CFP Flashcards

Question

Goals of State Insurance Regulation

Answer 1

protect the insured maintain & promote competition maintain solvency of insurers

Answer 2

provides watch list of insurance companies based upon financial ratio analysis NO regulatory power over insurance industry involved in accrediting state insurance regulatory offices issues "model legislation" that state legislatures may or may not adopt

Answer 3

Cash Accumulate at interest = dividends invested by company, tax free up to basis, interest pad on dividends IS taxable Reduce Premiums Paid-up Additions One-year term insurance additions (purchase of)

Answer 4

age 55 & older catch up $1,000 catch up distributions for NQ medical expenses are subject to income tax & a 20% penalty if taken before age 65; income tax only at 65 or older Permitted Expenses: (same as those expenses qualifying as medical expenses for purposes of the itemized deduction) (tax free) - dental/orthodontics/vision - COBRA & LTC premiums - healthcare premiums while receiving unemployment - Medicare & other health care coverage (65 or older) - OTC (medical use, pain relief, cold relief etc) NOT PERMITTED EXPENSES = cosmetic surgery

Answer 5

EXAM TIP: to be offered COBRA there must be 20+ EEs, ER offers group health & the EE is already participating in the group health plan NOT required to offer COBRA under 20 EEs EXTENSION TO FAMILY MEMBERS: E: 18 months reduction in hours or normal termination D: 36 months death, divorce, medicare eligibility, loss of dependency status by children of EE E: 29 months if EE meets SS definition of disabled EEs have 60 days to make a COBRA election **an EE terminated d/t "gross misconduct" is NOT eligible for COBRA

Answer 6

price change = movement along demand curve curve shift = income, taxes, savings rates, disposable income

Answer 7

price change = movement along curve prices down = supply down; prices up = supply up curve shift = technology, competition, anything other than price

Answer 8

Uber Is A Drunk Person's Immediate Motor Vehicle -- UIADPIMV 1. Understand client's personal & financial circumstances 2. Identifying & Selecting Goals 3. Analyze current course of action & potential alternatives 4. Develop Financial Plan Recommendations 5. Presenting the Financial Planning Recommendations 6. Implementing the Financial Plan Recommendations 7. Monitoring the Plan A CFP must complete all steps unless specifically stated in engagement letter

Answer 9

Losses w/ 12 named perils Fire Vehicles (damage caused by vehicles) Lightning Smoke Windstorm Vandalism or malicious mischief Hail Explosions Riots or civil commotion Theft Aircraft Volcanic eruptions S-L-W & F-V-V-V-H-E-A-R-T (Pronounced Slow Favorite)

Answer 10

12 basic perils plus 6 additional named perils Falling objects Weight of ice/snow/sleet Accidental discharge/overflow of water or steam Sudden & accidental cracking, burning, bulging of appliances Freezing of plumbing, heating, air conditioning, fire sprinkler system, or appliance Sudden & accidental damage from artificially generated electrical currents Basic + FAS-FWD (Pronounced Fast Forward)

Answer 11

protection from losses associated w/ all perils except those specifically excluded provides more comprehensive coverage than the basic & broad policies Exclusions include neglect (termite damage), flood & earthquakes

Answer 12

Coverage A = Dwelling Coverage B = Other Structures Coverage C = Personal Property Coverage D = Loss of use

Answer 13

Liability & Medical payment coverage Coverage E = Personal Liability Coverage F = Medical payments to others

Answer 14

Part A = Liability coverage Part B = Medical payments coverage Part C = Uninsured motorist coverage Part D = Coverage for damage to the insured's automobile Part E = Duties after accident or loss Part F = General Provisions Part A 50/100/50 50K bodily injury per person; 100K bodily injury per accident; 50K property damage

Answer 15

Reduced by: 5/9 of 1% for each month for first 3 years Then 5/12 of 1% for each month beyond 3 years

Answer 16

8% SIMPLE interest increase for each year the retiree delays their benefit

Answer 17

dental care, dentures cosmetic surgeries hearing aids eye exams

Answer 18

Value Line = ranks stocks; 1 = highest = buy; 5 = lowest = sell Morningstar = ranks mutual funds, stocks, & bonds; 1 = lowest; 5 = highest

Answer 19

1 day before date of record if stock purchased on or after ex-dividend date then you will NOT receive the dividend to receive the dividend an investor must purchase the stock prior to the ex dividend date

Answer 20

money market security short term loans b/t corporations maturities of 270 days or less & does NOT have to register w/ SEC denominations of $100,000 & are sold at a discount

Answer 21

money market security facilitates imports/exports maturities of 9 months or less can be held until maturity or traded

Answer 22

money market security deposits in foreign banks that are denominated in US dollars

Answer 23

Price Weighted = avg of price, does NOT take into account % allocation of the position w/in portfolio; examples = DJIA (dow jones industrial average) Value Weighted = incorporates market capitalization of individual stocks into average; examples = S&P 500, Russell 2000 (smallest market cap), Wilshire 5000, EAFE (Europe, Asia, Australia, Far East)

Answer 24

judging whether good or bad do they like or dislike some company based on non-financial issues

Answer 25

attaching or anchoring one's thoughts to a reference point even though there may be no logical relevance or is not pertinent to the issue in question anchoring is also known as conservatism or belief perseverance

Answer 26

relies upon knowledge that is readily available in memory, cognitive heuristic known as "availability" is involved; this may cause investors to overweight recent events or patterns while paying little attention to longer term trends

Answer 27

when individuals make decisions, their rationality is limited by the available information, the tractability of the decision problem, the cognitive limitations of their minds, & the time available to make the decision decision makers in this view act as "satisficers" seeking satisfactory solution rather than optimal one one consequence of this concept is that having additional information does not lead to an improvement in decision making d/t the inability of investors to consider significant amounts of information

Answer 28

Weak = price reflects historical price data, advantage through fundamental analysis & inside information; rejects technical analysis Semi-Strong = price reflects public information, advantage through inside information; rejects both technical & fundamental analysis Strong = price reflects all information, no advantages to gain, no insider info; diversify stocks randomly or merely go w/ an index

Answer 29

tending to misinterpret info that is contrary to an existing opinion or only pay attention to info that supports an existing opinion

Answer 30

also known as regret avoidance or "faulty framing" where normal investors do NOT mark their stocks to market prices investors create mental accounts when they purchase stocks & continue to mark their value to purchase prices even after market prices have changed

Answer 31

investors often have incorrect understanding of probabilities which can lead to faulty predictions investors may sell stock when it has been successful in consecutive trading sessions because they may not believe the stock is going to continue its upward trend

Answer 32

people value gains & losses differently & will base their decisions on perceived gains rather than perceived losses investors are "loss averse" & have an asymmetric attitude to gains & losses getting less utility from gaining $100 then would lose if they lost $100 explains why investors may avoid higher risk investments even if they offer strong risk adjusted returns also explains why they over insure against risks through low deductibles

Answer 33

you give yourself credit for all the good outcomes & any bad outcomes are d/t outside factors

Answer 34

used when a decision or judgement is made when an apparently similar situation occurs even though the situations may have very different outcomes

Answer 35

thinking a good company is a good investment w/out regard to an analysis of the investment familiarity causes investment in companies that are familiar, such as an employer

Answer 36

investors prefer avoiding losses more than experiencing gains an unwillingness to sell a losing investment in the hopes it will turn around in other words, investors feel more pain from losses, then enjoying gains

Answer 37

Leptokurtic = high peak, flat tails; higher chance of extreme events Platykurtic = low peak, thin tails; lower chance extreme events

Answer 38

nondiversifiable risk, market risk, economy based risk PRIME Purchasing Power risk* Reinvestment Rate risk* Interest Rate risk* Market risk Exchange Rate risk * = most likely to be tested

Answer 39

diversifiable risk, unique risk, company specific risk ABCDEFG Accounting risk Business risk* Country risk* Default risk* Executive risk Financial risk* Government/Regulation risk* * = most likely to be tested

Answer 40

multi factor model pricing imbalances cannot exist for any significant period of time explains returns based on factors, if a factor is 0 then it has no impact on returns APT attempts to take advantage of pricing imbalances SD & BETA are NOT inputs/variables inputs are factors = inflation, risk premium & expected returns & their sensitivity(b) to those factors

Answer 41

1. increase 2. increase 3. decrease 4. decrease

Answer 42

how much an investor is willing to pay for each dollar of earnings; measure of relationship b/t a stock's price & its earnings; stock price as a multiple of company earnings used to value a stock if the firm pays no dividends the relationship of price to earnings is known as the P/E multiplier P/E = Expected Price per share / EPS OR Expected Price per Share = P/E x EPS P/E ratio = P/E multiplier example if P/E = 3 then trading at 3 times its value

Answer 43

relationship b/t the amount of earnings paid to shareholders in the form of a dividend, relative to earnings per share typically the higher the dividend payout ratio, the more mature the company a high DPR may also indicate the possibility of the dividend being reduced a low DPR may indicate that the dividend may increase, thereby increasing the stock price DPR = common stock dividend / EPS Retention Ratio = 1 - DPR

Answer 44

measures the overall profitability of a company; there is a direct relationship b/t ROE, earnings & dividend growth ROE = EPS / Stockholders Equity per Share Stockholders Equity per share = total equity / shares outstanding

Answer 45

= Dividend Per Share / Stock price states the annual dividend as a percentage of the stock price

Answer 46

ratio analysis on balance sheet & income statement to determine future performance looking at economic data Fundamental analysts believe that a stock price performance is largely driven by the financial performance of the firm Fundamental analysis assumes: 1. investors can determine reliable estimates of a stock's future price behavior 2. some securities may be mispriced & through fundamental analysis it can be determined which securities are mispriced

Answer 47

charting & plotting a stock's trading volume & price movements to predict future direction does NOT involve ratio analysis or analysis of financial statements analysts believe supply & demand drive a stock price

Answer 48

investors cannot consistently achieve above-average market returns prices reflect all information that is available & change very quickly to new information stock prices will follow a "random walk" investors who believe in the EMH believe a passive investment strategy is appropriate such as buy & hold an index

Answer 49

the behavior of stock prices closely resembles a random walk prices of stocks are unpredictable but NOT arbitrary impossible to consistently achieve above-average market returns at any given moment prices that exist on securities are the best incorporation of all available information & a true reflection of the value of that security prices are in equilibrium changes in price & volume of trading are generated by changing needs of investors

Answer 50

1. January Effect = January tends to be a better month d/t tax loss selling in November & December followed by investors getting back into the market in January 2. Small Firm Effect = small caps tends to outperform large caps; easier for them to grow revenues & earnings faster than a large cap 3. Value Line Effect = stocks that receive Value Line's highest ranking (1) outperform stocks that receive the lowest ranking (5) 4. P/E Effect = stocks w/ a low P/E ratio tend to outperform stocks w/ a high P/E ratio

Answer 51

Strategic = involves assessing the likely outcomes for various allocation mixes b/t asset classes; buy & hold strategy Tactical = investor determines expected returns for asset class, then rebalances the portfolio to take advantage of the expected returns; pricing anomalies or strong sectors; active management strategy BOTH are active allocation strategies

Answer 52

all US Treasury securities are nontaxable at the state & local level

Answer 53

not easily bought or sold 1. Series EE/Series E Bonds 2. Series HH/Series H Bonds 3. Series I Bonds (inflation-indexed)

Answer 54

1. T-Bills (sold at discount, no interest) 2. T-Notes (semi-annual interest) 3. T-Bonds (semi-annual interest All bills, notes, & bonds are sold in denominations of $100 or more treasury securities are sold on an "auction" basis w/ the lowest yield winning the auction

Answer 55

issued at discount from par value; example = zero coupon bonds zero coupon bond sold at deep discount; bond will increase in value over term of bond until matures at par value no interest paid until maturity bond holder must recognize income each year even though no interest is received; known as imputed or "phantom income" because bond holder doesn't receive interest, but still must pay taxes on the increase in value of the zero-coupon bond particularly suited to accounts w/ benefit of tax deferral (ex IRA) d/t not having to recognize phantom interest

Answer 56

inflation & purchasing power protection principal/par value adjusts for inflation, coupon rate applied to new principal amount coupon rate does NOT change as is the case w/ I Bonds (important!)

Answer 57

periodic coupon payments separated from bond & each coupon payment including the par value trade separately essentially treasury STRIPS create zero-coupon bonds highly liquid & appropriate for investors looking for a low risk, highly liquid investment & w/ a specific time horizon

Answer 58

Mortgage Backed Securities (MBS) - backed by pool of mortgages, biggest risk is prepayment risk & default risk Collateral Trust Bonds - backed by an asset owned by the company issuing the bonds; asset held in trust by third party

Answer 59

divided into "tranches" which determine which investors receive principal repayment; A-Z; short, intermediate, & LT tranches interest distributed pro-rata & principal repayments used to retire tranches sequentially investors in ST tranche receive principal repayment before intermediate & LT tranch meant to mitigate against prepayment risk associated w/ mortgage-backed securities

Answer 60

Debentures - unsecured debt not backed by any asset; backed on belief of creditworthiness that the issuing company (or government) will repay the debt Subordinated Debentures - lower claim on assets than other unsecured debt; more risk d/t lower claim on assets if company defaults on bond repayments Income Bonds - interest only paid when a specific level of income is attained

Answer 61

issued by insurance companies w/ guaranteed ROR insurance company agrees to repay the principal & guaranteed rate of return for a period of time yield is higher than treasury securities

Answer 62

backed by full faith/credit & taxing authority of the municipality that issued the bond

Answer 63

backed by the revenue of a specific project NOT backed by full faith/credit & taxing authority of the entity that issued the bond

Answer 64

used to finance construction of stadiums

Answer 65

American Municipal Bond Assurance Corp (AMBAC) Municipal Bond Insurance Association Corp (MBIA)

Answer 66

= Annual Coupon Payment in dollars / Current Price of the Bond

Answer 67

YTC YTM CY CR or Nominal Yield **Remember when shopping if you see a Discount "Call Mom's Cell Now! = Discounts from highest to lowest is yield to CALL, yield to Maturity, Current yield, & Nominal yield

Answer 68

Liquidity Preference Theory = yield curve results in lower yields for shorter maturities since some investors prefer liquidity, paying for liquidity means lower price Market Segmentation Theory = curve depends on supply & demand at any given maturity; when supply > demand rates are low; if supply < demand rates are high Expectations Theory = curve reflects investors' inflation expectations; since investors believe inflation will be higher in future, LT yields are higher than ST yields

Answer 69

Duration = weighted average maturity of all cash flows the bigger the duration, the more price sensitive or volatile the bond is to interest rate changes duration is the moment in time the investor is immunized from interest rate risk & reinvestment rate risk Modified Duration is a bond's price sensitivity to changes in interest rates a bond portfolio should have a duration equal to the investor's time horizon to be effectively immunized the higher the coupon rate, the lower duration the lower the coupon rate, the higher duration zero coupon bond always w/ highest duration; zero coupon bond always have a duration equal to its maturity higher the term of the bond the higher the duration & vice-versa as YTM increases, duration decreases as YTM decreases, duration increases coupon rate & YTM are INterest rates & there is an INverse relationship; the IN should help keep it straight

Answer 70

1. Tax Swap = selling a bond w/ gain & a bond w/ loss which offset each other; OR selling a bond w/ loss & just buying a new bond 2. Barbells = owning both ST & LT bonds; when interest rates move only one set of positions needs to be sold & restructured 3. Laddered Bonds = purchasing bonds w/ varying maturities; helps reduce interest rate risk d/t bonds being held until maturity 4. Bullets = very little payments during interim period then lump-sum at some specified date in the future; most bonds mature in or around same time period; zero-coupon/treasures/corporates most likely candidates; used when the investor has a balloon payment due on a liability at some future date

Answer 71

both equity & debt features debt features = stated par value; stated dividend rate as a percentage of par equity features = price of a bond may generally move w/ price of common stock dividend does NOT fluctuate like a common stock dividend; NO maturity date like a bond price of preferred stock more closely tied to interest rates than common stock Tax Advantage = corporations receive a 50 or 65% deduction of dividends (preferred & common stock) based on percentage of ownership of the company paying the dividends (covered in tax) 65% for 20% or more owned corporations same deduction applies to common stock dividends as well

Answer 72

conversion value (CV) is value of convertible bond in terms of stock into which it can be converted CV = (Par / CP) x Ps Ps = price of the common stock CP = conversion price (Par Value / CP) is the conversion ratio or the # of shares the convertible can be converted into

Answer 73

to determine how much an investor is willing to pay for a piece of property Capitalized Value = Net Operating Income (NOI) / Capitalization Rate Capitalized Rate = NOI / Cost NOI = Gross Rental Receipts + non-rental income - vacancy & collection losses - total expenses NOT including depreciation or mortgage payment OR NOI = Net Income + depreciation + financing activities

Answer 74

fixed initial market capitalization specific # of shares initially sold to public those shares then traded on an organized exchange; NO new shares issued by fund shares may trade at a premium or discount to NAV

Answer 75

unlimited # of shares as long as fund receives contributions, fund family will continue to offer shares shares bought/redeemed directly from fund family shares trade at NAV NAV = (Assets - Liabilities) / Shares Outstanding

Answer 76

managed by trustee self liquidating, passive management, NO trading of assets w/in the trust issues units, NOT shares units can be sold back to the UIT at NAV; very thinly traded secondary market

Answer 77

portfolio of stocks representing an index traded on exchange similar to stocks & can be traded intra-day unlike mutual funds investors do NOT have to buy/sell blindly low cost of ownership d/t passive investments trading only occurs when stocks are added or removed from an index Most ETFs are tax efficient investments d/t low asset turnover & passive investment strategy ETFs structured to track an index but can also be actively managed to track an investment manager's top picks, or mimic an existing mutual fund

Answer 78

low correlation w/ stock market & diversification benefit provided to portfolios real estate is a hedge against inflation REITs MUST distribute 90% of investment income to shareholders to maintain tax-exempt status

Answer 79

invest in real estate for capital appreciation income generated from rental income & appreciation

Answer 80

invest mostly in mortgages & construction loans make the spread b/t the lending & borrowing rate

Answer 81

foreign stock held in domestic banks' foreign branch dividends & capital gains (capital gains in ADRs include currency fluctuation) trade on US exchanges, denominated in US dollars, trade in US dollars dividends paid in US dollars ADRs do NOT eliminate exchange rate risk **** MUST KNOW

Answer 82

= premium - intrinsic value

Answer 83

KNOW THE VARIABLES used to determine the value of a CALL option Variables = current price of underlying asset, time until expiration, risk-free ROR, volatility of underlying asset, strike (exercise) price all variables have a DIRECT relationship on the price of the option except the strike price; as the strike price increases, the option decreases in value

Answer 84

attempts to value a PUT option based on the value of a corresponding call option MUST KNOW

Answer 85

attempts to value an option based on the assumption that a stock can only move in one of two directions MUST KNOW

Answer 86

two potential tax consequences 1. if contract expires: premium paid = ST loss, premium received = ST gain 2. if contract exercised: premium added to stock price to increase basis in underlying stock; if underlying stock held for more than 12 months = LTCG or LTCL; if underlying stock held less than or equal to 12 months = ST gain or loss

Answer 87

essentially LT call options issued by the corporation expiration period much longer than options, usually 5-10 years terms are NOT standardized ex = call option contracts are standardized in terms of expiration month & # of shares controlled

Answer 88

Two types = commodity futures & financial futures options give holder right to do something; futures obligate holder to make or take delivery futures contracts do NOT state the per unit price of the underlying asset which is determined by supply & demand two primary players in futures are hedgers & speculators futures contracts are "marked to market" = gain or loss (in cash) is credited/debited to your account on a daily basis

Answer 89

Position 1 = long the commodity, short the contract (orange grove owner, long the commodity oranges in the trees & short the futures contract to lock in his sale price) Position 2 = short the commodity, long the contract (manufacturer of orange juice user of oranges, long in futures contract & short position in manufacturing costs of juice in the future)

Answer 90

consumer spending government spending business investing net imports/exports

Answer 91

each depositor $250K insurance PER TYPE OF ACCOUNT OWNERSHIP including IRAs up to $250K; 3 types of ownership = individual, joint & trust accounts; retirement accounts also separate but cov depends on type of asset; each person deemed to own 50% of a joint account; money market mutual fund NOT covered; stocks/bonds/mutual funds NOT covered; any deposit payable in US IS covered; any deposit only payable outside of the US is NOT covered

Answer 92

relief through liquidation

Answer 93

relief through adjusting debts "means test"

Answer 94

rollover IRAs have unlimited protection IRA & Roth exempt up to about $1.3 million (as indexed) alimony & child support pensions, life insurance & annuities INHERITED IRAs DO NOT HAVE ANY PROTECTION

Answer 95

1. Workers Compensation - absolute form of liability (doesn't matter who was at fault), regardless of fault if injured at work EE collects benefits, benefits NOT subject to income taxation 2. Unemployment compensation - collects if EE loses job, funded by tax on ER, benefits INCLUDED in gross income

Answer 96

1. Liquidity Ratio = ability to meet ST or current liabilities 2. Debt Ratios & Debt Analysis = indicates how well a person manages their debt 3. Performance Ratios = assesses the financial flexibility of the client as well as progress towards goals

Answer 97

Liquidity Ratio ability to meet ST obligations CL = credit cards, ST debt less than 12 months Current Ratio = Current Assets / Current Liabilities balance sheet

Answer 98

liquidity ratio need 3-6 months in nondiscretionary expenses (expenses that do NOT go away if you lose your job, debt/utilities/food) EF Ratio = Current Assets / MONTHLY Nondiscretionary Expenses

Answer 99

debt ratio also known as FRONT Ratio should be less than or equal to 28% of GROSS income = MONTHLY Housing Costs (P+I+T+I) / MONTHLY GROSS income P =Principal I = Interest T = Taxes (Property) I = Homeowners Insurance

Answer 100

debt ratio also known as BACK Ratio housing plus all other recurring debt should be less than or equal to 36% of GROSS income = [MONTHLY Housing Costs (P+I+T+I) + ALL Other Recurring Debt] / MONTHLY GROSS Income P =Principal I = Interest T = Taxes (Property) I = Homeowners Insurance All other recurring debt includes auto, student loans, boat, credit card & any other type of monthly debt

Answer 101

primary driver is TIME Rent/Lease = time in property short (1-3 years) Buy = time in property long (> 3 years), build equity, high marginal tax bracket

Answer 102

performance ratio = Annual Savings (EE + ER Contributions) / ANNUAL GROSS Income target 10-12% depending on age starting saving could be 20-25% if saving later in 40s or 50s important to include employer contributions to 401k, profit sharing plans etc

Answer 103

***529 Savings plan default answer for best education savings plan unless given data/info making 529 impossible/unavailable/disadvantage Qualified State Tuition Plan invests in diversified portfolio stocks/bonds based on child's age appreciation tax free if used for qualified education expenses contributions made pro ratably over 5 year period up to $90K in one year w/out gift tax consequences a couple that elects gift splitting can contribute $180K (18K x 2 x 5) in one year 2024 significant for grandparents want to reduce their gross estate considered a PARENTAL asset for financial aid purposes distributions from plans owned by someone other than the parents for education expenses are NO LONGER considered income of the child for FASFA purposes

Answer 104

Advantages: possible state income tax deduction for contributions no phase out for who can participate owner controls the account can change beneficiary anytime contributor can remove assets from gross estate SECURE 2.0 Act changes after 12/31/23: beneficiaries permitted to rollover up to $35k over course of lifetime from any 529 account in their name to their Roth IRA these rollovers are also subject to Roth IRA annual contribution limits, & the 529 account must have been open for more than 15 years Disadvantages: 10% penalty & included in gross income if NOT used for qualified education expenses Exceptions to 10% penalty include death, disability & scholarship for beneficiary

Answer 105

Debt Ratio consumer debt payments should NOT exceed 20% of NET income

Answer 106

all assets are capital assets EXCEPT ACID: Accounts/notes receivable Copyrights & creative works Inventory Depreciable property used in a trade or business

Answer 107

1. Capital Assets - most personal use assets & most investment assets 2. Section 1231 Assets - section 1245 & section 1250 depreciable business property used in a trade or business 3. Ordinary Income Assets - assets that are not capital assets & not section 1231 assets

Answer 108

assets used in a trade or business do NOT include = inventory, property held by the taxpayer primarily for sale to customers in the ordinary course of their trade or business, copyrights or creative works Section 1231 specifically includes certain property such as: Timber Coal Iron Ore Certain Livestock Unharvested crops (under certain conditions)

Answer 109

capital improvements that extend the life of the asset NOT repairs/maintenance

Answer 110

Section 179 deduction depreciation

Answer 111

when property acquired in exchange, newly acquired property has carryover basis if property exchanged for property of equal value (no boot is paid) if property exchanged for MORE valuable asset (thus boot is paid), new asset has carryover basis (CB of the exchanged property) plus any boot paid if property exchanged for LESS valuable asset (thus boot is received), new asset has carryover basis reduced by any boot received that was greater than the gain

Answer 112

General Rule = donee's basis in gifted property is the SAME as the donor's basis in the gifted property Exception 1 = FMV of gifted ass is less than donor's basis (loss property); Double Basis Rule must be used - for gains only, basis of donor is adjusted basis of donee - for losses only, basis to donee is FMV of property on date of gift - if asset later sold by donee & amount realized is b/t FMV at time of gift & adjusted basis of donor, NO gain or loss is recognized; donee's basis = sales price Exception 2 = when gift tax has been paid & asset appreciated in hands of donor, portion of tax which is associated w/ the appreciation is added to the donor's basis to determine the donee's basis Donee's Basis = Donor's Basis + [(Net Appreciation in Value of Gift / Value of Taxable Gift) x Gift Tax Paid]

Answer 113

General Rule = holding period in the hands of the donee includes the HP of the donor If double basis asset (gifted asset where FMV is less than donor's basis at time of gift) is sold for a loss, then the holding period for the donee starts on the date of the gift

Answer 114

ONLY AFFECTS TRANSACTIONS WHERE THERE IS A LOSS Transferor's loss is forever lost; DISALLOWED LOSS transferee takes asset w/ DOUBLE BASIS RULE (FMV for losses, transferor's basis for gains) holding period ALWAYS begins at the date of the sale related parties include siblings (include half but NOT step), lineal descendants (children/grandchildren), ancestors (parents/grandparents), spouse EXAM TIP: NEVER gift or sell an asset to a related party when the donor's basis is greater than the FMV of the asset

Answer 115

if a taxpayer sells property to a charity for less than its FMV, the basis of the property must be allocated b/t the portion of the property sold & the portion given to charity Basis for Sale Purposes = (Amount Realized / FMV) x Basis of Property

Answer 116

LTCG maximum rate 20%; STCG taxed as ordinary income LTCG = asset held MORE than one year day of disposition is included in HP but day of acquisition NOT included in HP

Answer 117

gains on capital assets are taxed only when there has been BOTH (1) a realization event AND (2) a recognition event gains must be realized BEFORE they can be recognized realization occurs when there is a disposition of property (sale/exchange) OR segregation of the gain Recognition occurs when a realized gain is taxed as a general rule realized gains are recognized (taxed) unless an exception to this rule can be found in the Internal Revenue Code; an exception will generally provide that the gain is exempt from taxation OR the gain is deferred to a future time

Answer 118

Section 1001 Realized Gain/Loss = Amount Realized - Adjusted Basis Adjusted Basis = Cost of Property + Capital Additions - Cost Recovery ordinary gains are fully taxable, ordinary losses are fully deductible capital gains/loss subject to special tax treatment

Answer 119

Amount Realized = Cash received + FMV of property received in exchange + Liabilities Shed the party that is giving up or "shedding" the debt will be deemed to have an additional amount realized conversely the party assuming the debt will be deemed to be paying that amount in the exchange

Answer 120

losses on wash sales are disallowed occurs when a taxpayer disposes of securities at a loss & acquires substantially identical securities w/in 30 days before or after the date of the loss sale the disallowed loss is ADDED to the cost of the new stock or security to determine the new basis of the substantially identical securities EXAM TIP: Index fund for Index fund = wash sale rule APPLIES Index fund for managed large cap fund = wash sale rule does NOT apply Personal Use Property - losses disallowed = losses generated on the sale or exchange of property that is used for personal purposes is disallowed for income tax purposes

Answer 121

property must have been owned & occupied as a principal residence for 2 of the last 5 years; exclusion can only be used once every 2 years single taxpayers may exclude up to $250K of gain from sale of principal residence MFJ may exclude up to $500K of gain from the sale of their principal residence if married both MUST meet the use requirement & not have utilized the exclusion w/in the last 2 years but either may meet the ownership requirement a reduced exclusion is available if sale of personal residence is d/t change in employment, change of health, or other unforeseen circumstances Exclusion Allowed = (# of months met / 24) x Available Exclusion

Answer 122

a loss resulting from worthless securities is deductible in the year in which the securities become completely worthless Section 165 sets the artificial sale date for the securities as the last day of the year in which the securities became worthless Always 12/31 for Calendar year taxpayers!

Answer 123

1. Capital Assets = most personal use assets & most investment assets 2. Section 1231 Assets = Section 1245 & Section 1250 Depreciable Business Property used in a trade or business 3. Ordinary Income Assets = assets that are not capital assets & not Section 1231 assets

Answer 124

single deduct up to $50K ($100K MFJ) on loss on small business stock as ordinary loss if following requirements met: 1. stock represents ownership in domestic corporation 2. corporation was a small business corporation (less than $1MM total capital contributions plus paid-in capital 3. loss was sustained by the original owner of the stock loss in excess of per year limit is treated as capital loss any gains associated w/ Section 1244 stock treated as capital gains

Answer 125

assets must have holding period more than 1 year gains = capital gains losses = ordinary losses Depreciation Recapture: gain on the disposition of Section 1245 property treated as ordinary income to extent of depreciation allowed/allowable on property any gain beyond that which must be treated as ordinary income is treated as a Section 1231 gain Section 1245 property = property subject to an allowance for depreciation or amortization, tangible personal property used in a trade or business & includes depreciable property (equipment), patents, copyrights & other intangibles Real Property (land & buildings) is NOT Section 1245 property EXAM TIP: the ONLY way to have a section 1231 gain on a section 1245 property is to sell it for more than it was originally purchased for EXAM TIP: Note - ANY sale amount in excess of the original purchase price of a Section 1245 asset is a Section 1231 gain Section 1250 governs the recapture of depreciation on real Section 1231 assets (business realty such as buildings & real estate) - lesser of gain or difference b/t depreciation taken & straight line depreciation taxed as ordinary income (recapture of excess depreciation) - if gain exceeds amount, lesser of the remaining gain or the SL depreciation taken on the property will be taxed at 25% (un-recaptured Section 1250 depreciation) - any gain in excess taxed at capital gains rates ALL Section 1250 losses are ordinary losses

Answer 126

deferral of gain on an involuntary conversion of property d/t destruction/theft/seizure/condemnation defer gains to extent proceeds received reinvested in replacement property w/in appropriate time period time period starts at date of realization of involuntary conversion or threat of condemnation; time period ends 2 years (3 years for condemnation of realty) from the year-end of year that gain is realized to extent proceeds are not reinvested gain must be recognized

Answer 127

deferred taxation of gains only for real property transactions held for either productive use in a trade or business or as an investment; only applys to U.S. realty, NOT foreign 1031 does NOT apply to = tangible personal property (since TCJA), personal assets, inventory, stocks, bonds, notes, interests in partnerships, certificates of trust or beneficial interests anything considered not like-kind in the exchange is called "boot" party trading up recognizes no gain & adds to their old basis any boot/cash given to other party party trading down (receiving less like-kind property than given up) recognize gain to extent of boot received; if boot exceeds gain the amount of boot in excess of gain is treated as return of capital & reduces the basis in the new asset FMV of new asset - gain NOT recognized + loss NOT recognized = basis in new asset basis in boot received is FMV of property IRC Approach (BEWARE OF USING IRC APPROACH!) Adjusted Basis of Like-kind asset Given + Adjusted Basis of Boot Given + Gain Recognized - FMV of Boot Received - Loss Recognized = Basis in New Asset TIP: mortgage relief is boot, so is forgiveness of debt, the one receiving debt relief think of as the one receiving cash

Answer 128

Value Managers Technicians looking for the next big, but as yet, undiscovered stock that will break onto the scene start w/ the company then the industry then finally the economic climate

Answer 129

Group rotation managers Market timers starts w/ the economic climate, moves to the industry then the company

Answer 130

R-Squared = correlation coefficient squared R-Squared measures the percentage of return d/t the market greater than or equal to 0.7 means beta is appropriate

Answer 131

when a portfolio is not well diversified

Answer 132

Gross Income = Income (broadly conceived) - exclusions from income AGI = Gross Income - deductions FOR AGI (ATL) Taxable Income = AGI - (the greater of total itemized deductions (BTL) OR standard deduction) - any QBI x 20% deduction Tax Due (or Refund Due) = Tax on Taxable Income - tax credits (including federal income tax withheld & other prepayments of federal income taxes)

Answer 133

income is taxable when it is: 1. Readily available to the taxpayer, AND 2. that income is NOT subject to substantial limitations or restrictions

Answer 134

Meets all of the following tests: 1. Relationship Test = taxpayer's child, grandchild, step brother/sister, half brother/sister 2. Support Test = child does NOT provide more than 1/2 of their own support 3. Age Test = child is under age 19 or student under age 24 4. Abode Test = child lived w/ taxpayer more than 1/2 of the year

Answer 135

Meets all of the following tests: 1. Relationship (or household member) Test = children, grandchildren, siblings, parents, grandparents, parent's siblings OR anyone that lives w/ you all year even if they are not related 2. Support Test = provide more than 1/2 of the support of a dependent 3. Gross Income Test = dependent's gross income must be less than $5,050 (2024) 4. Not a Qualifying Child Test = a dependent cannot be a qualifying child of any taxpayer for the tax year EXAM TIP = no cousins unless in the same household!

Answer 136

Compensation for services (including certain fringe benefits) Gross income derived from business Gains derived from dealings in property Interest & Dividends Rents & Royalties Income from life insurance & endowment contracts Pensions Discharge of indebtedness (unless under bankruptcy) Distributive share of partnership gross income Unemployment benefits Income in respect of a decedent (IRD) Income from an interest in an estate or trust Annuity payments Alimony & separate maintenance payments (dated PRIOR to 2019) Below Market Rate Loans (Imputed Interest)

Answer 137

up to 85% of SS benefits may be taxable; dependent on taxpayer's MAGI MAGI + 1/2 of SS benefits must be compared to hurdle amounts (not on tax table) 1st hurdle: MFJ = $32K; MFS = $0; All Other Taxpayers = $25K 2nd Hurdle: MFJ = $44K; MFS = $0; All Other Taxpayers = $34K 1. If MAGI + 1/2 SS Benefits exceeds first hurdle but not the second; taxable amount of SS Benefits is LESSER OF: - 50% SS Benefits OR - 50% [MAGI + (1/2 SS Benefits) - Hurdle 1] 2. If MAGI + 1/2 SS Benefits exceeds second hurdle; taxable amount of SS Benefits is LESSER OF: - 85% SS Benefits OR - 85% [MAGI + (1/2 SS Benefits) - Hurdle 2] + LESSER OF: (a) $6K MFJ, $4,500 all other taxpayers OR (b) taxable amount calculated under the 50% formula & only considering Hurdle 1

Answer 138

imputed interest included in income of lender (phantom interest income); also is the amount of the gift from the donor (lender) to the donee (borrower); gift may be eligible for annual gift tax exclusion if loan less than or equal to $10,000 = NO imputed interest loan greater than $10K but less than or equal to $100K = imputed interest is LESSER of NII or interest calculated using AFR less interest calculated using stated rate of the loan (if borrower's NII less than or equal to $1,000 then $0 imputed interest) if loan greater than $100,000 = imputed interest calculated using AFR less interest calculated using stated rate of the loan AFR = Applicable Federal Rate

Answer 139

Gifts & Inheritances Life Insurance Proceeds Scholarships (tuition, fees, books) Gain on Sale of Personal Residence Qualifying Distributions from Roth IRAs & Roth 401(K)/403(b) Plans Compensation for Injuries & Sickness (workers comp?) Employer sponsored accident & health plans Child support payments received

Answer 140

meals & lodging; lodging must be condition of employment Employer sponsored Accident & Health Plans - Medical - Group Term Life Insurance -- cost of first $50K of coverage NOT taxable to employee; cost of excess coverage taxable determined by Uniform Premium Table I Other Employee Fringe Benefits: - Athletic Facilities (on employer premises) - Educational Assistance Programs (limited to $5,250/year) - Flexible spending Accounts permitted $3,200 (2024) per year whereas Dependent Care Spending Accounts permitted $5,000 maximum contribution per year Classes of Nontaxable Employee Benefits: - No-additional-cost-services - Qualified employee discounts (service -20%; products - profit %) - Working condition fringe benefits - De Minimis fringe benefits

Answer 141

1. limiting measure (floor) for medical expenses (7.5%) 2. limiting measure (ceiling) for charitable deductions 3. determines deductibility of IRA contributions 4. determines phaseout of other tax benefits

Answer 142

deductions from losses on sale or exchange of property deductions from rental & royalty property 1/2 self-employment tax paid 100% health insurance premiums paid by a self-employed individual contributions to pension, profit sharing, annuity plans, IRAs, etc penalty on premature withdrawals from time savings accounts or deposits interest on student loans = $2,500 deduction regardless of filing status; may be used for higher education expenses related to tuition, fees, room & board, necessary fees for people at least half time; phaseout single 80-90K, MFJ 165-195K 2024 Health Savings Accounts Trade or business expenses Alimony payments = divorced before 2019 & NOT materially modified

Answer 143

in order for expenses to be deductible, they MUST be: 1. Ordinary = normal/usual/customary for others in similar business & not capital in nature 2. Necessary = prudent businessperson would incur same expense 3. Reasonable = question of fact Other Ordinary & Necessary: - Business Gifts = limited to $25 each plus shipping - Entertainment Expenses = deductions except for meals are eliminated for years after 2017; 50% limit on meals, 100% of transportation costs; entertainment expenses are NO longer deductible

Answer 144

for alimony paid under an agreement signed on or before 12/31/2018 alimony paid is a deduction FOR AGI ATL; payment for support, payments in cash that do NOT extend beyond death of payee CHILD SUPPORT IS NOT ALIMONY alimony received is earned income (provides for IRA funding) if divorced on or before 12/31/2018 alimony cannot be property settlement; no deduction is available for property transferred among spouses for agreements signed (or significantly modified w/ an election to follow the new tax treatment) after 12/31/2018 = alimony is no longer deductible or taxable

Answer 145

Changes since TCJA: - under TCJA, moving expenses are NO longer deductible except for armed services relocating to a permanent duty station - if employer pays or reimburses moving expenses then employer must include the amounts paid in the employees gross income

Answer 146

greater of sum of itemized deductions or standard deduction standard deduction = given amount for tax year itemized deductions (aka Sch A & BTL) charitable contributions limited casualty losses medical expenses in excess of 7.5% of AGI (made permanent) limited miscellaneous itemized deductions interest on mortgage & investments, subject to limitations taxes (state/sales & use, local, US property) capped at $10,000 ***Qualified Business Income Deduction - applies to both standard & itemized

Answer 147

only available for Federally declared disaster areas; sudden & unexpected loss; not available for erosion or termite damage loss equal to LESSER of decline in FMV or Adjusted Taxable Basis less $100 per incident; subject to 10% of AGI floor Estate Administration losses & Business casualty losses still exist; not subject to same restrictions

Answer 148

NOT subject to 2% AGI threshold: - Income in respect of decedent (IRD) - Gambling losses to extent of gambling winnings - Impairment related work expenses for handicapped - Annuity losses for decedent annuitant *ABSOLUTELY need to know the deductions not subject to 2% floor miscellaneous deductions previously subject to the 2% AGI limit are no longer deductible

Answer 149

Mortgage Interest: - interest on up to $1MM of indebtedness on primary residence & one other property for property financed prior to 12/15/2017 - interest on up to $750K of indebtedness on primary residence & one other property for property financed after 12/15/2017 - NO home equity interest is deductible unless used to improve the property - calculated by dividing the qualified mortgage over the total mortgage times the interest paid Investment Interest: - to the extent of net investment income (NII) - NOT including qualified dividends & LTCG - special election to tax these at ordinary income tax rate will include in net investment income (NII)

Answer 150

state income taxes OR sales & use tax city income taxes ad valorem taxes (property taxes (house/vehicles etc) for US property deduction when paid (cash basis) no foreign taxes are deductible deductible only by tax bill recipient Capped at $10,000

Answer 151

overall the total deductible contributions for the tax year cannot exceed 50% of the donor's AGI when both cash & property are donated in the same tax year

Answer 152

credit for adoption expenses incurred up to $16,810 (2024) phased-out ratably for MAGI b/t $252,150-$292,150 (2024) an eligible child is one that is less than 18 years of age OR physically or mentally handicapped

Answer 153

partially refundable child tax credit of $2,000 available to individual taxpayer for each qualifying child under the age of 17 Qualifying Child = - is son/daughter/stepchild/foster child/brother/sister/stepbrother/stepsister/halfbrother/halfsister/or a descendant of any of them (ex grandchild) - under age 17 @ end of tax year - did NOT provide over half of their support for the tax year - lived w/ taxpayer for more than half the year - was a U.S. citizen, U.S. national, or a resident of the United States under TCJA up to $,1700 each qualifying child credit may be refundable phaseout AGI $200k/$400k

Answer 154

qualifying dependent credit for years after 12/31/17 $500 nonrefundable credit qualifying dependents includes dependents as defined under present law except for qualifying children under age 17; so assume qualifying relatives AND qualifying children age 17 & over are eligible

Answer 155

credit of 20% of expenses paid (limited) for the care of dependent under age 13 or spouse or dependent w/ a handicap lesser of actual costs or $3,000 for one qualified individual & $6,000 for two or more qualified individuals and the earned income of the lower earning spouse EXAM TIP: most likely to be tested is 20% x eligible costs; $3,00 for one child or $6,000 for two children

Answer 156

applies to unearned income of dependent children under age 19 living w/ parent or under age 24 & a full-time student unearned income in excess of $2,600 taxed at parent's rate unearned income b/t $1,300 & $2,600 taxable @ child's rate earned income above the standard deduction taxed @ child's rate apply standard deduction for a dependent = greater of $1,300 or earned income plus $450 (limited to $14,600) EXAM TIP: the kiddie tax only applies to UNEARNED INCOME in excess of $2,600

Answer 157

taxpayer liable for greater of regular tax liability or the AMT AMT = regular taxable income +- adjustments + preferences less AMT exemptions (2024) $133,300 MFJ, $85,700 single/HoH, $66,650 MFS preferences = permanent changes (private activity bonds)

Answer 158

positives or negatives accelerated depreciation for real & personal property that is allowable for regular tax purposes (added back) the standard deduction if itemized deductions are NOT used (added back) taxes (state/local/property) (added back, capped at $10k) Incentive Stock Option bargain element (positive @ exercise, negative @ sale)

Answer 159

Percentage depletion Intangible drilling costs Interest on private activity bonds EXAM TIP: make sure to know the three preference items! permanent increases; always added back, NEVER subtracted

Answer 160

all ordinary, necessary, & reasonable business expenses are deductible against income; to be classified as a business activity the taxpayer must have a profit motive when there is no profit motive & the activity is classified as a hobby = ALL of the hobby income must be included in gross income TCJA hobby expenses are NOT deductible no profit in 3 years out of 5 years = presumed a hobby hobby activities cannot generate deductible losses the hobby rules may still be tested as it relates to when an activity is deemed a hobby & as it relates to mixed use real estate rentals

Answer 161

1. Is the property rented for less than 15 days? - YES = nontaxable activity = income realized, NOT recognized, no expenses may be claimed - NO = see next step 2. Is the property used by the owner for more than the greater of 14 days or 10% of the rental days? - YES = Mixed Use Activity = income recognized, allocable expenses deductible to extent of income, 2% floor does NOT apply, expenses deducted ATL, unused expenses can be carried forward - NO = Rental Activity = income recognized, all allocable expenses deductible even if rental activity results in loss, ability to claim loss may be limited by passive-activity rules

Answer 162

20% deduction based on QBI; deduction reduces taxable income, NOT AGI

Answer 163

At Risk Rules & Passive Activity Treatment: - three types of income = active, passive, portfolio - under the at risk rules, apply before passive activity rules, losses can only be deducted to the extent of property/money that is at risk passive losses can only offset passive income &/or gains At-risk = amount of a taxpayer's economic investment in an activity, amount of cash & adjusted basis of property contributed to activity plus amounts borrowed for which taxpayer is personally liable (recourse debt) Passive Activity = NO material participation, rental activities even w/ material participation; exception = real estate dealers are NOT considered a passive activity if the real estate is actively managed then taxpayer can deduct up to $25K from ordinary income subject to phase-out of $1 for every $2 AGI exceeds $100K Material Participation = greater than 500 hours per year OR greater than 100 hours & the most of any participant Suspended Losses at Risk = if suspended losses are from "At Risk" activity they are NOT deductible until the at risk amount is positive from additions or income; if losses are suspended under passive activity rules the losses are deductible upon disposition Publicly Traded Partnershps must be treated separately; income/losses can only be used for that partnership losses from a limited partnership cannot be used to offset income from a master limited partnership (MLP)

Answer 164

can elect to immediately expense up to $1,220,000 of business tangible property placed in service during the year expense limitation reduced by amount of Section 179 property placed in service during year that exceeds $3,050,000; dollar-for-dollar reduction election to expense cannot exceed taxable income (before section 179) of taxpayer's trades or business (taxpayer cannot create a loss using Section 179) - excess of limitation over taxable income limitation may be carried over to subsequent years, amount carried over still reduces basis currently Section 179 applies BEFORE MACRS

Answer 165

Capital Goods & Consumer durable goods are cyclical & fluctuate directly w/ the economy & GDP

Answer 166

(SP - PP +- CF) / PP or equity invested % of return available from a given investment CF includes margin interest SP = selling price PP = purchase price CF = cash flow

Answer 167

CV = (PAR / CP) x Ps values a convertible bond in terms of its conversion value rather than its market price CV = conversion value PAR = face value of bond CP = conversion price to convert the bond to shares of common stock Ps = sale (or market) price of the stock

Answer 168

measures performance of portfolio manager to the market on a risk adjusted basis +alpha = good -alpha = bad absolute measure

Answer 169

MP = Equity / FMV current equity position of the investor Equity = Stock Price - Loan Required Equity = Current Price x Maintenance

Answer 170

Margin Call = Loan / (1 - Maintenance Margin) the lowest price at which the price can fall before an investor will receive a margin call ***at what price does an investor receive a margin call price

Answer 171

not on formula sheet = corporate rate x (1 - Marginal Tax Rate) after tax ROR a taxable corporate bond pays

Answer 172

on formula sheet TEY = r / (1 - t) r = tax exempt yield t = investor's marginal tax rate the equivalent yield of a taxable security Exam Tip = if I am given the taXable rate, I need to multiple (X) in the formula Tax Equivalent = think pre-tax

Answer 173

on formula sheet IR = (Rp - Rb) / SDa Rp = return of portfolio Rb = return of a benchmark SDa = tracking error of active return measures return above benchmark divided by SD measures the excess return & consistency provided by a fund manager relative to a benchmark

Answer 174

on formula sheet r = (D1 / p) + g D1 = next expected dividend p = market price paid for a security g = dividend growth rate or the company growth rate the rate an investor should expect based on price paid for a security

Answer 175

Value = Net Operating Income (NOI) / Capitalization Rate the value of income producing property cap rate = opportunity cost of capital

Answer 176

NPV = PV of CF - Cost value of a stream of future cash flows discounted at the opportunity cost of capital Exam Tip = if NPV = 0 then yes make the investment a positve NPV the investor would make the investment a negative NPV & the investor would NOT make the investment

Answer 177

CV = SD / x x = mean expected (average) return standardizes the measure of risk per unit of return useful when comparing two assets w/ different average returns Exam Tip = the asset w/ lower CV (risk/return) has the higher risk asjusted return (return/risk) the higher the CV the more risky an investment & the less likely an investor is to achieve the average return

Answer 178

value that a well informed buyer is willing to accept from a well informed seller where neither is compelled to buy or sell

Answer 179

x axis = quantity y axis = price top left to bottom right = Demand bottom left to top right = Supply

Answer 180

HMO = cheaper, in-network only PPO = more expensive, more flexibility similarities = no paperwork if in-network?

Answer 181

must be chronically ill or suffer from substantial cognitive impairment chronically ill = unable to perform 2 of 6 ADLs for at least 90 days substantial cognitive impairment = behavior threatens own/others health & safety ADLs = eating, bathing, dressing, transferring from bed to chair, toileting, continence BEDTC EXAM TIP: walking is NOT a current ADL premiums tax deductible & benefits tax free if policy is qualified maximum deduction if over 70 = $5,880 (likely to be tested) EXAM TIP: a portion of LTC premiums are tax deductible subject to medical deduction of 7.5% of AGI qualified requirements = no surrender value, limited to qualified LTC services, dividends to reduce future premiums or increase benefits, meet consumer protection laws, does NOT pay for expenses covered under Medicare

Answer 182

Movement of ground (earthquake/landslide) Ordinance or Law (regulations construction/demolition) Damage from water (floods, water from underground, sewer backup) War or nuclear hazard (nuclear power plant) Power failure (power plant failure that causes a loss) Intentional act (burning down your own house) Neglect (must take reasonable means to save property & mitigate loss)

Answer 183

HO-1 = Basic Form, basic named perils HO-2 = Broad Form, basic & broad perils HO-3 = Special Form, coverage on dwelling & other structures on an open peril basis resulting in coverage against all physical loss other than those specifically excluded; personal property covered on a named peril basis (memorize HO-3) HO-4 = Contents Broad Form (renters) HO-5 = Comprehensive Form HO-6 = Unit Owners Form (CONDO OWNERS) HO-8 = Modified Form (old homes)

Answer 184

Part D protects against an accident involving another car, running off the road, into a creek or lake, tree, wall

Answer 185

Part D covers the following perils: falling objects fire theft explosion earthquake windstorm hail water flood mischief vandalism riot contact w/ a bird or animal breakage of glass

Answer 186

protection against legal obligations that arise from negligent acts pays the costs up to the face of the policy that result in a liability usually provides defense for the insured in the event of a lawsuit requires higher liability limits on underlying auto & homeowner policies the coverage includes exposure at the premises of the residence or away from the residence EXAM TIP: if a client doesn't have a PLUP THEY NEED IT; a PLUP is always the right answer; look for $1 million in coverage

Answer 187

OASDI 6.2% (both ER & EE) up to wage base $168,600 (single, rest on formula sheet) Medicare 1.45% (both ER & EE) unlimited amount of wages Additional Medicare tax of 0.9% (EE) on income in excess of $200,000 if single or $250,000 for MFJ unlimited amount of wages

Answer 188

disability is expected to last for 12 months or disability will result in your death & cannot perform the duties of any occupation severe physical or mental impairment that is expected to prevent worker from performing substantial work for at least one year or result in death

Answer 189

to qualify for retirement benefits a worker must be "fully insured" must earn 40 quarters of coverage 1 quarter = $1,730 in wages subject to social security

Answer 190

covered for disability if age 31 & greater, fully insured (40 quarters) & earned 20 quarters in the last 40 quarters 24-31; 1/2 of calendar quarters elapsed since worker reached age 21 if ages 21-24; 6 quarters earned currently insured has NO spousal benefit

Answer 191

Most Important: Disabled insured worker under age 65 A retired insured worker under age 62 Spouse of a retired or disabled worker who is at least 62 OR is caring for a child under age 16 or disabled Divorced spouse of a covered worker if age 62 & married to the worker for at least 10 years & did not remarry Widow at age 60, care of child under age 16 *watchout for blackout period

Answer 192

provides hospital & medical insurance must have attained age 65 years OR disabled for 2 years

Answer 193

Failure to File = Five % Failure to Pay = Point five %

Answer 194

Adjusted Basis - Salvage Value = Depreciable Amount Depreciable Amount / Estimated Useful Life = Annual Depreciation Deduction

Answer 195

3 Year = Tractors, rent-to-own property **5 Year = Autos, computers, office equipment **7 Year = office furniture & fixtures 27.5 Year = rental home 39 Year = office building ** = the two categories most likely to be tested

Answer 196

nonresidential real property & residential rental property

Answer 197

Advantages: - easy to form - simple to operate - easy to sell business assets - few administrative burdens - income generally passed through to the owner on Schedule C of Form 1040 Disadvantages: - generally have limited sources of capital - unlimited liability - no guarantee of continuity beyond the proprietor - business income is subject to self-employment tax

Answer 198

Advantages: - more sources of initial capital than proprietorships - usually have more management resources available than proprietorships - have fewer administrative burdens than corporations - income & losses generally passed through to the partners for tax purposes Disadvantages: - transfer of interests more difficult than for proprietorships - unlimited liability (each partner liable for partnership debts & obligations) - partnership income tax & basis adjustment rules can be complex - business net income subject to self-employment tax - partners entitled to few tax-free fringe benefits that are generally available to all employees

Answer 199

Advantages: - favorable pass-through partnership taxation status - flexibility in structuring ownership interests - limited partners are not personally liable for the debts & obligations of the limited partnership as long as they do not engage in management Disadvantages: - must file w/ the state to register - in most states, general partners are liable for debts & other obligations of the limited partnership - losses for limited partners are generally passive losses

Answer 200

Advantages: - favorable pass-through partnership taxation available - flexibility in structuring ownership interests - partners can insulate themselves from the acts of other partners Disadvantages: - required to file w/ the state to register - unlimited liability for own acts of malpractice

Answer 201

Advantages: - control retained by senior family member - valuation discounts are available for minority interests - annual exclusion gifts generally used to transfer interests to family members - some creditor protection - restrictions can be placed on transferability of limited partnership interests of junior family members - FLP is commonly used as an estate planning strategy Disadvantages: - attorney setup fees & costs - periodic valuation costs - operational requirements - potential IRS challenges regarding valuations & discounts

Answer 202

Advantages: - members have limited liability - # of members unlimited but single member LLC is disregarded entity for tax purposes (file form 1040 schedule C) - members may be individuals, corporations, trusts, other LLCs & other entities - income passed through to members usually on Schedule K-1 - double taxation affecting most C corporations avoided if partnership tax status elected - members can participate in managing the LLC - distributions to members do not have to be directly proportional to the members' ownership interests as they do for S corporation - can have multiple classes of ownership - entity may elect to be taxed as a partnership, an S corporation, or a C corporation Disadvantages: - may have limited life (often by the termination on the death or bankruptcy of a member) - transfer of interests is difficult & sometimes limited by operating agreement - some industries or professions may not be permitted to use LLC status - laws vary from state to state regarding LLCs - laws are relatively new for LLCs therefore precedent from prior court cases are limited - for tax purposes the complex partnership rules generally apply - members not meeting exceptions are subject to self-employment tax on all earned income if partnership status is elected

Answer 203

ownership less than 20% = 50% DRD ownership at least 20% & less than 80% = 65% DRD ownership at least 80% (affiliated corporations) = 100% DRD

Answer 204

Advantages: - relative ease raising capital - limited liability of shareholders - unlimited life of entry - ease of transfer o ownership interests - generally more management resources - shareholder/employees may receive the full array of employer-provided tax-free fringe benefits Disadvantages: - potential for double taxation d/t entity level taxation - administrative burdens (filings) - more difficult to form & dissolution can cause taxable gains - borrowing may be difficult w/out stockholder personal guarantees which negates part of the advantage of limited liability - requires a registered agent - requires a federal tax ID #

Answer 205

must meet all following requirements at all times for "S" election to be initially & continually valid 1. no more than 100 eligible shareholders 2. ownership of S corp stock restricted to individuals who are US citizens or US residents, estates, certain trusts, & charitable organizations; an ESBT (Electing Small Business Trust) is one of the trusts that an own an S Corporation 3. the corporation must be an eligible corporation created under the laws of the United States or of any state 4. Insurance companies, Domestic International Sales Corporations (DISCs), & certain financial institutions are NOT eligible for S corp status 5. the corporation is allowed only one class of outstanding stock however the one class of stock may have shares w/ voting rights & shares w/ no voting rights

Answer 206

Advantages: - income passed through to shareholders for federal income tax purposes - income taxed at individual level which may be lower tax rate than applicable corporate rate - shareholders have limited liability - distributions from S corporations are exempt from the payroll tax system assuming the corporation provides adequate compensation to those shareholders who are employees of the corporation Disadvantages: - limited to 100 shareholders - only one class of stock permitted - cannot have corporate, partnership, certain trust, or nonresident alien shareholders - shareholder employees owning more than 2% of the company must pay taxes on a range of employee fringe benefits that would be tax-free to a shareholder/employee of a C corporation - the tax rate of the individual shareholder may be higher than the corporate tax rate - borrowing may be difficult w/out stockholder personal guarantees, which negates part of the advantage of the limited liability

Answer 207

both requirements to be met: 1. Personal Holding Company Income Test = at least 60% of the corporation's adjusted ordinary gross income for the tax year is from dividends, interest, rent & royalties 2. Stock Ownership Requirement = at any time during the last half of the tax year more than 50% in value of the corporation's outstanding stock is owned, directly or indirectly, by 5 or fewer individuals

Answer 208

small investors are always wrong if odd lot purchases are falling d/t relative odd lot sales, it indicates the little guy thinks the market will fall according to theory this would indicate rally is coming

Answer 209

deals in three levels of market activity over time

Answer 210

Taxable Amount = Death Benefit - Purchase Price of Policy - Premiums Paid by Purchaser after Purchase

Answer 211

purchasing power risk interest rate risk prepayment risk

Answer 212

current price time to maturity yield to maturity coupon rate

Answer 213

1. Implied Authority = actions assumed to be part of an agent's repertoire w/in their rights; authority to write a policy etc; this level takes place b/t the agent & the company (as stated in the facts of the question) 2. Express Authority = written in the contract 3. Apparent Authority = when a 3rd party believes there is authority (signage, business cards) but NONE EXISTS Note: when a client sees letter head, they assume you can conduct business; that is based on one of two things: 1. you have expressed authority which means you have implied authority OR 2. you do not have expressed authority which means you have apparent authority

Answer 214

Cash Dividends: - qualified dividends receive capital gains treatment - Qualified Dividend = paid by american company or qualifying foreign company, not listed as a dividend that doesn't qualify by IRS, held the stock for more than 60 days during the 121 day period that begins 60 days before the ex-dividend date Stock Dividends are NOT taxable to the shareholder

Answer 215

measure of systematic risk or market risk whereas standard deviation is a measure of total risk beta is an appropriate measure of risk for a well diversified portfolio beta of the market is 1 beta greater than 1 will have greater fluctuation & vice versa

Answer 216

R-Squared measure of how much return is d/t the market R-squared tells the investor if beta is an appropriate measure of risk greater than or equal to 0.7 indicates beta is an appropriate measure tells us diversification & benchmark

Answer 217

acceptance by an investor of a given level of risk while maximizing their expected return objectives Optimal Portfolio is the one selected from all efficient portfolios 1. investors seek the highest return attainable at any level of risk 2. investors want the lowest level of risk at any level of return 3. the assumption is also made that investors are risk averse

Answer 218

issued in series & mature in series

Answer 219

paid interest based on to whom the bonds are registered

Answer 220

pay interest to the holder of the bond

Answer 221

interest rates can be reset on reset bonds & U.S. government issues Treasury bonds, both are registered

Answer 222

take advantage of anticipated & potential yield differentials b/t bonds that are similar w/ regard to coupons, rating, maturities, & industry

Answer 223

utilize forecasts of general interest rate changes

Answer 224

designed to alter the cash flow of the portfolio by exchanging similar bonds having different coupon rates

Answer 225

replaces bonds w/ offsetting capital gains & losses

Answer 226

90% of current year, 100% of prior year, OR 110% of prior year If AGI from year prior is greater than $150K then safe harbor is 90% of current year tax or 110% of prior year tax 110% for prior year tax safe harbor ONLY applies if AGI is over $150K this year

Answer 227

the average rate a taxpayer pays based on taxable income determined by dividing the tax liability by the taxable income

Answer 228

any deduction for personal exemptions capital losses in excess of capital gains the section 1202 exclusion nonbusiness deductions in excess of nonbusiness income net operating loss deduction the domestic production activities deduction

Answer 229

AMT does NOT apply to NQSO

Answer 230

legal promise of the plan = paying a pension at retirement NO in-service withdrawals permitted (under Pension Protection Act of 2006 defined benefit pension plans can provide for in-service distributions to participants age 59.5 or older) mandatory funding standards (for plan years beginning in 2008 the funding rules under IRC Section 412 have been amended by the Pension Protection Act of 2006) 10% of plan assets available to be invested in employer securities plan must provide qualified joint & survivor annuity & qualified presurvivor annuity

Answer 231

legal promise of the plan = deferral of compensation & taxation in-service withdrawals permitted after two years if plan document permits NO mandatory funding standards up to 100% of plan assets available to be invested in employer securities plan does NOT have to provide qualified joint & survivor annuity & qualified presurvivor annuity

Answer 232

annual contribution limit = not less than the unfunded current liability Employer assumes investment risk forfeitures allocated to reduce plan costs subject to Pension Benefit Guaranty Corporation (PBGC) coverage EXCEPT professional firms w/ less than 25 employees investment accounts are commingled (NOT SEPARATE ACCOUNTS); participants have accrued benefits; accrued benefit roughly equal to the present value of the expected future payments at retirement credit CAN be given for prior service for the purpose of benefits favors older employees

Answer 233

annual contribution limit = 25% of total employee covered compensation Employee assumes investment risk forfeitures allocated to reduce plan costs or allocate to other participants plan NOT subject to PBGC coverage investment accounts are usually separate (separate accounts); participants have account balances credit CAN NOT be given for prior service for the purpose of benefits favors younger employees (usually)

Answer 234

Advantages to the Employer: - Employer contributions currently tax deductible - Employer contributions to the plan are NOT subject to payroll taxes; no avoidance for employee elective deferrals Advantages to the Employee: - Availability of pretax contributions for employees - Tax deferral of earnings on contributions - ERISA protection (Anti-Alienation prohibits any action that may cause the plan assets to be assigned, garnished, levied, or subject to bankruptcy proceedings; protection from employers) - Lump-sum distribution options (ten year averaging only for those born prior to 1936, NUA, Pre-1974 capital gain treatment)

Answer 235

limited contribution amounts contributions cannot be made after money is received plans usually have limited investment options no or limited access to money while an active employee distributions usually taxed as ordinary income (basis = $0) early withdrawal penalties may apply mandatory distributions at age 73 only ownership permitted is by the account holder cannot assign or pledge as collateral cannot gift to charity before age 70.5 w/out income tax consequences (charitable gifts from IRAs post age 70.5 & pre age 73 will NOT count towards RMDs for those turning 70.5 after 12/31/19 or for those turning 73 after 12/31/22) any year a deductible contribution is made to an IRA & a charitable distribution is made from an IRA the allowable charitable deduction will be reduced by deductible contributions made after age 70.5 limited enrollment periods considered to be an Income in Respect of a Decedent (IRD) asset, subjecting distributions to both income & estate taxes w/ no step-up in basis costs of operating the plan

Answer 236

Plan Document - in writing by end of tax year; funding doesn't have to occur until tax return filing plus extension Eligibility - 21 years old & 1 year of service or 2 years of service w/ 100% vesting (does NOT apply to 401(k) plans) Coverage Vesting - 2 to 6 years graduated or 3-year cliff Special Qualification Requirements apply to Top-Heavy Plans & Cash or Deferred Arrangements (CODAs) 2 to 6 years graduated or 3-year cliff Limitation on Benefits & Contributions

Answer 237

Eligibility: - Age 21 & one year of service (1,000 hours worked during one plan year) - special election to require two years of service - 100% vesting requirement; NOT available for 401(k) plans - Tax-exempt educational institutions can require age 26 - Plan Entrance Date - MUST have at least 2 per year

Answer 238

for plan years beginning after 12/31/20: - 401(k) must allow LT PT Employees to participate in 401(k) (SECURE Act) upon the completion of: 500 hours per year, 3 continuous years, years completed after 12/31/20 will count; eligibility would begin in 2024 (after the completion of 3 continuous years)

Answer 239

Two Classifications = Highly Compensated (HC) & Non-Highly Compensated (NHC) Highly Compensated = an employee who is either: 1. a more than 5% owner at any time during the plan year OR preceding plan year (owns more than 5% of a company's stock or capital (if an EE owned 5% of their employer's stock that EE would NOT be considered highly compensated); don't forget in addition to direct ownership the family attribution rules consider shares of stock owned by certain relatives including spouse, children, grandchildren, or parents as if owned by one owner 2. an EE w/ compensation in excess of $155,000 2024 for current plan year; if special employer election is made add "and in top 20% of employees ranked by salary" 3. an EE w/ compensation in excess of $150,000 2023 for the prior plan year; $135,000 2022 look-back

Answer 240

Plan must be nondiscriminatory; all qualified plans must pass at least ONE of the following tests: 1. Safe Harbor Test = greater than or equal to 70% of NHC covered 2. Ratio % Test = % NHC Covered / % HC Covered ratio greater than or equal to 70% 3. Average Benefits Test (Both Tests AB % Test & Nondiscriminatory test) (Nondiscriminatory test rule not likely to be tested) = AB % NHC Covered / AB % of HC Covered ratio greater than or equal to 70 % AND Nondiscriminatory test

Answer 241

Defined Benefit Plans must additionally pass the 50/40 test Plan must cover the LESSER of 50 employees (eligible) or 40% of employees (eligible) w/ a minimum of 2 our of 3 employees (unless there is only one EE in which case only 1 participant is required) EXAM TIP: to remember that it's 50 employees or 40%, remember 'people come first'; EMPLOYEES COME FIRST!

Answer 242

Defined Contribution Plan: - Noncontributory = 2-6 year graduated OR 3 year cliff - Deferral (Contributory) = 100% vested Defined Benefit Plan: - 3-7 year graduated OR 5 year cliff ***In any case ER can always be more generous

Answer 243

Special Plan Requirements for Top-Heavy Plans: Top-Heavy: - Defined Contribution: greater than 60% of account balance attributable to key employees - Defined Benefit: greater than 60% of accrued benefits attributable to key employees Key Employee: - greater than 5% owner OR - greater than 1% owner w/ compensation in excess of $150,000 (not indexed) OR - an officer w/ compensation in excess of $220,000 for 2024; officer determined based on all facts

Answer 244

1. More than 500 hours of participation 2. Taxpayer is the only one who substantially participates 3. Taxpayer spends greater than 100 hours in the tax year & no one else spend more 4. Taxpayer has materially participated in any 5 of the previous 10 years 5. The activity is a personal services activity & the individual has materially participated in any 3 prior years 6. Taxpayer participates 100 or more hours in this activity & total participation in all such activities exceeds 500 hours

Answer 245

Section 1231 gains offset by most previous 5 years amount of most recent 5 years of losses is amount taxed at ordinary income & remaining 1231 gain taxed as section 1231 capital gain

Answer 246

Annual Pension Benefit Amount = percent per year x # of years of service x Average of the 3 highest consecutive years salary (salary used can vary based on plan documents)

Answer 247

Limited Investment in Life Insurance; any QP may purchase life insurance as long as life insurance is not the primary focus of the plan premiums paid by ER taxable to EE at time of payment to extent of the Table I cost of insurance to maintain its qualified plan status a QP that includes life insurance must pass EITHER the 25% test OR the 100-to-1 ratio test 25 Percent Test: consists of two tests depending on type of life insurance 25% or 50% - Term/Universal Life = aggregate premiums paid for the life insurance policy CANNOT exceed 25% of the employer's aggregate contributions to the participant's account - Whole Life = aggregate premiums paid for the whole life insurance policy CANNOT exceed 50% of the employer's aggregate contributions to the participant's account 100-to-1 Ratio Test: - limits the amount of the death benefit of life insurance coverage purchased to 100 times the monthly-accrued retirement benefit provided under the same qualified plan's defined benefit formula

Answer 248

Actuary = determine required plan funding range, assumptions, costly (drive up costs of the plan) Required Annually for Defined Benefit Pension Plan & Cash Balance Pension Plan Required ONLY at Inception for Target Benefit pension plan money purchase pension plan has no need for actuarial services because the annual contribution is predefined in the plan documents EXAM TIP = NO other plans require an actuary

Answer 249

Excess Method = provides an excess benefit to those participants whose earnings are in excess of the Social Security wage base; used by both Defined Benefit & Defined Contribution Plans Offset Method = reduces the benefit to those employees whose earnings are below the Social Security wage base; used ONLY by Defined Benefit Plans

Answer 250

mandatory funding pension benefit based on defined funding formula - Flat Amount Formula = equal dollar benefit - Flat Percentage Formula = % of salary - Unit Credit Formula = YOS x % x salary commingled accounts favors older plan entrants all plans must meet eligibility/coverage/vesting rules

Answer 251

DB pension plan mandatory funding pension benefit based on an annual guaranteed contribution rate & guaranteed earnings on the contributions Quasi-Separate Accounts = participant sees hypothetical account w/ hypothetical earnings; actuarially determined favors younger plan entrants all plans must meet eligibility/coverage/vesting rules uses 3 year cliff vesting; employer can be more generous in vesting schedule EXAM TIP = cash balance plans are a popular choice to get rid of old expensive DB plans!

Answer 252

DC pension plan mandatory annual funding of a fixed percentage of total employer covered up to 25% participant bears investment risk separate accounts favors younger plan entrants eligibility/coverage/vesting not likely to be stablished after EGTRRA 2001

Answer 253

special type of money purchase pension plan determines the contribution based on the participant's age participant bears investment risk favors older plan entrants eligibility/coverage/vesting requires actuary services at inception of plan

Answer 254

defined contribution plans established & maintained by an employer provides for employee participation in profits utilizes a definite predetermined formula for allocating the contributions to the plan MUST be nondiscriminatory either noncontributory or contributory

Answer 255

Noncontributory = employee does NOT contribute to the plan & all contributions to the plan are from the employer Contributory = employee contributes to the plan (deferrals/CODA)

Answer 256

contributions must be made by the due date of the company's income tax return contributions are discretionary but MUST be "substantial & recurring" NO requirement of company profit for contribution limited to 25% of total employer covered compensation limited to the LESSER of 100% of compensation or $69,000 for 2024 per employee per year

Answer 257

technique or method of allocating plan contributions to employees' accounts so that a higher contribution will be made for those employees whose compensation is in excess of the Social Security wage base EXAM TIP = the excess rate is generally 5.7% higher than the base rate EXAM TIP: Base Rate + Permitted Disparity = Excess Rate, so "BP = Exxon" where Permitted Disparity equals the LESSER of the Base Rate or 5.7%

Answer 258

Standard Allocation = equal percentage to all participants Social Security Integration = provides higher allocations to employees whose earnings are greater than the Social Security Wage base; Profit sharing plans can ONLY use the excess method Age-Based Profit Sharing Plans = use a combination of age & compensation to allocate the plan contribution New Comparability Plan = contribution dependent upon employee classification; Owner, Officer, Rank-and-File

Answer 259

any profit sharing can have a CODA/401(k) attached most prevalent type of plan established today; predominantly funded by employee deferral contributions attaches to a profit sharing plan or stock bonus plan permits employees to defer compensation to a qualified plan; limited to $23,000 for 2024 per year or $30,500 for 2024 for those age 50 & over employers may (but are NOT required to) match the employee's deferral SECURE 2.0 Sec 110 effective after 2023 allows employers to making matching contributions on behalf of employees that are making payments on outstanding student loans in lieu of retirement contributions (401(k), 403(b), 457(b) or SIMPLE IRAs)

Answer 260

Corporations Partnerships LLCs Proprietorships Tax-exempt entities

Answer 261

an employee could contribute up to $23,000 to a Roth 401(k) account or to a pretax account but NOT to both

Answer 262

Eligibility (2 year not available) Vesting: Employee deferral contributions 100% at all times Employer matching contributions must vest as rapidly as: - 2 to 6 year graduated (0%, 20%, 40%, 60%, 80%, & 100%), OR - 3-year cliff

Answer 263

Actual Deferral Percentage Test (ADP Test) - limits the employee elective deferrals for the HC based on the elective deferrals of the NHC; test ensures that HC aren't taking too much more advantage of the plan than NHC **If ADP for NHCEs is 2% then 2 times; technically second row is over 2% & less than 8% **if the HC are higher, employer failed the ADP test

Answer 264

Corrective Distribution = cheapest/easiest; decreases ADP of HC Recharacterization = change from pre-tax to after tax contributions; decreases ADP of HC Qualified Non-elective contributions (QNEC) = increases ADP of NHC, 100% vested, made to all eligible EEs Qualified Matching Contributions (QMC) = increases ADP of NHC, 100% vested, made only to EEs who elected to defer in the current year

Answer 265

Actual Contribution Percentage Test (ACP Test) Like ADP but determined utilizing EE after-tax thrift contributions & ER matching contributions uses same scale as ADP uses same corrective procedures as ADP

Answer 266

NOT required to pass ADP or ACP tests ER must provide either one of the following: 1. 3% non-elective contribution to all eligible EEs 2. Matching contribution: 100% up to 3% & 50% from 3% to 5% ER contributions are 100% vested at all times EXAM TIP = safe harbor ER contributions are 100% vested AT ALL TIMES!

Answer 267

defined contribution profit sharing plan ER contribute stock to plan contributions are discretionary but must be substantial & recurring allocations to the plan must be nondiscriminatory tax deduction for FMV of stock; cashless tax deduction

Answer 268

Net Unrealized Appreciation; lump sum In-kind distribution of ER securities; usually from ESOP or Stock Bonus Plan NUA = FMV at date of distribution - value of stock at date of ER contribution In year of distribution of ER stock = ordinary income, value at date of ER contribution, 10% penalty if applicable, deferred LTCG At date of sale of ER stock = recognize deferred LTCG regardless of holding period; any subsequent gain/loss short/long term CG based on holding period since date of distribution

Answer 269

allow owners of closely held businesses to sell all or part of their interest in the corporation & defer recognition of the capital gain Qualification Requirements: - the ESOP must own at least 30% of the corporation's stock immediately after the sale - the seller or sellers must reinvest the proceeds from the sale into qualified replacement securities w/in 12 months after the sale & hold such securities 3 years; qualified replacement securities are securities in a domestic corporation, including stocks, bonds, debentures, or warrants, which receive no more than 25% of their income from passive investments; the qualified replacement securities can be in the form of stock in an S Corporation - the corporation that establishes the ESOP must have no class of stock outstanding that is tradeable on an established securities market - the seller or sellers, relatives of the seller/sellers, & 25% shareholders in the corporation are precluded from receiving allocations of stock acquired by the ESOP through the rollover - the ESOP may not sell the stock acquired through the rollover transaction for 3 years - the stock sold to the ESOP must be common or convertible preferred stock & must have been owned by the seller for at least 3 years prior to the sale if the seller purchases & retains qualified replacement securities, there will be no taxable event

Answer 270

defined contribution profit sharing plan; established as a trust participant receives allocations of the employer stock from the ESOP seller can defer gains if proceeds reinvested w/in 12 months

Answer 271

Publicly Traded Corporations: - participants have voting rights as regular shareholders - participants earn dividends Privately Held Corporations: - participants must be allowed to vote in major corporate decisions (mergers, acquisitions, consolidation, reclassification, liquidation, dissolution, recapitalization or a sale) - trustee of the ESOP votes in all other matters

Answer 272

Cash: - ESOP uses to purchase ER stock or ESOP uses to pay bank debt (Leveraged ESOP) - interest on note deductible above 25% Stock: - ER has tax deduction for the value of the stock or the cash at the date of the contribution - subject to 25% of ER covered compensation limit - dividends paid are deductible

Answer 273

Age-based; CANNOT use Social Security integration EXAM TIP = salary deferral plans, such as 401(k) plans 403(b) plans & SIMPLEs, are also prohibited from using Social Security integration; it should be noted that many 401(k) plans have a profit sharing component, which can be integrated w/ Social Security; however the CODA portion CANNOT

Answer 274

participant can demand distribution of ER securities; ER may limit Substantially equal periodic payment requirement = if participant elects they may demand equal distributions from the ESOP for a period no longer than 5 years unless their account is value at more than $1,380,000 for 2024 in which case the distribution period may be extended one year for each additional $275,000 for 2024 of account value up to a total of ten years; NOT eligible for NUA If lump sum, then NUA net unrealized appreciation

Answer 275

Put Option EE can require ER to repurchase stock at the FMV on the distribution date - w/in 60 days after distribution OR w/in a 60 day period during the following plan year the put option reduces the EE's risk but increases the ER's cash requirements

Answer 276

IMPORTANT RULE! a Qualified Participant may force investment diversification w/in their account during the qualified election period Qualified Participant = at least age 55, completed 10 years of participation in the plan the qualified election period is the 6-plan year period beginning after becoming a qualified participant may diversify 25% of their post 1986 stock balance for the first 5 years of their qualified election period & 50% of their post 1986 stock balance during their 6th & final year the diversification calculation is a cumulative calculation meaning that the stock balance consists of the # of eligible shares that have ever been allocated to a qualified participant's account less any shares previously distributed, transferred, or diversified diversification can be satisfied by a distribution, a transfer to another qualified plan, or offering 3 or more investment options in the ESOP (certain requirements apply) Note that ESOPs are not generally subject to the diversification requirements implemented under PPA 2006; exception is if the ESOP is a contributory plan or is a publicly traded business

Answer 277

NO in-service withdrawals for participants under age 59.5 At Participant's Death = distributed to beneficiary or participant's estate; Qualified Preretirement Survivor Annuity (an annuity benefit payable to the surviving spouse of a participant if the participant dies before attaining normal retirement age) At Participant's Disability = distributed to participant

Answer 278

lump sum distribution, rollover plan assets to IRA or other qualified plan, or leave assets in plan (value must be greater than $7,000 as per SECURE Act 2.0 effective after 12/31/23

Answer 279

Qualified Joint Survivor Annuity QJSA = an annuity benefit payable to the participant & spouse as long as either lives, single life annuity if QJSA is waived, signed by NON participant spouse & notarized or witnessed by plan sponsor Lump sum distribution rollover plan assets to IRA or other qualified plan

Answer 280

may permit in-service withdrawals after 2 years of participation in the plan at termination of service: - lump sum distribution - rollover plan assets to IRA or other qualified plan, or - purchase annuity

Answer 281

ordinary income except: - direct rollovers of plan assets to IRAs or other qualified plans, - adjusted basis in plan, (annuities w/ adjusted basis) - lump sum distribution options, & - Qualified Domestic Relations Orders (QDRO) if rolled over to IRA Taxable distributions are subject to 20% income tax withholding

Answer 282

Rollovers to IRAs causes a loss of: - ERISA Protection (although will be protected under federal bankruptcy law as a result of BAPCPA 2005), - 10-year forward averaging, - NUA, & - Pre-1974 Capital Gain Treatment

Answer 283

Direct Rollover = a distribution from a qualified plan trustee directly to the trustee of the recipient account, NO income tax withholding Indirect Rollover = a distribution to the participant w/ a subsequent transfer to another account, mandatory 20% income tax withholding, must deposit all w/in 60 days to avoid income taxes

Answer 284

permissible by any qualified plan; usually only found w/ CODA type plans Loan may not exceed the LESSER of $50,000 OR 1/2 of the participant's vested account balance reduced by the highest outstanding loan balance w/in the previous 12 month period EXCEPTION when vested account balance is < $20,000: maximum loan limited to the LESSER of $10,000 or vested account balance reduced by the highest outstanding loan balance w/in the previous 12 month period

Answer 285

permissible by any qualified individual in a qualified disaster area; plan must have loans available loan may not exceed LESSER of $100,000 or 1/2 of the participant's vested account balance reduced by the highest outstanding loan balance w/in the previous 12 month period

Answer 286

5 years, up to 30 years if loan proceeds used to purchase principal residence substantially level amortization of the loan is required over its term payments must be at least quarterly plan sponsors often apply additional rules & requirements failure to repay the loan as prescribed will consider the value of the loan a taxable distribution, possibly subject to the 10% early distribution penalty termination from employment generally causes entire loan to become due however under TCJA 2017 terminated EEs will be permitted to rollover/repay loans until the due date of the tax return including extensions

Answer 287

59.5 Death, Disability Substantially equal periodic payment SOSEPP 72(t) Medical expenses in excess of schedule A medical AGI limit for tax year 7.5% Federal Tax Levy $5,000 per taxpayer for birth or legal adoption (SECURE Act) Terminal illness Up to an aggregate amount of $22,000 in a qualified disaster SECURE Act 2.0 of 2022 for 2024: - Emergency personal expense up to $1,000 - Domestic Abuse

Answer 288

Separation from service age 55 or after Separation of service at age 50 or w/ 25 years of service for safety officers, firefighters & correction officers Qualified Domestic Relations Order QDRO

Answer 289

Higher education costs Health Insurance for unemployed First time home purchase up to $10,000

Answer 290

1. Required Minimum Distribution Method = payments calculated same as minimum distributions 2. Fixed Amortization Method = payments calculated over applicable single or joint life expectancy w/ reasonable interest rate 3. Fixed Annuitization Method = payments calculated using an annuity factor (w/ reasonable interest rate & mortality table)

Answer 291

Age 72 after 12/31/2019 (SECURE Act 2019) but before 1/1/2023 (SECURE Act 2.0 of 2022) Age 73 for those obtaining age 72 after 12/31/22; first minimum distribution must begin by April 1 of the year following the year in which the participant attains the age of 72/73 (Required Begin Date RBD) Those that began RMDs on or before 12/31/22 will continue them EXAM TIP = watch the year on the exam!!! EXCEPTION = a participant who is still employed by the plan sponsor may delay the first minimum distribution until April 1 of the year after the participant terminates employment (a > 5% owner cannot use the exception) NOTE: this exception does NOT apply to SEPs or SIMPLE IRAs All other RMDs must occur by December 31 of each year missed RMD penalty = 25% on amount equal to RMD less any distribution that was taken but the result cannot be less than zero

Answer 292

QDRO = order under state law recognizing the right of a former spouse to benefits under the participant's qualified plan former spouse is an alternate payee describes the spouse's interest in the plan benefits cannot override plan rules (e.g. if QDRO calls for lump sum distribution but plan does NOT allow lump sum distributions)

Answer 293

1. Flat amount of income = fixed dollar income throughout entire lifetime 2. Inflation-adjusted income = annual income increased based on prior year inflation or a flat pre-selected inflation amount 3. Performance-based income = annual income determined by performance of the investment portfolio 4. Combination

Answer 294

allocate the excess annual additions to other plan participants hold excess annual additions in a separate account & allocate in future years make corrective distributions

Answer 295

Self-employed contribution rate = Contribution Rate / (1 + Contribution Rate) Self-Employment Tax = Net Self-Employment Income x 92.35% = Net Earnings Subject to Self-Employment Tax Net Earnings Subject to Self-Employment Tax x 12.4% up to $168,600 + 2.9% on all income = Self-Employment Tax Net Self-Employment Income - 1/2 Self-Employment Tax = Adjusted Net Self-Employment Earnings Adjusted Net Self-Employment Earnings x Self-employed Contribution Rate = Self-Employed Individual's Plan Contribution

Answer 296

EXAM TIP: know that for the maximum Keogh Plan contribution the 25% really equals 20%! if a self-employed individual contributes 15% to their employees, 15% is used in the contribution rate formula making the ER contribution 13%

Answer 297

generally include actions by a disqualified person that potentially could have adverse consequences to the plan or participants, including: EXAM TIP = be able to recognize prohibited transactions

Answer 298

when income is readily available to the taxpayer, & that income is not subject to substantial limitations or restrictions, that income should be subject to tax

Answer 299

if the new line of business is purchased & it is in a different line of business as the current trade or business operation, the costs of investigation are recouped by capitalizing the expenses & amortizing it ratably over a 60 month period

Answer 300

when dealing w/ an exchange there are 2 things to note: realized & recognized realized is a transaction happening recognized is when a realized transaction has NOT met an exception & must have tax calculated a like kind exchange is an exception to realized transactions to not be recognized realized amount is the value received plus debt relief

Answer 301

First $168,000 (2024) taxed at partial employee FICA rate of 6.2% all earnings will be taxed at the remaining FICA Medicare rate of 1.45% Total is the two multiplications added together

Answer 302

insurance proceeds which exceed the current basis of destroyed property will not be taxable if the taxpayer replaces that property w/ similar property w/in a 2 year period from the end of the year in which realization resumed if a natural disaster (fire) or 3 years from the end of the year in which realization occurred in the event of a government taking (emminent domain)

Answer 303

recognizes income upon either actual OR constructive receipt actual receipt = taxpayer has received cash directly constructive receipt = though not having received the money in hand, the taxpayer has immediate access to the money (i.e., lock box receipt) includes income upon receipt

Answer 304

must offer at least one taxable benefit (usually cash) & one qualified nontaxable benefit a written plan under which the EE may choose to receive either cash or taxable benefits as compensation or qualified fringe benefits that are excludable from wages authorized by Section 125 of the IRC appropriate when EE benefit needs vary w/in the EE group

Answer 305

Less than 25% of the time spent on trip was personal taxpayer does not have control over the timing or arrangements for the trip the trip outside the United States lasts for less than 7 days vacation was not a primary consideration for the trip

Answer 306

contributions in excess of the contribution limit subject to 6% excise tax for each year the excess contribution remains in account avoid excise tax by withdrawing excess contribution & attributable earnings before April 15 of the following tax year plus extensions SECURE 2.0 Act of 2022 will waive the 10% early withdrawal penalty (under age 59.5) for corrective distributions made w/in the correction window

Answer 307

contributions must be made by the due date of the individual's income tax return (w/out extensions) usually April 15 of the following tax year Jan - April 15 can be current or prior year contribution

Answer 308

Deduction Reduction = contribution amount x ([AGI - lower AGI threshold] / AGI Phaseout Range)

Answer 309

age 59.5 death, disability substantially equal periodic payment Section 72 medical expenses in excess of schedule A medical AGI limit for tax year - 7.5% up to $5,000 for birth or legal adoption, w/in 12 months of birth or adoption federal tax levy terminal illness $22,000 aggregate for federal disasters emergency funds up to $1,000 every 3 years domestic abuse

Answer 310

separation from service after age 55 (50 safety/fire/corrections) Qualified Domestic Relations Order QDRO

Answer 311

health insurance for unemployed higher education costs first time home purchase up to $10,000

Answer 312

income tax-free NOT subject to 10% early withdrawal penalty 1. distribution is made after a 5 taxable year period (which begins Jan 1 of the tax year for the first contribution) AND 2. the distribution is on account of the owner attaining age 59.5, the owner's death, disability, or first-time home purchase (maximum $10,000) (trigger) *5 years AND a trigger

Answer 313

contribtutions first then conversions then earnings finally *think "best out 1st"

Answer 314

Life Insurance Collectibles Other coins (Krugerrands, Maple Leaf, Pandas)

Answer 315

if an individual or beneficiary of an IRA engages in ANY of the following transactions then the account will cease to be an IRA as of the first day of the current taxable year: selling, exchanging, or leasing of any property to an IRA lending money to an IRA receiving unreasonable compensation for managing an IRA pledging an IRA as security for a loan borrowing money from an IRA buying property for personal use (present or future) w/ IRA funds if a "deemed distribution" is made d/t a prohibited transaction then the entire balance in the IRA is treated as having been distributed; taxpayer will be subject to ordinary income tax on the entire balance & will also be subject to the 10% early withdrawal penalty

Answer 316

small business retirement plan tax-deferred growth of contributions NOT a QP but has similar characteristics w/ unique rules: - more liberal coverage requirements - can be established as late as the extended due date of the income tax return - unique contribution, vesting, & distribution rules established utilizing Traditional IRA accounts EXAM TIP: no longer the only plan eligible to be established after the calendar year has ended

Answer 317

employers that sponsor SEPs MUST provide benefits to all employees who meet the following requirements: 1. attainment of age 21 or older, & 2. performance of services for 3 of the last 5 years, & 3. received compensation of at least $750 (2024) during the year SECURE 2.0 Act of 2022 made SEP plans available to domestic employees (ie nannies) beginning w/ the 2023 tax year

Answer 318

employer MUST complete the following 3 steps by the extended due dates of the tax return: 1. complete a formal written agreement (form 5305-SEP) 2. give eligible employees notice 3. open a SEP-IRA account for each eligible employee SECURE 2.0 Act of 2022: employees can direct all or a portion of employer contributions to a designated Roth account; contributions will be taxable to the employee

Answer 319

employer funded ONLY contributions are discretionary - must be made to all employees eligible during the year even if dead or no longer employed at time of contribution contributions limited to LESSER of: - 25% of an employee's covered compensation, or - $69,000 for 2024 can utilize pro-rata, flat dollar & Social Security Integration

Answer 320

self-employed individuals subjected to special contribution calculation Self-Employed Contribution Rate = contribution rate to other participants / (1 + contribution rate to other participants) EXAM TIP = applies to all self-employed plans

Answer 321

employees 100% vested in their account balance at all times withdrawals treated just as withdrawals from IRAs - ordinary income - 10% penalty unless excepted under IRA penalty exceptions

Answer 322

Savings Incentive Match Plans for Employees (SIMPLEs) retirement plans for small employers easy to establish & maintain similar tax advantages to QPs employee elective deferral contributions

Answer 323

SIMPLE IRA - utilizes an IRA account as the funding vehicle SIMPLE 401(k) - utilizes a 401(k) plan as the funding vehicle SECURE 2.0 Act of 2022 allows for SIMPLE Roth contributions for both ER & EE contributions (in whole or part); EE is taxed on the Roth contributions

Answer 324

can ONLY be established by small employers; small employer = ER w/ 100 or fewer EEs who each earned at least $5,000 of compensation in the preceding calendar year must be a calendar year plan to establish complete & provide participants w/ either Form 5304-SIMPLE or Form 5305-SIMPLE provide participants w/ 60-day period to elect deferral ER cannot maintain a QP

Answer 325

EEs eligible if they earned at least $5,000 in any 2 preceding years from the ER & is expected to earn $5,000 in the current year EXAM TIP = $5,000 of earnings for eligibility participant 100% vested in all their contributions to either a SIMPLE IRA or 401(k) & ER contributions if the plan is a SIMPLE IRA

Answer 326

Employee Elective Deferrals: - maximum $16,000 (2024) plus $3,500 (2024) catch-up age 50 & over; contribution limit (& catch-up) increased to 110% of the regular contribution limit after 12/31/23 - Roth contributions for allowed for taxable years after 12/31/22 Employer Contributions (they choose one): 1. Employer Matching Contributions - dollar-for-dollar match up to 3% of all compensation - may be reduced under special circumstances 2. 2% Non-elective Employer Contributions - 2% of covered compensation contribution to each eligible employee

Answer 327

tax deductible, tax deferred growth employer contribution must be made by the due date of the employer's income tax return filing deadline (including extensions) employee deferral contributions subject to payroll taxes; employee designated Roth contributions subject to payroll, federal & state taxes additional non-elective contributions for taxable years after 12/31/23; LESSER OF: 1. up to 10% of compensation or $5,000 (indexed beginning in 2025) 2. cover comp limit for non-elective contributions

Answer 328

ordinary income to recipient may be rolled over to an IRA or other QP may be subject to early withdrawal penalties - 25% penalty, rather than 10%, if withdrawal completed w/in first 2 years of the EE's participation in the plan - subject to IRA early withdrawal penalty exceptions

Answer 329

SIMPLE IRA plan can be replaced by a SIMPLE 401(k) plan or other 401(k) plan that requires mandatory employer contributions during a plan year - 2 year 25% penalty withdrawal rule waived - effective for plan years beginning after 12/31/23

Answer 330

similar to SIMPLE IRAs participants may take loans from SIMPLE 401(k)s very few established covered comp rules apply

Answer 331

retirement plan for the following: - public schools or educational organizations & - tax-exempt organizations under IRC Section 501(c)(3)

Answer 332

ERISA applies to: - EE benefit pension plans of 501(c)(3) organizations; unless ER involvement is minimal; ER only provides salary reduction agreement ERISA does NOT apply to: - Governmental 403(b)s - Church Related 403(b)s WHEN ERISA APPLIES: - plan must meet the nondiscrimination test & matching contributions must satisfy ACP test - plan must offer preretirement Joint & survivor annuity & qualified Joint & survivor QJSA

Answer 333

employee elective deferrals: - tax deductible - subject to payroll taxes - limited to $23,000 per year for 2024 plus $7,500 for 2024 catch-up 50 & over (combined limit w/ other CODA plans) (401(k)s) 401(k) + 403(b) employer may match or provide non-elective contribution

Answer 334

15-year catch up contributions permits up to an additional $15,000 (maximum $3,000 additional per year) of contributions to the 403(b) participants must have completed 15 years of service w/ the employer & have unused deferral ONLY applies to HER organizations (Health, Education, Religious) EXAM TIP = maximum either be $23,000, $26,000, $30,500, or $33,500!

Answer 335

can only be invested in: 1. insurance annuity contracts 2. mutual funds 3. SECURE 2.0 Act of 2022 allows for investment in Collective investment trusts; SEC rules need to be modified to have this available

Answer 336

only permissible from ERISA plans subject to same rules as loans from 401(k) plans

Answer 337

Nonqualified Deferred Compensation Plan - Eligible tax-exempt entities - Eligible governmental entities Employee elective tax-deferred savings Designated Roth contributions

Answer 338

3 years prior to normal retirement age an EE may defer an additional $23,000 for 2024 to the 457(b) plan - public & private eligible - limited to prior unused deferral amounts - maximum contribution equals $46,000 2024 ($23,000 for 2024 deferral contribution + $23,000 for 2024 catch-up contribution prior unused contributions) - CANNOT include 50 & over catch-up contribution when determining the 3-year catch-up or for Private 457

Answer 339

to provide benefits to a select group of EEs w/out the limitations of QPs to discriminate the provision of benefits to key EEs QPs CANNOT provide sufficient retirement resources for key executives who earn in excess of the covered compensation limit of $345,000 for 2024

Answer 340

an EE will be taxed on funds or property set aside for the EE if the funds or property are unrestricted & nonforfeitable in other words, if there is constructive receipt or no substantial risk of forfeiture the EE will currently have taxable income

Answer 341

property transferred to an EE in connection w/ the performance of services is taxable to the extent the FMV of the property is greater than the amount paid by the EE; ordinary income subject to payroll taxes ER gives EE stock w/ FMV of $10, EE pays $3, $7 is taxable as ordinary income for the EE

Answer 342

1. cash outflows are often deferred until the future 2. the employer will save on payroll taxes except for the 1.45% Medicare match (since EE's income probably over Social Security wage base) 3. the employer can discriminate & provide these benefits exclusively to a select group of key employees

Answer 343

Funded - Secular Trusts, Rabbi Trusts Arrangements - Deferred Compensation, Salary Reduction, SERP, Phantom Stock Plan, 401(k) WRAP

Answer 344

Irrevocable Trust Holds set-aside funds of a NQDC Plan - for the benefit of executive - trust funds are not available to ER or ER's creditors Usually, no substantial risk of forfeiture for EE - trust may require a vesting period - executive would have substantial risk of forfeiture until meeting the vesting period requirements W/out substantial risk of forfeiture, value of trust is taxable to executive at the time it is funded

Answer 345

Irrevocable Trust Holds set-aside funds of a NQDC Plan - for the benefit of executive - funds are not available to ER BUT may be available to the ER's general creditors under bankruptcy Substantial Risk of Forfeiture exists Assets w/in the rabbi trust are NOT currently taxable to the executive

Answer 346

NQDC plan ER gives fictional shares of stock to key executives at a later time, stock is valued & the executive will receive the increase in value as compensation no actual stock is issued executive has taxable income & ER has deduction at time payment is made to the executive

Answer 347

Stock Options - the right to buy stock at a specified price for a specified period of time; agreement must be in writing & holder has no obligation to exercise Option Price = FMV at date of grant Vesting - right to exercise options only after certain period of time, performance, or occurrence Types: 1. Incentive Stock Options (ISOs) 2. Nonqualified Stock Options (NQSOs) 3. Stock Appreciation Rights (SARs)

Answer 348

Incentive Stock Options Statutory Stock Option ties an EE benefit to the stock price of the company & may provide special taxation may only be granted to EEs aggregate FMV of ISO grants must not exceed $100,000 per year per executive; excess over $100,000 treated as a NQSO for ISO special tax treatment, individual must hold stock 2 years from date of grant, one year from date of exercise

Answer 349

Grant Date = no taxable income unless exercise price less than FMV at date of grant Upon Exercise = no regular tax; AMT adjustment equal to appreciation over exercise price Upon Sale of Stock = LTCG for stock appreciation over exercise price; negative AMT adjustment ER does NOT have a tax deduction related to the ISO

Answer 350

selling stock acquired from an ISO before 2 years from grant date or 1 year from exercise date loss of favorable tax treatment appreciation over exercise price at exercise date = ordinary income (reported on W-2) Appreciation after exercise date = capital gain (short/long) based on holding period beginning at exercise date ER has tax deduction equal to the executive's W-2 income

Answer 351

an executive exercises an option w/out cash; very common 3rd party lends executive cash to exercise the option executive repays the lender almost immediately w/ the proceeds & has W-2 income for the excess value over the exercise price a cashless exercise IS a disqualifying disposition

Answer 352

NonQualified Stock Option (NQSO) option that does not meet requirements of an ISO ties an EE benefit to the performance of the company stock exercise does not receive favorable tax treatment no statutory holding period requirements; ER's may place holding period requirements on the stock

Answer 353

Grant Date = no taxable income unless exercise price less than FMV at date of grant Upon Exercise = executive will have W-2 income for the appreciation over the exercise price; ER has income tax deduction for same amount Upon Sale of Stock = executive will have capital gain/loss w/ holding period beginning at exercise date

Answer 354

Gifting of ISOs & NQSOs ISOs: - unexercised ISOs cannot be gifted - can only be transferred after exercise date NQSO: - may be gifted if allowed by ER - when donee exercises: EE W-2 income; ER tax deduction - donee's basis equals exercise price plus W-2 amount

Answer 355

Stock Appreciation Rights (SARs) rights that grant the holder cash in an amount equal to the excess of the FMV of the stock over the exercise price ties an EE benefit to the value of the ER's stock essentially a cashless exercise w/out any right to purchase the stock NO taxation at grant; unless EE elects 83(b): Employee = W-2 income for excess value over exercise price Employer = tax deduction for W-2 amount

Answer 356

Restricted Stock Plans plan which pays executives w/ shares of the employer stock executive does NOT pay any amount towards the stock stock has restrictions preventing the executive from selling or transferring; usually on a vesting schedule; creates substantial risk of forfeiture plan increases executive retention & ties the executive's benefit to the employer stock price

Answer 357

IRC Section 83(b) EE election to include value of stock in taxable income at date of grant rather than at date of vesting or when restrictions are lifted any gain in value over the grant date is capital gain rather than W-2 income if EE does not vest, or otherwise loses rights, no tax deductible loss EE's holding period for stock received will be the date the amount was included in the EE's gross income must be filed no later than 30 days after the stock is transferred EE must file a written statement w/ IRS

Answer 358

Employee Stock Purchase Plan (ESPP) allows EEs to purchase ER securities at a discounted price & receive favorable tax treatment on the subsequent disposition of the stock (if qualifying disposition) ties EE benefit to the price of the ER stock no less than 85% of a date determined stock price or an average price (Example = lesser of FMV at grant date or exercise date) statutory purchase limit of $25,000 per year; based on the FMV of the stock at the date of grant

Answer 359

if held 2 years from grant & 1 year from exercise then discount taxed at Ordinary Income rates (double check in class)**** if not held for the required holding period then the discount is W-2 income (OI + payroll) remaining gain = LT/ST capital gain w/ holding period starting at exercise ESPP - Losses: - short or long term capital losses - holding period begins at exercise date

Answer 360

Voluntary Employees' Beneficiary Association (VEBAs) tax exempt trust vehicle provides out of pocket reimbursement for healthcare costs available to both EEs & retirees may not provide retirement benefits or commuting benefits Taxation: - ER deducts contributions to a VEBA; earnings on contributions are NOT taxed to the ER or EE - EE does NOT recognize income on contributions to VEBA

Answer 361

Reformation = both parties agree to work together Rescission = occurs when no agreement can be reached & is usually carried out by a court of law

Answer 362

process of accumulation, management, conservation, & transfer of wealth considering legal, tax, & personal objectives GOALS: 1. Effective Transfers - decedent's assets transferred based on their wishes 2. Efficient Transfers - transfer costs including taxes are minimized; maximize net to heirs

Answer 363

people who inherit under state laws

Answer 364

people who inherit under the will

Answer 365

reduction of bequest

Answer 366

extinguishment of a right

Answer 367

the will maker

Answer 368

Wills - avoids intestacy; age 18 & of sound mind Durable General Power of Attorney Durable Power of Attorney for Health Care (to keep principal alive) - in writing, survives disability but NOT death Advance Medical Directive - power to terminate life sustaining treatment Others: - side letters of instruction - powers of attorney for property - living wills - do-not-resuscitate orders

Answer 369

a legal document that provides the testator (the will maker) the opportunity to control the distribution of their property at death & thus avoid their state's intestacy laws testate = decedent w/ valid will intestate = dieing w/out a valid will or die w/ a will that does NOT dispose of all property (also known as "partially intestate")

Answer 370

in own hand written in testator's handwriting must be signed & dated by testator

Answer 371

usually only covers tangible personalty oral dying declarations made before sufficient witnesses NOT valid in all states

Answer 372

generally drawn by an attorney complying w/ the laws for wills of the domiciliary state

Answer 373

selected will provision requires that the beneficiary to survive the decedent for a specified period of time in order to inherit cannot be longer than 6 months for transfer to qualify for unlimited marital deduction

Answer 374

selected will provision reminds legatee they may disclaim & the clause may direct who inherits if they do disclaim

Answer 375

1. disclaiming party cannot have benefited 2. must be made in writing w/in 9 months 3. person disclaiming can't direct disposition of property surviving spouse may disclaim so more assets go to kids & the applicable estate tax credit is utilized kids may disclaim so that the surviving spouse may inherit to utilize the marital deduction

Answer 376

determines how the proceeds will be divided w/ relation to the deceased heirs & their descendants Per Stirpes (By Representation or By the Roots): - grandchildren stand in for their deceased parent & get that share to split among themselves Per Capita (By the Head): - equal shares based upon # of living beneficiaries; heirs of the same generation get an equal share IF they are the only heirs Per Capita At Each Generation: - heirs of the same generation ALWAYS get an equal share; typically one of the more preferred methods of leaving assets to heirs

Answer 377

sometimes called an "in terrorem clause" attempts to discourage disappointed heirs from contesting the will by substantially decreasing or eliminating a bequest to them if they file a formal, legal contest to the will

Answer 378

the testator can destroy the will, either by shredding or burning testator can also create a new will specifically revoking the previous will in some states the testator can revoke the will by writing "cancel" across the will

Answer 379

supplement to a will may be executed like a statutory will, which must be signed, properly witnessed, & notarized used to modify, explain, or amend a will

Answer 380

details the testator's wishes regarding the disposition of specific tangible possessions (such as household goods), as well as funeral & burial wishes exists separately from the will

Answer 381

stand-alone document, allows an agent to act for the principal & may include power to appoint assets power to act ends at the death of the principal may be general or limited may be revoked at anytime by the principal used for health care or property management Limited used in a non-marital trust General may be used in a marital trust

Answer 382

a power, usually included in a trust or power of attorney, allowing power holder to direct assets to another (eg pay bills) power to transfer assets may survive the death of the grantor may be general or limited to an ascertainable standard or limited in some other way may be revoked at anytime by principal

Answer 383

All POAs cease at death - exam questions may be structured to see if you know whom you work for; once the principal dies the accounts will be frozen until the estate administrator brings the letters testamentary to gain control over the accounts Planners are NOT required to recognize the POA - if the agent requests an action that is harmful to the principal, the planner can refuse to take action; contacting the compliance department is also a good answer choice for these types of questions

Answer 384

agent's power does NOT expire upon the principal's incapacity or disability but rather expires ONLY at the principal's death

Answer 385

agent's power "springs" into existence upon some defined event or determination (i.e., at the disability of the principal) even though the principal has signed the power of attorney, the agent CANNOT exercise the powers granted to him until the specific event occurs

Answer 386

medical power of attorney legal document appoints an agent (someone w/ authority to act on behalf of another) to make health care decisions in the case of a principal who is unable to make those decisions for themselves

Answer 387

legal document expressing an individual's last wishes regarding sustainment of life under specific circumstances establishes the medical situations & circumstances in which the individual no longer desires life-sustaining treatment in the event they are no longer capable of making those decisions

Answer 388

1. Operation of Law 2. Contract 3. Trust 4. Probate - Will, Intestate, Estate named as beneficiary; process of retitling assets

Answer 389

No Survivorship Feature or No Beneficiary Listed Examples: - Sole Ownership Property - Tenancy in Common Property - Community Property - Invalid or no named beneficiary designations

Answer 390

State Contract Law - Life insurance - Annuities - IRAs, SEPs, SIMPLEs, & QPs - Pay-on-Death (bank accounts) & Transfer-on-Death accounts (investment accounts) State titling law- if survivorship feature State trust law - all trusts EXAM TIP = non-traditional (non-married) relationships should always avoid probate

Answer 391

one owner no survivorship feature 100% included in probate & gross estate qualified for marital deduction if spouse step to FMV at death

Answer 392

2 or more undivided interest no survivorship feature % owned included in probate included in gross estate qualified for marital deduction if spouse partitionable involuntarily (portion can be sold w/out consent of other interest) % step to FMV at death Actual Contribution Rules NO Deemed Contribution Rule

Answer 393

2 or more undivided interest w/ survivorship rights (w/ certified death certificate) AVOIDS probate included in gross estate qualified for marital deduction if spouse partitionable involuntarily % step to FMV at death Actual Contribution Rules EXCEPT spouse Deemed Contribution Rule IF spouse

Answer 394

married couple w/ survivorship (w/ certified death certificate) AVOIDS probate included in gross estate qualified for marital deduction NOT partitionable involuntarily % step to FMV at death NO Actual Contribution Rules Deemed Contribution Rule

Answer 395

married undivided interest, NO survivorship, NO gift splitting fruits are separate or are community property step to FMV on both halves 50% included in probate 50% included in gross estate qualified for marital deduction if spouse NOT partitionable involuntarily 100% step to FMV at death NO Actual Contribution Rules Deemed Contribution Rule separate property includes property acquired before marriage, inherited property, gifted property, & any income related thereto if maintained separately

Answer 396

assets may transfer & be retitled through the probate process, by contract, by state titling law, or by state trust law

Answer 397

appointed to administer the probate estate called the executor or administrator

Answer 398

identify & produce a detailed list of decedent's property/assets safeguard, manage, & invest assets give legal notice to creditors & heirs/legatees pay the estate's expenses pay the debts & taxes of the decedent collect revenues, interest, rents, etc during the estate file all federal, state, & local tax returns timely make appropriate tax filing elections distribute assets to heirs/legatees as appropriate close the estate w/ the court

Answer 399

Heir = person who receives property under the state intestacy laws Legatee = person named in a will to receive property

Answer 400

petition court for appointment put up security bond court selects court issues letter of administration

Answer 401

locate will submit will to court prove will w/ witnesses/notary receives letters of testamentary

Answer 402

creates a present interest in a trust which then qualifies the contribution to the trust for annual exclusion allows the trust beneficiary to withdraw some or all of any contribution to a trust for a limited period of time to create a present interest

Answer 403

if a trust has more than one beneficiary, the 5/5 Lapse Rule must be applied to determine i the lapse causes a taxable gift from the beneficiary holding the Crummey power to the other beneficiaries of the trust such a taxable gift is a gift of future interest & is NOT qualified for the annual exclusion a taxable gift is deemed to have been made when a power to withdraw an amount in excess of the GREATER of $5,000 or 5% of the trust assets has lapsed, or not been used by a beneficiary

Answer 404

each person also has one lifetime credit equivalency amount up to $13,610,000 (2024) of cumulative taxable transfers equals a credit against tax of $5,389,800 for 2024; gift & estate taxes are a cumulative lifetime tax Credit calculated as: - first $1M = $345,800 in taxes due (estate & gift tax table not provided) - amount over $1M taxed at 40% ($12.61m x 40% = $5.044m) - to arrive at the credit: $5,044,000 + $345,800 = $5,389,800

Answer 405

must be filed - April 15 of the following year can be extended by extending income tax return the donor is primarily liable for gift tax but the donee can become responsible if the donor does not pay

Answer 406

Taxable Gifts/Estates are over $1M.... Tentative Gift/Estate Tax = $345,800 + 40% of the excess of such amount over $1,000,000

Answer 407

EXAM TIP = know this chart!

Answer 408

Bequest = testamentary, or at death, transfers Advantage to lifetime gifting: - ability to use annual exclusion ($18,000 2024) - gifting appreciating assets out of the estate - any future income/appreciation from property gifted is taxable to donee & out of donor's gross estate - any gift tax paid on a taxable gift is excluded from the donor's gross estate if the gift was made more than 3 years prior to the donor's death - payments of support & the expenses that would be considered qualified transfers during life are excluded from the calculation of gift tax; the estate tax calculation includes the transfers for future support & for reasons that would otherwise be a qualified transfer

Answer 409

value of a decedent's gross estate = the FMV of all interests owned by the decedent at their time of death

Answer 410

includes the FMV at the date of death or alternate valuation date of the following: property owned by the decedent General powers of appointment Life insurance (death benefit if policy transferred w/in 3 years before death) Joint tenancy property - actual or deemed contribution rule applies Retained life interests Retained power to amend or revoke Reversionary interest Gift taxes paid w/in 3 years of death

Answer 411

section 2035 requires a decedent's gross estate to include: (3) 1. any gift tax paid on gifts made w/in 3 years of the decedent's date of death 2. the value of any property gifted w/in 3 years of the decedent's date of death if the decedent retained an interest 3. the death proceeds of any life insurance policy insuring the decedent's life that was gifted w/in 3 years of the decedent's date of death (if decedent continued to pay premiums on policy gifted w/in 3 years of death the premium payments would be a gift eligible for the annual exclusion if a present interest & any gift tax paid on the gift may be included in the decedent's gross estate)

Answer 412

a decedent's gross estate includes the value of any interest in property transferred by the decedent in which he retained some interest in the property during his life

Answer 413

a decedent who retains an interest in property for any period not ascertainable w/out reference to the decedent's death must include the FMV (determined at the decedent's date of death) of the property in his gross estate

Answer 414

when a decedent transfers property & retains or reserves an interest for any period of time & that interest does not in fact end before the decedent's death the FMV of the property at the decedent's date of death must be included in his gross estate inclusion also applies when the decedent retains the use, possession, right to the income, other enjoyment of the transferred property, or the right, either alone or w/ another person, to designate the person, or persons, who shall possess or enjoy the transferred property or its income

Answer 415

any interest which includes a possibility that the property transferred by the decedent may return to him or his estate or the possibility that property transferred by the decedent may become subject to a power of disposition by him the FMV of a decedent's reversionary interest is calculated as of the moment immediately before his death, & use of the alternate valuation date does NOT apply to determine whether or not the decedent retained a reversionary interest in transferred property of a value in excess of 5%, the FMV of the reversionary interest in the property is compared w/ the FMV of the transferred property, including interests in the property which are not dependent upon survivorship of the decedent

Answer 416

a decedent's gross estate includes the FMV at the decedent's date of death of any interest in property transferred by the decedent if the enjoyment of the interest was subject, at the date of the decedent's death, to any change through the exercise of a power by the decedent to alter, amend, revoke, or terminate, or if the decedent relinquished such a power in contemplation of death Section 2038 does NOT apply to: 1. to the extent that the transfer was for full & adequate consideration, or 2. if the decedent's power could be exercised only w/ the consent of all parties having an interest (vested or contingent) in the transferred property, & if the power adds nothing to the rights of the parties under local law, or 3. to a power held solely by a person other than the decedent

Answer 417

Straight Single Life Annuity = decedent who owned a straight life annuity before his death will NOT include any amount related to the annuity in his gross estate since the annuitant's interest in the contract terminated at his death Survivorship Annuity = when the first annuitant dies the value of a comparable policy on the second annuitant is included in the first annuitant's gross estate; if the second to die has contributed to the purchase of the policy then only the proportionate value of the annuity is included in the gross estate of the first to die; the value of the survivorship annuity included in a decedent's gross estate is based on the ratio of the decedent's contributions to the survivorship annuity's total cost to the total cost of the survivorship annuity Gross Estate Inclusion = Value of annuity at decedent's death x (Decedent's cost basis / Total annuity cost basis)

Answer 418

power to name who will enjoy or own property General power of appointment = causes inclusion in the holder's gross estate To avoid inclusion in gross estate limit to ascertainable standard (HEMS): - Health - Education - Maintenance - Support 5-and-5 Power: - if the right to exercise is limited to the greater of $5,000 or 5% of the aggregate value of the property each year & the power lapses before the decedent's death then the power of appointment is NOT included in the decedent's gross estate; 5-and-5 power designed to limit the withdrawal right to a de minimis amount & penalize those withdrawals that exceed the de minimis amount

Answer 419

includes the DB proceeds of a life insurance policy on the life of the decedent in the decedent's gross estate if at the decedent's death, either the proceeds were receivable by the decedent's estate or the decedent possessed any incident of ownership in the policy generally the amount to be included is the full DB payable from the life insurance policy; if the proceeds of the policy are made payable to a beneficiary in the form of an annuity for life or for term of years, the amount to be included in the decedent's gross estate is the value of the available lump-sum payment at the decedent's death if the proceeds of a life insurance policy made payable to the decedent's estate are community property under the local community property law & as a result 1/2 of the proceeds belongs to the decedent's spouse, then only 1/2 of the proceeds is included in the decedent's gross estate

Answer 420

FMV at date of death or alternate valuation date (6 months from death)

Answer 421

appraisals

Answer 422

Valuation Discounts: - Minority discount - Lack of marketability discount - Blockage discount - Key person discount

Answer 423

Average of the High & Low FMV on the trading day Accrued Interest - included in value Accrued Dividends - included in value Stock that is not actively traded Valuation included in decedent's gross estate = [(Trading price after decedent's DOD x # of days b/t decedent's DOD & first preceding trade) + (Trading price before decedent's DOD x # of days b/t decedent's DOD & next subsequent trade)] / The sum of the days before & after the DOD* *NOTE = weekends, holidays, or other days that the market is closed are NOT included in the calculation

Answer 424

Policy owned on another: - depends on pay status of premiums - Premium Pay Status = interpolated terminal reserve + unearned premium - Paid up status = replacement value Policy owned on decedent: - death benefit (face value)

Answer 425

To Qualify: 1. the total value of the gross estate must depreciate after the DOD, & 2. the total estate tax must be less than the estate tax calculated using the date-of-death values Valuation if properly elected: 1. all assets valued at the alternate valuation date 2. EXCEPT: - assets distributed or sold before 6 months which are valued at the date of distribution or sale, & - Wasting assets (annuitized annuities, patents, royalties, installment notes, lease income) must be valued at the DOD wasting assets = assets that will decline in value for reasons other than market movement SUMMARY: - 6 months after DOD - executor must make election by the filing date of the estate tax return - election must lower the gross estate & estate tax due - election applies to all assets in gross estate - exceptions = wasting assets (notes, patents, annuities), & assets disposed of b/t death & alternate valuation date

Answer 426

funeral expenses last medical expenses 1040 / 706 administration expenses 1041 / 706 debts casualty losses during administration 1041 / 706

Answer 427

Adjusted Gross Estate LESS unlimited: - Charitable deduction - Marital deductions EQUALS Taxable Estate PLUS sum of all Post '76 gifts (keeps taxation cumulative) EQUALS Tentative Tax Base

Answer 428

Inclusion in the decedent's gross estate - must actually be included in the gross estate Property transferred to a surviving spouse - must go to the spouse... not just in trust for someone else The Terminable Interest Rule - must later be included in the surviving spouse's GE - surviving spouse's interest cannot terminate at a future date

Answer 429

1. 6 month survival contingency 2. terminable interest where spouse has general power of appointment 3. QTIP trust 4. CRT where spouse is the only noncharitable beneficiary

Answer 430

unlimited marital deduction NOT available for non-U.S. citizen spouse Remedy = non-U.S. citizen spouse becomes a U.S. citizen before the due date of the return & maintains residency following the death of the spouse of utilize a Qualified Domestic Trust (QDOT): - at least 1 U.S. trustee - must prohibit distribution unless U.S. trustee has right to withhold taxes - trustee must keep sufficient assets to pay taxes - executor must elect marital deduction (election made post-mortem)

Answer 431

Applicable estate tax credit: - $5,389,800 for 2024 ($13,610,000 exemption) Prior transfer credit: - credit for estate taxes paid w/in the last 10 years Foreign death taxes credit: - tax paid on property outside the U.S.

Answer 432

Estate Tax Return: - Form 706 due 9 months after death - Extension to file (but not to pay) can be granted for an additional 6 months Penalties: - Failure to File = 5% per month up to 25% - Failure to Pay = 0.5% per month up to 25% - Failure to File is REDUCED by Failure to Pay if penalties are concurrent, the reduction of failure to file does NOT elevate the failure to pay penalty

Answer 433

you have to actually file a timely 706 to make the portability election Remarriage Issues - the election is based on the last deceased spouse - a remarriage in & of itself would NOT impact the last deceased spouse - if multiple spouses are deceased, then the calculation can be complicated

Answer 434

income a decedent was entitled to be paid but did NOT receive before his or her death the asset is included in the gross estate of the decedent BUT there is NO step-up in basis income tax must be paid by the recipient

Answer 435

All IRAs & qualified retirement accounts (excluding Roth IRAs, Roth 401(k)s, Roth 403(b)s & Roth 457s) Dividends declared but not received Commissions earned but not paid Rents & royalties owed but not yet paid Partnership income of a deceased partner S corporation income of a deceased shareholder Continuing payments from an annuity (period-certain annuity) Unpaid debt on an installment note

Answer 436

the amount of capital needed under the capital needs analysis approach can be determined using the following formula: Capital needed = Annual Income / Interest Rate Interest Rate = real rate (1 + ROR) / (1 + inflation)

Answer 437

the amount invested plus the investor's share of recourse debt

Answer 438

transfers not subject to gift tax gifts outright & in trust partial sales/gifts full consideration transfers/sales (SCIN vs private annuity) Family limited partnerships FLP Trusts

Answer 439

NOT considered a gift, does NOT utilize annual exclusion Legal Support Qualified Transfers - direct payment to medical/educational institution Below-Market Rate Loans - deminimis Transfers to U.S. citizen spouses will generally result in no tax d/t unlimited marital deduction

Answer 440

transfer b/t unrelated parties in the form of a sale, an installment sale, or an exchange

Answer 441

can be used to: - Utilize annual exclusion - requires a present interest - Remove future appreciation - Reduce gross estate

Answer 442

sell an asset for less than the FMV gift for difference b//t the FMV & the sale price will be a gift

Answer 443

transaction b/t 2 private (but usually related) parties unsecured promise from the buyer to make payments to the annuitant for the remainder of the annuitant's life effective when the actual life expectancy is less than the IRS life expectancy table used when the seller is in poor health can't be terminally ill... but if seller lives > 18 months then it is presumed that the annuitant was NOT terminally ill risk that the seller/annuitant will live longer from annuitant's perspective, each private annuity payment is split into 3 components: 1. interest - at the section 7520 interest rate in effect at the date of the sale 2. capital gain 3. income-tax-free return of capital (adjusted basis) capital gain portion = (current FMV - adjusted basis) / number of expected payments (yearly capital gain portion) interest portion = subtract both the return of adjusted basis & the capital gain from the yearly annuity payment

Answer 444

Self-Canceling Installment Notes installment sale w/ payments of interest & principal over term SCIN premium paid to cancel note at seller's death no gift if the PV of the note is = to the value of the underlying property & the SCIN premium is appropriate interest can be deductible used when seller is in poor health

Answer 445

partnership created to transfer assets to the younger generation 1% general partner - parent 99% limited partner - gift these to the child (make use of annual exclusion) take advantage of minority shares & marketability discounts use when transferor is intent on gifting asset while maintaining control

Answer 446

held by the trustee trustee is a fiduciary (acts in the best interest of the beneficiaries)

Answer 447

Revocable - NOT a completed gift Irrevocable - generally completed (unless retained interests) Income tax: - Grantor trust = income taxed to grantor - Non-grantor trust = hybrid entity Distributed = taxed to beneficiaries Accumulated = taxed at trust rates - Simple trust = mandates distribution of income - Complex trust = permits accumulation of income

Answer 448

1. Revocable Trusts - grantor can revoke the trust 2. Irrevocable Trusts - grantor CAN'T revoke the trust 3. Inter Vivos Trust - created during life 4. Testamentary Trusts - created at death 5. Standby Trust - unfunded or minimally funded; waiting for trigger event (usually incapacity) 6. Pourover Trust - receives assets from another source 7. Grantor Trust - inter vivos trust for the grantor; grantor pays ALL income tax 8. Funded or Unfunded (available to receive $ or property in the future)

Answer 449

avoids probate provides for management of the grantor's assets if grantor is incapacitated important in states w/ high probate costs privacy is maintained - no notice requirements, terms confidential will contests are discouraged - state law controls but generally more difficult NOT effective for reducing estate taxes

Answer 450

used to achieve estate & gift objectives completed gift use annual exclusion - remember need present interest! - distributions of income are considered a present interest - Crummey (do NOT forget "5-and-5" power)

Answer 451

makes it possible to transfer an irrevocable trust for the gift tax annual exclusion; allows beneficiaries of trust to withdraw any contribution made to the trust w/in a certain period of time (typically 30 days) REMEMBER: whenever a trust that gives the beneficiaries the right to demand distribution of the grantor's contribution to the trust is created, the "5-and-5" power must be considered hanging power = to the extent that a demand beneficiary has a right to withdraw that does not lapse (the portion over the "5-and-5" amount), the nonlapsing portion will hang over to a subsequent year, when it can lapse under the "5-and-5" standard "5-and-5 Power" allows beneficiary the right to appoint the GREATER of $5,000 or 5% of trust assets; power is made noncumulative (when it is not exercise for a give year it lapses) thus failure to exercise this power in any year will NOT result in gift tax consequences - IF the power has NOT been exercised in the year of death, the beneficiary's gross estate will only include the GREATER of $5,000 or 5% of the property & NOT all the trust assets

Answer 452

pays fixed annuity to grantor for defined term remainder to noncharitable beneficiary at the end of term Gift = PV of remainder interest if grantor dies during term = value of trust IS included in gross estate; no tax saved use property that is expected to appreciate at a rate greater than the 7520 rate RISK = grantor dies too EARLY

Answer 453

similar to GRAT EXCEPT pays fixed percentage of assets each year that are revalued on an annual basis NOT suitable for hard to value assets used very infrequently

Answer 454

form of GRAT for personal residence grantor receives use of the house transferred ideal if house is appreciating faster than the 7520 & family plans to keep home Gift = PV of remainder interest if grantor dies during term = INCLUDED in Grantor's Gross Estate

Answer 455

trust holds life insurance policy utilizing the annual exclusion; Crummey provision avoid requiring the trust to pay proceeds to estate for taxes or administration expenses because it causes inclusion in the gross estate in order to provide liquidity: - allow trust to purchase assets of the estate - allow trust to loan money to the estate not included in the gross estate of the insured if there is no incidence of ownership

Answer 456

minors are not generally permitted to own property 2503(b): - may hold assets for beneficiary's lifetime but must distribute income annually - annual exclusion available for the PV of the income interest 2503(c): - allows income to be accumulated but assets must be available to child when they turn 21 - annual exclusion available for the contribution

Answer 457

power of appointment trust gives surviving spouse general power of appointment over trust's assets; avoids terminable interest rule value of property qualifies for marital deduction

Answer 458

taxable beneficiaries to ensure use of applicable credit amount spouse can still get the income, HEMS, "5-and-5"

Answer 459

allows decedent to qualify a transfer for the marital deduction at his death yet still control the ultimate disposition taxed in the estate of the second spouse to die property must qualify for marital deduction spouse entitled to trust income for life & the income must be paid annually spouse must be able to compel the trustee to sell non-income-producing assets during the spouse's lifetime no one can appoint property to anyone other than the spouse must file an election on the 706 QTIP is election executor has 15 months to determine the applicability of the QTIP election; 9 months plus extension

Answer 460

allows a noncitizen spouse to qualify for the martial deduction requires a domestic trustee

Answer 461

if there is a split gift b/t charity & non charitable beneficiary

Answer 462

contributions are pooled in a trust maintained by the charity income for life to donor remainder to charity good for SMALL gifts

Answer 463

less flexible fixed annuity greater than or equal to 5% initial FMV annuity must be paid at least annually to donor life or term (term cannot be more than 20 years) donor can change charitable beneficiary no contributions after inception Remainder Interest greater than or equal to 10% of initial FMV

Answer 464

more flexible fixed percentage of at least 5% of the annual FMV annual valuation donor can contribute after inception catch up provisions allowed if only distribute income if less than stated % Remainder Interest greater than or equal to 10% of initial value

Answer 465

CRAT: - multiply annuity by IRS table to get income interest - deduct income interest from FMV to get remainder CRUT: - complex calculation

Answer 466

donate the property but retain the right to use it similar to a QPRT personal residence or farm

Answer 467

charity receives income, remainder to noncharitable beneficiary used by high net worth individuals who do NOT need current income use appreciating assets! must be grantor trust to receive charitable income tax deduction

Answer 468

no deduction for income tax purposes for estate deduction (if applicable): - must be mandatory - amount must be certain & included in the gross estate some items are more beneficial at death - papers of political figures: - During life = income tax deduction limited to AB which is 0 - At Death = no income tax deduction, but no estate tax either - Potentially Better = get adjustment to basis, give to an heir & let heir donate & get higher income tax deduction

Answer 469

transfer-for-value rule will not apply when there is a transfer of a life insurance policy to any of the following individuals: the insured a partner of the insured a partnership in which the insured is a partner a corporation in which the insured is a shareholder or officer a transferee who takes the transferor's basis in the contract

Answer 470

closely held business extend the payment of estate taxes over a 14 year period first 4 years of payments are interest-only, followed by 10 payments that amortize the estate tax liability over the payment period the value of the business interest must be at least 35% of the value of decedent's Adjusted Gross Estate the business interest MUST be a closely held business: - a sole proprietorship; - a partnership if at least 20% of the capital interest is included in the decedent's gross estate or if the partnership has fewer than 45 partners; or - a corporation if at least 20% of the voting stock is included in the decedent's gross estate or if the corporation has 45 or fewer shareholders

Answer 471

stock may be redeemed from an estate up to the total amount of: - estate & inheritance taxes, estate administration costs, & funeral expenses w/out being treated as a dividend business must be a corporation & the value of said corporation must be more than 35% of the decedent's adjusted gross estate EXAM TIP = question is likely to ask about the percent of the estate that the corporate makes up; also it is ONLY applicable to corporations

Answer 472

3 Tax Systems = Estate, Gift, & GSTT GSTT = an excise tax imposed on the transfer of property to a donee who is 2 or more generations younger than the donor GSTT rate = the maximum estate tax rate in effect at the time the generation-skipping transfer (GST) occurs times the "inclusion ratio" (2024 = 40%; flat)

Answer 473

any natural person or trust that is not a skip person

Answer 474

Lineal Descendants = 2 or more generations younger than the transferor Unrelated = transferees that are 37.5 years younger than the transferor Trust may be skip person if: - all interests in the trust are held by skip persons, or - if distributions can only be made to skip persons charitable organizations are considered to be in the same generation as the transferor Predeceased Ancestor Rule = if a child of the transferor is deceased at the time of the transfer, then the deceased child's descendents are moved up one generation

Answer 475

outright gift to a skip person direct skips are taxed only once regardless of how many generations are skipped GSTT on a direct skip is imposed only on the amount received by the transferee any GSTT associated w/ a direct skip that is paid by the transferor is treated as a taxable gift by the transferor the transferor is generally liable for the GSTT on a direct skip if a direct skip is made from a trust, the trustee is liable

Answer 476

any termination of a trust interest unless at the termination of the trust: - the trust property transferred is subject to federal or gift tax, - a non-skip person receives an interest in the property transferred out of the trust, or - the distribution from the trust will never be made to a skip person the taxable amount = the value of the trust property transferred less any expenses, indebtedness, & taxes attributed to the termination the trustee is liable for the GSTT on a taxable termination

Answer 477

any distribution from a trust to a skip person that is not a taxable termination or a direct skip taxable about = amount received by the recipient, reduced by any expenses incurred by the recipient in connection w/ the determination, collection or refund of the GSTT imposed on such distribution transferee is liable for the GSTT on a taxable distribution

Answer 478

Qualified Transfers Annual Exclusions $18,000 (& split gifts) Lifetime Exemption $13,610,000 2024

Answer 479

the transferor may elect out automatically allocated at death to the extent not actually allocated on or before the due date for the transferor's estate tax return - first allocated pro rata to direct skips - remaining GST exemption allocated pro rata to trusts

Answer 480

= GST Exemption Allocated / (Value of property transferred - Death taxes - Charitable deductions - Nontaxable gift portion)

Answer 481

= 1 - Applicable Fraction

Answer 482

= Inclusion Ratio x Maximum Transfer Tax Rate (40% for 2024)

Answer 483

KEY POINTS: - designed to tax large transfers b/t skipped generations (i.e., grandparent to grandchild) - it is separate from, & additional to, the gift & estate tax systems TRANSFERS SUBJECT TO GSTT: - Direct skips - Taxable termination - Taxable distribution GSTT RATE: - the GSTT rate is the highest marginal rate for the unified gift & estate tax rates (40% for 2024) - any GSTT paid will be added to the FMV of the gift to determine total taxable gifts for the federal gift tax EXCEPTIONS TO GSTT: - GSTT annual exclusion is $18,000 per donee per donor, gift splitting is available if both spouses elect - Indexed but $18,000 for 2024 - The predeceased-parent rule applies for direct skips to lineal descendants & collateral heirs if the decedent does not have any direct lineal descendants (children, grandchildren) - Lifetime exemption available during life or at death equal to the applicable estate tax exemption of $13,610,000 for 2024 - Qualified transfers are excluded

Answer 484

punitive damages = included in income only compensatory damages for bodily injury are excludable from gross income compensatory damages w/out bodily injury are includable as are punitive damages

Answer 485

rate at which member banks borrow from each other TIP = follow supply & demand for banks looking for loans and banks w/ loans to give fed has no direct control but DOES have influence