year** of service in benefit * DC - **3% qualified non-elective** contribution to Non-Key EEs (if ER willing to do this, adds a lot of flexibility to plan structure) If in doubt, go 2% (DB) and 3% (DC) also, in DC SIMPLEs 2% nonelective and 3% matching

Answer 203

* Creates a basis in the account, basis is tax fee, but non-deductable contributions and earnings are taxed as OI * withdrawals are based on an allocation between basis and earnings, meaning each withdrawal is a blend

Answer 204

* 30 days - get baby needs to get covered by group health plan (super important if NICU) * 16 - last year that can get survior disability for mom * 18 - last year for contribution to a CESA * 18 or 21 - age of majority - UTMA/UGMA/2503c - release funds! * 24 - last year to be claimed as a dependent, if in school * 26 years - when kids get removed from parents insurance (with COBRA can go to 29 years!) * 55 years - $1K catch-up for HSA starts; withdrawal from 401k after separation from service * 59.5 years - begin distributions from retirement accounts, annuities, life insurance, ??? * 60 years - age divorced spouse must atain as unmarried to recieve benefits * 62 years - eligible for SS * 65 years - eligible for Medicare * 67 years FRA - SS at full benefits * 85 years - when distribuions from QLAC must start

Answer 205

* Employer securities purchased by an ESOP with borrowed funds do not give rise to UBTI, because this is a specific exception to the UBTI rules. * Dividends, interest, and royalties are also excluded from the calculation of UBTI.

Answer 206

* Applies to transactions conducted by a qualifed plan trust * Any investment which is purchased with "leverage" or borrowed funds generate UBTI (capital gains), except for a qualifying ESOP or LESOP. * Any business enterprise run by a qualified plan is subject to UBTI. (e.g., installing vending machines) or direct investment in a business generates income which is UBTI. * NOT subject: * Statutory exemption for rental income (e.g., renting raw land, buying apartment complex) * Dividends, royalties,

Answer 207

* At death, * if payable to owner, then NOT included in gross estate or probate estate - as payments cease? * if payable to spouse/other bene, then * included in gross and probate estate * Considered IRD (income in respect of a decedent) * no step-up in basis

Answer 208

* will offer guranateed minimum death benefit, but not minimum cash value (that's the variable part)\_

Answer 209

Must pay SE taxes: * Sole Prop - Yes! * General Partnership - Yes! * Limited Partnership (no for the LPs, but yes for the GP?) * LLC - chooses how they're taxed, so follow the base entity If they file a Schedule C - then yes! Do NOT pay SE taxes, canot have Keoghs! * C Corp * S Corp

Answer 210

Any plan allowed to integrate with SS, so all plans except ESOP, SIMPLE, and SARSEPs Offset method is only allowed forDB plans Excess method allows for DC and DB

Answer 211

* When surrendering or discontinuing premium payments on a whole life insurance policy, options: * Surrender for the **cash value** (most often used) * Leaves cash value with the company and receive a **smaller amount of fully paid-up insurance**/single premium permanent * Leaves the cash value with the insurance company in exchange for retaining the **full value term** insurance policy for a guaranteed period

Answer 212

* not issued by treasury, instead, created by corporations * creates "phantom" income * imputed interest amount is taxed annually (meaning does not accumulate until sold) * Bond may be called

Answer 213

* made at least annually * Over the life expectancy of the owner or the owner and **a beneficary (like spouse)** * For a qualified plan (e.g., 401K) or 403b - participant must have separated from service * payment must continue for the great of 5 years or until age 59.5

Answer 214

* Amortizatized payments - must be over 5+ years or until owner reaches 59.5 - **whichever is longer!** * Over the life expectancy of the owner or the owner **and a beneficary (like spouse)** * Can be done from qualified or tax-advantaged plans - not from pension plans * For tax advantated plans separation from service **NOT** required * But for qualified plans (e.g., 401K) or 403b - participant **MUST** have separated from service * Payments made at least annually * Reminder: avoids 10% EWP, but **still income taxed**, if appropirate

Answer 215

* Express - what they are allowed to do by the principal * Implied - stuff the agents needs to do their job, but not expressed * Apparent/ostensible - what the insured thinks the agent can do based on surrouding (what can get you trouble)

Answer 216

* Preferences - always positive (IRS would 'prefer to tax') * % depletion of oil and gas in excess of basis * tax exempt interest on private activity bonds (except 2009 & 2010) * exclusion of gain on sale of QSBS - qualifed small buisness stock (1202) * Adjustments - positive or negative * std. deduction (only if used, vs. itemization) * itemized deduction: property and state taxes * medical expenses in excess of 7.5% * Business depreciation (e.g., depletion) * **ISOs - Bargin Element \*\*\*most tested\*\*\*** **Regular Taxable Income** **+ Positive AMT adjustments** **- Negative AMT adjustements** **_+ Tax Preferences_** **= AMTI (Alternative Minimum Taxable Income)** - AMT Exemption = Minimum tax base x AMT Rate = Tentative AMT - Regular Income Tax = AMT!!!!

Answer 217

* Immediate - begin paying within 1 year * QLAC - qualified longevity annuity contract * max of 25% of account balance (IRA/401K) or set amount per year ($135K in 2021) * but don't need to start taking until as late as 85 * annuity is an insurance contract, NOT an investment - * win by living a long time and collecting more than you put in (opposite of life insurance where you win by dying young!)

Answer 218

* A- Liability - how it's listed: 100/300/100 **(only part A is actually mandatory!)** * B: Medical Payments - covers everyone (including you) in or around the car, also covers you and family as pedestrians * C: uninsured motorist * D: * collision * comprehensive - other damages * endorsments - toys - must have liability damage *

Answer 219

* SML is drawn based (a representatoin of) the CAPM * Assets above SML are undervalued * Asset below SML are overvalued \*\*\*can get returns ABOVE the efficient frontier, by borrowing/trading on margin\*\*\* (of course, this adds risk)

Answer 220

1) 1,000/$18 (conversion price) =55.56 shares 2) 55.56 shares×$16.75 market price = $930.63 conversion value

Answer 221

* relative measure of total risk per unit of return * SD divided return of asset * lower is better (unlike Sharpe and Teynor - where higher is better)

Answer 222

* \<500EEs * 50% matching on first 4% * automatic enrollment * combo of DB and 401k - easier than separate plans

Answer 223

Either: * 2 to 6 years graded * 3 year cliff

Answer 224

will continue to recieve forever, unless marry an able bodied person

Answer 225

* married for at least 10 years * didn't remarry before age 60 * once the divorced spouse reaches 62, they qualify for coverage without regard to status of previous husband

Answer 226

* New Rate - Old Rate divided by Old Rate (?)

Answer 227

Form 5500 * Must be filed by the end of the seventh month after the plan year ends * Must be filed for all profit sharing plans SPD - Summary of Plan Description * made available to the EEs periodically, often on website

Answer 228

* Must be filed with the SEC each year and must be filed no later than 90 days after the end of the adviser's fiscal year. * Allows the SEC to know whether the investment adviser is still in the business. * Allows the SEC to know if there have been any changes in the adviser's information. * Gives the investment adviser an opportunity to submit a current balance sheet.

Answer 229

**Survivorship** * **Fully** = 1 credit for every year since age 21 (age - 22) * Spouse 100% for FRA, 82% at 62, 72% at 60 * umarried child \<18 = 75% * spouse with disabled child = 75% * parents - 75% * **Currently** insured = 6 of the last 13 quarters * Spouse 0% * umarried child \<18 = 75% * spouse with disabled child = 0% * parents - 0% $255 sent to spouse

Answer 230

* if elected applies to **ALL** gifts given by **EITHER** spouse!

Answer 231

- The group model - of the HMO is an arrangement that is sometimes known as the network model - staff model - Is a corporation and medical staff members including doctors, nurses and clerical staff are employees of the HMO. - IPA - Is a type of HMO organization that is made up of physicians who have their own office locations. ALL HMOs employ gatekeepers.

Answer 232

* represent all points where an investor is equally satisfied with the risk/return tradeoff. * the higher the indifference curve, the happier the investor * For risk averse investors, indifference curves are concave from above with increases in risk required for increasing returns.

Answer 233

* For buy-sell - NOT deductable (you want the full proceeds to buy the business) * For entity purchase, when firm own, NOT deductable

Answer 234

* Spousal * No gift taxes * ½ of FMV goes into gross estate * Survivor receives stepped-up basis on the decedent’s half * Nonspousal * Federal gift tax (if unequal initial contributions) * Federal estate tax – 100% assumed to be owned by the decedent, unless survivor can prove otherwise

Answer 235

* Based on net self-employment income (earnings) 1. determine **net** Schedule C/Schedule K1 income 2. Subtract deductible portion of SE tax (half) 3. Multiply result by net contribution rate Short cuts: to get deductable portion of SE tax = 7% of net income to jump to answer = 18.6% of net income

Answer 236

Describes the shape of the standard deviation curve * Platykurtic - like a plate - flat and spread out (small cap, EM) * Leptokurtic - spike in the middle - (tbills) Investors like Leptokutic as there's less variation in return

Answer 237

* Price where margin call will occur = 1-Initial Margin % / 1-Minimum Margin % X's Price of Stock * debit balance/1-Margin * Current Fed Rate = 50% Intial Margin

Answer 238

* Risk measure is Standard Deviation, not Beta * Also need correlation between the asset classes

Answer 239

* should enroll within 120 days * if missed, can still enroll, but there is an increase in premium * if still employeed, becomes a secondary source of coverage (only applies to ERs with \>20 EEs) * ERs cannot discontinue coverage because someone has reached age 65

Answer 240

* develops model regulation, but then the states still ned to pass

Answer 241

* Cash surrender - lump sum cash distribution (most likley) * reduced paid up - reduces face value, still has cash value, but no more premiums * extended term - becomes a term policy

Answer 242

* can do from ANY qualified plan (401K, ESOP, Stock Bonus) * If all company stock, and distribution....assume NUA! - "lump sum distribution of ABC stock" * Pays marginal tax rate on basis * then gains in the account at time of distribution are LTCG * and gains after distribution are LT or ST depending on holding period \*\*\*I can do this in my 401K, how to get stock into my plan? Can I do from RSUs? or maybe only works if on ER stock in plan???\*\*\*

Answer 243

* * 10k to 20k = 10K * 20K to 100K = 50% of vested balance * \>100K = $50K typically lessor of 50% of account balance or $50K

Answer 244

* which entities can have: Sole prop, general partnership, LLC....but NOT a C or S Corp! (if corp, have W2 income on Schedule C) types - always defined contribution * profit sharing * money purchase * target benefit 1. Determine Net Schedule C or K1 income 2. Subtract deductable amount SE tax (.0765%) 3. Multiply result by contribution rate (usually 20%) short cut for max contribution = 18.6% of salary (must be below the taxable wage base (148K)) if already deducted SE tax, then use 20% of income or $58 as max ER contribution to pplan

Answer 245

TMV calc FV= 200,000 I/YR= 4.8077 [(1.09 ÷ 1.04) − 1] × 100 N= 6 PV= 0 PMT= (29,546.11) Find 2nd payment 29,546.11 × 1.04 = 30,727.95 30,727.95 × 1.04 = $31,957.07

Answer 246

* 30 year maturity * gurantee minimum payment * principal adjusts based on CPI....not the interest paid!

Answer 247

* SS Credit - get one for each $1470 paid, up to 4 each year * 40 credits to be fully insured, so 10 years * PIA - primary insurance amount * Me = 100% * Spouse 50% for FRA, 35% at 62, 0% at 60 * umarried child \<18, 19 if in High School, or disabled before 22= 50% * spouse with disabled child = 50% * parents - nada

Answer 248

**Fully - get Retirement, Survivor, and Disability (if meet additional recentcey criteria)!** * Need minimum of 6 and max of 40 * 1 for each year, calc is Age minus 22 **Disability - get Disability** * must be Fully insured **AND** * need 20 of last 40 and meet definition of disables (e.g., not able to do ANY occ, 5-month waiting period) **Currently Insured - very limited survivor benefits ONLY** * 6 of last 13 quarters

Answer 249

* EEs get to vote their stock * Stock Bonus - usually public companies * ESOP - usually a private company * LESOP - allows plan to borrow to buy stock * ESOP - **cannot** be integrated with SS

Answer 250

* Failure to Pay = 5% per month or partial month (counts for full month) * Failure to File = 0.5% per month or partial month (counts for full month) \*\*\*combined max is 5% per month\*\*\*

Answer 251

Sensitive to interest rates (opposite direction)

Answer 252

* ordering: * typical, buy....sell, buy (within 30 days) * but also!, buy....buy, sell (original lot within 30 days)

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