All Flashcards
(221 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
What is not financial advice?
A
A communication that, based on its content, context and presentation would not reasonably be viewed as a recommendation, response to directed orders, and marketing materials, general financial education and general financial communications
3
Q
Three questions to determine financial planning
A
Agreed to provide or provided financial planning, client have a reasonable basis to believe financial planning, does it require integration of relevant elements of the client’s personal and financial circumstances
4
Q
What are the integration factors
A
Risk exposure, relevant elements, time, barriers % and $ of assets affected
5
Q
What are approved methods of documentation
A
CRM software, handwritten notes, and emails
6
Q
Seven steps of financial planning process
A
- Understanding the Client’s Personal and Financial Circumstance 2. Identifying and Selecting Goals 3. Analyzing the client’s current course of Action and Potential Alternative Courses of Action 4. Developing the Financial Planning Recommendations 5. Presenting the Financial Planning Recommendations 6. Implementing the Financial Planning Recommendation 7. Monitoring Progress and Updating
7
Q
Client’s life cycle is determined by
A
Age, Marital Status and dependents, financial status, special needs, attitudes
8
Q
Financial Statements Formula
A
Assets = Liabilities + Net Worth
9
Q
Current Ratio and Implications
A
Current Assets/Current Liabilities - A higher current ratio greater than 1 indicates can pay off short term liabilities
10
Q
Consumer Debt Ratio
A
Non-housing monthly debt payments/monthly net income - no greater than 20%
11
Q
Housing Cost Ratio
A
All monthly non-discretionary housing costs/monthly gross income - less than 28%
12
Q
Debt to income ratio
A
All monthly debt payments and housing costs/gross monthly income less than 36
13
Q
What is the avalanche technique
A
It prioritizes the high-interest debt first then to lower-interest debt
14
Q
What is a reverse mortgage
A
Used for elder people who want to build equity in the home. HECM. Lender pays the homeowner an income stream secured by equity in the home
15
Q
Components of Mortgage payments
A
Principle, Interest, Taxes, and Insurance (PITI)
16
Q
What are the goals of insurance companies
A
They keep insurers solvent, safeguard policyholders against substandard insurer practices, ensure coverage is available to all individuals and maintain competition
17
Q
Difference between AOTC and Lifetime Learning Credit
A
AOTC - Undergrad, by student 100% on first 2k and then 25% on next 2k, Lifetime Learning - Undergraduate, by family, 2k overall
18
Q
Employer Educational Assistance Program
A
Enrollment fees, books, supplies and equipment and they cover $5,250 per year
19
Q
QTP Plans
A
Not subject to phaseouts, and unlimited amount to be contributed, change beneficiary at any time, transfers control by 18
20
Q
CESA
A
Phaseouts, only allow for 2k per year, but can be used for any educational institution, be used before age 30
21
Q
Expected Family Contribution
A
Smallest parent assets (5), then student assets and parent income (20 and 22-50), and largest student income (50)
22
Q
What is the difference between ordinary annuity and annuity due
A
OA - Payments occur at the end (end mode), AD - Payments occur at the beginning (beg mode)
23
Q
What is Securities Act of 1934
A
Established the SEC, Disclosure requirement, registration of organized exchanges, and outlawed insider trading
24
Q
What to do if there is a billing dispute
A
Suspend payments but notify and give an explanation of error within 60 days
25
What debts cannot be discharged under Chapter 7
Back taxes (up to three years), Debts associated with illegal activities, alimony and child support, debt to intentional tort, student loans
26
What is conservatism bias
When clients originally assume a rational view but fail to change that view as new information becomes available
27
What is hindsight bias
A selective view of the past. Remember correct views and forget the errors
28
What is Fiduciary Duty
Act in the client's best interest when providing financial advice to the client
29
What happens if a CFP is suspended?
Suspension of marks for five years if board believes it can be rehabilitated
30
If a incident against the practicant
Need to report to the board within 30 days
31
difference between universal life and whole life
whole life is for those with low tolerance, fixed premiums, and reliable payouts while universal is for those with more risk flexible premiums and borrow against it and unbundled insurance
32
tax treatment of annuities and life insurance
At withdrawal life insurance is tax free (unless above FV in which case taxable) and annuities are part return of premium and part OI. Pre life insurance is FIFO except for MECs (LIFO and 10 percent penalty) and annuities and LIFO with 10 percent penalty above basis
33
Exclusion ratio for annuities
Investment in contract/expected return (fixed annuity)
Investment in the contract/annuitants life (variable annuity)
34
Definition of presumptive disability and social security disability
Presumptive - certain definitions that automatically qualify, blindness, deafness, loss of speech, loss of two or more limbs.
SS - Disability lasted five months has to be expected to last at least 12 months or death.
35
Definition of hybrid and modified any occupation
Modified own/any occupation - (and I am not working anywhere else vs. sick or injured where I cannot perform a job that is suited for me)
Hybrid - Starts off as own occupation then modified occupation
36
What is the COBRA Disability Coverage
29 months
37
What qualifies you for COBRA
Death, Termination (all except gross misconduct), a change on status, divorce, child reaching 26, employee reaches Medicare age
38
What does Part A and Part B of Medicare Cover
Part A - Hospital Care, skilled nursing care, hospice care, and home health care
Part B - Physicians' fees and outpatient services
39
What does Part C and Part D of Medicare Cover
Part C - Advantage Plans - Health plan options
Part D - prescription drugs
40
Definition of Chronic Illness
either inability to perform two of six activities of daily living for at least 90 days or chronic impairment
(BEDTTC) - Bathing, Eating, Dressing, Transferring from bet to chair, toileting, continence)
41
Difference between promise to pay, rabbi trust and secular trust
promise to pay - unfunded plan (may not get benefits)
rabbi trust - informally funded - (has language that is subject to the claims of creditors so no taxable event) so security
secular trust - funded plan, they will get it in the future, constructive receipt get tax deduction, may be a long time before received
42
Definition of ACV
Replacement Cost - Depreciation
43
How does land factor into replacement cost for insurance
It is excluded
44
How much coverage does Section B have?
10 percent of primary
45
What is the traditional coinsurance requirement
80 percent
46
To be legally binding a contract must have five things
1. Offer and acceptance 2. Consideration 3. Legal object (legal purpose) 4. Legal capacity (not a minor and not of unsound mind) 5. Legal form (written and signed)
47
What is the collateral source rule
Damages assessed against a negligent individual shall not be reduced if they have another recovery avenue available.
48
Difference between waiver and estoppel
Waiver - the intentional and voluntary relinquishment of a known right
Estoppel - prevents denying an action if it had been accepted previously
49
How can dividends from life insurance be paid
1. cash 2. used to reduce premiums 3. Left with insurance company to accumulate interest 4. purchase additional paid-up insurance 5. used to purchase one-year term insurance
50
What is Deferred Income Annuity
Longevity annuity, Future income start dates are selected at contract issue, great for those who may have other sources of income, can elect to annuitize up until age 85
51
Split Dollar Life Insurance
Is an arrangement typically between employer and employee in which costs and benefits of life insurance are shared, NOT disability insurance
52
What does life insurance need to do to be in a qualified plan
The 25 percent test (need to have majority term or universal) and 100:1 ratio rule a death benefit cannot exceed 100 times expected benefit for contributions
53
Difference between ISOs and NQSOs
At exercise - NQSOs W-2 compensation and AMT adjustment At sale - Capital gain or loss
ISO- at exercise AMT adjustment of basis and no tax. At sale if qualifying disposition, then LTCG and AMT adjustment
54
Tax treatment of ESPPs
Do not pay the income tax until sold then OI
55
Features of Cafeteria plan
Must include a cash option they want to choose package that best suits their needs
56
Two main features of health insurance
It must be noncancelable and guaranteed renewable
57
Difference between HMOs and PPOs
HMOs provides an network of health care providers for a fee where they finance and deliver the care whereas the PPOs do the same thing but allow treatment outside the network with higher deductibles
58
Lookback period for medicare
60 months
59
What is self-employment tax
Based on net income. 15.3% (12.4%(OASDI or Social Security Tax) + 2.9%(net income tax))
60
What does not count to medicaid
Primary residence, personal property, one motor vehicle, life insurance, trusts
61
Difference between HO-3 and HO-5
HO-5 = HO-3 + Open perils for personal property
62
What are the eight exclusions
Ordinance or law, earth movement, water damage (outside the home), power failure, neglect, war, nuclear hazard, intentional loss
63
What does the a/b/c mean for liability coverage for part A?
a - bodily injury for one person
b - total for all persons in accident
c - personal property coverage
64
Difference between Futures, Forwards and Options Contract
Options contract there may or may not occur in the future. Futures contract happens in the future, traded on exchanges, and standardized. Forwards happen in the future, not traded on exchanges, and suit individual needs.
65
How to figure out Intrinsic Value of Puts and Calls
C.O.M.E. Call Option Value = Market - Exercise and P.O.E.M - Put option Value = Exercise - Market
66
Value of the option Formula:
Value = IV + TV
67
Call Option vs Current Market Value, Exercise Price, Time to Expiration, Volatility of Return, and Risk-Free Rate of Return
Direct Relationship with all except exercise price inverse relationship
68
What is a Zero Cost Collar
protect gain in long position of a stock - Consists of long stock position, long put position, and short call option
69
Difference between warrant and rights
Warrants - purchase a certain amount of share
Rights - Buy more at a lower price to keep their proportion of control
70
At what level is Beta appropriate;
R2 > .70
71
Difference between Sharpe and Treynor
Sharpe - Total risk, Over the standard dev of portfolio
Treynor - systematic Risk, Over the Beta of portfolio
72
What do we use Information Ratio for an give formula
Measure of average return over benchmark
Alpha of portfolio with Benchmark over its standard deviation
Measures for manager beats benchmark
73
MPT - Markovitz
Three rules:
For any two risky assets with same E(r), choose one with lower risk
For any two assets with same risk, choose one with higher E(r)
Choose any asset that has a higher E(r) and lower risk
74
Formula for current yield:
Annual interest yield/price of bond
75
Conversion ratio
par value of convertible security/conversion price
76
Multistage Growth and trick
0 CF1, D1 CF2, D2 CF3, D3+D4/(r-g) CF4. IIR is r then NPV Use the constant growth rate and then select the next one down
77
Real Estate Valuation
Do not include mortgage costs, depreciation, and capital improvements. Subtract out vacancy rate and operating expenses
Net Operating Income/ Discount Rate
78
Geometric return
Take hypothetical $1 and grow it then use I/YR
79
Difference between DWA and TWA
TWA - Do not take into account additional shares will look at one share and how that grows (manager)
DWA - Takes into account additional purchases and sale of more than one share
80
Rules for selecting portfolios
a. Asset allocation - not going to get to more than 90 percent equities
b. Will have at least 10 to 20 percent in fixed income or MMF
c. 20 to 25 percent in international funds this includes emerging markets
d. Small Caps 15 percent max with the most aggressive investors
81
Margin Call
Debit Balance (DB)/(1-maint margin(MM)) - DB/(1-MM)
82
Taking a short and long position
Farmer (risk of falling price), natural position long, hedge short, Sell future
Baker (risk of rising price), natural position short, hedge long, buy a future
83
What are the systematic risks
PRIME, Purchasing Power Risk, Reinvestment Rate Risk, Interest Rate Risk, Market Risk, Exchange Rate Risk
84
Difference between liquidity and marketability
Liquidity is the ability to convert to cash easily marketability is the ability to find a ready market
85
SEC yield
Standardized calculation used to compare yields
86
APT
Arbitrage Pricing Theory - Says that return are a factor of various returns
87
Which bonds are more susceptible to interest rate changes and what to do when rates rise/fall?
Low coupon rates with long maturities. If rates rise put more in short term if rates fall put more in long term
88
Free Cash Flow to Equity Evaluation
V = FCFE1/(r-g)
89
Inventory Turnover Ratio
Cost of goods sold/average inventory
90
What is P/E Ratio
P/E/ = market price per share/earnings per share
91
What is CV
Coefficient of Variation = standard deviation of asset / expected return of asset
92
What kind of property should never be gifted
Loss property
93
What is the difference between deductions for Charities?
Public and Private Operating vs. Private Nonoperating Foundations
94
What property when making charitable deductions can we choose between basis and FMV
Intangibles tangibles and real property
basis (50%) or FMV (30%)
95
How to calculate kiddie tax
Take Unearned Income - $2300 then that is at parent's rate, then take overall income and subtract the main deduction (1150 to 12950) and then get taxable income, subtract the first amount to get amount taxed at parent's rate
96
What is the 1250 income tax
Real-estate The recapture of the depreciation is taxed at OI rates (25%) rest is at LTCGs
97
What is 1245 income tax treatment
Below basis - Ordinary Loss
Above Basis and less that Original Basis - Ordinary Income
Above Original Basis - Ordinary Income and Long Term Capital Gain
98
Section 121
Pass use and ownership test, primary residence past two years can subtract 250,000 each per taxpayer
99
Definition and use of rental vs. personal use
* Personal property
o If the property is rented less than 15 days a year
o Excluded rental income from gross income
* Rental Use
o Property rented at least 15 days a year not used for personal use more than the greater of 14 days per year of 10% of rental days
o Allocate the expenses
o Can deduct loss up to 25k on business a reduced amount allowed for MFS
* Mixed Use
o Rented more than 14 days and personal use exceeds the standard for rental
o Allocate the expenses
o Cannot deduct losses
100
How does Section 1031 - like-kind exchanges work
If boot is given then you increase in basis if you rec. the boot then there is a recognized gain while basis would remain as the original property you gave. Use the FMV to see who is giving and who is receiving. The person would then have a recognized gain of the lesser of boot or realized gain
101
1035 exchange (order)
LMAL Life Insurance, MEC, Annuity, Long-Term Care
102
Related party transaction
Cannot recognize any loss and the receiving party has a double basis
103
Wash Sales Rule
Take the loss that you tried to take and add it to the basis of the new stock you now hold.
104
Tax on Section 1202 stock
Exclude 50 percent of the gain of small business stock
105
What is the surtax on net investment income
3.8%
106
What is AMT, what kind of income is taxed and what is a good strategy
What is it? - Separate Alternative tax that targets high income earners. If it results in a larger number than TI then pay AMT
What kinds of income? - Interest on Private Aciivity Bonds, Sale 1202 stock, B.E> exercise of ISOs
What would be considered good strategy? - Best strategy would be to push into lower income year and pull it out of higher income year.
107
Section 179
* Allows me to take an expense for a capital expenditure
* Designed to allow a medium sized business to take an immediate expense if they want to
* Up to 1.08 million reduced if purchase greater than 2.7 million
* Example if 2.8 million there is 100,000 over
* Then we subtract 100,000 from 1.08 million to get 980.000
* Depends on if we have the cash to purchase the machine or not
108
Life Insurance - Taxation on surrenders and installment payments
* Lump-sum payments - OI above basis
* Interest payments - Interest income -O.I
* Installment Payments - Part T.F. Part O.I.
109
Installment Sales
* Don’t have to recognize all gain on the sale
* Split into principle and Interest
o Principle - 40% LTCG and 60% TF
o Interest - Ordinary Income
* Section 1245 not eligible for installment sale treatment
* Section 1250 does not apply
* If a portion consists of the LTCG then the 25 percent gain before the 50
110
Nonviatical sale
Take selling price minus (original basis-cost of insurance) to get total gain, subtract ordinary income (cash value-original basis) rest is at LTCG
111
Self employment tax
Based on net income. 14.13% of schedule C income
112
Interest on educational loan
Can take $2,500 per person phased out at certain MAGIs
113
Home office deduction
Simplified version - $5 per square foot of home used for expense or percentage of home used for business, where you can allocate or get the 1500 simplified deduction
114
What is Section 165
Losses of nonbusiness property are limited to losses from federally declared disaster
It is reduced by $100 floor and 10% of AGI
Amount of loss is the lesser of the adjusted basis or decline in FMV resulting from the event
To calculate Loss - Insurance Reimbursement - $100 - 10% of AGI
115
What is the additional standard deduction and what is it used for
Either $1750 or $1400 per person and is used for those over 65 and who are blind
116
How does converting from FIFO to LIFO impact the taxes
The changes of valuation might need to recognize the additional valuation in inventory in income and taxed as such
117
What is considered a capital asset
ACID Accounts and notes receivable, Copyrights and creative works, Inventory, Depreciable property or real estate
118
How does payment of gift tax impact basis
Donor's adjusted basis + ((unrealized appreciation(FMV at gift-basis))/(FMV(when gifted)-donor's annual exclusion amount used for the gift)) x gift tax paid
119
1033 gain coming from involuntary conversion
So we will keep the old basis, realized gain between the cash given and old basis, deferred gain the difference between the new property and original basis, recognized gain is the difference between the amount given and cost of the gain
120
Section 1244 stock
Losses are excluded up to $50,000 per year as ordinary loss. The rest is LTCL
121
How to calculate AMTI
Regular taxable Income + Positive AMT Adjustments - Negative AMT adjustments + Tax Preferences = AMTI
122
Taxes that apply to C corporations
Personal holding company tax (50% owned by five or fewer or consists of personal holding company)
Personal service corporation tax (95% held by internal, 21%)
Accumulated earnings tax (tax avoidance 20%)
123
Difference in S corp and C corp taxation
S corporation filed with K-1 and taxed to the individual and C corp taxed to the entity
124
Why is Sole Proprietorship a red flag
No protection from creditors
125
Beneficiaries from trusts are taxed on what
Just the tax that was distributed to them
126
What is NUA treatment
Net Unrealized Appreciation for Qualified Plans, Moving employer stock from inside the plan to outside. At distribution the basis is taxed at OI, then at sale FMV at distribution- Basis is LTCG, then growth are also taxed at LTorSTCG
127
What is the difference between profit sharing and pension in-service withdrawals?
For pension plans you can withdraw after the age of 62, In-service withdrawals are only allowed if the plan documents permits
128
What is a pension allowed to invest in
They are only allowed to invest 10% in company stock
129
What are the standard eligibility requirements for pension plans
(21 and 1) rule for so they must be 21 years old and have worked for at least one year. If they go to 21 and 2 then they need to be 100 percent vested
130
Which vesting schedules are used for which plans
3-7 year and 5 year vesting for defined benefit pension plan 2-7 year and 3 year vesting for a defined contribution plan
131
Qualified plans must meet one of these tests
1. General test (safe harbor test) (percentage)
#NHC covered/#NHC employees eligible under years of service and age > or equalt to 70
2. Ratio test
(% NHC covered)/(% HC employees covered) > 70%
3. Average benefits test
Average benefits % NHC/Average benefits % HC > 70%
132
What is a highly compensated employee
Greater than 5% owner in current or preceding year OR Compensation > $135,000
Family attribution rules still apply
You could also use the top 20 percent election
Only replaces the rule where compensation > 135k
Used for discrimination in qualified plans for the amount contributed
133
What is a key employee?
Officer with compensation greater than $200,000 (2022)
OR
A greater than 5% owner
OR
A greater than 1% owner with compensation > $150,000 (not indexed)
Used for discrimination in qualified plans for the total amount
134
What is the 40/50 test
Additional test either need to cover the lesser of:
50 employees
40% of all employees
This is for defined benefit plans
135
What is a safe harbor rules
Avoids ACP/ADP test
Assume meets T.H. requirements
Employer contributions 100 percent vested
Matching at least 100% of the first 3% deferred by the employee and 50% of the next 2%
Nonelective conribution at least 3%
Employer wants to give highest incomer earners the ability to put in max
136
What are the ACP vs. ADP rules and why they matter?
Used to distinguish HC vs. NHC
ADP Test - Actual Deferral Test
CODA - Cash or Deferred arrangement
Do they want to take Cash compensation or defer it into the plan
This tests pretax and Roth Deferrals
ADR
ACP Test - Actual Contribution Percentage
2x, +2, 2.25
All qualified DC plans
matching contributions, mandatory employee contributions, and employee after-tax contributions (Excludes Roth 401(k) deferrals
137
If there is a failure of ADP and ACP test what can be done?
Corrective distribution
Send it out to the NHC employee
Could either make a Qualified nonelective contribution (QNEC)
Or qualified matching contributions (QMAC)
138
What is the most includable comp in a pension plan for DB
The most includable comp is 305k the limit applied to the DB plans is that the first-year plan cannot exceed the lesser of 100% of includable compensation over the last three years
139
What is the difference between money purchase and cash balance plans
Money Purchase plan
-Defined Contribution plan
- Employer Contributing to each account
- Will have mandatory contribution
Cash balance plan
-defined benefit plan
-More investment risk
-interest rate needs to be fixed
140
Shortcut for SE tax to determine max contribution
18.6% of Schedule C income
141
Difference between an age-weighted plan and a target benefit plan?
Age-weighted - profit sharing and D.C.
Target benefit plan - D.C. and leaning more towards D.B.
142
What are Kehog plans
Can be any type of plan but only for self-employed individuals
143
What are hybrid plans
1. Between DC and DB plans
2. The funding is designed to produce a target amount at retirement
3. The actual benefit rests on the employee to choose the appropriate investments
4. Employers are required to make contributions
5. Requires an actuary when the plan is implemented
6. Participants have their own accounts
7. Plan needs to be cross-tested
8. Can be discriminated more so
144
What is SS integration
What is the maximum permitted disparity
3/4 of 1% of 75 basis points multiplied by years of service
It is going to go above the 147k
The excess is higher integration above a certain level
More contributions and it favors those above 147k and below 305k
145
What is the difference between SEP and Simple
SEP all employees who make above 650 a year and older than 21 and are part-time are eligible while in SIMPLE all those who make above 5,000 are eligible for the plan. SEP for businesses of all sizes and simple for small businesses. Only employers can contribute to SEPs while SIMPLE both can. Contributions limits are different for both.
146
What is a Roth IRA recharacterization look like
It is taking money that was put into a Roth IRA and putting it into a Trad iRA
147
What are Roth IRA distribution orders
1. Contributions (T.F./P.F)
2. Conversions FIFO (T.F./Penalty?)
3. Earnings (Taxed/Penalty?)
No 10% penalty
Aged 5 years
Not taxable @ conversion
EWP exception applies
148
What are qualified distributions for ROTH IRA
Made after five years and ONE of the following:
Age 59.5
Death
Disability
First-time home purchase
149
What 10 percent penalty exceptions apply to qualified plans and IRAs?
Age 59.5
Death
Disability
Substantially equal periodic payments
5 years or 59.5 age
Medical expenses
Greater than 7.5% AGI
150
What 10 percent penalty exceptions apply just to qualified plans and just to IRAs?
Qualified plans only
-QDRO
-Age 55 and separated from service
IRA's only
- Higher Education
- Purchase a home (10k max)
- Pay health insurance premiums if unemployed
151
What is the difference between currently insured and fully insured?
Fully insured has the 40 credits necessary and currently insured is at least 6 credits in the last 13 quarters
152
How much can a spouse and child take of benefits
Spouse takes 50% PIA
Cannot be taken until worker has been taken
Unmarried child < 18
The unmarried dependent child could take if still in high school
Could take the 50% benefits
Also for spous if caretaker of child < 16 or disabled
Divorced spouse was separated and did not marry before age 60
Treated same as spouse
153
What is the max reduction of SS benefit for one who chooses to take it early?
Max reduction of SS benefits is 30% max increase is
154
What is the limit of a qualified plan loan?
Lesser of 50% of account balance or $50,000 no greater than five years unless reasonable
155
What is the definition of provisional income
Used to determine SS taxation MAGI + 50% of SS benefit
156
What are 457 plans?
Section 457 plans options
Employer may include a Roth provision
Not considered active participant status
Deferrals to a 457 are not aggregated with other plan deferrals
157
What is the difference between a stock bonus plan and ESOP
Advantages
Stock bonus plan - publicly traded stock
Distributions
ESOP can borrow money to purchase those stocks
Voting rights - still have the voting rights
NUA
Disadvantages
Nondiversidied portfolio
Appraisal costs
Dilution of ownership
Thought sometimes specifically used to sell shares
Stock bonus plan vs. ESOP
ESOP may borrow funds to purchase stock
When it comes to Social Security Integration
Plan has made calculations or benefits for social security
Stock can be integrated with SS and ESOP cannot be
Main reason want to use stock is to encourage performance
158
what is the ss age of retirement?
67
159
What kinds of titled assets pass through probate and are included in the gross estate?
Fee simple assets, when the client has death during the term, and when the client has TIC (% of assets) those pass through probate and are include in the gross estate. Life estate and death after the term of interest are not included in the gross estate.
160
What are the exceptions to community property
Property acquired before marriage, property acquired by gift during marriage, property inherited, property acquired by court award, and donated property
161
How does one avoid probate?
1. Operation of law (JT/TbyE)
2. Operation of Contract (Bene)
3. Trust
162
Purpose of a buy-sell agreement and pros of cross and entity agreements
Buy Sell Agreement is something put in place for the succession of the business
It Simplifies estate and reduced complexity
Attracts investors because it will continue should they die
Provides for the continuation of the business, so there is a cross-purchase agreement
Cross-purchase is great but impractical with a higher number of partners
EP, the business itself, buys insurance on all
- with EP The purchase of stock or ownership with your cash may be treated as dividends and taxed as such
- rest of the owners percentage share might not actually change
163
What assets are included in the gross estate lookback period?
Only life insurance, taking effect at death, retained life interests, those that can be changed, and gift taxes
164
Bargain Sale
Sale of assets less than FMV
Part Gift part sale
Part of the discount is the gift
The rest above the basis of the sale price is a sale
165
Gift/Leaseback
involve tangible property of the business
Senior family members own a farm
Might decide at some point to give to kids and lease back from them
Pay a lease payment from parents to kids
If there is some arbitrage and payment to the taxable income to kids
166
Installment Note
I hold this note while I provide capital to person and they pay it back slowly over time
Good idea to cancel the note when die
Works for everyone except Uncle Sam
Needs to have a premium that factor in mortality tables
Not a good idea if going to outlive expectancy
167
Private Annuity:
Could also hold an annuity that the children pay to the adult
Used for when the adult plans to die
Cannot have collateral
Not good if die too soon might then have too low a basis for kids
168
Family Limited Partnership (for family) and Corp Recapitalization (anyone)
Partnership with a general partner and at least one limited partner
Senior members want to give gifts to family members to reduce taxes
Partnership is made up of general partnership interest and other 99 percent
Two discounts that show us it isn't really worth nine million
Minority interest discount - If they are not in control then Limited partners can receive a discount
Lack of marketability - hard to find a market to sell interest
Case by case depending on valuation of business interest
Reduces gift and estate taxes
Identification of partnership assets as separate
Reduce probate costs
Discounting greater for illiquid assets
169
At death how is joint property treated
Joint property owned by nonspouses
- Percentage includible in gross estate receives a stepped-up basis
Percentage includible in gross estate depends on percentage originally contributed by the decedent
Joint property owned by spouses
- 50% of the property receives a stepped-up basis
Community property
-Both halves receive stepped-up basis
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What is 203A?
Real estate used in farming or business
Get appraised at the highest and best use
Reduced valuation for current actual use
Qualified use and material participation in five out of eight years
Pass to qualified heirs
value must be 25% of GE
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What is section 303?
Stock in closely held corporation where treated as disposition of assets (Captial gain) instead of receipt of dividends (OI)
Requirements
Stock included in gross estate
Stock value must exceed 35% of adjusted gross estate
Redeemed amount cannot exceed death taxes plus funeral and administrative expenses
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What is section 6166?
Farm or closely held business assets
Value must exceed 35% of gross estate
taxes are Deferred for up to five years, then payable in 10 annual installments
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What is a skip person?
Related person two or more generations below donor
Trust when all beneficiaries are two or more generations below the donor
Unrelated person younger than donor by 37.5 years
Unless they are married
Direct Skip: transferring assets to another person
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What is the difference between a taxable termination and a taxable distribution
Taxable terminations: a trust interest terminates, and only a skip person holds an interest. Trust is responsible for GSTT tax
Taxable distributions: trust distribution to skip person. Beneficary is responsible for paying GSTT tax
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How much is GSTT tax?
40 percent
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Benefits and drawbacks of probate
Orderly - efficient
Can be costly
Take time
No privacy
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what is a dynasty trust?
Allows passing of wealth from generation to generation free of estate tax, gift tax, and GSTT
What are four critical design issues
Transfer assets into the trust and provide benefits to future generation
Don't have to include it again and again
Trustee may make distributions using HEMS
Healthcare, Education, Maintenance and Support
Does not cause inclusion in the estate
Charity is the backstop
Avoid significant amount of taxes for future generations
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What is the crummey provision?
Allows gift of future interest to qualify for annual exclusion
Limited withdrawal power given to benes
Usually limited to lesser of amount contributed to trust or annual exclusion amount
If multiple beneficiaries - withdrawal also limited to greater of 5% of contribution of $5000 or greater to avoid gift tax issues from the beneficiaries
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What is AVD?
Six months after date of death
Executor makes election
Allowed if lowers both gross estate and the estate tax
Applies to all assets except which two broad categories
Sold assets
Wasting assets
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What is a special needs trust?
Only for those receiving SSI or other government assistance
State by state
Set aside assets that still allow them to qualify for aid
Specific language saying won't distribute
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What is the difference between 2503b and 2503c trusts?
Both allow for the annual gift exclusion
2503(b) trust
- income paid annually
- Does not have to pay principle
- Must be distributed beyond the age of majority
- Bad boy - if they turn 21 and are being bad don't have to pay out
2503© trust
- Income does not have to be paid annually
- Need to be paid by 21
- Present Interest gift
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What is a custodial account?
Assets of the minor
Minor's tax consequences
UI >$2300 will be at the parent's bracket
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Features of EE Bonds
In a normal year considered taxable income, and interest is not taxed. The parents are owners and payments to CESA and QTP qualify
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401k rules on contributions and distributions?
1. Do not need to make regular contributions
1. All funded by elective deferrals by the employee - subject to FICA and FUTA
2. Employees are 100% vested
3. Employers make some sort of matching for employees, usually up to 3% of total salary
2. Can provide annuity distributions
1. Spouse needs consent for someone else to be beneficiary
2. Taxed as OI
3. Must come from either death, attainment of 59.5, separation of service or disability
4. Eligible for 10-year forwarding
5. Can have hardship withdrawals
3. If ADP and ACP tests fail then corrective distribution or additional contribution to NHC employees
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Simple IRA contributions
1. Employees can contribute up to 14k and catch up of 3k
1. Excluded from gross income
2. Employers can match up to 3% (Dollar for dollar), as little as 1% in certain years, or a 2% match
1. Deductible if made before the tax return
3. Fully vested
4. No more than 305k can be considered for income
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What is the withholding from retirement plans?
1. If there is a distribution from a qualified plan there will be a 20% tax withholding
2. No withholding for distributions from IRAs
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1035 more details
To figure out the basis of exchange - the basis of old + adjusted basis of boot given - FMV of boot received - loss recognized
1. Then realized gain is not what you report
2. Then recognized gain is lesser of realized gain or boot received
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What is the dividend exclusion for corporations
1. Distributions to shareholders are not taxed to org
2. 20 to 80 percent will have deductions from investing in another businesses stock
3. From 50 to 65 to 100 percent of the gain will have exclusions
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How long is revocation and how many years after suspension can a candidate reapply?
1. Suspension is for those that the board believes can be rehabilitated
2. It should not exceed five years
3. Need to prove that they have been rehabilitated, then they can use the marks again
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What is the inverted yield curve?
1. raised short-term interest rates
2. Short-term borrowing costs are higher than long-term borrowing costs
3. Investors should favor longer maturities
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What happens when the gift tax has been exhausted?
1. It is what happens when a net gift tax is decided
2. It is considered part sale and part gift
3. Annual exclusion still applies but the donee will pay
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What happens with NQSOs and ISOs for disqualifying dispositions?
1. ISO - non-qualified disposition
1. sales price-Basis = W-2 income
2. This is not subject to payroll tax
2. ISO - just the exercise
1. Exercise price-Cost Basis = AMT Adjustment
3. NQSO - nonqualified disposition
1. Exercise Price - Cost Basis = W-2 Income
2. This is subject to payroll tax
4. NQSO - Just the exercise
1. Exercise Price - Cost Basis = W-2 Income
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What is the Excise for Overfunding the HSA?
6%
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What bad debts can be forgiven?
The bad debts need to be written down and signed by both parties
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How to calculate Medical deduction
Take medical expenses subtract 7.5% of AGI and see if that or 7.5% of AGI is less then take that
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What is the difference between a funded and unfunded ILIT?
1. Proceeds included in the estate if the transfer is within three years of death
2. Avoids probate, restricts the use of funds by beneficiaries
3. Unfunded - grantor pays premiums at a later time - reduce the gift tax
4. Funded - contributes cash or property to trust - results in a large taxable gift in the first year
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Does a defined benefit plan or a defined contribution have separate accounts?
Defined contribution
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What are the features of the grantor trust, what happens if they die and what is considered a gift?
1. If the grantor dies, then annual annuity or other payment without reducing or invading principal
2. Income is taxed to the grantor during lifetime
3. Gift to the extent the value of the transferred property exceeds the present value of the retained income interest
4. Value of the gift at trust creation is FMV or peppery minus the value of the grantor’s retained interest
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How to calculate the probate estate?
1. Gross estate - ABCD (Administration, Burial, Casualty, Debts) = Adjusted Gross Estate
2. Adjusted Gross Estate - (Charitable, Marital, and State Death Tax) = Probate estate
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What is the difference between a funded and unfunded NQDC
1. Unfunded - one where the employee has the promise to pay in the future
1. Tax deferral because subject to creditors
2. Funded - assets set aside from the claims of creditors
1. Included in the gross income
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What is the goal when selecting bond?
The duration matches the time horizon
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How should you calculate the emergency reserves?
1. Cash and cash equivalents
2. Three to six months worth of nondiscretionary expenses
1. Mortgage, car loans, credit car loans, and taxes
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What is the underinsured motorist principle?
1. You may only receive what you can collect from the underinsured motorist unless you add on an underinsured motorist endorsement
2. This endorsement allows you to collect any additional claim amount, up to your policy limit, above the underinsured motorist’s coverage amount from your own insurance company
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How does the charitable deduction work in future years?
1. Carryover allowed up to five years for disallowed amounts
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SEP contributions are subject to what?
FICA and FUTA taxes
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What is the transfer for value rule
If an existing policy is transferred (sold) for valuable consideration, the insurance proceeds are includible in the gross income of the transferee (buyer) to the extent that the proceeds exceed the basis (amount paid for policy plus any subsequent premiums paid), meaning that the death benefit loses its tax-free status
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What is part B coverage for PAP?
It covers medical coverage necessary
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What is the inputted interest in the loan?
If the loan is less than or equal to $100,000 and the unearned income of the borrower is greater than $1,000, the imputed interest is the difference between the interest at the federal rate less the interest charged, not to exceed the borrower’s net investment income.
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What does not qualify for employer's tuition assistance
Meals, transportation, and lodging
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What is a nonforfeiture provision?
When a policyowner discontinues premium payments in a cash value policy, the policyowner is entitled to either the cash value or surrender value
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What happens to a stock when there is a tax free distribution?
The basis decreases by the amount of the tax free distribution
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What form of interest is not taxable
Municipal Bond Interest
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What is a revocable standby trust?
A standby trust is a separate legal entity you create to own property for you (like a house, boat, or mutual fund shares). It is a tool you can use to give your trustee (the person you name to run the trust) the power to manage your property if you become incapacitated.
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COBRA applies to what businesses?
Businesses that have over 20 employees
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What is a reverse QTIP
A reverse QTIP is used to make use of the decedent's GSTT. The election treats the QTIP property as if the QTIP election was not made for GSTT purposes.
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What is a morale hazard?
Intentional cause of a loss
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What is the difference between a long straddle and short straddle?
Long straddle expects that the price of the stock will become volatile and shift down or up in value while short straddle believes that the stock will stay at its current price.
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Why should you invest in short term securities
Once an investor has a forecast of interest rates, the bond portfolio's maturity can be lengthened when interest rates are expected to decline, or shortened when interest rates are expected to rise. So when interest rates rise get into short term securities
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What is a durable power of attorney?
It allows the attorney-in-fact to expedite the principal's Medicaid eligibility, arrange for in-home or nursing home care, hire necessary health care personnel, or employ companions
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What plans do not get an early withdrawal penalty?
457 plans
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How are worthless securities treated?
The realized loss is based on disposal at the end of the year. Then only 3k is allowed to be recognized in that year
